Weird

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.

147 comments ↓

#1 Matt on 10.15.14 at 7:10 pm

Where is everyone tonight?

#2 Fred on 10.15.14 at 7:14 pm

Matt, I guess you weren’t on the invite.

#3 Smoking Man on 10.15.14 at 7:19 pm

DELETED

#4 Ex-Cowtown on 10.15.14 at 7:19 pm

Getting ready to pick up some stuff in the market. Finally some deals. RE? not yet, but that day is coming.

#5 western observer on 10.15.14 at 7:20 pm

With all due respect Garth real estate values for SFH’s will not be going down in Vancouver.

Interest rates will stay low, maybe go even a little lower.

40% of owners in Vancouver do not have mortgages.
Highest rate in Canada.

Vancouver is a resort city where the world’s rich either own a home or will own a home. Probably purchased with cash.

Mildest climate in Canada, most attractive city in Canada. Whomever you are or where ever you come from you will find your community, culture, cuisine and acceptance. No gun culture.

Vancouver is like the San Francisco or Seattle of Canada. The home values there are at or above where they were prior to the US real estate collapse.

#6 Waterloo Resident on 10.15.14 at 7:22 pm

Garth is correct, it might be very close to a buying opportunity very soon. I have 5 charts of ‘Sector Bullish Percent Index’ data on them, charts that I look at and don’t buy until at least one of them has a rising bar on it’s MACD Histrogram (S&P Financial, Nasdaq, S&P 500, NYSE, and TSX) and so far not one of them have a rising bar, all of them have only falling bars the past 2 days, so it’s not the time to buy tomorrow, but maybe the day after tomorrow might be okay.

#7 José on 10.15.14 at 7:23 pm

Now Garth,

That works. Pessimism with a little bit of optimism. Good job.

Not like Monday’s armegeddon post.

#8 crowdedelevatorfartz on 10.15.14 at 7:25 pm

@#1 Matt
Busy stuffing their mattresses with money…..

#9 Cato the Elder on 10.15.14 at 7:26 pm

Based on my short experiences on this earth, I’d say the vast majority of people, upwards of 95%, base their decisions on emotion, not logic.

It is the reason it took us so long to progress from riding horses to driving cars. It’s the same reason the next progression is being stalled. Whether it’s religion (dogma), environmentalism (dogma), or marxism (dogma), the longer someone holds a particular false belief, the more painful it is to overcome even when presented with the truth. No one is more enslaved than someone that falsely believes they are free.

Those who are in positions of power are no longer the enlightened few – those learned men that took us out of the dark ages. Those men who took great risks to challenge the status quo, and were revered for it. No, we elect those that make us ‘feel good’. Of course, they never have a plan to pay for it all and are never around when it is finally time to.

The more I read about human history, the more our lack of progress becomes upsetting. If people lived forever, I’m sure we would have progressed further. It just takes some people so long to learn the lessons that history has so often repeated. We don’t need to repeat these mistakes – we only need to read about them and implement different policies – it’s quite simple.

Price increases in a LIABILITY that you NEED to survive is NOT good for the economy. That’s what a house is. It’s a massive liability. You have to finance it, pay for repairs, pay for insurance, and pay taxes among other things. It produces NOTHING but drains your finances in perpetuity. That is nothing to be proud of, and yet it is what everyone brags about including our benevolent leaders.

The truth is, without such an easy access to credit, houses would decline in value over time as a result of wear and tear – just like cars. Unfortunately, bankers own the earth, and this is just one of their schemes to deprive us of our land that was settled by our ancestors.

If you doubt that narrative, I dare say you aren’t paying attention. Many of the houses in the US that were foreclosed on were bought up by large hedge funds and many are still owned by the banks. Just as Jefferson warned, through the detrimental effects of inflation, the banks will possess all.

#10 Lala on 10.15.14 at 7:28 pm

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#11 darth on 10.15.14 at 7:28 pm

And we haven’t had a real shock to the system yet – 25 ebola cases in NYC, a terrorist attack, China’s debt bomb finally going off, Europe officially in a Depression, Australia’s housing bubble bursting, Russia, Middle East, a Trudeau/Wynne/Chow triumvirate… QE is ending. This will be a huge bear – we have another 20-30% to fall.

#12 dosouth on 10.15.14 at 7:30 pm

I must say that a lot of “locals”, wherever that may be for you, seem to be leaning more and more on “opinions” of others as you said Garth than professionals not vested in selling the product.

It is true, opinions are like noses, everybody has one and they seem to be growing longer, as in the case of Teranet and CREA, every reporting period.

#13 Suede on 10.15.14 at 7:30 pm

Get that attack capital ready to go ladies and gentlemen, stock markets are finally having the back to school sale.

#14 the Jaguar on 10.15.14 at 7:30 pm

I adore Kevin O’Leary. Yes, I recognize why some find him abrasive. But I read something once about his approach to family finances that made him appealing. It was something about his kid wanting some kind of computer game (expensive X-box type of device) that the kid wanted Kevin to bankroll, and O’Leary’s response was that it had to benefit the majority of the household member’s or the kid had to buy/earn money to purchase it himself. A sensible old fashioned approach that I admired since clearly O’Leary could clearly afford to purchase it outright. It showed that although he was a rich guy he was still trying to teach his kids something. I see a more sentimental side to him, I guess.
On all this sliding oil price business and other stock market calamity: some oil & gas investment expert quoted in the Gobe today that Saudi Arabia was ‘targeting’ Alberta oil and prepared to send the price down for an extended period of time in order to do so…..
My own theory, especially with winter approaching, is that the USA is attempting to kick Russia where it counts because Russia is now abandoning the US dollar ( i.e. the big contract this summer between Russia & China ). If the US dollar gets abandoned as the world wide exchange currency the fecal matter will hit the fan big time. Only the countries who have positioned themselves outside of that equation will be saved..(Russia, China).
The headlines these days are all scary. Ebola, ISIS, churning markets (stock or real estate). It’s kind of ‘Biblical”.

#15 Dual Citizen In Canada on 10.15.14 at 7:31 pm

#1 Matt on 10.15.14 at 7:10 pm
Where is everyone tonight?

Watching our gains from this year do the disappearing ink act. But never panic. I did the same thing in 2008 and never regretted it. Like Garth says, your emotions may be many of us undoing.

#16 Linda on 10.15.14 at 7:32 pm

Matt, early readers of Garth’s posts get fewer comments to scroll through. Just wait until people get home/have supper.

Regarding the market drop & human emotion – where are the bargain hunters? Have people stopped loving sale prices where they can snap up the desired object & then boast how they scored to their acquaintance/family/friends? Or is it that the bargain hunters smell even better deals in the days to come & don’t want to pay more than they have to? I’ll admit, if you are into bargains to boast about your deals it bites to find out your deal was bested by your shopping rivals – its all about who does best when the sales are on!

#17 Kenchie on 10.15.14 at 7:34 pm

#169 Italians love real estate on 10.15.14 at 2:35 pm
“Really disappointed you deleted last one. Shows me you’re not as open to opinion as you want us all to believe

Many of your posts are adolescent tripe. They will be published at my discretion. — Garth”

Can you start showing some “discretion” regarding Cato The Elder’s “adolescent tripe”?

#18 Freedom First on 10.15.14 at 7:34 pm

Human behavior. The masses are always ruled by fear and greed, 2 financially dangerous emotions, Just like Garth has expanded on so succinctly. The love part too, absolutely, as the majority of men will buy what the woman wants when she wants it. Fact. Major fact.

#19 West Coast Jerry on 10.15.14 at 7:35 pm

FYI, Garth, in Vancouver, it’s “west side”, not “Westside”.

Actually, it isn’t. You must be from Surrey. — Garth

#20 Skeptical on 10.15.14 at 7:39 pm

This is the correction I’ve been waiting for! i’m pretty excited. Garth, how long do you estimate it will last for?

Thanks.

#21 Flamed out in Kitchener on 10.15.14 at 7:48 pm

Gotta love all those pics of traders with their hands over their mouths, eyes looking up at the tape in disbelief … get over it! … sit back, have a few drinks and let the divy cheques roll in every month. REITs will still pay every month, pipelines will still push oil and gas through, and people will get in their cars and use gas to get to work. And they will even eat and visit the LCBO and Beer Store every few days (Okay, maybe every few weeks, but I digress) … so ho, hum, … life goes on. Enjoy the ride. It’s always happy hour if you decide that it is.

#22 james on 10.15.14 at 7:53 pm

#3 western observer

Ha ha ha. Vancouver is like SF or Seattle is it?

Really? Have you ever lived in those cities? I have lived in both. Let’s just talk Seattle, for reasons of space.

Have you checked out a chart of housing values for Seattle lately? It is very interesting. To make it short for you, big run up, big crash… then a recent run up, but still 20% OFF the peak back in the last housing bubble days. (You are lying when you say prices are back at housing bubble levels).

Now look at the income levels in King County, and look at debt levels. Look at the employment picture. Look at the tax rates.

I think Seattle and SF (as well as other select US cities) are in another mini bubble. The US Fed has muttered about that as well. However, they have little in common with Vancouver in terms of market trends, jobs, disposable income, affordability, labour mobility, etc etc etc. About the only thing you can point to is interest from Chinese investors taking money from the mainland. Odd thing, though… all these foreign investors failed to prevent the housing bubble from popping in Seattle in the first place.

Seattle is not a ‘resort city’. First, it rains far too much. Second, people have jobs. Yes, we produce things here in Washington State. Software, airplanes, vegetables, etc etc.

#23 Mike in the Okanagan on 10.15.14 at 7:58 pm

Sure get your cheque book out but wait until the dust settles. Don’t try to catch a falling knife with the TSX.

#24 Manning Smoke on 10.15.14 at 8:03 pm

Still claiming the markets are not rigged? If your TSX was up 27% and someone cashed the chips, there are guys at the same table who are now going to lose 27% or more or less. It’s a zero sum game. So pray tell Garth how is this different than Seneca? And this is coming from a former politician who has the best interest of Canadians at heart. The boomers love this system, especially when they are milking it.

And I bet you wish you were. — Garth

#25 TS on 10.15.14 at 8:12 pm

Hilarious Garth.

Hilarious….

#26 not 1st on 10.15.14 at 8:16 pm

#21 Flamed out in Kitchener on 10.15.14 at 7:48 pm

You do know those floor traders are paid actors don’t you? Their job is to walk around looking worried or happy depending on the hour. They don’t make any trades. Thats all done in banks of computers in the basement that nobody sees. Its just part of the market illusion.

#27 Marian on 10.15.14 at 8:19 pm

#19 West Coast Jerry on 10.15.14 at 7:35 pm
FYI, Garth, in Vancouver, it’s “west side”, not “Westside”.

Actually, it isn’t. You must be from Surrey. — Garth

HAHAHAHHAHHAHAHHAHAHAHAHAHAHHAHAHAHAHHAHAHAAHAHAHHAHAHAHAHHA
LOVE THIS BLOG !!!M

#28 noplu$$$$ed on 10.15.14 at 8:19 pm

Relax folks it’s just my new financial guy I finally got based on Garth’s advice rebalancing my portfolio. He should be done soon. I’ll have a word with him not to put up all the sell orders on open.

Well I hope this Ebola thing isn’t all it’s hyped up to be as I’m getting on a plane again soon. Seems to me ticket prices are already way down from even a month ago but that could be seasonal as well. I’d get a hazmat suit, I understand they are fashionable now, but they are all sold out. Crazy doomers. FEMA and the CDC that is.

I hope you aren’t selling any books on the other blog Garth! I’d take a look but I’m afraid….

PS how’s the leg? I assume it’s on the up and up?

#29 Cato the Elder on 10.15.14 at 8:42 pm

Re: #17 Kenchie

Garth can handle a difference of opinion.

#30 Nemesis on 10.15.14 at 8:46 pm

#ThePinkTicklerStrikesAgain! #Or,Plaintiff’sBriefsLaunch… #TheTwistedKnickersTort!…

[USA Today] – Man sues over pink panties after colonoscopy

“When the plaintiff recovered from the effects of the anesthesia administered by defendants, he awoke to realize that while he was unconscious pink women’s underwear had been placed on his body,” according to the suit. “When the plaintiff initially presented for his colonoscopy he had not been wearing pink women’s underwear and at no time did the plaintiff voluntarily, knowingly or intentionally place the pink women’s underwear upon himself.”

http://www.usatoday.com/story/news/nation/2014/10/15/man-sues-over-pink-panties-colonoscopy/17304761/

#31 Buy Low Sell High on 10.15.14 at 8:52 pm

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#32 Anson on 10.15.14 at 8:53 pm

Fear is the motivation of fools, it can make some act irrationally in haste, while at the same time paralyzing others in fear. decisions made due to fear are always bad decissions
It is obvious the latest wave of home buyers are purchasing because of fear, fear of being priced out of the market, or fear of not getting in before rates rise, or fear of looking like a loser because everybody knows only losers rent and equity comes easy to home owners
Some people fear change and some embrace it but one thing I think we can all agree on is change is comming.
………………….Or is it already here?…………………

#33 TurnerNation on 10.15.14 at 9:02 pm

Get ready to buy the TSX and oil Friday or Monday.

I checked my workplace RRSP today.
We’re limited to some middling mutual funds.

I mix Treasury Blondes Fund, TSX Monthly Income Fund, and a Global Real Estate fund.

As of yesterday month-to-day it is down…wait for it…half of one per-cent! Yeah that’s .005.

Yawn, wake me when this is over.

#34 Retired Boomer - WI on 10.15.14 at 9:04 pm

I really have to hand it to my local pub operator. He rarely misses a good excuse for a party!

Tonight the “Market Blues” midweek recovery party.

Cooked chicken wings .25 each

Beer (Bud or Miller) 6 for $10

Mixers $2.50

Jukebox re-priced at 2 for a quarter (tonight only!)

Place was PACKED for a Wednesday night. He is gonna do well, as he is holding regular prices on other food, and shots etc. I always admire a smart business guy

#35 The real Kip on 10.15.14 at 9:16 pm

Don’t worry, the crash protection team in Washington will stop this latest “correction”.

QE-4 anyone?

#36 omg the original on 10.15.14 at 9:17 pm

#26 not 1st

They don’t make any trades. Thats all done in banks of computers in the basement that nobody sees.
—————————-

Actually the trades are done on about 40 different exchanges housed in concrete bunkers in New Jersey.

There is no central stock market anymore.

#37 Nomad on 10.15.14 at 9:20 pm

85 year old calls BNN freaking out (and I mean freaking out) about his bank stocks. It’s fascinating to hear this, when for months the market begged for a correction. Well, maybe an 85 year old should be THAT invested in stocks…

http://www.bnn.ca/Video/player.aspx?vid=468412

Doubled down on on Manulife, Industrielle Alliance, RIOCan. Added to ZIN (industrials), ZUB (US banks).

I really hope stocks keep falling. Please sell me your shares.

(Don’t buy Great West Bank. Too many clients in Alberta)

#38 Manning Smoke on 10.15.14 at 9:22 pm

And I bet you wish you were. — Garth

You and your ilk encourage these games full of greed and fear, not me. How is that different than CREA?

Back off, and keep my elk out of this. — Garth

#39 Anson on 10.15.14 at 9:23 pm

#4 EX COWTOWN
“Getting ready to pick up some stuff in the market. Finally some deals. RE? not yet, but that day is coming.”
Patience my friend…Have you ever heard the expression “catching a falling knife”
6 years of low rates have forced many into dividend paying stocks in search of cash flow and as you know the majority of these stocks are owned by boomers in search for yield.
Boomers will sell on any major weakness and those that hang on will sell later at a steeper loss once the dividend is cut
Dividend stocks are not so attractive once the dividend is cut.

#40 AK on 10.15.14 at 9:24 pm

“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. ”
===================================
And for every one of these panic sellers, there is a buyer. :-)

#41 AK on 10.15.14 at 9:26 pm

#35 The real Kip on 10.15.14 at 9:16 pm
“Don’t worry, the crash protection team in Washington will stop this latest “correction”.

QE-4 anyone?”
==========================

Keep dreaming…

#42 Manning Smoke on 10.15.14 at 9:28 pm

Go ahead guys, buy the dips. But don’t forget to “diversify and be liquid”. What does this even mean? Do you ever ask yourself how stupid it sounds?

#43 Almost Retired on 10.15.14 at 9:30 pm

Do the people who write an essay on this blog really think anyone is going to read the whole thing?

When the Dow was down 450 points at one point today I was dazed and confused. It’s one thing to know it might happen, but not really expect it. No one understands the fall. Just too much gas in the bag I guess.

Unfortunately I am fully invested so I don’t have much cash lying around to try to pick up bargains. I think the only thing to do is hang in there and see what November and December bring.

#44 Algo3 on 10.15.14 at 9:30 pm

So few comments tonight. Where did Shawn go?

#45 Inglorious Investor on 10.15.14 at 9:31 pm

Listen, folks. Greater Fool is a bastion of free speech. Kudos to Garth for allowing people to spew, vent, pontificate, opine, and share. This is Mr. Turner’s blog; it’s not up to any of us to decide who should be banned or not. I disagree with much of what some people say on this blog, but I’m glad they have a forum to say it.

#46 Inglorious Investor on 10.15.14 at 9:32 pm

BTW: like the photo. Oh the things one can say…

#47 Roger on 10.15.14 at 9:35 pm

RETAIL INVESTOR ? stampeding ? … seriously ?????????

Oh and never try to time the market … wait… I mean always buy low and sell high … no wait stay long , stay the course …but you have to know when to get in and when to get out of course … you know – risk on , risk off… but invest in value stocks… and ETF’s are not stocks … sort of… but safer , unless stocks go down… But remember you have to pick your stocks carefully … but not ETF’s because they are not stocks, just made up of stock so you have nothing to worry about.

So remember don’t try to time the market … but you should have sold two months and so now you need to buy.

Got it !

Actually get a nice diversified portfolio and rebalance when you change the smoke detector battery. — Garth

#48 Son of Ponzi on 10.15.14 at 9:35 pm

Where is everyone tonight?
———
Taking the mid-night train to the Wet Coast.
The Oppenheimer park is having vacancies.

#49 Blacksheep on 10.15.14 at 9:36 pm

James # 22,

My take on W.O.’s, # 5 post, is this.

If one cannot immigrate to the US (most cannot, various reasons), but wanted to live a lifestyle as close as possible to that of the bigger, US West Coast cities of Seattle, San Francisco, Los Angles or San Diego.

What is the first Canadian city you think of: Halifax, Calgary, Toronto?

No…it’s undeniably Vancouver. This is why Van, is so god dammed expensive. Period.

Is Van worth the ridiculously high prices commanded lately? Don’t know, that’s a whole other convo.

#50 Unknown Marketer on 10.15.14 at 9:41 pm

Parts Of Vancouver – Prices Are Crashing – Condo’s

A Vancouver blog talks outlines what was reported in BIV

http://rpdne.ws/ZFnONo

#51 Inglorious Investor on 10.15.14 at 9:43 pm

So, I think the markets will fall further than the bulls think, but less than the bears hope. How does 25 or 30% from the peak sound? If so, get ready for a rally that could blow your socks off. But what do I know.

#52 Ronie A Rice on 10.15.14 at 9:44 pm

#5 western observer on 10.15.14 at 7:20 pm

Vancouver = SF or Seattle?????
A tad delusional mayhaps? 6 months of bitter rain and cold, lots of gangs, and no booming silicon valley a la San Fran…..

I am guessing this shill is a real estate hound…..(s)he should read the following link, while endlessly repeating, “I will not fail, I will not fail, I will not fail” , preferably while wearing yoga pants or a tutu

http://www.investopedia.com/ask/answers/101314/why-do-real-estate-agents-fail.asp?partner=YahooSA

#5 western observer on 10.15.14 at 7:20 pm

Vancouver is a resort city where the world’s rich either own a home or will own a home. Probably purchased with cash.

Mildest climate in Canada, most attractive city in Canada. Whomever you are or where ever you come from you will find your community, culture, cuisine and acceptance. No gun culture.

Vancouver is like the San Francisco or Seattle of Canada.

#53 I'm stupid on 10.15.14 at 9:45 pm

Things to remember:

Buying stock in Facebook, Twitter and all the other social media companies will result in loses over the long term. Don’t be fooled by the amount of users or their impact on society. The only metric you need to worry about when investing in anything, is how much money the company is making and can it continue to do so. I just don’t get how Facebook or Twitter will increase revenue 100 fold. If Facebook began charging $1 a year to be a member I can bet that 50% of users will delete their accounts. There is a only so much Ad revenue that can go around. They could try to sell information but that too will have an impact on users.

Netflix will not survive the decade. I can confidantly say this because no one pays for anything they can get for free. I currently have a hacked up Appletv2 and can watch any tv show or movie ever made for free. How long until their subscribers stop paying?

Technology companies are the worst long term investments you can make. Even Apple will fall from grace eventually, just like RIM. Don’t be holding the bag when they do.

I know some will say I’m wrong but in a creative world new talent replaces old, new companies will emerge to replace the old ones and the cycle will continue. But Coke, P&G and other consumer staples with solid distribution and brand recognition will still be around. The key is to buy when corrections occur. Don’t be afraid to lose money, just think of it this way; if they all go broke (they only way for you to lose all your money) chances are you won’t be around either because society will have broken down.

So get out your cheque book and buy, the 100 year old blue chips!

#54 Inglorious Investor on 10.15.14 at 9:53 pm

“No two ways about it. The only safe place to be will be government bonds. All else will not make it through.”

My gut says that at some point gov bonds will no longer be the place to hide. Many have predicted that when rates finally do make a secular upturn (if ever), the rise will be slow and measured. I’m not so sure. When rates finally do turn for real they might just jump like a frog on a frying pan. But what does my gut know.

#55 Not an economist on 10.15.14 at 9:54 pm

I’m going to go ahead and disagree with most of you and give my opinion this is the “stepping on a twig” moment that starts the avalanche. There will be no recovery for a long time, not for stocks, not for real estate, and not for jobs. The balance between labour and capital has been tilted so far that the economy isn’t functional anymore, and this isn’t something limited to Canada. The sooner we have this century’s depression, the sooner the new generation can have their “new deal”.

I’m not happy at all that this is the path things have to take, but like Garth said the other day it won’t be pragmatism and gradual change that will get us back on course. Unfortunately things have to get worse before they get better.

If someone wants to disagree, I’d love to be proven wrong. What rational reason do you have to believe that a recovery is coming without a pretty serious revival of the social contract? Please someone tell me what exactly will cause a recovery. Or are you just hoping for hope’s sake?

#56 Terrier on 10.15.14 at 9:56 pm

Nothing to worry about .. some good old world war will perk things up in no time.

#57 Inglorious Investor on 10.15.14 at 9:57 pm

#47 Roger on 10.15.14 at 9:35 pm

You cant time the market. Unfortunately, timing really is everything.

#58 RayofLight on 10.15.14 at 9:59 pm

We only hate the rich humans.
The Chinese guy buying the mansion on the Westside. …Check
People in Porsches…Check
Kevin O’Leary……

#59 Inglorious Investor on 10.15.14 at 10:02 pm

#9 Cato the Elder on 10.15.14 at 7:26 pm

“Based on my short experiences on this earth, I’d say the vast majority of people, upwards of 95%, base their decisions on emotion, not logic.”

I guess that makes 95% of people human.

I’ve often lamented that the problem with people is that we are human.

And by the way, “my short experienced on this earth”? Haven’t you been around since the third century BC? O tempora o mores! (I know, that was Cicero. Sorry.)

#60 obviously on 10.15.14 at 10:02 pm

your argument for buying stocks is no different than that for buying houses.

stocks always go up, so just keep buying. if there’s a sell off, don’t sell, just buy more, and hold.

houses always go up, so just keep buying. if there’s a sell off, don’t sell, just buy more and hold.

I argue against buying stocks, and being more balanced and diversified. I think owning both a house and a financial portfolio is perfect. — Garth

#61 45north on 10.15.14 at 10:02 pm

The Federal Court of Appeal has weighed in on the issue of racial profiling, saying customs officers can use their on-the-job experience to inform decisions about who to stop and search at Canada’s airports.

of course they can

http://ottawacitizen.com/news/local-news/appeal-court-overturns-racial-profiling-case-involving-customs-officer

#62 Inglorious Investor on 10.15.14 at 10:09 pm

“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.”

I constantly encourage my kids to think for themselves. Don’t let others (especially your teachers) tell you what to think. Question everything. Find out the truth for yourself. Stand on your own two feet. Have the power of your convictions. Make your own decisions, take responsibility, and deal with the consequences.

Now go clean your room!

#63 Son of Ponzi on 10.15.14 at 10:10 pm

What happened to the Dow today?
Down 450 points, then rallied back big time.
No cryptic pronouncements from Yellen.
Could not be individual investors like Shawn.

#64 Smoking Man on 10.15.14 at 10:10 pm

#57 Inglorious Investor on 10.15.14 at 9:57 pmYou cant time the market. Unfortunately, timing really is everything.
……

I can but because I’m so insane no one takes my crow calls seriously, less of course they have been following me for a while.

You all remember my recent post, don’t have a good felling about Monday. Look at the charts. What do you see.

#65 Shawn G in TO on 10.15.14 at 10:13 pm

#1 Matt on 10.15.14 at 7:10 pm
Where is everyone tonight?

watching CNBC and reading zerohedge, haha!

i could be wrong, but today felt like capitulation. after days of big falls, today TSX was off 350 in all panic selling.

but calmer nerves jumped in and made 1.4% in the afternoon.

#66 youcrazybro on 10.15.14 at 10:15 pm

No offence, but as little as two weeks ago you were saying how everyone should buy into the market in some fashion RIGHT THEN. If someone bought in 2 weeks ago, as this very blog directed them to, they would have lost money now.

Sure it will probably go back up, you seem to think it always will go up, forever, and sure maybe they will make it back in the next few years. It’s gambling, pure and simple. You do the right thing at the right time, you win. Luck. But for the people like me, making 45k living paycheque to paycheque, saving maybe 1k per year, are not savvy enough to play the game. The stakes are enormous if you make the wrong move, and status quo if you do nothing by putting it in savings. Money makes peoples brains turn to mush, mostly. I am not ashamed to admit it happens to me.

But ill be damned if i lose it all gambling on the history and structure of a 20th century society in a 21st century world.
Im sure the railroads looked great all the way up to 1908, and perhaps a few years after that. We live in an age of volatility, kudos to you, if you can rip someone off because of it I guess. However the future I want to live in, you will be giving your “winnings” back to society in the form of higher taxes on the rich.

So one never knows what the future will bring. Just some fuzzy guesses made clearer by experience. Experience your average joe simply does not have when it comes to financial markets.

That was bitter. Maybe you should spend more time learning and less spewing. — Garth

#67 Helen on 10.15.14 at 10:17 pm

Just because people in Vancouver choose not to go to work doesn’t make it a “resort city”. Also, being “the best place to live in Canada” is… well, it is what it is and Vancouver IS a perfectly nice place to live… except for the shortage of family practice doctors because its too expensive for them to practice in Vancouver. Looking forward to the implosion.

#68 Manning Smoke on 10.15.14 at 10:22 pm

“Bulls and bears” – idiotic syntagma that means nothing. People are completely conned by the propaganda and adopt this made-up language.

#69 DON on 10.15.14 at 10:24 pm

#5 western observer on 10.15.14 at 7:20 pm
With all due respect Garth real estate values for SFH’s will not be going down in Vancouver.

Interest rates will stay low, maybe go even a little lower.

40% of owners in Vancouver do not have mortgages.
Highest rate in Canada.

Vancouver is a resort city where the world’s rich either own a home or will own a home. Probably purchased with cash.

Mildest climate in Canada, most attractive city in Canada. Whomever you are or where ever you come from you will find your community, culture, cuisine and acceptance. No gun culture.

Vancouver is like the San Francisco or Seattle of Canada. The home values there are at or above where they were prior to the US real estate collapse
**************************

LOL – “No Gun culture” in Vancouver. Yah right! Someone miss the last 10 years in Vancouver, not a safe city anymore by any means. And IT RAINS solid, just about everyday from mid October till end of April. Yah the soggy city, and the view of the mountains through the CLOUDS.

But hey, it is golden at times in the summer, when not fighting the hostile traffic to get almost anywhere. It also is appealing to the single crowd, but rated as the hardest place to meet someone. Yah Vancouver, once was a place much like you described but not anymore.

But it is a trendy and emtional place – somewhat of a delusional utopia to some.

#70 Deflation is happening in Kelowna on 10.15.14 at 10:31 pm

Okay, here’s a true example of deflation taking hold here in Canada. I just purchased a beautiful lake view lot in Kelowna for $37,000, which previously sold in 2007 for $120,000. This isn’t a foreclosure.

I been looking at houses here in Kelowna, that weren’t lake view and were way too expensive. On top of that they were all dumps and needed another $200,000 to update them.

This way I’ll spend what I originally budgeted for a house and end up with a palace.

Its time to get going RE vultures, as Garth has pointed out, other than the big cities its a buyers market. Start bidding low, get those sellers use to it.

With interest rates rising in the spring and the Saudis intent on destroying the North American oil market, you’ll be seeing the start of the decline in prices for residential RE.

It worked for me, no reason it won’t for you! So venture out and become that RE vulture we all know is in you!

#71 KommyKim on 10.15.14 at 10:33 pm

RE: Read the comment section from yesterday and there’s one thread woven through most of it.

I thought we weren’t supposed to read the comments?

I have to. — Garth

#72 Joseph R. on 10.15.14 at 10:38 pm

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

I don’t see many people hating the rich, Garth. In fact, our social nature make us want to imitate them; well, the PERCEPTION we think they lives are like. That’s why we have a national debt issue.

If you really want to know what millionaire REALLY live like; pick up “the Millionaire Next Door, from Stanley and Danko.

Professional Hockey players are rich but they are not hated; same for any other sport figures; ditto for Rock Stars and Hollywood Actors.

O’Leary is a cartoonish character; he’s a business man Don Cherry.

#73 Casual Observer on 10.15.14 at 10:39 pm

#9 Cato the Elder on 10.15.14 at 7:26 pm

I agree with much of what you write, but either I’m misunderstanding you, or at times you seem to be “talking out of both sides of your mouth”, as they say.

A couple of days ago you said…

“THE ONLY WORRY ANY OF US SHOULD HAVE IS THIS:

That the FREE MARKET allocation of capital and the pursuit of a profit is INTERFERED with or INFRINGED.”

http://www.greaterfool.ca/2014/10/13/progress/#comment-329059

Yet today you seem to be against the inevitable results of un-fettered capitalism…

“Unfortunately, bankers own the earth, and this is just one of their schemes to deprive us of our land that was settled by our ancestors…

Many of the houses in the US that were foreclosed on were bought up by large hedge funds and many are still owned by the banks.”

A free-market capitalist shouldn’t have a problem with this.

If hedge funds (pools of capital) are allocating capital towards buying up houses, it’s all OK, as long as no government regulator tells them not to do it, right?

In a completely capitalistic society, the pursuit of profit is the ultimate goal, regardless of the impact on society.

Be careful what you wish for.

#74 MJ on 10.15.14 at 10:47 pm

Garth, can you write a post later on on the approach and strategy to invest once the buying begins. Please. Thank you!

#75 bretonner on 10.15.14 at 11:15 pm

Did I miss something today. Why did EQB, CXS and a number of other mortgage related Cdn stocks get a major beating? I know they’re all overdue, but why today?

#76 Topsy-Turvy on 10.15.14 at 11:20 pm

>we fear loss more than we savour gains
It is rational as humans think in percentages of gain and loss rather than probabilities. In other words, if you’ve lost 50% of your investment, you have to gain back 100% (twice as much) just to get even, and not the same 50%, so pain from any loss rationally should be twice as much than satisfaction from gain. Moreover, if we would start thinking in probabilities and got a 5%-chance to lose 100% of investment, and hit this chance, it wouldn’t matter anymore how much we can gain in the next round as the account balance will always stay $0.

#77 Observer on 10.15.14 at 11:22 pm

@Manning Smoke #38
You and your ilk encourage these games full of greed and fear, not me.

There’s a place run by a little pudgy guy named Kim Jong-il where greed and fear take on a whole new meaning. You’re free to try this change of business culture.

#78 Bob Denver on 10.15.14 at 11:22 pm

O’Leary does not to deserve to be hated, that’s more emotion than he deserves. He should merely be forgotten as a minor footnote in pop culture history. Like Alf or Skippy Handelman.

#66 youcrazybro – as Yogi Berra put it
“It’s tough to make predictions, especially about the future”

Keep that in mind when you hear buy or sell from *anyone*

#79 Blane McLean on 10.15.14 at 11:29 pm

Finally a time to enter the indexes! Start that couch potato portfolio now and buy more if it goes lower and sell when you are very well into your golden years!

#80 OttawaGUYrenting on 10.15.14 at 11:32 pm

#22 james on 10.15.14 at 7:53 pm

Dude… Bang on Seattle.

How about the homelessness rate?!

Tent cities and huge need for social safety net

#81 nonplused on 10.15.14 at 11:34 pm

#72 Joseph R.

“Professional hockey players are rich…”

Well, no, not most of them.

I have an 8 year old playing hockey, probably in the top quartile in the club and it’s a fair size club. But we had to do some research deciding which league and level he should play seeing as he didn’t evaluate well this year. He still made “rep”, but not the first or second team even though he is a second year player. anyway that’s more than you need to know other than it inspired me to do some research.

Did you know the average length of an NHL career is 3 years? Now my dad and I had different opinions on what the minimum salary was, he thought it was $750,000/y and I was stuck in the past at $400,000/y. You know either number is good as an annual salary. But what if you only can make that for 3 years or less, maybe only one, and then you are off to serve tables at Denny’s??? 1 year at $750,000 isn’t going to get you through life. And you have to pay tax on that. About half of it is tax.

Yet you have to give up your whole life to get it. These kids are suffering an alarming number of concussions because it’s gotten so violent, partly because of the crackdown on fighting (if the ref and the league won’t do anything somebody has to but now they can’t self police so the goons run wild). You can’t go to school or think about anything else.

The NHL has not drafted somebody from Calgary in a long, long time. And it’s a big league. Big. Nobody.

A lot of parents are putting out $250,000 over their son’s career getting them to AAA, buying new $800 skates, $300 sticks they break 4 times a month, private lessons, etc. And very few get drafted.

Yet, $250,000 will quite readily pay for a degree in dentistry, and now you are making $400,000 for life.

It’s absolutely stupid what we pay for hockey, far worse than the housing bubble and you can’t live in it. There are only 1 or 2 Wayne Gretsky’s per team, and they stick around for ever keeping everyone else out.

Mind you I’ve seen photos of Wayne’s wife. Maybe it is worth it. But dentist’s do ok in that department too.

#82 OttawaGUYrenting on 10.15.14 at 11:38 pm

#42 Manning Smoke on 10.15.14 at 9:28 pm
Go ahead guys, buy the dips. But don’t forget to “diversify and be liquid”. What does this even mean? Do you ever ask yourself how stupid it sounds?
—————————————-
Sounds like I need another trip to California with my INDEX $$$$

#83 Joe2.0 on 10.15.14 at 11:40 pm

Quiet tonight, or shell shocked.
Tomorrow Dallas announces a state of emergency.
Ebola.

#84 nonplused on 10.15.14 at 11:47 pm

Oh ya and so what happened to my son? We put him in a less competitive league hoping he would have a good year and gain some confidence, and abandoned the idea he was going to play for Team Canada in the 2026 Juniors. He scored in his first shift with his new team and went on to get a hat trick and at least one assist. His new coach seemed to suddenly like him.

And he’s really good at math and reading at school. Don’t want to distract from that.

#85 Tom from Mississauga on 10.15.14 at 11:50 pm

Got some dry powder here. The ZEB is in a head and shoulders pattern, so forget it. But ZUB, once its stabilized for 2 or 3 days, OPEN FIRE.

#86 prairie person on 10.15.14 at 11:54 pm

residential accommodation in the West is in short supply. Not only is the vacancy rate in both Calgary and Edmonton just one per cent, but rents in both cities are likely to rise four to eight per cent over the next year, Mr. Olin notes. Moreover, there’s no rent control.

I wonder if the last few day’s events will change that?

#87 Kenchie on 10.15.14 at 11:59 pm

#29 Cato the Elder on 10.15.14 at 8:42 pm
“Re: #17 Kenchie

Garth can handle a difference of opinion.”

It’s not about you and I having a difference of opinion. Sometimes I agree with some of your drivel. But the problem is you haven’t learned to appreciate other people’s opinions and life lessons, nor do you incorporate them into your own train of thought, which is required to evolve your understanding of the world. In other words, you’re ignorant. Overall, my undereducated friend, all you spew is conjecture. Maybe CATO stands for “Conjecture’s All That’s Offered”…

And when you spew all your opinions in long diatribes, it’s (IMO) boring as hell. Clearly, since fewer and fewer people are responding to your often ill-conceived criticism of how the world works (or should work), others are too finding your posts boring.

#88 Kenchie on 10.16.14 at 12:06 am

#29 Cato the Elder on 10.15.14 at 8:42 pm
“Re: #17 Kenchie

Garth can handle a difference of opinion.”

PS: relax, it’s a just funny that Flawed and Italians Love Real Estate, and others, get “DELETED” but you haven’t (Yet! – as far as I can tell) and neither have I (Yet!) been “DELETED”

#89 Kenchie on 10.16.14 at 12:27 am

Not sure if this was posted before or not, but interesting for those who own condos in False Creek:

http://globalnews.ca/news/1581787/chaotic-scene-at-one-year-old-olympic-village-social-housing-complex/

#90 Obvious Truth on 10.16.14 at 12:35 am

#53

Some of us are actually trying to make money. I wouldn’t give any money to mindless CEOs.

The companies you hate are my largest holdings. One garth eluded to and the 2000 are more recent large additions. The Silicon Valley set are making it possible for people to chip away at large consumer product companies.

I personally think zuckerberg is a genius. The next gates or jobs. I put my cash on that horse. Jack ma looks like the real deal too.

Don’t laugh garth. Baba was green almost all day today. Rut was a champ.

But who really knows. Portfolio management plays a big role and it’s different strokes for different folks. That’s the beauty. Nobody has a monopoly on how to make money.

I like to get popcorn out for days like today and listen to prognosticators babble. Love the blowouts. Most curious to me are tips. Not sure how technically they trade but I see a large gap to fill just north of here. Lots of technical damage done to indexes. Let’s see what happens. This is fun for someone like me. Rising markets are boring, mindless.

#91 Happy Renting on 10.16.14 at 12:48 am

For those of us without any other exceptional advantages (come from money, earn a lot, marry rich, brilliant mind for business or invention, lottery win), hopefully the simple act of keeping a long-term view and applying reason over emotion will gradually lift us to an affluent situation.

One doesn’t typically get a lot richer than the masses without something special to them. Odd to think that the trait “don’t panic” might be enough to do it, but at times like these I can believe it really could be enough.

#92 Happy Renting on 10.16.14 at 12:49 am

Garth, if your other blog is a pay site, I have my chequebook ready. :)

#93 DON on 10.16.14 at 12:58 am

55 Not an economist on 10.15.14 at 9:54 pm
I’m going to go ahead and disagree with most of you and give my opinion this is the “stepping on a twig” moment that starts the avalanche. There will be no recovery for a long time, not for stocks, not for real estate, and not for jobs. The balance between labour and capital has been tilted so far that the economy isn’t functional anymore, and this isn’t something limited to Canada. The sooner we have this century’s depression, the sooner the new generation can have their “new deal”.

I’m not happy at all that this is the path things have to take, but like Garth said the other day it won’t be pragmatism and gradual change that will get us back on course. Unfortunately things have to get worse before they get better.

If someone wants to disagree, I’d love to be proven wrong. What rational reason do you have to believe that a recovery is coming without a pretty serious revival of the social contract? Please someone tell me what exactly will cause a recovery. Or are you just hoping for hope’s sake?
.*****************

Agreed…perhaps money will flow naturally to profit in alternative energy streams. we do have more knowledge, technical thus ability than in the past. This may help us adapt in shorter amount of time. However, we need leadership and a committment to not let greed run rampant. Yes the social contract must be renewed, the quicker the better. First step might be to vote in all elections, municipal, provincial, Federal, School board in your area.

#94 Big English on 10.16.14 at 1:08 am

Last few weeks some of the media has changed its tone on real estate market, an article on why renting was better than owning appeared…… it is now harder to find.

The equity market’s appear to be correcting, for some this will be a buying opportunity, others will panic.

Vancouver SFH RE remains delusional, whatever side your on.

Condo market is slowing. A friend now feels they over paid for there two bedroom condo, took longer to sell there previous one bedroom condo which eventually sold for under asking.

Another friend’s landlord gave notice of the intention of selling one bedroom condo, a couple of weeks later, landlord had a change of heart ‘as the market is cooling’. One may assume couldn’t get what they wanted for it.

We watch, we wait.

#95 cynically on 10.16.14 at 1:15 am

— Vancouver is definitely not like S.F. or Seattle in a business sense in that the latter are productive cities, go-getter cities, corporate headquarter cities but is, in another sense, a laid-back resort city – for half the year!!!

#96 Has anyone read..... on 10.16.14 at 2:22 am

This?

http://www.viewzone.com/abioticoilx.html

#97 betamax on 10.16.14 at 2:39 am

#5 western observer: “Vancouver is like the San Francisco or Seattle”

Seattle is regarded as a rainy city in which residents are consequently prone to depression. Equating Seattle (or Vancouver) with San Francisco is a joke.

Almost everyone I know in Van owns a home, and they’re all making six figures, and they’re all mortgaged to the hilt and literally living paycheque to paycheque.

“resort city” desired and populated by “the world’s rich” is a pipe-dream promulgated by realtors.

Keep whistling past the graveyard.

#98 rentin on 10.16.14 at 2:40 am

Can’t be in cash waiting to buy if you don’t sell at or near the top.

Garth – I have been following since 2005. You are right about everything except the housing bubble, I mean eventually your prediction will come true, and you have never actually put a date on it…..

I switched from RE to stocks in 2012, and have made out like a bandit.

#99 Nomad on 10.16.14 at 6:35 am

Thursday: Stock futures are deep in the negative
Oil fell another 1.5%.
Canada’s own balance sheet will soon look red too.

Meanwhile, China changed its mind making it easier to buy a second property. That means less money flowing here. From Bloomberg:

“After four years of government restrictions to cool housing prices that had tripled since 2000, the central bank is reversing course, making it easier for homeowners to buy second properties. They are not likely to get back into the market, several analysts said, until prices become more affordable.”

16.10.14, 8 am: Oil at $80 and Dow futures negative 147. — Garth

#100 live within your means on 10.16.14 at 6:48 am

#14 the Jaguar on 10.15.14 at 7:30 pm
I adore Kevin O’Leary. Yes, I recognize why some find him abrasive. But I read something once about his approach to family finances that made him appealing. It was something about his kid wanting some kind of computer game (expensive X-box type of device) that the kid wanted Kevin to bankroll, and O’Leary’s response was that it had to benefit the majority of the household member’s or the kid had to buy/earn money to purchase it himself. A sensible old fashioned approach that I admired since clearly O’Leary could clearly afford to purchase it outright. It showed that although he was a rich guy he was still trying to teach his kids something. I see a more sentimental side to him, I guess.

………………….

I too read that story about O’Leary & agree with him re family finances. However, I’m glad he’s no longer part of the current season’s Dragon’s Den on CBC as I don’t like his abrasiveness. Apparently he owns a huge summer property on a lake in Nova Scotia.

#101 Newbie on 10.16.14 at 8:01 am

Garth,

Delusions are everywhere when it comes to RE, even where you least expect them.

Usually a voice of economic reason, but not today – OMG – we just heard Armine Yalniyzan on CBC radio Toronto talking about the market correction and the risk of deflation.

She treated the CIBC report on mortgage debt as gospel, then said this in support of it:

“The good news is Canadians are doing what they should be doing. They are getting into the housing market and building up their equity”

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

#102 crowdedelevatorfartz on 10.16.14 at 8:48 am

@#78 Bob Denver
“O’Leary does not to deserve to be hated, that’s more emotion than he deserves. He should merely be forgotten as a minor footnote in pop culture history. Like Alf or Skippy Handelman….”
+++++++++++++++++++++++++++++++++++

Or Gilligan?

#103 crowdedelevatorfartz on 10.16.14 at 8:53 am

@#81 nonplussed

Total agreement about parents and their “grooming” of their budding children’s NHL “propects”.
Have a friend, his son is an amazing hockey player. Top of his team, division, league for years. Dad spent endless hours/years and dollars on his training.
His son stopped growing at 5ft 2.

#104 obviously on 10.16.14 at 8:54 am

there is a big difference between a BULL MARKET CORRECTION, and a BEAR MARKET CORRECTION.

2000-2002 was a BEAR MARKET
2007-2009 was a BEAR MARKET

2011 was a BULL MARKET CORRECTION

you know how to tell the difference?
you have no idea what this will be. bull market correction or outright bear market.

#105 Smoking Man on 10.16.14 at 9:05 am

Blood bath coming up, Dow Fut – 217 unless you’re naked and short… :)

Off less than 150 at the open. This will likely be a good day to just stay naked. — Garth

#106 Kenchie on 10.16.14 at 9:14 am

FYI,

Greek bond yields hit 8.94% this morning in Europe.

Last week, it was 6.6%.

#107 Kenchie on 10.16.14 at 9:33 am

Garth,

I know you don’t like when people paste text from very long articles, but this particular op-ed is for subscription only, which I doubt many blog dogs subscribe to. So please post it because it should be interesting for the blog dogs.

From the Financial Times Comments Section:

“Has Saudi Arabia lost control of the oil market?”
Nick Butler | Oct 16 11:58 | 11 | Share

“Conspiracy theories abound around the oil price fall. A 25 per cent drop in less than three months is certainly exceptional and the assumption is that in a politically driven market a political decision by someone, somewhere must have forced prices down. The most popular conspiracy theory is that the US and the Saudis have combined to take money away from their major enemies – Russia and Iran. In both cases, [the argument goes], a shortage of revenue could help to bring President Vladimir Putin and the Supreme Leader, the ailing Ayatollah Ali Khamenei, to the negotiating table to sort out a deal on Ukraine and Iran’s nuclear ambitions.

In a complicated world anything could be true. I don’t happen to believe the conspiracy theory but I accept that it is a possibility. To me the interesting thing is what happens next, and that is down to the Saudis. The risk for the whole industry, and for many countries dependent on oil revenues, is that Saudi Arabia’s games have led them to lose control of the market. Prices could go a good deal lower with wide and mostly negative consequences, starting with more regional instability and a cutback in investment which can only feed the next cycle.

We tend to have a mental image of Saudi Arabia drawn from the events of the 1970s and 80s. That image is of a fabulously wealthy country with a tiny population sitting on a sea of oil. The Kingdom is run by an old-fashioned but basically ethical monarch, staffed by brilliant technocrats who have managed to create a situation in which the country can set the world price for oil by adjusting output and exports at will. This power supposedly gives Saudi Arabia not just enormous revenue but also US protection in a dangerous world.

If it was ever a reflection of the truth, this image is now wrong in almost every respect. In reality, Saudi Arabia is now ruled by a gerontocracy nervously clinging to power in the face of dissent generated across the Middle East both by the younger generation who hoped for an Arab spring and modernisation, and by religious fundamentalists for whom the apparent subservience of a country which should be at the heart of Islam to the materialist values of the West is profoundly offensive.

Saudi is no longer a country with a tiny population. The population is now almost 30m, up from 5.7m in 1970. The technocrats have failed to develop an industrial economy or to find gas to provide local power, with the result that domestic oil demand goes up and up. 30m Saudis now use as much oil (3 million barrels a day ) as 203m Brazilians. For obvious reasons the Kingdom is much disliked, even by its nominal allies. US Vice President Joe Biden said the other day that Saudi citizens were supporting terrorist groups. He had to withdraw the remarks but no one doubts that behind the “mistake” was a darker story. As Ed Luce put it in an article for the FT, the US link with Saudi Arabia is a dangerous “Faustian pact”.

The challenge now is whether the Saudis are in any position to reverse the price fall. The danger of the trend which we have seen since June is that with each step downwards, other producers are tempted to increase production in the short term in order to maximise much needed revenue. Any field which can produce a bit more is pushed a little harder; normal maintenance schedules are postponed and so on. That is what seems to be happening. The price fall over the last three months has not produced any fall in production.

On the basis of standard economic theory, a fall in prices should stimulate demand, but the oil market is a very special place where production costs are much disguised by consumer taxes (as in the UK, where taxes account for more than three quarters of the final pump price) or subsidies (as in India where the price paid by drivers is still a fraction of the world market price). We are not likely to see a dramatic demand effect as a result of what has happened — not least because in the US, Europe and Japan, oil demand is in structural decline. For the moment therefore, excess supply continues to chase static demand with the result being falling prices.

The only action which would break this trend is a sharp and sustained cut in output by Saudi Arabia. Saudi has acted in this way in the past but never alone. Its cuts in output have always been part of an agreed strategy in which it has been joined, if only in a modest way, by its OPEC partners. But the world has changed and it is hard to think of any OPEC state, except perhaps Kuwait, which is in a position to accept any sustained cut in production and revenue.

The Saudis then are on their own. Can they do it ? The judgment is very marginal. Restoring order will require a serious cut in output of perhaps 2 million barrels a day for a sustained period to rebalance a market which is in surplus even in the absence of significant supplies from Libya and Iran. In the short term such action would require a rewritten budget, reduced domestic welfare and defence spending, and a cut in some of the subsidies being made to allies in the region who are trying to maintain order after the Arab Spring.

If the conspiracy theorists are right, this has all been planned and prepared. The fall in prices will force Russia and Iran to negotiate and restore the authority of Saudi Arabia in the world oil market by discouraging new high cost investments. But the scope for miscalculation is enormous. Oil has certainly been a market in which prices have been set by politics. Fundamentals have a habit of reasserting themselves. Once started, a price fall is going to be very hard to reverse. Much of Saudi Arabia’s power is psychological in nature — people have believed that because they have controlled prices in the past they will do so for ever. Many, many investments across the world are grounded on that belief. But once the facade collapses the game will change completely.”

#108 Kenchie on 10.16.14 at 9:46 am

Conversely, this may interest les chiens de cette pathetique blog…

http://www.nytimes.com/2014/10/16/world/europe/fall-in-oil-prices-poses-a-problem-for-russia-iraq-and-others.html?_r=0

“Last week, Venezuela, which depends on oil for 95 percent of its export revenues, called for an emergency meeting of the Organization of Petroleum Exporting Countries to address the steep slide in prices, a move that other members rebuffed in favor of a regular meeting next month.”

Me thinks OPEC ain’t so friendly right now..

#109 Newport High School Bellevue washington on 10.16.14 at 9:59 am

@22 james in Seattle.

The Seattle area began inflation big time in the mid 1980’s. Before that it was much like Vancouver Island in terms of pricing of housing and feel. That really changed when Redmond(microsoft)started taking off and the Californians started showing up. Then rents and cost of housing took off. I remember in Bellevue ’77-’90 my mother rented a 1300 sq foot house for $385/month. Cheap. The reason was the landlord across the street worked as a VP for Rainier Bank. He didnt raise the rent cause it wouldve put him in a higher tax bracket. He is still in the same house across the street, but he sold that house, I think for $350K. Most of the housing in the eastside by the I-90/I-405 corridor is insanely priced.

It doesnt rain that much in Seattle. It’s overcast much of the time. Basically the Olympic mountains on the west and the cascades on the east create this buffer zone for which the weather bumps back and forth like a pinball machine. The ironic thing about Seattle is it really is a clean and slow sleepy city. That is ironic because coffee was “born” in Seattle which is ridiculous. If anything a person needs to slow down to survive in Seattle. There is a reason why many rockers have committed suicide in Seattle: Wishy washy people, crappy weather, and doldrums. Grunge music became popular because rockers decided to do heroin to cope with Seattle, so a dirty liver=grunge.

I was willing to do anything to get out of that screwed culture of overcast sea level nonsense that is Seattle: Too small freeways, lukewarm people, crappy weather. The only good thing there is the clean drinking water. I am glad I escaped.

#110 HappyPenguin on 10.16.14 at 10:09 am

…aaaaand that is why my husband and I are looking for houses in the Halifax area NOW. We are currently renting and have been putting off buying for many, many years. We make around $40 K (the government takes about $10K of that; so we take home around $30K), and we just didn’t see paying $200K + for a (piece of crap) house as very… ummm… wise.

Around the corner from us is a nice house that doesn’t need major renovations where the seller is asking $158K. That is still too much for us, so we’re going to lowball. Maybe about $118K (the tax assessment is $108K, so even $118K is an awful lot).

And if the seller doesn’t like it, we will walk away. Why? Because nobody is buying around here. We have the upper hand.

Muahahahaha!!!

#111 Grantmi on 10.16.14 at 10:18 am

Wow! USA 30 year mortgage rates just dropped to 16 month low – 3.97%

When will this EVER END!! Here comes QE4!!!

#112 HD on 10.16.14 at 10:25 am

@ #81 nonplused on 10.15.14 at 11:34 pm

Good post. Very well said. Not a lot of people are aware of this cognitive bias.

http://en.wikipedia.org/wiki/Survivorship_bias

Best,

HD

#113 Doug in London on 10.16.14 at 10:59 am

Read the comment section from yesterday and there’s one thread woven through most of it. Yes, fear.
————————————————————-
Really? I never noticed, as I was scooping up bargains during these early Black Friday sales yesterday. I thought these Black Friday sales came after the American Thanksgiving in late November, not after the much earlier Canadian Thanksgiving. Wow, XEG actually dropped below 16 bucks, isn’t that amazing? Today I don’t feel as good, kind of like the hangover after a great party. Why? The sales are gone, and stock prices are climbing up again. Bummer!

#114 Debtfree on 10.16.14 at 11:11 am

@ # 70 dihik Tease !

#115 Nemesis on 10.16.14 at 11:18 am

#ThursdayMischief… #MandaToryPartyDiscipline?! #Or,IsThatAnExtraJudicialMuscleInYourKnickers? #It’sADirtyJob… #ButSomeOneHasToInspectTheLingerie… #ABloggerNamedPu… #ALawyerNamedChu:

[FT] – China eyes rules-based system but flexes extrajudicial muscles

“Many party leaders are very worried because they never know if they are next.”

http://www.ft.com/intl/cms/s/0/2cc4981c-5448-11e4-84c6-00144feab7de.html?siteedition=intl

[NoteToGT: Just between the two of us, I’ve always wondered… whether the persistent rumours about the ‘other’ CPC’s extraordinarily cruel and effective disciplinary tactics – employing recordings of their DearLeader’s piano playing to punish disobedience – were true. Do tell…]

#116 Son of Ponzi on 10.16.14 at 11:28 am

#106 Kenchie on 10.16.14 at 9:14 am
FYI,
Greek bond yields hit 8.94% this morning in Europe.
Last week, it was 6.6%.
————
Beware of Greeks bearing bonds.

#117 Bobby on 10.16.14 at 11:32 am

Yup, prices are indeed falling here in Victoria. I chuckle when I hear the CREA hype about prices continuing to go up. They should get out more.
Out to open houses this weekend here in Victoria. One house, on the market forever with a number of price drops. Nice but still overpriced. Realtor described making a sale as pulling teeth. Nobody else there. Went to another, a real dump that needs lots of updating. Second listing and price down from the original price in the triple digits. Realtor just called to say there is another price drop. New condos for sale, built in 2012, isn’t it now 2014.
Starting to think about making some offers.

#118 Son of Ponzi on 10.16.14 at 11:38 am

The EU should have let the Drachma fall where it may a few years ago.
Now Greeks problems again are becoming the EUs problems.
People never learn.
Always follow the Weltmeister.

#119 Dupcheck on 10.16.14 at 11:41 am

It seems like TSX just hit the bottom, now it is on fire.

#120 SWL1976 on 10.16.14 at 11:56 am

#45 Inglorious Investor

Well put, this blog offers excellent information and no need for censorship outside of general respect.

Garth you have thick skin at times and always deserve a thumbs up

#121 not 1st on 10.16.14 at 12:05 pm

QE to be paused, rates to stay where they are for a long time.

Garth is wrong about this. Wall Street is QE crack addicted and everytime something comes up will be their excuse to mess with the markets and cry wolf.

One thing about govt programs in the US. Once they start, they NEVER get cut no matter what. They become a political football just like defense spending or the ag subsidies. That program will never be stopped.

No accounting for what some people will believe. — Garth

#122 Joe2.0 on 10.16.14 at 12:10 pm

Smoking Man
For sh..s and giggles and excluding another paper injection where do you think the DOW will settle?
I say in the 11s.

#123 not 1st on 10.16.14 at 12:39 pm

Garth, my opinions are based solely on observation. A year from now QE will still be here and rates unmoved.

But thats for debate. RE is still the elephant in the room;

http://www.leaderpost.com/business/Home+prices+slide+Regina/10292187/story.html

You said QE was eternal. Ridiculous. — Garth

#124 Retired Boomer - WI on 10.16.14 at 12:52 pm

#122 Joe 2.0

I’m in for 13,800.

#125 Anthony on 10.16.14 at 12:58 pm

If humans fear loss than they savour gains – why do Casino’s exist?

#126 Retired Boomer - WI on 10.16.14 at 1:04 pm

To me it is amazing that such a relatively small movement down in the markets (under 10%) can get everybody so emotional, and irrational.

Heard from my dear friend, who has “no interest” in managing his own money. We found him a GOOD advisor a while back who has put his money into a well diversified group of funds with a good balance of growth & safety.

He e mailed me yesterday all atwitter about his “losses.”
I tried to cal my explain that despite his balanced portfolio when markets correct as they are now doing, he will see a “loss” on paper, but it will be less than if he had been 100% in stocks.

I truly believe that is why so many small “investors” who get cold feet and sell near a bottom never seem to make any money in the markets. I used to be one of that ilk, and would flee the markets. After a few years noticed I didn’t do as well as the buy and hold crowd. Timing is not my game, and having learned that lesson (I think) have discovered best to leave a well constructed portfolio alone. (yes, the periodic rebalance does happen).

I guess it really does not matter WHAT happens as that is really out of my control.

I AM invested, I will stay invested, I will see loss, and I will see stagnation, and I will see gains.

I will live my life outside of the markets.

#127 Son of Ponzi on 10.16.14 at 1:46 pm

#125 Anthony on 10.16.14 at 12:58 pm
If humans fear loss than they savour gains – why do Casino’s exist?
———
Because you get free drinks.

#128 Son of Ponzi on 10.16.14 at 1:50 pm

You said QE was eternal. Ridiculous. — Garth
————
Maybe the poster is right.
Just ask Prince Charles.

#129 pbrasseur on 10.16.14 at 1:51 pm

Deflation? The “gig D” as Garth would put it, well it is just not happening:

http://scottgrannis.blogspot.ca/2014/10/still-no-signs-of-deflation.html

But was does happen during market panics such a this one is that quite a few idiots will lose money by letting emotions take control of their investment decision.

#130 Bob Denver on 10.16.14 at 2:16 pm

@ #102 crowdedelevatorfartz

Haha. Touché

#131 45north on 10.16.14 at 2:37 pm

nonplused : Did you know the average length of an NHL career is 3 years?

no I didn’t and it’s very significant. You are certainly right to encourage your son in math and reading. My son played college football, he had a good time and then graduated.

Kenchie: from your link : Mayor Gregor Robertson’s plan to end homelessness in Vancouver has some Olympic Village residents saying they’re paying the price.

The problems all center around the Margeurite Ford Apartments, a large social housing complex right next to several high-end condo developments.

in Ottawa the Shepherds of Good Hope run an overnight shelter. I’ve been there many times – as a helper not as a client.

Don : Agreed…perhaps money will flow naturally to profit in alternative energy streams. we do have more knowledge, technical thus ability than in the past.

that’s wishful thinking. America’s project to put a man on the moon was not the result of money flowing naturally to space exploration. It was a concerted national effort. The costs were huge, people died.

I would like to see a pilot project to demonstrate liquid fluoride thorium reactors. It requires a concerted national effort.

#132 Kenchie on 10.16.14 at 3:16 pm

Interesting perspective on what was driving the volatility this month:

http://www.businessinsider.com/hedge-fund-short-squeeze-hitting-markets-2014-1#ixzz3GJK2WQ52

#133 Smoking Man on 10.16.14 at 3:28 pm

#122 Joe2.0 on 10.16.14 at 12:10 pm

It depends on how the herd reacts to a few more Ebola cases… That’s the game changer…

#134 Tony on 10.16.14 at 3:28 pm

Re: #6 Waterloo Resident on 10.15.14 at 7:22 pm

The markets should fall until October the 24th at the close. Then rebound the last Monday, Tuesday and Wednesday of this month because of Janet Yellen’s speech on October the 29th. The FED will make sure the markets don’t crash the months of May, September and October.

#135 Holy Crap Wheres The Tylenol on 10.16.14 at 3:41 pm

#125 Anthony on 10.16.14 at 12:58 pm

If humans fear loss than they savour gains – why do Casino’s exist?
_____________________________________________

Come on now!!! Casinos exist because of Smoking Man!
Plain and simple isn’t it!

#136 Holy Crap Wheres The Tylenol on 10.16.14 at 3:45 pm

Wow the last time I recall this much swinging was at a party in 1972. Boy did I trade stocks that night!

http://www.cbc.ca/news/business/tsx-up-dow-down-as-market-volatility-continues-1.2800875

#137 Mike S on 10.16.14 at 3:57 pm

“However the future I want to live in, you will be giving your “winnings” back to society in the form of higher taxes on the rich.”

Define rich?
Is a doctor making above 150K per year considered rich? Is it OK to tax her extra? How much would you tax her? Why not take 100K and leave her to live on 50K?

#138 Bill Gable on 10.16.14 at 4:13 pm

#5 western observer – you are such a typical Vancouver snob.

In reality – this is a second tier City, with dimming job prospects, a cost of living so far off kilter, it will give you vertigo, and morons paying millions, for garbage homes, and high rise deathtraps, being slammed up in Yaletown.

These Yaletown cupboards, will be the new blight on the City, when this Market corrects.

At night, half the places are dark already, because their genius owner, in Shanghai, can’t find anyone stupid enough to pay his exorbitant mortgage for him.

Tough.

#139 Mike S on 10.16.14 at 4:38 pm

“When will this EVER END!! Here comes QE4!!!”

There can’t be QE4 at this point for the following 2 reasons
– US deficit/GDP is decreasing
– rates are low as it is
– risk outweighs the benefits at this point

Other form of stimulus might be considered if there will be a need, but QE is most likely over this time

#140 Mike S on 10.16.14 at 4:42 pm

“Garth, my opinions are based solely on observation. A year from now QE will still be here and rates unmoved.”

How much QE do you see in 1 year?

#141 jess on 10.16.14 at 4:49 pm

“The masses are always ruled by fear and greed, ..”

“always ” what about an empty stomach and poverty?

==========

survivorship bias
http://online.wsj.com/news/articles
/SB10001424127887323398204578487052352376298

‘Survivorship Bias’ Is Among Pitfalls When ETFs Shut Down …
online.wsj.com/…/SB1000142412788732339820457848705235237629…
May 20, 2013 – Next month, iShares, the largest exchange-traded fund provider by assets, will do something it hasn’t done in more than a decade: close one of

#142 Nemesis on 10.16.14 at 5:04 pm

#Casinos?… #WayMoreThanFreeDrinks&Smokin’Men…

http://youtu.be/ZN6mp2NjMhs

#143 Kenchie on 10.16.14 at 5:10 pm

Lol, Vancouver’s more similar to Arcadia, CA than San Francisco or Seattle:

http://www.businessweek.com/articles/2014-10-15/chinese-home-buying-binge-transforms-california-suburb-arcadia#r=rss

#144 Cato the Elder on 10.16.14 at 6:49 pm

Re: #73 Casual Observer

We don’t have un-fettered capitalism – we have crony capitalism. Regulations are written to benefit big business that have close connections with big government. Why do you think they pay full time lobbyists?

The reason the banks buying everything up is so deplorable and NOT capitalism is because they get to print the money we are FORCED to use. Capitalism allows people to make choices as long as they don’t hurt anyone – those choices include what to use as a medium of exchange (currency). However, we are forced to use the paper issued by our central bank. If you don’t you go to jail.

I recommend you read about this to better understand the state of why things are the way they are. Ever since the end of Bretton Woods and the end of convertibility into gold, the bankers have had free reign over everything. Savings have plummeted. Real wages have stagnated. Productivity has decreased. Manufacturing has been wiped out. Debt has skyrocketed.

This isn’t capitalism. This is managed/crony capitalism, more akin to fascism. Yes, this pains many people to learn to such a degree that they dismiss what I have to say and call me a loon. However, it is true and the sooner we recognize it the sooner we can get to work fixing it.

The first thing anyone who honestly wants change can do is DEMAND that their government officials repeal regulations and quit passing new ones. Why? There is a phenomena called ‘regulatory capture’ whereby big companies essentially run the regulatory agencies through lobbying, political donations, and a ‘revolving door’ of hiring former regulators into the private sector as an indirect bribe.

************

Re: Kenchie

Sorry that you feel that way. Many people have trouble coming to terms with the government we REALLY live in when they’ve gone their whole lives believing it’s a free and prosperous democracy. It’s called cognitive dissonance and sometimes its so powerful people often resort to anger and violence to deal with the discomfort of learning of it.

Want the truth? We live in a crony capitalist/fascist system. You know when the Ontario premier went on TV with her commercials and promoted more ‘public/private partnerships’ I had to laugh because that’s basically the same way Mussolini defined fascism.

How is a small business supposed to compete and upend existing businesses when those big businesses have lobbied the government to pass burdensome regulations? Those regulations aren’t there to help you (even though that’s ALWAYS how they word it) – those regulations are there to PREVENT COMPETITION. Competition that would lower prices, introduce new technology, improve quality, and increase productivity are never allowed to exist because of this situation.

Look no further than Uber – a company that is providing employment, better service, and more availability for customers. What is the government’s reaction? They need to pay for a taxi license or they’re not allowed! Why? For ‘safety’! Even though it’s been operating for years in many cities WITHOUT INCIDENT. No, it’s an attempt by the ‘taxi driver lobby’ to prevent competition. This happens EVERYWHERE in our economy now and it’s UNDENIABLY hurts customers, businesses, and Canada as a whole.

The greatest regulation is the marketplace. Scammers don’t last long in a free market. The only time scams reach epic proportions and hurt MANY people are with some sort of government support (like our heavily government induced low interest rate monetary system). Think about the last time you went to a restaurant. The owner didn’t serve you unsanitary food because the government forced him not to, he fed you good food in a sanitary environment because he wanted to MAKE A PROFIT. He also wanted you to come back! And he also didn’t want to kill you (that’s good for business).

The entire notion that we need regulation to save people from the market is ridiculous. Bad product and bad people will exist regardless of regulation. Unfortunately, I dare say that regulation actually hurts more people than not. People get COMPLACENT when they feel the government is sorting out the bad guys and are MORE prone to becoming victims. Look no further than the CMHC and what it is doing to banks. They’re taking massive risks under the MISTAKEN assumption that the government regulators know best. We all know how this is going to turn out, but most don’t. This ALSO is happening throughout our economy, adding an unnecessary cost and price increase to every product we buy.

If you don’t agree, that’s fine. My thoughts however are not really my thoughts, they are firmly rooted in objective history. Many studies have been done proving what I’m saying. There are also ENTIRE COUNTRIES that operate more along the lines of what I’m saying, and they are wealthier than we are (their citizens are better off). Unlike many, I’m not spouting off my personal thoughts on matters that make feel good policies or appeal to my emotions.

I believe in freedom. I have confidence that people, when left to their own devices, can solve anything. Get the government out of the way and anything is possible.

**********

Re: Inglourious Investor

If the Romans had followed the sage advice of the Catos (elder and younger) they might not have fallen. Maybe we’d be 2000 years more technologically advanced instead of having lost all those years to the dark ages of mysticism and irrationality.

#145 Doug in London on 10.16.14 at 10:57 pm

Yes, I read that loser paper called The Globe and Mail, and here’s something I saw in Thursday’s paper that caught my attention. On page B12 there was an article about how we would recover from this stock market correction, and the last paragraph had these words: But there is one truth that is universal, nothing goes up forever. keep that in mind the next time you look at Canadian house prices.
Wow, doesn’t that sound familiar?

#146 chapter 9 on 10.17.14 at 12:12 pm

The country lost a great representative of the people eight years ago tomorrow. Doing what you were elected to do is the cornerstone of democracy and being suspended from caucus was a complete failure of the system. Garth, you are a stand up guy!

#147 crowdedelevatorfartz on 10.17.14 at 7:24 pm

@#144 Cato
Re: “Inglourious Investor

If the Romans had followed the sage advice of the Catos (elder and younger) they might not have fallen. Maybe we’d be 2000 years more technologically advanced instead of having lost all those years to the dark ages of mysticism and irrationality.
+++++++++++++++++++++++++++++++++++

Actually I think “I. I.” meant Romulans not Romans…..
and we’d be 2000 years more advanced but we’d have to date girls with big wrinkly foreheads and greenish skin………….
Live long and prosper my Vulcan “cousin”