D

deflate1

In today's news: Is the economy dead?

“Okay, this is a shocker,” said Douglas Porter, deputy chief economist at BMO Capital Markets. “We’re not talking about a shot across the bow of the optimists, this is more like a torpedo through the hull.

Imported wine at seven bucks a bottle. Incredibly cheap food, jeans and household staples. Real estate prices 40% below levels of more than a decade ago. Structural unemployment and families that save a fifth of their gross income.

Welcome to Japan, and the new face of deflation.

The country’s in the news this week after the latest stats showing Japanese prices racing downwards at an unprecedented clip. Now we hear that Germany has been in a price decline for four months and, of course, Canada’s inflation rate has been negative since mid-summer.

This utterly confounds those among us who have been gleefully predicting hyperinflation, as central banks print wheelbarrows full of money, as governments borrow without limit, and stimulus spending goes off the chart. Especially loud have been gold bugs dreaming of their basement rock collections soaring in value, and real estate investors praying runaway asset values will be their ticket out of debt.

But what if they’re totally wrong?

Here’s the other argument: Prices are in a gentle downward slope which will only pick up speed as demand withers and producers are forced to cut prices again…and again. Why would that happen?

The growing legion of the unemployed, the underemployed and the utterly discouraged. Official jobless levels are pushing 10% in North America, but lots of economists say when you count in the folks who have given up, the ones no longer collecting benefits and the Boomers who will never work again, it’s closer to 17%. Jobless people don’t buy much, after all.

Meanwhile consumer incomes are going down, not up. Real incomes are lower in the US, and most of Europe. If it were not for “cash for clunkers” and homebuying grants in the States, the home reno tax credit in Canada and 3% mortgages, what would the economic landscape look like? And what will transpire when the artificial government stimulus finally ends?

Reduced demand has led to overcapacity, withering corporate profits and a drying up of new business investment. This creates a vicious circle in which there is no new job creation, therefore no increase in consumer income, no consumer spending surge, no new demand, no new jobs. And how can we rationally expect anything different, when consumer spending accounts for 60% of all economic activity?

So, if price deflation becomes asset deflation, dropping the relative value of computers, bungalows, cars, commodities and iPhones, where does that leave most Canadian families?

Well, figure it out. Unlike Japan, families here have basically no savings. Unlike the Japanese, who have had 20 years to deal with deflation, we have the highest personal debt rate in history. Unlike in Japan, we have a housing bubble creating new billions in mortgage borrowings. Unlike Japan, a large portion of our national wealth depends on digging stuff out of the ground and selling it – commodities.

The downside potential is unlimited. And that’s what scares economists. Deflation’s a monster.

The good news: Those higher interest rates will take a lot longer getting here.

The bad news: You won’t notice.

121 comments ↓

#1 Not Garth on 09.29.09 at 11:36 pm

Garth, I am a fan of yours, love the way you think.

But I must ask, and demand a reply – you are now talking low rates and deflation – where in other posting’s your of the view that interest rates move up substantially in the years ahead as to consumer prices – can you please clarify your views – thank you.

Love,

Not Garth

#2 Steve on 09.29.09 at 11:37 pm

Even scarier is that even in its 20 year slump, the Japanese economy looks pretty good on the ground compared to Canada. Jobs are easy to get, and they actually have a society of people that care about each other to boot!

#3 Jim on 09.29.09 at 11:46 pm

Finally an article about deflation. I like it!

Everybody and their mother has been talking about higher interest rates and inflation like it’s a foregone conclusion. If the market has taught us anything it’s that anything is possible!

If you believe in higher interest rates and an inflationary future, then this is the time to take on massive amounts of debt! This is your chance to lock in historically low rates and watch as your hyper-inflated future dollars are used to pay off your today-denominated million dollar loans! In an inflationary environment, all the home buyers today with 5% down and 95% leverage are the “smart money”!

Heh. I doubt it.

http://www.theglobeandmail.com/report-on-business/crash-and-recovery/deflation-taking-root-in-global-economies/article1306056/

#4 tokyo joe on 09.30.09 at 12:00 am

just to add to garth’s blog, Japan ran a-2.6% CPI just last month, and it keeps going down… In Japan where the bubble was bigger than anywhere else, prices have come down and down for 20yrs and still its more expensive than Canada…
to be honest thou… CPI is a joke… it does not take into account housing and also when people quote cpi they always say without the volitile food or oil! to be honest, these things cost so much more and affect our daily lives more than any other componet of the index itself!!!

#5 ALE on 09.30.09 at 12:01 am

Mish at globaleconomicanalysis.com has been calling for deflation for a long time. Inflation and deflation by definition is the creation and destruction of money including credit. Government printing isn’t coming close to the contraction in credit in the u.s. and thus deflation. CPI may be negative in Canada but we are in a period of inflation with government printing and credit increasing. Credit contraction hasn’t yet taken hold here – but it will.

#6 Rob on 09.30.09 at 12:10 am

well, during the last deflationary depression, gold doubled and Homestake Mining (a gold mining company) went from $36 to $630 a share. Gold is a hedge in both inflation and deflation, its called a flight to quality . If one believe the Central Banks of the world are going to sit idly by when they have the keys to the money printing presses you are sadly naive. There will be more stimulus packages, the U.S is already talking about another 2 trillion dollar stimulus this fall . The debasement of paper money will only accelerate . Two to three years from now look for the G-20 to hold another meeting where the U.S dollar will be devalued on a 3 to 1 bases, 1 new dollar for every 3 old dollars. This is the only way they can pay of their 70 trillion dollars in unfunded liabilities . 1/3 of all government debt will be defaulted on and all currencies will be revalued and devalued along with the U.S dollar. The Global bankers who really run the governments of the world will then issue SDR’s (Standard Drawing Rights) as the new World reserve currency. This is just another debt based fiat currency that is already being used by the IMF so it will also fail . If you still think gold is a bad investment then you are either too dumb or too blinded by the mainstream media. The Chinese Government is running three adds an hour telling the Chinese citezen to buy gold and silver while they are doing the same thing. The Chinese are smart and know that there will be a paper currency crisis in the near future . So deflation in the short term maybe. But the true definition of inflation is the increase in money supply and debasement of currency which will always lead to price increases in the end.

#7 LS on 09.30.09 at 12:14 am

Just like in the bible, Garth’s blog contains everything and its opposite.

Yesterday: Bond market will force interest rates up!

Today: Deflation, interest rates will remain low!

The lesson here is: No one has a crystal ball, so make up your own mind. In the meantime we can all be entertained, educated, and insulted by Garth’s collective works (that was supposed to be a compliment). Rock on.

#8 Jim on 09.30.09 at 12:25 am

Deflation in Japan started in 1990s. The government and the Bank of Japan reduced interest rates to 0%. This tactic was unsuccessful for over a decade and ended in the summer of 2006. The ‘zero-rate policy’ was deemed a failure.

Economics have cited the following reasons for deflation in Japan (some of these may sound very familiar to Canadians):

Falling asset prices including real estate. Japan experienced a massive real estate bubble that peaked in 1989. When assets like real estate decrease in value, the money supply shrinks which is deflationary.

When real estate prices collapsed, the banks who loaned money for the purchase of said real estate found that their mortgages weren’t being paid. They tried to collect on the collateral, but it wasn’t enough to pay off the loan. Banks then delayed these decisions in hopes that asset prices would improve. Some even made more loans to mortgage-holders to service the debt they already had (!) thus maintaining an “unrealized loss” (at least until the assets were sold off and the loss realized). This exacerbated deflationary forces.

As banks continued to rack up non-performing loans (no payments and not written off), they handcuffed themselves since they had to increase their cash reserves (to cover the non-performing loans) and were unable to lend any more money.

As the population paniced; fearing the collapse of the financial system, they avoided entrusting their money to the banks and instead used their cash to buy gold or foreign Treasuries. Again, this exacerbates deflation as the money is not available for lending or economic growth.

The savings rate rises and depresses consumption since the money isn’t used in the economy in an efficient form to create new investment.

Japan also continued to import cheap Chinese goods. Domestic producers, in order to match these low (and continually lower) prices decreased prices for many items in the domestic economy and further promoted deflation.

If deflation happens, it will be ugly.

#9 s33knges8 on 09.30.09 at 12:26 am

It’s about time they deflated those houses and rib eye. We used to pay less than $20 for a pack of rib eye; 3 years later Superstore (yes, Superstore!) wants close to $40 for the same thing – screw them, we will eat daffodils with those from Portland now.

Garth, we don’t care what the government is inflating or deflating. Just make sure my family and I get into a house at half the price in no more than 3 years. And nothing less than some RE with the aristocracy in West Van. Until then, we will save $$$ and rent in East Van with a view of the port and mountains for $775 a month.

#10 Onemorething on 09.30.09 at 12:45 am

Great post Garth! You captured the real just of it!

When Bill Gross from PIMCO just recently said the same you better all buckle up!

#11 Chaostrology on 09.30.09 at 1:06 am

Talk about putting it in a nutshell.

That’s ddddddepressing.

#12 TaxHaven on 09.30.09 at 1:22 am

But my “basement rock collection” IS soaring in value. It’s your paper-with-dead-prime-minister’s-pictures that isn’t…in fact, I’m betting almost all assets will
drop further and faster than my yellow metal.

Do you know why most Canadians are afraid of deflation? Why the financial powers-that-be campaign vociferously against it?

It’s because they haven’t been frugal. They haven’t invested, haven’t saved. They’ve been borrowing to fuel personal consumption. Borrowing to chase huge houses costing many multiples of their family income.

It’s because the jobs of many middle-class Canadians don’t really exist at all. Were it not for cheap money and lend-and-spend those businesses and companies would not have been started. Many Canadians paycheques are mere “misallocations of capital” and won’t even exist soon.

It’s no use telling people whose savings are non-existent and whose ersatz companies and Potemkin jobs are at imminent risk that beans-on-toast will soon become cheaper.

They’re more worried about having that new flatscreen repo-ed and losing “their” house to the lenders…

Well, they should’ve thought of that in 2005. I did, and I look forward to affordable housing soon.

#13 asp on 09.30.09 at 1:32 am

Just wondering. Wages have not been keeping up with inflation for many years now. What happens during deflation? Will wages continue to not keep up?

In other words, will prices fall faster then wages?

#14 Bogdan on 09.30.09 at 1:34 am

I see some gear change, which is great. I think short term (2 to 5 years) we will have deflation all over the world, although not in USD. With all the money printing going on, the monetary amount is too small right now to monetize the debt already created. In the last 3-4 decades, money were created as debt, and all the accumulated debt has to be corrected in connection to GDP and productivity by a (new) crash, which will happen sooner than later. Only after that we will faire connaissance avec l’inflation.

Overall, for the 20+ years in debt home buyers it doesn’t really matter if it’s inflation or deflation, in both cases they are screwed.
- In case of inflation the household income increase will not keep up with the higher interests rate and the home prices will not inflate (in case they do, not by much)
- In case of deflation home prices will decrease, mortgage rates will remain on the same level, many jobs will vanish and the minimum wage law will be canceled or at least the amount will decline.

Their only chance is not to have inflation, not to have deflation, but to live in this fairytale forever, and hope that every time there will be a sucker bailing their debt out.

#15 Lance on 09.30.09 at 2:07 am

The theory is that all of the stimulus money will spur on inflation as a result of watering down the dollar. But what is occuring is most of this money is not making it on to the street and is instead propping up the balance sheets of the banks and other corporations (car companies) who receive it and are using it to build liquidity in anticipation of future losses. If things turn around to such a degree that businesses expand and banks lend, then we’ll see the inflation hit hard… and while I have been firmly in the inflation camp up until recently, I am starting to suspect that this money will not be freed up in any appreciable quantity and deflation will take hold regardless of central banks’ desire to do otherwise. If deflation does take hold and CPI starts to creep ever backward a few points at a time, it’ll be damn hard to pull ourselves out of it… and it’ll sink our debt burdened citizens and governments that are entirely geared toward inflationary expectations.
If most of our wealth as Canadians (and elsewhere) is on paper in the form of real estate holdings, then does it really exist? Asset deflation may take it all away again and only those who actually saved will be left with any true wealth.

#16 POL-CAN on 09.30.09 at 3:22 am

Japan tips ever deeper into deflation
By Ambrose Evans-Pritchard

Japan is sliding into the deepest deflation since the Second World War, forcing the new-broom Democrats to abandon their strong yen policy within weeks of taking office.

Core inflation fell a record 2.4pc in September, a steeper drop than at any time during the country’s Lost Decade. A surging yen is twisting the knife further. The currency has risen 22pc against the euro, 27pc against the dollar, and 43pc against sterling since mid-2007.
.
.
.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6244429/Japan-tips-ever-deeper-into-deflation.html

Deflation will be with us world wide until debt levels (corp/gov/personal) are substantially reduced. Might as well get used to it.

#17 ca on 09.30.09 at 3:58 am

But the stock market keeps going up. Could you please say a few words on whether you believe this will continue.

#18 Tanya on 09.30.09 at 4:49 am

You said: Unlike the Japanese, who have had 20 years to deal with deflation, we have the highest personal debt rate in history.

Isn’t that why shows like Til Debt Do Us Part have become such a huge hit with people. Have you see how stupid some people can be with their money? And it doesn’t matter how much the “experts” talk about not spending more money than you make, the banks are still lending people more money than they can afford to pay back. Whatever happened to lending responsibly? Gail Vaz-Oxlade (my hero) blogs about this stuff all the time and she’s always talking about the hundreds of quesitons people ask her. So is some TV personality really the only person with the answers? god help us.

#19 Devil's Advocate on 09.30.09 at 5:04 am

Yas pays yer money and yas takes yer chance…

Step right up folks, step right up to the greatest side show on earth. Like herding cats you’ll try to predict the course ahead wagering with logical reason only to find that in this house of smoke and mirrors logic and reason succumb to dementia as you continue to place faith in the conductor’s control too obtuse to realize he is taking you for a ride.

#20 Frugalistas on 09.30.09 at 5:41 am

I would say that this ‘deflation’ that you talk about is simply supply and demand. Big screen TVs, cars, houses, and other large purchases are going down and thus the prices must drop.

Inflation of staples, such as food and energy will go up, but these are conveniently dropped from the CPI.

Japan’s era of deflation happened because it was the only country which had significant bad loans in the banking sector that were ‘revealed’. Unfortunately, Japan buried those toxic assets, and was forced to enter a period of stagnation ITSELF. This resulted in the Govermint trying lower interest rates to spur inflation, but it ended up fueling the carry trade, which caused even further destruction on the economy.

I would argue that Japan was different – it was the only country that had near zero interest rates. When that is supposed to spur spending and consumption, it only ended up exporting its yen to other higher yielding assets – the carry trade. That decimated Japan and thus fueled its ‘deflation’ as you speak of.

En face, it looked like deflation, but really was a huge carry trade.

Now, ALL countries have gone to near zero (some more than others). Where does the trillion dollar carry trade go?

There can only be inflation when the USD is being intentionally devalued, as all assets are denominated in USD. If assets do not see USD (like houses that switch hands in Canada), they will deflate, but other stuff that is USD denominated – like oil – will inflate.

That’s my simple take on things, but I’m not an economist unfortunately, and I don’t even think they know what is going on in this manipulated non-free market system.

#21 David Bakody on 09.30.09 at 6:07 am

The crunch as already hit the US of A, Mid Term Election fever has hit Washington ( health care tanking) and our Republican is telliin us he sold Buy Canadian? hello?? every US candidate is saying Buy American save American jobs! Heard that the credit card companies are checking sales receipts and moving limits lower to those who have moved to box store purchases. “Bad Risks” we here are tied to the US in many respects so be prepared ladies and gentlemen, same things happen here if only in different colour or venue.

#22 JO on 09.30.09 at 7:29 am

Japan was in a better position to go through a deflation as they had high savings rates and most of their debt problems are commercial, not personal. Japan was lucky as for most of the 90′s, they had a (artifically) strong global economy to help mitigate the impact of their domestic deflation. Japan is also a poster child for the FAILURE of Keynesian nonsense. They are the world’s most indebted nation and their future looks very bleak indeed. Who will pay their generous social programs and debt ? Something will give way.

As for us, we remain one of two nations that so far have managed to keep the credit inflation going (Australia being other), but all this means is our pain is coming up and will be sharp. Rates are likely to remain very low for most of the next couple of years, but in a deflation, most rates rise except gov’t debt (most pristine debt). That is why we have banks increasing rates. Given the contraction of economic activity and falling collateral values (with rising unemployment), the banks increase rates to help the potential borrowers/good borrowers pay for the dead beats who cannot pay their debts.

As long as deflation continues, at some point, even short term gov’t bonds may become affected and collapse in price as investors fear repayment due to collapsing tax revenues.

Eventually, once enough debt is destroyed and once enough people want to take on new debt, or once gov’t cannot find enough investors to buy its bonds at any rate of interest, a period of high inflation will ensue.

So as you can see, even though rates will likely remain low for the next year or two (or three), at some point in the next 4-5 yrs, higher rates are very likely regardless of whether we have inflation or deflation. The bond market has a noose on the economy.

As for the short term here, I am expecting a possible US Dollar scare in the next month, but the US dollar is most likely bottoming before a spectacular rally over the next 12-18 months. Yes it will be worth nothing eventually (late 2011 – 2013), but not likely now. A wicked wave of deflation is the most probable scenario from late 2009 and most of 2010. SP500 should peak out at under 1120 before end of October. CAD $ will trade under 65 cents in 2010, oil under $30/brl, and gold will touch low 600′s….how’s that for an attempt at being Nostradamus !…
JO

JO

#23 molson cdn on 09.30.09 at 7:36 am

Garth’s new prophecy – “The good news: Those higher interest rates will take a lot longer getting here.”
Hmmm, I think, maybe I shouldn’t of locked into my 10 yr mortgage at 5.15%.
I’m starting to get an sick feeling- that 50 yr old triplex , with good , steady income in downtown Toronto (ossington and bloor)- I wouldn’t saved an easy $50,000 on purchase and acquired a rate of 3.6% for 5 yrs.

Who can we trust? What can we believe? How credible is Garth? Will his book sales increase with this new revelation?

I wonder what the disciples of this site feel like? Especially those who sold (in Toronto of course, who cares about the rest of Canada!) and those who HELD OFF, believing the words of the pontificator.

Oh well like Doris Day used to sing “ka sera sera, whatever will be,will be!”

Im starting to think that I just might remove this site from my favourites?

#24 pbrasseur on 09.30.09 at 7:37 am

In the end my grand-mother was right: you work hard, you move forward. It’s true for individuals but also for societies

The Japanese work hard individually but collectively they work less because of their demographic decline. Their work force shrinks too much for that to be compensated by productivity increases.

Europe should know the same faith, except they do accept some immigration which should alleviate some of the problem.

North-America’s population is expanding much more rapidly. It’s economy is freer and much more capable of adapting.

#25 Civil Disobedience on 09.30.09 at 8:02 am

Okay now I’m paying attention but didn’t you say inflation was around the corner not too long ago and that rates will be going up just yesterday? There is a big wildcard and it is the government. Nix this beast and someone could actually predict something and we could use logic to carry on with our lives. Trying to predict the future and store seeds and nuts for the future is becoming impossible and incredibly frustrating. Imagine what feeling the common man has.

#26 Denis on 09.30.09 at 8:03 am

Good read this morning – The federal deficit is small (in 1991 Dollars), manageable problem with a simple solution. So why are politicians being so boneheaded? http://bit.ly/YDOxg

Basically – Vote for the first guy that stops blowing smoke up our asses! There’s no way you can get rid of our deficit without increasing taxes or cutting services. Harper/Flaherty and Iggy are lying to Canadian citizens. It’s about time we get someone that tells us the truth! No wonder Canadians overwhelmingly don’t show up to vote because we don’t believe anything the leaders tell us! (See Rick Mercer’s latest blog post – http://bit.ly/2nKzU8)

First person to say they’re going to bring the GST back up to 7% wins because they had the balls to say it! It’s the only logical way out & adding some improvements/increased efficiencies to the way our Government programs are administered.

To be honest … My Timmy’s coffee costs me more now than it did before the political photo op tax cut.

#27 dd on 09.30.09 at 8:08 am

#20 Frugalistas

“Inflation of staples, such as food and energy will go up”
“assets are denominated in USD – like oil – will inflate.”

Ok … if deflation takes hold then contractions takes hold, people lose jobs, and corps earnings decrease etc. Then demand decreases. However, oil will inflate because of the US $ as long as demand doesn’t decrease fasters.

Thoughts?

#28 Downsized and Delighted on 09.30.09 at 8:29 am

So now you are giving the deflation risk equal time? But of course the risk isn’t equal is it? Nassim Taleb talked about this in his book “Fooled by Randomness”. Just because the odds are lower for an event (say deflation), if that event will wipe you out financially you had better prepare for it regardless. You might want to elaborate on the “monster” deflation.
Maybe talk about what it will be like owning a 500 sq ft condo with ever-rising fees, and no possibility of selling because there will be no buyers. Talk about how nobody will be buying the condos at half-price because if they still have jobs, they will have had huge paycuts.

#29 Dean on 09.30.09 at 8:44 am

Sounds like what you’re saying is that you have no idea what’s going to happen either. Rates will either go up or down and we will either have inflation or deflation.

My prediction is that you’ll be right next year because you’ve pretty much covered all the permutations. Tommorrow’s post: Why you should invest in real estate.

Bye.

#30 Doug from Calgary on 09.30.09 at 8:49 am

A year ago we were feeling the effects of high oil prices on consumer goods, so would it not make sense that deflation over the past few months as compared with 1 year ago is largely related to lower oil prices?

#31 Makeorbreak on 09.30.09 at 8:53 am

I went to the Société des Alcools du Québec in Hull a few days ago. Couldn’t believe the wide variety of products on sale. Even wine. The store was almost empty. Only me and two little old ladies who were commenting on the fabulous sale of a particular liqueur.

Something must indeed be cooking if Quebec, among all places, has to lower the price of a bottle of wine to get it sold.

Or it could mean that more people are making their own wine at home, like we do. Whatever it is, it does not look good.

#32 jess on 09.30.09 at 8:59 am

steve: compassion and changing in teaching methods evolved because of the lack of empathy amongst children in japan. competition and math camps tend to leave out emotion

http://www.youtube.com/watch?v=armP8TfS9Is

“Jobs are easy to get, and they actually have a society of people that care about each other to boot!”

BBC NEWS | Programmes | Correspondent | Japan: The Missing Million
20 Oct 2002 … Most consider hikikomori a problem within the family, rather than a psychological illness. Historical origins. Japan’s leading hikikomori …
http://www.cbc.ca/documentaries/passionateeyeshowcase/2009/japan/

Japan: A Story of Love and Hate
Sunday February 8, 2009 at 10 pm ET/PT on CBC Newsworld

A warning from the Japanese economic front offers an unprecedented look at Japan’s ‘working poor’.

Japanese promises of late…
During the campaign, the Democratic Party of Japan promised child care allowances, free high school tuition, lower gasoline taxes and an end to tolls on highways. The party also stressed that politicians, not bureaucrats, will decide policy and budget priorities.

The new National Strategy Office, under the direct control of the prime minister, is expected to take the initiative in deciding the overall budgetary framework.

Deputy Prime Minister Naoto Kan has been appointed as minister in charge of the bureau.
http://search.japantimes.co.jp/cgi-bin/nn20090930a1.html

..”amid rising unemployment and falling wages, the government said Tuesday. The figure marks the steepest decline since officials began compiling comparable data in 1971.”

#33 David Bakody on 09.30.09 at 8:59 am

#23 molson cdn on 09.30.09 at 7:36 am

Nothing stopping your Sir/Madame of taking advantage of making that once a year extra payment (applied directly on the principle!) providing high savings coupled with the locked in mortgage at a reasonable rate you chose to do. And enjoying life rather than …….

#34 Nostradamus jr. on 09.30.09 at 9:01 am

Garth, “Don’t fight the Fed”.

“”Fed Promises Easy Money for an Extended Period””

September 23, 2009,

The FOMC meets regularly to decide where to set the Federal Funds Rate.
“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

So all the recent media talk about a soon-to-begin exit strategy or a normalization of monetary policy was obviously premature. The Fed is reassuring us that there will be easy money for as far as the eye can see.

Why?

Two reasons come to mind:

First, the Fed is still very concerned about the economy … the employment situation is dire … and a double-dip recession is a real possibility.

Second, and more important, is that they know how precarious the banking situation still is. They know that the bad debt problems have not been solved … that most banks would go bankrupt if they had to implement mark-to-market rules … and that the banking system is still on life support.

This Is Important News
For the Stock Market

Since the Fed is confronted with two major problems — a shaky economy and an unstable banking system — it’s not worrying about a possible stock market bubble in the making.

Why is this so important?

Just look at the charts below. The stock market has rallied some 60 percent since the March low. But earnings are still very depressed. Hence the classic version of the P/E ratio — using twelve months trailing GAAP earnings — shot to the stratosphere!

Twelve-month trailing earnings as of the first quarter 2009 were a mere $6.86 for the S&P 500 making for a P/E ratio of 154. According to Standard and Poor’s, these earnings are estimated to rise to $7.51 in the second quarter, and $7.61 in the third quarter. Then they’re expected to jump to $39.35 in the fourth quarter and $43.58 in the first quarter 2010. Based on this last figure the P/E ratio will decline to 24.

http://www.moneyandmarkets.com/

#35 Kurt on 09.30.09 at 9:02 am

Why are people equating a prediction of higher interest rates with commodity price and/or asset inflation? In addition, I took Garth’s “take a long time getting here” as associated with hyperinflationary conditions, not a return to historic norms. Even a small move *towards* historic norms would deal a great many new home purchasers a good swift kick in the nuts. So interest rates are set by competing processes, some driving them up, some restraining them – so what? If they don’t all more or less point in the same direction, we’re unlikely to see extremes, and so we won’t see doom’s day scenarios. We’ll just see lots of economic stagnation and the effects associated with that. No drama, unless you’ve made some bad decisions (or been remarkably unlucky) – the drama ends up being yours, not the world’s.

#36 Mike (Authentic) on 09.30.09 at 9:04 am

Can you have economic deflation and raising interest rates or are those 2 items ying and yang?

I am on board with the deflationary topic and have thought we would be in a deflationary zone (thus I didn’t buy gold, but I did buy oil).

The question is: Can North America enter deflation but the other parts of the world enter inflation? (Ie, BRIC becomes America and America becomes Japan)?

Deflation will hit savers hard, but debtors much harder.

Cash is king, but pay off your debts now and save those nuts. The snow is starting to fall…

Mike

#37 Nostradamus jr. on 09.30.09 at 9:16 am

Ladies and gentlemen,

…After nearly 500 years of simple outside the box thinking, I will recap my prognostications.

The U.S. will bankrupt the world before it allows itself to go bankrupt.

If so, u will see

…wars will break out

…gold prices will collapse as India and China will sell theirs for food.

…various forms of “protectionism” have already begun

…The U.S. dollar will remain the world currency

…Vancouver gallops towards its destiny of becoming North America’s Financial, Trade, Culture and Leisure Capital

Nostradamus jr.

#38 Mathew Gibson on 09.30.09 at 9:17 am

20 Frugalistas wrote

“That’s my simple take on things, but I’m not an economist unfortunately, and I don’t even think they know what is going on in this manipulated non-free market system.”

All the more reason to expand your understanding of inflation and deflation.

We live in a credit-based economy, wherein most of the actual money we use does not exist, it is the credit created by banks using the fractional reserve system. This is also referred to as the shadow money supply, as distinct from the official, printed money supply.

As much as the BoC might print dollars, the quantity is not rnough not keep pace with the amount of credit being destroyed as debts are written off.

Moreover, the velocity of money is slowing down, reducing (deflating) its effective impact. This means that people are buying less, engaging in fewer transactions, and the existing money is providing less ‘liquidity’ in the system.

Combined, these two elements ensure that we are experiencing deflation. Already happening, which is why most governments are printing money like crazy, to try and stem the spiral of deflation. It isn’t working, just as it hasn’t worked in Japan.

In Japan, ay least, they had the global economy to prevent the situation getting worse. That is, until the global economy also entered deflation with the result that theirs is now also worsening.

#39 infernalmachine on 09.30.09 at 9:25 am

So which is it? Higher interest rates tomorrow or low rates for another 4-5 years.

You can’t have your cake and eat it too.

This post has me seriously annoyed.

Then I am fulfilled. — Garth

#40 jwk (nee jwkimba) on 09.30.09 at 9:54 am

I think Garth ‘s statement is consistent:

1)Interest rates are headed up with inflation – so house prices will come down as carrying costs go up

2) Interest rates stay flat with deflation – so houses prices will come down along with everything else.

Either way, in real dollars home prices have to come down.

“Maybe talk about what it will be like owning a 500 sq ft condo with ever-rising fees, and no possibility of selling because there will be no buyers. ”

We just sold our 500sf condo. We lived there 3 years and after realtor fees made 65000. Our carrying cost was negative – we made more than we paid to actually live there.
We combined the windfall with our savings and paid cash for a 2bed co-op. We spent 20k completely renovating it -even the lightbulbs are new!

I don’t know what’s going to happen next – but we are debt free and ready!

Good point that Japan lost decade happened alone – now the whole world is down it is a different picture.

I think Garth ‘s statement is consistent:

1)Interest rates are headed up with inflation – so house prices will come down as carrying costs go up

2) Interest rates stay flat with deflation – so houses prices will come down along with everything else.

Either way, in real dollars home prices have to come down.

#41 smw on 09.30.09 at 10:06 am

What are the parallels between the savings and loan debacle that initiated Black Monday in October of 1987 and the subsequent movement of the stock market higher for a year after that 22% one day drop; to last fall’s drop of 50% and the collapse of the investment banks?

Are there any?

October 19th, 2009 falls on a Monday(again). How much could dividend payments in the middle of the main earnings month play on sell offs after recieving those payments?

With the lack of positive data coming out, is this the next exit point for investors? Forward looking some of the valuations of companies are way overvalued.

The TSX dropped 25% from almost 4K in the fall of 1987, rallied to 3400 in October in 1988 and continued to 4K again in October 1989, when it stayed until January 1990 and slide back to 3K in October 1990.

Are we not in worse financial shape worldwide today then we were in the late 80′s?

I would love some input from some of you more “senior” folk whom had been through this as I was a teen at the time.

Somebody quoted it a couple days ago, history doesn’t repeat itself, but it sure rhymes…

#42 Shawn on 09.30.09 at 10:08 am

#23 Molson Cdn

Apparently blames Garth for what may turn out to be a bad choice to lock in ten years at 5.15%

And asks
Who can we trust? What can we believe? How credible is Garth? Will his book sales increase with this new revelation?

Molson is typical of people who want someone else to make a hard decision for them on an uncertain topic and then blame that peron if the world unfolds differently. (But if it works out they are not about to share the profits)

Has Garth flip flopped?

Or is he changing his outlook as the facts change?

What should he do? cling to old predictions even if the facts change?

Garth explained his logic in predicting eventual inflation, all are free to agree or disagree. But expecting Garth to accurately predict the future is a bit much. He might get it right or the world might unfold differently.

Even with uncertainty a well reasoned forecast is worth something. But there are no gurantees in this business.

#43 Matt on 09.30.09 at 10:09 am

I’d like to know what exactly is dropping in price in Canada. My large double-double has gone up about 5% in the last few weeks; many of my grocery items have gone up about 10-15% (fruits, vegetables, meat – I’ve also noticed a lot of companies putting LESS product in their packaging but charging the same price – I’m talking to you Kellog’s Nutri-Grain bars!).

Beer prices are sky rocketing too – that’s the true catastrophe.

#44 jussupow on 09.30.09 at 10:21 am

Garth, welocome back, mate. We, the partisan deflationista, salute you from our bunker. Despite your obligatory spanking of our collective (and my personal – oh that hurt) warm butt (and rather exhilarated ‘we are not Japan’ calls). It is all in the past and forgotten. No hard feelings. Glad to see you proclaim the abysmal triviality interest rates have just one way to go –flat. Not a chance in hell anything is going to be done to actually address the real issues by our (and their) politicos. Of course. Thus prolong and painful sinking, monetary stimuluses and quantitave easing of all kinds by conservatives and liberals alike. The only debatable thing is/will be – how big the stimulus should be. Gotta be this big. No this BIG. Oh no that BIIIIIG. HUMONGOUS (which inevitable leads me asking – based on what I shall go out and vote? hey you, that politico crusader schooling us on virtues of ones civil responsibilities why shall I take my butt to the ballot? It is hopeless don’t you see?). Now if you think our national debt is crazy – look… err… japan, likely most of “first world” nations are going to walk the same green mile. Again. And again. And again.

#45 lgre on 09.30.09 at 10:25 am

Everything is going up and we have deflation, someones calculator must be broken. I have seen nothing deflating, infact I just got a raise, Tims just increased their coffee prices, RE is increasing in value.

We may have delfation sometime down the road, I doubt its here yet. I am interested in that fancy calculator being used to come up with delfation numbers though….anyone know where I can get one at a deflated price?

#46 Bill-Muskoka (NAM) on 09.30.09 at 10:27 am

Here is some wise counsel from John Ralston Saul’s book ‘The Collapse of Globalism and The Reinvention of The World’

A Short History of Economics Becoming Religion

There was little hint until the mid-nineteenth century that economics might be transformed into the source of civilization truth. Only when God was said to have died did various leaders, professions and sectors risk pushing themselves forward as successors.

Even then, the market seemed an unlikely candidate, immersed as it has always been in the short-term needs of utilitarianism. After all, the weakness of the market place, when it comes to great issues, is the possession of a memory somewhat longer than a dog’s, slightly shorter than a cat’s. But that is also a great strength — its ability to pick itself up after every fall, to recapture its enthusiasms, to move in circles without being bothered by the self-evident repetitions of error. That dogged, not overly reflective, willingness to just keep on trying is admirable.

What is the memory of the stock market? About that of a dog.

The money market? What was the question?

The great economist Joseph Schumpter therefore insisted on the need to grasp historical facts, the need to have a historical sense or a historical experience. Without these, you couldn’t get any idea of how whole economies work, let alone societies. But the historical sense is not a natural market function. And it is most certainly is not a function of microeconomics or even of today’s macroeconomics. The practioners of both are awash in the sort of facts that carry them away from memory. (page 36-37)

Therefore, do not expect sane thinking by economists regarding the current situation because they simply cannot break free from their myopic viewpoints to see the Real Solutions.

This reminds me of the old story of the person who asked ‘What time is it?’ Unfortunately the person asked was a watchmaker and instead of stating the time the reply gave a detailed analysis of how a watch works. The politicians have mastered such diversionary tactics which inundate the masses with non-related BS.

On page 28 Saul clearly states the reasons for this If an incapacity to deal with history is one warning sign of a transient ideology, another is the degree to which that ideology is presented as an inevitability. Westerners in particular seem to have a weakness for sudden absolute beliefs in rather improbable propositions.

Oh, and for those who think Gold is the solution you might want to take serious heed of this insight regarding the reality that Spain experienced during the High Middle Ages and the Renaissance If ther was one lesson learned during this period, it involved Spain. Awash in Latin American ghold and silver from the sixteenth century on, the Spainards mistook bullion – money – for wealth, that is for a form of reality, and so undermined their own economy. Because they had the money, which is normally the outcome of making and trading something, they didn’t think they had to bother with the production side of their economy. So once the bullion was spent, there was nothing left. They had mistakenly seen some divine providence in the ease with which so much had fallen into their hands. Here was an early warning of the dangers attached to confusing economics with belief systems. Spain didn’t understand that the only purpose of money was as a grease or glue for reality. Today that Spanish imperial childishness seems very modern. It is an almost parallel to our belief that in a technological, global era, money markets have in and of themselves become a form of trade and so a source of wealth creation — that money has at last become real. (page 38-39)

While we readily abandon our productivity in actually making things for mere transactional gains, we have repeated Spain’s error many fold. The loss of national icons of technology such as NorTel are as foolhardy of economics as one can find. The off-shoring of production merely to allow bidding wars for materials is a death nell to this nation, or any nation. The belief that commodities markets are real wealth because of paper transactions is a mindless journey to the Dark Side. Inflation has raised the cost of everything without adding true value. The result has been a never ending spiral of demands for more by everyone. We have become the horse pulling hard ahead in hopes of gaining the carrot which will never come into its reach.

#47 Kevin in Winnipeg on 09.30.09 at 10:42 am

No one likes a bipolar “economist”.

You must have a novelty fortune teller ball too *shake shake shake* Depression *shake shake shake* Higher interest rates *shake shake shake* Deflation

Of course, just like a train wreck I can not look away!

PS.. How was the Winnipeg crowd? Very optimistic I would say.

#48 ralph on 09.30.09 at 10:52 am

Inflation or deflation. Either way we are screwed. There are going to be a lot of people joining the homeless.

#49 Alister on 09.30.09 at 10:56 am

Deflation? Where?

I am a notorious record keeper and I just checked some prices.

My grocery bill is up 20% in a year.
My car insurance just came in – up 10%
My house insurance is up 6%
My sons university tuition is up 11%!!!!!!!!!!!!!
My property taxes came in yesterday – up 6%
My dentist just charged me 6% more than last years visit.

Looks to me like 6% inflation is more typical.

It goes on and on. The only thing I’m paying less for is gasoline but that is only because at this time last year it had been in a parabolic rise.

ANYBODY who believes in deflation hasn’t been paying attention for something like the last 80 years.

As long as governements have the printing press to put money into the system at will, we will have inflation regardless of economic factors. A typical example of such an extreme is current Zimbabwe where they had 100,000 % inflation while the economy was imploding and people had no food. History is full of examples of poor consumer demand, yet inflation was out of control. It’s simple – add governement money, stir and shake = inflation (really its currency devaluation).

Another thing – these governement deficits – that means that the country is spending more than it can earn, or the populace can pay – it’s inflationary because they are either printing that money or borrowing it and sending it into the system. Once it’s in the system, it cannot be removed without pain that no one will accept.

Those who count on deflation will be surely dissappointed.

#50 Makeorbreak on 09.30.09 at 11:06 am

Time-shares are deflating!

http://www.bloomberg.com/apps/news?pid=email_en&sid=axqN.SR9bsRs&ref=patrick.net

#51 kc on 09.30.09 at 11:07 am

“#17 ca on 09.30.09 at 3:58 am But the stock market keeps going up. Could you please say a few words on whether you believe this will continue.”

How can this “bubble” or bear market rally continue when you factor in PE ratios and how over bought the market is? Do you feel that it will continue? if so keep your faith… however, in a consumer driven economy that is unwinding ask yourself how these companies can still show profits when we are heading to hell in a handbasket.

Here is an insightful quote from page 135 “The Stock Market Crash of 1929″ by Gordon V. Axon

“The old saying that a stitch in time saves nine applies with force to controlling speculation and a booming economy. The nation as a whole can produce only so much wealth. No country, no system, has found the means to rapidly stimulate national wealth, over a period of years, without facing either serious social problems or a dramatic setback. Wealth does not normally increase rapidly, but through the slow processes that increase industrial and argricultural productivity as the years pass. So any stock market boom that rapidly outpaces the economy is bound to collapse sooner or later. Any economy that is stimulated to excess will surely have setbacks that undermine the future.”

cheers

#52 Makeorbreak on 09.30.09 at 11:10 am

So the economists are surprised…makes you think about the need for these bozos…

http://www.theglobeandmail.com/report-on-business/theres-no-spark-in-our-economy/article1306631/

#53 Evangeline on 09.30.09 at 11:18 am

#28 D and D

((Nassim Taleb talked about this in his book “Fooled by Randomness”. Just because the odds are lower for an event (say deflation), if that event will wipe you out financially you had better prepare for it regardless))

I’ve been thinking a lot lately about how the old tried and true aphorisms still apply, and can be applied to investing. In all our sophisticated economic modeling etc., we seem to have lost sight of common sense. The quote that you supplied means essentially, “Don’t put all your eggs in one basket.”

#54 Evangeline on 09.30.09 at 11:22 am

#28 D and D

I said you had quoted when actually you had paraphrased. Sorry for the mistake.

#55 robert on 09.30.09 at 11:27 am

For all you folks now disappointed with the prospect of lower interest rates please consider that real interest rates are at historic highs. See Mish and Bill Gross. The former calculates CPI at -6.2%. More mainstream analysts are still talking CPI -2.0%.

When was the last time we saw real yields on 10yr treasuries at 5%+ (or over 9% if Mish is correct)? Mr. Gross concedes he is buying the long bond. Can you blame him? After all where can you find a virtually risk free 6%+ rate of return. And no, there are plenty of other subordinate debt issues which will default (think the debt of other sovereign nations, munis, state, corporate ) long before US Treasuries collapse. Combine this with a US Dollar that appears closer to a bottom than a top and practically every other currency in the world on the other side of that boat and you have an interesting incentive for risk averse foreign investors to acquire these instruments. Not to mention the natives who are decidedly de-leveraging and developing a new frugality.

What people seem to forget is that in the late 70s early 80s we had nominal rates of nearly 20% but combine that with a 17%+ inflation rate and what have you got in real terms? Where is the inflation today? Evidently the Treasury market hasn’t seen any sign of it since early June.

#56 Got A Watch on 09.30.09 at 11:29 am

The Government and Banks will fight hard to prevent deflation, but they are failing spectacularly. Simply put, there is no blowing up any more bubbles with easy credit – you can’t solve a problem of too much bad debt by re-financing it yet again.

We have seen this in stark terms in the USA, where mortgage loans that were “re-structured” have a failure rate of almost 100% in the months right after the supposed rescuing was done. Many of them have never have never seen another payment made.

Even the conservative IMF says Banks have only written off about half of the bad debts so far. In fact, the entire global Banking system is insolvent and far underwater, still, after 2 years of “rescues”.

We live in an “extend & pretend” world, where bad business decisions are bailed out by Governments, and taxpayers will foot the bill for generations. Keep whistling past the graveyards.

Seen in this cold light, Canadian consumers (and Australia) are the last pathologically deluded group left standing. We need national psycho-therapy, to rid ourselves of the debilitating “consumer over spending” disease.

And our “real estate” industry is a dinosaur, looking up into the sky at that bright falling light which will cause their own extinction.

We have done nothing in the last 2+ years to actually resolve this crisis in a proper manner, only made things worse. Incompetent Government, acting on behalf of brain-dead voters. At every level: municipal, county, Province, nation, continent, globe. They manipulate statistics to make it look better, but it’s all optics and spin. It’s the jobless/recovery-less recovery!

In fact, I would say we are in worse shape now, because so many have been fooled by Government propaganda into thinking this crisis is over. Well, don’t worry, it should be behind us in 10 years.

#57 Nathan in Edmonton on 09.30.09 at 11:31 am

For a long time I thought actual pay cuts would not happen; something I had never seen in my 20-years in the work force, but my wife had a 10% wage cut in the spring and since then I have been in the deflation camp; real people are not seeing these stimulus dollars; what is created electronically disappears just as fast. And even though the cost of things I do buy have increased — food, diapers, gas, beer — there is a shift in where, what and how I purchase them and I think many people are doing the same — becoming bargain hunters and coupon clippers that never where before. This mass shift in spending habits should give downward pressure to the cost of these items. I’ve noticed a lot of cartons of the $8 ice-cream in the grocery store.

#58 rory on 09.30.09 at 11:38 am

Watched a great video on exponential growth in a finite world….one example he had was:

We have bacteria that double every minute in a jar…Bacteria being people and the jar being the finite world, Earth…So between 11:00am and 12:00 noon the bacteria double every 1 minute …so at 11:01 we have 2 bacteria, at 11:02 we have 4 and so on …so when do the bacteria/people notice that their world will be so full that no more expansion is possible…let us say we notice when the jar is half full …so what time does that make it …you ready – it makes it 1 minute to 12:00 or 11:59am…that would be a yikes.

The person then goes on to say that the bacteria finally understand the trouble they are in and rush out and discover 3 more bottles …wow…a triple play …that should last a lifetime or 3 they say …guess what time it will be when those other 3 bottles are also full …yep 12:02…so here are we at 11:59 and what is the probability we will find 3 more bottles/or 3 times more oil then ever discovered/or jobs/or another 3 planets to live on and a starship to take us there….that’s what I thought too.

We simply have or will have to many people fighting over a limited amount of resources in a finite world …something has to give …what that is or will be or even when I have no idea but it cannot be good in the traditional sense…is this economic times the beginning or just a blip.

Aritmetic, population & energy … our inability of the human race to understand the exponential function … http://www.youtube.com/watch?v=F-QA2rkpBSY

#59 Finanzkrise on 09.30.09 at 11:39 am

I’ve noticed a number of posts today seeking clarity on the relationship between inflation / deflation and interest rates. E.g. an assumption could be made that if there is deflation, then rates will stay low. It doesn’t seem to be that simple.

Garth – what are your thoughts on the likelihood of a scenario where deflation persists but at the same time bond markets drive up yields due to oversupply of new debt, even if the central bank keeps its target rate low? This seems like a much worse scenario than yields going up due to optimistic an economic outlook and expected inflation. For example, the combination of falling house prices, rising unemployment and rising rates could result in increased mortgage defaults, even in Canada which hasn’t seen defaults en masse (yet).

Thoughts?

#60 rory on 09.30.09 at 11:44 am

From my previous post I have to add this as most will scoff at what I said but do you do so because of this …”Do we as a nation now fear the truth so much that we prefer deception and lies?” …http://www.oftwominds.com/blog.html

#61 Daystar on 09.30.09 at 11:44 am

I wrote this last night and sat on it… sometimes do until you came up with your story on deflation, Garth. Interesting…

61 Daystar on 09.29.09 at 1:05 pm

Was I right about this? I was but I can better explain it.

When interest rates rise 101:

- currency rises boosting import buying power that creates deflation. (if currency doesn’t rise, there is a risk of inflation and thats bad. Its what happened to Canada in the 80′s, early 90′s and the strength of the U.S. dollar didn’t help much then)
- assets become more costly to buy through credit and depreciate, also causing a slow down in consumer spending (less equity to borrow on), and hence deflation.

When interest rates fall:

- currency falls boosting exports and hamper buying power for imports, causing inflation. (and if currency doesn’t fall? There is the risk of deflation)
- assets appreciate (RE bubbles, etc.) causing inflation.

Why is Canada experiencing deflation with record low interest rates?

Good question. Currency is still strong relative to the U.S. dollar. Thats the biggest reason. Imports are still cheaper without the rise in interest rates and some exports are slowed, lowering profit margins and as a consequence a rise in salaries and profit expense hikes, offsetting asset inflation.

So what is the best kind of economic environment that Canadians can possibly hope for? Deflation, stagflation, inflation… if you had to pick, what would you prefer? Go ahead, humor me. Pick one.

I’d pick deflation. We all want things to be worth less as buyers and if my home is worth less, thats ok because chances are all other homes are worth less in a deflationary environment, I can live with asset deflation. (and I can live with stagflation, but I like deflation I like buying power. 87 Mark in Japan on 09.29.09 at 7:43 pm says it best as to why)

And if you had your choice between a strong or weak dollar, what would you choose?

For me, its a strong dollar. Can’t get deflation otherwise, and I want my buck to go far in this world. A strong dollar means buying power (deflation) for me everywhere I go. (oh, and to be honest, I have cash and can make it, so cash isn’t a big deal for me, hence, I like a strong dollar personally)

And if you had to choose between high interest rates and low interest rates, what would you prefer?

Easy for me, its low interest rates. I don’t want the bank owning me and have credit more easily available, its a no brainer.

Now… I don’t know what you all want, but to get what I want, I need 3 things to occur for deflation, a strong dollar and cheap interest rates, which is for me, the best of all worlds.

I need a strong currency and hence, I need a government that runs surplus’s. We had that with the previous government, but don’t have it now and its a guarantee that later, as it always follows nations that like to run up massive deficits, we won’t have a stronger currency later. Couple this with a possible Greenback recovery, and… watch this looney fall in the face of rising interest rates. Ouch!

I also need low interest rates for deflation and we have that now, but won’t have it later because we are running deficits in federal spending and trade deficits due to governmental policies and that means we can’t keep interest rates low if we wanted to… we once could, you know, when we were running surplus’s but can’t now… thanks to this current government.

And I want deflation. Assets (real estate) have wildly inflated. Can I have what I want with deflation of assets in a near zero interest rate environment? Yes, I can but only if this federal government makes it tougher to borrow mortgages like say… 25 year 10% down CMHC regs? Unfortunately, thats a thing of the past and likely won’t come this way again, thanks to… our current government. Instead, what we have is Canadians more in debt than ever before. All my neighors are earning the same as they did before, some less… but they have more debt, thanks to this governments loose regulations in housing.

Oh, and I want greater earnings potential. I want our Can corps more protected, given less tax burdens… i.e., I want income trusts. We had it… until this government.

So let me recap. I need 3 things for deflation, a strong dollar, low interest rates and better earnings potential. I need a fiscally responsible government with strict regs on mortage lending and I need government surplus’s for a strong dollar, I need good trade policies for trade surplus’s and federal surplus’s to create the ability to control interest rates or keep them low if I want and I need a government that gives domestic corps a tax advantage of some kind to compete with and I haven’t got that in this government.

We could have had surplus’s and hence, a stronger dollar internationally well into the future the ability to control what our dollar does and we still have that now. Its not mere coincidence that the dollar follows the rise and fall of the price of a barrel of oil. Soon due to deficits, that ability to have some control the floating dollar will be lost. We will also have lost full control over the ability to artificially keep interest rates lower and ability to create deflation even after this recovery, even in the area of assets, the best of all economic environments, if we would have had a government that ran good policies. (Oh do I miss those surplus’s)

What we now have is a strong dollar only because the U.S. dollar is weak and U.S. bond investors are scrambling from the U.S. bond market and see Canada as a possible haven (too bad for them if we continue on with this current government), and ow interest rates only due to a U.S. bond market collapse that has shook the G -20 bond markets into a low interest rate policy and bubble asset inflation that is going to drive Canada into a recession once interest rates rise… and rise they will.

We could have had this through prudent spending, and yes, we wouldn’t have missed out on low rates regardless or a strong currency relative to the U.S. dollar in any case, but… this is likely to be very shortlived now thanks to Harper deficits and a modest U.S. recovery. And… we could have had asset deflation at the very least, stagflation through much tougher mortgage regs and I know, I know, realtors would grumble reading this but if they fancy being realtors in a Real estate bubble gone bust with shrinking commissions and lengthy sale turnovers in the future, then they will be happy to know that this is whats coming for them as a result of bubble going bust and todays so called great and stellar government policies.

I’m an avid supporter of a strong currency if you haven’t caught on and I like deflation. I like it when things cost less and the banks don’t own more of me. And strong currencies don’t have legs unless Governments run surplus’s. And GDP growth doesn’t happen where it counts unless our corps can be given advantages right here at home by our governments to compete globally. And nations can’t have low interest rate banking policies unless they run surplus’s or face an ugly hangover later.

The fact that we are now in record federal deficits, combined with Flarehty’s move to buy 125 billion worth of its own insured mortgages through CMHC with money drummed up by the sale of bonds that totals 200 plus billion Canadian dollars (something like 17% worth of debt compared to our GDP in one year alone) does not sit well with me. Its not the sale of bonds at attractive rates that bothers me…. its the forced need to do so through stupid government policies and the likely loss of 100 billion or more at the taxpayers expense through CMHC should this real estate bubble burst badly and such record deficit spending will bring with it, a steep climb in interest rates and that might not be enough against a Greenback that could actually surprise everyone over the next couple years and rise internationally and should this happen in just a few short years its could be the 80′s and 90′s all over again.

I mean… check this link out by Reuters:

http://www.reuters.com/article/marketsNews/idCAOTW00242820090928?rpc=44

This is the full story provided:

“OTTAWA, Sept 28 (Reuters) – The Canadian government said on Monday it will maintain until March 2010 a program to buy insured mortgages from banks.

In a report on its economic stimulus program, the government said lenders had not participated in the program as aggressively since credit market conditions improved, but that it was important to keep some extraordinary measures in place in case normal sources of funding become less available. (Reporting by Louise Egan; Editing by Jeffrey Hodgson)”

Thats the full story, surprise, surprise. So whats missing? All the facts. 125 billion dollars worth of bonds sold to americans to hedge against a real estate bubble going bust is one simple tidbit. What a wonderful state our media is in today. Less information is apparently more.

I think… people need to understand that the only way governments can truly get out of the debt mess they’ve created (and its world wide) is through inflation. Dilute the existing debt through inflation and everyones happy, right? While incomes are falling make everything worth more and everyone’s happy?

Not this cat. I believe in a strong currency and inflation devalues currencies if left unchecked. Never mind our children and grandchildren paying, everyone pays. Everything will simply end up costing way more and if incomes don’t inflate, look out. And if deficit spending goes on for too long, this nation can go bankrupt and who owns us? The bondholders. Our creditors. So am I happy with this federal government running this nation like its a banana Republic? Happy to see massive federal debt, governmental policy forcing this nation to borrow, literally begging interest rates to rise, running our currency down in the future as a result of record deficits and big losses in the future from a Canadian housing bubble gone bad in the face of a U.S. recovery?

It does suck to see it coming… :-(

#62 McSteve on 09.30.09 at 11:59 am

Without massive intervention, we would have deflation. I think that much is certain. Excess liquidity is irrelevant if nobody’s spending or borrowing. With a “real” unemployment rate of 15 -20%, there is lots of slack in the system. Add to this the number of people who are “underemployed”…

The best minds in the world haven’t figured out – how can the average person?

I vote to keep it simple. Minimize debt. Keep some deployable cash on hand for opportunities and a crisis alike. If you have debts, pay them first and forget bonds – your return on paying off your line-of-credit or mortgage is guaranteed and likely better than most bond yields today AND you won’t have to pay capital gains on the proceeds. Interest income is taxed at the highest rate.

Invest in the market – sure, if you’re brave. Simple rule, only invest risk capital. Go for dividend paying stocks – it won’t sting as much if there is a correction and you’re being paid to wait.

If you are a risk-taker, take calculated risks. Buy energy securities – it will go up eventually. Have some precious metals (5%) in your portfolio as an insurance policy and hope you never need them – again buy on weakness and don’t over do it.

Inflation concerns – buy a real return bond – there is (some) deflation protection in these too.

Don’t buy more house then you can afford. Budget at least a 3% rate hike in the coming years. If it doesn’t come, be grateful. If it does, you can afford it. If you can’t afford your current mortgage at measley 6.9%, you’re in over your head.

Until things improve, there is a limited upside and an infinite downside. Nice and slow, see – that’s the way to do it…nice and slow…

#63 Future Expatriate on 09.30.09 at 12:22 pm

Deflation is going to have far less of an effect on my “basement rock collection” than the complete collapse of the US Dollar, which now, is absolutely inevitable as China realizes that Obama has no intention whatsoever of getting out of the Mideast, and indeed, is working on expanding the war to Iran.

China has the mojo to completely collapse the dollar, and they’re going to do it as a last resort to protect their energy supply in Iran. The tsunami aren’t working.

What Canadians have to ask themselves is what the hell are they doing in Afghanistan helping the US CIA keep the poppy crop going? For that, and a lousy pipeline that will never be able to be built let alone secured unless the country is wiped out, are the only reasons the US is in Afghaninam.

#64 charles on 09.30.09 at 12:25 pm

Just today in the government daily,
Pratt and Whitney 410 jobs gone.
Viceroy Homes 120 jobs gone.
Matts Sundin paid entourage gone.
These lucky duckies are now free to join Canada’s vibrant new economy which includes collecting alluminium cans on the side of the highway, hangning out at the Labour on Demand office for day work and of course for those of the right age signing up as cannon fodder.
Enjoy.

#65 Jason on 09.30.09 at 12:25 pm

Deflation in things you WANT, inflation in things you NEED (to a certain extent).

Personally I have accumulated everything I need at this point in my life and won’t be asking for any material goods for Christmas. Usually Gift Cards would be a good idea, but I fear an increase in bankruptcies going forward may cause some GC’s to become worthless.

#66 steven rowlandson on 09.30.09 at 12:29 pm

Deflation or the “D” word is no fun to be sure particularly for those that are on the multi decade inflationary joy ride. You know. Real estate, union jobs, government jobs and the stock market as insiders or just lucky investors. Yes there is cause for concern. All you know and love is at risk of being greatly diminished. Paying off debt or defaulting on it is the method by which the money suppy deflates.
The permanent supply of cash really is quite small relative to the total supply of electronic currency and credit.

If you go to 321 gold and look for a pdf file by Sprott Asset Management you will have good read regarding
US government debt and the status of the dollar as the reserve currency. Its scary stuff. I think most will see the possibility of there being no way to pay except by either default or by hyper inflation. There is not the will and wisdom in government to simply pay it down over time. Unfortunately in Canada we lost the discipline to pay down the debt as well…. The best way to stimulate the economy is for government to pay down debt thus returning money to the lenders to be re invested in productive ventures…. The other benefit is it lightens the future tax liability for tax payers by decreasing the cost of interest on the debt itself.
Debt repayment is a win, win proposition.

Steven

#67 Mikey on 09.30.09 at 12:33 pm

Canadian economy stalls in July, putting in doubt hopes of stronger rebound
Module body

2 hours, 20 minutes ago

0

What’s this
By Julian Beltrame, The Canadian Press

ADVERTISEMENT

OTTAWA – Widespread expectations of a strong economic rebound took a major hit Wednesday, with the stunning Statistics Canada announcement that growth stalled in July.

Following a 0.1 per cent increase in June that signalled the end of the recession, economists had been expecting a strong rebound in July of anywhere from 0.5 per cent to 0.7 per cent.

And many of the early indicators were pointing in that direction, including the outsized 5.5 per cent pop in manufacturing sales the agency has previously reported.

Instead, the economy delivered a goose egg.

“Okay, this is a shocker. We’re not talking about a shot across the bow of the optimists, this is more like a torpedo through the hull,” said economist Douglas Porter of BMO Capital Markets.

And it will send economists and policy-makers scurrying back to the drawing board, he added, trying to figure out not only what went wrong with their computer projections, but also what the economy will do going forward.

Two weeks ago, the Bank of Canada enthused that the economy was bouncing back even faster than its July forecast of a 1.3 per cent pick-up in the third quarter, which at that time was seen as cheery news.

And Monday, governor Mark Carney was so sure of his forecast that he boasted in a Victoria speech about having been a lonely voice in the spring in predicting that policy measures would spur growth later this year, particularly so in Canada, “expectations (that) are beginning to be fulfilled.”

#68 Daystar on 09.30.09 at 12:52 pm

Yen to dollar piece over 20 years:

http://www.yen-to-dollar.com/yen-to-dollar-japanese-economy/

Why is Japan in deflation? Imports are cheap. The Yen is up!!!

http://story.argentinastar.com/index.php/ct/9/cid/3a8a80d6f705f8cc/id/548164/cs/1/

#69 Makeorbreak on 09.30.09 at 12:55 pm

Is Loblaws trying to trim costs by hiring people with no university degree for their management recruits?

degreehttp://www.ottawacitizen.com/Unlikely+retail+recruits/2048821/story.html

#70 bill on 09.30.09 at 12:57 pm

I dont think deflation wil be a problem. Cheapness, the essential ”shlockness” of a product though is. Everything of quality ,I see ,is pretty well priced beyond our reach. No 3 grand flat screen tv in our future. All those cheap flatscreens are gonna die very quickly . I wonder how long of a lifespan they have. Not that we would buy one any way, as we shot our tv years ago.
We have a ”weed puller” that my grandfather bought Just before the second world war. It still functions perfectly. It pulls the weeds on the first try and the weed falls to the ground,ready for the next one. A weed puller purchased from crummy tire or even Lee Valley is just not in the same league. They were so frustrating to use in comparison to the ancient one . I think a lot of products made these days are just plain ”cheap crap”. Does that count as deflation? To reproduce the ancient weed puller would ,I am sure ,cost a substantial amount more. I bet my grandfathers weed puller would run you about 75 bucks or more to reproduce these days.A quick look at our food bill shows that it is not getting cheaper. However the quality and freshness seems to be declining. Gas continues to be around a buck or so a litre.That isnt cheap. And more taxes coming.
Have a listen to Frank Zappa’s song ”Flakes”
California ‘s got the most of them but there is no shortage elsewhere.

#71 Keith in Calgary on 09.30.09 at 1:01 pm

Bill Gross at PIMCO, the world’s largest bond hedge fund said today on Bloomberg that he has almost sold all his mortgage funds and is buying nothing but long US treasuries as he thinks delfation is going to be around for along time.

#72 jmcanuck on 09.30.09 at 1:04 pm

Deflation (or disinflation for you inflationists) is happening because the velocity of money has slowed despite there being more of it. Banks and individuals are hoarding due to lack of confidence/trust. When money isn’t moving around (banks don’t lend and people don’t spend) you get too many goods chasing too few consumers. Prices drop. Couple that with demographic trends (boomers ending their spending years) and stagnant incomes and job losses. Maybe house prices will deflate and interest rates will stay low. A win win for us savers/renters.

#73 Nick from Vancouver on 09.30.09 at 1:06 pm

Well, if deflation starts spiraling, we’ll see deflation in all goods except food and oil. Food and oil prices will go up.
Why?
As the whole economy slows down, demand for oil will drop, but refiners will have to make up for refining losses. Does anyone have an idea how multiple shut-downs/start-ups per year, or half-capacity runs affect the techno-economics of a refinery?
As energy prices go up, so will food. Pesticides, fertilizers, transport and handling – it will go up.
Bottom line: we will be paying less for gadgets and more for food. Just have a look at East-European countries – more than 60% of after tax income goes for food. The rest of it is mostly housing – and people here are taking on more and more debt (mortgages). But, we’ll be slim, skinny, healthier than today, because most of money will have to go to pay off the mortgage.

Some of us will be surprised one day when we learn how many unnecessary, non-essential things we have right know in our garage, shed, cabinets and even fridge. I also have them, but I am aware of that.

Some old trades will become fancy, instead of proudly saying “Yea, I am a realtor”, looking at your Lexus, some may go back to school to learn – stitching, shoe repair, bike repair…

#74 jmcanuck on 09.30.09 at 1:10 pm

Oops by win win I mean when we go to buy a home (lower prices and low interest rates). Of course low rates punish savers but I guess deflation offsets it a little.

#75 BDG YYC - Weeee ... What a ride !!! on 09.30.09 at 1:45 pm

Hey Garth, I see a lot of folks hitting you for an easy to understand, precise, unwavering, exact, timed, for their exact location, silver bullet, instruction on exactly what to do, suited to their personal circumstances, without requiring them to adjust their present thinking or wasting time on having to figure anything out for themselves, or actually involving anything not fun … or … they won’t like you anymore :-)

I don’t always necessarily agree with everything you say, but I do think you are all over this stuff and have it as well figured as anyone, and I have to say that agree or not I have great respect for the views and opinions and your knowledge and understanding. Likelyhood is that almost everyone is going to be wrong on a lot of “stuff” as this plays out for a lot of yet to be seen twists and turns and perhaps a black swan or two showing up along the way. Some people will be better positioned and equipped to navigate their way through the process as it unfolds over the next months, and years and yes decades (its called life :-) ) better than others. I doubt its going to be simple … or that many are going to get through without banging up some fenders.

There are a hell of a lot of moving parts and dots involved … and it ain’t really much about “Vancouver” or “Toronto” … any more than the Enola Gay was ultimately about “Heroshima”.

Anyway keep up the good work I enjoy reading your “stuff” … its very helpful and an important input as I work to figure it out for myself – which should be what anyone who hopes to get through the next few years might be working on.

Seems many think they’ve got it all figured out already … personally I’d be a bit worried if I was there. But what the hell eh?

Where’s that samich … hey the games on! :-)

#76 Keep Dreaming on 09.30.09 at 1:49 pm

You know guys, we can all predit the future but no one has a crystal and we might all be wrong.
I think we should call Garth the FOOL because he has been saying we will see a crash for ever and it has not come yet. We had a small correction about 8 months ago but as the rates came down prices went the other way.
I persoanlly made a mistake a returned a house I had purchased in 07 to the builder. Guess what the house was sold in 2 day:)
I still think houses are way over priced in Canada, I hate the weather and will not retire in this country but as far as RE goes I think we have to realize that it is out of our hands. As long as we have rich asians migrating to this coutry every year we have to rent thier properties from them and that is the sad truth.

(1) Provide a link to any time I suggested housing would ‘crash.’ (2) Sounds like you are a bitter person. Correction, a bitter racist person, — Garth

#77 nonplused on 09.30.09 at 2:03 pm

Popping asset bubbles are not the same thing as deflation. Once real estate gets back to 3 times average earnings, it will have “normalized”. It won’t be deflating unless “owner’s equivalent rent” continues to decline at that point. Which it probably will. But anyway, my point is ITS A BUBBLE! Bursting bubbles are not deflation. No more than the collapse of Bre-X, my favorite bubble of all time, was deflation.

What I am curios is how many more greater fools there are left the government can coax into the housing market with 3% rates, 35 year ams, and no money down? If they run out, do they move on to relaxed lending standards? Say extend the same terms to second homes, rental properties and the like? Sooner or later they must end up pushing on a string, in which case buying dries up despite low rates. That’s what happened in Japan.

I too have noted that absolutely nothing I buy has gone down in price. Was in Costco yesterday, and everything seemed to be up, and a lot. Beef Jerky, just for an example because it was typical, went from $7.50 to $8.88 in like a few months since I last bought some. Pickles were up! Used to be under 7 bucks for the big jar and now are almost 8!

Imported stuff was cheap though. 2HP 5 gallon air compressor for $99. I don’t think I’ve seen that before. With a regulator! I remember paying $20 for just a regulator some many years back.

#78 Keith in Calgary on 09.30.09 at 2:09 pm

#49 Alister……

Here in Calgary the following has happened to my wife and I……

1- Our condo lease went down from $1,650 to $1,500 last year, and according to my landlord who I chatted with on the weekend, our suite now rents for $1,400…….my lease is up in June, maybe it will be $1,300 be then…….heh.

2-Our monthly grocery bill has gone down from between $800-900 to $650-700…….sure, we shop smarter, but many of the same things we buy are going down in price, or, more frequently they are on sale.

3-Major chain department stores (Sears, Bay, Zellers) when we need to buy something such as a small appliance or a clothig item, always now have 30-50% off sales on weekends, and when utilized in conjunction with another 10% off if you use their C/C, you get fabulous deals as most items are already marked down between 25-50% to begin with and then you pay off the C/C in full in 45 days when the bill comes in. So in essence, we can delay paying for stuff at 65-75% off if we are smart and wait for the deals. I have no qualms whatsoever about telling a clerk in a store their stuff is too expensive and/or walking out, or negotiating right there on something and asking for the manger in order to do so, if I really need it.

4-Our car insurance renewal is up next week and we dropped it from $1,470 down to $1,053 thru shopping around and negotiating. same coverage, but with a different carrier now.

5-Premium gas has gone down to .89 cents from $1.49…….and stayed low.

Life is good…….and going to get better for everyone but the “banksters” and the ‘greater fools”…….

#79 David on 09.30.09 at 2:16 pm

The reason interest rates will go up, baring long term depression, is because the debt levels of major developed countries are becoming unrepayable.

You’d have to be a fool to think that future US generations will pay 70-80% income tax rates to pay back the Chinese, Canadian, and yes US investors who’ve bought their T-bills.

They will default.

And as that notion becomes more obvious, bond investors will demand higher and higher yields to compensate for the RISK OF DEFAULT.

Not the risk of inflation, but CREDIT RISK.

If nations around the world act like Banana Republics, they will pay Banana Republic Interest rates.

Even if economic growth, and inflation are low.

There are those three interconnected factors to housing affordability, and we’ve seen the peak of ALL THREE.

1. Debt Levels – Consistently rising, now have to fall.
2. Interest rates – Been falling for 30 years. Now at bottom with no where to go but up.
3. Personal Incomes – Median incomes are going to get crushed. The days of making $100,000 building cars, $250,000 selling junk bonds or $50,000 waiting tables in big cities has reached its peak, and is in long term decline.

Not a pretty picture for housing prices.

#80 View from the south on 09.30.09 at 2:46 pm

The tourism sector’s convention is on in Windsor. They heard from an economist today.

http://www.windsorstar.com/business/gains+will+slow+economist+tells+tourism+summit+Caesars+Windsor/2051204/story.html
The Windsor region is a hot retirement RE market.

http://www.scaledown.ca/2009/09/26/ontarios-sunshine-coast-draws-retirees/

#81 lgre on 09.30.09 at 3:17 pm

“How can this “bubble” or bear market rally continue when you factor in PE ratios and how over bought the market is? Do you feel that it will continue? if so keep your faith… however, in a consumer driven economy that is unwinding ask yourself how these companies can still show profits when we are heading to hell in a handbasket.”

simple, markets are irrational, if the markets were played on fundementals then the rally would of never lasted this long, eventually it will pop just like the dot com bubble..but when? that is the question..staying out is losing, playing and staying in too long is also losing..play with discretion and money can be made..I make it on a weekly basis.

#82 jess on 09.30.09 at 3:53 pm

exit speaking

…”I am not alone on this front. I have faith my colleagues on the Federal Open Market Committee will stand and deliver in a timely way. And I expect that when it comes time to tighten monetary policy, my colleagues and I will move with an alacrity that, if needed, will be equal in speed and intensity to that with which we pursued monetary accommodation.”

Richard W. Fisher
Excerpts from Remarks Before the Texas Christian University Business Network of Dallas
Dallas, Texas
September 29, 2009
http://www.dallasfed.org/news/speeches/fisher/2009/fs090929.cfm

#83 Nostradamus jr. on 09.30.09 at 3:56 pm

As predicted by me, North Shore RE prices continue to rise…

http://mlslink.mlxchange.com/EmailView.asp?r=1635943167&s=BRC&t=BRC

…the future North American Financial, Trade, cultural and leisure capital…..Vancouver BC

Nostradamus jr.
(my head hurts)

#84 Jim on 09.30.09 at 4:12 pm

Some of you guys need to brush up on what deflation is. Deflation is not disinflation. Japan has tried 0% interest rates to combat deflation – hint: it didn’t work. Ben Bernanke has suggested another way to fight deflation – hint: it involves printing.

Germany is in deflation. Canada is in deflation. The U.S. is in deflation. Japan has been in deflation for 20 years. I have no ability to predict the weather (neither does Garth or anybody else), but I tell if it’s raining outside.

(As an aside, does anybody else find it weird that we need to tell grown adults that people can’t predict the future? The same grown adults who laugh at people who pay good money to visit fortune tellers? I mean, WTH)

In a deflationary environment cash is king and debt is suicide. Why? Because future dollars are worth more than current dollars. This means that $1 of interest payment today is worth less than $1 of interest payment tomorrow. So even if interest rates are at 0%, but deflation is running at 10%, the consumer’s payment next year is 10% more even though the nominal payment amount remains the same.

Everybody and their sister was talking about inflation like it was a foregone conclusion. If investing has taught me anything is that the market never does what you think it will do!

If a person _knew_ that inflation was coming, then the prudent strategy is to lock in millions of dollars of debt (which is what homeowners are currently doing)! Why? Because the debt in today’s dollars will look rediculously “small” in an inflationary future!

For an extreme example, think about compressing the time between 1960 and 2010. Lets say you could buy a home in 1960 for $15,000 and then pay it off in 2010 dollars. For most people, they would be able to pay it off very quickly because they’re holding inflated 2010 dollars!

If a person took out a million dollar mortgage today and inflation hits as badly as some people were predicting, then it wouldn’t matter tomorrow because they would be paying off their mortgage with fistfulls of $100,000 bills!

Here is a short view on both “disaster” scenarios – deflation vs. inflation.

http://cosmos.bcst.yahoo.com/up/fop/embedflv/swf/fop_wrapper.swf?id=13550358&autoStart=0&prepanelEnable=1&infopanelEnable=1&carouselEnable=0

#85 jess on 09.30.09 at 4:29 pm

http://www.bankofcanada.ca/en/rates/inflation_calc.html

A “basket” of goods andservices that cost: $ 100.00 in 1920
…would cost: $68.38 in 1940

Per cent change: %-31.62
Number of Years: 20
Average Annual Rate of Inflation/ %
Decline in the Value of Money: -1.88
CPI for first year (Aug 1920) 11.7
CPI for second year (Aug 1940) 8.

#86 Calgary_Rip_off on 09.30.09 at 4:46 pm

The good news: Those higher interest rates will take a lot longer getting here.

How is that good news? So housing prices can be sustained at crap levels? What nonsense. Better to have 15% interest and reasonably priced houses than the current load of crap.

Read more carefully. Systemic deflation would reduce house prices faster than rising rates. — Garth

#87 HouseBuster on 09.30.09 at 5:15 pm

You’re missing a very basic point in your deflation/inflation analysis and that is currency. When people speak of inflation/hyperinflation they are always referring to the US of A.

As the US dollar goes down it becomes more expensive to buy things that are priced in US dollars. Conversely, it becomes cheaper to buy things priced in Canadian dollars.

For example, 10 years ago it would cost me $180 CAD to buy a nice pair of jeans in Buffalo. Last year, with the dollar at par, it cost me $80 CAD.

How to get ahead? Buy financial instruments that increase greater than the increase in value of the CAD. Or find something that you can buy in CAD that tracks the USDX decline direclty and does not taking into account the CAD rise ( so if USDX goes down 5% you make 5% even if CAD goes up 3%).

Or, just stay in cash.

Capisce?

#88 Ottawa_Tradesguy on 09.30.09 at 5:39 pm

Interesting, while I respect someone who changes their mind when the facts change it is hard to believe in predictions from someone who one day posts about rising interest rates skewering buyers in next 2-5 years and the following day claims that deflation will get us all. Very rarely (if ever) are the two seen together.

Second, while everyone screams ‘remember Japan’ let us review a few facts about the Japanese experience which may or may not be similar to Canada’s experience.

1.) Japan’s deflationary spiral began when home prices reached approximately 12X family income and commercial real estate in tokyo sold for approximately $93,000 / ft. Does anyone remember the unbuildable piece of land that was barely big enough for a vegetable stack that sold for close to a million dollars? While these prices are close to Vancouver (residentially) they do not come close to what is experienced in the majority of communities in Canada (e.g., Ottawa average house costs ~300,000 where average house costs about 2.93 x income, source http://www.canada.com/topics/news/national/story.html?id=41125e17-3782-4e28-8b35-77fad8761473&k=5386)

2.) Japan’s collapse was largely driven by commercial real estate which had become ridiculously expensive and was further compounded by banks becoming unwilling to writeoff non-performing loans (similar to the U.S.). This created a vicious cycle where banks would prop up their old lending by not recognizing them which in turn forced them to carry more capital on their books and ultimately slowed down lending. End result, less lending, more stringent credit standards, deflation despite low interest rates (perhaps this will happen in the United States and could be a possibility in Canada though unlikely). As banks were unwilling to lend more Japan’s economy became less and less competitive with the world and their technological advantage began to disappear in the manufacturing. Businesses were denied access to the credit that they needed to continue reinvesting in tools and R&D to remain economy competitive — will this happen in Canada? Potentially, however given the highly resource based nature of our economy it is unlikely that other than the oil sands (which while impressive are not the largest revenue driver in Alberta) our exports will become un-needed by the rest of the world. The Chinese and Indian populations represent nearly 1/2 the world’s population between them with a burgeoning middle class. These consumers are beginning to learn a more balanced savings vs. consumption plan which will only continue over time — this will surely drive some level of economy prosperity for Canada as all material goods need either wood, minerals or oil / gas.

3.) Japan’s default rate / non-performing loan rate became extremely high during their deflationary spiral as businesses and consumers deleveraged. So far in Canada the default rate seems to be relatively low which is allowing banks to continue lending money and drive some form of inflation. See the chart at the bottom of this link. (http://www.stubbornmule.net/2009/07/deleveraging-and-property/)

4.) A correction has to be driven by the fundamentals behind the economy (exorbinant unemployment, poor lending standards, extreme overbuilding or some other catalyst). While many people are struggling to find work (8.7% is obviously high) and others remain ‘underemployed’ we must remember that real estate, especially of the residential variety is an extremely emotional purchase. A home is the last thing that someone will sacrifice. All other spending will be cut to the bone before they allow the house to go down. Furthermore, unemployment remains relatively low by historical standards (even in good times for Canada) and certainly low by any recessionary standard. In this context rising defaults will occur, but likely not to the same degree as in the US or Japan.

Ironically, while deflation remains a near term threat as do rising interest rates these are really the least of our worries. Ultimately the world has changed and we have been loathe to change with it. The vast majority of the Canadian population (Autoworkers, government workers, majority of private sector boomers etc.) are content to simply go to work everyday, earn a paycheque and never really leave the safe haven of their world. Furthermore, onerous tax laws, capital gains taxes and tax regimes in Canada make it highly unprofitable for companies to truly innovate in our country. Without the drive and determination to become a country with a leading research a development regime from the public and private sectors we will find ourselves left behind as the true economic powerhouses emerge (BRIC). We seem to lack the foresight to look beyond meeting our daily needs and ‘having some fun’ to truly understand what is needed to become competitive in a far more global world than before. There are jobs out there to be had in this recession, nearly everyone I know who has been laid off (with the exception of my father, a commercial real estate specialist) has been able to find work relatively quickly. There was much adaptation required, many people have moved provinces, and others have taken jobs they never would have considered (who knew you could make 45K / year working as a waitress at the keg?) before. However, they reacted quickly and found employment. The recession has certainly been tough and my business has taken a massive hit (we’re down nearly 35% year over year) but we are surviving because we adapted quickly. I find that Canadians and Americans have lost their entrepreneurial spririt and have adopted a sense of entitlement; to a house, to a job, to a timmies or starbucks in the morning, to things being ‘easy’. Whatever happened to the lessons that our grandparents and parents learned living through other recessions? Perhaps we need to suck it up a bit and become more willing to do whatever is necessary.

If you haven’t already seen it I would strongly suggest watching ‘do you know’ which chronicles some of the more interesting facts about how quickly our lives change.

To be accurate, I am not so much predicting deflation in the above post as explaining its context. Clearly less bright than you, I just ramble along and make comments which may be helpful to the masses. The Japanese experience was not quite as simplistic as you and other posters make it out to be, but no matter. The bottom line for most folks coming to this wretched blog is what happens next. More on that in a few hours. — Garth

#89 Too Old Bob$ on 09.30.09 at 5:41 pm

Time to get priorities in order.

Disinflation: to delay a purchase late in a prolonged recession or early in an economic revival.
What promotes it:
- a lack of confidence about the future.
- avoiding purchases until the lowest possible price is obtained.
- putting off purchases is rewarded with lower prices.

I’m sure most already delay buying items until they are lower, go on sale or indicated as specials, but some still don’t apply these tactics. (Real estate) Eventually they will see the effects.
Also remember that disinflation is a slowdown in the rate of price increases, where as deflation is an actual drop in prices. Lets see what happens and hope it isn’t deflation.

BTW! If accelerating inflation is bad for stock prices, doesn’t this mean disinflation is good for stock prices?
I won’t bother asking what deflation is for the stock market. 1930′s.

#90 dd on 09.30.09 at 5:46 pm

#86 Too Old Bob$

“BTW! If accelerating inflation is bad for stock prices doesn’t this mean disinflation is good for stock prices”

Not if revenues decrease faster than costs.

#91 nuttysquirel on 09.30.09 at 5:47 pm

Re : #76 Keep Dreaming

(1) Provide a link to any time I suggested housing would ‘crash.’ (2) Sounds like you are a bitter person. Correction, a bitter racist person, — Garth

You have been saying that house prices will drop and drop hard. If this is not the case maybe you should stop writing about it every day.

Also to call someone a racist because they say Asian’s are buying house. That is a little harsh

http://weblog.stepbystepimmigrationcanada.com/115/buying-real-estate-in-canada/

http://www.facebook.com/note.php?note_id=119638083004

Immigrants support their families buy putting extended families in a single home. Grown children have no problem supporting their parents later on in life. Maybe we should learn something from them. Also ask a condo developer if immigrants come in and buy multiple condos.

I’ve said housing will correct, and it will. Whether it ‘falls hard’ cannot be known right now. But teh word you ascribed to me was ‘crash.’ You lie. As to the statement, “Immigrants support their families buy putting extended families in a single home,” you cannot possibly lump all people from all cultures in all countries other than ours in one pot. That’s called xeonophobia, and you got it bad. — Garth

#92 Auditor General on 09.30.09 at 5:47 pm

Vlad….could you please reply to this message as soon as possible!

Perhaps you could send an e-mail to Dr. Van der Meer regarding the implosion of the Federal reserve system on Sep 30 as per your link from a month ago. Is the date supposed to be tomorrow? I’m in my basement waiting out the storm while wearing a rather heavy tin hat and the news doesn’t seem to have made any mention of China defaulting on their derivative trades (which is strange because i didn’t think they had any). Please get back to me.

#93 Men With Hats on 09.30.09 at 5:52 pm

Well this is certainly interesting .
The G&M edited Doug Porter’s comment . Excising the part about a shot across the bow and a torpedo to the hull.
Guess their masters at the ‘Death Star ‘ did not like what Doug had to say .
I Know it is fact because I went to the link early this morning and read the unedited version .
Propagandists .

#94 dd on 09.30.09 at 5:53 pm

#76 Keep Dreaming

“will not retire in this country”

Please leave now. We really don’t need you.

#95 Men With Hats on 09.30.09 at 5:57 pm

Edited version of Mr. Porter’s comments :

“Okay, this is a shocker … It’s not just the consensus that will be surprised by this result – the Bank of Canada has been loudly proclaiming lately that growth would likely surprise to the high side of their July forecast in the second half of the year. However, with flat GDP in July, that even puts 1 per cent growth in [the third quarter] at risk (the BOC was initially looking for 1.3 per cent), unless we get a neat reversal of this weakness in August. Given the broad-based softness here … don’t count on it. ”—
Douglas Porter, deputy chief economist, BMO Nesbitt Burns

#96 dd on 09.30.09 at 6:01 pm

#22 JO

…I am expecting a possible US Dollar scare in the next month…
What is the scare from?

… a wicked wave of deflation….
Not if the government keeps printing press going. That is the Feds mandate. And that will keep commodity prices higher.

….oil under $30/brl…
not if the US dollar goes down

#97 dd on 09.30.09 at 6:09 pm

#23 molson cdn

…Hmmm, I think, maybe I shouldn’t of locked into my 10 yr mortgage at 5.15%…I wouldn’t saved an easy $50,000 on purchase and acquired a rate of 3.6% for 5 yrs….

Did you see rates jump in the last year? No. If you are cash positive don’t worry. Live and learn.

#98 dd on 09.30.09 at 6:15 pm

#37 Nostradamus jr.

…The U.S. will bankrupt the world before it allows itself to go bankrupt…wars will break out

If the above is correct then gold will be the money.ell theirs for food.

…various forms of “protectionism” have already begun…
If that is the case, then commodities are the money.

…The U.S. dollar will remain the world currency…
Not if they keep printing money.

…Vancouver gallops towards its destiny of becoming North America’s Financial (not if banks fail), Trade (not if there is protectionism), Culture and Leisure Capital (not if war breaks out)

#99 dd on 09.30.09 at 6:18 pm

#50 Makeorbreak

“Time-shares are deflating!”

Time shares had no reason to inflate in the first place.

#100 Dan in Victoria on 09.30.09 at 6:20 pm

Why’s everbodys tail in a knot for?I read the post as an explanation of deflation,and the possibilitys of the outcome.Seems Garths posts are balanced to me,or am I missing something?

#101 $fromA$ia "Garths Nugget Boy" on 09.30.09 at 6:26 pm

Thanks for the thread Garth.

Me gots CASH AND GOLD.

I think one thing we can all agree here is that REAL ESTATE IS INFLATED!!!

Garth, one more thing… With home valuse still up it allows the public to still have that sences of wealth causeing them to spend easier. This is the economic strategy to keep things going because if houses dropped and the Gov still printed money the 90% of the Canadian POP would be allot more reluctant to spend. As well, Canadians truley think that they and their banks are different.

What do you think?

#102 dd on 09.30.09 at 6:38 pm

#71 Keith in Calgary

“Bill Gross at PIMCO, the world’s largest bond hedge fund sold all his mortgage funds and is buying nothing but long US treasuries”

Of course he is …. he is a bond guy!

#103 Bill on 09.30.09 at 6:48 pm

Remember “stagflation”? That’s when assets deflate but prices rise. Empty factories and mortgage foreclosures and the only thing running overtime are the Gov. printing presses.

#104 Vladman Across The Water on 09.30.09 at 6:54 pm

The lead pic reminds me of a giant old windbag of a wet fart, akin to the CPC (Constipated Party of Canada). Presently, it is not inflated enough to either explode nor implode; hence, stag-plode (flation).

Spent a couple of hours at Fairview Mall today. Quite busy, so Timmy’s and I had some quiet, quality time together.

Interesting that when we left Toronto in 1988, there were a few Chinese people in Scarborough (my significantly smarter half is Chinese; I was made up of spare parts from Dofasco in Hamilton).

Now Scarborough is almost a Chinatown by itself. Man how things evolve and change so quickly, and BIL said that in the past five years, folks from Asia have taken over a lot of areas here which, perchance, leads me to these two excellent posts (about 98% were pretty good):

#37 Nostradamus jr. at 9:16 am — “The U.S. will bankrupt the world before it allows itself to go bankrupt. . . . wars will break out . . . gold prices will collapse as India and China will sell theirs for food . . . The U.S. dollar will remain the world currency . . .”

I do concur that, one way or the other the US must eventually deal with their debt / deficit.

With the link I provided a few nights ago, the Bilderburg Group (Rockefellers, Rothschilds, ‘elite’, NWO, etc.) clearly want a one-world currency here and now, controlled by the IMF in Europe which is one of the reasons for escalation of tensions in the world — have various ‘other things’ happen in order to fool most of the people most of the time.

So, re: the US$. This is where we have differing views. My view is that the greenback will be gonzo, replaced either by a one-world currency, or three different currencies, all controlled from Europe.

One always has to look after themselves first and let the world take care of itself (such as it did with the double ‘quake a day or two ago; a rogue asteroid or meteorite landing in the centre of any of the major oceans would certainly grab our collective attention spans).

Add to this #63 Future Expatriate at 12:22 pm — “. . . than the complete collapse of the US Dollar, which now, is absolutely inevitable as China realizes that Obama has no intention whatsoever of getting out of the Mideast, and indeed, is working on expanding the war to Iran.

“China has the mojo to completely collapse the dollar, and they’re going to do it as a last resort to protect their energy supply in Iran.”

These are part of the increasing tensions thruout the world, aligned with the US setting up bases in Colombia (next to Chavez + oil), countries fighting for oil and other resources, the economic downturn (but we’re special here, so it won’t happen in Puff the Magic Dragon Land) and numerous other things, all of which are way too complicated for me to figure out.

It is clear, ‘tho that people have forgotten what saving entails. Fortunately, most of us here are not part of the present ‘Entitlement Society’; we are part of the ‘Pull up your sox and work hard for a paycheque society’, as that is where we grew up.

#105 lgre on 09.30.09 at 6:54 pm

#78 Keith in Calgary on 09.30.09 at 2:09 pm

It sounds like Calgary really is different, everything you mentioned deflating in Calgary is increasing in Ontario. My car insurance just went up 30% because this is the first time in a while that the insurance companies were allowed to increase premiums, rents are up, food is up..the only thing down is oil, compared to last summer of course.

#106 Darlene on 09.30.09 at 7:14 pm

I know this is a stupid question but can someone explain why it is 2 downward consecutive quarters to be considered a recession and only 1 month of growth to determine that we are on the road to recovery?

Wouldn’t it make more sense if we determined recovery based on 2 quarters instead of a month?

#107 kc on 09.30.09 at 7:35 pm

#87 Ottawa_Tradesguy on 09.30.09 at 5:39 pm

there is a fly in your ointment… you forgot how the commercial RE was driven up… it was due to the fact that Japan’s stock market went on the greatest bubble of all time. these high rolling “companies” bought up everything that was for sale in auction fashion. the major catalyst to the bust was when the market tanked and all that paper wealth went with it.

#108 jess on 09.30.09 at 7:44 pm

“But the duties come at a particularly difficult time for the global solar power industry. Many panel manufacturers are losing money because of fierce competition from ever-expanding production in China and a worldwide downturn that has driven down prices. Raising prices now to cover past tariffs will be hard because the market is glutted with panels; prices have fallen a fifth since early this year.

The decision is legally binding on most solar panels imported into the United States. But virtually no one in the industry became aware of it until the last few weeks, Meanwhile, unpaid duties piled up, along with penalties that are likely to double the cost.

The United States exported almost as much solar panel equipment as it imported in the first seven months of this year — $605 million in imports and $555 million in exports, according to Commerce Department data.

The Solar Energy Industries Association, a coalition of domestic and foreign companies, argues that American tariffs on solar panels could lead other countries to impose tariffs on American exports.

The customs decision is dividing the industry between importers and companies that produce solar equipment in the United States. And with China accounting for a rising share of American imports, the tariff could become a sticking point in bilateral trade relations already troubled by the dispute over tires, autos and chicken parts.

Some Chinese solar panel manufacturers are already planning to move final assembly of solar modules to plants in the United States, a step that could allow them to avoid the duty someday, said Rhone Resch, the chief executive and president of the industry association.

The duty generally applies to solar panels that provide power to a residential, commercial or industrial electrical system; small solar panels imported with built-in light bulbs are already counted as electric lights and are subject to a tariff of 3.9 percent.

Lawyers are critical of the industry for not spotting the problem sooner.”

http://www.nytimes.com/2009/10/01/business/global/01tariff.html?ref=world

===================
Record staff

KITCHENER A fast-growing solar power products company has moved its global headquarters to Kitchener.

Canadian Solar Inc., which makes solar ingots, cells and modules at seven plants in China, announced today that it has opened its head office in a building at 650 Riverbend..

#109 artisuseless on 09.30.09 at 7:47 pm

I think this quote was telling of what goes on in the bullish head:

On the other hand, the manufacturing sector registered its first rebound since the start of the recession (output of motor vehicles and parts increased 17%)

Interestingly, I have a friend who works at Chrysler, where they (the company) have been ‘told’ to ramp up production. I’ve been arguing for a while that Obama, Harper, etc. have been doing all they can do to ‘fake’ a recovery and then hope the real economy underneath can catch up in the meantime but it ain’t gonna happen.

I just hope the inevitable next wave down in Canada happens BEFORE the next general election, not after.

#110 jess on 09.30.09 at 7:58 pm

SEC lacks guidance on how to analyze complaints.??????????
http://www.sec-oig.gov/Reports/AuditsInspections/2009/467.pdf

Could this be Mr. baird’s problem since he pointed out many times to Hanna from the Fifth Estate (http://www.cbc.ca/fifth/2009-2010/riding_on_risk/)
that he was indeed ,”a very good listener.” Maybe he should read this report it might enhance his reasoning skills.

“Priorities change like the flavor of the day,” one respondent said in comments OIG included in its report. “Whatever’s ‘hot in the news’ becomes our priority. Often it feels like we’re the dog chasing its own tail.”

The OIG recommended 21 measures to strengthen management control, including establishing formal guidance for handling complaints, reviewing and testing effectiveness of policies and procedures on an annual basis and forming a new — or using an existing — working group to review staff concerns over case-handling procedures and inter-departmental relationships.
http://www.sec -oig.gov/Reports/AuditsInspections/2009/467.pdf

#111 Jonathan on 09.30.09 at 9:11 pm

When are governments going to get it. Keep out of the market. The free market will win.

This massive credit expansion should never have existed… and never would have existed had the government not intervened in the free markets by offering monetary stimulus, fixing interest rates below market rates, currency manipulation, and government bank regulation that started in the 70s. These issues caused the problem.

The government’s solution: Do exactly what they did for the past thirty years and expand it a ten fold. Let’s regulate banks further, let’s drop interest rates further, let’s print money. None of this works. This is all cheating.

Here is the solution: kick the big ol’ government out of the picture, a few men are not better than millions of men and women making their own decisions. Let the market deflate (and deflate it would), let people default on most of this debt, dissolve the big banks and failing companies.

Once all that is gone, the market would thrive. Our children would see true economic growth.. be hired by real companies that produce real innovative products.. we’d see our resources used in the most productive manner.. homes would be affordable.. debt would be low, savings high. It would be the perfect market.. the free market.

When will government learn?

#112 Frugalistas on 09.30.09 at 9:16 pm

Thanks for the economics lesson. If a currency crisis is thrown in somewhere, there will be interesting inflationary consequences, won’t there?

#113 Evangeline on 09.30.09 at 9:24 pm

“D” is the most damnable letter in our alphabet, so many horrible words start with it: depression, death, deception, destruction … and so many more.

#114 are we being inflated? on 09.30.09 at 9:25 pm

what about the trillion the canadians are sitting on in cash…………i read that the other day……….it seems like Garth = Baskin Robbins. So many flavors…..I just can’t decide……

Cheerio

#115 Evangeline on 09.30.09 at 9:33 pm

#110 Jonathan

((When will government learn?))

When the people who elect governments learn.

#116 Evangeline on 09.30.09 at 9:34 pm

Debt is another nasty “D” word — and our whole economy is based on it.

#117 Dan in Victoria on 09.30.09 at 10:30 pm

Post#110 Jonathan,This is the way I look at it.What’s the definition of an elephant?A mouse built to government specifactions.

#118 Future Expatriate on 09.30.09 at 11:42 pm

#110 and #144: “When the people who elect governments learn.”

Oh, terrific. Which means never.

#119 Bill-Muskoka (NAM) on 10.01.09 at 8:50 am

When are governments going to get it. Keep out of the market. The free market will win.

#110 Jonathan

Oh really? Here is a little REAL HISTORY about your belief.

Cobden, 1843: “A law which prevents free trade is a law which interferes with the wisdom of Divine Providence, and substitutes the law of wicked men for the law of nature.”(Page 41, ‘The Collapse of Glablism and The Reinvention of The World’

I suggest studying the history of that philosophy and realizing that it led Britain into not only the Opium wars with China, but WWI and WWII. Check out the results of the Corn Wars and all that followed.

Your religious fervor for the mantra of free trade is based on belief only, not facts. As John Ralston Saul said “Unregulated competition is a naive metaphor for anarchy.”
John Ralston Saul

History clearly shows the results of unregulated trade and it is perhaps the greatest threat to democracy in existence. The Free Traders believe that economics were and are more important than people. They ignore basics and historical facts in favour of their mindless mantra like any other funnymentalist.

#120 Bill-Muskoka (NAM) on 10.01.09 at 8:57 am

I know this is a stupid question but can someone explain why it is 2 downward consecutive quarters to be considered a recession and only 1 month of growth to determine that we are on the road to recovery?

#105 Darlene

The answer is simple. The followers (Sucker Sheeple) will not come back to the Temple if things are bad for too long. They need to hear the Good News or they lose faith.

Remember, those collection plates must be kept full and flowing into the backroom coffers lest the Ponzi scheme be exposed.

#121 Tony on 10.02.09 at 10:11 pm

#6 Rob on 09.30.09 at 12:10 am

The opposite will happen. As you’ve seen the past few days when the US stock markets fall the US dollar strengthens. The US stock market should test the 5,000 mark on the DOW. That should put some oomph in the value of the US dollar. Add the fact that China holds a large portion of the US debt and a US dollar devaluation is something that just isn’t going to happen. Gold is the sucker’s of all suckers’ bets. The time to have bought was at 200 dollars an ounce back in 2001. The time to sell is now not at 500 dollars an ounce in two years’ time.