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Alan Greenspan, the policy failure whose tenure at the Federal Reserve helped create the conditions for the largest financial crisis in nearly a century, was inexplicably given a major newspaper platform on Monday to opine about regulation, which he ideologically abhors.

So it came as a surprise to read the second paragraph of his Financial Timesop-ed, wishfully describing an alternative history of 2008, if only there had been robust regulation.

“What the 2008 crisis exposed was a fragile underpinning of a highly leveraged financial system,” Greenspan writes. “Had bank capital been adequate and fraud statutes been more vigorously enforced, the crisis would very likely have been a financial episode of only passing consequence.”

Greenspan must have temporarily forgotten that he had the power to accomplish both of these priorities as Fed chair.

Before the Consumer Financial Protection Bureau, the Fed had primary responsibility over consumer protection, including rule-writing, supervision, and prohibition of unfair and deceptive practices. They even were charged with resolving consumer complaints.

Greenspan famously did none of this during the inflating of the housing bubble from 2002 to 2006, instead extolling the virtues of adjustable-rate loans andmortgage securitization, even as fellow Fed governors and the FBI publicly warned about looming fraud. The responsibility for vigorously enforcing fraud statutes, then, fell to Greenspan, and he ignored it.

Greenspan also laments that Wall Street firms carried too much debt before the crisis, and not enough capital. More capital – in the form of stock or cash reserves – would have made sure banks, rather than taxpayers, covered their own losses. But Greenspan could have enacted this at the time, being the head of the most powerful financial regulatory agency from 1987 to 2006.

…click on the above link to read the rest of the article…

Only The Date Is Unknown

August 18, 2015

Only The Date Is Unknown

economy09-29-10outlookRGB20100929043641 The US and world economies are frauds that are coming unraveled. The Greek bailout is the most recent example of “kick the can down the road” solutions. The US housing bubble was an attempt to cover up/recover from the dot-com bust. Now the US is in a financial bubble engineered to recover from the housing bubble debacle. Soon this bubble will burst. Only the date is unknown.

Two predictions can be made with reasonable confidence:

The stock market is likely to be halved and that might be optimistic. Only the date is unknown.
The economy will eventually resemble the Great Depression. Only the date is unknown.

Nothing is ever certain. An experienced CFO told me at the beginning of my career that “even the impossible has a 20% probability.” In deference to him and years of empirical evidence, I put the the above two events as virtually certain, i.e., an 80% probability.

The Current Problem

Phoenix Capital provided reasons to expect horrible outcomes: dow death cross

The REAL problem for the financial system is the bond bubble. In 2008 when the crisis hit it was $80 trillion. It has since grown to over $100 trillion.
The derivatives market that uses this bond bubble as collateral is over $555 trillion in size.

Many of the large multinational corporations, sovereign governments, and even municipalities have used derivatives to fake earnings and hide debt. NO ONE knows to what degree this has been the case, but given that 20% of corporate CFOs have admitted to faking earnings in the past, it’s likely a significant amount.
Corporations today are more leveraged than they were in 2007. As Stanley Druckenmiller noted recently, in 2007 corporate bonds were $3.5 trillion… today they are $7 trillion: an amount equal to nearly 50% of US GDP.

…click on the above link to read the rest of the article…

Recession Risk Mounting For Canada

August 3, 2015

Recession Risk Mounting For Canada

The latest economic data from Canada shows that it is inching towards recession, after its economy posted its fifth straight month of contraction.

Statistics Canada revealed on July 31 that the Canadian economy shrank by 0.2 percent on an annualized basis in May, perhaps pushing the country over the edge into recessionary territory for the first half of 2015. “There is no sugar-coating this one,” Douglas Porter, BMO chief economist, wrote in a client note. “It’s a sour result.”

The poor showing surprised economists, who predicted GDP to remain flat, but it the result followed a contraction in the first quarter at an annual rate of 0.6 percent. Canada’s economy may or may not have technically dipped into recession this year – defined as two consecutive quarters of negative GDP growth – but it is surely facing some serious headwinds.

Canada’s central bank slashed interest rates in July to 0.50 percent, the second cut this year, but that may not be enough to goose the economy. With rates already so low, there comes a point when interest rate cuts have diminishing returns. Consumer confidence in Canada is at a two-year low.

There are other fault lines in the Canadian economy. Fears over a housing bubble in key metro areas such as Toronto and Vancouver are rising. “In light of its hotter price performance over the past three to five years and greater supply risk, this vulnerability appears to be comparatively high in the Toronto market,” the deputy chief economist of TD Bank wrote in a new report. A run up in housing prices, along with overbuilding units that haven’t been sold, and a high home price-to-income ratio has TD Bank predicting a “medium-to-moderate” chance of a “painful price adjustment.” In other words, the bubble could deflate.

…click on the above link to read the rest of the article…

This Coal Mine Valued At $630 Million In 2011 Just Sold For One Dollar

August 1, 2015

This Coal Mine Valued At $630 Million In 2011 Just Sold For One Dollar

The following photos are from Australia’s Isaac Plains coking-coal mine.

Why is Isaac Plains relevant? Well, in 2011 at the height of the Australian mining boom, Japanese conglomerate Sumitomo thought it has spotted a bargain, and a SMH reports, it approached Tony Poli, the founder of mid-tier miner Aquila Resources with an offer: it would buy its 50% stake in Isaac Plains, at the time Aquila’s only producing mine, for $430 million. Market participants thought Aquila’s stake might fetch $300 million at best but Sumitomo was confident it would make a strong return, and offered almost 50% above fair value, especially since Brazil’s legendary mining company Vale owned the other 50% stake. Net, the total value of the Isaac Plains mine in 2011 just just about $630 million. It turns out Sumitomo was very, very wrong, and within a few years the writing was on the wall. In September 2014, Sumitomo and Vale shuttered the mine citing the downturn in the international coal market. Sumitomo said it would also take a writedown worth ¥30 billion ($11 million) on its Australian coal investments. And as SMH tongue in cheekly adds, Isaac Plains was added to the long list of coal mines up for sale – but at a price. That price was finally revealed on Thursday: the princely sum of $1. Why the complete collapse in price of the mine? Simple: blame China. As Bloomberg explains, “a slump in the price of coking coal, used to make steel, to a decade low is forcing mines to close across the world and bankrupting some producers. Alpha Natural Resources Inc., the biggest U.S. producer, plans to file for bankruptcy protection in Virginia as soon as Monday, said three people with direct knowledge of the matter. It was valued at $7.3 billion in 2008.”

…click on the above link to read the rest of the article…

Liar Loans Pop up in Canada’s Magnificent Housing Bubble

July 31, 2015

Liar Loans Pop up in Canada’s Magnificent Housing Bubble

For a long time, the conservative mortgage lending standards in Canada, including a slew of new ones since 2008, have been touted as one of the reasons why Canada’s magnificent housing bubble, when it implodes, will not take down the financial system, unlike the US housing bubble, which terminated in the Financial Crisis.

Canada is different. Regulators are on top of it. There are strict down payment requirements. Mortgages are full-recourse, so strung-out borrowers couldn’t just mail in their keys and walk away, as they did in the US. And yada-yada-yada.

But Wednesday afterhours, Home Capital Group, Canada’s largest non-bank mortgage lender, threw a monkey wrench into this theory.

Through its subsidiary, Home Trust, the company focuses on “alternative” mortgages: high-profit mortgages to risky borrowers with dented credit or unreliable incomes who don’t qualify for mortgage insurance and were turned down by the banks. They include subprime borrowers.

So it disclosed, upon the urging of the Ontario Securities Commission, the results of an investigation that had been going on secretly since September: “falsification of income information.” Liar loans.

Liar loans had been the scourge of the US housing bust. Lenders were either actively involved or blissfully closed their eyes. And everyone made a ton of money.

So Home Capital revealed that it has suspended “during the period of September 2014 to March 2015, its relationship with 18 independent mortgage brokers and 2 brokerages, for a total of approximately 45 individual mortgage brokers,” who’d together originated nearly C$1 billion in single-family residential mortgages in 2014. That’s 5.3% of the company’s total outstanding loan assets, and 12.5% of its total single-family mortgage originations in 2014.

That’s a big chunk. The company, however, didn’t disclose why it took so long to disclose this.

It said an “external source” had warned it about income falsification on mortgage applications submitted by a number of brokers. Its investigation did not find any evidence of falsified credit scores or property values, it said.

…click on the above link to read the rest of the article…

We Need a Crash to Sort the Wheat from the Chaff

July 20, 2015

We Need a Crash to Sort the Wheat from the Chaff

Once the phantom collateral vanishes, there’s no foundation to support additional debt and leverage.

When a speculator bought a new particle-board-and-paint McMansion in the middle of nowhere in 2007 with nothing down and a $500,000 mortgage, the lender and the buyer both considered the house as $500,000 of collateral. The lender counted the house as a $500,000 asset, and the speculator considered it his lottery ticket in the housing bubble sweepstakes: when (not if) the house leaped to $600,000, the speculator could sell, pay the commission and closing costs and skim the balance as low-risk profit.

But was the house really worth $500,000? That’s the trouble with assets bubbles inflated by central-bank/central-state intervention: when inefficient companies and inflated assets are never allowed to fall/fail, it’s impossible to tell the difference between real collateral and phantom collateral.

The implosion of the housing bubble led to an initial spike of price discovery. The speculator jingle-mailed the ownership of the poorly constructed McMansion to the lender, who ended up selling the home to another speculator who reckoned a 50% discount made the house cheap for $250,000.

But what was the enterprise value of the property, that is, how much revenue, cash flow and net income could the property generate in the open market as a rental? Comparables are worthless in terms of assessing collateral, because assets are mostly phantom collateral at bubble tops.

Let’s assume the enterprise value based on market rents was $150,000. The speculator who bought the house for $250,000 sold for a loss, and at the bottom of the cycle the house finally sold for its true value of $150,000.

Leveraged 20-to-1, the lender’s loss of $250,000 in collateral/capital unhinged $5 million of the lender’s portfolio as the capital supporting those loans vanished.

The first speculator who put nothing down suffered a loss of creditworthiness, and the second speculator lost $100,000 plus commissions when he dumped the property for a loss.

…click on the above link to read the rest of the article…

Shadow mortgage lending on the rise as house prices soar

July 9, 2015

Shadow mortgage lending on the rise as house prices soar

Shadow lending represents about 4 to 5 per cent of Canada’s mortgage market

Canada’s housing boom is increasingly driving homebuyers to seek mortgages from private lenders, who demand rates that can be more than five times higher than those charged by the nation’s banks.

Canadian house prices have risen 36 per cent since June 2009, according to the Teranet-National Bank house price index. At the same time, Canadian banks have become more conservative and regulators are making it harder to lend, giving rise to an alternative market, including Canadians who refinance their own homes at low rates and then use the money to become mortgage lenders themselves.

Some analysts say a housing investment is increasingly risky because the pace of price increases has vastly outstripped wage growth, all amid a time of historically low interest rates and record debt levels. If and when interest rates rise, the concern is that consumers would have little ability to increase their payments, because they have so much debt.

“The risk arises if the unintended consequence of regulation is to push out the risk profile of the less regulated sector, and to encourage it to grow quickly at the same time,” said Finn Poschmann, vice-president of policy analysis at the C.D. Howe Institute.

“In dollar terms it is not a huge part of the economy (but) my concern is that we pay attention, because small problems sometimes get unexpectedly large, and quickly so.”

Mortgage broker Lou Perrotta said that in terms of volume, 20 per cent to 30 per cent of the mortgages he puts together are now privately financed, typically because borrowers are declined for a bank loan for reasons like a low credit rating or unsteady income. That represents about $4 million to $5 million of the $20 million of mortgage business he does annually, he said.

…click on the above link to read the rest of the article…

Australia’s Housing Bubble—–The Mania Down Under

June 17, 2015

Australia’s Housing Bubble—–The Mania Down Under

Australians are being “irrationally exuberant” and borrowing too much to invest in housing, exposing the economy to financial shocks, global bond fund giant PIMCO says.

In a detailed statistical study that compares Australian borrowers to those in other countries, PIMCO researchers found that Australians’ decision to borrow is driven by falling interest rates and rising house prices – not economic fundamentals that reflect the health of the economy like employment.

In the US wages and other measures of economic health drive people’s decisions to borrow.

The world’s biggest bond investor said Australians’ focus on capital gains and cheap credit “may not be sustainable or linked to the productivity of the asset.”

Australians also appear to be ‘trigger happy’ about debt – they respond far quicker than other borrowers to changes in interest rates and asset prices. They start borrowing more after only six months of increases in house prices compared with a year in the US.

“Households are exhibiting irrational exuberance because they are placing little weight on broader fundamentals like unemployment that may be more representative of future incomes or asset price returns, increasing the likelihood of asset price bubbles,” the report released by the bond fund on Wednesday said.

Australians react faster and “more vigorously to a shock in asset prices or mortgage rates” which makes the economy more vulnerable to an external shock, such as a sharp slow down in China’s economy or another financial market sell-off, the report said.

The conclusions may bolster those who believe parts of Australia’s property market are into a bubble, including Treasury secretary John Fraser, and put pressure on regulators to take action. A sharp fall in property prices could hit the big banks, which borrow billions each year from overseas investors like PIMCO.

“The key point is that the speed which Australian households reacted to changes in housing assets and mortgage rate was much faster,” the researchers said.

…click on the above link to read the rest of the article…

“Bernanke & Greenspan Have Destroyed America” Schiff & Maloney Warn “People Don’t Realize What Is Coming”

June 3, 2015

“Bernanke & Greenspan Have Destroyed America” Schiff & Maloney Warn “People Don’t Realize What Is Coming”

Ali and Frazier, Laurel and Hardy, Mayweather and Pacquiao, Liesman and Santelli, and now Schiff and Maloney. Peter and Mike join clash of the titan-like to discuss their investment strategies and expose the charts the government doesn’t want you to seeas “people like Bernanke are taken seriously still and the people that did predict [the crisis] are dismissed as lunatics half the time.” The wide-reaching conversation covers everything from gold and stocks to The Fed and The Dollar – Bernanke “took the coward’s way out because all he did was exacerbate the problems to postpone the day of reckoning.” The air is coming out of the bubble, they warn, “Bernanke and Greenspan have absolutely destroyed America. People don’t realize what is coming…”

Full transcript below:

Mike: I was in Puerto Rico a little while back and Peter Schiff invited me over to his house and we were just amazed at how we are exactly on the same page when it comes to everything economically. And so he just made a trip out to California near my offices and we decided we’d get together and discuss some of this stuff. So on your travels Peter lately you were just at a show you were speaking. Where were you at?

Peter: I was in Las Vegas. It’s great to see you again Mike. I was speaking to a very main stream audience of hedge fund managers at an annual conference there. And what was very interesting is even though the audience was, as I said, very main stream, and I was on a panel with a lot of very high profile, main stream individuals, the only person that really got applause was me.

…click on the above link to read the rest of the article or view the interview…

Something Smells Fishy

May 30, 2015

SOMETHING SMELLS FISHY

It’s always interesting to see a long term chart that reflects your real life experiences. I bought my first home in 1990. It was a small townhouse and I paid $100k, put 10% down, and obtained a 9.875% mortgage. I was thrilled to get under 10%. Those were different times, when you bought a home as a place to live. We had our first kid in 1993 and started looking for a single family home. We stopped because our townhouse had declined in value to $85k, so I couldn’t afford to sell. In 1995 I convinced my employer to rent my townhouse, as they were already renting multiple townhouses for all the foreigners doing short term assignments in the U.S. We bought a single family home in 1995 with the sole purpose of having a decent place to raise a family that was within 20 minutes of my job.

Considering home prices on an inflation adjusted basis were lower than they were in 1980, I was certainly not looking at it as some sort of investment vehicle. But, as you can see from the chart, nationally prices soared by about 55% between 1995 and 2005. My home supposedly doubled in value over 10 years. I was ecstatic when I was eventually able to sell my townhouse in 2004 for $134k. I felt so smart, until I saw a notice in the paper one year later showing my old townhouse had been sold again for $176k. Who knew there were so many greater fools.

This was utterly ridiculous, as home prices over the last 100 years have gone up at the rate of inflation. Robert Shiller and a few other rational thinking people called it a bubble. They were scorned and ridiculed by the whores at the NAR and the bimbo cheerleaders on CNBC. Something smelled rotten in the state of housing.

…click on the above link to read the rest of the article…

High End Real Estate in Canada in Frenzied Bubble Blow-Off

May 6, 2015

High End Real Estate in Canada in Frenzied Bubble Blow-Off

Throwing Caution to the Wind

We have discussed the dangerous housing and consumer credit bubble in Canada in these pages on several previous occasions in some detail (see “Carney’s Legacy” and “A Tale of Two Bubbles” as examples). Since we first wrote about Canadian real estate, the bubble has continued to grow with nary a pause. Why are we calling it a bubble? The gap between incomes and house prices is widening ever more, and has been far above what is considered normal for several years already.

This decline in affordability is the result of monetary pumping and ultra-low administered interest rates imposed by Canada’s central bank. Moreover, the boom is subsidized by a giant state-owned mortgage insurer, an institution that has the potential to severely impair the government’s finances once the bubble bursts.

van-twilight Vancouver skyline at night – no doubt a nice place, but a bit pricey.

Photo credit: Mohsen Kamalzadeh, imaginion.wordpress.com

The housing bubble is most pronounced in big cities like Toronto and especially Vancouver. Trophy properties are selling like hotcakes to people who evidently don’t care much about money. In fact, the frenzy proves that the demand for money has long been overwhelmed by the huge growth in its supply among the richer strata of society

A friend has pointed us to a short video at CTV News about a recent high end property sale in Vancouver that is quite remarkable, to say the least.

…click on the above link to read the rest of the article…

Canada has the Most Overvalued Housing Market in World

May 2, 2015

Canada has the Most Overvalued Housing Market in World

Canada has the Most Overvalued Housing Market in World [Chart]

The Chart of the Week is a weekly feature in Visual Capitalist on Fridays.

In every inflating bubble, there’s usually two camps. The first group points out various metrics suggesting something is inherently unsustainable, while the second reiterates that this time, it is different.

After all, if everyone always agreed on these things, then no one would do the buying to perpetuate the bubble’s expansion. The Canadian housing bubble has been no exception to this, and the war of words is starting to heat up.

On one side of the ring, we have The Economist, that came out last week saying Canada has the most overvalued housing market in the world. After crunching the data in housing markets in 26 nations, The Economist has determined that Canada’s property market is the most overvalued in terms of rent prices (+89%), and the third most overvalued in terms of incomes (+35%). They have mentioned in the past that the market has looked bubbly for some time, but finally Canada is officially at the top of their list.

Of course, The Economist is not the only fighter on this side of the ring.

…click on the above link to read the rest of the article…

How Insane Is Canada’s Housing Bubble? 42% of “Second-Time” Buyers Need (a lot of) Money from Mom & Dad to Buy a Home

April 25, 2015

How Insane Is Canada’s Housing Bubble? 42% of “Second-Time” Buyers Need (a lot of) Money from Mom & Dad to Buy a Home

A housing bubble is a huge party. Everyone gets drunk and has a good time. The economy booms because housing, particularly construction, is a very local business. It creates local jobs. People spend this money. Businesses get this money. Governments exact their pound of flesh. But there is a drawback to a housing bubble, beyond the fact that it will eventually crash with terrible consequences: New entrants into the market are getting locked out by soaring prices.

Canada’s housing bubble has been a sight to behold. Home prices only dipped 8% when the US housing market crashed. Then it re-soared. Now, across the country, home prices are 26% higher than they were at the already crazy peak in 2008. In Toronto, they’re 42% higher! Prices in the major urban centers where young people like to live have become a challenge for first-time buyers.

First-time buyers are special. One, they’re the foundation of a healthy housing market; they represent growth. And two, they don’t benefit from any run-up in home prices. Current homeowners profit from the housing bubble by owning a home that has gotten pricier. When they move, they sell an overpriced home, which soothes the pain of buying another overpriced home. But first-time buyers feel the full brunt of the bubble price.

So the Bank of Montreal (BMO), in its Home Buying Report, determined just how difficult it’s getting in Canada. The survey found that 42% of the potential first-time buyers, those hardy folks that haven’t been discouraged by the soaring prices, expect to recruit the help of mom and dad, and in a big way.

To begin with, which is not a good sign, first-time buyers whittled down their budget by C$3,400 on average from last year to C$312,700 (US$259,000).

…click on the above link to read the rest of the article…

Magnificent Housing Bubble Unravels in Much of Canada

April 15, 2015

Magnificent Housing Bubble Unravels in Much of Canada

Canada’s housing bubble, which has been so much more magnificent than anything the US was ever able to conjure up, notched another gain in March, according to the Teranet-National Bank House Price Index, which rose 0.3% for the month. Prices were up in eight of the metropolitan markets and down in three, the broadest diffusion in seven months. Year over year, the index rose 4.7% to a new all-time record.

Since 2000, home prices have jumped 140% in the survey’s 11 metropolitan markets. A number of years charted double-digit gains before the Financial Crisis and right afterwards. Before the Financial Crisis, Canada’s home prices had largely followed the US run-up. But when US housing went into a terrific tailspin, Canada’s home prices just dipped about 8% before re-soaring, fired up by easy money, a resource boom that has now crashed, and in certain metropolitan markets an influx of flush and motivated foreign buyers.

Home prices are now 26% higher than they were at the already crazy peak in 2008. The chart of the Teranet–National Bank National Composite House Price Index is what areal housing bubble looks like. Note the now puny dip during the Financial Crisis:

But it wasn’t spread evenly. In some metro areas, home prices are still skyrocketing. In others, they’ve never moved much beyond the prior bubble. And in other areas again, once booming, home prices have already started to deflate.

…click on the above link to read the rest of the article…

Canada Housing, Office Market Mauled by Oil, Layoffs – but Vancouver Bubble Still Soars

April 6, 2015

Canada Housing, Office Market Mauled by Oil, Layoffs – but Vancouver Bubble Still Soars

Back in December, the Bank of Canada said home prices were overvalued by as much as 30% and posed an “elevated” risk to the Canadian financial system. In January, Deutsche Bank found that Canada’s housing market was, more realistically, 63% overvalued.

In greater Vancouver, the “benchmark” price of all types of homes (detached, townhouse, and apartment) in March rose 7.2% from a year ago to C$660,700, according to the Real Estate Board of Greater Vancouver. Detached homes jumped 11.2% to C$1.05 million; and in Vancouver West, 12.3% to a breathtaking C$2.4 million.

Those are the Board’s “benchmark” prices. The average price for detached homes in Vancouver soared 16% from a year ago, surpassing $1.4 million for the first time. Transactions skyrocketed 54%; supply plunged 15%. Prices were doped by low interest rates, limited supply, and foreign investors. This market is hot.

But the oil patch of Canada is skidding into serious trouble.

“The recent international price war over oil has demonstrated the risks and dangers of relying on energy revenue to fund public services,” Alberta’s government explained on Thursday, as it presented a C$43.4 billion budget for fiscal 2015/2016. It projects arevenue decline of C$5.6 billion!

It’s “simply irresponsible” to rely on unstable oil revenues “to fund health, education, and other vital public services that Albertans depend upon,” the government said.

And things would change. Energy revenue would from now on – if they ever return to prior levels – be treated as “windfall” that would at least in part go into savings. And there would be a slew of new taxes and fees, such as a bump in gasoline taxes, steeper income taxes for high-income earners, and a new health-care levy. With these measures, the government hopes to balance the budget three years from now.

…click on the above link to read the rest of the article…

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