Tuesday, March 2, 2010

A Tale of Two Countries

So the big party has ended. Kudos to the thousands of volunteers who put in hundreds of thousands of free hours into making it work. Without their free and friendly labour, we would have had a very different, and less successful event.

So to Canada and BC now and what we have in store for us. Forgive the rambling post- I am going to write it as it hits my cerebral cortex.

First lets look at BC.

We are in deep doggy doo-doo. $1.7 Billion budget deficit this year. Our debt will be an astounding $36 Billion in three years. The Government now says we will have a budget surplus by 2013..er right! This is the same government that was forecasting a balanced budget just a year or so ago- before the elections of course. Truth is they have no clue and if commodities start to go soft, expect a higher deficit and more cuts.

They are going to cut 3500 government jobs by attrition, (lets see which industry is going to pick them up) and are spending more on infrastructure- what more do we need to build? How about an eight lane highway to Cache creek?

I would expect Olympic bills and law-suits and costs to maintain the new facilities will roll in for some time, and will add to our fiscal woes. Then there is the city and we have to wait and see how much we all end up being on the hook for the Olympic village.

Now to the BoC

In Australia which is very much like us- it is also a commodity-exporting nation, where there is also a housing bubble, despite Millions of acres of uninhabited land- the Australian Reserve Bank just raised rates to 4%.

That's right 4%.

Meanwhile our bank, after warning about the housing bubble, after warning about the personal debt bubble- has today decided to stay PAT at 0.25%! Pathetic really.

Why the difference, because our Bank, like the Fed in the US has become completely politicized and is not an objective defender of either currency value or stable prices.

Rather they see themselves as defenders of asset values. Since they allowed the cat of the bag, by allowing assets to balloon and then allowing debt to be piled high on these assets, they are left with no choice but to try and prop the assets up at ALL COSTS.

They hoped that the breathing space would allow speculators to unwind leverage gracefully, but to their shock the leverage HAS GROWN (duh.. what do you expect at 0.25%) and so they wag their limp fingers at borrowers and... do nothing.

Much like that complete fool Greenspan did.

In any case we should be at 2% at least..Why 2%?

-that is our true inflation rate,
-it will dampen speculation without damaging legitimate businesses
- AND you have something left to cut when the next &(*& hits the fan.

But how can they raise when one Province alone will be in debt to the tune of $36 Billion in a few years, when $500 Billion has been added to the National liabilities by the CHMC alone.

OK- To Vancouver Housing.

What now? I have no idea whether rich Finns and Danes will start flocking here to buy properties or whether the current problems in Europe will escalate and they will have their own problems to deal with.

However we are now up their with the most expensive cities in the world, based on price to income and price to earnings (rental income).

Demand has been strong, both local and Far East. We are now at the all time highs in terms of price, in fact a couple of % higher than May 2008. What a difference a year makes. If you think about it, what has driven the desire to buy is the fear of being left behind and the greed for gains.

Late 2008 and early 2009, the game ended and the rampant price rises became price declines and folks pulled back sharply. The price was heading towards fundamentals. This was something that could not be tolerated, since the fundamentals dictated a price 40-50% less.

So they changed the fundamentals- 0.25% rates and the new fundamentals supported price and in came the fear and greed again.

I noted this in early March and April, that the 20% price drop and the 30% drop in carrying costs had given us the 50% decline that we were looking for, and some folks may want to buy in.

The dramatic way the policy makers would throw caution to the wind and AGAIN try and prevent a normal business cycle (which requires price busts too to cleanse out speculation and PREVENT a bubble) took all us bears by surprise.

Capitalism REQUIRES a boom/bust cycle. If you are stupid enough to think you have found a way to prevent the bust, like Greenspan and his idiot students in the World's Central banks, all you have done is blow up the boom to lunatic levels and made the subsequent bust catastrophic. I don't think for one minute that this credit implosion cycle is over.

Those who do, are missing the news of countries like Greece, which are fiscally bankrupt and now need other countries to bail them out!

This either has to end in a deflation or inflationary resolution, and it is not clear which one it will be.

The biggest problem with all this, is if the market does collapse, then the fiscally prudent ones will carry most of the burden. How?

By getting next to nothing on their hard earned, tax-paid savings. By having to bail out the CHMC if loans go sour. By having their cash inflated away so that those who piled on debts can pay them back with cheaper dollars.

Now our wise Premier has said that taxes can be deferred and paid on sale of the home, as if the home is some treasure chest which mints gold coins. What happens if prices drop and the seller cannot pay back-taxes? the services still have to paid for..by the rest of us, who kept up with our obligations.

So where does this get us?

As I said before, the bubble graphs would still be valid if we just had a divergent high. That means the price goes up, but with lower volume and in a more narrow area. This seems to be the case. However, if we keep pounding up, then the graph has been invalidated and all bearish bets are off.

Graph from Larry Yatter's site: