if the cap fits,

let him wear it



Wowza!

Did I hear someone say;

- The TSX closed at 9600 - down 4.5% on the day? That is just a measly 1/3 from the peak. Oil down, and the dollar down.

Batten the hatches, this is just the leading edge of the storm. The market was as over-valued when flirting with 15,000 as the RE prices were last May, so it is no big surprise. I feel that if things hadn't been messed with so much by scoundrels and fools, the TSX is about where it should have been. But it will see 6,000 or less before it turns back. (It might not ever do that.)



- Harper say to Peter Mansbridge that there are good buying opportunities in the stock market? For who? His mother? Does he not read newspapers? Have advisors? If he does read a paper, it must be The Stars and Stripes. His advisors must want to see him fail. Who calls an election without having a platform?

Harper is completely out to lunch, and it seems to be showing in the public sentiment. What foolishness will he utter next? Let them eat corn flakes!? His narcissistic nature leads him to believe in the Noble Lie, and that he is smarter than everyone else. He is clever, but that ain't smarts. Duceppe pinned him down in the debates. So did May. Layton openly laughed at him. Dion made him look like a chump.

When Mansbridge interviewed Harper, he swallowed hard a few times when Mansbridge threw the truths at him. Harper forced this election because he knew that the sheet-storm was coming, but it caught up to him, and he has blown it. $300 Million so that he could have an even smaller minority than he had, and my bones are starting to say that he might not even get that (so are some other commentators, I believe). There are around 20% of voters undecided the last I read, and I doubt they will go Cons. A coalition of the left is starting to look like a strong possibility.

- That 230 Canadian economists, teaching at Canadian universities, say that a carbon tax is what is needed at this time - even without the tax cuts? The Greens' plan would be even better, in that case.

What a sham. Harper looks the complete fool in this one. Cold, hard irony. Whap!

canned goods & ammo

I have had a few people write to ask me what I do with my cash while waiting for a correction. Frankly, I do not know what the heck to do with it. Stuff it in my mattress? Hide it in plain sight? Good question.

My response has been that I am very conservative with my capital, and because it is so hard to come by, I keep it in the bank - either in GIC's, or these days, in a "high" interest (4%) savings account at a big bank. I have had the option of putting it into market-linked GIC's, but stayed with the staid old cashable GIC.

So, I am making 4%, but factor in inflation (supposedly ~3%, and income tax on the earned interest, and I am not really getting any further ahead. I could gamble with ABCP, oil futures, pork belly futures, precious metals, the stock market, or the casino, but those are not guaranteed safe havens. I sure could have made money in TSX-linked GIC's, or gold, but I also could have lost money. I could have bought a few pre-sales and made money too (if I bought 3 years ago, and sold this past summer, I would have done well), but I also could have lost it all (I have been expecting a correction for a while...).

What are your safe havens? My 4% earned does not add up to a hill of beans.

taxes & interest

In the last post, Larry questioned whether our savings from renting over owning were net of tax. I found it an interesting question, as I've never really thought about it, so I did.

Firstly, the principle of savings is tax free - the money itself is not taxed, but the interest is. The tax on the interest would be relatively little. Putting aside appreciation in my example, we still saved more than we would have paid on the principle of the mortgage. Then there is the thirty odd thousand that we would have paid in interest. We make about $500/month in interest on our capital, so in the last 3 years we have made about $18,000 on that, less maybe $5K in tax (to be honest, I have never paid any attention to what percentage I pay in taxes, but it doesn't seem any where near 25% of gross. I don't really mind paying taxes, as long as they are spent wisely. They seldom are, but I don't have to pay thousands of dollars a day to stay in the hospital, and Canadian universities don't charge 30-40 thousand a year for tuition, etc.). Add that $13K to the $24K in rent/own savings and we are up at least $37K.

OK, I have to address the appreciation. I thought at the time (2003-2004) that prices were due for a haircut (as did many of you). I was wrong. But what if prices had retreated by 10%? There would be no appreciation, and that $400K house would be worth $360K - maybe less because of it's problems. The $18K in principle pay down would mitigate things a bit(?), but... There would also have been about 6K in property taxes over that time, plus PTT, agents' commissions, etc.

Then I thought, wouldn't that $30K in interest paid be a kind of taxation in the truest sense of the word?

Oh well, I have always recognized that you have to spend money to make money, unless of course, you are a money lender. Then you get your money for nothing, and your chicks for free.

I take some solace in the idea of a 50% correction, which would put that house back to about $350K. Our down-payment will be bigger, and our mortgage will be smaller.

what if?

Back in 2004, my wife and I felt that we had enough of a down payment (better than 35%) to buy into what we thought was an outrageously over-priced market. Problem was, we saw very little that caught our fancy, and what we did look seriously at were all involved with bidding wars. I thought to put an unconditional, full asking offer on a character house that had obvious issues, but my agent suggested not to bother. It went for $150K over.

So what if we had been reckless, and got the place? It needed foundation work, modernized plumbing and wiring, a new heating system and a new roof, not to mention windows and what not. I could have done a lot of the heavy-lifting, but it still would have cost at least $50G's that we did not have. Second mortgage? The first mortgage, including property taxes. would have been $500/month over what we were/are paying in rent. We would have had some tough months even without a 2nd mtge. Doing the work mostly myself would have been a few years' project in itself. Looking back, I'm glad that we didn't, because we would have been buying at our margin, and at the time, I thought that a turn-around was probably imminent. Appreciation was far from my mind.

I guess I was wrong about the appreciation, the place is probably worth $700K now. Maybe more. We missed out on a couple of hundred G's. That sucks. At the same time, we had a kid, and our income has dropped a bit, so we might be a bit uncomfortable now.

There are certainly intangibles to owning, and I wondered what those might practically be. Starting with interest rates: we were approved at 4.2%/5 years. If we had taken a 3 year term and had to renew at today's 5.79% or there abouts, we would be priced out and would have to sell. Mind you, we would walk away with a nice chunk of change, and go travelling for the time it takes for fundamentals to return. I would have gone for 7 years at a slightly higher rate though, and would be sorely tempted to cash out. Ooops. I forgot about li'l solipsist. I guess we would be locked in... But, as of December 07 we would have paid down $18,174.81 in principle, and $30,102.78 in interest. Instead, we have saved over $24K in the difference between rent and own, and we have been making interest instead of paying it, and I always feel better about that. And then there are those pesky repairs and maintenance, and increasing property taxes. But oh, yeah, the paper equity.

Bottom line is, I don't really have any regrets. It was over-priced.

it's not news

image from here

It's probably not news to you, but the BoC cut the prime rate by a quarter point today. I'll bet that all those that scrambled for pre-approval and bought over-priced shacks in the summer will be happy that they did so.

I have read rumours (no links) that the BoC will be cutting rates by another 3/4 of a point before a year has passed. Smoking, impervious economy and all, y'know.

It will not save this (or other) doomed market(s) though, the writing has been on the wall for a while (4 years...), and I believe that the psychology has changed. There will still be sales - there always will be - but for less and less until purchase prices catch down to rents.

the grab bag # 9 - the trigger

Did y'all hear what David Dodge has been saying in London, England (the same day there is a bank run there)?

ECB cash infusions may not succeed: Dodge
Reuters
September 14, 2007 at 7:06 AM EDT

ZURICH — The European Central Bank's efforts to restore confidence to credit markets by pumping in liquidity are unlikely to succeed, Bank of Canada Governor David Dodge was quoted as saying on Friday.

“I'm not sure practically, whether it would do anything,”

Interest rates have risen well above overnight money market rates as banks have hoarded cash as a precaution in case they are forced to bail out off-balance-sheet debt vehicles they helped to set up during an era of abundant cheap money.

“If I thought that somehow there was a magic wand and if we did that for three or four days, then all of a sudden the markets would clear and life would be beautiful ... There is no principle that says (this) is a bad thing to do, but I can't believe it will do the job,”.

Mr. Dodge also said it was not the duty of central bankers to “bail out people who have made losses.”
link

Also:

Dodge says he should have driven rates up 'harder'
TAVIA GRANT
Reuters, Globe and Mail Staff
September 14, 2007 at 5:26 PM EDT

Bank of Canada Governor David Dodge says he should have driven up interest rates “harder” before the current global credit squeeze to tighten borrowing conditions, according to an interview published in The Economist magazine.

In a mea culpa to financial markets, he said the central bank may have played a role in fomenting excesses in credit markets prior to the disruption stemming from rising defaults on payments by U.S. subprime mortgage holders.
link

I never thought that those cash infusions would work, but merely give the big players the chance to get their money out. The shite hits the fan, there is a big bally-hoo, the CBs use a whole bunch of our money to drag things up, the big money pulls out, and the greedy sucker class rushes back in to get slaughtered again. Or something like that. I have also been hoping for significantly higher interest rates for the last 3 years - to slow this train down. I am fairly ignorant of economic intricacies and ephemera, but if I have seen this coming (and many of you have too), how come it took all these "experts" so long to see it? Wilful ignorance?

Things have reached an excess in every aspect of Western civilization and exploitation, and there is a cleanse coming. Recession talk in the MSM, etc. means depression. Things are much worse than is let on. We are living in interesting times, and as I have admonished before, gird your loins.

I can't believe that people are still buying real estate at this point. It is going to crash, and crash very hard - along with everything else. These banking/loan shenanigans are the trigger - the "outside event" that so many of the RE boosters have been saying we would need to turn the RE market. You know - the one that will never happen.


I have a little theory on what is really causing all of this madness. It is very "out there", but I will present it in the coming days.

collapsing?

OK, this is anecdotal, but I wonder if it is a sign of the beginning of the end.

My "neighbour", whose property I have written about here, here, and here (and maybe a few other places), told me today that his deal to sell his house had collapsed. It seems that the RE agent (he is also an agent) who was going to buy his place for $795K, has backed out of the deal because the person that was supposed to buy her place (another realtor perhaps?), couldn't sell their place (and so on).

The price point is in the high "low end", so I wonder if this is a sign of shaky knees in the market. Finally.

I must say that I do have a certain schadenfreude about it, as I and my family have been living in a construction zone for the past 9 months. Flat tires, noise, damage to my (rented) property, etc. It is unlike me to have those types of emotions, but...

It will be interesting to see if he can flog it without losing too much money. I will keep you up to date (whether you are interested, or not), and will probably feature the monster in the curb appall series.

ADDENDUM:

So, the BoC hiked rates by a quarter point today, and the reaction was interesting. I don't know if it was a reaction, or just the normal inscrutability of the markets, but the Dow was down, TSX was down, and the dollar was down a half cent. I don't know about oil. It was interesting to me that the dollar actually went down.

The BoC is kind of stuck - with over a quarter million jobs lost in the Ontario and Quebec manufacturing sectors in the last three years (some 39,000* jobs lost just in June), while the West continues to be smoking hot. Alberta is hot on oil and gas, and BC is hot in ...construction (those Microsoft jobs are meaningless in my HO).

The housing market in the US is still in the process of shaking itself out, and I think that it is starting here.

I wonder if rates will rise again in September. I'm not sure that they will, because the East is kinda hurting, and receives more attention in these things than does the West. It's further interesting that the East has lost so much with rates low - that should have dinged the dollar a while ago, no? (presuming that it was the high dollar hurting exports)

I have a feeling that things are about to get really interesting. The bankruptcy rate is double what it was a couple of years ago, and it won't be just mortgage rates going up. How about all those HELOC's, LOC's, credit cards, etc. being hiked too.

Gotta go and pay off my credit card, and look for the best plan for my cash.



*working from memory - it might have been 31,000 jobs lost in June.

I grabbed the picture from this blog - red guy blue state - who grabbed it from somewhere else. The red guy is blogging on RE in the US, and is worth perusing.

I like the "Doh!" take on Munch's The Scream, which I have used somewhere here before.

fly like a loon

How about that dollar? It has taken wing. It is up about a half-cent today (93.17 cents US) on hints from the BoC that it will be raising the rate to keep inflation in check. We keep hitting new 30 year highs. The last time our dollar was this high, Talking Heads had just released their first album, and Stevie Wonder was "it" (I wonder how many that are buying condo's have heard of either). We were also moving into recession.

I think that the timing is pretty safe - the economy is over-heating, house prices are, um, nuts, lumber is already in the toilet, and other economies are slowing down - which will mean less demand for commodities in general. Oil fell 2.8% today as well. It has to happen sooner or later.

The Canadian dollar is at a 15 year high against the Yen, a 6 month high against the euro and is showing strength against the most traded currencies. The big banks raised mortgage rates 0.3% today as well.

What does it mean? I think that we will see housing inventory surge, sales slow markedly, increasing unemployment, less commodity sales, less tourism, and hopefully - a return to some semblance of sanity.

This excerpt from Bloomberg

Canada's Dollar Reaches 30-Year High on Hint of Rate Increase

By Kim-Mai Cutler and Haris Anwar

May 29 (Bloomberg) -- The Canadian dollar rose to a 30-year high after the central bank said it may raise borrowing costs to restrain inflation. Short-term government bond yields surged.

The Bank of Canada suggested it may raise overnight rates in the ``near term'' to curtail inflation, though it held the benchmark lending rate at 4.25 percent for an eighth meeting. It last raised borrowing costs 0.25 percentage point in May 2006. Benchmark two-year bond yields climbed the most in almost 23 months to 4.58 percent, the highest since March 2002.

``This is more hawkish than what the market was expecting,'' said Marc Levesque, chief North American strategist at TD Securities in Toronto. ``The Bank of Canada is squarely telling the market that it's going to hike and the Canadian dollar has clearly gotten a kick off the back of that.''

The central bank, departing from earlier statements describing inflation risks as balanced, said there is an ``increased risk'' that inflation will persist above the 2 percent target. The statement added that ``some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target.''

Ten of 15 economists surveyed today by Bloomberg predict the central bank will raise rates at its next meeting, July 10. Last week, two of 19 forecast such an increase. (Gee, psychology can turn pretty fast...)

feeling pugnacious

Billy Speary, Pugilist

I heard the news today, oh boy, RBC has raised it's rates, and the other big boys are gonna raise their's too.

Yawn. A fifth of a point. They didn't raise them enough, and the variables didn't change at all. BOC is sitting on it's hands too. A commentator on CBC today likened it to Goldilocks. Everything is just right - except the dollar is falling. Is that an issue? I would think it would be good for Central Canadian manufacturers - who are hurting a bit.

Low interest rates and marketing are what drove this insanity. When I step back and look at the big picture, I wonder who really benefits. Hmm. Banks have increasingly record profits - obscene ones. Oil companies are making like profits. Bub Rainbladder is doing well. The developers are getting obese. There is a lot of money floating around, but it's not homeowners that have it. It's an enormous Ponzi scheme. When they do hike rates meaningfully, it will crush many.

I wonder why they did not hike variables. Is it another manipulation to catch those last dregs of those "afraid of being priced out forever"? (I do understand that variable mortgages are linked to Prime BTW)

I say bring on 6%, 7%, 8% discounted rates. Let's get this over with fer crassness sake.

I'll take it on.

regional economies, national policies

I've been thinking of the different economies in Canada, and the universality of interest rates. RBC Economics has a report on the economies that reveals a polytomous disparity in those economies, yet one will be afforded the relatively identical interest rate whether in Calgary, Toronto, or Corner Brook, NFLD. The Bank of Canada sets the benchmark, and the chartered banks and credit unions tack on their percentage.

As the larger economy(s) of Ontario (and Quebec) contracts, the BoC hints at cutting rates, but as they do so, they stand to further stimulate the hot economies of Alberta and BC. Being that the BC economy is largely driven by construction (as of late), will this stimulate more building (and buying)? Will this drive RE prices up further in BC?, or has the limit been reached (read - surpassed)?

But the BC economy seems to be feeding on itself. As lumber, oil and gas, and metals (copper) see less demand, how can that idea be supported? An economy built on construction (no pun intended). What could possibly sustain it - other than construction itself? Greater and bigger fools?

I think that things have become so surreal, that we cannot even guess at what will transpire. It seems to me that as the central government tries to maintain equilibrium, it creates a greater imbalance. Order out of chaos, and order begets chaos.

So what is the answer? Regional interest rates? How could that be engineered? Maintained? Sublimation of the nation into distinct regional societies?

There is a growing trend away from globalization/conglomeration, micro-credit is filling the void left by larger institutions, large corporations are being riven by anti-trust type rulings, citizens are turning inward, and reclaiming community, federal gov't off-loads responsibilities to provincial gov'ts, which in turn, off-load responsibilities to municipal gov'ts, which in turn, off-load to the denizens of the cities.

For those familiar with the Peter Principle (The implication of the Peter Principle for an organization as a whole is that the organization is prone to collapse when the number of incompetents among its ranks reaches a critical mass, resulting in the inability of the organization to perform its functions.), it would seem that we, as a society, have reached a critical mass.

The only conclusion that I can reach is that "the system" is primed for collapse.

Thoughts?