More of the same?

What has changed since last week? Not much I guess. In our 'super power island', things are crawling to a halt in terms of sales, at least in Calgary. There is now 7 months of inventory for SFH in Calgary as per CREB ticker. This is perhaps the highest since the deflation of this bubble began.
Not unexpected at this time of the year, but it's likely to be worse than previous years if you account for the short term boost that the days before the end of 'subprime lending' gave to the sales.
The important thing is that even with oil at around $60 and natural gas a little over $6, no major bad news has hit Alberta yet in terms of lay offs and the employment picture. But for how long? People are still confident that they will ride through this storm unaffected. Perhaps the Canadian smugness will save them.
In other parts of the world, Aussie dollar has taken a brutal hit and is down all the way to 60 cents. At this point, the currency markets are pointing to something other than inflation for the world economy and it begins with a capital D. Can our loonie go to 65 cents or so?

Weekend Open Thread

Doesn't look like a happy Friday for the markets.

• Terrible day in India with Sensex down by a whopping 10 per cent. What was the second country after China who we were counting on so much for the perpetual $120 price of oil?
• Doesn't look like a promising start for the North American markets, but anything can happen. What was it, don't fight the fed or whatever....
  
• Loonie below 79 cents....Over 33% of those who took the poll here said loonie could tumble in the below 75 cents range. It looks very likely it will happen. Just for record my cash position is 40 per cent in USD and more than half of our income is in USD as well.
  
• The cartel armies are trying desperately to keep their massive cash flows intact. Looks like they are failing as oil is touching $63.
  
• The moral of the fiascoes we have witnessed since 1998: Don't trust the economists. Don't trust the political leaders. Don't trust the bankers. Don't trust CNBC, Jim Cramer, Globe and Mail, Financial Post or Mainstream Media. They are the tools by which sheeple are led for shearing. Don't trust the lawyers. Don't trust realtors. Don't trust mortgage lenders. Don't even trust bloggers here or anywhere else. Most have no clue. Appeal to Authority is for losers. Trust yourself. Even though most on this blog already do this, form your own well reasoned opinions. Study the markets. Study Austrian economics. Save money. Spend only when necessesary to reduce your footprint on the world. If it doesn't make sense, don't invest. Cash is not trash. It's the old fashioned way (before the fiat currency and free lending for all reared its ugly head), rather the only way to make investments to fuel growth. Enough for today. It's all captured in the cartoon below:

Have a great weekend.

The Princes of Alberta Island are now running scared....

as Suncor cuts its spending by a third. Yes, a whopping third.
“Our aim is to ensure we are living within our means during a time of market uncertainty, while also making the strategic spending decisions that will allow us to continue our growth path,” Suncor chief executive officer Rick George said in a news release.

Living within our means, how relevant and appropriate. Expect something similar from all the oil sands majors, minors and the expectants. Consumer spending will be the next shoe to drop in a big way even as the falling loonie makes big tickets purchases even more expensive. And the signs of it are clearly imprinted in the August Sales report.

"Alberta was the only province in the country in August to register an annual decline in retail sales."

Any specific reason? I think it's got everything to do with the MEW(or the house ATM or the home equity loans). Alberta was the only province to have registered an YOY decline by August this year and we can see how phony the 'growth story' was. It was never the oil money as we had been clamoring but the retail spending and construction money. Very much like in other parts of the world.

This can't bode well for the $400k shoe boxes in the prairie land, on either side of Lloydminister.

Right now, the loonie is in a free fall and so are oil prices. The other 'kings of the world', Goldman et.al are chopping their workforce by 10 per cent....I think this is just the first step in cuts that will deep, prolonged and painful.

I consider myself to be bearish, but the rapid rate of fall of crude oil, stocks, loonie and everything other than USD has shocked even me. But I can't say there were no warnings.

The Falling Loonie

is making new multi-year lows today....can't help but mention my call again to move the cash to USD. Canadians overall are going to feel really bad about the fall in loonie as pretty much all their assets have taken a significant beating on the world stage. The only saving grace is that we are doing better than the Australian dollar whose dollar has fallen more precipitously than ours.

To put things into perspective, from the days of parity:

those in cash are down about 17 per cent in USD terms.
those in TSX are down by about 35 per cent in CAD leading to a total USD decline of (.83*.65) around 46 per cent.
Those in Alberta real estate are down by about 20 per cent in CAD leading to a total decline of (.83*.8) around 33.5 per cent.

What will this do the Canadian consumer confidence? Not a whole lot of good. People will begin to feel poorer as months go by. The Canadian retailers can resume the blatant gouging without having to do any token service of bringing down the prices.

Most export businesses will be happy with this in as much as their revenue side will be intact(of course the slowdown in the US is the other impact, along with demand destruction for the oil patch) but their cost base just plummetted by a whopping 20 per cent or so. One of the big challenges of Canadian economic policy was just cured by markets in 15 days.

Where do you think the loonie is headed?

Weekend Open Thread

Some discussion starters:
-And why not begin with the favorite of both bulls and bears- the price of oil. Some in the deflation camp are talking of $40 oil, the price that was considered 'good' just 4 years ago.
-Some 'financial wizards', in their tradition of 'cash is trash', are arguing that if you keep money in bank account, you would have lost roughly 15 per cent of purchasing power in terms of US Dollar. That's true, assuming one did not convert to USD and used the ATB protection, but even if someone didn't convert to USD, those in straight cash have fared so much better than those in any other asset class over the last 15 month period. TSX is down by 35 per cent or so, Alberta real estate by 15 to 25 per cent, oil is almost half of its peak value...and cash is well, still the same, so long as you are within Canada.
-The Greater Fool as applied to the stock market bubbles.
-Edmonton SFHs and condos have erased all the gains made during 2007 (plus more). It took around 15 months (Aug 2007 to October 2007) to give up the gains of 7 months (Jan to July 2007). Does it mean that we can be back to 2005 prices in 2 years? Or could it be even sooner, given the commodity bust, credit crunch, potential job losess and otherwise tough economic climate? We'll find out....

And finally:
- While imitation is the sincerest form of flattery, I am not too pleased with excessive usage of exclamation marks in my writings. Now some people do like their exclamation points, I'm not one of those. The imitator of 'Gloria White' on other blogs, should note that.

Have a great weekened everyone.

No Banker Left Behind

Happy days are here again....let's go out and buy some more toxic garbage. The first $25 billion was merely the prelude.
Too bad, in the garb of 'regulatory arbitrage', the sound Canadian banks will be 'bailed out' for the maximum possible impact. The Canadian federal debt is a little south of $500 billion. These guarantees alone are going to be worth $225 billion.

In this cold harsh world where free markets hurt so much, No banker should be left behind.

In a strict free market environment, the insolvent financial system in much of North America and Europe would have ceased to exist in its present form. Instead, it's being nourished and nurtured in ICU at enormous cost to the taxpayers. Mish describes it best as:

The method of recapitalization is best described as robbing Taxpayer Pete to pay Wall Street Paul. In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed.

And now that every country is willing to do 'whatever it takes' to help their elite class of bankers, Canada will be forced to up the ante as well. Otherwise, the 'regulatory arbitrage' will come into play and capital will flow away away from Canadian banks.

Please do go out and vote and try to make whatever difference one vote will make.

Weekend Open Thread

Update: So much for only talking about buying back mortgages. They are now buying $25 billion worth of garbage to ease 'liquidity' concerns. Too bad that our 'pride' and 'faith' in our financial system will lead us down. No debate, no policy discussions. At least in the US they ran through a charade of democratic process. Not here....the hockey season has started for sure.

• Brent crude below $80. How long before we see $60, or dare we say $50 oil?

• Roubini warning of ‘severe global depression’ if radical measures are not taken. Too often government actions only exacerbate the problems. I think the train of pleasing the markets by rate cuts and simple fiscal measures has long left.

• Loonie continues to plummet and is now going at a princely 85 cents. Days of rejoicing in Ontario won’t be too far, provided there is too much demand left in the US to keep the factories in Ontario running.

• Canadian banks are safest ones in the world, but based on similar surveys, so were Lehman Brothers and WaMU. And if everything is well with Canadian banks, what’s the need for ‘Paulson style’ recapitalization using the CMHC as the buyer of last resort? There’s bound to be lot of toxic garbage on the books of these banks. After all, someone lent to all the ‘property barons’ of Alberta, BC, Ontario and Saskatchewan during the ‘last commodity boom’ (if I may take the liberty of calling an end to the boom, or am I too early?). So how will this work? Apparently, the exchange program will work the same way as in the plan of Dr Evil himself- the AAA rated CMHC bonds (which we discussed a while ago here) will be swapped for the 40 year NINJA variety loans (read an anecdotal example here- international students in Edmonton buying $300k condos) so that the banks’ balance sheets are strengthened and lending to Canadians is not impacted. As if we really need more debt to buy overpriced condos, twentieth iPod and the third gas guzzling SUV in five years or take the cruises to the Caribbean.

• And on a personal note, we have not bought anything on credit since recognizing the perils of buying on debt when we bought our first new car ten years ago. And we are still driving it. And we will positively pay all cash for our house as soon as sanity returns to the markets (like it is returning to stock markets).
  

• As and when the markets begin to bottom, there’ll be some great opportunities for those who have a fat savings account at ATB. I don’t know when this will occur, but that day will arrive eventually.
• And finally, a happy Thanksgiving to all of you-bulls, bears, readers, optimists, pessimists and realists. Good health and strong families are way more important than material wealth. Let's count our blessings and get ready for another down week (not)!

What Now?

I’m not a big fan of doomsday scenarios, but what has transpired in last week is nothing less than astonishing. The markets worldwide are in free fall. Loonie just lost 10 cents in a week (my call of going into USD was pretty good I think). The shine is about to wear off of the strength of the Canadian economy. The commodities will fall further and could push Western Canada into a deep slump. Ironically, Eastern Canada could benefit again in the backdrop of a weaker loonie. This scenario is increasingly likely to play out as the deflationary forces strengthen their grip on world economy and hapless central bankers and debt ridden governments and consumers watch the show like meek spectators.

Master Card recently recorded a 9.5 per cent fall in US gasoline sales in September 2008 versus last year’s numbers. Canadian sales held up a little better and were down only 5.4 per cent in August. I won't be surprised if sales fall further off in the coming months. October is likely to be worse. People who have just taken a 50 per cent of more haircut on their 401k and RRSP’s won’t exactly be jumping out to vacations and burn gasoline in gas guzzlers. Don’t expect Asia to be savior either-Japan is falling into its gazillionth recession in the last 20 years, China is slowing down and India isn’t fairing too nicely either.
As unemployment rises further in the US (some people are forecasting a double digit unemployment rate by the time everything settles), there will be further reduction in gasoline and commodity demand. This demand destruction will outstrip any, if at all, demand increases from the emerging economies.

The big questions are- if the clock rewinds to 2004 in terms of asset prices, commodity prices and job opportunities are you sufficiently prepared? Can anyone even imagine another bust in Alberta when most of the people around you are drowning in debt and falsely insulated by the 'home equity' gains. Or by the illusion of 'secure jobs' in the Oil/Gas industries and pretty much everything else that services it. I can't think of any industry that will pick up the slack employment wise if Oil and Gas sector fizzles again. The government depends too much on the tax and royalty revenues that basically stem from the oil and gas industry.
Too bad that Alberta manages to kill all the diversification that occurs during the bust years in less than 3 years of a boom…

Central Banks are Panicking....

...and have cut interest rates almost in every part of the world. In US, Canada, EU, BOE, China (and every other Banana Republic) has cut interest rates by half a point. Too bad Japan can't join the party. The ammunition of interest rate cuts is now seriously depleted, at least in the US. The big question is-what if the markets shrug this off as it becomes aware of the enemy. Sure you could get a dead cat bounce, but it doesn't change anything fundamentally. Consumers that can't buy any more houses (except in Alberta perhaps), banks that don't trust each others and an enemy that is as cold as the Hannibal.

"A Depression doesn't run hot and fierce like some crazed meth burner. A Depression is methodical, purposeful, patient. It will build a shelter out of tree branches and newspaper, light a small, well-contained campfire and wait you out, brother. While you feed on the empty calories of denial and popcorn, it will quietly gather shards of broken dreams and fashion them into a terrible weapon of blunt force reality."

Meanwhile, let's enjoy the last few days of easy credit flow in Canada before the faucet dries up.

Monday Market Turmoil

Despite the biggest boondoggle of this century getting passed quickly and becoming law, world financial markets are tumbling. Nikkei down 4.5 per cent. Indian stocks down by almost 6 per cent. Oil below $90 (who could have thought that?). A lot of people were speculating that Fed would cut again, but when you have so few bullets left in your armor, you do not want to waste them every time the markets fall by 5 per cent in a day. The days of Greenspan put were so good....
But finally it looks like Fed has found its match or better still. And that is deflation.
If global deflation does materialize, it will be very painful for everyone, but especially for those who carry debt. Commodities will be hit hard.
The last thing you should want to do is get into a zero down 40 year mortgage, but a lot of people seem determined to lend to people who can't save even $20k for their down payment. Yes, we don't have sub-prime in Canada.

Deflationary Week

The WSJ has a very interesting graphic on how various investments did in the last week. It was massive wealth destruction across various asset classes.



We can safely add the TSX and Canadian dollars to the asset classes that were mauled quite badly.



The most common opinion out there is that the bail out package is inflationary. But a few people, including those from the Austrian school say that the bailout package is of very small scope as compared to the massive deflationary spiral that has been unleashed by the global credit contraction.

And while those who called for oil prices to fall below $80 or so were called lunatics just a few months ago, Merrill Lynch has now released a forecast for $50 oil if the global recession materializes.

Alberta Real Estate bulls and 'Fundamentals are strong in Canada' proponents had better be prepared to handle the destruction of their favorite underlying factors(commodity boom).

People are mad as hell....

...and they are showing it. On the momentous occasion of another attempted bailout in the house, a couple of clips that behoove the situation.





In other news, commodity bust is enjoying eating the TSX gains made during last few years. Are we back to 2005 yet?
While the gloom and doom spreads around us, remember that we'll be presented with some great once in a generation opportunities in the coming months and years. Stay put in cash (preferably at ATB) and when everyone is running for covers, it will be time to buy. But we are far from it in Alberta real estate yet.

Global Demand Slowdown

...is happening at a fast pace. Canada has been one of the biggest beneficiaries of the boom in China, India and other fast growing emerging economies. But it looks like something is finally beginning to give in after years (or decades) of relentless growth.
Here's an interesting link on how Chinese importers are defaulting on Iron Ore purchases from India:
"Our exports are in deep red as there is no demand from China," said Rahul Baldota, president of the Federation of Indian Mineral Industries and managing director of miner MSPL Ltd.
Exports in the first half of September dropped to 1.99 million tonnes from 2.7 million tonnes in the same period last year.

FT is also reporting on the same item as well.

At least a few in Canada are taking notice of this:

That may sound like a manageable slowdown, but if China's economy hits any serious roadblocks, it won't take long for Canadian investors to start feeling the pain, given that nearly half of the benchmark S&P/TSX composite index is made up of resource stocks.

Island of Alberta should remain intact in the financial maelstrom though. Just ask any realtor or mortgage broker trying to lure the 'greatest fools' into a 0 down 40 year mortgage.