Entries from October 2009 ↓

Ready?

Rescue1

Have you stored your nuts yet? Split and stacked several cords of seasoned hardwood? Sold those ETFs? Listed your house?

If so, sweet. It’s time, I’d say, we got ready for winter.

The stock market has careened enough this week (600 points) to warrant a bead of sweat. GMAC, the financing arm of General Motors, has gone back to Washington for a bailout. Its third. Another country (albeit a dinky one, Norway), raised interest rates. US new home numbers are dismal. The US is on the verge of extending its $8,000-per-buyer real estate subsidy. And a new report says the affordability of Canadian houses has taken a dive.

Those things may not seem to have much connection, but there is much. They point to a potentially difficult winter in which we should expect an equity market pullback after months of torrid gains, a deterioration in the American economy causing job grief here, and the beginning of the end of the beaver bubble in real estate.

Why such predictions? Simple. You can’t build an economic recovery on duct tape and faerie droppings. At least, not for long.

The facts seems obvious to me.

The auto business is in just as bad shape as it was last winter when it was weeks away from collapse. That’s despite $70 billion in government money from Canada and the US. Car sales are down almost 40%, and the only bright spot came when Washington gave people $4,500 each to secure a new vehicle. The result of that genius move should have been clear to a grade schooler: If you pay people to buy stuff, they will. When you stop paying them, they stop buying.

The same logic is being applied in Canada with things like the Home Reno Tax Credit, which the feds claim has been a bonanza for the trades. So, let’s contemplate what happens at midnight on February 1st, when it ends. Yeah, in the middle of winter. More genius.

Ditto with the US grant of $8,000 tax credit for first-time homebuyers in the States. That’s been credited as the only reason resales have been going up, even if prices haven’t. But that ends in six weeks. What then?

And how about the artificially low, engineered interest rates? I mean what, exactly is Mark Carney trying to tell us? (Hint: rhetorical question.)

OTTAWA (CP) – Bank of Canada governor Mark Carney has repeated his concern that Canadians may be getting in over their heads in the purchase of homes, saying the government has ways of slowing the market. Carney told a Senate committee Wednesday afternoon that the central bank is conducting an analysis of whether Canadians are taking on too much debt, particularly in buying homes.

Canada’s housing market has rebounded more strongly than other parts of the economy with sales at times hitting record levels, although prices remain depressed from last year.

The central banker said “exceptionally low” mortgage rates are luring Canadians into taking on mortgage debt to purchase homes. Deputy governor Paul Jenkins said the effective variable rate is currently at 2.25 per cent, a post Second World War low…..

….Carney said he was speaking hypothetically, but added: “If this were to persist, there are other options. The housing market is subject to considerable regulation and policy influence.

“That would be the way to approach it.”

There you have it. More evidence the real estate asset bubble is being recognized for what it is – a giant debt trap with the potential to do to our middle class what it did to the American one. As I’ve been saying (and Mark has been reading), when people borrow at rates which will only go up to buy houses that will only come down, this won’t end well. Especially when most new buyers have basically no money, and wouldn’t even qualify if interest rates were not a third of what they should be.

But even so, as the Desjardins Bank report tells us this week, housing affordability is eroding in Canada as prices rise. Less affordable houses mean fewer buyers. Less demand, less bubble. So the only question is whether the regulators will let it die on its own, or move in and squish it. Or both.

Finally, it’s always instructive to look south, even when you’re a superior Canadian. American houses prices are back to 2003 levels, which means anyone who bought in the last six years has lost money. In some cities, like Cleveland and Detroit, they’re at 1995 levels. And this is after Americans have been showered with tax credits, tax rebates, low rates, corporate bailouts, mortgage relief programs and so much public spending that people not yet born will be paying for it.

So either governments keep it up. Or they stop. Or they extend. And then they stop.

Either way, same result.

So pass the axe.

Pandemic puts

Nouriel
More 'bubble trouble' on the way

swine

Calgarians lined up for hours to get H1N1 vaccine

On a highway not too far from the bunker is a yard where a local bus company keeps its rigs. These guys make their money in the charter business. You know, hauling old ladies to the casino, providing transportation for conventions, trucking tourists from the airport to Niagara Falls.

In the yard are tie-ups for about 30 buses.

One summer day in 2003 I was driving by, and noticed that every slot has a bus sitting idle. Then I heard that most drivers had been laid off. If bus rentals were a measure of economic activity, we were in trouble.

In fact, if you lived anywhere near Toronto, you might remember that summer.

More than 800 bus tours were scrubbed, costing businesses about $6 million. During one month alone hotel cancellations cost $39 million. The following month, area hotels were half empty. The dazzling shows at Toronto’s Prince of Wales Theatre played to rows of vacant seats. Restaurant receipts were down by about a quarter.

The mayor of Toronto pleaded with banks to provide more loans to struggling small businesses. The provincial health care system was burdened with $945 million in additional expense.

The Conference Board said the GDP of Canada as a whole declined by about $1.5 billion, while Toronto’s economy shrank by .5%. Nationally the travel industry lost $1.1 billion in bookings.

What caused this massive set of losses? A respiratory ailment called SARS, of course. It ended up killing about 50 people before disappearing – but not before forcing the quarantine of hundreds of thousands of people, and turning thoroughfares like Bay Street into the equivalent of quiet country roads.

I mention this in the context of H1N1. As you know, the US president has declared a state of emergency and there are lineups hours long in American cities of people desperate to get the vaccine. Troubling, there’s a serious shortage of the stuff stateside. In Canada, the sudden death of several children, as well as thousands of new cases are turning Swine Flu into the major media story of the day. Maybe the year.

The economic impact of this is completely unknown, but it will not be small. After all, eight million doses of vaccine in Canada are the result of one contract worth at least $400 million. More significant will be the toll on businesses if the next few months bring widespread school closings, forcing parents stay at home, or if the virus sweeps through offices and factories.

Doubtlessly many people will thump me for even raising this topic, since the conspiracy types already believe H1N1 is exaggerated, some kind of hoax, or (sheesh) an excuse to inject a microchip into everyone’s bloodstream. And I have no idea.

But I do know this: SARS hurt, a lot. If H1N1 is half the thing we keep hearing about from humourless public health officials, then it’s hard to see how this will not impact the economy and them, ultimately, the markets. If the US is as unprepared as the CDC and CNN make out, it could be another Katrina.

As you know, it also comes at a time when we’re already vulnerable, sinking wildly into public debt and our tourism sector’s trying to cope with an out-of-control currency.

Hopefully the thing will fizzle, victims will recover and the media can move on to the latest diddling bishop. But until that becomes clear, I’d be taking some profits, shorting the airlines, holding puts on the indexes, and sitting on cash.

Might be some great deals coming on motor coaches.