Entries from June 2013 ↓

The chill

chill

When Big Box home stores pack it in, you know something’s up. Rona’s decision this week to shutter 11 mega locations in BC and Ontario not only throws too many people out of work (over 800), but coming after weeks of rate turmoil, it chills.

Yeah, yeah, the Quebec-based chain has had the poutine kicked out it by Home Depot. We know that. Two hundred jobs went in February. Another 125 admin positions punted yesterday. But retreating from markets like Mississauga, Abbotsford and Woodbridge – where people are about as house-horny as it gets – is a leading indicator of real estate retreat. The company will also convert 63 more stores into smaller discount centres and trash corporate sponsorship programs.

Why? Simple. Slagging sales in high-cost suburban locations where consumers are pigged out on debt and home ownership rates approach 80%. It’s exactly the scenario central bankers nightmare about – families taking on so much debt to buy inflated houses that disposable income evaporates. Along with jobs.

And now mortgages have jumped. This will not end well.

By the way, American rates have swollen like a donkey in love. Thirty-year home loans just popped from 3.9% to almost 4.5%, for the biggest one-week increase in 26 years, all part of the same rate fever which tumbled the bond market in the wake of speculation the Fed will soon begin tapering down its stimulus program.

Bad news? Higher loan costs might be in Canada, but not so in America. That’s because the Yanks have been merrily reflating the real estate bubble which almost ate capitalism five years ago. House prices in twenty cities are rising at an annualized 12%, the most torrid rate since the spring of 2006, when subprime loans allowed Oakies to buy McMansions in Florida. House sales are the best since 2008. New construction has taken off, with housing starts back above the one million level.

There are bidding wars in Phoenix, Boston, Chicago and Vegas. Prices in Detroit, of all places, have risen 14%. As in Canada, a lot of this has been fueled by tight inventories and dirt-cheap money. So, a rate cool-off is not such a bad thing, even though most economists insist the buying frenzy won’t quell much.

This underscores a key difference with us, of course. Canadian houses cost half again what equivalent homes in America change hands for, since the correction here’s only just begun. A general mortgage rate increase of just 1% in Vancouver or Montreal would slaughter real estate, while in the States rates would have to travel from 4% to 7% before the average home becomes unaffordable on the average income. See how screwed we are?

Of course the greatest screwees will be people living in $800,000 houses with $700,000 mortgages in Mississauga where they can’t shop at Rona anymore, who listened to Peter Schiff and put all their savings into gold bars they keep in Ziplock bags in the guest bathroom toilet tank. Let us pray for them.

Unless they read this pathetic blog when it was first published last night, went to that wicket in Scotia Plaza I pass every day, and handed the rocks over. At least they’d have sold hundreds of dollars above the bottom gold looks destined to reach. The yellow stuff dipped under $1,200 an ounce Thursday night, hitting a three-year low amid the latest news showing the US is irrefutably on the mend. The psychology of gold is worsening by the hour, as stock markets rally and assets like REITs and preferreds (which, unlike bullion, pay you to own them) recover.

As one Wall Street biggie told Bloomberg:  “When the market gets into a trend, people just want to follow it, and now we’re in a severe downtrend, so the psychology has become terrible.” You bet. After gold plunged two months ago there was a huge rush by metalheads and bullion-lickers everywhere to buy more. But after this $200-an-ounce dump… crickets. The simple fact is, you can’t fight the Fed. The future holds a rising America, higher rates and a stronger greenback. No hyper-inflation. No currency crisis. No financial mess. No reason to own gold.

The speculation now is a wave of selling could take the yellow stuff to as little as $800 an ounce. That would represent a loss of almost 60% since the peak in 2011, when this blog told the doomers to collect their profits.

So clearly, there are two crimes against nature. Failure to rebalance. And ignoring Garth.

Yellow fever

gold

Almost two years ago Jennie called me from Regina. “You’ve got to talk to him,” she said of Tom, her husband of 34 years. “He’s just whipped up on this stuff and I can’t convince him otherwise.”

Nor could I. Tried hard. Buying silver at about $50 an ounce is financial suicide, I said. You will live to regret this. But Tom was mesmerized by the doomer sites, infatuated with meteoric bullion prices as the US debt ceiling crisis mounted, determined to drain their joint account and turn it into a glittery, shimmery shrine in his basement vault. He sent me links to metal-pumping newsletters promising economic collapse, $500 silver and gold at five grand an ounce.

Needless to say, Tom’s lost half their money. I don’t talk to Jen anymore. This week that would be especially awkward.

There ‘s no better symbol of the end of the financial crisis than the collapse of precious metals. Simply put, there’s no reason to hold metals. No runaway inflation. No currency devaluation. No velocity of money. No weakening American currency. No systemic financial collapse. Nor should there should be surprise.

I told Tom and Jen as gold was cruising towards $1,900 (as I told people on this blog, to the howls of metalheads) that the gains were emotional and unsustainable. The American economy would continue to improve, unemployment fall, corporate profits rise, and the metals melt. And they have. Whether you own gold or not, it’s significant. You should learn from it.

Gold is now at a 34-month low and will fall more in this current quarter than at any time since 1920. The decline for this three-month period alone is 23%, which means it entered a bear market back in April.

About $60 billion has been wiped away from people like Tom in the form of precious metals ETFs. Investors are deserting the commodity in droves, now that it’s clear the United States is advancing, not contracting. As I mentioned yesterday, house prices are up 12%, house sales are at an 8-year high, unemployment has dropped 3%, consumer confidence is buoyant, the US dollar has grown stronger, corporations are profit-driven, inflation is contained, car sales rock, the federal deficit is lower and now the central bank has decided it’s time to reduce its stimulus.

Overall economic growth is still subdued at 1.8% in the latest quarter, but there’s no hint of recession. The fiscal cliff was a dud. Enforced government spending cuts were a dud. The presidential election was decisive. And that US debt ceiling debate, titillating the gold maniacs two summers ago, a complete phfttt.

The ‘money-printing’ by the Fed, the US central bank, was the last, best kick the bullion bunnies had at convincing non-believers to surrender their cash for ounces. But that too was a myth. The Fed may be buying $85 billion a month in bonds, but it’s not printing the money. Rather credit is created on the central bank’s expanding balance sheet in favour of the bond sellers. No actual money is created, making its way down into Mr. & Mrs. Front Porch’s bank account.

This is called the ‘velocity’ of money, and right now it’s at the lowest level in history. Without new dollars coursing through the economy, there’s no currency debasement or hyperinflation. There goes the one sane reason to hold metals, as a storehouse of wealth.

We’re back to 2010 levels, thus all those fools who listened to the can’t-lose arguments of gold nuts and bought in the last three years, are losers. Poor Tom’s silver is down 34% this quarter, the biggest tumble since 1980, and is the worst performer among 34 major commodities.

As the US gains strength, so does its currency. Positive economic data pushes the dollar up and gold down (as well as the Canadian loonie). Now the certainty that central bankers will cut loose their stimulus spending has pretty much sealed the deal. Those left holding gold positions – the clever ones, anyway – realize the best strategy is to cut loose and flee future losses.

What does this tell us?

Don’t bet against America, because you will lose. Do not buy assets that don’t pay you own them. Don’t pile into stuff that’s reaching historic highs. Never invest out of fear. Move from real assets into financial ones. Invest, don’t gamble. And realize the financial crisis is over.

Undoubtedly, the bullion-lickers, doomers, skeptics and America-haters will pile on me once again. They want the US to fail and banks to wobble. They long for another Zimbabwe or Weimer Republic, when fiat money folded and gold ruled. They think owning rocks is iconoclastic, cool and defiant of efforts to control them with government-issued money. Many think wealth you dig up is natural and superior to the wealth that actually funds your life.

And you know what? They’ll never stop. Never change. Never understand.

But for the rest of us, the lesson should be simple. Fear is done.