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The Doomsday Scenario for the Stock and Housing Bubbles

The Doomsday Scenario for the Stock and Housing Bubbles

It was always folly to believe that inflating asset bubbles could solve the structural problems of a post-industrial economy.

The Doomsday Scenario for the stock and housing bubbles is simple: the Fed’s magic fails. When dropping interest rates to zero and flooding the financial sector with loose money fail to ignite the economy and reflate the deflating bubbles, punters will realize the Fed’s magic only worked the first three times: three bubbles and the game is over.

So what happens when punters realize there won’t be a fourth bubble? They sell. Bids disappear because who’s dumb enough to bet (with Japan and Europe as lessons) that more liquidity and negative interest rates will magically work when zero interest rates didn’t move the needle?Who’s foolish enough to catch the falling knife (i.e. buying plummeting assets on the way down) on the unsupported assumption that the next dose of Fed magic will reverse a bidless market?

And should the Fed start buying stocks, mortgages, housing and bonds to prop up those bidless markets, what’s the message it will be sending? Desperation.If the only buyer is the money-printing central bank, that’s pretty good evidence that your economy and markets are in free-fall.

The loss of faith in central bank magic will be gradual at first, as magical thinking dies hard. It’s oh so comforting to believe the central bank will rescue every overleveraged mal-investment and bail out every high-risk speculation, but the funny thing about the Fed’s magic is it only works in liquidity crises–in every other condition, it only makes matters worse.

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

2019: Zombie Markets Before The Fall

Francis Tattegrain La ramasseuse d’épaves (The Beachcomber) 1880

I haven’t really written about finance since April of this year, and given recent fluctuations in what people persist in calling the markets, maybe it’s time. Then again, nothing has changed since that article in April entitled This Is Not A Market. I was right then, and I still am.

[..] markets need price discovery as much as price discovery needs markets. They are two sides of the same coin. Markets are the mechanism that makes price discovery possible, and vice versa. Functioning markets, that is. Given the interdependence between the two, we must conclude that when there is no price discovery, there are no functioning markets. And a market that doesn’t function is not a market at all.

[..] we must wonder why everyone in the financial world, and the media, is still talking about ‘the markets’ (stocks, bonds et al) as if they still existed. Is it because they think there still is price discovery? Or do they think that even without price discovery, you can still have functioning markets? Or is their idea that a market is still a market even if it doesn’t function?

But perhaps that is confusing, and confusion in and of itself doesn’t lead to better understanding. So maybe I should call what there is out there today ‘zombie markets’. It doesn’t really make much difference. What murdered functioning markets is intervention by central banks, in alleged attempts to save those same markets. Cue your favorite horror movie.

Now Jerome Powell and the Fed he inherited are apparently trying to undo the misery Greenspan, Bernanke and Yellen before him wrought upon the economic system, and people, cue Trump, get into fights about that one. All the while still handing the Fed, the ECB, the BoJ, much more power than they should ever have been granted.

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

Toronto Home Prices Just Plunged At A Rate Not Seen Since 1996

A seismic shift is currently underway in the Toronto real estate market which may have finally pricked Canada’s biggest bubble. In October, home prices plunged at the fastest pace in more than two decades, according to new data published by Statistics Canada.

Statistics Canada’s Price Index for new Toronto homes declined 1.4% in October from a year earlier, the most since September 1996. Across all provinces and territories, home prices increased 0.1%, the slowest pace since 2010, which signals the country’s real estate market has stalled and could reverse into 2020.

The pace of new home construction crashed by a massive 40.3% in the Greater Toronto Area between October 2017 and October 2018.

Bloomberg describes the turning point in the real estate market as a result of government measures, introduced in 2017 to help cool the city’s red-hot housing market, such as tighter mortgage lending laws.

“The Bank of Canada also raised its trend-setting interest rate five times between July 2017 and October of this year,” notes Bloomberg.

“New home prices were advancing at an annual pace of almost 4% late last year before the mortgage rules took effect.”

Further, the current economic backdrop suggests storm clouds are gathering across the country. Last week, the Canadian 2 and five year bond yields inverted, for the first time since 2007.

“This is often taken as a signal that investors are more optimistic about short-term prospects versus the long term, suggesting a lack of confidence in continued economic growth. This can also impact bank profitability, as banks pay short-term rates on deposits and take in long-term rates on loans. A flat or inverted yield curve, therefore, could lead to negative net interest margins,” said Steve Saretsky of VancityCondoGuide.

As Saretsky shows, this can cause bank lending to further tighten, leaving borrowers high and dry when market liquidity is most needed.

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

Vancouver Housing Starts Flash Red As Chart Rolls Over

Canadian housing construction starts slowed in August, coming in at a seasonally adjusted annual rate of 200,986 vs. 205,751 in July – missing expectations of 210,300, according to CBC

The decrease came as the annual pace of urban starts fell 2.5 per cent to 184,925 units. Starts of urban multiple-unit projects such as condos, apartments and townhouses fell 2.4 per cent to 132,700 units in August while single-detached urban starts fell 2.6 per cent to 52,225 units. –CBC

“The national trend in housing starts continued to decline in August from the historical peak that was recorded in March 2018,” said Bob Dugan, CMHC chief economist. “This moderation brings total starts closer to historical averages, largely reflecting recent declines in the trend of multi-unit starts from historically elevated levels earlier in the year.”

Of note, housing starts are in Metro Vancouver are slowing to a greater extent, falling 4% from its March 2018 peak, according to Steve Saretsky of the VanCity Condo Guide.

A slowdown in housing starts suggests homebuilders perceive risks ahead or simply can’t make new projects feasible due to elevated land prices and construction costs, which is typical at this stage of the cycle. This does not bode well for future economic growth considering housing and the consumption that goes along with it (renovations, furniture, etc) are a big driver of the economy. In Canada, household consumption and residential investment as a percentage of real GDP is nearly 65%. –VanCity Condo Guide

Saretsky notes that a rebound in housing starts seems unlikely “given how extended this current expansion is,” while the labor market is at capacity and rising interest rates should cause investors to reduce exposure considering that Vancouver home sales are at a 17-year low.

Instead, the construction industry is working at a frantic pace to complete existing units. Housing under construction in Metro Vancouver ticked upwards to a new record high in August- hitting a staggering 43,684 units. well above annual population growth of 30,000. –VanCity Condo Guide

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

The greedy little nation that sold its soul for house prices

There was a time when Australia’s housing bubble was not much more than a curiosity. Contained mostly to Sydney it seemed it would pass with a little pop and be forgotten.

Then there was a time when the bubble went national. And suddenly the little pop was going to be a big pop so monetary and fiscal policy began to distort in support of it.

Next there was a time when moral hazard became so great that the bubble grew to engulf all policy and media, marginalising an entire generation from home ownership. Politicians routinely lied to cover the collapse in evidence based policy-making.

Finally, we come to today. When notions of managing the macro-economic levers of an economy now boil down to just one thing:

  • low interest rates to prevent the housing bubble bursting;
  • fiscal repair to prevent the bubble bursting, and
  • mass immigration to prevent the bubble bursting even though it is crushing living standards and gutting wages.

This classic slippery slope upon which one bad policy choice cannoned directly into the next is not over. Three ridiculous further steps are being mulled that will ensure the complete selling of the nation’s soul in a vain attempt to save house prices. The first is captured by Anthony Bubalo of the Lowy Institute:

Not long ago I listened to four Australians of Chinese heritage speak at the Lowy Institute about the impact on their communities of the foreign interference question. Some of the issues they raised were similar to those articulated by Muslim Australians when they talked about the effect of terrorism on their relationship with broader society.

…The government is certainly seized of this challenge. New legislation has been passed and a new position, the National Counter Foreign Interference Coordinator, has been created in the Department of Home Affairs, similar to the longer-standing position of Commonwealth Counter-Terrorism Coordinator.

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

Neoliberalism, Pipelines, and Canadian Political Economy

Neoliberalism, Pipelines, and Canadian Political Economy

Photo by Luke Jones | CC BY 2.0

The national debate about how to get diluted bitumen to trans-oceanic markets by means of a twinning of the existing Kinder Morgan pipeline route between Alberta and British Columbia – known as the Trans Mountain Pipeline Expansion Project – illustrates the sad state of economic planning, diversification and vision in Canada.

The current policy of dependence on the sale of carbon-based energy resources, coupled with reliance on residential real estate construction and sale, is a short-sighted environmental and industrial strategy for a nation such as Canada. The country’s forecast continued dependence on the extraction of oil and gas, the burning of which our planet can no longer sustain, along with our primary devotion to the FIRE (Finance, Insurance and Real Estate) model of wealth creation does not serve the well-being of all Canadians nor preserve our natural environment. Instead, we should be considering alternative economic approaches that affirm Canadian economic sovereignty through the creation of jobs and socially re-invested dividends linked to a sustainable future.

It is time we organize our economy along different lines, putting people, communities and the environment ahead of pipeline revenues, quarterly profits, and energy stock prices. That this may pose challenges is not a matter of dispute. Nevertheless, our reluctance to revise or discard established ways of doing things has been an impediment to change in the past.  This was noted fifty years ago by the distinguished Canadian economic historian Harold Innis, who, in discussing our political culture, noted our “infinite capacity for self-congratulation.”  This complacency is perhaps not surprising when one considers our rich abundance of resources, land, and water; our good fortune to be situated next to the world’s economic behemoth which possessed an apparently insatiable appetite for our raw materials and commodities; and, finally, our small population occupying an immense landmass according each individual an almost blessed sense of space, ease and, for a time, opportunity.

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

10-Minute Neighborhoods: The Low-Tech Solution to Almost* Everything

10-Minute Neighborhoods: The Low-Tech Solution to Almost* Everything

What if it were possible to make headway on all these issues with simple changes to our neighborhoods?

What if we could cut our medical costs in half? What if we could give the average American an added five years of healthy life? What if we could cut our energy use, our water use, and our greenhouse gas emissions by more than half while improving our happiness and prosperity? What if we could provide affordable housing for millennials staggering under student loan debt? What if we could help elders age gracefully in a connected community, with their mobility and cognition intact? What if we could create communities where children can experience both safety and independence? What if we could cut in half the cost of essential services provided by cities and towns? What if we could prevent prime farmland from becoming suburbs and McMansions? What if we could create biodiverse greenbelts and wildlife corridors around our towns and cities? What if inside our cities we could create calming tree canopies, community vegetable gardens and open spaces for all to benefit from?

All this can be achieved with 10-minute walkable neighborhoods, neighborhoods where everyone can step out their front door and reach a wide array of goods and services within ten minutes by foot. All it takes is enough density within a half-mile radius of a commercial shopping street to allow the businesses and services there to prosper. We’re not talking Hong Kong or Manhattan density, just 16 or so housing units per acre, which can be easily achieved by allowing again the “Missing Middle” of housing that was so common before World War II. What is the Missing Middle?

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

Why the American Dream of owning a big home is way overrated, in one chart

Courtesy of Rogers & Cowan
Do you NEED this much space?

From 1978 through 2015, the median size of the single-family home increased every year until it peaked at 2,467 square feet, according to the U.S. Census Bureau. Then, in 2016, that number began to shrink, albeit ever so slightly.

So, are we finally coming to our senses about McMansions?

Of course, owning a big house has long been a key component of the American Dream — you know you’ve arrived when you have columns, an indoor pool and a theater room — but, in reality, it’s all usually a huge waste of space, according to a study cited by Steve Adcock on the Get Rich Slowly blog.

A research team affiliated with UCLA studied American families and where they spend most of their time while inside their homes. The results were fascinating, but really not all that surprising. Here’s one representative example:

As you can see, most square footage is wasted as people tend to gather around the kitchen and the television, while avoiding the dining room and porch.

“The findings were not pretty. In fact, they helped prove how little we use our big homes for things other than clutter,” Adcock said. “Most families don’t use large areas of their homes — which means they’ve essentially wasted money on space they don’t need.”

And Adcock knows a thing or two about utilizing space.

Like the family in the illustration above, he used to spend all of his time hanging out in the kitchen and family room in his 1,600-square-foot home. Now, after managing to retire from his full-time gig at the age of 35, he lives his version of the American Dream in an Airstream trailer with his wife.

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

Australians Face Huge Spike in Repayments as Interest-Only Home Loans Expire

Day of Reckoning: Hundreds of thousands of interest-only loan terms expire each year for the next few years.

The Reserve Bank of Australia (RBA), Australia’s central bank, warns of a $7000 Spike in Loan Repayments as interest-only term periods expire.

Every year for the next three years, up to an estimated 200,000 home loans will be moved from low repayments to higher repayments as their interest-only loans expire. The median increase in payments is around $7000 a year, according to the RBA.

What happens if people can’t afford the big hike in loan repayments? They may have to sell up, which could see a wave of houses being sold into a falling market. The RBA has been paying careful attention to this because the scale of the issue is potentially enough to send shockwaves through the whole economy.

Interest Only Period

​In 2017, the government cracked down hard on interest-only loans. Those loans generally have an interest-only period lasting five years. When it expires, some borrowers would simply roll it over for another five years. Now, however, many will not all be able to, and will instead have to start paying back the loan itself.

That extra repayment is a big increase. Even though the interest rate falls slightly when you start paying off the principal, the extra payment required is substantial.

Loan Payments

RBA Unconcerned

For now, the RBA is unconcerned: “This upper-bound estimate of the effect is relatively modest,” the RBA said.

Good luck with that.

“Canada Is In Serious Trouble” Again, And This Time It’s For Real

Some time ago, Deutsche Bank’s chief international economist, Torsten Slok, presented several charts which showed that  Canada is in serious trouble” mostly as a result of its overreliance on its frothy, bubbly housing sector, but also due to the fact that unlike the US, the average Canadian household had failed to reduce its debt load.

Additionally, the German economist demonstrated that it was not just the mortgage-linked dangers from the housing market (and this was before Vancouver and Toronto got slammed with billions in “hot” Chinese capital inflows) as credit card loans and personal lines of credit had both surged, even as multifamily construction was at already record highs and surging, while the labor market had become particularly reliant on the assumption that the housing sector would keep growing indefinitely, suggesting that if and when the housing market took a turn for the worse, or even slowed down as expected, a major source of employment in recent years would shrink.

Fast forward to last summer, when the trends shown by Slok three years ago had only grown more acute, with Canada’s household debt continuing to rise, its divergence with the US never been greater…

… making the debt-service ratio disturbingly sticky.

And yet despite all these concerning trends, virtually all of these red flags have been soundly ignored, mostly for one reason: the “wealth effect” in Canada courtesy of its housing market grew, and grew, and grew

Looking at the chart above, Bloomberg recently said that:

On a real basis, Canadian housing prices experienced a much smaller, shorter decrease in prices during the financial crisis and a much larger, longer increase in prices during the recovery. When you couple this unfathomable rise in housing prices with near-record high household debt-to-income ratios, the Canadian housing bubble starts to look scary should the tide turn.

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

Economists Who Push Inflation Stunned That Rising Home Prices Put Buyers Deeper Into Debt

Once again, when the government intervenes – this time in housing – the left hand is starting a fire that the right hand is trying to put out.Rising prices for homes are once again pricing out prime borrowers and nobody can “figure out” why this is happening.

It is news like this article reported this morning by the Wall Street Journal that continues to perpetuate the hilarious notion of Keynesian economics as giving a job to one man digging a hole and another job to another man filling it, simply so that they both have jobs.

There is nothing funnier (or sadder) than “economists” struggling to understand how housing prices got so high and why people are taking on more debt in order to purchase them. However, that is the great mystery that the Wall Street Journal reported on Tuesday morning, making note of the fact that people are “stretching“ in order to purchase homes. What’s the solution to this problem? How about just easing lending standards again? After all, what could go wrong?

Apparently blind to the obvious – that forced inflation could amazingly make things more expensive relative to income – “economists” have hilariously blamed this price/debt delta on lack of supply. Of course, no one has mentioned the credit worthiness of borrowers getting worse or the fact that homes prices are being manipulated in order to offer home ownership to people who otherwise may not be in the market.

More Americans are stretching to buy homes, the latest sign that rising prices are making homeownership more difficult for a broad swath of potential buyers.

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

Toronto’s Epic Housing Bubble Turns to Bust

Toronto’s Epic Housing Bubble Turns to Bust

Prices of detached houses plunge C$207,000 from a year ago as sales collapse.

After having ballooned for 18 years with barely a dip during the Financial Crisis, Toronto’s housing market, Canada’s largest, and among the most inflated in the world, is heading south with a vengeance, both in terms of sales volume and prices, particularly at the high end.

Home sales in the Greater Toronto Area (GTA) plunged 39.5% in March compared to a year ago, to 7,228 homes, according to the Toronto Real Estate Board (TREB), the local real estate lobbying group. This was spread across all types of homes, even the formerly red-hot condo sector:

  • Detached houses -46.3%
  • Semi-detached houses -30.6%
  • Townhouses -34.2%
  • Condos -32.7%.

While new listings of homes for sale fell 12.4% year-over-year, at 14,866, they’d surged 41% from the prior month, and added to the listings of homes already on the market. The total number of active listings – new listings plus the listings from prior months that hadn’t sold or been pulled without having sold – more than doubled year-over-year to 15,971 homes, and were up 20% from February.

At the current sales rate, total listings pencil out to a supply of 2.1 months. The average days-on-the-market before the home is sold or the listing is pulled without having sold doubled year-over-year to 20 days. Both data points show that the market is cooling from its red-hot phase, that potential sellers aren’t panicking just yet, and that potential buyers are taking their time and getting more reluctant, or losing their appetite altogether, with the fear of missing out (FOMO) having evaporated.

Sales volume has been plunging for months while listings of homes for sale have also surged for months. Prices follow volume, and prices have been backing off, but in February they actually fell on a year-over-year basis, the first since the Financial Crisis, and in March, they fell more steeply. This is what the report called a “change in market conditions.”

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

It’s Looking A Lot Like 2008 Now…

It’s Looking A Lot Like 2008 Now…

Did today’s market plunge mark the start of the next crash?

Economic and market conditions are eerily like they were in late 2007/early 2008.

Remember back then? Everything was going great.

Home prices were soaring. Jobs were plentiful.

The great cultural marketing machine was busy proclaiming that a new era of permanent prosperity had dawned, thanks to the steady leadership of Alan Greenspan and later Ben Bernanke.

And only a small cadre of cranks, like me, was singing a different tune; warning instead that a painful reckoning in our financial system was approaching fast.

It’s fitting that I’m writing this on Groundhog Day, as to these veteran eyes, it sure has been looking a lot like late 2007/early 2008 lately…

The Fed’s ‘Reign Of Error’

Of course, the Great Financial Crisis arrived in late 2008, proving that the public’s faith in central bankers had been badly misplaced.

In reality, all Ben Bernanke did was to drop interest rates to 1%. This provided an unprecedented incentive for investors and institutions to borrow, igniting a massive housing bubble as well as outsized equity and bond gains.

It’s worth taking a moment to understand the mechanism the Federal Reserve used back then to lower interest rates (it’s different today). It did so by flooding the banking system with enough “liquidity” (i.e. electronically printed digital currency units) until all the banks felt comfortable lending or borrowing from each other at an average rate of 1%.

The knock-on effect of flooding the US banking system (and, really, the entire world) in this way created an echo bubble to replace the one created earlier during Alan Greenspan’s tenure (known as the Dot-Com Bubble, though ‘Sweep Account’ Bubble is more accurate in my opinion):

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

The Biggest Ponzi in Human History


Jean-Léon Gérôme Slave market 1866
Here’s the story in a nutshell: Ultra low interest rates mark a shift away from people’s wealth residing in their savings and pension plans, and into to so-called wealth residing in their homes, which are bought with ever growing levels of debt. When interest rates rise, they will lose that so-called wealth.

It is grand theft auto on an unparalleled scale, and it’s a piece of genius, because while people are getting robbed in plain daylight, they actually think they’re winning. But as I wrote back in March of this year, home sales, and bubbles, are the only thing that keeps our economies humming.

We haven’t learned a thing since March, and we haven’t learned a thing for many years. People need a place to live, and they fall for the scheme hook line and sinker. Which in a way is a good thing because the economy would have been dead without that ignorance, but at the same time it’s not because it’s a temporary relief only and the end result will be all the more painful for it.

Whatever Yellen decides as per rates, or Draghi, it doesn’t really matter anymore, this sucker’s going down something awful. This is a global issue. Housing bubbles have been blown not only in the Anglosphere, though they are strong there, many other countries have them as well, Scandinavia, Netherlands, even Germany and France. It’s what ultra low rates do.

First, here’s what I said in March:

Our Economies Run On Housing Bubbles

What we have invented to keep big banks afloat for a while longer is ultra low interest rates, NIRP, ZIRP etc. They create the illusion of not only growth, but also of wealth. They make people think a home they couldn’t have dreamt of buying not long ago now fits in their ‘budget’. That is how we get them to sign up for ever bigger mortgages. And those in turn keep our banks from falling over.

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

Stagnation Nation: Middle Class Wealth Is Locked Up in Housing and Retirement Funds

Stagnation Nation: Middle Class Wealth Is Locked Up in Housing and Retirement Funds

The majority of middle class wealth is locked up in unproductive assets or assets that only become available upon retirement or death.

One of my points in Why Governments Will Not Ban Bitcoin was to highlight how few families had the financial wherewithal to invest in bitcoinor an alternative hedge such as precious metals.

The limitation on middle class wealth isn’t just the total net worth of each family; it’s also how their wealth is allocated: the vast majority of most middle class family wealth is locked up in the family home or retirement funds.

This chart provides key insights into the differences between middle class and upper-class wealth. The majority of the wealth held by the bottom 90% of households is in the family home, i.e. the principal residence. Other major assets held include life insurance policies, pension accounts and deposits (savings).

What characterizes the family home, insurance policies and pension/retirement accounts? The wealth is largely locked up in these asset classes.

Yes, the family can borrow against these assets, but then interest accrues and the wealth is siphoned off by the loans. Early withdrawals from retirement funds trigger punishing penalties.

In effect, this wealth is in a lockbox and unavailable for deployment in other assets.

IRAs and 401K retirement accounts can be invested, but company plans come with limitations on where and how the funds can be invested, and the gains (if any) can’t be accessed until retirement.

Compare these lockboxes and limitations with the top 1%, which owns the bulk of business equity assets. Business equity means ownership of businesses; ownership of shares in corporations (stocks) is classified as ownership of financial securities.

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

Olduvai IV: Courage
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Olduvai II: Exodus
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