Thursday, July 18, 2013

Here's one from my week off

I picked up on the Pimco report from Vancouver Condo info.

The National Post has painted this as a don't short Canada piece. I thought I would read the original.

First who is saying it? Pimco. The world's largest bond dealers. What they say counts. 

Have they been wrong? You betcha. They bet big against the US bonds a few years ago as the US deficit exploded and then switched when they realised the US bond rally had legs.

Are they talking their book? From what I could see their Canadian bond funds have holdings from $3 Billion to as low as $7 Million.  Performance is from +9% YTD to -9% YTD, depending on the fund. 

PIMCO has $2 Trillion of assets under management. yes that's Trillion with a T. They are acknowledged to have two of the smartest bond brains that walk this earth....William Gross and Mohammed El-Erian. You don't get to a T without consistent performance.

However as you can see the Canadian funds are peanuts in the PIMCO empire. So while they may be smart, Canada is a side show for them.

So what did Mr Devlin say?

Did he say that Canadian housing will not correct and is not over-valued? 
NO. He said it IS over-valued and DUE for a correction and very much so in the over-heated areas like Vancouver. However he said it will not be the catastrophic event that everyone has been betting on. I HOPE HE IS RIGHT.

We may be housing bears, but we don't want our country to implode. 

Click on the link above and lets look at figure 2. Household debt to disposable income is declining in the US and UK and plateauing in Australia and rising in Canada. This cannot go up for ever. Currently low rates, HELOCs and asset appreciation are making us feel richer and pushing borrowing. We are no different from the Americans.

It is supported by higher wages. This ratio cannot go up forever. Eventually it will hit a hard wall and start down. 

Then there is the CMHC. I did not read any mention of this monster in Mr Devlin's piece. How can one discuss the prospects for a major housing correction without mentioning the CMHC?

A 10-20% correction, which is his benign scenario, will put a lot of stress on the CMHC and in turn the Federal Government which will have to bail it out. This will have to come from somewhere...higher borrowing or cuts elsewhere.

I hope Mr Devlin is right. I hope it will be a gradual deflation of 10-20% and larger hits in the bubble cities. I hope the Canadian banks will take a few quarters of bad earnings to get over it. I hope the tax-payer won't be skewered for the huge debt of the CMHC.

However what annoys me most is that all of this could have been avoided by less Government meddling and a sane interest policy.