"Yes the fabricators at Re/Max struck again, issuing a 2011 forecast based on, well, nothing, and predicting still-higher housing prices. In every single city. As outrageous as this seems, at a time when the economy is so fragile that we still have emergency interest rates, exports are plunging, unemployment is going structural and families have never owed as much, the media reaction was even more cookie-hurling. After reading 18 versions of the story in as many markets, I could not find a single one that expressed a contrarian sentiment. So Canadians were once again deprived of a balanced view of the world."
In Vancouver the Re/Max spokesperson gushed about the presence of Hot Asian Money and how, like it or not, it will send the Vancouver westside market higher by 10%. This based on "someone" from CMHC telling him that upwards of 40,000 Asians 'may' immigrate to Vancouver next year. Guess we better buy now or be priced out forever...
As I have written before, China - on a per capita basis - has pumped more stimulus money into their economy than have the Americans. A vast amount of that money is working it's way into the Asian stock markets and into foreign property purchases.
I personally believe the China Economic Miracle is, in reality, a paper tiger waiting to be shredded.
With that in mind, I took particular interest in a MarketWatch article by Paul Farrell. Farrell is predicting another major stock market crash and notes that the preceding condition that triggers that crash is collapse in China.
Citing an interview that Fortune’s Bill Powell did with hedge-fund kingpin Jim Chanos of Kynikos Associates, Farrell notes that Chanos is “betting that China’s economy is about to implode in a spectacular real estate bust.”
From the article:
China is “an economy on steroids.” In a Charlie Rose interview, Chanos said “China’s on an economic treadmill to hell.” If so, then all of Wall Street’s highly promoted emerging markets are also sucker bets.
Another hedge-fund player warned: Chanos “is shorting the entire country,” including a company “Goldman Sachs recommended as a buy … the listing for the Hong Kong Stock Exchange … China’s Merchants Bank, one of Beijing’s largest.”
Back in the 1980s, Japan “grew largely on the back of capital investment” and then turned into “a capital-destruction machine, and that’s what China is now. You have an economy that’s 60% fixed-asset investment, and not even in the developing world is that sustainable.”
Chanos won’t pinpoint the timing or the trigger: “He just believes it’s coming,” and he is betting on it. Reminds us of Henry Paulson shorting Goldman Sachs’ crooked deals before the 2008 crash.
As everyone gushes about how the stagnating North American economy and wages are irrelevant to our increasingly unsupportable real estate market because of the Asian factor, one thing is for certain.
If China suffers a 1990s style economic collapse, not only will our real estate implosion be spectacular... it will be on a scale that surpasses even my predictions.
In a move that comes as a surprise to some, President Obama announced a tentative deal with Congressional Republicans on Monday to extend the Bush-era tax cuts at all income levels for two years as part of a package that would also keep benefits flowing to the long-term unemployed, cut payroll taxes for all workers for a year and take other steps to bolster the economy.
This extension will cost $900 Billion - equal to QE2. In essence we have just seen QE3. But how does cutting back on government revenue deal with the massive looming debt problem the United States faces?
It doesn't of course.
And as people like Jim Sinclair have been saying for years, the political realities both in taxation and quantitative easing make prediction here all too easy.
America (and Europe) have no practical way out of the debt problem – none.
They are going to inflate and spend continuously as the problem is kicked further down the road.
QE4, 5 and 6 are all but assured.
Which is why I believe you will see a rush into Gold and Silver in the foreseeable future. And faithful readers know I favour silver over gold.
Eric Sprott sees it too. The Toronto-based money manager whose Sprott Hedge Fund returned about 496% in the past nine years, outlines his thoughts in an article in the Globe and Mail:
Why did you become bearish just before the Nasdaq stock market imploded in 2000?
We had an 18-year bull market from 1982 to 2000. This is about the average length. You could tell from the almost insanity of the market at the time that it had to be over … We were valuing stocks at 100 times sales in the Internet boom. It was ridiculous.
How long do you expect a bear market will last?
I have always thought it would be a long bear market – about 15 to 18 years. It started in 2000, but it might even be longer this time because the powers-that-be keep manipulating the financial market. Having a zero interest rate policy is manipulation. Having quantitative easing is manipulation of what the market would otherwise do. …They are delaying the liquidation phase of a bear market. Almost all governments keep bailing out their financial systems.
You have been a bull on gold from the get-go. Is its price over $1,350 (U.S.) unfolding as you expected?
It’s been the investment of the decade. When I bought gold, I was buying gold to hold [as a long-term investment]. As it turned out, it quintupled. I didn’t think it would go that far because no none would have imagined that the central banks and governments would get themselves in a position where they are printing money.
The printing of money makes gold more valuable. You don’t have to be a genius to figure this out. The Johnny-come-latelies – the Paulsons, Einhorns and Soros – all figured out, when [the Fed announced the first round of quantitative easing], that they should own gold. It becomes more obvious every day as you see these financial challenges that we have in Europe.
How high will gold go?
I think gold is the reserve currency today. There is not a currency in the world that it hasn’t appreciated against by at least 300 per cent. And it has beaten every stock market. You can’t even rent a safety deposit box in Germany because they are all full of gold and silver … I am pretty convinced that gold will go a lot higher because it is under-owned as only 1 per cent of people’s money is in it. It could go to $2,000 an ounce. I could imagine it at $5,000. I am not giving a time frame on that, but I could certainly see that happening. But the real story now is silver.
Why are you more bullish on that metal?
Gold has traded at a ratio of 16-to-1 to silver in terms of price, but today it trades in the range of 50 to 1. I think the gold-to-silver ratio is going to go back to 16 to 1 given the passage of time, say three to five years. And I bet you that silver overshoots. The gold-to-silver ratio may even get down to 10 to 1. I believe that the price of silver has been suppressed.
How much of your wealth outside of Sprott Inc. shares are in bullion and precious metals stocks?
I only own funds and gold and silver. I am probably 90 per cent in precious metals personally. And I don’t lose sleep over it.
As I have been saying for almost 2 years now, a huge opportunity lies ahead.
One of the Vancouver City Councillors talks about a looming 20% price reduction in the Olympic Village condos dying on the vine in False Creek (hat tip to L.M.).
It's a far cry from the days of this October, 2007 Vancouver Courier article, isn't it? Check out some of the priceless Bob Rennie quotes as he gushes about the ease with which the Olympic Village is selling out.
Olympic village condos selling like hotcakes Prices range from $450,000 to $3.4 million
More than 80 per cent of the first wave of Olympic athlete's village market condos sold over two days last week, and almost all the buyers were local.
More than 80 per cent of the first wave of Olympic athlete's village market condos sold over two days last week, and almost all the buyers were local.
The condos, part of the Millennium Water development along False Creek, will become market housing the summer following the 2010 winter Games.
About 255 of the 302 units available in the first phase were sold, according to Bob Rennie of Rennie Marketing Systems. A second phase of 400 is expected to go on sale in February.
Some buyers and realtors stood in line for five days before sales started last Thursday.
Most units were priced at between $600,000 - for a 725 to 759-square-foot suite with marginal view - and $3.4 million, although a few were available in the $450,000 to $600,000 range.
There are still about 10 available on either side of $500,000.
The cheapest still on the market is $489,000, which gets the owner 574 square feet overlooking the plaza and Salt heritage building. The $3.4 million unit was purchased, but some $3-million suites are available.
Rennie estimated there were only about five out-of-town buyers.
"There's a lot of interest from West Side addresses--from buyers who live on the West Side that don't necessarily want to be downtown," Rennie said. "And there's a huge amount of interest from buyers who see it as one of the last new communities -it's on the water and there's the legacy project [aspect], that it will be the home of the 2010 [Games]."
He's never seen prospective buyers line up for five days before and was taken aback by how much interest was shown in the project. The marketing company anticipated it would sell about half the units during the opening days.
"A lot of people that came in, they wanted a certain view or a certain size and said, 'You know what, for the big ones we want to wait until the next phases,'" Rennie said. "For the next phase all bets are off for how much activity there's going to be there and how we're going to handle it. Maybe we should do similar to Woodward's where everybody phoned in for a wrist band. But there's no one system you can put in place that doesn't offend somebody."
Rennie suspects the buying frenzy was sparked by three factors: the "green" aspect of the project as a sustainable community, the Olympic connection and the views of False Creek, the city and the mountains.
"We keep switching around over which one we think is the driving force in buying," he said.
Yesterday I posted this Cartoon Bear explanation of the JP Morgan Silver Manipulation saga...
The video, as you discover at the end of the cartoon, was put together by the website Silvergoldsilver. Viewers are invited to visit the website to make purchases of physical silver if they found the video persuasive.
Well... the video has gone viral and caught the imagination of a lot of people.
And many of those people seem to have been converted. So much so that as of yesterday the company is not taking any orders and is sold out of all products. The company will not be accepting any new orders until December 6 (see their website).
This is only part of the intense interest building for the opening of markets on Monday.
November saw the start of an intense Internet campaign by Mike Krieger and Max Keiser to attack and destroy JP Morgan (the design you see posted at the top of this post is the logo for their campaign). The central component of the campaign is: if every person buys an ounce of silver JP Morgan and its massive synthetic silver short position will have no choice but to cover and face unprecedented margin calls. This could possibly lead to an end for JP Morgan.
By no coincidence, during the month of November the US mint sold a record amount of silver American Eagle coins.
Silver is up 50% since August and as of Friday was once again flirting with the all important $30 dollar level.
This level is significant as outlined in Paul Brodsky’s presentation and comments delivered to the BCA Fall Investment Conference in New York on October 25, 2010.
Brodsky, and his partner Lee Quaintance, spent over twenty years as bond traders, running government and credit trading desks for one of the world’s largest banks and on the buy-side running fixed income investment funds prior to opening a macro fund.
Brodsky speculates that silver will hit resistance levels of $30, then $64 before going onto $140 an ounce in the very near future.
The events of the last month are culminating this week in what many observers expect will be a very wild week for both silver and gold.
And the JP Morgan Silver Manipulation explained by Cartoon Bears...
And, if you haven't heard it yet, on Sunday US Federal Reserve Chairman Ben Bernanke will be on CBS's 60 Minutes telling America that QE2 will be expanded... quelle surprise!
Yesterday while surfing the TV channels I came across an interview on CNBC with David Cote, Honeywell CEO and a member of America's National Commission on Fiscal Responsibility and Reform.
His comments caught my ear and I rewound the PVR to write down what he said.
If you have any doubt about my post yesterday about Quantitative Easing and even more money printing in our immediate future, consider Cote's comments.
"I consider myself a fiscally conversant CEO and the thing that surprised me is that I had no idea of the magnitude of the problem coming in the next 10 years.
I was disturbed by where we are, I had no idea what was going to happen over the next 10 years, largely because my generation, the baby boomers, are going to be retiring, going though social security, medicare and medicade.
And when that happens we are crushing the system, it can't handle it. We go from $9 Trillion in public debt today to $20 Trillion 10 years from now, even if GDP grows at 4.6% per year.
That's astonishing.
I told the commission that if you spent $1 million dollars a day, every day, since Jesus Christ was born you still would not have spent a Trillion dollars. And by 2021 that will be our annual interest bill alone.
Serving on the debt commission has been eye opening. We need to deal with this before we are forced to deal with it like they are being forced to in Europe.
This is going to be a crisis on a scale we have never seen before."
Cote went on to say that the reforms the commission are proposing will allow America to achieve a BALANCED budget in a few years.
It does NOTHING to address paying down the debt, it just stops adding to it.
And that's if the commission is successful in getting it's reforms implemented. I can guarantee you that this commission, just like all before it, will fail to get Congress to achieve a balanced budget.
The contagion you are seeing in Europe is only a preview to what is coming to North America.
Cote said it best. "This is going to be a crisis on a scale we have never seen before."
Massive QE and ultimately massive interest rate hikes as the bond market forces discipline on goverment (just as is happening now in Europe).
Anyone who sits down and does the math can see it coming. Can you?
Faithful readers know I continually refer to the 2008 finanicial crisis as an earthquake whose depth and breadth we still do not fully understand nor appreciate.
What is happening in Europe with the PIIGS (Portugal, Ireland, Italy, Greece and Spain) is not a 2010 issue. It's a continuation of the 2008 financial crisis.
And this week as the contagion spreads from Ireland to Italy, the main story is how the EU-IMF rescue plan for Ireland has failed to restore to confidence in the eurozone debt markets, leading instead to a dramatic surge in bond yields across half the currency bloc.
Spreads on Italian and Belgian bonds jumped to a post-EMU high as the sell-off moved beyond the battered trio of Ireland, Portugal, and Spain, raising concerns that the crisis could start to turn systemic. It was the worst single day in Mediterranean markets since the launch of monetary union.
"The crisis is intensifying and worsening," said Nick Matthews, a credit expert at RBS. "Bond purchases by the European Central Bank are the only anti-contagion weapon left. It needs to act much more aggressively."
And by 'bond Purchases' he means Quantative Easing, aka printing money.
So this crisis continues to unfold despite Herculean rescues by the European Union, the International Monetary Fund and the U.S. Federal Reserve.
So now Europe is printing money, America is printing money, and you have China which has - on a per capita basis - pumped more emergency money into their economy than have the Americans.
Which is why, after a savage attack at options experation time last week, gold and silver have started their march upward again.
Clearly the debt crisis is accelerating and the bailouts aren't working.
And this issue is only going to intensify.
For 2011, the Bank for International Settlements estimates that Portugal’s and Spain’s government debts will be 99% and 78% of GDP, respectively.
But for the same year, U.S. government debts will be 91% of GDP.
By this measure America’s debt burden is similar to Portugal’s and bigger than Spain’s.
Of course the main difference is that the US dollar is the world’s reserve currency and that gives Washington the ability to print money with impunity … press other rich countries to accept its debts … and borrow huge amounts abroad to finance its deficits.
The flight to gold and silver is only going to intensify as both Europe and America massively increase the money supply to battle this crisis.
Apparently many affluent homeowners are switching to becoming home renters this year, not because they can't keep up with payments or they have lost their jobs, but because they are nervous about the state of the housing market.
The article quotes Patrick Lee, a managing director at a major bank, who says “I wanted to protect ourselves from prices going down. I didn’t want to be an owner anymore.”
Apparently demand for luxury rental units has increased as wealthier individuals who can afford to buy are deciding not to, according to brokers and real estate analysts in affluent areas of the country such as New York City, Chicago and San Francisco.
“More affluent Americans are opting to rent as oppose to buy,” says Jack McCabe, an independent real estate analyst and CEO of McCabe Research and Consulting in Deerfield Beach, Fla. “Within the last year, so many people have seen their family and friends get burned in real estate. They don’t see it as being a risk free investment as they used to.”
All across the US it appears there is a general attitude where potential buyers are in a huge 'wait and see' mode to assess if property values will continue to fall.
Speaking of vultures, we've all heard about how the City of Vancouver has forced Millennium Development into receivership in order to recoup its $740 million loan to the developers for the Olympic Village in False Creek.
As part of that deal, Millennium’s owners agreed to hand over other assets to the city to sell if the City can’t cover the loan through sales of the high-end condo' in the Olympic Village.
Last week represetatives insisted Evelyn was on track.
But now a lawsuithas been filed against Millennium saying they haven’t been making payments on their loans of more than $75 million.
Backers of the project, Peoples Trust Company, bcIMC Construction Fund Corporation and bcIMC Specialty Fund Corporation, filed petitions in B.C. Supreme Court Wednesday against Millennium Evelyn Properties Ltd., Millennium Development Corporation and Shahram Malekyazadi — one of the brothers who own Millennium — seeking a declaration that the developers have defaulted on their mortgage.
There is more than $71 million owed to two of the backers, with interest adding up at a rate of $12,000 a day.
More than $4 million is owed to another mortgage holder.
In the lawsuit, the backers ask the court to appoint a receiver and grant an order giving the backers power to sell the property to recoup their loans.
The City of Vancouver has also registered a charge against the Evelyn properties as part of the Olympic Village process.
Looks like wealthy Asians have a lot of buying to do.
The day after our central bank's Governor restates his warning to Canadians about mortgage debt we are treated to the spectacle of our federal government's Finance Minister telling Canadians there is no housing bubble.
The Financial Post carried a story on Monday wherein Finance Minister Jim Flaherty dismisses the idea that our country might face the same kind of property crisis as Ireland.
“The evidence is not there that Canada has a housing bubble. In fact, the evidence with respect to affordability of mortgages in Canada is solid and we have a stable market,” he told the House of Commons finance committee.
“It’s a long, long stretch to compare our housing market with that of Ireland,” he said.
Of course this is the same man who in late 2008, while the financial crisis was engulfing the Western World, continued to insist that the recession would not come to Canada and that our nation would continue to run a budgetary surplus.
As the crisis deepened, it was Flaherty who insisted Canada would never run a deficit. A claim he made prior to plunging Canada into it's biggest budget deficit in history.
Riiiightt!
Meanwhile the Globe and Mail runs a story which asks "is Vancouver in a housing bubble?"
We are treated to more of the 'rich Asian' storyline.
The article does contain an interesting passage, though. University of British Columbia historian Henry Yu notes that while Vancouver is popular as a lifestyle destination for those who can afford it, the City is not a place to make a living.
And that's the kicker.
There is no economic underpinning for our real estate market in Vancouver.
Vancouver is not a financial engine. Current valuations are not supported by local incomes, local economic activity, household balance sheets or employment.
And when the domino's start to fall on the 90% of homeowners who live (and earn incomes) here, will the west side of the City become an island that maintains values from a steady influx of rich Asians who will pay exorbitant prices?
In 2005 everyone claimed there was no housing bubble in the United States. In 2010 wealthy Asians do NOT pay 2005 prices for property in any of the luxury markets in the United States.
Instead they pick at the ravaged real estate carcasses just like any other vulture.
As Arctic outflow winds sweep down across Western Canada, the Village on the Edge of the Rainforest has been plunged into winter's icy grip.
A rare snowfall blanketed the region on the weekend and since then nighttime temperatures have dramatically dropped to -10 Celsius (14 degrees Fahrenheit for our American friends).
Snow and icy cold temperatures? Things keep up like this and we might even consider hosting a winter event like the Olympics.
But I digress. Lots has been going on locally over the last week and as I have touched base with a number of the local blogs there seems to be a whirlwind brewing about the status of 'our bubble'.
After almost half a year of declining real estate sales, our local market is best described as stagnant. The bubble has yet to burst.
The result is a growing sense of fatigue.
Some buyers, tired of waiting for a crash that isn't forthcoming, are jumping into the housing market. Against better judgement they are taking on massive levels of debt as house lust consumes them.
Meanwhile on the west side of Vancouver, sales gallop along at a pace and with prices that have some suggesting Vancouver is - in fact - different.
It makes me smile.
Perhaps it is because I am not sitting on the sidelines - eagerly waiting for a housing collapse - so that I can make a move and purchase a house in the city.
'A watched pot doesn't boil', goes the famous saying and because prices aren't dropping dramatically, many find themselves doubting what logic and common sense tells them is all too obvious.
As I repeat ad nausam, in 2008 the world suffered a financial earthquake the depth and breadth of which we still do not fully understand, appreciate or comprehend.
Canada enacted a number of emergency measures which shielded real estate in our county from the Great Credit Contraction that is sweeping the rest of the globe.
After experiencing a minor contraction in 2009, real estate appears to have recovered. In reality all we have done is forestall the Great Reckoning.
And no one is better positioned to remind us about what is coming than Mark Carney, Governor of the Bank of Canada.
Over on the blog Housing Analysis, Jesse has transcribed parts of a 15 minute interview Carney did with CBC's Sunday Edition (hosted by Michael Enright).
You can listen to the entire interview here (it takes place in hour two, about 10 minutes in).
As transcribed by Jesse, the most significant comments are listed:
Michael Enright: You expressed concern publicly for a long time I think from the moment you took the job about household debt in Canada. I think it was running somewhere around $40,000... and you're concerned about that. Interest rates are very low at the moment. Is there a correlation between the lower the interest rate [and] the more likely it is for people to take on more debt?
Mark Carney: Well this is the concern. Interest rates in Canada are low, abnormally low, exceptionally low...
Enright: Are they emergency rates do you think?
Carney: Well we had them at emergency levels from April of last year, in April of 2009 after the crisis...
Enright: Right.
Carney: The Lehman crisis. We got them down to 25 basis points and we further increased our balance sheet beyond that. But we moved them up from emergency levels because the Canadian economy is back at the level we were before the crash, we recovered all the jobs we lost during the crash, and things have moved quite positively for Canada. But they're still at exceptionally low levels. And the risk is that Canadians, some Canadians, take on debt on the assumption that interest rates will always be this way.
Enright: Or they're here now, they look pretty good and they'll probably stay that way for a while.
Carney: Exactly. And particularly when one thinks about mortgage debt, thirty year mortgage debt, that is not a sensible assumption. And our concern is that people will get themselves into positions which will make it very difficult to service their debt.
Enright: But you can't say, wait a minute folks, I wouldn't go and buy a summer cottage because something might happen in the next 6 or 8 months. I mean, that would send Bay Street spinning, wouldn't it?
Carney: No. We're taking a longer term perspective on it and we're providing as much transparency as we can about the future path of monetary policy, as much as appropriate. The one thing we can say with high degree of certainty is that over a thirty year mortgage interest rates are not going to be at the same level as they are now, they're going to be higher, and that Canadians, individuals, should be comfortable that they can service their debt at higher interest rates, and the banks that lend to them should also be comfortable about that.
As Carney says, interest rates are still at "exceptionally low levels." They are going to go up... way up.
And for those who have taken on debt on the assumption that interest rates will always be this way, Carney makes it expressly clear they are in for a rude awakening.
It does not matter if there are some people with vast amounts of money who can easily afford the multi-million dollar single family houses in our little hamlet on the Edge of the Rainforest.
When the reckoning comes, when interest rates normalize, there are so many who will affected by a crisis of debt in the Lower Mainland that the exact same chain of domino's that has brought down so many American R/E bubbles will repeat itself here.
One of the rationalizations you often hear about the big collapses in real estate values in the United States is that those markets that are collapsing don't compare to Vancouver.
Vancouver, the R/E defenders chip, is a world class city. Therefore you need to observe how bad the 'real estate correction' is in those types of American cities.
Invariably New York City is one of those cities held up as an example.
Until recently, NYC had weathered the downtown moderately well. But it appears that the tide is starting to turn.
This is the Apthorp, a 1908 heritage building located on New York's upper West Side.
The Apthorp is a luxury building, elegantly detailed with elaborate wrought ironwork, a massive courtyard hosting a pair of fountains, marble benches, statuary and greenery.
The courtyard's facades are rusticated limestone and the first and second stories have arched windows and each angled corner has an entrance to apartments.
The complex was undergoing a massive luxury condominium conversion when the real estate market crashed. Struggling since then, the complex is finally succumbing to the new R/E economic reality.
According to this story in the New York Post, New York condos values are crashing headlined by developments like the Apthorp.
The Post is reporting that a one-bedroom penthouse in the historic building, originally offered at more than $2 million, was sold for an amazing bargain-basement price of around $200,000.
The building, plagued with strict state regulations regarding rental-to-condominium conversations, has been battling a number of related problems.
Conflicts with rent-stabilized tenants worried about losing their deals as well as declining services, including problems with elevators and electricity. New buyers have also said they couldn't get renovation plans approved.
The issues have culminated with a one-bedroom penthouse, "unrenovated but livable", selling for a mere $228,900 - down more than 88% from the asking price of $2,025,765.
The 763 square-foot home had been on the market for 13 months, according to real-estate-data site StreetEasy.com.
The real estate downtown has lead to similar deals in the Gilded Age-era building.
A 405 square-foot penthouse sold for just $123,717 in July - down 86% from an asking price of $895,000.
And a 964 square-foot penthouse also closed in July for $417,177 - down 84% from an asking price of $2,559,420.
If you can get a 90% collapse in condo prices in Manhattan, is a 70% collapse in our bubble all that far fetched?
CNN notes that the greatest issue looming for our nation is our housing market which "has, despite a brief blip, continued to drive higher through the world's economic snow bank due to easy credit, low interest rates and encouraging government tax breaks."
The article troupes through all the arguments put forth by "believers in the Canadian miracle (who) say the country's housing market is not likely to have much of a correction at all, and certainly not the sort of housing swoon seen in the United States or Europe."
But CNN zero's in on the fact that our housing market is showing signs of strain and as housing prices level off after a decade of scaling ever-greater heights, the article focuses on the looming problem.
Canadians easily obtained mortgages with only 5% down and payments running out 35 years. More than 65% of Canadian mortgages are fixed for five years (and now face more stringent renewal terms and likely higher interest payments). But variable rate mortgages offered in Canada were at least as creative as those doled out in the US, with banks allowing terms as short as six months. Unlike in the US, people who default on mortgages in Canada don't just lose their houses, they risk other assets as well.
Lower housing prices could hit Canadians fairly hard. Housing accounts for more than 20% of Canada's GDP, and its employment gains have been fueled by continued spending in the construction industry, which is one of Canada's largest and fastest growing employment sectors. In October, while the number of workers in Canada's massive service sector declined by 33,000, construction added 21,000 jobs.
Canadians easily obtained mortgages with only 5% down and payments running out 35 years. More than 65% of Canadian mortgages are fixed for five years (and now face more stringent renewal terms and likely higher interest payments). But variable rate mortgages offered in Canada were at least as creative as those doled out in the US, with banks allowing terms as short as six months. Unlike in the US, people who default on mortgages in Canada don't just lose their houses, they risk other assets as well.
A fast or unexpected rise in interest rates (Canada was the first G7 country to begin moving them higher following the recession) could leave Canadians with little cushion. Last year the IMF noted that, by some measures, Canadians were paying a larger percentage of their income for housing than Americans did prior to the housing bust.
And, of course, in our little hamlet here in the Village on the Edge of the Rainforest recent date shows that the average homeowner with a two-story home spends 70% of their household income on mortgage servicing.
And now we are half way through the sixth consecutive month of the worst real estate sales totals in the last 10 years - despite the fact interest rates remain among the lowest in our nation's history.
It brings to mind something Paul Krugman wrote in the New York Times back in August 2005. He was talking about a possible looming collapse in real estate prices and said:
"[The end of the U.S. housing bubble] won’t come in the form of plunging prices; it will come in the form of falling sales and rising inventory, as sellers try to get prices that buyers are no longer willing to pay. And the process may already have started."
Krugman wrote this a full year before the concept of a Real Estate collapse was even on the radar screen of the average American.
In November of 2010 his words ring eerily true here. Indeed, the process here may have already started. And it seems everyone, except us, can see it.
What a wild day in the markets. As I mentioned in the wee hours of the morning (see last post), "I will be stunned if the immediate response is not a gigantic spike in precious metals later today."
Silver soared to $29.25 from yesterday's close of $27.72, a huge spike, up almost $1.60.
Then there were two formal attempts to engineer a price sell off.
By the time the day was done, Silver settled at $26.80, down almost $1 from yesterday's close.
As I said on the weekend, the watchword for what lies ahead is volatility. We are going to see violent swings in all areas.
For the inflation vs deflation fans, yesterday Peter Schiff and Robert Prechter carried out a 15-20 minute debate on Schiff's radio show. While both agreed that the US is doomed, Schiff argued for inflation and Prechter argued for deflation. It was a very civil debate and far more in depth than anything you might hear on CNBC.
For the past few weeks the blogosphere has been debating the 'real' purpose of QE2.
The underlying sentiment? That QE2 has nothing to do with stimulating the economy but is, in fact, a covert way for the US Federal Reserve to monetize the debt.
Of course... that line of thinking is just wack-o, tin foil hat wearing, blathering... right?
Well last night a stunning bit of information hit the blogosphere.
Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas, posted a stunning commentary on it's website.
Titled Recent Decisions of the Federal Open Market Committee: A Bridge to Fiscal Sanity?, the Dallas Fed has publicly admitted that "The math of this new exercise is readily transparent: The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation’s central bank will be monetizing the federal debt."
This is a stunning admission.
Selected passages from Fisher's statement:
As is our tradition, I can only account for and speak for myself and the Dallas Fed, not for anybody else or any other Bank or for the Federal Reserve’s Board of Governors. Today, I will provide a précis of the analysis of the nation’s economic predicament I presented to the FOMC last week on behalf of the Dallas Fed, summarize the arguments I made with regard to the course of monetary policy, and then provide a personal perspective on the decision made by the committee as a whole.
In his speech in Jackson Hole, Wyo., in August, Chairman Bernanke had asked all of us to consider the costs and the benefits of further accommodation. My response was that I was skeptical about many of the presumed benefits of further asset purchases. I was more certain of some of the potential costs.
One cost is the risk of being perceived as embarking on the slippery slope of debt monetization. We know that once a central bank is perceived as targeting government debt yields at a time of persistent budget deficits, concern about debt monetization quickly arises.
also worry about the risk of our being perceived as using quantitative easing and buying copious amounts of financial assets above and beyond the ordinary bounds of the Federal Reserve’s System Open Market Account as “the new normal” for implementing monetary policy. Everything we know from monetary history tells us that in times of crisis, we should open the floodgates—this has been the practice of central bankers since the 19th century. This is what monetary theorists might call Bagehot 101, after the British patron saint of central banking, Walter Bagehot. We did it in 2008 and it worked to pull us from the maw of financial panic and economic ruin. But it did not seem to me last week to be a time of panic or crisis. I suggested that were we to act by throwing more money at the economy under these more benign circumstances, the markets might come to expect more, that quantitative easing could become like kudzu for market operators—expectations of continued Federal Reserve purchases of Treasury securities as normal operating procedure might grow and grow and be terribly difficult to trim once they take root in the minds of market operators.
I might understand the case for accommodation if serious deflation were a clear and present danger. As I pointed out by citing the trimmed mean and through my anecdotal reports, it is not. I would add for this audience here today that this is thanks to Ben Bernanke’s adroit leadership in engineering the liquidity measures implemented during the Panic of 2008-09 and by avoiding the policy errors of the 1930s. Because of what we did in staring down panic and its aftermath, neither M2 money growth nor inflation has fallen off the cliff.[2] And while nominal growth is less than desired and is very painful, nominal income is growing, however incrementally, not shrinking.
Then there is the issue of exit policy. The more we engage in a policy of asset purchases that moves us further out the yield curve—and the more we laden our balance sheet with price-sensitive assets—the greater the likelihood of realizing a loss on our holdings.
In sum, I asked that the FOMC consider that we might be prescribing the wrong medicine for the ailment from which our economy is suffering. Liquidity and abundant money are not the binding constraints on the economic activity we wish to see. The binding constraints are uncertainty about income and future aggregate demand, the disincentives fiscal and regulatory policy impose on ridding decisionmakers of that uncertainty, and the reluctance, given those disincentives, of those who have the power to create jobs for our people to invest in undertakings that would create them.
The remedy for what ails the economy is, in my view, in the hands of the fiscal and regulatory authorities, not the Fed. I could not state with conviction that purchasing another several hundred billion dollars of Treasuries—on top of the amount we were already committed to buy in order to compensate for the run-off in our $1.25 trillion portfolio of mortgage-backed securities—would lead to job creation and final-demand-spurring behavior. But I could envision such action would lead to a declining dollar, encourage further speculation, provoke commodity hoarding, accelerate the transfer of wealth from the deliberate saver and the unfortunate, and possibly place at risk the stature and independence of the Fed.
My perspective, as with those of all other members of the FOMC, was given a thoughtful and fair hearing at the table. After deliberation, the majority of the committee concluded that under current and foreseeable conditions, the better approach was to purchase $600 billion in Treasuries between now and the end of the second quarter of next year, on top of the amount projected to replace the paydown in mortgage backed-securities. The math of this new exercise is readily transparent: The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation’s central bank will be monetizing the federal debt.
As I said, a stunning admission.
One of the presidents of America's Federal Reserve Banks has just admitted that the United States Federal Reserve has set about to monetize next year's entire issuance of debt.
I will be stunned if the immediate response is not a gigantic spike in precious metals later today.
I have a feeling today is going to be one of those 'bookmark' days in history.
Do you smell that? Do you smell that?... QE2 son... Nothing else in the world smells like that. I love the smell of QE2 in the morning... The smell... you know, that gasoline smell... the whole economy. It smelled like... victory. Some day this recession is gonna end...
If you plan on taking advantage of QE2 in the stock market, remember that history does not repeat... it does but follow similar patterns.
A subtle, but crucial distinction.
When it was first announced I expected much of QE1 to find it's way into all segments on the stock market. Which is why, back on March 12th, 2009 I said, "One thing is for certain, all this money printing is going to juice the economy in the short term like nothing any of us have seen in our lifetime. Look for commodities in the stock market to take off like a rocket."
The stock market has gained back 60% of what it lost in September 2008.
Back in late August 2010 the Federal Reserve announced QE lite and promised QE2. What has happened since then?
Essentially we are in an inflation trade melt-up.
Everything that is an inflation hedge has exploded since late August. Gold is up 15%. Silver is up 48% (courtesy of the manipulators finally getting taken to court). Agricultural commodities are up 25%. Oil is up 20%.
And stocks?
Stocks are only up 17%.
Right now money is flowing to commodities, especially precious metals and agricultural commodities, as well as emerging markets.
The Federal Reserve's continued goosing of equities is (by Mr. Bernanke's own admission) designed to spark a "virtuous cycle" in which a rising market lures investors in, further driving up prices, which creates new wealth which then triggers "the wealth effect:" people who see their 401K accounts swelling will open their wallets and spend, spend, spend.
But the folly of this approach is already getting push back as this Wall Street Journal Op-Ed by Kevin Warsh, Federal Reserve Board Governor and former member of the President's working group on capital markets.
"But if the recent weakness in the dollar, run-up in commodity prices, and other forward-looking indicators are sustained and passed along into final prices, the Fed's price stability objective might no longer be a compelling policy rationale. In such a case—even with the unemployment rate still high—we would have cause to consider the path of policy. This is truer still if inflation expectations increase materially."
Much of the rising values in the stock market have come as volume drops. It appears much of the 'gains' are coming solely on the back of Federal Reserve injections of POMO.
In 2010 individuals have withdrawn $92 Billion from mutual funds.
As I said on the weekend, the watchword for what lies ahead is volatility. We are going to see violent swings in all areas.
Be aware and beware.
History is governed by the Law of Unintended Consequences.
One of the big questions I am hearing locally is whether QE2 will prevent a collapse in real estate here in the Village on the Edge of the Rainforest.
Of course not.
As I have already mentioned, in the normal cycle of classical Capitalism the expansion of credit/debt and rising assets leads to mal-investment and rampant speculation: overbuilding, overcapacity, over-indebtedness and leveraged bets that misprice risk.
This is precisely what occurred in the 1995-2000 stock market bubble and the 2002-2007 housing/real estate bubble; mal-investment, over-indebtedness, overbuilding and mispricing of risk on a grand, unprecedented scale.
All around the Western World the correction has taken hold, with the exception of Canada and Australia.
In the normal scheme of things, all this bad debt would be written off and the assets would be sold/liquidated. Holders of those assets and the debt based on those assets would both suffer losses or even be wiped out. All the overbuilt/overpriced properties and overcapacity would be sold for pennies on the dollar, and the liabilities (debt) wiped off the balance sheet along with all the inflated assets.
There is no other way to clear the market for future growth.
The Canadian Government has been successful in delaying the reckoning with the record levels of stimulus the Conservatives dumped into the economy in 2009.
The effects of wasteful misallocation of capital cannot be fixed by policies that encourage the wasteful misallocation of capital. But those policies can often help to prop up unsustainable patterns of activity in order to "kick the can down the road."
This is what we have done in Canada, in general, and particularly in Vancouver.
Stimulus can postpone major economic adjustments, but often that makes the ultimate adjustment even worse. And ours is only getting worse.
Put simply, policies and investment practices that are effective and friendly to the short-term can often be destructive and violent to the long-term, particularly when those policies and practices encourage the misallocation of capital.
Everyone is in a tither about how the average price of a single family house in Vancouver rose in October to top the $1 million mark again.
But as we have already discussed, those numbers are skewed.
In October 2010 west side Vancouver SFH sales totaled 161.
One mansion in Shaughnessy sold for $17.5 million along with a handful of other sales in the $3 million to $5 million range.
The $17.5 million Shaughnessy house alone juiced the west side detached average price by $108,695.
Take that away and the average drops to under $950,000.
Will QE2 also juice the market and lead to an increase in sales?
Well it appears the real estate boosters don't think it will.
The Canadian Real Estate Association (CREA) came out with a statement on November 5th (the day after QE2) that 'revised' their forcast for national sales activity downward by 4.9% for 2010 and predicts sales will collapse further in 2011, down by another 9%.
But that's nationally. In BC the CREA sees sales dropping by another 15% in 2011.
That's 15% less than this year's totals where we have spent half the year with sales down by 40% from 2009.
Sounds like a "NO" to me on a rebound from QE2.
With sales hovering at their lowest levels in the last 10 - 15 years, a prediction of another 15% drop is not what I would call 'bullish'.
QE2 may juice the stock market for a while, but it will not save the Vancouver real estate market.
What it will do is keep interest rates from rising in the short term, which will prolong the slow melt.
Meanwhile for your Sunday viewing pleasure: three video clips.
The first is the trailer for the documentary "Inside Job". I had a chance to watch it last night in the only theatre in Vancouver it's playing at (Tinsletown) and it's worth checking out. It didn't explain the crisis as fully as I would have liked, but it does a really good job.
Next is a 7 minute clip featuring Peter Schiff on inflation and QE2. Schiff is bang on with his assessment and this clip is destined to be central to another round of "Peter Schiff was right" videos once this episode fully plays out.
Finally there is a repost of a 45 minute documentary titled 'Overdose: The Next Crisis' for those who may not have seen it the first time around.
So we are now into QE2. Anyone else make a lot of money this week?
Today's post will be about Real Estate in Vancouver AND about the economy.
First the economy.
Do you remember QE1? I do.
Back on March 10th, 2009 I commented that I fully expected a lot of the QE1 stimulus would be misdirected and end up in the stock market.
On March 12th, 2009 I said, "One thing is for certain, all this money printing is going to juice the economy in the short term like nothing any of us have seen in our lifetime. Look for commodities in the stock market to take off like a rocket."
And on March 13th, 2009 I said, "This (the rise of both stocks and gold/silver/oil) insiders say points to a bottoming out of the worst Bear market since the Great Depression and the start of the predicted hyper-inflationary period. If they're right, buckle up folks, it means things are gonna take off like a rocket if that is the case. It's not the end of the recession or hard times in Canada, but the market is usually six to eight months ahead of the economy. My recommendation? Now's the time to play the market. Silver stocks like First Majestic, commodities like Tech Resources and oil stocks. But beware! A rapid blowing up of the market could lead to another rapid collapse. Study the 1930s! The market recovered almost 60% after the crash of 1929. All the stimulus that has been announced will find it's way into the market - mark my words."
I'm kinda proud of that.
Note I refered to entering a hyperinflationary period. I still believe that if we do enter one, that people will look back on the week of March 9th, 2009 as the Genesis point that instigated Hyperinflation.
As you can see QE1, for me, meant that the stock market was about to embark on an incedible run.
18 months later I don't think anyone would dispute that.
And the stocks I referred to?
On March 13th, 2009 First Majestic Silver Corp. (TSE:FR) was trading at $1.76. Yesterday it closed at $9.96.
On March 13th, 2009 Tech Resources Limited (TSE:TCK.B) was trading at $5.04. Yesterday it closed at $49.71.
As for Oil. It had dropped to about $30 a barrell. Now it is over $85. A Canadian Oil Income Trust like Provident Energy Trust was trading for $3.99 on March 13th, 2009 and yesterday closed at $8.00. More importantly it has been paying out a dividend of $0.06 per share each and every month since then (with the occasional double dividend).
Anyone who properly recognized the impact of QE1 back in March 2009 will be laughing today.
That's why I sit back and chuckle at all the R/E aficionado's who chortle at the R/E bears.
"Poor Bear," they say. "Wrong again," they intone about Real Estate in the Village on the Edge of the Rainforest in 2009/2010.
Ummm... I don't think so.
Yes... it is true that the high interest rates I have warned will decimate the Vancouver Real Estate bubble have failed to materialize... yet.
But the advice in Spring 2009 was to bail out of Real Estate and invest in Silver, Equities and Oil. If you were looking to enter the Real Estate market as a first time buyer, the advice was to take your downpayment and put it into the same markets instead.
A first time buyer, with a $30,000 downpayment (5%) on a $600,000 home, would be looking at about at 23% return on his R/E investment. Minus, of course, $3,000 a month in mortgage payments (the majority of which would go to interest, not principle).
If he turned around and sold the house today (if it sold) he would be looking at a profit of around $80,000. And that's if you bought in an area that did, in fact, rise about 23%. Most areas beyond the westside of the City of Vancouver have remained stagnant and have not risen at all.
So, at best, a profit of $80,000, after applicable fees. Big deal.
$30,000 invested in a commodities stock like Tech Resources would have given you a return of $266,000.
$30,000 invested in a silver mining fund like First Majestic would have given you a return of about $140,000. And if the lawsuit against JP Morgan I spoke of earlier this week pans out, the return on silver will dwarf Tech Resources.
Real Estate has been an extremely poor investment over the past year.
Meanwhile, as someone who had sold their real estate and capitalized on the equity from the stunning housing bubble... well your profits would have made you a multi-millionaire.
Just look at what the first time buyer would have reaped.
But now the question is... what can we expect from QE2?
As already mentioned, the Federal Reserve will continue with quantitative easing for the foreseeable future. There will be many episodes of QE, often combined with other initiatives such as inflation targeting.
I believe you will see far more QE than the announced $600 Billion. Much will depend upon the amount of economic growth or shrinkage that the U.S. economy experiences…and the recurring fear of many professional economists at the Federal Reserve that the U.S. is slipping into a Japanese-style deflation/stagnation. As explained yesterday, a QE2 of almost a Trillion will do nothing to counteract the amount of debt delveraging that is about to occur.
Add to this the issue of whether or not the Bush tax-cuts are renewed.
Non-renewal or expiration of the tax cuts means the Fed is on its own in stimulating the economy, and that means even more QE.
The amount of budget-cutting done by Congress (especially if it is rapidly implemented) could have deflationary consequences, prompting more QE from the Fed.
The majority of the economists at the Federal Reserve believe that inflation targeting and QE is the only way to prevent millions more U.S. jobs from disappearing. The language in the Fed’s announcements repeatedly states that they believe inflation is too low.
Inflation will be a longer-term focus of the Fed.
They have already come out and said they want to stimulate investment in real estate, commodities, and stocks by institutions and the public.
Fed officials want the U.S. economy to grow and they want individuals to start new businesses to increase employment and salaries. A long-term policy of continuing QE will be part of that process.
Side effects of QE are: a lower dollar, stronger commodity prices, and increased demand for stocks that can grow in the U.S. and abroad.
It must also be stressed that QE is going on in many places.
Every country engaged in printing money to buy dollars and thus keep their currency from rising too much is engaging in QE.
Japan, Brazil, and many other Asian and Latin American countries are in this category.
QE is everywhere and the additional liquidity from it is flowing into the markets of Asian and Latin countries with good growth prospects. It is also flowing into some non-U.S. currencies, gold, silver, oil, copper, food, cotton, rubber, and many other commodities, in addition to U.S. and European stocks.
Currency intervention, trade wars, and volatility will become the norm.
Expect to see trade wars break out in a major way as this game progresses. We’ve already had a hint of this with China’s decision to cut rare earth elements exports. However, this is just the tip of the iceberg. Things are going to be getting very messy going forward. Expect to see capital controls, tariffs, and outright trade wars break out. As a result, prices of various goods will skyrocket.
Inflation is coming sooner rather than later. The cost of just about everything is going to be going up... a LOT.
One thing that is different this time around, however, is that QE1 will not be like QE2.
In the prior instance, the short-term fuel led to short-term complacency about the economic trajectory. QE1 was presented an an Emergency Effort.
Everyone sees what QE2 is about.
Compounding that reality is that the Fed has no ability to direct its fire.
What’s likely is that much of the investment capital freed up by Fed purchases of Treasury debt will overshoot its target — the U.S. economy — and flow to emerging markets and especially into commodities that serve as a hedge against a falling dollar.
Be aware of this difference.
Back in March 2009 I referenced a couple of specific stocks. I was deluged with emails for advice about what to do. People literally freaked out when the stocks I recommended dropped in value.
I won't make that mistake again.
That's what triggered the disclaimer you see at the bottom of this blog.
I won't recommend any specific stocks this time.
What I can guarantee you is that the immediate future is one of great volatility, especially in anything related to gold/silver/commodities.
I can also guarantee you that the Federal Reserve will be resolute in it's mindset on this issue. Bernanke, an intellectual, wrote a doctoral thesis on how to respond in times like these. He won't do anything to deviate from that thesis.
Predictability is you ally here, use it wisely.
All the information you need to know on what is going to happen over the next 6-12 months have been covered in the last 3 days of posting.
Do you own research.
If you click on the youtube video I have posted above, you will hear a catchy tune from 1993 which I think you will find could serve as the Federal Reserve Theme song for QE.
No no limits, we'll reach for the sky! No valley to deep, no mountain to high No no limits, won't give up the fight We do what we want and we do it with pride
Bernanke has made it clear what he intends to do.
Study the past, study what is happening, and position yourself to take advantage of it.
We are living in a once-in-a-lifetime moment in history.
Don't let it pass you by.
PS. Be warned now, I give whatever commentary I offer in my posts you are reading on this blog. Please read the disclaimer at the bottom of this blog and DON'T email me for investment advice.
I won't reply to your email if you are asking for investment advice.
Hell, I don't respond to 75% of the emails I receive as it is, (although I do read every single one of them).
If you read yesterday's discussion of QE1 you know that, as a plan to "get the economy on its feet again," QE1 was deemed insufficient.
Enter QE2.
If you have not seen it, Ben Bernanke wrote an OP-ED piece in the Washington Post defending the Federal Reserve's latest actions. You can read it here.
Will it succeed?
As mentioned yesterday, in the normal cycle of classical Capitalism the expansion of credit/debt and rising assets leads to mal-investment and rampant speculation: overbuilding, overcapacity, over-indebtedness and leveraged bets that misprice risk.
It is precisely that excess which occurred in the 1995-2000 stock market bubble and the 2002-2007 housing/real estate bubble; mal-investment, over-indebtedness, overbuilding and mispricing of risk on a grand, unprecedented scale.
And given that the economy faces $15 trillion in writedowns in collateral and credit, the bottom line is that the Federal Reserve's QE1 and QE2 in new credit/liquidity is insufficient to achieve the Federal Reserve's objectives.
It cannot help but fail.
Consider the size of the U.S. economy: $14 trillion. The probable size of QE2, when all is said and done, will be about $1 trillion.
That means QE2 is perhaps 7% of GDP. Even a whopping $2 trillion QE would equal about 14% of GDP.
(In contrast, by some measures China opened the floodgates of credit to the tune of fully 35% of their GDP to combat the contraction caused by the global financial meltdown in late 2008)
How much collateral and credit will be destroyed as the U.S. economy rolls over into recession/depression in 2011-14? Based on the latest (September 17, 2010) Fed Flow of Funds, Charles Hugh Smith provides the following rough estimates of losses yet to be booked in assets (collateral) and credit (debt):
Residential real estate: current value, $18.8 trillion. Estimated value in 2014: $13.8 trillion, i.e. a decline of $5 trillion or 26%. If all impaired mortgages are written down or sold for fair market value, a full $5 trillion will need to be written off by somebody, somewhere. And Smith's 26% estimate is conservative; according to the Case-Shiller Index chart, a decline of 40% would be required to return the index to the year-2000 level.
Commercial real estate (CRE): The Flow of Funds only reports "nonfarm nonfinancial corporate business" so the CRE number of $6.5 trillion is a few trillion light (that is, we need to add in CRE owned by financial corporations). Smith estimates writedowns of $3 trillion - a number others have also guesstimated. Empty malls, empty office parks, empty warehouses, empty retail: they're all worth essentially zero. The cost of bulldozing them is higher than their auction value.
Consumer durable goods: All this "stuff" is supposedly worth $4.5 trillion, but when the millions of bulging storage units are emptied and sold, the actual market value of all this will be more like $3 trillion at best. So knock off another $1.5 trillion in collateral.
Corporate bonds: A huge amount of junk bonds have been sold in the last year, bonds which will be useless once inflated profits and corporate balance sheets adjust to the 2011-14 reality. Smith tags the losses here at $1 trillion, which is probably conservative.
U.S. stocks: Roughly $14 trillion: $6.7 trillion owned outright, $4 trillion in mutual funds and another $4 trillion in pension funds (which total about $11.6 trillion total). Once skyhigh estimates of future profits fall to Earth and the risk trade fades, then equities will get a $4 trillion haircut (i.e. they are about 30% overvalued). Investors are already exiting equities as an asset class (once burned, twice shy, and they've been burned twice in 8 years) and the next downturn will accelerate this prudence.
Equity in noncorporate business: The Fed sets this at $6.6 trillion, and as the economy rolls over, households and business deleverage their massive debts and taxes rise, then a fair accounting of this non-publicly-traded equity would probably drop by at least $1 trillion.
Many analysts consider each of these estimates to be conservative, and they total $15 trillion.
The Fed estimates total assets of households and nonprofits (which is of modest size compared to households) at $67 trillion, and net worth at $53 trillion (that is, liabilities are "only" $14 trillion).
A reduction in collateral of $15-$20 trillion (including the $3 trillion in CRE losses) would still leave tens of trillions in assets. But it would certainly impair the economy's ability to leverage up trillions more in new debt.
The reality is that this uncollectible, impaired or defaulted debt would have to be written down or written off. Those holding the debt - the "too big to fail" banks - would be bankrupted by these reductions in collateral.
So how do you generate the "modest inflation" which is the Fed's stated goal when $15 to $20 trillion in collateral and credit are disappearing from balance sheets? How do you goose credit enough to inflate a new asset bubble?
Excessive debt and speculative bubbles cannot be "fixed" with additional doses of debt and speculation. The Capitalist reality is this: if the Fed truly wanted to fix the U.S. economy rather than protect its over-extended, debt-ridden Financial System, then it would force the liquidation of trillions in bad debt and force a "marked to market" valuation on every balance sheet, household and corporate alike.
Anyone who believes a meager one or two trillion dollars in pump-priming can overcome $15-$20 trillion in overpriced assets and $10 trillion in uncollectible debt is in for a profound disappointment.
The Fed's tinny little QE "bazooka" will be rolled over by the M-1 tanks of deleveraging and the recognition of $15-$20 trillion in losses.
And as long as Bernanke is Chairman of the US Federal Reserve, and this philosophy is followed, you can be assured there will be a QE3, 4 and 5.
It is inevitable.
Tomorrow some thoughts on the best way to position yourself.
“The Federal Reserve is now a government within a government. It is totally out of control. Congress doesn't control it. It's funded by the banks and we either have constitutional government or we don't."
![[Most Recent Quotes from www.kitco.com]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_tJ78vptOLCZG4wSM7rV0FVTanLlWoZseQ6q3R_MXztWqfQTnJ493uKpSt9Kh6Rnaemhoebqk_G5ge95CZwq2420HrW0NAKsaEQJUyyNNMPTGwuhBLmUoCrxZCEwr3ak03Nqg=s0-d)
![[Most Recent Quotes from www.kitco.com]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_vH6ZjFfDghH8-5l2Y3ALsgcqbYo7LfYQa9ermirIe2UaZS-DSccyTfhR3oHokIR87Nydd8tK9KI-6ryMKJERQ4g52AjOW96OOZM5qq4GDzbemJq1orR0edd3P4v1Zr-vNcq5iS=s0-d)
![[Most Recent Quotes from www.kitco.com]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_uZrkHp41RElTEAQvJDq-hMHdV5W7DgLutj_NQGuWvOrRjyGSGWRlXwd-F_5GU2YG3TNhrOe1499f6iRYw5YZYpPPm3VNTgz7-1ZuB_JNIfTAgaVSsrWu6T=s0-d)
