Entries from October 2009 ↓

“You,” she said, “are a contrary old bastard. Which is exactly what I like in a man.”

“I watch the dollar, I watch the markets and I listen to my own instincts. I am a small businesswoman in Victoria BC and I know what my customers are buying (or better yet, not buying) quarter by quarter. I know by my results what corporations are willing to spend right now and who is bucking down and why.”

Her email continued: “That’s why I am selling my house. I owe less than half of what I’ll get for it. I’m going to rent for a bit…. And then jump in again before the interest rates really start taking off. In the meantime, I am going to enjoy a long awaited and much deserved 1 month holiday in an exotic and far-away locale. Signed: anticipating gazing at dollar signs on my sand-covered, painted toenails.”

Smart woman. Good eye for men, too. But mostly with a well-endowed sense of timing.

I mean, how can you argue with the logic of selling off an over-valued asset when it’s at the top of the curve? When some greater fool’s happy to come along and give you more than the home has ever been worth before, mostly because he’s all hopped up on cheap narco-bucks from the bank, and because everybody’s doing it?

Like you need any more proof we’re in the bubble phase:

• average price of a home in Victoria last month: $619,936

• average price the month before: $596,498

• one-month price increase: 3.9%

• annualized price increase: 46.8%

• increase in sales from last September: 50%

This is why people like Painted Toenails are so prescient and wise. Ditto for those who write me daily crowing about their new locked-in, sous-4% five-year mortgage. They understand housing is now at the top, and rates are at the bottom. This can be a life-altering discovery. Too bad so damn few get it.

And that brings us to guys like Ed Yardeni and Dennis Gartman and others now warning anyone who’ll listen that there may be a shock coming.

Here’s the scenario: Central bankers and politicians desperate not to be in Wikipedia for the wrong reasons decide to take desperate measures to prevent the economy from tanking on their watch. They used unprecedented amounts of government cash to bail out failing companies, put billions directly in consumers’ hands and rescue imprudent banks while plunging into new debt and keeping interest rates at the lowest point in history.

And, mirabile dictu, the sucker actually works. Sort of. No depression. But in its place, something else – bubbles.

After all, should we be surprised, given what’s happened, that stock market investors are raking it in? The TSX in Toronto has mushroomed from below 8,000 seven months ago to more than 11,000 today – a climb of some 40%. The Dow has roared ahead even more – gaining 50% since the dark days of late winter. (As predicted here, BTW.)

And this is hardly based on sustainable corporate profits. Instead companies ‘recovered’ by firing a huge chunk of their workers, slashing overheads, liquidating inventories and burning the furniture. Investors know this is crap, but they keep buying equities. Why? Because central bankers and governments are egging them on, flooding the streets with cheap money, sucking up their own bonds, talking up those ‘green shoots’ and becoming the hos of recovery.

So, a financial bubble. And, as you know (if you visit Victoria this week) in Canada we also have a housing bubble.

Both are bad. In fact, if central bankers were acting normally, they’d be doing the job they are paid for, which is to (a) keep inflation in a narrow and predictable range through market interest rates, (b) maintain a stable money supply and (c) protect the value of the currency and prevent erratic exchange rate movements.

So far this year, these guys are 0 for 0. But, no depression.

And that brings us to the inevitable conclusion: Bubbles do not go away on their own.

The US needs to attract trillions of new dollars to support its new debt, and that means interest rates will have to rise. The stock market has turned into a born-again casino, and that needs to be addressed. The housing market in Canada needs to be deflated, lest it pop as the US one did. The Canadian dollar needs to fall (and the Euro, and the yen), and that will only happen when the greenback rises.

The inevitable conclusion is that when Ben Bernanke thinks the moment is right, he’ll drop the bomb. If he doesn’t, he becomes Alan Greenspan – the central banker who went before him and allowed cheap money to inflate a housing bubble that destroyed large swaths of the middle class, and the global economy.

Trust me. S’coming.

Which is why Ms.Toenails is so righteous.

Some misguided people think I’m a gloomy guy. They accuse this blog of being nihilistic. They probably don’t believe I wear boxers with little hearts on them. Ha. Fools.

So I’d like to make it clear what this site (and me) are all about. I have nothing to sell but the occasional book. There are no ads here. No pop-ups to knock down. No aggregation or sale of email addys. No offers for insider investment newsletters, fabulous pre-construction condos or no-lose mutual funds. The blog’s free. My financial talks are free. And while I hope you buy the new book (it’s a corker), I’ll still be here if you don’t.

My agenda is to tell the truth, at least as I see it. My finances are in order. I live by my own rules. And since deciding a few days ago to forever shun the hypocrisy and compromise of party politics, I even have a pure soul. Well, except for my shorts.

So let me tell you where I think we’re at.

When Mark Carney made his big announcement this week it was viewed as evidence that Bank of Canada interest rates won’t soon rise. Duh. Of course they won’t – not until next year. But we knew that. However we also know Mr.C has no control over the bond markets, where mortgage rates are set, so this means less than it seems.

What Carney did let out of the bag was that the rising dollar has now wiped out all of the promising gains made by the economy lately. And he has no control over that, either. So the export and job-killing flight of our currency will continue.

Rising bond yields and the march to dollar parity were both forecast here some time ago. Yes, and hundred-dollar oil.

Underscoring this is the dismal collapse of government finances. Did you heard Ontario Treasurer Dwight Duncan this week? “To be able to continue investing in key priorities while managing down the deficit, we must focus our priorities and make strategic and, yes, sometimes difficult choices,” he said. That means Ontario is launching a review of its spending, because there’s now no choice but to cut funding for schools and hospitals.

I told you that would happen, too. Ontario, BC, even Alberta, along with Ottawa – they will have absolutely no choice over the coming years but to decrease services and increase taxes.

And have you been reading the Globe’s seven-part series on the retirement crisis this week? Do it. This is the elephant in the room. At this point 60% of Canadian workers have no corporate pensions, and almost half have no retirement savings, either. Of the half that do have RRSPs and whatnot, the average amount saved is enough to live on for less than two years.

And do you know what the public pension system in Canada pays you when the work runs out? The combined total of CPP and OAS is just over $16,000 a year. So what, exactly, are eleven million pensionless families going to be living on? More importantly to the rest of us, what burden will this put on the economy (through a collapse in disposable incomes) and taxes (because this disaster will surely be mitigated)? And how about all those houses which will have to be unloaded?

These are the things that perplex me. Make me wondrous when I see people gorging themselves on cheap debt that will only cost more soon, to buy things that will be worth less eventually. Make me question leaders who lie to us about options. Has me worried like hell about ten years from now.

And I haven’t even started in on peak oil, climate change or the demographic tsunami.

So if you think this blog is too, um, raw for your sensibilities, split. If you’d rather be in a happy place, invite Phil Soper, Gregory Klump or Ringo Harper over for dinner.

But if you want some suggestions on what to do about what’s coming, stick around. There are times we need contrarians.

This is one.