Tuesday, September 30, 2008

They are a persistent bunch....

No matter, where you look at. From the realtors in Calgary, to Edmonton to fraudsters on Wall Street and Washington. Their sole aim is to make their commission, earn their profits and separate the masses from their money by getting them deeper into debt.
Now they are planning an unprecedented vote in the Senate and Mr Bush is going to address the nation yet again talking about how we are inches away from Armageddon.
And while they are it, they might also include a rehashed form of 'Suzzane Researched this' with 'Paulson/Bernanke researched this':

These are truly uncertain times and most certainly not a time when you pile up several hundred thousands of debt. But what's this, the Canadian GDP actually grew by 0.7 per cent due to higher energy costs, so everything is going great. The island looks fortified. Even though every major collapse in the US is creating a chink in the armour of the Canadian Financial system.

Friday, September 26, 2008

Weekend Open Thread

Sorry for no posting during the week. Some discussion starters:
- Merrill says what we have all known for last several years and says Canadian housing is overvalued by quite a bit. Scotiabank, fully aware of the mortgage junk it has loaded in its balance sheet during the last several years, denies it vehemently. Most Canadians, in our great tradition of smugness agree.
-From, "but Canada is an Island" category, SunLife says it has just a quarter of billion dollars of exposure to Wamu bonds.
-A personal anecdote: I think we are light years away from any fear or panic, even in the US. A friend of mine who just got a job with WAMU(yes, this is a different epoch, companies about to go bankrupt are hiring. After all, what's a small overhead like employee salary when you have spent billions in gambling over housing prices) bought a huge $600k home in Seattle with just 5% down(Yes, countrywide is still making these loans, which means they are still selling more rope to hang themselves with).
I strongly advised him not to do so given the precarious state of WAMU and the Seattle housing market which has to go down quite a bit. I talked to him last night to see if he was okay after the WAMU seizure but he wasn't even aware of it. When I told him, he was overjoyed that WAMU was "bought". I guess before this is all over, people will be once again afraid, something that has eluded the credit drunkards.

Your thoughts....

Thursday, September 18, 2008

Weekend Open Thread

Some discussion starters:

* Joining the legendary list of countries such as Pakistan, China and more recently the UK, the US bans short selling of all financial stocks. Way to go. Free markets at work.
* Theories of financial terrorism are floating around to legitimize the case for banning short selling. Big Picture guy has a discussion on this. Of course, we know that patriotism is the last refuge of the scoundrel and it's very likely that quite a lot of people will actually buy this. Mission accomplished.
* As a further add on to the Credit Union guarantees of Alberta, the key point to remember is that the guarantee is all backed by the Government of Alberta, perhaps the most solvent government in the western world (after Norway and Alaska perhaps?). So let's say ATB goes under then Alberta Government will step in and make up for the losses of around $22 billion in deposits(Annual Report pdf). And that should be relatively easier to fix than for Canadian government to try and make up for the loss of over $250 billion dollars in deposit for a typical Big 5 Canadian bank.
* [rant on]The cardinal rule of the game is- don't fight the bankers. It's not don't fight the fed, it's not don't fight the government but don't fight the bankers. Bankers will typically get whatever they want by flexing their muscle and exercising their clout over the who's who of the world.Will this mean there won't be any recession? Will this mean there won't be any major spike in unemployment? The certain thing is that the bankers will be bailed out no matter what the consequences. There's no leadership left anywhere in the world to stand up and protect the interest of the little guy. Not even pretensions. [/rant off]

And the safest place to place your money is....

....any credit union in Alberta. Of course, the one that's backed by the Credit Union Deposit Guarantee Corporation.

Despite the innocent appearances, what’s going on in the hidden balance sheets of the Big 5 and other Canadian banks is all unknown. We didn’t know anything was wrong with the Canadian banks last year until the ABCP fiasco emerged. We won’t know the implications of the CDS contracts the Canadian banks have written until a big counter party blows up.
So it’s better to be safe than sorry and rather than chasing a 100 basis points yield advantage by picking up your bank, it makes more sense to move to a safer place.
That safe haven is the Credit Unions of Alberta.
They will insure all your deposits, yes there’s no $100k limit as imposed by CDIC. And if you want to diversify into US Dollars, that is covered as well in the insurance.
Of course, the Alberta Credit Union Deposit Insurance is backed by the Alberta Government.

From the site:

Is this guarantee the same as the banks' $100,000 insurance?

This guarantee is more extensive than the banks' insurance. All deposit amounts are fully guaranteed and include accrued interest to the date of payout. Deposit amounts include chequing and savings accounts, RRSP deposits, RRIF deposits, foreign currency deposits, and term deposits, including those with terms exceeding five years.

So I’m moving pretty much all of my US Dollars savings from TD to ATB.

Wednesday, September 17, 2008

Impact on Alberta Island Continues....

As Petro Canada tries to talk itself out of Oil Sands project.
The other day I was a reading a post somewhere that the recent fall in prices shouldn't impact most energy companies inasmuch as they base their investment decisions over long terms- 20 years or more. And then I suddenly wondered the giant rush to develop oil sands- an energy inefficient, economically risky and environmentally unfriendly way to make oil. All based on expectation that the prices will remain in high double digits or triple digits from here to infinity.

And since most new oil sands projects are based on the same expectations that Calgary condo projects are, the inimitable Warren Buffett in his recent visit to Fort McMurray said:
"Because you could be the world's greatest mining engineer, but if you were wrong about the price of oil in a big way, it would negate all that knowledge."

"So I can tell you that ... if you had $120 oil from now till, you know, 50 years from now, that the tar sands would work out very well. But I don't know the answer to that."

Finally, "The stage is set for Petrocan to walk away from this project. There are any number of deeper-pocketed, more visionary energy companies that will make $14-billion-plus bets on the 50-year potential of the oil sands. If control of Fort Hills comes up for grabs, watch EnCana, Canadian Natural Resources, Suncor or one of the foreign energy giants to step up."

Make that a $21 billion project (new cost), seriously impaired credit markets, slowing or contracting global economy, falling energy prices and we'll see how many brave company boards exist out there to venture into such a project.

Monday, September 15, 2008

Credit Destruction

…is here and in full force. It’s most certainly a deflationary event. The credit markets' tale of wanton and greed of last couple of decades is now ending with a bang and I’m not sure if we have reached the grand finale. Oil is already below $100, peak oil, China etc notwithstanding.
Not incidentally, China, which was growing at a blistering pace of over 10 per cent growth for the last gazillion years has eased its interest rates for the first time.
If we witness wealth and credit destruction of historic proportions, expect commodities to tumble to unimaginably low levels. Most financial institutions in the world have their balance sheets seriously impaired and the banks fighting for their survival don't make loans on overvalued, deprecating assets (aka housing).
If you think the housing sector is about to recover in the US and Canada will escape unscathed, wake up.
Enough said on this early Monday morning. A lot more influential people around the world will chip in much more valuable stuff.
Your comments?

Tuesday, September 9, 2008

The Joys of Economic Modeling

A physicist, an engineer and an economist go for a job interview. The interviewer, not in a mood to use lots of his gray cells, asks a simple question to each of the candidate. He asks, “What is the sum of 2 and 2?”
The physicist snaps immediately: exactly 4.
The engineer thinks for a while and says, 4 with may be 2 per cent margin of error.
Then comes the economist's turn. When asked the same question, he responds, “What do you want it to be?”

So goes the old joke about the nature of dismal science. Forecasting of any type is inherently risky, but when it is applied in the realm of social sciences it can be self serving.

Of course, this perambulatory text was required before trying to question some of the “research” published by the UBC school of Business.
There are generally very few problems with the models used in forecasting or in pricing based models. The models are generally borrowed from the domain of physical sciences and the underlying "math" of these models is solid. The problems are usually with the assumptions behind these models.
No wonder, it was the contribution of similar simplistic and infallible modeling that has left the US financial system almost bankrupt. Stupid is as stupid does. Especially when making important assumptions.
Most financial institutions priced their mortgage securities based on the assumption that real estate always goes up. And they gently added an appreciation factor of 4 or 5 per cent in all their calculations. Of course, prices go up, until they don’t.
And that’s precisely the mechanism you use to come out with ridiculous statements such as Vancouver being over priced by a mere 11 per cent and Edmonton actually being under priced by 8 per cent as mentioned in this study.
Vancouver, is the mother of all bubbles and we’ll see how far it’s going to fall when everything is said and done.
But this whole paper is just a glorified buy versus rent calculator designed to appeal to authority. There’s nothing interesting there- just a simple formula with unreliable data, with no references to data collection techniques or sample space. We don't know for example, how many data points were analyzed when collecting rent information. How many ads were actually verified for accuracy on craigslist or Kijiji? Did they actually call the advertisers? Did they negotiate the rates? One would expect some rigour or explanation on data collection when an academic paper is published.
But this study isn't meant for publication in a peer reviewed journal. It's designed to get the greatest of all fools who have somehow managed to so far resist the temptation to buy.
Rather than wasting 20 minutes or so on this paper, prospective buyers will be better served if they use this intuitive and simple buy versus rent calculator from NYT.

The Real Estate complex in this country knows that things are falling apart pretty much all across the Canada and they are trying their level best to contain the impending crisis. This "academic work" is too feeble an attempt and unlikely to convince anyone but severely delusional.

Sunday, September 7, 2008

Freddie/Fannie.....Can it happen here?

Two years ago the very thought that Freddie/Fannie would be "socialized" in the capitalistic paragon of the world would have been ridiculed. So at the risk, of inviting ridicule, I wonder, can something similar happen here? I've not had the time to dig deeper into the financial details of CMHC, but they are doing quite a bit of heavy lifting (around $120 billion in Canada Mortgage bonds) in terms of guaranteeing mortgages with a rather thin capital base (less than $7 billion in equity).
But in Canada no mid Sunday morning bail outs will be necessary, should we experience anything remotely resembling the rout in the US housing markets. After all, "CMHC’s Guarantee of Canada Mortgage Bonds carries the full faith and credit of Canada, and constitutes a direct, unconditional obligation of Canada."

Here is a video in celebration of the 'socialization' (heads bankers win, tails taxpayers lose) of our southern neighbour...
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