The monster

foreclosure1

This week staffers at the Miami Herald were asked to take a pay cut. Chrysler Canada management have been asked to do the same. Salaries are also going down at Wal-Mart and the restaurant near my house.

At the same time, the price of a car, flat screen TV and a laptop are decreasing. Houses are falling in value. So is clothing. Mortgage rates, too.

This is deflation. Lower prices lead to lower corporate profits, then lower salaries and wages and lower consumer spending, which prompts drops in prices. It’s exacerbated when people start expecting lower costs, so they delay purchasing decisions. This is one factor helping to pound real estate prices down.

Deflation is the monster now stalking the land, and the one economic condition which scares the hell out of central bankers, finance ministers and presidents. Before this, North Americans had seen only one sustained period of deflation, which we now call the Great Depression. Unlike inflation – which we have learned to choke off with higher interest rates and reduced government spending and borrowing – deflation is a lot harder to snuff out.

So, we have cut rates to zero, vastly increased the role of government and thrown balanced budgets to the wind. Canada will go deep into deficit and goose spending to the point where tax cuts will not be seen for at least a generation. Barack Obama is overseeing new trillions in expenditures which will drive the greatest capitalist country into permanent abject debtor status.

In practical terms, there are only two things of consequence for most of us:

(a) Deflation increases the value of money, just as inflation diminishes it. That means debt becomes harder to pay. As the value of your home falls, the mortgage principal rises proportionately.
(b) Deflation is therefore cruel to debtors, but it rewards spenders. Those who are able to buy assets at 30% or 50% off during days such as these are the ones who emerge with wealth.

Perhaps this is why an investor from Europe flew over to Detroit last week and bought 30 houses, for $150,000.

Smart guy.

81 comments ↓

#1 squidly77 on 03.11.09 at 11:16 pm

Ron Duby, plant chairman for Service Employees Union International Local 2, said the workers make about $18 an hour. He said the company wants to cut that by $5, as well as cut benefits and pensions and make everybody part-time with a maximum of 24 hours a week.
http://www.windsorstar.com/opinion/blogs/year+drives+through+picket+line/1377654/story.html

deflation is the beast to be wary of

#2 Markel Smyth on 03.11.09 at 11:26 pm

Deflation will not last. The Fed is printing money like there is no tomorrow, and eventually that will catch up with us all in the form of inflation.

We wish. — Garth

#3 squidly77 on 03.11.09 at 11:55 pm

45 percent of world’s wealth destroyed says Blackstone CEO
http://www.iht.com/articles/reuters/2009/03/10/business/OUKBS-UK-BLACKSTONE.php

you can not print money that fast

#4 Grumpydawgs on 03.11.09 at 11:58 pm

I don’t think real estate values are deflating , instead they are coming out of a false bubble pricing regime which was solely the product of artificial and manipulated intrest rates. Rather than grow with notional inflation real estate prices were being created out of low intrest monthly payment equivalents.

it’s silly to equate real estate bubble prices with a value which never existed. Ipso Facto there is no ‘value’ to deflate. The only people who will lose from a more normalised price regime are the Greater Fools who bought at the peak of the market. These are the ones who are crying foul and whining the loudest.

If we are going to normalise the market we must clean the ‘Fools’ out of the marketplace and cut the bubble top off the price chart which went parabolic in 2002 through 2008. Technically a 50++% price correction will merely put the market back to where it was , in nominal terms before the crazy manipulation began.

Value is relative mes ami. We were in a bublle, we will not be returning to a bubble, The Greater Fools are the losers , so what, life go’s on?

#5 TheComingDepression on 03.12.09 at 12:11 am

Deflation will NOT LAST..Interest rates WILL GO BACK UP..and soon…. with that brings INFLATION just to try and save the US DOLLAR.

#6 poorguy on 03.12.09 at 12:35 am

Greater Baltimore Board of Realtors President Bankrupt

http://www.citypaper.com/news/story.asp?id=17674&ref=patrick.net
:-)

#7 Mark on 03.12.09 at 12:40 am

“he Fed is printing money like there is no tomorrow, and eventually that will catch up with us all in the form of inflation.”

Unlikely to work – but lets say that it DOES work.. with all the extra money in the economy which shouldnt be there – without any “real” commodities to back it up – the money becomes nothing but an imaginary thing… And we’ll end up with $10 loaves of bread and a dollar which is worth bugger all.. and the 2nd recession this time caused by hyper inflation and interest rates through the roof trying to stop it…

(which in turn will continue to cause the house prices to tumble)

#8 Smith on 03.12.09 at 12:49 am

This deflation stuff is pretty scary. I think with all the money printing we’re gonna see hyperinflation when certain banks start turning a profit from government bailouts. The toxic assets never disappear, they just ‘shine the turd.’ It’d be a good time right about now to have a load of cash waiting to catch the upside of this cycle. House prices will not increase with inflation for at least a decade, but they will nevertheless increase over present dollar cost. Smoke ’em if you got ’em!

#9 gold bug on 03.12.09 at 12:54 am

I agree with Markel. Governments will print money and literally hand it out to us if that’s what it takes.

Deflation? Might as well believe in the Tooth Fairy.

#10 JM Vancouver Island on 03.12.09 at 1:01 am

The problem with deflation is that you can TRY to stop it by printing money. This is exactly the route that Canada and the US are taking. The problem is that it might not work, as it didn’t for Japan… Printing money does not solve the problem, unless people start taking that money and spending it (creating money velocity). Instead, I am afraid people will pay off their debt. This is the paradox of thrift. It is the right thing to do for individuals as their debt gets bigger through deflation making the dollars more valuable; but if enough people do this, instead of buying their new house, car, boat, etc, then prices continue to fall or at the very least stay stagnant, and deflation continues.
As John Heinzl from the Globe and Mail once said, “Money is not the root of all evil; Debt is.”

#11 WestCoastGirl on 03.12.09 at 1:05 am

How ironic, given the first line of Garth’s post tonight.

Email just in late tonight from the CEO of the company I work for…we’re healthy, we’re on track for growth in 2009 AND they’re taking measure to ensure continued health and viability (this company also grew exponentially during the dotcom crash, it’s got smart stewardship), one of which includes reduced ops during the last 2 weeks of the year. So staff have the choice of saving 6-7 days of accrued PTO to use, OR will be taking time off w/out pay.

Interesting times are upon us, my friends…

#12 First stone on 03.12.09 at 1:18 am

“Deflation will not last…….

“We wish. — Garth”

If deflation does last, as you suggested, Garth, then how does one “… emerge with wealth.”?

Double speak are we, Garth?

#13 dg on 03.12.09 at 1:31 am

Article on CAW – Let them all sink. Years of mismanagement and bad product.
Seventy bucks an hour all in to work on the line. What a joke. The companies and the employees need to wake up.
Were getting slaughtered by countries that live on small islands with no resources only a strong work ethic.

If the gov’t bails these guys out I vow never to buy another North American car. I would rather give my money to the Germans and gladly pay in Euros.

http://www.guardian.co.uk/business/feedarticle/8398891

#14 Da HK Kid on 03.12.09 at 1:54 am

Deflation will be with us for at least another 12-18 months then it’s a question of the pace of re-inflation. At this stage you want to be in inflation hedged assets, ie gold, silver on precious metals, oil and food commodities.

On currencies you want to be off the USD and into commodity currencies as well so that as Garth says, you can strike with pace on revalued assets so the next 20 year haul is a sweet one.

The question is when??? not who as most will have exhausted all their wealth (ie baby boomers) during this period still in denial.

#15 Steve on 03.12.09 at 1:58 am

The whole system of growth, which includes the no growth scenario known as a depression or recession, is flawed. We need to find a better way.

#16 Future Expatriate on 03.12.09 at 2:07 am

Smart investor… IF he’s in his early 20’s, because it will be 40 years before he sees a profit.

And we’ll get that wish for inflation… and be careful what you wish for.

#17 confused and a little crazed on 03.12.09 at 3:35 am

Garth,

Found has gotten more expensive
ie Old Dutch potato chips box last year $1.99 this year $2.28

4 liter jug of Milk last year $3.39 this year $3.84
100 % whole wheat bread last yr $1.28 this year $1.69
@your local Superstore or I guess Loblaws

Is this because of our dollar weakening.?deflation on big ticket items but inflation on necessities

#18 Jay Currie on 03.12.09 at 3:35 am

I suspect you are right in the US. In Canada the scenario is rather different.

The Loonie is poised for a flight upward. As oil rises so does the loon. Our deficit – pointless as it is – is tiny compared to the US trillions. Our banks, for the moment, are sound.

If the flood of money in the US leads to serious curency inflation – which it almost certainly will – then the boring old Loonie will look like safe haven. We have the resources and the fiscal probity to become the Swiss franc of the 1960’s. Boring but a store of value.

No one, not the least you Garth, thinks that oil and gas will remain at their present lows. Nor will hydro.

All of which suggests that, if the CPC does not succumb to stimulus fever, the Loonie will be at par in no time.

Deflation may hit us; but it will be a glancing blow. More in line with a return to reality. No, that 1.5 million dollar sheetrock palace is not actually worth 1.5 – rather it is worth 900K. You loose. But the next guy in sees a huge saving.

Deflation is about marking to market which is no bad thing.

#19 confused and a little crazed on 03.12.09 at 3:36 am

ooops not “found” but food

#20 Steve on 03.12.09 at 3:54 am

They all wish … Inflate, or die.

#21 ted on 03.12.09 at 3:56 am

I think that investor screwed himself. If a house goes for $5000 in detroit I can only imagine the neighborhood. How does one collect rent and he could lose more. One he has to pay for any back taxes. And two anyone breaks into these shacks could sue if they hurt themselves. I think the liability of having 30 places in a slum is too risky. Forgtet the $5000 per house that is nothing the investor could lose far more.

#22 Munch on 03.12.09 at 5:08 am

Smart guy?

Maybe!

Too early to call!

#23 SaraBeth on 03.12.09 at 5:53 am

Mr. Turner ~ How low do you think housing will go? What do you see as the bottom…?

This is important to me because my husband and I are living on a fixed income in a rental house (with VERY cheap rent – hubby has lived here for over 30 years) owned by a very elderly landlord.

When he passes on we are worried his kids will kick us out. And our income is not such that we could even afford to rent something comparable (and it is not luxurious by a long shot). Our rent would probably triple if not quadruple…

SB

#24 David Bakody on 03.12.09 at 6:18 am

#2 Markel Smyth on 03.11.09 at 11:26 pm

If you can not afford what you have now how do you think one can afford what costs more. Check out energy costs, public transportation and food …. all up (10-15%) and more to come!

What went over most Americans heads is that yesterday their National Debt went above $11,000,000,000,000 (Trillion) and when I checked this morning it gained another $8,000,000,000,000 (Billion) and their deficit is over $1 Trillion with word of yet another stimulus package. Word now is the credit card companies are about to demand help “BIG TIME” … but here in Canada ….. we are just fine and this world crisis is just a Zephyr according to two wizards in Ottawa (Harper/Flaherty) and it’s all the Senate’s fault that gentle breeze happened at all .

#25 Anon - GTA on 03.12.09 at 6:43 am

Just caught a part of news on 640

If Govt, eliminates GST, PST and house taxes, people will be left with ~50K to 60K in their pockets and that can change the equation pretty quick.

If this happens, Shouldn’t the U turn be quick? And the house prices may not drop for a couple of years?

#26 Glenn on 03.12.09 at 7:26 am

What kind of stark raving lunatic would buy one property in Detroit, let alone 30?

Thats like buying deck space on the HMS Titanic, or an ocean side condo in Hiroshima circa 1942.

America is on the verge of going down the exact same path as the Soviet Union. An fast,ugly, and complete disintegration with financial armageddon thrown in for good measure.

With bat shit insane “investors” like that running around, no wonder the world is falling apart.

#27 Matt Stiles on 03.12.09 at 7:48 am

Garth,

The first 30 years of our existence as a country were deflationary – as were they in the US. The entire continent was in deflation of approximately 2% yearly from 1865-1897 (compound that!)

That period also happened to be the most prosperous in both ours and the US’s history (relative to it’s previous 30 years). Deflation is not an evil. Deflation is the engine of productivity. We need it in order to go back to producing “things” again. Lower business overhead and higher savings rates will eventually be what pulls us out of this. I have discussed this in the last 3 posts on my blog: http://futronomics.blogspot.com

There are yet other examples. Think about the massive deflation in technology, transportation, communications over the last few decades. Where has all of our legitimate growth been focused? Precisely on those areas.

#28 Al on 03.12.09 at 8:09 am

There are 2 sources of money supply that cause price inflation.

1) central banks
2) debt, leverage ratios

Leverage will continue to fall. The central banks can’t print fast enough to keep up. If they do, their currencies will collapse. All the inflation we saw in the last decade was based on increasing leverage, and it never should have been. Trying to replace one mistake (excessive leverage) with another mistake (excessive money printing) is not a good move. For the next decade, the phrase should be “inflate and die”.

#29 DG on 03.12.09 at 8:11 am

I don’t know, 30 houses for $150k might not be a dumb move, even in Detroit. I imagine there will be all kinds of urban redevelopment projects, funded in part by government money. Probably could strike a deal to build new rental housing units on that land, or some other subsidized development.

#30 nothing to see here on 03.12.09 at 8:12 am

“(b) Deflation is therefore cruel to debtors, but it rewards spenders. Those who are able to buy assets at 30% or 50% off during days such as these are the ones who emerge with wealth.”

While I agree that deflation is cruel to debtors, you should say that it rewards SAVERS. By definition, deflation means an increase in the purchasing power of money. Therefore, plowing your money into hard assets right at the start of a bout of deflation is a losing proposition. Spenders are only rewarded as deflation transitions to inflation, which I agree will take longer than most think.

Saving is a prelude to spending. Die broke. — Garth

#31 Jonathan on 03.12.09 at 8:28 am

Just as it was about time to finally reward saver with deflation, the government and central banks are about to step in and start buying bad assets by printing money. Thanks for stealing directly from our bank accounts.

Deflation is definitely the monster that stalks the automotive world. Ask anyone who needs a car but is delaying the purchase, and 9 out of 10 will say it is because they are waiting for a better price.

#32 nothing to see here on 03.12.09 at 8:47 am

Of course saving is a prelude to spending. I was only pointing out that timing matters. At this point in the cycle, you will be rewarded for saving so that you can spend later when asset prices are cheap. No one ever went broke by saving (by definition). The savings should be held in cash or cash equivalents during a deflationary time and should be transferred into hard assets during a period of inflation.

By the same token, going into debt later (right before a sustained period of inflation) does not hurt the same way that it hurts to be a debtor at the start of a deflationary phase.

#33 David Bakody on 03.12.09 at 8:54 am

Right again Garth. I suspect as our unemployment numbers rise much the same will happen here albeit under a different tent.

NEW YORK (CNNMoney.com) — The foreclosure picture suddenly darkened again in February.

More than 74,000 homes were lost to bank repossessions during the month, up from 67,000 in January, according to a regular monthly report from RealtyTrac, the online marketer of foreclosed properties. Nearly 1.2 million have been lost since the foreclosure crisis hit in August 2007.

The number of foreclosure filings rose 6% during the month after falling 10% in January. Worse, filings leaped nearly 30% compared with February 2008. And the results confounded expectations: A downtrend had been expected due to the numerous foreclosure moratoriums in effect during the month.

Empty homes bring a host of other issues …. All Bad …let your mind wander and as mentioned most of these people had credit cards and no doubt maxed them up prior to moving out. But heck Canada is different …. as Mr. Empathy himself told Canadians on TV.

#34 Smart Guy???? on 03.12.09 at 9:19 am

Smart guy?

I’m not so sure … the City of Detroit has seen housing prices and communities crumble for the last 40 years since the ‘white flight’ began after the race riots in the late 60’s.

I drive through Detroit often and am always astonished at the utter urban decay. The city of Detroit is on the verge of financial bankruptcy, it already has one of the highest rates of unemployment in all of the US, has LOST half it’s population since it’s peak of almost 2 million in the 50’s (currently less than 900,000) and the worst of the North American automotive car company restructuring has yet to hit (more layoffs and plant closures, tens of thousands will run out of unemployment and will have spent their severance over the next year and worse, GM or Chrysler or BOTH could still declare bankruptcy!).

If your readers are seriously thinking about investing in real-estate in Detroit or Michigan in general, here’s a story they should read first (this story is from Oct. 2008) … Saginaw is one of a number of Michigan cities that are suffering badly from urban decay and the automotive downturn … after reading this you may consider $5,000 for a house as paying TOO MUCH!!

—————————————

SAGINAW, Mich. – With a winning bid of just $1.75, a Chicago woman has won an auction for an abandoned home in Saginaw. Joanne Smith, 30, recently was the top bidder for the home during an auction on eBay, The Saginaw News reported. Her bid was one of eight for the home.

“I am going to try and sell it,” she told the newspaper. “I don’t have any plans to move to Saginaw.”

Smith said she hasn’t seen the property or visited Saginaw, which has been hard-hit by economic troubles in recent years.

There’s a notice on the door of the home saying a foreclosure hearing is pending, the newspaper said. She must pay about $850 in back taxes and yard cleanup costs.

—————————————-

Picture available here …

http://housingdoom.com/2008/10/02/house-goes-to-top-bidder-on-ebay-for-175/

#35 Bill-Muskoka (NAM) on 03.12.09 at 9:21 am

Let us have a moment of silence for the poor billionaires (tick, tick, tick…long enough)

Recession is ravaging the world’s billionaires

By the way, note the Perp Lists for the world and Canada. These are the ones who believe they are more deserving than YOU are!

#36 Signal Loss on 03.12.09 at 9:22 am

The European is a lunatic. While the US may emerge from this crisis in better shape than Europe (though in massive debt), and therefore might be perceived by a European as a better place for his money, Detroit is not that place. Detroit is very far from that place.

How scared of your own situation do you have to be to think that real estate in Detroit is a good place for your money? Could this actually speak more to the integrity of the EU? Could it break up?

#37 Bill-Muskoka (NAM) on 03.12.09 at 9:24 am

And here is the Star Criminal!

Madoff to plead guilty in $50B fraud

The expected plea ends a half-century career that saw him rise to Nasdaq chairman and one of Wall Street’s elite, and could result in a maximum prison term of 150 years.

We need look no further than this ilk of asshole. Do they deserve respect? Leniency? Reknown?

Are you Mad as Hell and not willing to take it anymore?

#38 DG on 03.12.09 at 9:35 am

Had to post this… I’ve been getting spam for a couple of weeks now from a desperate real estate firm trying to con buyers in TO into thinking that this climate is the buying opportunity of, well, forever… Here’s his latest nugget of wisdom:

“Deal… Or No Deal?
If you’ve ever seen the TV show “Deal or No Deal”, you’ve likely noticed how common it is for contestants to be lured into taking additional risks to see if they can get through just one more case and keep their dream of big money alive.

Sometimes it works for them and they win big.

However, more often than not, the contestant pushes the envelope a bit too far and ends up squandering a ‘sure thing’ in the hopes of obtaining the alluring
million-dollar prize.

We see buyers doing the same thing lately.

They’re waiting to catch a big fish and they’re hopelessly trying to predict the lowest point in the market.

The truth is that it might really backfire and cost them
thousands of dollars.”

So apparently not buying real estate right now is tantamount to squandering a “sure thing”. I wrote back to the guy to suggest he read up on Economics 101 (and stop sending me spam), and he promptly replied saying that his major is Economics and that it’s all about “consumer confidence”. I thought about sending him this link, but really what’s the point?

#39 Investor on 03.12.09 at 9:37 am

Markel Smyth,

Yes, I agree with you. Eventually we will see inflation. Ben Bernanke studied the Great Depression and he knows very well that to economies based on paper currency can be inflated within a short period of time. That is why in 1930s US abandoned the gold standard and started printing money backed up by debt.

In my opinion most of the inflation will show up in basic goods. Real Estate will be dead for years in a lot of areas, but in some where debt to property value ratio is pretty low might slightly go up.

#40 Smart Guy #2???? on 03.12.09 at 9:37 am

Actually, here’s a better story on the sad state of affairs in Detroit’s real-estate sector that I remembered reading last year … mind blowing that a house that sold for $65,000 in Nov. 2006 could sell for $1 (yah that’s ONE DOLLAR!!!) in Aug 2008 … and this before the $^%T really started hitting the fan!

http://www.detnews.com/apps/pbcs.dll/article?AID=/20080813/METRO/112290001

#41 Chris in England on 03.12.09 at 9:42 am

News from the frontline – after two years of property price decreases we are heading for freefall. But please, not until my house sale goes through!

http://tinyurl.com/caxenn

#42 kc on 03.12.09 at 9:49 am

As I have been wondering …. how long before we get to watch this implosion (commercial RE) …. this is in today’s Van Sun…

“Lenders, Levine said, are asking buyers to put more equity into their purchases, to the order of 35 to 40 per cent of a purchase price. Nine months to a year ago, he said, they would let buyers put down just 20 to 25 per cent on a purchase.”

Credit crunch to squeeze commercial real estate in 2009

http://www.vancouversun.com/business/Credit+crunch+squeeze+commercial+real+estate+2009/1374465/story.html

#43 Bill-Muskoka (NAM) on 03.12.09 at 9:51 am

Detroit is the visible result of decades of racist anti-social policies by the U.S. and Michigan governments. They tried moving the Slave labour North and Detroit is the result. Thanks to the Big Three!

Buy the land, start a commune! Might I suggest investing in tent sales? The houses are not safe to live in!

#44 Alex on 03.12.09 at 10:41 am

According to Stats Canada the cost of the food basket went up 8.6% compared to last February – it means that REAL numbers are at least 2-3% higher.

10% increase? Definitely inflation, not deflation!

Agricultural commodity prices have deflated. But I guess while demand for retail products remains, consumer edibles won’t. End this madness. Stop eating. — Garth

#45 Another Albertan on 03.12.09 at 10:54 am

You guys do realize that food inputs are bought forward and attempts are made to hedge?

Take a look at the pricing for food commodities a year ago. Prices were going up substantially, so if you bought supply one year out, you are taking delivery now at that contracted price.

The price of finished goods is going up because of the nature of supply contracts. By the end of the year, the prices of raw, semi-finished and finished foodstuffs should drop because of the pricing schemes that have been contracted in the past 6 months.

Anyone who looks at the futures pricing today and expects there to be an immediate implication at the grocery store needs to review the concept of a “lagging effect”.

#46 Average guy on 03.12.09 at 10:59 am

Private industry is reeling with plant closures, job losses and pay reductions. Requests for Gov’t bailouts are increasing daily. And then an article in the National Post on March 11 says Toronto’s city bargaining team has been holed up since January with reps of Local 416. Apparently they want more… and have promised to play hardball. Come to think of it, I can’t recall 1 instance where a city employee has been downsized, laid off or even asked to take a pay cut. Is this what they refer to as a 2 tiered system?

#47 Jelly on 03.12.09 at 11:12 am

About Detroit real estate, I was tempted about a year ago for investment purposes and then I chickened out because I just thought to myself, why are they selling that low? Doesn’t it seem too good to be true?
I think a lot of people will get burned with scary tenants, stolen house products (wiring etc.), threat of violence etc. etc. Not to mention when things worsen which they certainly will, how are these people going to come to the house and sort anything out when the people surrounding Detroit NEVER go there because of the crime. When I was speaking to a realtor that lives near the city said he has not been there in years.
Sounds pretty scary and industry will only worsen it, I shudder to think what it will be like in a few years.

#48 Sally on 03.12.09 at 11:30 am

Deflation eh?

Good news for my variable mortgage at any rate.

Garth: I know you’ve recommended before that “all mortgages should always be variable” – are you still a proponent of that? The doomers and their hyperinflation talk get me worried about my decision every now and then…

All mortgages should be variable. Period. — Garth

#49 Comrade Okie on 03.12.09 at 11:42 am

New business opportunity for Blackwater when the US pulls out of Iraq.

Property Management in Detroit.

#50 Another Albertan on 03.12.09 at 12:11 pm

Calgary Commercial RE anecdote from a colleague who is an executive at one of the major commercial firms:

“The commercial market could not be worse! I am super busy sticking my finger in the leaking dam so to speak but it is inevitable it is going to come crashing down hard soon!

It is really the perfect storm, way too much new supply, no demand and tonnes of sublease now hitting the market daily. Rental rates in the downtown core have plummeted to about 1/2 of where they were 6 months ago. It is a mess.”

And now on the condo side:

“The condo market is a mess as it is cheaper for people who bought in Arriva and similar towers to walk away from their deposit than it is to close and try to sell and lose $50K on a unit…especially when your deposit was $5, $10 or $15K!”

Everyone else’s mileage may vary.

#51 Kettle...Pot Calling on 03.12.09 at 12:28 pm

All mortgages should be variable. Period. — Garth

Variable, with an option of locking in? Some mortgages remain at least partially floating – no free option to lock in at a fully fixed rate. Obviously there’s a fat discount on variables but if you can’t fix the rate at some point you *could* lose that advantage, no? (I already know the answer to that but I’m just wondering if your statement applies to this subset of mortgages). Thanks

#52 Marc on 03.12.09 at 12:36 pm

All mortgages should be variable. Period. — Garth

How about natural gas variable, or fixed rate? We had gas resellers, offering 5 year fixed rates. I told the salesman to hit the road. They were so aggressive our city passed a bylaw, banning door to door sales, except for registered charities. Good bye girl guides. Lots of suckers signed up for these 5 year rates to “save money”. I fail to see how over paying for 4 years, to potentially save money in year 5 is cost effective. Our natural gas supplier has dropped their price in Oct 08 by 12%, and has applied to do so again Apr by another 12%. I wonder how much the suckers are over paying now, but they did get the cost certainty they were looking for, albeit at their own expence.

#53 Foreign Investor on 03.12.09 at 12:37 pm

Deflation – Inflation

http://finance.yahoo.com/tech-ticker/article/206651/Dont-Sweat-Inflation%3A-Deflation-%22In-the-Cards%22-for-2009-and-Beyond%2C-Shilling-Says

#54 clemence on 03.12.09 at 1:15 pm

On the subject of food price inflation:

I say resist it anyway you can. Well known & respected professor, Nouriel Roubini, rgemonitor.com, also says that price of commodities, excluding oil, has gone down 30% from peak and that it is expected to go down 15 to 20% more.

So get flexible, get smart and fight them back. I know they sat around the table and agreed to corner us….but ….remember the old Dominion store?

By the way, have you also noticed how they even get you at the “loo”, by having shrunk the size of the sheet of toilet paper. Structural inflation right out of the factory. (Could it be that Chinese toilets allow using much less paper? It is the case, I have been to China. I have in fact liked their toilets; …. after the usual initial “Western” reaction.)

Therefore, we are better get creative & resist, if we don’t want to be had once more.

For example, I buy a tin of baked beans at regular price at Wall-Mart for $0.77 (Value brand), not at over $1.50 as I saw Heinz at today. The beans taste much better at $0.77, you know what I mean….(they are good anyway). But, you can figure out something too.

Remember, you want them to know that they are price gouging you just as you are getting that pink slip. Ouch! The idea is to suggest to them ……………… r………….may die hard.

By the way, in the last few weeks, cherry picking for luxuries on special has been profitable & fun; I bought organic cheese today at nearly 20% off; cheese keeps for quite a while until opened. In my neighbourhood, Monday is good at a big chain and Thursday, may be, at a smaller local chain.

I must eat, but I am also part of the “resistance”; I find it necessary and why wouldn’t it alsa be fun?

#55 Jeff Smith on 03.12.09 at 1:18 pm

I don’t know if deflation applies to everything we buy or not. It seems prices at the grocery stores have been going up constantly. Which kinda sux, because for the common people like us, its the stuffs at the grocery stores that matter, not big items like a house,cars.

#56 Munch on 03.12.09 at 1:33 pm

Glen said

“What kind of stark raving lunatic would buy one property in Detroit, let alone 30?

Thats like buying deck space on the HMS Titanic, or an ocean side condo in Hiroshima circa 1942.

America is on the verge of going down the exact same path as the Soviet Union. An fast,ugly, and complete disintegration with financial armageddon thrown in for good measure.

With bat shit insane “investors” like that running around, no wonder the world is falling apart.”

Glen is correct!

Murrika is doomed – sorry, but that’s the truth – and Canada probably not far behind

Here in Africa, we’re okay – yes we have our problems, but we also have lots of oil, lots of space and lots of ingenuity – and we DON’T have a lot to lose – you’ve heard THAT story before, I’m sure

Greetings to all

#57 Jeff Smith on 03.12.09 at 2:25 pm

Lets look at it this way. If the government bail out the
car companies then essentially employees of car companies are government employees. We don’t seem to complain too much about government employees. I mean the ongoing jokes are that government employees collect a paycheck but are slackers. Whether this is true or not is rather subjective. So if we can put up with government employees, we can put up with government automotive employees. Only thing is government employees don’t generally makes $70/hour. So if we will need to make gov’t automotive have a pay similar to the other gov’t employees. Definitely not $70/hour for high school level line workers. This probably fair, unless we are willing to accept a GM bankruptcy. Even though a GM bankruptcy is at times desirable, and sometimes I feel this way, but I think it will never happen. Why? The gov’t won’t let it happen. It is after all a quasi-state company. We will just have to live with it.

*********************************************
#13 dg on 03.12.09 at 1:31 am

Article on CAW – Let them all sink. Years of mismanagement and bad product.
Seventy bucks an hour all in to work on the line. What a joke. The companies and the employees need to wake up.
Were getting slaughtered by countries that live on small islands with no resources only a strong work ethic.

If the gov’t bails these guys out I vow never to buy another North American car. I would rather give my money to the Germans and gladly pay in Euros.

http://www.guardian.co.uk/business/feedarticle/8398891

#58 rory on 03.12.09 at 2:48 pm

#54 Munchy

Problem in your neck of the woods is that the Murrikans/Chinese are going to buy/confiscate all your oil/commodities and the profits will go into the next/existing corrupt gov’t pockets which will then all be spent at Disneyland.

Ingenuity usually comes about from necessity …would be real nice if you guys could get your ***t together …not holding my breathe anytime soon as Mugabe seems to be the poster child for the continent right now.

#59 David on 03.12.09 at 2:48 pm

On the surface buying 30 homes for $150K sounds like a swell deal. An investment like that presupposes that the properties will all be cash flow positive and have potential buyers and renters at some point in the future. The cost of demolishing an eyesore public health risk house is about $10K. It would be difficult to police rental payments from distant shores. Bringing those discounted properties up to current building code standards may itself require many more thousands of dollars of investment. Anyone can buy a barrel of rotten apples on the cheap. The man is still a speculator, no matter which way. With prices plummeting to near zero, there is still the risk of financial loss or less than expected profits. It is no different than buying penny stocks, only a penny per share, but a 100% risk of loss. In a market with little activity, the risk of loss becomes a near certainty.

#60 jess on 03.12.09 at 2:54 pm

capitalism gets co-operative

Exit Strategy –

Bernanke The Crisis and the Policy Response:
http://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm

1)nationalization -grow the fed balance sheet
2) denationalization – shrink the balance sheet and the
Federal Reserve will have to unwind its various lending programs
A significant shrinking of the balance sheet can be accomplished relatively quickly,means of making monetary policy–namely, by setting a target for the federal funds rate.”…

May 2009 new rules (repos market)proposed by the Treasury Market Practices Group (TMPG) -failing to return

#61 Dave on 03.12.09 at 3:09 pm

Murrika is doomed – sorry, but that’s the truth – and Canada probably not far behind

Here in Africa, we’re okay – yes we have our problems, but we also have lots of oil, lots of space

———————————————

Canada is bigger than Toronto. Word on the street is there might be some oil fields too….not to mention other resources.

Africa is the place to be though. People live in huts over there by choice- because of the warm weather..

#62 Another Albertan on 03.12.09 at 3:46 pm

Lunchtime anecdote from an audit partner here in Calgary:

“The next 4 to 6 weeks are going to be critical for many junior oil and gas companies. Many are trying to renegotiate their bank and credit terms and it isn’t going well. We will soon see firms going into receivership or being pushed into mandatory mergers in order to attempt to survive.”

Many of my friends in finance are now tight-lipped. This means that data rooms are being opened and that the trolling has begun. Even though one or two juniors have been taken out recently, as soon as one or two companies are pushed under duress into a deal and are deemed “in play”, this will signal the beginning of “open season”.

#63 Too Old Bob$ on 03.12.09 at 3:56 pm

“Perhaps this is why an investor from Europe flew over to Detroit last week and bought 30 houses, for $150,000.

Smart guy.”

Did he pay cash or just borrowed with his line of credit. 5% down. Hmm! $7500.00, no risk here, really!

#64 Too Old Bob$ on 03.12.09 at 4:15 pm

“#23 SaraBeth on 03.12.09 at 5:53 am.
my husband and I are living on a fixed income in a rental house (with VERY cheap rent – hubby has lived here for over 30 years) owned by a very elderly landlord.
we are worried his kids will kick us out. ”

If the kids have been brought up with respect and honor the Elder’s wishs, you’ll be fine. If he has a legal will (like a trust) to continue allowing you to rent with an inflation increase only, no problem.
I’d be willing to bet they would want to sell it or gouge you as a renter. They have no commitment to the property. Talk to the landlord and see if you can get a perception about what he or the kids may want to do when the time comes.

#65 AM on 03.12.09 at 4:46 pm

#40 Chris in England

Glad to hear that you got a bite.
Now keep your fingers crossed that the buyers get their mortgage approved and than you are home free ( pun intended ))

Cheers

#66 Bill-Muskoka (NAM) on 03.12.09 at 5:18 pm

#48 Comrade Okie on 03.12.09 at 11:42 am

ROFLAMO! Man, you’ve got that one RIGHT! Maybe the government will buy it up for an Urban Warfare Training Camp? Sure will save fuel and money over transporting all those troops to the Middle East.

Like they said about Chicago under Mayor Harold Washington ‘It’s Beruit On The Waterfront!’

#67 Bill-Muskoka (NAM) on 03.12.09 at 5:22 pm

#62 Too Old Bob$ on 03.12.09 at 4:15 pm

The problem remains however because if ownership changes then the Landlord & Tenant Act in Ontario allows the new owner to do as they please with a minimum notice to vacate.

If the current owner remains then they are protected by the calculated rent increase, which is currently 1.8%.

Renters are highly vulnerable in a market where speculators are unloading properties like Ebola infected turds.

#68 Bill-Muskoka (NAM) on 03.12.09 at 5:28 pm

#57 David on 03.12.09 at 2:48 pm

Plus most municipalities have the authority to impose demolition on buildings which are deemed dangerous, uninhabitable, health hazards, etc. They tack the costs, where they have it done, onto the tax bill, and then the owner is then subject to Sheriff’s sale at auction if they fail to pay.

The government can also (in the U.S.) declare Emminent Domain for the Public Good or need. They have to pay the owner a meager sum whcfih is usally far below market value. They have to power to condemn properties for a lot of legal reasons.

The laws are written for the protection of the wealthy and that includes the government. not the average citizen facing a financial disaster.

#69 Bill-Muskoka (NAM) on 03.12.09 at 5:43 pm

Personally, I would start buying up all the shipping containers, used up semi trailers, and railroad box cars, because they are going to become the NEW RE market very soon.

Warning to RE agents, you will be having stiff competition from all the unemployed car sales people because they are far more atuned to dealing in ‘iron’ than you are. I am sure you will find it a ‘riveting’ situation! Frank Lloyd Wright would smile at the architectural potential of these stacked living units.

Here are some examples of the High End Spacious Units

And here is an example of the soon to be on the market Fort McMurray Econmy Hi-Rise unit

#70 Bill-Muskoka (NAM) on 03.12.09 at 5:46 pm

All mortgages should be variable. Period. — Garth

Oh really? Wait until the banks UP the rates like they did in 1980-82. I can’t agree with your premise dear friend.

A VRM can be turned into a fixed term in 30 seconds with a phone call. There is no reason to pay years of premiums for something you can change in moments. — Garth

#71 clemence on 03.12.09 at 6:13 pm

“Many of my friends in finance are now tight-lipped. This means that data rooms are being opened and that the trolling has begun. Even though one or two juniors have been taken out recently, as soon as one or two companies are pushed under duress into a deal and are deemed “in play”, this will signal the beginning of “open season”.”

I don’t speak this tech language. Would you kindly explain?

#72 HJD on 03.12.09 at 7:55 pm

In your previous blog you referred to Bernie Madoff getting 150 years in jail. Well deserved. However, a question. Apparently he illegally (and simply) diverted clients’ funds to his own account at Chase Manhattan Bank – billions of dollars. Any idea what happened to all that money? His victims apparently believe it has completely vanished. Could Madoff have spent the 50 billion? Amazing.

#73 dekethegeek on 03.12.09 at 8:11 pm

#54 Munch munch munch.
Waddda ya talkin about buddy?
Ingenuity ? Hacking peoples arms off so they cant hold a weapon ? (I never thought of that!). Kidnapping children to become soldiers/slaves ? ( I never thought of that either). 3rd World leaders(Africa)Stealing/stock piling; Monetary donations( Switzerland here I come !), UN Aid, charitable food etc. to sell back to the starving masses it was meant for. ( Hmmmm quite a way to make money ! I must admit I never thought of that either).
Tires soaked in gas and then “necklaced” over a living persons’ head and lit. ( Got me there too ! New one for the Canadian mobs to try)
If Ammurrika and Cannon-duh are doomed then prepare for the Continent wide catastrophe that will occur in your neck of the woods when our 1st world aid dissappears along with the finances for UN troops, Doctors Without Borders, The Gates Foundation, Etc., etc. etc.
Good luck with that.
P.S. I know the South African arms dealers are very well equipped but does South Africa make their own bandages?

#74 Bill-Muskoka (NAM) on 03.12.09 at 9:59 pm

Oops! My bad HTML, but that can be corrected

And here is an example of the soon to be on the market Fort McMurray Economy Hi-Rise unit

#75 Naive on 03.12.09 at 10:43 pm

Well, I wonder Japan has had trouble with deflation, could that be it has been facing the situation alone?

With more and more western countries joining in the battle of fighting deflation, could Canada suffer less because of its relatively stronger economic position?

Could there be a collective solution for deflation?

Let’s say an apple costs 2 dollar when one’s wage is 20 dollars; and how is it different from an apple costs 1 dollar when one’s wage is 10 dollar? The real value for goods and services wouldn’t change if we can reform/ revaluate all currencies now used in the world, providing all countries are facing deflation….well, I know I am naive and probably missing some big pictures…just a thought…

#76 Chris in England on 03.12.09 at 10:55 pm

AM -their mortgage is approved and they have also sold their house and have either moved in with the in-laws or are about to. I am still uneasy though because of the helpful news today that UK house prices may drop another 55%. I know not everyone reads the news as obsessively as I do, but what if THEY do? We are expecting them to send someone to do a house survey for them but so far .. nothing. I wouldn’t have thought surveyors are amazingly busy at the moment! I am just itching to get contracts signed and exchanged, after which we are all locked into the deal.

On a related note – there aren’t that many rural rentals where I am looking, so I decided to make an approach to owners whose properties have been languishing on the mls for most of last year. There is one place I even considered buying a while back and I heard tonight that the owners will consider renting it to me. Haaaa!! Now I just have to get out of here before everyone starts running around England like headless chickens shouting “55%! 55%! Abort purchase mission!”.

#77 Another Albertan on 03.13.09 at 1:43 am

@69:

A data room is a room set up in order for potential suitors to examine a subset of a for-sale company’s assets and numbers. It’s basically a requirement for orderly acquisitions and divestitures of land and assets. Companies want to know what you’ve got if they are going to contemplate a bid.

Being “in play” means that some organization has made an unsolicited wholesale takeover bid. This is typically known as a “hostile takeover”. The whole BCE sales saga is a great example of what can happen when you’re “in play”.

“Open season” simply refers to the Follow-The-Leader mentality in many industries. Once one company crosses a line – layoffs, new development, acquisitions, etc, others follow suit in short order. It’s very typical in the oil patch.

#78 canuck on 03.13.09 at 7:01 am

Is it surprising that banks are hoarding cash when fewer people qualify for repaying loans with jobs shrinking, assets devaluing and wages going down? Banks are just shit scared to let go of their money. So too are people–they’re sticking it under mattresses instead of putting it in banks. What’s the point of having spare cash in the bank when the interest that’s earned on it is next to nothing. Yep, more and more people will stop putting their money in the banks and more and more banks will refuse to lend because they can’t afford to it.

That’s the catch 22 of deflation. Absolutely everyone is terrified of the future. Governments can’t control deflation and they’re scared out of their wits too.

No idea what it’s gonna take to turn economies around, but the longer deflation lasts, the harder it will be.

#79 Ally Ally Oxycontin Free on 03.13.09 at 10:54 am

Stocks Soar, But Dismal Signs Remain

Fed Says Americans Lost Wealth at Staggering Rate

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/12/AR2009031201668.html?wpisrc=newsletter&wpisrc=newsletter&wpisrc=newsletter

Who’s the short guy in the background on Canadian TeeVee shouting, “now’s the time to spend, spend, spend, … and lend, lend, lend!”

Ooops, the Missus just reminded me, it was Jimbo Flim-Flam O’Flairity.

My memory lapses is gettin’ worser an’ worser!

I shor do like the look of thet thar fixer-upper, Garth. Is they room for a savant to be playin’ a banjo in thar?

#80 Bill-Muskoka (NAM) on 03.13.09 at 3:13 pm

A VRM can be turned into a fixed term in 30 seconds with a phone call. There is no reason to pay years of premiums for something you can change in moments. — Garth

Garth,

Thanks for that information. We, however, would eat a lot switching to a VRM as we just got a fixed rate last Fall and the penalty would be atrocious. We are at 5.5%. Any suggestions?

Tell them you were a client of Mr. B. Madoff. — Garth

#81 pjwlk on 03.19.09 at 10:00 am

#13 dg
“If the gov’t bails these guys out I vow never to buy another North American car. I would rather give my money to the Germans and gladly pay in Euros.”

Your part of the problem and not part of the solution…