Greater Fool - Authored by Garth Turner - The Troubled Future of Real Estate Book and Weblog - Authored by Garth Turner Tue, 21 Oct 2014 00:16:24 +0000 en-US hourly 1 Screwed Mon, 20 Oct 2014 22:10:17 +0000 TUNNEL modified

What a drag it must be being a millennial. When the GFC rattled the world, you were in college. When the dot-com bubble exploded, you were in high school. When the last serious recession hit, you were in Huggies. When financial apocalypse erupted 27 years ago Sunday, you were an urge.

So how can we expect you to have any real context for all of this angst? Suddenly a lousy job market and temporarily inflated house prices have created a crisis that makes WW2 look inconsequential. Worse, it’s all a seething conspiracy.

Well, that’s the way they’re feeling at The Tyee these days, an online journal for the youthful, oppressed underclass that, astonishingly, uses the word ‘screwed’ more often than this pathetic blog. Days ago, readers lapped this up:

“Vancouver has morphed into a machine for screwing millennials.

“Unless we do something drastic, we will have deprived that generation of productive 20- to 35-year-olds the ability to own a house in Vancouver. If you think that’s no big deal, consider this: each person shut out of affordable home ownership in Vancouver is consigned to the screwed side of the increasingly widening global wealth divide.

“That’s right. Vancouver’s perverse real estate market is a textbook example of the suddenly fashionable realization that the rich are getting way richer at the expense of an evaporating middle class.”

Now, there is some logic to lamenting the middle class. The demise of the middle is obviously happening, a phenom best illustrated by American society, where just 1% of the people control 37% of the wealth, and the average family has saved only $25,000 for retirement (or anything else). But there’s one overriding reason for this. Real estate. American families bet big on housing, and they lost spectacularly. It’s estimated that $6 trillion was wiped away when real estate values collapsed an average of 32% – and most of that slipped through the fingers of middle class households.

Ironically, while American millennials have seriously backed away from home ownership, Canadian puppies can’t get enough of it – and feel, yes, screwed when a person in their twenties is denied a house. Simply because they can’t afford it. How awesomely unfair is that?

Despite watching the meltdown south of the border (if any of these whiny kids were paying attention), plus the way real estate has decimated wealth in many European countries, along with deflationary threats and the risk of borrowing a mountain of mortgage money, they’re still horny. Can’t help it. They see houses as wealth. Evidence be damned.

So, society is “depriving” millennials of real estate ownership thereby pushing them into the screwed side of the wealth divide. It sounds like a human rights violation, and the push is on to find solutions – like (as the Tyee author suggests) carving up existing houses into micro-units that the kids can afford. I think we used to call those  “apartments.”

But here’s the deal. Somebody with credibility (and that’s not a Boomer blogger with a titanium leg and penchant for Harleys and Amazons) needs to keep a generation of horny millennials from self-destruction. Just this week another alarm was raised. Giant ratings agency Moody’s affirmed Canada’s good credit standing, but said our housing is “particularly inflated” and the ever-increasing debt load of the middle class is a risk that cannot be ignored.

“This combination presents a potential risk to the banks and to the federal government directly, as it guarantees a considerable portion of mortgages,” said the report – as Moody’s joins fellow rating company Fitch, plus Morningstar, The Economist, the IMF, the World Bank and other international observers who think we’ve flipped. And now that oil prices have fallen, imperiling one of the country’s major export industries, while the dollar has tanked, how can young people think housing is safe? Why would they want the debt, potential illiquidity and likely losses?

Simple. They don’t believe it. The generation these kids hate and blame did an excellent job in brainwashing their offspring. Nick Nanos knows that.

The pollster’s latest Canadian numbers are precious:

  • Those who believe the economy is getting worse: 83.7%
  • Those who do not feel better off financially: 80.2%
  • Those who believe real estate prices will rise: 40.3%.
  • Those who think house prices will decline: 10.6%.

How do you are argue with that? You don’t, of course. Because when most people think something, it just has to be so. Today the majority of us, including our educated-to-the-gills young people, fail to make the connection between the stuttering economy and the one asset that depends on economic expansion more than any other. Without more income and more jobs, housing is doomed. No matter how cheap mortgage rates get.

Seems obvious to me. But I spent my youth growing hair.

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What could go wrong? (2) Sun, 19 Oct 2014 16:25:36 +0000 WRONG

“I have a car-buying company,” says Paul. “Lately I have seen a strange phenomenon. Most of our customers are trying to sell their vehicles to pay their household debt. The problem is that 70-80% of their vehicles have loans. Too much debt!!!! I feel sorry but we cannot help them.”

While a lot of people who come to waste their time reading this pathetic blog have high net worth and the income of potentates (as opposed to potatoes), debt is a massive national problem. It could bring us all down, especially if deflation has legs.

For example, look at what the kids are doing. Since Boomer parents messed so much with their heads, young people continue to think that buying real estate they can’t afford and shouldering massive, low-rate debt, is what adults do. Sad, but pervasive. Here’s an example from this past weekend.

Casey sounds like a smart 23-year-old, working in IT for an outfit he likes. He sent me this:

“My newlywed wife and I live in Victoria BC and are looking to take the next step at building our future. We are currently renting, paying $1200 per month on a decently sized two bedroom, one bathroom apartment. We don’t hate the place, but we have found a condo we like and think we can afford. The builders have yet to break ground on the project and estimate 2.5 years to completion. The place we are interested in is about $450,000 with $340/mo in strata fees. My question to you is, is this a smart decision? Do you predict that our home will be worth the same value or more when it comes time to close? Is it smart to lock into a builder rate of 4.99% now in case interest rates shoot up between now and closing? We are hoping to be approved for 5% at signing and then take the 2.5 years to build up enough of a down payment to avoid CMHC costs at closing.

“I was all gung ho to go out and sign the papers when I woke up this morning, but since talking to a co-worker today and reading your blog thanks to his recommendation, I clearly haven’t thought things through enough. I need you to help explain how we can assess Canada’s economy and the predictions of the big-D.”

So I wrote back, to learn more. When I asked Casey what assets he and his babe have to contemplate buying a $450,000 unbuilt condo, and what their financial position will be afterward, this was his reply:

“Great to hear back from you. The only assets we have now are a car with a payment of $500/mo. Because this is a new development, and we expect to get approved for the initial 5% signing down payment instead of the 15% signing DP over 9 months, we can currently afford to pay the 5%. My wife and I both earn about $65k each. She is trying to get another casual position so she can pull in a bit more than that. And currently we have no plans to start a family.”

There you go. A typical situation these days – young adults who figure they can go from zero to a half-million-dollar home in one step. How should I respond?

Obviously I could remind Casey and his new wife they’re gambling and speculating in buying a housing unit which is unbuilt, unknown and with a contract which typically gives the builder all the cards – the right to delay closing, to change floor plans and materials, or even not to build if pre-sales sputter. They should know that over the course of two or three years everything could change. Rates could rise. The economy sink. Pandemic hit. Markets fall.

The kids need to be reminded we’re in the final throes of boom housing market that cannot last, which means they’re probably buying at the top. Or that Victoria already (like most major cities) has too many condos coming to market, in buildings hastily and cheaply-built whose future problems will be manifest in special assessments and illiquidity.

I could ask them why they’d trade being young, free and mobile with a shiny new life ahead, for debt, obligation and financial servitude – and still not have a back yard, if babies arrive. Or simply, I could remind Casey and wife that by buying they will likely double their living costs (to about $2,500) compared with their current rent. If the new condo doesn’t appreciate every single year they own it, this will be a money pit tainting the rest of their lives. Why would anyone want to start a marriage that way?

This is what easy debt does. For that we must blame gutless policy-makers, omnivorous bankers and misguided helo parents. Household credit – loan and mortgages – are on the rise again, swelling at twice the pace of income growth. And while seeping deflation now suggests interest rate increases will come slowly, we have a greater threat to ponder – economic torpor. Without steady job growth, expanding GDP and higher family incomes, this giant pile of debt is a giant threat. If Casey & his squeeze buy this place, their consumer spending will go to zero, and their savings along with it.

Kids without assets ready to buy a half-million-dollar apartment? I shouldn’t even have to write about this.

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What to worry about Fri, 17 Oct 2014 22:09:28 +0000 LAWYER modified

Well, that was fun. Days ago markets were crashing and fools were selling. By Friday bargain-hunters were plumping stocks and draining bonds. It was enough to make a boy dizzy.

What happened, and what comes next?

In a word, markets (which were a tad frothy and fat) were attacked by fear. It may have been largely irrational, but fear’s like that. You don’t think it, you feel it. This time it came from worry everything was starting to come unraveled – Europe’s a mess, ISIS goons are winning, deflation’s coming, the US is sputtering, and Ebola.

Picture4  In fact, here’s an interesting chart for you (from Myles Zyblock, at Dynamic) which tracks the main American stock market, the S&P 500, and the number of news stories about the spread of the West African virus. Coincidence? Hardly. People are like that. They overreact to risk. Markets hate surprises. And selling begets more selling.

After a few days of this, driving share prices down almost 9% in New York and over 10% in Toronto, the panic petered out. The news got better. US corporate profits rose, consumer confidence shot up as mortgage rates and gas prices fell, central bankers stepped in and jobless claims dropped. Brave investors moved in to Hoover everything in sight. And up she went.

“Needless to say, we do not see the typical hallmarks associated with a deep and prolonged downturn,” says Zyblock in a research note. “In fact, leading data argues that the economy and earnings should continue to march higher over coming months – a development which is usually associated with positive longer-term returns for equity investors.”

In fact, when you think about it, not a lot changed last week to cause all the freaking. The American economy is doing just fine by every measure that matters – job creation, corporate profits and government finances, for example. The unemployment rate is at an eight-year low and the federal deficit has virtually plunged, thanks to less spending and more taxes.

Europe sucks, but we knew that. The central bank there is about to start a stimulus program, and has just slashed interest rates so much that some banks are charging to hold your money. ISIS is evil and scary, but will probably end up being bombed back to the 13th Century. And Ebola is pure terror – until you realize it’ll be heart disease or cancer that kills you.

The week showed how destructive emotions can be. Imagine rushing to your laptop to dump the equity ETFs in your TFSA on Wednesday, only to see them rocket higher on Friday. And being in a registered account, you couldn’t even save any losses to write them off against taxable gains. Bummer.

Human nature often betrays us. It’s amazing how much time some people spend trying to identify and avoid risk – driving, cooking, walking the dog, dressing the kids and, of course, investing. Meanwhile we pick careers haphazardly, and fall into love and marriage randomly. In short, we worry about the wrong stuff, fretting over global markets while we snorfle a maple glazed at Tim’s.

This is why having a balanced and diversified portfolio makes sense. When the TSX was nailed for a 10% loss this past week, that portfolio was down less than 1.5%. By design. ‘Balance’ means you own both growth assets (like exchange-traded funds holding the S&P) plus fixed-income stuff, like bonds – which soared in value as stocks fell. Meanwhile the diversification element gives you a steady income stream from more stable assets, like preferred shares, and ownership of stuff that’s not correlated to stocks, such as real estate investment trusts.

The goal is to grow money without swilling Imodium. The best way to do that in a world where you can’t control disease or stupidity, is to hedge your bets by owning a lot of assets, in a rational mix (40% safe stuff, 60% growth, works well) that ends up being an antidote for fear. In the past seven days there was all the proof ever needed that this approach works.

Now, what next?

Hard to imagine the volatility is over. The Fed still has to end its stimulus spending this month, or not. Either way, that will get people excited. So will more Ebola in the US, which looks predictable. Earnings season continues, and that’s going well. Lower gas and rates should goose consumer spending going into the key holiday retail season. Overall, the American recovery continues and Europe has only one direction in which to travel. No wonder some people were buying. They don’t believe the wheels are coming off. Me neither.

So, you can flop around with emotional wrecks flipping stocks in their Qtrade accounts. Or, you can build that portfolio and concentrate on your love life. Tough choice.

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The end Thu, 16 Oct 2014 22:13:49 +0000 TAILS modified

Remember the Fort Mac dude who told us some weeks ago he was going to unload his house in a squalid city populated with horny engineers? (Like there’s any other kind.)

Well, the guy has horseshoes up his rear, apparently, listing and selling just days before the price of a barrel of oil plunged enough to put oil patch execs into cardiac arrest. “First of all, thanks for reading and posting my story! I feel somewhat famous now,” he says, pathetically. “My house just sold for $10k less than what I bought it for back in June of 2008.

“I’m just glad it’s over, especially the way the world markets have been acting this past week! I’m pretty sure back when I bought it the exact same thing was happening globally, but I was completely oblivious to it, just like these new greater fools probably are. I bought at a bad time, but looks like I probably just sold at a great time.”

Now, remember the Financial Post dude who dissed me recently, arguing there’s no real estate bubble – only a gasbag full of twits like me writing about it. “Booming real estate markets are producing another kind of bubble: An expansion of authors writing about a looming crash,” he wrote. Then Marr quoted such unbiased and credible people as Joe Owe and Brad Lamb to help calm the afeared masses.

Well, times change. Sometimes ya gotta flip. Sometimes, flop. Mr. Marr, praise be, has seen the light. “No matter what statistics show, Canada’s housing boom is about to end, experts say,” is his latest piece. Just in time, too. CREA reports sales fell last month – a significant event. Even Royal LePage is warning consumers not to expect real estate to perform. And Capital Economics’ David Madani earns some ink with this observation:

“What concerns me is some buyers seems to have this view that prices can only go up. People feel it’s a one-way bet. A lot of younger people seem to think that if they don’t get in now on the home ownership ladder, they’ll miss out. Some of these people will come to regret this decision. In the more expensive markets, it’s almost like a capitulation where they say ‘If I don’t buy now, I’ll never own a home’. This is what happens in a housing bubble.”

Meanwhile, even The Motley Fool is lining up to take a whizz on the housing market. “If you buy Toronto real estate now, you’ll hate yourself later,” says this week’s headline. In arguing for an investment in nice REITs that pay you actual cash to own them, the Fool reminds is why GTA housing is a potential sinkhole.

“The city’s real estate boom has produced some jaw dropping figures. For instance…

  • $951,000: Toronto is about to become the second Canadian city where a single-family home costs more than $1 million. Last month, the average detached house sold for $951,000, up 8% year-over-year.
  • 130 skyscrapers: Toronto has more skyscrapers under construction than any other city in North America. Today, there are 130 high-rise projects underway.
  • 39,000 realtors: The number of realtors in Toronto has doubled over the past 10 years. Today, there’s one realtor for every 140 people in the city.
  • 37x rental income: Toronto housing prices are valued at 37x annual rental income. Typically, the market has traded between 15x and 20x rental income.
  • 3.7% cap rate: Toronto capitalization rates — the rate of return based on what a property is expected to earn in rental income — have hit new lows. This was highlighted last year when the Bayview Village shopping mall sold for a record low cap rate around 3.7%.

The conclusion: “You should buy assets that make sense based on cautious assumptions. Nobody should be speculating that people will pay growing premiums for a house.”

That sure is good advice these days in a bunch of cities, like poor Regina. The latest realtor survey shows the average two-story house is 7% cheaper than it was a year ago, even as sales hold steady, while bungs have dipped 8%. Inventory has been flooding on to the market as more sellers sense this is a now-or-never moment. There are more houses for sale than at any time in the past twenty years. Says local broker Mike Duggleby: “The inventory levels available on the market right now are approximately 40 per cent higher than usual, which has created a supply-demand imbalance and pushed home prices down. Strong unit sales this quarter have not been enough to support previous price levels.”

In all of Nova Scotia, including Halifax, prices are dropping. They were off about 3.5% last month compared to the same time a year ago, with more than full year’s worth of houses sitting on the market. In Montreal, prices are running less than the rate of inflation, after an absolute decline through the summer.

Of course, this is at a time when the cost of money has never been lower and a five-year mortgage can be stapled down for a lowly 2.8%. As mentioned earlier this week, already 60% of Canadian markets are seeing falling sales, with most experiencing rising inventories. So the hot housing conditions most realtors and reporters keep telling us exist is really a three-city phenom. And, as I wrote here a few days ago as oil collapsed, you really have to wonder about Calgary.

Well, a crappy, raw semi with a Wild Kingdom basement on a hipster street in Toronto sold this week with twelve offers – all from virgins. The asking was under $830,000, and the sale was over $950,000. When I spoke to the agent for one of the losing bidders (who reads this blog), all he would say is, “I am so done with this town.”

Smart people know where this is going. Tails up.

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Weird Wed, 15 Oct 2014 23:04:08 +0000 CAT BATH modified

It never fails. The price of stuff that people want goes down, and they don’t want it any more.

We have two reports on this most emotional of human behaviour – the trait that just about guarantees the majority will end up as financial dweebs.

First (our fav), houses. This week CREA did its latest stats-pumping thing, saying real estate sales across the country last month were up a whopping 10.6% over last year, with prices ahead more than 5%. But there are two stories, not one. People are still horny for houses in delusional little hormonal pools, including Calgary (of course – at least for now), Vancouver and Toronto.

And because prices have been increasing in these places as mortgage rates fade (Calgary up over 10%, Toronto plus 8%), sales have been robust. When folks see rising prices they equate it to a good investment. It’s illogical, I know, but that’s why we have hormones in the first place. Think foot fetishes or handcuffs.

Hence, buyers in those cities are paying the highest prices on record for houses, which is never a good idea unless you’re convinced they will go higher still. And they are. Sadly.

Meanwhile in 60% of all local markets across Canada, sales are down. You know where – this blog has laid that out for you in recent weeks, talking about the funk that has settled over places like Halifax and Regina. And in at least half of those cities, prices are lower now than they were a year ago.

See what I mean? Buyers fading away where houses are getting cheaper, while bidding wars continue where real estate is less affordable every month. It’s not so much about the markets, as it is about human behaviour. Most people have no confidence in their own judgment, and are massively influenced by what their co-workers, friends or off-colour relatives have to say. If enough people tell them something’s a good (or bad) deal, they end up thinking that way, too.

This is what bubbles, manias and deflation are made of. Love, too. More on that later.

Now, here’s another great example of people doing the opposite of what they should.

Read the comment section from yesterday and there’s one thread woven through most of it. Yes, fear. Stock markets in Canada and the US have shed between 8% and 10% over the past few trading sessions, as oil tanked, global growth stalled, the Ebola scare spread and investors collected their profits. This is exactly the correction that we should have had a year and a half ago, since they happen on average every 18 months. (The last 10% blow-off was back in 2011 during the US debt ceiling crisis.)

To the middle of last month, the TSX had showered investors with a 28% return over twelve months, with US markets gifting about the same. Volatility was comatose and silly things happened, like a nutso IPO for a Chinese ecommerce outfit 90% of investors had never heard of. And still the market advanced, getting more and more expensive. A correction, mused this irritatingly sanctimonious site, is coming. Get your chequebooks ready.

Well, here she is.

And what do we hear? “Uh oh…2008 over again in the market,” and “Obviously, the US economy is belly up just like Europe. If there is deflation, stocks won’t go up, they will collapse lower. No two ways about it. The only safe place to be will be government bonds. All else will not make it through.”

The volume of selling on the markets was thunderous, especially at the opening bell on Wednesday. Retail investors – many of whom probably came to the party late, paying top dollar – were stampeding to get out. Being humans, they expected gains, no matter what they’d paid to get in. They bought high because things were going up. When the music stopped, panic.

This happened in March of 2009, and again in the summer of 2011. When equity markets got cheap, the buyers were scarce – because they lacked confidence and perspective. Emotion told them to flee, so they did. It’s as researchers have found – we fear loss more than we savour gains. That’s why Canadians have billions in GICs and bank accounts paying them nothing, yet barely have enough income to survive. They’d rather suffer, live small and squander their most valuable asset – time – than face any risk of loss.

No wonder so many of us hate the rich. The Chinese guy buying the mansion on the Westside. People in Porsches. Kevin O’Leary.

Emotion and investing don’t mix.

Emotion and underwear?  An entirely different thing. But that’s my other blog.

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The cowboy gene Tue, 14 Oct 2014 23:01:27 +0000 COWBOY modified

Aren’t you happy you didn’t just buy a honking big particleboard McMansion in suburban Calgary? Yeah, it was tempting. The locals swear there’s nothing more secure than fifty feet of Alberta dirt, and lately the numbers have supported that.

The average house in Cowtown had gained 10.2% year/year by last month, to $512,800. Hell, even condos have been sizzling – going for an average of $298,800, a jump of 9.5% from last autumn with a 21% goose in sales.

This has made Calgary the most speculative little line-dancin’ bubblette in the nation. And the burbs have been just as hormonal. In Airdrie, for example, prices popped 8% in a single month – last month.

But all that could be in jeopardy, now that Mr, Market has moved back into town. Oil prices have been pushed into a full-fledged correction – almost a free-fall – by tumbling demand and increasing supplies, which will nail Alberta’s provincial budget as much as it will inflated house values in Fort Mac and Calgary.

On Tuesday alone the price of oil dropped about 4.5% – an unusual event – taking crude to below the $82 mark (you may recall a few weeks ago this pathetic blog said eighty bucks was possible). (Wednesday a.m. update - oil now at $81. Oops.) This means oil has lost close to a third from its recent high, and is now caught in a vice from which there is no easy escape.

As the US dollar rises in value (the world’s safe haven currency) commodity prices are squished. (The loonie this morning dropped a full cent, to just 88 American pennies.) Meanwhile all that fracking south of the border has created more supply and propelled the US onto the path of energy self-sufficiency. Worse, that deflation stuff I’ve been talking about here for the past year has come to pass. Europe’s now an official mess. Germany just cut its growth forecast. The US has missed inflation targets for 28 months. Ebola threatens to freeze local economies and disrupt trade and travel. And demand for oil is dropping along with factory orders.

In short, this doesn’t look like a blip. The TSX sure thinks so. Down another 200 points on Tuesday, and now in official correction mode – thanks mostly to oil.

And even though average incomes in Calgary and Fort Mac beat the national average, so does debt – due to real estate. Alberta households carry $35,000 more debt on average than a year ago, and their debt load is now a staggering 64% higher than the national average, according to BeeMo.

How strong has the cowboy gene been?

  • About 500 homes prices over $1 million have sold in Cowtown this year. That’s ten times the number of a decade ago, and a record. Realtors have been so aroused that one firm (Sotheby’s) hired a helicopter to fly horny buyers over the little faux hills that conveniently connect the freeways.
  • Homes listed over $500,000 are higher by fifty per cent than just a year ago.
  • City Hall claims there are more millionaires in Calgary than anywhere else in Canada. At least, that was last week.

But, it’s all related to oil. Unlike the GTA (six times larger), the Albertan economy swings with crude. When asked why house prices have increased faster than anywhere else in Canada this past year, here’s how BMO economist Bob Kavcic sees it: “It’s a boom-bust economy that lives and dies by oil prices, and the housing market is the same. If you were to say what’s going to drive luxury real estate in Calgary, I’d say just oil prices.”

And that makes Alberta, especially Calgary and Fort Mac, ground zero for deflation’s dump on Canada. Housing values rising at five times the inflation rate are not sustainable. Worse, the buy-now-or-buy-never mentality so prevalent these past two years has blinded people to the dangers of spending big on inflated assets in a one-horse economy.

Oil’s descent may stop. It may not. Already some oil patch development has been curtailed and jobs lost. The newly-minted but well-worn premier is worried about plunging royalties, just days into his new job.

This is a not the first rodeo. Alberta is boom. Alberta is bust. What’s new is a city now packed with seven-figure houses, peppered with debt. At least gas will be cheaper for that drive to the coast.

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Progress Mon, 13 Oct 2014 21:46:10 +0000 TK 2 modified

When my father was a boy, almost a hundred years ago, his father ran a hardware store in a small Ontario town. When they needed to go into the big city (London), they took the stagecoach.

Yes, stagecoach. With, like, horses. Six of them.

When I was a boy, sixty years ago, we stopped on the way to our ramshackle summer cottage on Lake Erie to buy an ice block. For the icebox. Weighing 50 pounds and covered in sawdust it had been cut from the frozen lake by hand, hauled back to the warehouse and stacked. It went into the backseat of the car, where the dog licked it until we arrived.

I mention these things not to underscore the astonishing fact I’m still alive, but to remind us that we take progress for granted. In my father’s lifetime, we went from a stagecoach to a lunar landing and email. My grandfather, the hardware guy, was blind because he had cataracts. They’re now zapped away in 15 minutes.

So, life’s been getting ‘better’ for a long time. Optimists think the graph will keep going up. Like Vancouver real estate prices. Others fear this will end up being a Bell curve. Like house values in Japan. Or peak oil. In other words, might we be at the apex, or already starting to descend the other side – despite having iPhone 6, Instagram, Teslas and doctors who can keep a heart beating in a jar?

It’s an interesting thought. And while each generation expects things to improve, it’s not hard to be jaded. Ebola might be a game-changer. Maybe the ISIS thugs will destabilize the world. And it’s easy to worry about Brad Lamb, Bob Rennie and talk radio. But these are likely transitory issues.

More consequential is the fact 50% of all the animals on the planet have disappeared in the last forty years (since I married Dorothy) says the WWF. That could be the ultimate harbinger, and yet nobody cares much when cops in Calgary shoot one of the area’s last cougars. (Number of documented cougar attacks in the last 100 years: 27.)

While half the animals have purportedly left us, the human population has almost doubled since 1970. The optimum number of people is believed to be what it was when Pierre Trudeau was the prime minister, so we’re 100% above that. Another billion is added every decade, while life expectancy keeps increasing and personal consumption rises.

No wonder food production is a major concern. Especially as millions more join the middle class, and eat animals that feed on grain, instead of eating the grains themselves. Of course, climate change layers over all of this, making ground water depletion worse, augmenting drought and raising energy consumption. In the five minutes it takes to read this post, 255 babies will be born to Indian mothers. They all need sustenance.

Most worrisome is the disparity of income and capital. There have always been rich and destitute people, but never this many wealthy. Or this number of poor. When the Occupy kids spilled over onto Wall Street yelling “We are the 99%” they had a valid point. Even in the most favoured society on earth (ours) money has never migrated to the top the way it is now.

True, many of the 99% have made stupid choices. They buy condos with nothing down, embrace debt, are financially illiterate and stay in school until they’re 30. But there’s no question one of the greatest inventions of the modern age – the middle class –is breaking down. When half of Canadians can’t survive one missed paycheque, most 60-year-olds are incapable of retiring, and family debt spikes off the chart, society seems headed for catharsis.

As I said, this is the First World, where we live. Imagine life now in Liberia.

Many people come to this pathetic blog to carp about the monetary system, the banks, government pensions, politicians and wrinklies. That’s fine. There’s lots of blame to go around for the fact young people are bitterly disappointed and the nearly-retired are stressed out. But don’t expect gradual change to correct it. It’s more likely events will overtake us.

If this is the backside of Bell Curve of human progress, it’s worth knowing. When today’s hipsters are eighty-year-olds, will there be 15 billion people and even fewer animals? How about water and oil? Did my father live in the halcyon age? Or do we?

These aren’t doomer questions. Sometimes I just wonder what happened.

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The last tool Sun, 12 Oct 2014 20:51:20 +0000 HIPSTER modified

It was like having a cold Slurpee dumped in your warm lap. Bob Kaycic’s analysis of the condo market a few days ago could not have been more at odds with what the realtors have been telling the delusional citizens of Toronto. The boom, the BMO economist said, is kaput.

The facts are clear enough:

  • Housing starts in our largest market are at the lowest point in four-and-a-half years.
  • New builds in Toronto are down more than 50%. Two years ago there were 40,000 fresh units. Today, 16,500.
  • Building permits in the GTA crashed 43.5% in a single month (August). They’re down 27% year/year.
  • Meanwhile cranes darken the sky as almost 60,000 new units are under construction. Just imagine what that’ll do to the 2015 market.

This development’s worth mentioning given what happened over the weekend in Washington, and the financial markets last week. Seems the entire world is cooling off in way most political leaders and central bankers never saw coming. Global finance ministers are now up against a beast none have known in their professional or adult lives. A lot of them won’t survive.

“I’m worried about growth around the world right now,” was the comment of one senior Fed official to the ministers (including Joe Owe) and bankers. In fact, they’re all worried. Things are going badly.

In Europe inflation is the lowest in five years, and barely alive. Now European Central Bank boss Mario Draghi says massive stimulus spending is “the last monetary tool left” after the bank already slashed interest rates to nothing, offered cheap loans to banks and will be buying up private-sector assets.

Powerhouse Germany is running out of gas, and may soon be in recession. Manufacturing orders, industrial output and exports have all taken the biggest hits since 2009. The economy actually shrank in Q2 and Berlin’s about to forecast growth of around 1% for the year. Pathetic. Now the Merkel government’s being called the “Tea Party of Europe” by obsessing over a balanced budget while the economy sputters. Over the weekend a former US Treasury Secretary accused Germany of leading Europe into Japanese-style deflation. Ouch.

In the US, last week’s big market volatility seems to have rattled everybody. A new Ebola case in Texas isn’t helping much, either. Crappy growth in most of the world means falling US exports and lower corporate profits. Meanwhile uncertainty drives more money into Yankee dollars, which rise in value, making American goods less competitive. A higher dollar also creams commodity prices – like oil, already suffering due to reduced demand – and that’s bad news for Calgary. Worse, the Fed is scheduled to end its stimulative bond-buying program tater this month, which will further chill markets and inflation.

Speaking of which, expect central bankers to turn from creating jobs to desperately trying to raise prices. Commodities, incomes and inflation are all under downward pressure – even in the US, which is the world’s best hope for recovery. The inflation target there (2%) has been missed for 28 consecutive months. As in Canada, real wages are flatlining or in decline, and combined with low interest rates, it’s all having a profound effect on the economy, and society. Corporations can’t raise prices or they will hurt sales and cut profits. They have an impossible time cutting wages and salaries, thanks to organized opposition and the perception of unfairness. So, they can people instead. The unemployed don’t buy stuff, so the outcome is usually downward pressure on prices.

Yes, this is deflation. It’s approaching. Suddenly everyone’s focused on it, including investors who last week scrambled to turn paper profits into real cash.

While the Dow and the S&P 500 get all the headlines, small-cap stocks have already been leveled. About 80% of all smaller US publicly-traded companies have seen declines, while volatility has jumped 46% overall. Some people believe this is a portent for larger drops in the big indices, which seems like a reasonable conclusion. The current bull market has lasted almost 40% longer than most, and there hasn’t been a 10% correction for over three years (twice the normal).

Technically, it’s time. So you should expect more declines – which will probably set the stage for subsequent gains, since a protracted bear market is unlikely. That would mean selling into the teeth of this correction is a dumb thing to do – a strategy your know-it-all genius brother-in-law will probably embrace.

Well, there ya go. This is why people with balance, diversification and liquidity in their financial lives, as opposed to those with debt and illiquidity, will come out okay. Regardless of what lies ahead. In a deflating world – even mildly so – commodity and real asset values fall (happening now), real estate disappoints (that’s coming), incomes get swampy (had a raise lately?), making debt harder to pay regardless of what the rate is.

This past week has the Fed rethinking its plans to jack rates next year. It has people who bought stocks on margin avoiding their brokers. It has whole governments questioning. And it sure isn’t the time for your daughter to close on her condo.

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Thankfully Fri, 10 Oct 2014 22:35:29 +0000 YOGA CAT modified

I’m a grateful guy, who’s also been called a turkey on this blog, which makes me the perfect Thanksgiving dude.

Naturally I’m grateful for Dorothy, whom I married when I was 21 with an earring, and Bandit who five years ago was a rescue dog who rescued me after the prime minister booted my butt. I like it when they lick me.

I’m thankful I got into financial stuff instead of, say, something where you have to wear protective clothing. Actually I started as a journalist – a business type – and over many long years came to see there’s little else absolutely everybody sweats over, than money. Without it, life sucks. Thankfully, I’ve had the epiphany. Money isn’t the goal, since you can earn, borrow or steal it. The real purpose of life is to enjoy your limited time. You cannot mortgage one moment. And that’s what money helps.

I’m a thankful person that my day job now allows me to give some peace and security to individual families. Over the years I’ve been a media guy, a government guy and given speeches to vast numbers of people plus doing the TV and book thing. But my work now is the best. How can you not like helping people every day, so they worry less about soulless cash?

Thankful, of course, to live here. The country’s not perfect, run by a few too many doofuses and populated with a surfeit of house-horny, granite-stroking, debt-snorfling hipsters. But it’s basically a decent and fair place with an open society and ample opportunity. Not too many guns, no Tea Party and doctors who provided sixteen screws and three plates to fix my leg for less than I would have paid at Home Depot.

I think the system’s worthy of thanks, too. Imperfections abound, evidenced by the growing gap between the rich and the rest, but it’s stable and resilient. We don’t worry about banks failing or the city going bankrupt. As much as people on this site moan and slather over monetary policy, banksters, elites and rigged markets, fact is we inhabit an oasis of stability in a world of swirling crises. Most people have cars, houses, cable and cell phones. How bad is that?

I’m even thankful for this pathetic blog, populated with basement-dwelling mouldy Millennials to unconscionably wealthy wrinklies. Once intended to flog a few books and irritate realtors, it’s descended into a morass of opinion now visited six million times a year, without which the HuffPost would be desperate for story ideas.

So, thank you. It’s all good. I’ll be a problem again on Sunday. Honest.

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Reality check Fri, 10 Oct 2014 00:19:39 +0000 SELFIE modified

Was it only two days ago I warned you about deflation? Hmm. Two days later a lot more people are yakking about it. For example, when stock markets plopped on Thursday, this is what US investment fund manager Jordan Irving was saying to the boys at Bloomberg:

“The huge fear is deflation. The U.S. could have inflation creeping in here and there, but the rest of world’s deflation can snuff that out and that’s the concern.”

You probably noticed markets have been wildly emotional this week. Big dive on Tuesday. Big rally Wednesday. Big dump on Thursday. If you’re a day trader making money on volatility, it’s totally sweet. But if you’re normal, it’s a Tums moment. Especially if you don’t understand. And that’s why God made this pathetic little blog.

First, some context. Despite this week’s wild swings, US stocks are up 6% for the year and almost 19% over the last twelve months. The Toronto market’s okay, too – ahead 8.5% in 2014, and 17% since last October. Of course, gains like that mean investors are highly likely to take more money off the table if they think things are unwinding – and profit-taking could certainly erase market gains for the entire year in a few more sessions like we saw Thursday.


The IMF said earlier this week stocks are frothy compared to the actual global economy, and that was a good call. Nobody should be surprised if we lose 15% from the record close, which was less than a month ago. Given that yields are ridiculously low on most other asset classes, cheap shares in good companies will probably end up looking like bargains. After all, where else is money going to go?

So, sell-offs are not bad things. They restore better valuations. You just don’t want to be the last guy in before the plug’s pulled. There’s a valuable lesson here for people who recently bought a condo in Liberty Village, a baronial pile on the Westside or anything in Calgary.

Okay, why this turmoil this week?

The stock market is a leading indicator, stuffed with money trying to find future profits. Investors react not only to current events, but what they think those events and trends will bring. Right now, they’re seeing deflation – at least the potential of it. So investors sold when the IMF lowered its growth targets and commodity values fell, because a less busy world will bring lower corporate profits.

The next day investors bought when the US central bank hinted interest rates might stay lower longer (because the world economy is swampy) – which would help companies profit from cheap money. And on Thursday they fled again. This time things looked more serious and consequential. Oil has entered a bear market with the price of crude down at $85 a barrel, and more declines loom. Poor Alberta.

Europe’s a mess. The head central banker, Mario Draghi, said the euro zone’s economic growth is slowing and inflation is now “excessively low.” No kidding. At least three countries are in outright deflation, with falling prices and wage. Even Germany is sputtering. You already know about Russia, which is paying a heavy price for being run by a body-building, ex-secret police, jingoistic, country-grabbing egomaniac.

Meanwhile it’s earnings season, as big corporations report their Q3 numbers, and the expectation is profits of the biggest US outfits moved ahead 4.9%. Three months ago the forecast was for almost 8% – which reflects slumping commodity values and a rising US dollar.

Okay, so what about us?

The dollar has just dropped to the 89-cent level, and oil played a role in that. Despite the 10% erosion in our currency, the latest trade numbers suck. And you know about job creation, which has been a big disappointment (notwithstanding today’s surprising number). Household debt levels are rising again after a small lull last year. Youth unemployment is in double digits and family finances are more than tenuous. I gave you some of those numbers yesterday.

A quarter of the economy is based on real estate, where we have $1.2 trillion in mortgages. Houses are selling for ten times incomes in Vancouver and seven times in Toronto. Three times is viewed as affordable. Canadian real estate, in other words, is far frothier than the S&P, the Dow or the TSX. Leverage is extreme with rates at all-time lows. Instead of using cheap money to escape debt, we’ve used it to augment our servitude. The average down payment is 7%, and yet house prices have been rising in Calgary at five times the inflation rates, and in Toronto by four times.

What markets have been saying lately is that interest rates can go to zero, and it’s won’t matter. What the future needs is higher incomes, economic growth and jobs. Not more debt, and certainly not the Canadian model where people think they’re rich selling each other homes at ever-higher values, using borrowed money. The condo economy is not sustainable.

For two years the D-thing has been a topic here. If it does materialize, expect lower prices and falling incomes. No matter what the interest rate, debt will be harder to pay. Meanwhile frothy home equity will blow away. A temporary stock market rout will look so damn innocent.

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