Entries from March 2013 ↓

Hysteria

stomachs

People, being people, like to believe the worst. They want Tiger Woods to implode again. They like Kate topless. They loved prisoner Conrad Black.

No difference with public policy. We’re just as confused. In the free trade debate two decades ago people thought it meant Americans would take all our water. Quebeckers think they can have both independence and OAS cheques. And now people think their bank accounts and GICs will be stolen.

Can’t blame some of them. They’re sure being lied to in a big way.

For example, some hucksters flogging pieces of silver to the naive, scared and vulnerable have been relentlessly beating this drum.

BREAKING SD ALERT
It appears that the Cypriot bail-in is anything but a one-off event, and is in fact the new collapse template for the entire Western banking system, and not just the ECB/ Eurozone!
SD has been alerted to an alarming provision that has been buried deep inside the official 2013 Canadian Budget that will result in depositor haircut bail-ins jumping to this side of the pond during the next bank crisis!
Titled ECONOMIC ACTION PLAN 2013 and tabled in the House of Commons by Minster of Finance James Flaherty on March 21st, the official 2013 Canadian budget contains an explicit provision that Canada will pursue the bail-in model for systemically important banks for future bank failures!
Depositor haircuts have just jumped to this side of the pond, effective the next bank crisis/ failure.
Not to be outdone are the gold bullion humpers, who always use the lowest common denominator – fear – to promote their business.

Writes gold fanatic Jim Sinclair (who I almost respected years ago):

There are two things to do immediately:
1. Get your money out of the “Too Big To Fails.”
2. Increase your gold position.

Even some people who certainly should know better, like blogger and US financial advisor Mike Shedlock, have been sucked into the vortex of rumour, misinterpretation and doomsterism

Canada Discusses Forced Depositor Bail-In Procedures for “Too Big To Fail” Banks in 2013 Budget
Inquiring minds in Canada managed to slog through a massive 433 page budget proposal and discovered Depositor Haircut Bail-In Provisions For Systemically Important Banks.

Sure enough. Right on page 145 of the Canada Economic Action Plan for 2013 We see …

“The Government proposes to implement a bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail- in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants.”

In case you are unfamiliar with bank parlance, deposits are not “assets” they are “liabilities”. A plan that would turn “certain bank liabilities” into regulatory capital is a plan to confiscate deposits.

The hysteria is unfounded because the premise is wrong. The government is not proposing legislation of allow the confiscation of bank accounts to ‘bail-in’ a failing bank so taxpayers need not do the job. That’s absurd in a country where we have a crown corporation insuring deposits. It’s hard to believe so many people have fallen for this fable being spun by the gold-and-silver merchants acting in their own self-interest, and the bank-bashing economic nihilists who long for 2008.

Yes, Canada’s Big Six banks have been designated as ‘systemically important.’ Thank goodness. That means these guys will need to increase their capital reserves substantially (by about 14%), keeping a massive new amount of cash on hand at all times in case of a liquidity crisis. This helps ensure a Bear Stearns or Lehman meltdown never happens in Canada, where our few banks dominate the economy.

These words should comfort everybody with a savings account or a bank mutual fund:

“The Government also recognizes the need to manage the risks associated with systemically important banks—those banks whose distress or failure could cause a disruption to the financial system and, in turn, negative impacts on the economy. This requires strong prudential oversight and a robust set of options for resolving these institutions without the use of taxpayer funds, in the unlikely event that one becomes non-viable.”

It’s also correct the feds’ discussion paper (not the budget, but the ‘economic action plan’) proposes that before public money is used to rescue a bank (not that it’ll ever happen) its shareholders and bondholders step in first. Not depositors. That’s a fabrication.

Instead, the bail-in provisions (when announced) will require the big banks to hold debt that can readily be converted into capital if the institution falters. The logic is simple. Without some mechanism put in place in advance of any troubles, bankers might assume that being “too big to fail”, they’d always and automatically be bailed out (as happened in the US). So the feds are making it clear they need to save themselves. And how can you argue with that?

Nowhere does any document talk about ‘deposits’ or ‘depositors’ or funds held by the banks in trust for customers. The only reference is to the conversion of ‘certain liabilities’ into capital if the SHTF. And you can bet those liabilities will be new bond issues floated by the banks – which will be snapped up in a heartbeat by investors who know how deluded the doomers are.

As the authoritative publication ‘Credit Outlook’ pointed out, the whole idea is to impose losses on bank debtholders (ie, bondholders), not taxpayers, in the event of a disaster. “Canada’s plan to establish bail-in powers is consistent with other international reforms, including the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions, which recommends that resolution authorities have the power to write down or convert all senior unsecured and uninsured liabilities, as well as subordinated debt and preferred stock to regulatory capital.”

Let’s recap.

This is a good development. It slaps the bankers around, makes them raise a bunch of money and clearly says if they screw up, they have to fix it. This shifts liability from us to them. And nowhere – absolutely nowhere – does this suggest your bank TFSA is going to be sucked dry if CIBC chokes.

There will no more be confiscation of bank deposits in Canada than there will be a bank failure.

But it does prove we have a bottomless well of stupid.

The trouble with old people

oh shit

“Every Friday,” Ross says, “I play hockey with a bunch of guys who are over 55.  I’m a goalie, so even though I’m not 55, they let me play – I guess it’s hard to find 55 year old guys whose knees are willing to bounce up and down off the ice for an hour and half.

“Anyways, I overheard a conversation in the dressing room last Friday that I thought I’d share with you. It’s notable because (a) it was the first time I’d ever heard it, and (b) it completely validates what you have been saying for the past few years.

“I overheard one of the older guys (over 60) mention to the guy beside him (over 70) that he and his wife were thinking about selling their family home, and renting, in order to get some of the money that was locked up in the house.   The over-70 guy nodded in approval.  The over-60 guy asked if he had heard of anyone doing this before, as they couldn’t see any other way to continue to fund their retirement.

“The over-70 guy nodded, and said “yup, we did it a couple of years ago.  We’ve been renting now for two years – we had to do it, because we couldn’t afford the property taxes each year anymore”. So, my hat is off to you.  Two old guys who cough up $5 a few times a week to fire a puck around are selling the family homesteads and renting, just like you said would happen.”

Not so fast, Ross. Listen to Teresa.

“I’ve been a loyal reader for many years now, and I’ve spoken ad nauseum to whomever with a pair of ears to not buy RE right now. This includes my parents, of course, who this week just decided to make what I believe to be a very rash decision, and I just don’t know how to explain it to them… Perhaps you can help.

“They own a nice bungalow in the Montreal suburbs in, yes, a high demand area (houses regularly sell under 30 days in the area). My mother has had enough of the cleaning, maintenance and all that is required of owning a house. My father agreed and they immediately fell in love with this spanking new condo/penthouse just a few streets down, in the same area. The penthouse is 420k for 1300 sq ft, house is worth 360k. They will roughly bag in 110k in profits, which will be used to pay off the business debts (20k) and credit cards (??) accumulated when my father was building his business. They expect to have a mortgage of roughly 360k. I have no clue how much RSP or invested money they have, but probably not that much considering the years my father slaved to build up his business. Oh, and did I mention they had just locked their 5 year mortgage this summer?

“I mentioned having a mortgage beyond 65 sounds like a bad idea, but then again my dad’s a workaholic; mortgage or not, he will work till he drops. I don’t want to play the bad daughter here, but I find this all a bit too quick and rash, considering it’s a huge decision. They are just coming out of the debt tunnel and now this? I wish they would decide to rent and put as much money as possible into their savings, but I’m running out of arguments here. Can you please help me find the words?”

I juxtapose these letters for a reason. Real estate’s soon to be massively impacted by what the Boomers do, and it will not be monolithic. Some will downsize. Some will croak shoveling. Others will bail. Because most of them are just hitting 60 now (half a million a year for the next seven), there’s no template for what happens next. Nobody’s gone through it.

What we do know is that seven in ten will have no pension (other than the crumbs government gives), over 40% don’t have even a hundred grand saved and 78% own real estate. We also know the wrinklies make up 32% of the population.

That’s a higher proportion than in the US, where there’s a lot of talk about the coming “great senior sell-off.” It’s expected to start later this decade and usher in the next monumental housing crash, about 2020. Hmm. Seven years from now – not exactly the news you need if you’re 36 years old and shouldering a $450,000 mortgage.

One problem is way too many of the wrong kinds of houses. Just over 80% of all new builds in the last two decades across North America were single-family homes, mostly big and mostly in the burbs. There just aren’t enough young families in the demographic pipeline to suck up all that supply. And even if just a third of the Boomers try to convert their properties into much-needed cash flow, the market will be swamped. Prices will reflect that. Real estate as an asset class has a very poor future, no matter how cheap mortgages may get.

Ross’ hockey buddies are early adapters. Each year going forward there’ll be tens of thousands of new listings across the country from people who face a bleak retirement. If you’re a wrinklie, the longer you wait the greater the risk you’ll be selling for pennies on the dollars you expected.

Now, Teresa. What about her newly-mortgaged parents and their fancy digs? These cash-poor seniors have taken out a fat, 25-year mortgage that (statistically) they’ll never live long enough to pay off. They have diddly in the way of savings, no pension, and not enough money coming out of the house to invest and live off.

And yet here they are, moving into a luxury, spanking-new, sexy, spacious, hedonistic, penthouse condo.

So much for that inheritance. Damn hippies.