Entries from December 2008 ↓

It’s here

December 22nd, 2008 — Book Updates — E-mail this blog post to a friend

Things I hoped you noticed this week:

* The average home price in Detroit is now $18,500
* Consumer confidence in Canada is at a 27-year low
* Governments threw $21 billion at the car companies on the weekend and Monday GM shares crashed and the TSX lost 300 points.
* Toyota’s bleeding money for the first time since ever.
* And Rick Wallick, a 57-year-old software engineer in Arizona told USA Today the new $200,000 house he bought three years ago is now worth $80,000. He’s walking.

It gets even more interesting:

* Oil is $39 a barrel, which means it’s lost 73.4% of its value.
* A share in General Motors has lost 84% of its value in the last year.
* The stock market has lost 52% of its value.
* Copper, wheat and plasma TVs have lost between 22% and 78% of their values.

Still more interesting: I bought a new SUV on the weekend, a Jeep. It was $36,000 when I started. Not bad value, I thought. Then I was offered an employee pricing discount of $1,500, and another $4,500 because I was paying cash. Then I got free winter tires, and finally the price was knocked down a further $5,000 when I hesitated. When I finally write a cheque, it was for $15,500 after getting a hefty $9,000 trade-in allowance for my sputtering 2003 truck with 153,700 km on the dial.

Here’s the point: Deflation. It’s not something you need to someday fear. It’s here

As I’ve said a few times on this blog, inflation is a walk in the park compared to this. Inflation simply means money’s worth less and everything money buys gets more expensive. Thus, it inflates the value of assets and makes every genius born since 1970 think houses go up each year. It also makes debt less onerous, since old debts can be paid back in currency which is worth less, dollar-for-dollar.

Flip that, and you have deflation. Jeeps and houses, Toyotas and GPS thingys cost less every month. Money actually grows in value because its purchasing power rises. But debt becomes more expensive, since it has to be repaid in dollars which are worth more. This is exacerbated when deflation, falling prices, reduced sales and the accumulation of debt lead to business failures, rising unemployment, less spending and broken and dispirited consumers.

Economists and political leaders know this to be the case, but will not speak the D word. It’s like the housing market collapse which didn’t exist when it was taking place and the ‘technical’ recession which wasn’t an actual downturn. This is an irresponsible attempt at public manipulation, since people deserve the truth.

They deserve to know that real estate will fall by at least another third, that oil (as I forecast some time ago) will go to $30 and stay there for a while, that unemployment will worsen significantly, the auto bailout won’t work, home values will not recover for years – perhaps a decade, maybe longer, and the government is powerless in the face of this global tsunami. Given this, nobody should be taking on more debt, waiting to sell their house or failing to take immediate personal precautions against the potential next phase.

Hell, look at me. I just bought a vehicle that eats logs and fords rivers. At 30% off.

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‘World according to Garth’

December 21st, 2008 — Book Updates — E-mail this blog post to a friend

The story below, by Canadian Press senior writer Julian Beltrame, moved on the wire today. — Garth

‘Hard times have just begun, look out below’

OTTAWA — Garth Turner is finding that the scarier things get, the more people pay attention to his doomsday alerts. One reason is that he’s out of politics, he says, so his economic forecasts are no longer seen as possibly tainted by partisanship.

But more important may be that the former MP’s alarmist book about collapsing housing prices in Canada – “Greater Fool,” which he began writing last December when the sky seemed to be the limit – has turned out scarily bang-on.

If he turns out to be as prescient with his soon to be released new book – After the Crash – Canadians would be well advised to heed his warning and on how to survive the economic collapse.

Turner, who has worn a number of hats in his career including entrepreneur, journalist, broadcaster, author and combative politician, is predicting hard times for Canada over the next two years and he hasn’t ruled out a good old fashioned depression.

“We’ve had a crash. America has crashed, stock markets crashed, Wall Street crash, real estate crashed and the global economy crashed,” he says of the events of the fall. “The world as we’ve known it is gone. You are not going to get credit cards in the mail, you are not going to get lines of credit easily. Those days are gone. The question now is are we going into a bad recession, are we going into a depression?”

‘His book on collapsing house prices has turned out to be scarily bang-on.’

Turner believes Canada’s gross domestic product will plunge five to eight per cent from the beginning of the recession, which he believes began after Labour Day, to the end, which he says won’t come until the spring of 2010.

As well, he expects housing prices will plunge another 30 per cent next year – on top of the 11 per cent drop so far this year.

For the first time since the Dirty Thirties, Turner expects many Canadians will wind up owing more on their homes than what their home is worth, particularly those who purchased in the last two years with little down payment.

That’s not a depression, as he sees it, but pretty darn close.

Most economists – but not all – would scoff at such doom and gloom, to which Turner replies: That’s what they said when he predicted Canada’s housing market was on the same disastrous path as America’s.

“It’s a relatively straight forward to weave some pretty ugly scenarios,” says Douglas Porter. “He’s probably not too far out of line to say things could be very ugly if policy makers make missteps or don’t step in to support the economy.”

Porter places greater faith in the massive economic stimulus packages being proposed around the world, and in Canada. Prime Minister Stephen Harper is pegging the deficit next year at up to $30 billion, mostly as a result of increased spending to help the economy.

The Bank of Canada and Ottawa have also injected over $110 billion in liquidity – cash -to grease the money markets, and interests rates have been chopped.

Turner agrees those bold actions could stave off the worse, but they also may not, he adds.

“We’ve never had this amount of money thrown at an economic problem, so we’re in uncharted territory,” he says.

“But by the same token, they are blowing their wad all at once, so this better work because we are out of bullets.”

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