DROWNING IN DEBT modified modified

When I was in Ottawa the last time as an MP, sitting in the government lounge behind the green curtains to the right of the Honourable Speaker’s chair in the House of Commons, I first heard the expression.

“Wonder what the sheeple are thinking?” Seems to me it was John Baird who uttered the words. I don’t recall the issue of the day, but I was struck by the word. Sheeple. He meant citizens. Voters. The manipulated.

I thought of that on the weekend when I read a comment posted on this pathetic bog by an insurance guy from Ontario. “People here are so mistaken if they believe house prices will soon fall,” he wrote, “especially now that mortgage interest rates will be dropping soon.”

This is exactly what the feds (including Mr. Baird) and the Bank of Canada want the sheeple to believe. And a lot have already fallen for it, with a torrent of calls last week to real estate agents in Toronto and Vancouver. On CBC’s suppertime TV show Saturday night a woman with babe in arms said to a reporter: “It’s great they’re putting the interest rates down because we just bought a new house last month and we’re going to sell ours next week.”

Since the wheels came off the economy in 2008, this has been the government’s primary strategy – make money so cheap it’s irresistible. Then tell people things are getting better. The sheeple will respond. They will borrow to excess and spend beyond their means. So the economy will get better.

Only it didn’t. So, the manipulators have done it again, now that the oil price shock guarantees incomes in Canada will be softening, along with our overall fortunes. If the herd was that gullible the first time, they’re saying in the government lounge, it’s a sure thing it’ll happen again.

Of course, it’s not 2008 anymore. Seven years later we have houses that are far more unaffordable, an epic new level of personal and household debt, less economic growth and now the prospect of collapse in our key export industry. So it’s simply astounding what one quarter-point nip in the Bank of Canada rate can do – especially when (so far) it means not a single mortgage or line of credit payment is cheaper than it was two weeks ago.

Let’s talk about oil and real estate. And deflation. As I’ve been yammering on about for well over a year here, this is the beast you should most fear, not the absurd idea you’ll be priced out of the real estate market forever. If what’s happening in Alberta and elsewhere is an indication, real estate could end up being the black swan few expected to swoop in.

As this week begins, year/year sales are down 33% in Calgary and listings are up 79%. Last year at this time there were 2,400 properties for sale, and now there are 4,400. That may not be a big deal historically, but the rapidity of this buildup has been breathtaking. It correlates perfectly with the job losses and employment insecurity now sweeping the region. But this is not just a Calgary story, since this misery is expected to crash economic growth in all of Canada in 2015, send governments spiraling into deficit and has already nuked the dollar, sending the cost of a new Harley up 20%. The agony.

Here’s what Cowtown permabull realtor Mike Fotiou writes on his blog: “At this pace, month-end inventory will cross north of the 5,000 mark, making it the 3rd highest January level since 2006.    High inventory, low sales: too early to expect the benchmark price to be affected significantly this month but if this market imbalance persists, we’ll see price deflation.”

Of course we will. And things, says a TD economist, are destined to get worse.

According to Dina Ignjatovic, oil (now at $45), will drop to around forty bucks on average for the first half of 2015, then achieve only $53 by the final months of the year. This is low enough to roundly spank the oil sands industry, as demand for crude stays tepid while supplies pile up. (US oil inventories are at an 80-year peak.)

Officially, Calgary realtors are not ceding to reality. “People outside of our province have a much different perspective than Calgarians do. They think the sky is falling,” the president-elect of the Calgary Real Estate Board told the Toronto Star. “Don’t get me wrong, there is a lot of concern here. But people in Alberta have seen this movie before. I think they are a bit more level-headed in reacting to this.”

Well, the thousands of families rushing to the exits right now suggest otherwise. But we’ll see. Perhaps like the gullible in Ontario, Albertans will believe a small rate drop (that does not benefit them) will compensate for paying too much for housing while taking on massive debt, in a world bordering on deflationary contraction.

If so, the dudes behind the Commons curtains are geniuses.

Fleeced again.


AUDI POTTY modified

Let’s put a fork in this week. And our national creds at the same time.

These are strange days here in Mapleville. First the feds trot out a $27 billion spending orgy to begin in six months, giving people extra cash to have kids and income-split. Then oil drops. So the finance minister cancels the budget. That was unprecedented. Then the central bank warns house prices are inflated by up to 30%. The second-in-command pledges no big moves in policy. Oil drops more. So the bank shocks everyone by cutting its rate for the first time in six years. The dollar plunges. People think money’s free and start shopping for real estate again. The prime minister says we’re cool.

Now we have (a) no budget, (b) a crushed dollar, (c) a wounded economy, (d) more house lust and (e) a government without a plan.

As economist Louis-Philippe Rochon wrote a day ago: “The (rate) move was a remarkable admission by the Bank of Canada that the Canadian economy was in far worse condition than previously believed. So much so, that they had to defy the expectations of virtually all economists, lowering rates now without any warnings.”

As you know, this pathetic blog has been urging you for a long time to have fewer of your nuts in Canada and more in the US and elsewhere. Growth here has ground almost to a halt. The oil thing is major serious. Job creation’s been horrible. The layoffs have started again. Your neighbours are pickled in debt. The whole world is slowing down. And now word of a 0.25% drop in rates that won’t actually help anyone has ignited new real estate horniness.

You think this ends well?

I don’t. Nor does Prairie Person, who left this comment last night:

“When a govt. panics, and what else can you call it when the federal budget is delayed, then there is a shocking cut in interest rates, except panic? If I were on a ship and it was having trouble staying afloat and the captain panicked, I’d be filled with fear. If the PM and his ministers are no longer in control and the best they can come up with is to lower interest rates, are we not going onto the rocks? Can you not hear the surf? This isn’t just about overleveraged homeowners. This is about the system no longer working. Does the Costa Concordia come to mind? The question is how can the blog dogs best prepare themselves to ride out whatever is going to happen? Garth, I think some serious advice and guidance is needed. Even you were taken by surprise by the rate cut. When you are surprised, I think we are in trouble.”

What can you do to mitigate the mess rising around you? I have six suggestions.

1. As deflation becomes more of a reality (and it is, or central bankers everywhere would not be doing rash things), understand this will punish real assets and reward financial ones. It’s a strong argument to have a balanced and diversified portfolio of the kind I’ve often described. What happened when the Bank of Canada shocked people? Stocks and bonds went up. It was an admission money is getting more valuable, and real stuff (like commodities) isn’t. So get with the program.

2. Expect surprises. More are coming. So never exit an asset class. A few months ago people were trashing bonds, but 2014 turned out to be a big win for people holding fixed income. After the rate cut, REITs took off, because their fat yields and stability suddenly looked irresistible. The point of having a well-built portfolio is to hold all assets in reasonable weightings because none of us can predict what’ll happen next.

3. Don’t try to time the markets. All through 2014 this blog was brimming with experts saying US equity markets were peaking. They weren’t. You are better to get invested for the long term and stop being paralyzed into non-action by the latest headline. Despite all of the crap past year – Ebola, terrorism, extreme weather, oil shock, ISIS, Ukraine, Hamas, deflation – a 60/40 balanced portfolio delivered about 9%.

4. Kill off your debt, however possible. The worst position to be in when deflation drops prices, incomes, profits, jobs and growth, is to owe money. Ask oil patch workers with McMansions in Calgary now losing six-figure salaries. No wonder listings are up 75%. They left selling too late. Don’t make the same mistake.

5. Don’t be a patriotic investor. You’ll regret being overweight in Canada. And yet, incredibly, 70% of all of us with investments have only Canadian ones. Now that oil has helped whack the economy, it should be obvious that at least two-thirds of your growth assets are better placed in US and international assets. This is part of being diversified, since Canada accounts for just 4% of capital markets and is likely to seriously underperform the US. Investing this way does not mean you have to convert your dollarettes, as there are C$-based securities available.

6. Above all, stay away from realtors. The lightly-educated and over-sexed masses may think this week’s rate cut means mortgages will never go up and housing can never drop, but you know better. A deflationary push – the very reason the central bankers panicked – is a death knell for real assets financed with mountains of debt. You can avoid that.

Or, you can believe the government.