Entitlement and Delusions

The welfare queens and kings of Wall Street have already decided to start partying like it were 2007, never mind the trillions of dollars that have been forced upon taxpayers to keep these toxic dumps afloat. But, the underlying chutzpah at these places is enormous, along with the natural sense of entitlement that accompanies it. So what if we screwed up, so what if our products were garbage, so what if our products add negative value; we are entitled to the compensation, because we need to have the 'best and the brightest.' If this is the cesspool you get by hiring the best and the brightest, I wonder what would mere mediocres have done?

The OPEC ministers sing the same tune saying that a fairly high price of $50 is not good enough and is 'undermining economy.'
The wizards of the government economy in Alberta are not too different either as they are borrowing in the hope that the recession will go away if they wait for long enough. It's the same sense of entitlement- higher commodity prices- irrespective of the the macro economic situation. Well, here's a question. If $50 oil and $3.5 natural gas ain't going to cut it in Alberta, what happens if the prices again halve from here on? Can someone say the definite collapse in the mid east asset markets and Klein style cuts in not too distant future. Natural gas btw, is now down to around $3.2 and likely to fall further. We have been tracking natural gas since January and its slow but steady decline from $5 or more to the present levels. What this is doing to the drilling levels in the province and corporate profits will be discussed in another post.

At a more local level, thousands of 'landlords' are wishing that the recession goes away. They can't/won't/don't reduce the prices that reflect the current market conditions and hope that the prices will bounce back to a level higher than the current values. Again, it's a strong hope and delusion, built on the underlying entitlement of 'higher prices' for 'my real estate holding'.
The economy has changed since 2007. Many companies are talking about a permanent and new 'baseline' for sales, production and consequent growth.
The economy of last few years was a mirage. It ain't coming back, neither are the prices of assets that were used to foment this mirage.
A lot of people, currently on EI and the governments willing to take on more debt will recognize that despite the loads of apparent green shoots that appeared in last few weeks, nothing fundamentally has changed. The economy still stinks, no matter how much perfume is applied to it to make the stench go away. It simply can't be fixed by a culture of entitlement, and believing in the ideas of unfounded hope.
Debt deflation is here and it can't be wished away.

Season of Hope, again

The warm weather of last few weeks along with the ferocious rallies in equities markets worldwide has germinated what had almost disappeared by the middle of March. Optimism is back, and not lest due to the President who got elected on the message of hope. Optimism and hope are very powerful emotions, especially when there isn't much else available. And they were on vivid display and action during the last month and a half. The calls of 'the bottom' have been getting more vociferous, even if more cantankerous for us. 

So what if the world buccaneered in an orgy of debt for 25 years, the  magic potion of more debt by the Fed and the treasury cured all the problems in less than 18 months. The credit bubble will unwind in just as short a time and everything will begin their ascent to the end of the universe again. Oil will rise again, and so will other commodity prices. Alberta will blossom again, and this time Fort Mcmurray trailers will sell for $1 million. 

And how can we forget the major upswing in home sales across Canada? After all, sales in March have been higher than in Feb and those in April will probably be higher than in March. Notwithstanding the fact that this is as much of certainty as the average temperature going up in these months as compared to previous ones. But since this is the season of hope, no one is supposed to question such basics. 

But hope, like greed is a very powerful emotion. It clouds judgement. It diminishes the capabilities of mind to contemplate simple 'what if' scenarios. Not the ones that reinforce your perspective using selective data from the last few years.  Scenarios such as- what would happen to Alberta if oil goes back again to sub $30 level for a long time. Or if natural gas goes below  $3. Yeah, but we were told that oil  will never go below $80. 

I was looking at the new MLS site the  other day. For some reason, I did not hate it as much as I hated it the first time I used it. I almost liked it a little bit. If we forget the average and median prices for a moment, I think we are back to the levels last seen in April  2006 for many of the property types I used to track. A starter shoe box in Edmonton North is down to around $275k, and unlike in April 2006, there won't be multiple bids raising the price but some aggressive buyers who will ask for 5 to 10 % discount. It's the same story in Calgary. In Calgary, the homes that were selling for(at least  listed for $430k) are now going for around $340k, plus the  possible discount. 

These are not pretty numbers and have got to hurt those who have bought in  the last three years.  For most of these people, they haven't paid more than 5% of their mortgage and  are clearly in the red after accounting for the closing costs etc.

But these are all inconvenient facts. Facts that have the potential to dash hope and cause despair. And anger, frustration and grief. And that is to be avoided at all costs, no matter what the reality. So, the alternate reality world in which only good news happens, and is reported must be created and cherished. 

Credit bubble unwind, global deflation, falling employment, falling commodity prices, falling aggregate demand, falling real estate prices, exorbitant prices for shoe boxes, tapped out consumers, massive over capacity, end of 40 year mortgages, heavy over consumption and subsequent lower corporate profits are mere distractions. The world has changed with hope. We can wish the recession away if have strong will power. If we want to it strongly enough. Like the Russian comrades who could wish the fall of the Soviet Union just by believing in the alternate reality.  

But we know how that ended.  

The Biggest Delusion Revisited

One of the key things that bulls and bears alike must understand is that the recent run up in Alberta real estate prices had little do with the ‘oil economy’ of the province. It was more about real estate frenzy that gripped almost the entire world (Except Germany and Japan). It was more about cheap credit and gullible masses willing to go into massive debts in order to make quick profits. It was also about becoming house poor and getting into massive 40 year amortizations to somehow get into the market and not be priced out forever.

It was also about unscrupulous Realtors and Suzannes getting people to buy dilapidated eighty year old properties on Alberta avenue for $300k.

Not unlike the legions of day traders that were created during the tech bubble of 1999-2000.

Of course, in certain cases, like in Alberta, local supply and demand factors added fuel to fire. And we saw one of the most rampant price appreciation in real estate witnessed in the recent past.

But the market has changed since summer. Prices have been falling for the last several months in Edmonton and Calgary.

Denial is still fervently prevalent and the perma bulls do not hesitate to mock those who question their bullish perspective of "moderate correction is already done and we are set for ‘normal’ appreciation of 6 to 8 per cent till eternity.”

But not without reason. The reason unfortunately, is the same as has been used by all those who have ever bid up the prices of an asset to valuations far beyond its true value. In 2000, tech stocks were the rage because there was a ‘new paradigm’ of tech nirvana that the world had just discovered. For Vancouver, it’s the Olympics and the desire of every mortal to own a million dollar shack in the most beautiful city in the world.

In Regina and Saskatoon, well, the list of compelling reasons begins to shorten. But what was happening in Islamabad Pakistan (a third world country with no democracy and really low quality of living)?

The problem with most Alberta bulls (and those at all other places!) is that they do really believe that they are different. Truly different.

They conveniently forget that the same crappy $250k condos (down a good $50k already from the peak) were selling for around $100k in early 2006. They can weave all the ‘cock and bull’ stories they want to delude themselves, but nothing fundamental changed in the dwelling between 2006 and 2007. Yet the prices doubled.

As I’ve harped ad infinitum in the past, there’s no real reason why the prices should be so high in Alberta, incomes notwithstanding. In free, unregulated markets, cost of production ultimately determines the selling price. All the core ingredients for making a house-land, building materials-except labour are in abundance here. With the weakening in the oil and gas sector, more workers will move towards residential construction, easing the labor pressure. The prices are going to fall as they are now falling in almost all of the US and the UK.

What we witnessed in the world in the last five to six years was a global housing frenzy. We were amongst the last ones to join the party and even though ours was relatively of short duration, we did bid up our houses to near highest levels in the country.

But it is coming to an end. Worldwide. The credit cycle is now contracting. The ABCP problems in Canada haven’t been resolved yet. The Feds can offer all the money to the banks, but there is already a perceptible swing related to risk appetite.

On a different note, thanks to the offer for advertising this blog. Although you are free to go ahead and advertise this blog, I don’t really think there’s any need for doing so. Those who want to make the biggest purchase of their lives without doing any research on the condition of their market should learn it the hard way. A few people do know about this blog: last month this blog had 19,000 visitor sessions.

I do welcome the idea of guest posts from both bulls and bears. So far no bull has taken up the offer of making a convincing bull case. Please mail your post to albertabubble@gmail.com

Have a wonderful Christmas and happy holidays