Whoops

mark1

Well that was fun. Now back to business.

Hope you noticed the rest of the banks skulked in Tuesday night with higher mortgage rates. And not by a dog’s hair, either. By .35% on five-year money, which equals an increase of 7%. This happened on the same day the Canadian dollar flirted with 97 cents, and the latest new housing sales price numbers emerged.

What’s  in common? Lots.

First, rates.

Why are they going up when the Bank of Canada is doing nothing other than wringing its stony hands about the housing bubble and keeping its benchmark rate untouched? Of course… the bond market. As I let you know here some time ago, massive new government financings guarantee lots more competition for borrowed money, which is already dropping bond prices, popping bond yields and goosing mortgage costs. Remember: this is where baby mortgages are born.

So, why fret about the latest increase, effective this morning? Because it’s on the long end of the yield curve, which tells us something about where the cost of money’s headed.

Here, look at this:

Chartered bank mortgage rates -- 14.10.09
One year closed     3.7%
Two year closed     3.85
Three year closed    4.35
Five year closed     5.49

You can see pretty clearly that short-term money (like a one-rate rate at 3.7%) is now at a snappy discount to a five-year loan (currently 5.49%). This is because the bond market expects short-term money to be 5.49% in five years – which might well put your traditional long mortgage renewal at about 7.5% in 2014. This is not far off the 8% I warned you about. It means a $200,000 mortgage financed today with a 3% VRM requiring a $50,000 income will need a salary of $83,000 to qualify upon renewal at eight per cent.

(And don’t be confused by VRM rates which are lower than those posted above. They’re just long-term rates in stillettos and tube tops.)

By the way, a flat yield curve would indicate markets anticipate rates to stay in a narrow range for years while an inverted yield curve shows rates are expected to drop.  This one, bummer, is singing a different tune.

Now, the dollar.

Pay attention because the dollar is rising for one overriding reason: the US greenback is going down. I told you months ago we would have parity, and it’s coming. This is very bad news for the housing market, unless you are buying up whole smouldering blocks in Detroit.

Every one cent increase in the Canadian currency costs at least $2 billion in lost sales to our manufacturers and exporters. Each penny gained is also believed to wipe out 25,000 jobs. And as the American dollar sinks (which the Obama administration wants since it makes US exports cheap), we could see the loonie substantially above $1 US for months, or maybe years. There are two words for that: structural unemployment.

Now, new housing.

Why is it that resale house prices are up 11% in the middle of a recession, when new house prices are down 3.1%? Like, huh? Don’t young couples want to rush into contracts with desperate, price-slashing builders so they can have viriginal digs to consummate?

Sure they do. So where are the bidding wars, gushing realtor hype and romping prices that we’re treated to every four weeks from the real estate boards in Toronto, Vancouver and the horsey bits inbetween?

Oh, wait. Resale home prices are compiled by realtors who together make up self-regulated real estate boards. Wait again. They used average unweighted pricing in compiling their stats, which means if one delusional dweeb in, say, Calgary, spends $10 million on a faux palace, it drives the numbers skyward. And, by gosh, it is the arithmetic average of the unweighted local averages which are used by CREA to calculate the national average – then dutifully spoon-fed to a waiting and voracious media.

So, who compiles the new home sales prices? Statistics Canada. Like this…

chart1

So, what’s in common here? Wait and see.

114 comments ↓

#1 Kitchener1 on 10.13.09 at 10:09 pm

Im telling you that from my vantage point out here in KW and GTA in general were I commute often; we are just starting to build inventory the same way it happened last year.

I am seeing competitive priced properties linger on the market for 3-6 weeks were as in the summer they were gone in 7 days or less. Not a huge uptick yet, but at a subtle level it is starting.

Lots more of words “quick sale”, “act fast” “immediate closing” and “bring any offer” are popping up on the listings.

UI is going to be running out for a lot of folks very soon, Second Career putting their program on hold is very worrisome for many that were looking at that program to help pay there bills and upgrade skills.

The problem with the real estate market in the GTA and GTA west is that we had huge run ups of buyers over the last few months, that means that buyers are drying up at a time when many sellers are going to be squeezed. Increase in rates means downward pressure on prices. And if the stock market crashes again this year,

Say hello to the double dip recession and kiss this faux recovery goodbye.

#2 taxpayer like you on 10.13.09 at 10:18 pm

“… it is the arithmetic average of the unweighted local averages which are used by CREA to calculate the national average…..”

Really? So smaller cheaper markets like say St John NB,
Prince Rupert and Thunder Bay are given the same
weight as Vancouver, TO, and Calgary? This would give
the appearance of a much lower average.

But weighting the averages is just an unnecessary step anyway. Just add the total sales $$ figures for all areas and divide by total number of sales of all areas. How hard can that be?

#3 Not Garth on 10.13.09 at 10:33 pm

GREAT post Garth, awesome.

And BANG ON.

Do you think that the bond selloff will continue in earnest?

Interesting times, and great calls Garth – loving it – thanks!

#4 Phil on 10.13.09 at 10:35 pm

Does anyone believe the BOC will raise rates on the 20th? Or is it out of the question as the CDN dollar is rising so fast?

#5 Gord In Vancouver on 10.13.09 at 10:36 pm

Garth – thanks for the educational and objective post.

Looks like the Kool-Aid drinkers here in Vancouver are in for a heck of a rude awakening.

#6 Shawn Allen on 10.13.09 at 10:44 pm

Mortage rates up 0.35%…

And sure enough the 5-year government bond rate is up about that much in the past week.

http://www.bankofcanada.ca/cgi-bin/famecgi_fdps

If CMHC were sane it would not allow people to qualify based on variable rate mortages. The rule should be that you can buy only what you can afford on a 5-year rate. Then if you wish to, go variable and you can lock in when needed.

To put someone in the position of taking on the most expensive mortage that they can qualify for based on a varaible rate is financial russian roulette. If they get worried rates will rise, well too bad because no way can they afford to move toa five-year rate. So they a re stuck on variable rate with fingers crossed.

Those on variable that can afford to lock in five years, that is a different story altogether. Those people can afford to take the risk of the variable rate loan.

If CMHC does indeed let people qualify by using variable rates that is pretty close to the sub-prime situation in the U.S. (Though the U.S. took it a few steps further with no income verification, teaser rates, interest-only, falsified property assessments and more).

If rates rise, CMHC is in deep trouble. Our banks meanwhile will probaly welcome the higher rates as CMHC holds most of the loan loss problem that will occur, not the banks.

#7 Basil Fawlty on 10.13.09 at 10:46 pm

Great report Garth, I can’t believe it’s free. Oops forget I said that.
One thing that makes me wonder about Obama, is that while he supports a lower Dollar to increase exports, 70% of US GDP is generated through consumption. A lower greenback means less consumption, due to higher prices for foreign goods and the US imports a lot of their manufactured goods.

#8 Rob on 10.13.09 at 11:24 pm

For one, America doesn’t make anything anymore , they only consume, to the point of it being over 70% of their economy. So a devaluing dollar might only add 1/4 % to their GDP at best. Hmm could there be another reason to their “weak dollar” policy ? Its because a weak dollar and printing presses running off thousand dollar bills 24 hrs a day makes it possible to inflate away their 65 trillion dollars in unfunded liabilities . Medicaid, Medicade, and social security all will get funded in the end, but with inflated worthless dollars of course . What Carney will do in response (A former Goldman Sachs boy) remains to be seen. Will he say we must stay competitive with our biggest trading partner and print money to create a race to the bottom? Who knows . One this is for sure there is a currency crisis coming and like it or not the gold bull market that has been in place for the last 9 years will continue.

#9 Finanzkrise on 10.13.09 at 11:45 pm

Totally agree with Garth on the preditions and rationale for rising rates / bond yields.

However, regarding the USD, I can’t help but thinking that a near-medium term correction or crash in equity markets accompanied by further financial system instabilty due to the US real estate mess (it aint over yet) would result in a sudden and sharp rise in the USD as a flight to safety, as risk aversion kicks in again, much like we saw from Sept 08 – March 09.

#10 prairiegopher on 10.13.09 at 11:45 pm

I have read your books and followed your blog for about a year or so. You are bang on and I keep preaching your gospel to others. Most look at me like I’ve been drinking or smoking something from B.C. I know that things are going to get worse and there will be lots of suffering. We sold our house late in 2007 and have made 4 and 3% on our money. Not a huge return, but we are on the sidelines and ready to go in whatever direction we need to go. Keep up the good work and keep blogging!

#11 average joe on 10.14.09 at 12:18 am

Interesting…

I never knew there was a difference between the stats for resails and the stats for new homes. Thank you for clarifying.

We recently made a purchase of property. It was the family cottage. I went against all of Garth’s advise about buying now, but we just couldn’t let those memories go, even though we knew it was a bad financial decsion.

Still, even though we are in a financial bind, everything extra we have is going toward the mortgage. No dinners out, no movies, no day trips to the zoo for the kids.

We paid too high for the family cottage, but it is still worth it for us. Now my big concern is that we try to pay of as much as we can of the principal before the rates skyrocket.

Still, I don’t regret the hardship. You value what you pay for. It’s just I don’t want to pay too much for what I value.

For all Canadians, let us repeat the mantra: pay it off, pay it off, pay it off.

#12 Lucky C on 10.14.09 at 12:34 am

Now, new housing.

Does anyone remember this guy?

#13 Wayne Lewis on 10.14.09 at 12:36 am

This is playing out like a bad dream….

#14 Nostradamus Le Mad Vlad on 10.14.09 at 12:39 am

Putting “Whoops” together with the pic of Flaherty’s rabbit-ears (flags) is spot on, as one fits the other. Whether he is seeking divine assistance by looking up (maybe at a teleprompter?) is debatable.

Main thing is the greenback is sucking wind big time, which could lead to unintended consequences, namely a default on their astronomical debt.

With US taxpayers paying for GS’s and MLynch’s bonuses, while they watch their homes foreclosed and parts of cities bulldozed to create make-work projects to rebuild them again, my guess is another French Revolution is being hatched somewhere in the offing.

The loonie, unemployment (hidden and official), mtge. rates all ascending in order, the economy and a few other things descending, roughly in the same time frame so there will shortly be two polar opposites — rich get very rich, middle-class joins the working poor.

It’s completely out of whack. Talk about timing — you pulled the plug on politics at the right time.

On Castanet a day or two ago, a report said there were “thousands” of new people flocking to food banks in Toronto and elsewhere. Shouldn’t be happening, but the entire system, from the top down needs to be radically overhauled and very quickly.
——
Take a gander at these articles, and see why China (and Russia) are setting themselves up, business-wise, very nicely.
http://smallsizeurl.com/529/ and http://smallsizeurl.com/530/ and http://smallsizeurl.com/531/

The following is a test to see whether I am on the same planet as the rest of you; if not, you’re ok but I’m having a full-fledged crisis over Orion.

Jim Rogers, Garth and a few others have one thing in common — bunker
——
If ever proof were needed, here it is! Comment from wrh.com. — health
“… and running for Congress.”

#15 Michael_H on 10.14.09 at 12:43 am

Here’s the Stats Canada link for anyone interested in checking out their neck of the woods…
http://www.statcan.gc.ca/daily-quotidien/091013/t091013a1-eng.htm

#16 swag on 10.14.09 at 12:59 am

Garth

Longer term bonds always have higher yields than short term. By your logic (short term yields in 5 years=5 year yields today), bonds would go on increasing to infinity. I don’t think you truly think that.

If structural employment will happen with a dollar at parity, why didn’t that happen at $1.10 last year? Why weren’t we at record low unemployment when it was 60 cents? Businesses adjust to the new normal and jobs move back and forth. I don’t think our primary resources will pick up and move south where the cheap dollars are…

If structural unemployment does happen, wouldn’t the logical central bank response be to high unemployment to keep rates low and wouldn’t sensible bond traders predict this? Likewise if a housing runup prompts Carney to raise the rates, wouldn’t a subsequent decline in house prices cause him to keep them low?

Your arguments seem to always focus on a first-order dynamic while ignoring the market and central bank response. It’s kind of the reason why your real estate predictions were so far off this year. Perhaps instead of constantly harping about fiscal imprudence and making predictions, you could get behind a solution like lobbying the government to require higher downpayments on house purchases (like 10-20%). That way rates can be kept low and savers are rewarded.

#17 nonplused on 10.14.09 at 1:02 am

I posted to this blog repeatedly over the course of the spring rally that prices always go up in the spring. Granted, I did not expect prices to rise into August and September (and we don’t know yet they did in September). Volatility is the order of the day when the government and central bank are collaborating to support asset prices.

But there is only one thing to know. This credit bubble is done. From now on, you will have to pay cash or be of the highest quality of borrower. To clarify that, yes CMHC, the most vile institution in Canada, is still trying to proliferate loans destined to fail, but like the US FIDC, they will fail too as a result.

Insurance is a fraud, like a Ponzi scheme. It can only survive in a growing market. Your life insurance is worthless unless you die now. So is your “government pension”. Government pensions are all severely under water. But, you say, said teacher, “it’s backed by the government”. News for you: The promises the boomers made to themselves will not be paid. Why? Because the boomers never funded it, never even thought about it, they just kicked the can to the X, Y, and millennials. Good work if you can get it. But we won’t pay. Why? Because we can’t. You are expecting 100’s of thousands of dollars from a work force that is serving coffee at Starbuck’s, or changing your diapers, or unemployed. We can’t pay your debt. So we won’t.

Let me try and say this succinctly: The boomers used debt to balance their budget, figuring that they could make someone else pay. But nobody else can. Therefore all of the boomer promises will fail when the debt cannot be paid. And those promises were mostly to themselves. “We’ll make a debt upon our children, that we cannot pay, and call it a duty.”

The boomers kicked a big can of debt to the post boomers, expecting that they would just pay. And I am sure they would if they could. But they absolutely can not. Hence, the next phase of the crises.

#18 Too Old Bob$ on 10.14.09 at 1:53 am

I think the Canadian dollar is rising due to US dollar dropping and the price of oil.

So does this mean we have to print more money in order to keep the Canadian dollar down?
Oh Lord I hope not.

#19 Paul Singh on 10.14.09 at 3:26 am

Garth your a good man, my the higher being take care of you and your family.

#20 Tony on 10.14.09 at 4:06 am

Interest rates are headed down in Canada not up. The bond market will soar in the near future. Unemployment will jump a full point when the unemployment figures come up next month in Canada. A higher Canadian dollar also spells lower interest rates in Canada. The ruse in America is nearly over as earning season is just starting for the 3rd quarter. The stock markets will plummet worldwide as the sell to buy ratio is already up to 41 to 1 as can be verified by the comment here by AmericanPatriot.
http://www.marketwatch.com/story/dow-at-10000-might-be-a-sell-signal-2009-10-13
Following the collapse of the stocks market will be the collapse of real estate once again. Sell all commodities and buy long term bonds.

#21 TomOfMilton on 10.14.09 at 4:46 am

One thing I don’t get. The Toronto Star Bus. section said yesterday something along the lines of: “The bank of Canada is not going to be able to keep rates low as long a promised because the of the rising looney”
This seems like bad logic no? Isn’t increasing interest rates a way of pushing a country’s dollar even higher?

#22 Frugalistas on 10.14.09 at 5:37 am

We locked in a year or so ago at 5.1% before the BOC worked its magic. I was predicting rates to go up, but they went down in a historically unpredictable way. I don’t feel so bad now!

#23 Bill McMullin on 10.14.09 at 6:02 am

Garth, interesting analysis and opinion. Love your writing style.

Your analysis on the relationship between the variable rate mortgage and income really struck me. How come nobody is talking about this??? Could it be because the issue is too complicated for most, or is it because a lot of stakeholders have a vested interest in keeping things just the way they are or have been?

I can’t believe REALTORS or their Boards would actually play ‘spreadsheet magic’ with key economic stats. Shocking :-( Once again, you expose something that many would rather keep buried which is the ‘self regulation’ of the real estate services industry. This national tax extracted some $6 billion out of the pockets of homeowners every year in Canada. In my opinion, the industry should be cited for information abuse. Hard to believe in 2009 that key information and data is obscured from view or inaccessible….but it is.

#24 Mike (Authentic) on 10.14.09 at 6:22 am

Point #1 – Increasing mortgage rates.

Should be no surprise to any regular reader of Garth’s blog, we have been talking about them going up more regularly now. But the speed and frequency of the increased rates are faster than I thought they would come.

To put things in perspective, 5.49% 5yr Fixed is MORE than we paid in 2004 (4.65% 5yr Fixed).

I expect rates to keep going up now quicker as the Bond market keeps heating up. There simply is NOT ENOUGH printed money to chase the debt load out there.

Point #2 – The Canadian Dollar.

I think the US dollar is in serious trouble and the Canadian dollar is not, thus the Canadian dollar is much stronger. If the USD is doomed, does the CDN have to follow or is there a “decoupling”?

Point #2 – New housing

Great points Garth, I like to hear you “tell it as it is!”. I would trust Stats Canada over the Realtor(R) boards anyday. The realtor boards should report their stats to Stats Canada so manipulation doesn’t occur.

How can anyone trust any Realtor board with data is beyond me as they are in sales and sales are driven based on the data. Thus it is in their interest to show favourably to increase sales.

Mike

#25 Eggy on 10.14.09 at 7:08 am

I wonder though. There is a tension between the two factors you mention: higher interest rates and a high dollar.

I find it hard to believe that the Bank of Canada will have the nerve to raise rates significantly, if the Canadian dollar hits $1.05 or higher.

Or are you saying that even if the BoC holds, other pressures (bond yields, etc) will raise the rates of mortgages independently?

#26 Bill-Muskoka (NAM) on 10.14.09 at 7:12 am

Every one cent increase in the Canadian currency costs at least $2 billion in lost sales to our manufacturers and exporters. Each penny gained is also believed to wipe out 25,000 jobs. And as the American dollar sinks (which the Obama administration wants since it makes US exports cheap), we could see the loonie substantially above $1 US for months, or maybe years. There are two words for that: structural unemployment.

So, you have the same shit sheet the guy on Global National read from last night, eh? Where are the facts to prove this dogma?

Canada needs to start following what Italy has been doing…making products, quality products, and exporting them instead of playing Oliver begging for more from the U.S.. This dog won’t dance anymore with me Garth.

Time to start creatively working for a living, designing and producing needed items, and expanding our markets. The whinny exporters cry is like the Boy who Cried Wolf to my ears.

This, of course, will require someone who has a clue as a Minister in charge of foreign trade. Good luck finding anyone competent and free of the religion Oddawahaha has been living with for decades. Harper is still living in the 1990’s. Time’s UP!

#27 David Bakody on 10.14.09 at 7:42 am

Watching the National last evening Patricia Croft looked worn out, tired and most of all untruthful. AND to top it off she appeared to have been coached into her (?) words like Canada’s deficit is the envy of the world! Right Patricia, if that is true what was our $15B surplus and $3B emergency fund. Don’t tell me I know it was money big business wanted their hands on if only they could get Steve Harper elected it would happy hour at the government trough. and so it was but not only is trough dry the bucket in well needs a longer rope much longer!

Thanks Garth …. but I fear you are talking to converted … but some day many will say … should have listened to Garth Turner live would be much better to-day.

Off to Tim’s in Halifax ….. stay out my regular spot, too many sad Conservative faces ….. guess they did not one of those stimulus checks with the fancy “C” on it.

#28 dd on 10.14.09 at 8:30 am

Gold bugs:

Yup what a gain in gold. However in CDN buck … 3% gain.

If bought at low 08 $750US / .70 CDN = $1071 CDN Oz.

Sell today at $1070 / .97 CDN = $1103 CDN Oz

= 3% gain.

#29 Denis on 10.14.09 at 8:37 am

LOL … @RickMercer (www.twitter.com/rickmercer) is now saying the same thing as Garth:

“But the good news is, the same guy who said that we could never go into a deficit, now says we will pay off that 60 billion dollars without raising taxes or cutting spending. Imagine for a moment your fiancé comes home and tells you that when you weren’t looking he or she dropped 150 grand that you don’t have at the casino. Now imagine the same fiancé says, “Don’t worry, we’ll pay it back without making a single change to our lifestyle: I stand on my financial record.” […] as it stands right now this country has a 60 billion dollar wake up call coming and for the record, NOT A SINGLE LEADER HAS COME EVEN CLOSE TO BEING HONEST!”

http://bit.ly/1pFpsK

#30 robert on 10.14.09 at 8:49 am

#16 swag
#20 Tony

Bond market day of reckoning may be postponed! Ah, kindred spirits. We are a small group though aren’t we? Read more on this subject in the The Automatic Earth today:

http://theautomaticearth.blogspot.com/

The following blogs will also appeal to everyone interested in the machinations of the Canadian real estate market (particularly the role of the government) and the cock-up that is the Canadian economy:

http://americacanada.blogspot.com/2009/07/cmhc-and-our-government.html
http://canadahousingcrash.blogspot.com/

Both were linked in Mike Shedlock’s post A Look at ECRI’s Recession Predicting Track Record and are authored by Canadians I believe.

#31 wondering on 10.14.09 at 9:11 am

I have been watching the Victoria market and despite the Stats Can graph, prices still seem to be climbing here. Houses over 1200 sq ft start at $529,000 – and those generally need serious renovations. “Finished basement” means somebody nailed up some plywood and painted the cement floor. Desperate couples flock to open houses in droves. Almost everyone I know has bought a new home – none for under $650,000 – in the last year.

And realtors ask 40 yr olds – “What’s wrong with a 35 yr amortization?”

I feel like everyone has gone crazy around me.

#32 catamaran guy on 10.14.09 at 9:34 am

I know a 50 year old who bought a house 1 hour north of Victoria on a 35 year mortgage…..one income.last year.

good luck with that…and I bet his children will be grateful when he leaves them debt for an estate!

#33 Bobby on 10.14.09 at 9:36 am

I don’t get it. Why would anyone ask a commissioned realtor for advice about the real estate market? And they say many Canadians are financially illiterate. Duh!!

#34 Tom from Mississauga on 10.14.09 at 9:44 am

A petition just started in my condo to protest the HST. The fee is going up 10% on Jan. 1. So, HST, plus inflation. Are you going to join another party Garth?

#35 just a guy on 10.14.09 at 9:48 am

dd…

a 3% gain? I think you’re forgetting storage costs, taxes, insurance, bid/offer spreads and opportunity costs. The price of gold, assuming you could buy and sell both gold and Canadian dollars at the mid price (impossible) has returned exactly 0% in the last six months (minus the costs noted above), despite being the most overcrowded trade on the planet right now. Even the gold co. index is lower than where it was at the beginning of April.

This is just one of may reasons why I find it odd that some Canadians find it necessary to drone on and on about gold.

#36 smw on 10.14.09 at 9:48 am

#6 Shawn Allen

If CMHC were sane it would not allow people to qualify based on variable rate mortages. The rule should be that you can buy only what you can afford on a 5-year rate. Then if you wish to, go variable and you can lock in when needed.

Now that’s something I would expect from a conservative finance minister, instead of 40 year mortgages with all the risk on the tax payer’s back.

#37 Larry on 10.14.09 at 10:13 am

Thank god the worst is behind us here in Calgary according to the RE folks anyway. A bit like the weather LOL.

#38 Live Within Your Means on 10.14.09 at 10:14 am

#17 nonplused on 10.14.09 at 1:02 am

Government pensions are all severely under water. But, you say, said teacher, “it’s backed by the government”. News for you: The promises the boomers made to themselves will not be paid. Why? Because the boomers never funded it, never even thought about it, they just kicked the can to the X, Y, and millennials. Good work if you can get it. But we won’t pay. Why? Because we can’t. You are expecting 100’s of thousands of dollars from a work force that is serving coffee at Starbuck’s, or changing your diapers, or unemployed. We can’t pay your debt. So we won’t.
…..

We boomers did pay into our pension plans, based on those actuarial predictions. And you imply its our fault. The feds will be changing the rules for CPP in 2011, IIRC.
………..

Let me try and say this succinctly: The boomers used debt to balance their budget, figuring that they could make someone else pay. But nobody else can. Therefore all of the boomer promises will fail when the debt cannot be paid. And those promises were mostly to themselves. “We’ll make a debt upon our children, that we cannot pay, and call it a duty.”
………..

The vast majority of boomers I know have paid off their mtgs., raised children, struggled to help their kids with university tuition, and some are still supporting them. Don’t blame the average boomer for trying to do the best they could during their years. We didn’t have 0 down/40 year mortgages. Part of the problem is that young people were spoiled by their boomer parents. Yes, I can lay blame on boomers for that. Their children feel they are entitled to the same lifestyle that it took their parents many years to achieve. They want it NOW and feel they deserve it.
………….

The boomers kicked a big can of debt to the post boomers, expecting that they would just pay. And I am sure they would if they could. But they absolutely can not. Hence, the next phase of the crises.
…………

You sound like a very angry guy. Get over it.

#39 Bill-Muskoka (NAM) on 10.14.09 at 10:19 am

Blasts from the Past:

Sophocles:
Money, gentlemen, money! The virus
That infects mankind with every sickness
We have a name for no greater scourge
Than that!

1995 Jaques Chirac:

Speculation is the AIDS of our economies.

Bank of International Settlements:
Our financial revolution has been accompanied by an accelerated growth in financial transactions without any detectable link with the needs of the non-financial community.

Paul Krugman-2004 wrote of:
a new Gilded Age, as extravagant as the original” – the one that led into the collapse of 1929.

Haitian writer George Anglade called for the rejection os superfluous growth in favour of necessary development.

A little insight into the current continuing fiasco of mergers and acquisitions from John Ralston Saul:
Global mergers and acquisitions grew to a peak of $1.2 trillion in 2000, then collapsed slowly back to #300 billion in 2001, then began expanding again. By late 2004 this phenomenon was hitting $100 billion per WEEK. “The path of least resistance is is irresistible to large technocratic, bodies such as transnationals.”

Perhaps we should all welcome the G-8/G-20 gang next year with placards telling them what WE THINK as they drive up Highways 400 and 11 from Pearson, and across Highway 60 from Oddawahaha? There will be no access to these world ‘leaders’ in Huntsville because they fear the people. Probably no real MSM news coverage, other than selected photo-ops (will Steve be on time next year? Will Steve even be the PM?) either because it would rock the Apple Cart of the Globalist schmucks who are destroying our way of life.

#40 Bill-Muskoka (NAM) on 10.14.09 at 10:21 am

#36 smw

We do not have a Conservative FinMin, we have a CRAPper!

#41 Ky on 10.14.09 at 10:27 am

The rising C$ will give Harper a great excuse to rely on for the other problems in the Canadian economy. Politics – it’s awesome…

#42 Herb on 10.14.09 at 10:29 am

David Bakody @ #27,

watched the Three Economists on The National last night too. Poor Patti Croft was trying to make up in facial expression what she couldn’t say on account of lack of substance.

Why was the obvious socialist (why else would young Stanford work for the UAW?) the only one who made any sense? Looks like the dumbing down and beating into poverty will continue until the suckers stop complaining.

#43 Bill-Muskoka (NAM) on 10.14.09 at 10:30 am

Speaking of Blasts from the Past, how about this one?

Friedman’s theory finds little traction in economic recovery

The economies of North America and Europe finally appear to be in the beginnings of a slow recovery, a coda to the worst global recession since the 1980s.

Even with the return to growth haltingly underway, however, economists and other pundits are already beginning to argue about the lessons learned.

They will still follow along the path of least resistance regardless of the clear failures scattered throughout the world by their arrogant idiocy.

#44 Updown on 10.14.09 at 10:33 am

#24 “How can anyone trust any Realtor board with data is beyond me as they are in sales and sales are driven based on the data. Thus it is in their interest to show favourably to increase sales.”

Funny how we only hear that tired mantra when the prices and sales are going up. When prices are falling, like they were last year, the realtor’s stats were A-OK.

#45 Shawn on 10.14.09 at 10:40 am

# 8 Rob said

For one, America doesn’t make anything anymore , they only consume, to the point of it being over 70% of their economy.

Actually Rob, that is not true. Your opinion is shared by many.

But here is a fact.

Imports make up 13% of America’s GDP. Canada is closer to 30%.

America is mostly a economy within its self. A huge trader in dollar terms but not in percent terms.

That is why the average American is largely unaffected by a lower U.S. dollar, they don’t import much and they don’t even travel much on average.

I don’t think most of us understand how GDP is measured (I don’t)

But I will ask if not for consumption, why should anything be produced? Of course most things are producd for consumption why else produce it?

#46 Maureen on 10.14.09 at 10:47 am

Just to clarify. A lender uses their posted 3 year rate to qualify clients for an adjustable rate mortgage. CMHC guidelines. Although CMHC have not officially changed policy, it is evident they are no longer doing “stated income” applications as they have all been turned down for several months now. The Royal Bank raised their rate first on Friday. I emailed my clients in ARM mortgages and said this is it. Lock in now for 5 years. There is still one lender today doing 5 years at 3.99.
I had an interesting encounter yesterday with a new client referred by a realtor. He had made an offer on a 1300 sq ft rancher for 252500. He had a downpayment of 52500. I spoke with him around 8 am and took an application over the phone as I wanted to secure a fixed rate for him. He told me he was going to the Royal Bank to payoff a small balance on a credit line.
I met with him at 2 pm with a commitment for 3.99- 5 year term and he thanked me for my efforts and advised me that he had decided to go with the Royal Bank with an ARM product.. as he had a chat with them when he paid out the loan…they had also offered him a 5 year rate at 4.39 and told him they were giving him Friday’s rate(already increased). My commitment was from a reputal lender. His rationale for going to the Royal was a sense of loyalty and the brand name.
Further evidence that a fool and his money are easily parted.

#47 smw on 10.14.09 at 10:49 am

#40 Bill-Muskoka (NAM)

C’mon Bill, all the Euro-trash bankers think Flaherty is A-OK, I mean he got that pregstigious award for being the economic genious that saved Canada.

Of course we all know that Canada is in such good shape because of the tightened purse strings and careful planning of Martin and Dodge during the 90s and early in 2000s.

Its the equivilent of having your #1 goalie stand on his head for 59 minutes in a 5-0 game and then put in the backup for 60 second watching him let in 4 goals, flounder around, then award him the game MVP be being the last in net.

#48 Jeff Smith on 10.14.09 at 11:10 am

Oh boy, talking of a rising Canadian dollar. This analysis here shows that were are in for interesting time ahead

http://www.theglobeandmail.com/news/opinions/us-will-be-tempted-to-make-others-pay-for-crisis/article1322332/

This is exactly the point I made in the post above. The Obama admin is seeking to export domestic problems through a devalued currency. Bad news for the folks up north. — Garth

#49 Daystar on 10.14.09 at 11:13 am

http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20091014/dollar_parity_091014/20091014?hub=TopStoriesV2

This quote by Harper has got to rank right up there with the top 10 dumbest things he’s ever said, this time speaking on the rise of the loonie.

“I don’t think it’s a risk to choking off the recovery, but if it goes up too rapidly it does have difficult effects on our economy,” Harper said Tuesday while speaking to reporters in Vancouver.

If the Canadian dollar hangs at par with the U.S. dollar or above for 6 months or more, the damage done to our manufacturing will be extreme. When the loonie rose above par last year, the world was still consuming like mad. This time will be much different, creating record trade deficits this nation has never before experienced. We’ll be running record trade deficits (August’s 2 billion dollar trade deficit is to my knowledge, a record already) to go with our record federal deficits forcing this nation to borrow like never before. Should the U.S. dollar stablize and later rise in the spring/summer from its freefall, Canada could experience a major loonie tumble beginning from the summer on and in its wake comes with it a hike in BoC interest rates. The combination of the two, decimated manufacturing followed later by interest rate hikes, will lead this nation into home value deflation, a second recession and a cesspool of debt.

#50 DaBull on 10.14.09 at 11:15 am

Bond yields rates have been flattening fairly quickly in the last couple of days. So far it looks like the bond markets are just trying to return to normal. Longer bonds have risen slightly but not nearly as fast as shorter term bonds. If anything the current bond yield curve is showing that it expects the BOC to raise their overnight rate in the near future. I would only be worried about higher future long term mortgage rates if long term bonds were rising at or near the same rate as short term, but there not.

#51 jess on 10.14.09 at 11:17 am

Who profits on currency speculation?

This article is from Published: Friday, November 4, 2005 17:25 (GMT -0400)

Paraguay’s supreme court has ratified a 271mn-guaraní (US$35,350) central bank fine imposed on Citigroup’s (NYSE: C) local banking unit, the central bank said.

The central bank initiated legal actions against Citibank Paraguay in 2002 after the bank surpassed the limits established by the banking regulator on foreign currency positions.

In mid-2002, the guaraní soared to 8,000 to the US dollar, amid one of the worst periods of instability in Paraguay’s economy. A 300-guaraní difference between sell and buy orders was then attributed to speculation from one of the banks operating in the local system.

A central bank spokesperson told BNamericas that the ruling is likely to set the basis for a similar and upcoming case against the local banking unit of Dutch group ABN Amro.
=============

#52 Kurt on 10.14.09 at 12:01 pm

Garth: you said “This is because the bond market expects short-term money to be 5.49% in five years.” I don’t think this is quite true. I thought long term money included an interest rate risk premium that the short term does not, resulting in the characteristic yield curve associated with economic stability. Thus, the price of long term money reflects the lenders’ perception of both the expected interest rate *and* the expected volatility. What risk premium do you suppose is incorporated in the current 5-year rates? Or do I misunderstand bond coupons?

#53 Larry on 10.14.09 at 12:02 pm

By .35% on five-year money, which equals an increase of 7%. Can someone explain how we get this result plse?

Divide the rate increase by the former rate and convert to a percentage. — Garth

#54 My_View on 10.14.09 at 12:36 pm

Oh boy, the fear!

http://www.canequity.com/

Although the fixed terms are based on the bond markets and the VRM’s are based on the BOC/Prime Rate. A major chunk of the mortgages some people have taken are VRM’s. Take a look at the VRM today, the discount rate is back, Prime minus (2.25 -.10 = 2.15). Those who shop around will get a way better rate than the chartered banks, or the banks will meet it or beat it. So the sky is not falling, plus no one can say what the rates will be in 5 years, you can guess but that’s it. Further more the chartered bank rates back in 2005 were around 6-7% and homes were still selling. Now the dollar @ par is a different beast, I can see pro’s and con’s, but the bottom line is Canada is much more economically healthier than our southern neighbor.

There is already a 124% premium for houses in Canada versus the US. Dream on. — Garth

#55 tjmikey on 10.14.09 at 12:38 pm

I mean, really guys….

What exactly is it you expect the Realtors to tell you…..the truth?

#56 Marc on 10.14.09 at 12:42 pm

If our Dollar is heading back to parity and beyond, does this mean our econmomy is a strong as the Canadian Sheild again?

#57 Samantha on 10.14.09 at 12:47 pm

In other news in the ‘whoops’ department:

http://www.cbc.ca/news/canada/politicalbytes/2009/10/big-cheque-big-logo.html

#58 Bobby on 10.14.09 at 12:52 pm

#53 Larry,

is an excellent example of the financial illiteracy of Canadians. Realtors always say that rates will not go to the 16-18% like they did in the 80’s. Let’s remember at that time the going rate was 12%, so it was a 50% rise.

So if rates are now 4% and they climb to 6%, guess what, the rates have gone up 50%. And yes, incomes have not been keeping pace so many Canadians will lose their homes.

So, to the many Larry’s out there, be careful!!!

#59 Downsized and Delighted on 10.14.09 at 12:59 pm

Well who ever paid attention to what the real estate board said? Anyone looking to buy in Toronto right now knows what the stats are – there aren’t any good properties for sale and when there are they have bidding wars. You can interpret the stats any way you want but it won’t alter this fact.

#60 The Great Gazoo on 10.14.09 at 1:01 pm

Hey Garth, I’m in a bind – the free msn.ca horoscope says its a good time for real estate for Leos, apparently its a good time to buy and/or sell, does that stud muffin Brad Lamb moonlight as an astrologist? Does the bond market impact the celestial forces?

“Long-term investments, especially those involving real estate, could pay off at this time, dear Leo. If you’ve been thinking of buying or selling a home, this is the time to do it. All signs are that your patience and faith in yourself are likely to bear fruit…”

#61 Nathan in Edmonton on 10.14.09 at 1:04 pm

.#9 Finanzkrise
I agree, the USD isn’t sunk ‘yet’ and will rebound again. The cycle will continue a few more times.

#62 Two-thirds on 10.14.09 at 1:24 pm

#14 Nostradamus Le Mad Vlad

“Putting “Whoops” together with the pic of Flaherty’s rabbit-ears (flags) is spot on, as one fits the other.”

Uhmm… dude, that’s Mark Carney, not Flaherty.

I wonder if NLMV’s views on other matters are as trustworthy as his recognition of political figures…

#63 S on 10.14.09 at 1:34 pm

Re: “You can see pretty clearly that short-term money (like a one-rate rate at 3.7%) is now at a snappy discount to a five-year loan (currently 5.49%). This is because the bond market expects short-term money to be 5.49% in five years”

I don’t understand this… If I were to follow this logic, then I’d always only get a one-year mortgage for the next few years as rates rise instead of locking into a five year mortgage. It will take five years for the short-term rates to move from 3.7% up to 5.49%, so I could save a little interest each year. What am I misinterpreting?

The yield curve gives an expectation of rates. Of course you can continue to go short, and many people do – which is the logic of a VRM. But when rates do increase from historically low levels, the yield curve could well flatten over time, putting short-term borrowers at risk of actually paying more with no long-term rate stability. — Garth

#64 $fromA$ia "Garths Nugget Boy" on 10.14.09 at 1:34 pm

” It means a $200,000 mortgage financed today with a 3% VRM requiring a $50,000 income will need a salary of $83,000 to qualify upon renewal at eight per cent.”-Garth
*********************************************

Hmmm, don’t forget that inflation will play a factor by 2014 as well and that $50k might translate to $100,000 and GOLD at $2000/ounce.

#65 Grantmi on 10.14.09 at 1:37 pm

I’m so confused!!!!

**********

Fidelity Guru: Multi-Year Bull Market Ahead
By: Dan Weil

A multi-year global stock market rally has begun, says Anthony Bolton, president of investments for money-management powerhouse Fidelity International.

The rise will be led by emerging markets, he told Bloomberg. What’s going to feed the bull? Continuous, slow economic growth combined with low interest rates.

“Low growth means low interest rates, and actually that’s one of the best environments for stock-market investing,” said Bolton, who oversees about $141 billion.

http://moneynews.newsmax.com/streettalk/fidelity_bull_market/2009/10/13/271687.html

#66 Adam on 10.14.09 at 1:43 pm

To SWAG way up thread

SWAG: “That way rates can be kept low and savers are rewarded.”

Savers are rewarded not by being forced to save a downpayment, but by high interest rates.

#67 Munch on 10.14.09 at 1:56 pm

Magnifico Garth!

Brilliant!

You have talent!

{golf claps}

#68 $fromA$ia "Garths Nugget Boy" on 10.14.09 at 1:59 pm

Adam,

How will interest even at 10% help when inflation is at letsay 50%???

In other words get out of cash and into commodities.

Your next bubble comming right up. You know why?

Because 10% of the population has 90% of the wealth and the 90% of the population are desperate to get rich so thats 50% of the reason why bubbles are born.

You have to be 2 steps ahead to benifit.

#69 homeboi on 10.14.09 at 2:29 pm

Seriously Garth,
I like how you pick your correct predictions from the barrel and then crow about it, like you were 100% right.

Your followers then hail you as the second coming of Christ for seeing so many things, while simultaneously ignoring the pile of failed predictions.

what’s the point though, people were warned about Jim Jones and they still ended up drinking the kool-aid.

Your followers are too myopic to see the truth and question their ‘leader’

Don’t dis me, boy. — God

#70 theyneedhelp on 10.14.09 at 2:29 pm

OK. I love this blog. I read it frequently, but I have a real problem with it as well.

Instead of pointing fingers, condemming and laughing at all of the people that have the now-infamous “5%, 35 year” mortgages; why don’t some of the “smarter people” regularly that comment and contribute use their advice and knowledge (this includes you Garth) and try to advise and assist those that are or will be in DEEP trouble in 4-7 years’ time?

Negativity and fear-mongering are not the only ways in-which you can share your views.

I have at least 2 employees that will not likely earn 20-30% more $$ 4 years from now, and they’ll be in real trouble.

What advice can you give them?

I’ve told them to go to accelerated weekly payments as a start. Anything else?

#71 Bob on 10.14.09 at 3:36 pm

Recent studies say 41% of all statistics are made up.

#72 Devil's Advocate on 10.14.09 at 3:36 pm

I wish I didn’t know what I know…

#73 Denis on 10.14.09 at 3:39 pm

2 More Here: http://bit.ly/3ULKuN (click on the links to the MPs websites)

Another One Here: http://bit.ly/3CJ50M

Looks like it’s time to play find the conservative big cheque photo opp challenge!

#74 Men With Hats on 10.14.09 at 3:49 pm

The Canadian Manufacturers and Exporters estimates that each time the loonie appreciates by one per cent, sales are reduced by about $2 billion, which is the equivalent of about 25,000 jobs.

#75 AD on 10.14.09 at 4:00 pm

The percentage increase in a mortgage “rate” does not directly translate into similar percentage increase in a mortgage “payment” – some of your payment is capital.
Commenting on the percentage increase in a mortgage rate is a misleading argument.

On $100K on a 25 year amortization 5 year mortgage at 2% your monthly payment is $423. If rates double to 4%, your payment is now $526. If rates double again to 8%, your payment is now $763 – ultimately for each 1%, your monthly payment goes up about $50.

In the case of a rise from 5% to 5.35 (7%)
your payment for each $100K goes from
$581 to $601, an increase of $20, or 3.4% ( NOT 7%).

That is a misleading argument since with longer amortizations (now 35 years is becoming the norm) virtually no capital is paid back on a monthly basis in the first five years. And while payments do not jump in percentage terms with numerical mortgage rate increases, indebtedness does since the interest component of payments grow more onerous. If the goal is to rent a property, there are cheaper ways of doing that. Ownership, sadly, still means paying for something. — Garth

#76 Watched Bubble Never Pops on 10.14.09 at 4:05 pm

#16 swag

Good post. Too many people focus on what MAY happen and end up missing the boat completely. I find it more productive to focus on what IS happening, but I guess it’s easier to make money by peddling predictions as pseudo-fact.

“There are 60,000 economists in the U.S., many of them employed full-time trying to forecast recessions and interest rates, and if they could do it successfully twice in a row, they’d all be millionaires by now…as far as I know, most of them are still gainfully employed, which ought to tell us something.”
– Peter Lynch, One Up On Wall Street

#77 POL-CAN on 10.14.09 at 4:06 pm

Time for some stock market humour:

Then And Now: Top Ten DJIA Leaders By Market Cap

With everyone cheering the US economy finally completing its first lost decade, and likely the first of many, it is worthwhile to compare the top ten Dow Jones stocks by market cap today and ten years ago. What is notable is the rotation out of pharma companies, with both Merck and Pfizer dropping out of the ranking, and their replacement with taxpayer capital proxies, in the face of JP Morgan (#4) and Bank of America (#9). As both of these companies have achieved phenomenal profitability (and a resulting stock price appreciation) almost exclusively courtesy of the inverted yield curve and numerous other boons from the Fed, their market cap contribution should be carefully considered for whether it is sustainable or is one-time item (assuming the QE 1.0-xxxx.0 liquidity pump ever runs out). Also notable is CNBC parent GE’s fall from grace, and its over $200 billion loss in market capitalization.

Lastly, over half a trillion in market cap (21%) has been lost by the top 10 companies, even with the Dow at the same level.

http://www.zerohedge.com/article/then-and-now-top-ten-djia-leaders-market-cap

#78 POL-CAN on 10.14.09 at 4:11 pm

Further to my prior post….

It seems that the 21 % drop in market cap is pretty much due to the US $ as 25 % of its value has gone poof in the last decade.

DOW 10,000!!!! Oh Wait, Make That 7,537

Another great representation of the amazing loss of purchasing power by the US public are today’s oblivious statements about the Dow at 10,000. While in absolute terms the Dow may cross whatever the Fed thinks is a necessary and sufficient mark before QE begins to taper off (Dow crosses 10k just as Treasury purchases expire), the truth is that over the past 10 years (the first time the DJIA was at 10,000) the dollar has lost 25% of its value. Therefore, we present the Dow over the last decade indexed for the DXY, which has dropped from 100 to about 75. On a real basis (not nominal) the Dow at 10,000 ten years ago is equivalent to 7,537 today! In other words, not only have we had a lost decade for all those who focus on the absolute flatness of the DJIA, but it is also a decade where the US Consumer has lost 25% of purchasing power from the perspective of stocks! You won’t hear this fact on the MSM.

http://www.zerohedge.com/article/dow-10000-oh-wait-make-7537

#79 robert on 10.14.09 at 4:12 pm

#66 Adam

Yes but they still need something called principal upon which to earn that interest. How do they get it without saving?

#80 Bill-Muskoka (NAM) on 10.14.09 at 4:23 pm

#47 smw

WHEW! I can feel the blood rushing to my head after reading that analogy! :-)

So, Dim Jim can stand on his head? We should nominate him for next season’s ‘Dancing with The Stars’. After all they had Tom Delay (The Hammer) on until his feet fractured. Besides, we already know Flaherty is a master at spin.

#81 Bill-Muskoka (NAM) on 10.14.09 at 4:25 pm

Garth,

It just hit me…The real problem is we have too many stats and math and not enough REALITY!

#82 Ali on 10.14.09 at 4:27 pm

I’m with you #21 TomOfMilton….

Will raising the interest rates strengthen or weaken the Canadian dollar? I find all these reports on our rising loonie very contradictory.

“One thing I don’t get. The Toronto Star Bus. section said yesterday something along the lines of: “The bank of Canada is not going to be able to keep rates low as long a promised because the of the rising looney”
This seems like bad logic no? Isn’t increasing interest rates a way of pushing a country’s dollar even higher?”

#83 Bill-Muskoka (NAM) on 10.14.09 at 4:29 pm

#56 Marc on 10.14.09 at 12:42 pm

If our Dollar is heading back to parity and beyond, does this mean our econmomy is a strong as the Canadian Sheild again?

Why sirtanily (Sylvester speaks) including the BIG FAULT LINE! I think you meant ‘economy’ not econ’s momy? LOL

#84 Bill-Muskoka (NAM) on 10.14.09 at 4:31 pm

#71 Bob on 10.14.09 at 3:36 pm

Recent studies say 41% of all statistics are made up.

But research shows that 50% of studies are wrong 50% of the time, 19 times out of 20.

#85 Bill-Muskoka (NAM) on 10.14.09 at 4:34 pm

#42 Herb on 10.14.09 at 10:29 am

David Bakody @ #27,

watched the Three Economists on The National last night too. Poor Patti Croft was trying to make up in facial expression what she couldn’t say on account of lack of substance

And here I thought the Three Stooges had been resurrected? Darn!

#86 dave from Oakville on 10.14.09 at 4:35 pm

New home prices down from last year?

I’ve been looking around and see prices soaring at an insane pace. New releases sold out within 5 hours and buyers camping out for up to 4 days to get the first pick on the new releases.

Mattamy in Milton have been raising their prices weekly and in one case $5K increased for Sat and $10K increased on the Sun. Now they eliminated their very reasonably priced Spirit homes and increased their standard homes $20K. This was done in weeks. These prices are definitely not cheaper than same time last year.

#87 Dan in Victoria on 10.14.09 at 4:37 pm

Post#70 They need help.Go reread Garths past blog postings there has been a tremendous amount of advice offered here by both Garth and others.The info is there,tell them to spend some time and dig it out.If they know now”today” that they are in trouble in a few years, what steps of their own are they taking to avoid it?Have they made tough choices like, we should sell now?No more dinners out,rent a room,get rid of the car payments,no 80 dollar haircuts,Have they worked out their interest costs/payback options etc.Or are they just waiting for someone to do it for them.Tell them to go over to The Automatic Earth,read the sub titles on the right hand side ,link to Patrick Killea,Dan W,and Charles Hugh Smith on the left side.All the info they need is there.THEY are the ones who must then take action and the responsibitily to save themselves.Good Luck to them hope it turns out ok.

#88 Bill-Muskoka (NAM) on 10.14.09 at 4:48 pm

#79 robert on 10.14.09 at 4:12 pm

#66 Adam

Yes but they still need something called principal upon which to earn that interest. How do they get it without saving?

Derivatives! That’s the ticket!

#89 Bill-Muskoka (NAM) on 10.14.09 at 4:51 pm

#74 Men With Hats on 10.14.09 at 3:49 pm

The Canadian Manufacturers and Exporters estimates that each time the loonie appreciates by one per cent, sales are reduced by about $2 billion, which is the equivalent of about 25,000 jobs

Wow, you are really on top of things today, eh? We haven’t heard or read that before!

#90 Bill-Muskoka (NAM) on 10.14.09 at 5:01 pm

For those who just can’t really define what a ‘derivative is, let me introduce you to how the game is payed, er, played

Derivatives market

Here is but one ‘form’ of this mystical financial magick:

Futures markets
Main article: Futures exchange

Futures exchanges, such as Euronext.liffe and the Chicago Mercantile Exchange, trade in standardized derivative contracts. These are options contracts and futures contracts on a whole range of underlying products. The members of the exchange hold positions in these contracts with the exchange, who acts as central counterparty. When one party goes long (buys) a futures contract, another goes short (sells). When a new contract is introduced, the total position in the contract is zero. Therefore, the sum of all the long positions must be equal to the sum of all the short positions. In other words, risk is transferred from one party to another.</b? The total notional amount of all the outstanding positions at the end of June 2004 stood at $53 trillion. (source: Bank for International Settlements (BIS): [1]). That figure grew to $81 trillion by the end of March 2008 (source: BIS [2])

But WAIT, there are more: Read them in the link. Now, in case you are not familiar with casinos, that is how they work, only you can actually get real cash. And people wonder where all those trillions evaporated to? Ah, and there you have it! Pork Bellies anyone? Dan Akroyd and Eddie Murphy can show you how it works in ‘Changing Places’.

#91 steven rowlandson on 10.14.09 at 5:25 pm

Hello Garth
I noticed that there is a complaint about the dollar rising and it costs 2 billion dollars in losses for every penny it goes up. Sounds like quite the problem.
On the other hand I think the solution to Canada’s problem could be solved fairly quickly. All thats needed is for the banksters to create and pay me 5 trillion for my silver and my bank account will go up, the dollar will go down, the government gets a few trillion in capital gains tax killing the provincial and federal debt and all the other gold, silver miners and investors make money. And to top it off everyone is happy. And Canada winds up with a 16 to 25 cent dollar.
What do you think? Too easy?

Steven

#92 Dan in Victoria on 10.14.09 at 5:38 pm

Further to Bills post#90 I couldn’t get my brain around the “derivates” till I read this,it made it much easier to understand,and was some what entertaining,You can also read some other explanations on the right hand side of his blog. http://ashizashiz.blogspot.com/2008/12/global-poker-tour-allegory.html

#93 glw on 10.14.09 at 5:47 pm

Here I sit ~70% in “cash” having gotten out early -not knowing what to do – I don’t trust a bloody soul and I will need the income and then I watch this via Mish:

http://www.pbs.org/moyers/journal/10092009/watch.html

I feel my patience is being tried as a “mom and pop” investor being set up for the kill. If I finally get back in,even slowly, then the next bomb will be dropped.

I have a hunch I am not alone.
Dammit – the frustration level is growing – and anger.

Trust – there is none – being the fundamental problem.

#94 jess on 10.14.09 at 5:58 pm

Bill

..those currency speculators like to think of themselves as the ‘policy policemen’ Isn’t this what ms. Croft feared. I think one should since this market at 4t. moving billions around is highly profitable especially with instability. I read that “The foreign currency market is the largest and deepest market around by a long shot. If you have a few billion dollars to place, bringing them to the stock market is going to move the stock’s value and tip off other traders as to what you are doing. This is true in most bond markets (except for the US and some European markets because of their large size). In foreign exchange, even $5 or $10 billion won’t make a blip. So if you have a substantial amount of money to move around, this is the place to do it. You can get in and out without affecting the market.

http://www.twnside.org.sg/title/nar-cn.htm

#95 Denis on 10.14.09 at 6:28 pm

#75 – AD -> Here’s the breakdown for your example:

Rate Increase
2%
4% 100%
8% 100%

Total Payment
Year 1 Monthly Increase
$5,081.41 $423.45
$6,312.24 $526.02 24%
$9,158.56 $763.21 45%

Interest
Year 1 Monthly Increase
$1,963.36 $163.61
$3,827.47 $318.96 95%
$7,822.32 $651.86 104%

Principal
Year 1 Monthly Decrease
$3,118.06 $259.84
$2,388.29 $199.02 -23%
$1,336.24 $111.35 -44%

#96 jeff on 10.14.09 at 6:45 pm

#71 Bob on 10.14.09 at 3:36 pm
#84

Recent studies say 41% of all statistics are made up.

But research shows that 50% of studies are wrong 50% of the time, 19 times out of 20.

“He has a 50/50 chance of living, but there is only a 10 percent chance of that” Lieutenant Frank Drebin, in Naked Gun

#97 lgre on 10.14.09 at 6:46 pm

“Mattamy in Milton have been raising their prices weekly and in one case $5K increased for Sat and $10K increased on the Sun. Now they eliminated their very reasonably priced Spirit homes and increased their standard homes $20K. This was done in weeks. These prices are definitely not cheaper than same time last year”

Mattamy Milton was eating dirt last winter, sales down over 70% and nobody at their show rooms..that will happen again, just as fast as it did in the winter. Just wait for it.

#98 not again on 10.14.09 at 7:16 pm

16 swag on 10.14.09 at 12:59 am

If structural employment will happen with a dollar at parity, why didn’t that happen at $1.10 last year? Why weren’t we at record low unemployment when it was 60 cents? Businesses adjust to the new normal and jobs move back and forth.

“I don’t think our primary resources will pick up and move south where the cheap dollars are…”

UMMMM I have a news flash for you… where i work, last week one of the operations went down indef. 50 full time guys are out of a job… because of the slow down in wood products and the fact that they have another operation across the line. With the low price of lumber, the high cost of the Cdn $ and the fact that the plant in the USA works for lower wages it was a situation that had to be made to keep the 2 other places (in canada) working.

#99 mikef on 10.14.09 at 7:22 pm

All I can say is if you’re a Vancouver longshoreman

Think twice before getting a mega mortgage

[url]http://www.youtube.com/watch?v=fmDPXx2MZ34[/url]

#100 David Bakody on 10.14.09 at 8:09 pm

There once was a man called “Deif the Thief” from out west now history has repeated itself with “Steve the Thief” having used taxpayers money for his own personal gain. (nothing new here) sadly it should have never happened because the media turned a blind eye to several other incidents.

#101 Dennis Forbes on 10.14.09 at 8:26 pm

You really are hinging it all on your doomsday scenarios. Hard to get attention being rational. Easy to get attention from the fringe by endlessly fear mongering.

Your analysis of mortgage rates is delightfully silly and uninformed. Longer terms have traditionally always been higher simply because it has to factor in the risk. Only when rates are really atypically high does the curve invert.

It’s also cute that you are now pegging disaster on mortgage rates, when you specifically refuted my comment a year or so ago that higher mortgage rates were bad news (at the time high mortgage rates mean *high* mortgage rates, not some ludicrous pick and choose the posted no-one-pays

Why are resale homes appreciating? I’ll guess because of initiatives like the Green Belt, and other chokes on the endless expansion of new housing. Rather obvious. New housing has to meet density targets, so where there are new homes, they’re usually very densely packed townhouses or condo developments, pushing the cost per unit down. Again, this isn’t rocket science to a non fear monger.

Though I expect you to add some quaint little comments in here, and your vitriolic defenders, all hoping for some fight club reset that will undo all of their mistakes, will cheer you on. Not really a lucrative market you’re catering to.

If you can’t beat the argument, beat on the man. — Garth

#102 Hiteclowtec on 10.14.09 at 8:27 pm

#93 glw
Your PBS link is excellent – this is one to e-mail to everyone in my address book .
First it was 911 now they are being thrown into street by the wall street financial terrorists and their children held for ransom (taxes) and the icing on the cake a major Depression in a few years.

#103 Onemorething on 10.14.09 at 9:05 pm

#93 GLW, I sent this link to Garth a few days ago as well. It’s the direction we are headed! Some believe Obama has brought in the same team which screwed us to fix it, then will kick them to the street however, the global elite and big banks will prevail until a time we say its enough!

This is only a period in which the banks want to be flush again and then OBAMA will push regulation. The administration does not want to run banks even though they are already nationalized in my mind.

There will be another crash, it’s unavoidable, and by then all the banks write downs will be taken, TARP money returned and both lending practices and rates will be go back to the 70’s maybe 80’s.

The problem is, there will be no justice for the PONZI’s and the only justice will be via revolt, war or at least protectionism.

I would not want to be in the Western World when this happens! Especially North America.

#104 piccaso on 10.14.09 at 9:06 pm

I’m from overpriced pickupville Edmonton but working in downtown Toronto. The friggen skyline looks like Miami when I was working down there during U.S. boomtime. Downtown Toronto is highrise condo towers with cranes on the tops of them. Why?

#105 seanmhair on 10.14.09 at 9:41 pm

Looks like we’ll be seeing more resales down south. Increasing mortgage & HELOC rates severely impact already cash strapped families..add some of the highest property taxes in the province…

Unpaid taxes rising as economy sours http://bit.ly/z7IPN

I’m curious whether or not this issue is happening in other communities?

Interestingly, we had a chat with our banker the other day who bemoaned the fact that her (below prime) HELOC rate was increasing. She shared with us the news of the ‘specialist’ who attended the branch to train staff how to address client complaints concerning their rate increases. Threats to remove their business will fall upon deaf ears…banks are all in cahoots.

Those banks…they are at least two steps ahead of you and I.

#106 Live Within Your Means on 10.14.09 at 9:57 pm

#93 glw on 10.14.09 at 5:47 pm

Thank you for posting that link. I missed that show. I’ve lost a lot of faith in Obama. It scares me too as we have money to invest. We stopped investing several years ago because we lost faith in the markets. We’ve recouped about 40-50% of our losses but are nervous. Our fin. guy suggested we look at Manulife Plus but we’ve decided not to go that route. Beginning to think that we should buy some preferred shares in one or 2 of the top Cdn banks cause if you can’t beat them, may as well join them. After all, their mtg defaults are guaranteed by CMHC – the Cdn taxpayers. I bet 80% of the Cdn. population have know idea that this is the case. Granted Cdns are still on the hook for part of their default, but still.

#107 Grantmi on 10.14.09 at 10:21 pm

#70 theyneedhelp on 10.14.09 at 2:29 pm

OK. I love this blog. I read it frequently, but I have a real problem with it as well.

…….

What advice can you give them?

Advice!

Sell their homes and get out now! RENT!! That wasn’t so bad was it!!!

#108 Live Within Your Means on 10.14.09 at 10:22 pm

#104 seanmhair on 10.14.09 at 9:41 pm

I had been a TD customer and its previous names for about 30 years. They sent us a notice that they were going to start charging us for debits, etc. To make a long story short, my husband spoke to the bank manager and threatened to move our business. They make enough money off of us as is that we don’t pay for any of our transactions – approx. 40-50 a mo.

#109 Vince on 10.15.09 at 12:22 am

Garth,

Love the blog, and keep it coming, but I thought your argument below was a bit misleading:

You can see pretty clearly that short-term money (like a one-rate rate at 3.7%) is now at a snappy discount to a five-year loan (currently 5.49%). This is because the bond market expects short-term money to be 5.49% in five years – which might well put your traditional long mortgage renewal at about 7.5% in 2014. This is not far off the 8% I warned you about.

The discount between one-year and five-year rates has as much to do with the risk premium as it does the expectation of what rates will be in 5 years. The five-year rate represents, at least in part the option cost of fixed rates in future periods. This exposes the bank to risk.

I would say that a bank offering 5-year money at 5.49% makes no omission that money will be 5.49% in 5 years, in fact the effective rate for a five year rate could be a half point lower.

It is a further leap to then arbitrarily state that 5.49% then becomes 7.5%, and then close to your 8% estimate.

++
That aside, I am a firm believer that if you can lock in a 5 year rate (or longer period) for around 5%, you would be well advised to take it. Canada can control the bank rate, but the bond market will always dictate the cost of borrowing for the every day consumer. The historical long-run average for mortgages has always been up around 8%, so maybe just go with that, rather than the other argument you posited above.

Vince

#110 Mike (Authentic) on 10.15.09 at 5:52 am

For the first time in over a year, cashing CDN at a Canadian Bank gives you par (and today $.99) for USD.

Amazing. Basicly we are now “at par” for the average Joe.

Mike

#111 Dennis Forbes on 10.15.09 at 9:20 am

“After all, their mtg defaults are guaranteed by CMHC – the Cdn taxpayers. I bet 80% of the Cdn. population have know idea that this is the case.”

The CMHC has run a very hefty profit for years (now other companies like GE are guaranteeing mortgages).

I would be rather suprised if people weren’t aware of CMHC given that those covered pay many thousands of dollars for the coverage.

#112 TJ on 10.15.09 at 7:08 pm

Seniors home closures, longer elective surgery wait lists and fewer beds for the mentally ill. Those are just some of the health services cuts announced today as the Vancouver Island Health Authority struggles to deal with a $45 million budget shortfall.

Although the health authority received an extra $95 million in provincial funding toward its $1.7 billion budget, it wasn’t enough, Howard Waldner, the authority’s CEO, said at a press conference.

“What we’re seeing is a demand for services that is outstripping our ability to fund,” he said, citing an increasingly aging population exerting more pressure on services.

Tax Revenue is Cratering

#113 Kelly McMae on 10.16.09 at 11:50 am

#2 taxpayer like you

You miss the point concerning weighted average. You’re suggestion merely takes the current local context and duplicates it on a national scale. Median price descriptions are more accurate for the wide scope that housing prices cover.

#114 Not Garth on 10.16.09 at 8:43 pm

Garth:

WHEN do you foresee the next round of bank rate increases? How about the prime rate (vrm)?
Oil jumping – watch for that energy squeeze you’ve been warning about, it may be on its way.

Now answer my questions se vous plait.

Also, WHEN will Vancouver crack???? Listings are growing, at a multi-month high, but overall market still pretty strong – what gives?