The Great Recession (2008-2010)

ECRI: Follow up to a "famous" post

2011-11-08T22:03:00.005-05:00

This is a long overdue post following up on my "famous" post on ECRI from July 2009. This post was quite widely read, including a mention from Mish and Barry Ritholz.

Everyone makes mistakes. I have made many (ex. I thought that a double dip recession would start in 2010 and I did not think the market would ever hit 1300 again back in 2009). I just wish that ECRI would have admitted that they were a little late in calling the last recession. I don’t agree that there was a unique opportunity to avoid recession and Lehman in early 2008. I wish they would admit that they blew the housing market call in 2007. I wish they would stop using selective passages to market their past track record (as Mish has chronicled well a few times).

That being said, I admit that I was wrong back in July 2009 and ECRI was right (their call was made on April 30, 2009), when they were among the biggest bulls on the economy and they correctly stated that "We'll definitely see the end of this recession this summer."

According to NBER, the recession ended in June 2009. I issue a full apology to ECRI for that particular criticism.

Now that past issues are out of the way, let’s focus on 2010. ECRI was once again right in their call that the economy would not double dip, despite a huge drop in the publicly disclosed WLI Index. (Once again, I thought we would double dip, but I was wrong).

Now, as of September 2011, ECRI has come out with their “recession is inevitable” call. Now that the stock market has rallied big time since early October, people are getting a little nasty with ECRI as this recent CNBC interview demonstrates. The fact that ECRI's call is coming in the face of a sharp stock market rally (as was also the case in 2001 and 2008) and is being attacked by many, gives me further confidence that they are right.

It is possible that their call is one again late, as GDP was very slow in Q1 and Q2 2011, and with further revisions, it is possible that a recession has already started.

It is also possible that the recession will start soon (the best case scenario for ECRI). I agree with Lakshman that the stock market is nowcasting and likely responding to coincident indicators.

I greatly respect ECRI’s opinion, since they have no false calls and they were way ahead of the consensus on their 2001 and 2008 recession calls. They are back in my good book after their excellent calls of 2009 and 2010.

As far as I know, the consensus has never once predicted a recession. The Steve Liesmans and mainstream economists of the world will never tell you about one until it is well established.

My personal view, outside of the information from ECRI, is that we are going back to recession. John Hussman has laid out a compelling argument. Nothing is 100%, as he correctly states, but a recession is quite likely.

Blogging

2011-08-08T16:15:00.000-04:00

I haven't blogged for a long time. I just can't find the time given that family and work seem to take up nearly all of my time. Unfortunately, blogging also doesn't pay well for me, so as much as I would like to continue blogging and I have appreciated all the valuable comments, I don't think it will be possible, beyond an occasional comment.

The markets seem to finally waking up to the fact that there is just too much damn debt out there. Another recession is likely looming and with it, a bear market as well. A QE3 announcement from the Fed is more and more likely (although it will be interesting to see if the Tea Party is able to defeat it) and maybe another rally, but it appears that the markets are coming to the conclusion that you can not solve a credit problem with more credit.

Italy with $2 trillion of debt (about as much as Germany) can only be bailed out if it decides to give its sovereignty to Germany. Ditto for Spain. It can't be that easy as wars were fought over this type of thing in the past.

I still have all my long term bearish views from the past. However, I have learned from my mistake of being too bearish, on a cyclical basis, that when the sun is out, you need to go out and play. I was very bullish on certain stocks such as CMG and LULU but my bearishness prevented me from buying them once the market set a low in March 2009 (likely not THE low in my opinion). I subscribe to the Investor's Business Daily (William O'Neil) approach and if the market does give buy signals again, I will look for stocks.

For now, cash is king. Preferably US cash, in my humble opinion.

Disclosure: long US cash, short Euro and the loonie

PIMCO vs Spain

2010-09-22T10:14:00.000-04:00

From today's WSJ:

Prime Minister José Luis Rodríguez Zapatero declared that the European debt crisis is over but said that the governments have to work better together and with markets to stave off such events.

"I believe that the debt crisis affecting Spain, and the euro zone in general, has passed," Mr. Zapatero said in an interview with The Wall Street Journal on Tuesday.

Mr. Zapatero said his message is that "confidence has been restored," particularly after the country released results of tests that evaluated the soundness of its banking system in late July. The risk aversion toward Spain has also subsided as the government has shown progress in reducing its deficit.

PIMCO is saying the exact opposite.

“Market measures of risk for peripheral European countries (Greece, Ireland, Portugal and Spain) are at or near danger levels,” El-Erian wrote in an article posted Monday on Pimco’s Web site.
That’s despite “exceptional” support from the European Central Bank, the European Union and the International Monetary Fund, he added.
“The failure to reduce risk spreads means that the public sector bailout is not working,” El-Erian wrote. Rather than provide assurances of better times ahead and, thus, encourage new investments, ECB/EU/IMF support funding is being used by existing investors to exit their exposures to the most vulnerable peripheral European countries.”

I don't always agree with PIMCO as I believe that they are often talking their book (by pushing for government intervention in Fannie/Freddie while they hold billions of their bonds). Spain is "talking their book" as well, as they hope to build confidence in their economy and their bonds. However, in this case, I side with PIMCO.

History is littered with these types of statements just at the time that crisis worsens. In May 2008, there were tons of declarations that the credit crunch was over, when in reality, it was only a pause before the real credit crunch started.

The Euro is approaching its summer highs at 1.34 as it ignores the developments that PIMCO highlighted, but I believe that before the year is done, we should see a return to the 1.15-1.25 range that I highlighted back in late 2009 when the Euro was near 1.48.

Ultimately, the Euro is heading back to par or lower but that may be something for 2011 or 2012. I believe that a super strong US dollar would wreak havoc on the stock market.

Disclosure: Position in the Euro and US dollar.

Great interview with Robert Prechter

2010-08-31T00:33:00.000-04:00

I wanted to pass along this great interview with legendary Robert Prechter of Elliot Wave International. Mr Prechter wrote an amazing book, Conquer the Crash back in 2002

and updated it in 2009,

Much of what he predicted is happening, albeit much later than even he had thought back then. I highly recommend this book. It predicted the demise of Fannie, the current deflationary depression, the meltdown in the financial system, etc...

Anyway, this interview by the Daily Crux explains the deflation camp thesis very well and also surprisingly mentions Toronto (and Canada by extension)...

Crux: Well, not everything. Gold is at all-time highs...

Prechter: And so are Toronto real estate and vintage wine. But let's put these markets in perspective.

Prechter goes on to say later:

Here in 2010, a few late bloomers are making new all-time highs. I never thought the long-term inflationary topping process would take this long, but it has.

At each of these peaks, investors have focused on one area or another. Every time it's happened, the area of focus has reversed trend, plummeting in price by 50% or more.

This latest credit reflation is the weakest yet, so it hardly inspires confidence that today's isolated bull markets will end any differently. Each time a bull market matures, investors are sure it can't reverse. They said that about technology and Internet stocks; they said it about real estate; they said it about oil.

Now that a couple of markets are at all-time highs, we hear the same argument about them. This is natural, because investors always want to own markets that are way up. But investors in those previous booms are never going to get back to break even. Many of them were ruined.

Imagine a 50% price drop in Toronto!...Ultimately, I believe that the US real estate market is heading to a roughly 50% crash (it is at 30% right now). It sounds crazy to think that Toronto (and much of the Canadian real estate market) are going to drop 50% as well, but the history of bubbles indicates that as "today's isolated bull markets" reverse, such a drop may indeed happen.

Your parents' advice is wrong!

2010-08-25T00:58:00.000-04:00

Now that all the Obama adminstration housing gimmicks are finished, housing is heading back down after a brief bounce the past year.

I believe that all these gimmicks did is postpone the decline, waste taxpayers money and favor those that made mistakes with their housing decisions.

Housing sales dropped 27% to their lowest level since 1995, and point to a renewed drop in prices in the months ahead. The news was not unexpected, and adds to the recent dismal news in retail sales and unemployment. The only positives that I can see in the US economy right now is the ISM is still positive and corporate profits are strong. The ISM may turn soon and it will be interesting to see if there are any earnings pre-announcements in the coming weeks that point to weakening profits.

I also found this WSJ article interesting:

In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.
With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.
“People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale.
For the first half of the 20th century, he said, expectations followed the opposite path. Houses were seen the way cars are now: as a consumer durable that the buyer eventually used up.
The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as their bumper crop of children grew up and bought places of their own. The inflation of the 1970s, which increased the value of hard assets, and liberal tax policies both helped make housing a good bet. So did the long decline in mortgage rates from the early 1980s.

In the US (and especially California), people STILL expect housing to go up 10% a year! With inflation near zero, that is an astronomical assumption. That would put housing prices at record highs (even after inflation) by the middle part of this decade. These people just assume that what happened over the past few years was just a correction.

It is interesting how the housing wisdom of the Baby Boomers and the Silent Generation (in the parlance of Howe and Strauss) is actually not sound advice. And I hear it all the time from people my age and my parents generation. Even after the events in the US of the past few years. Renting is throwing away money in their view. Throughout most of their lifetimes, it was and housing has produced incredible wealth. In reality, it really was but a rare confluence of "a 100 year flood" type events concentrated in about 25 years.

Even in the best of years before the 1997 housing bubble, housing returned about 1% above inflation. I think it will take another 5-10 years to kill this 10% mentality (via a renewed 20-30% drop in home prices in the US over the next few years, followed by little or no appreciation for another few years). Then, maybe, housing will return to its traditional role as a necessary consumer durable but not an investment for most people.

US GDP contracted in May & June

2010-08-20T17:07:00.006-04:00

As a follow up to my view that a double dip has started(if indeed the recession truly ended- I don't believe it did!). Courtesy of Gluskin Scheff's David Rosenberg, whose awesome daily publication is free(!!):

Our suspicions have been confirmed — the recession never ended. Macroeconomic Advisers produces a monthly U.S. real GDP series and it shows that the peak was in April, as we expected, with both May and June down 0.4% in the worst back-to-back performance since the economy was crying Uncle! back in the depths of despair in September-October 2008. The quarterly data show that Q2 stands at a +1.1% annual rate (so look for a steep downward revision for last quarter) and the “build in” for Q3 is -1.5% at an annual rate. Depending on the data flow through the July-September period, it looks like we could see a -0.5% to -1% annualized pace for the current quarter. Most economists have cut their forecasts but are still in a +2.5% to +3.5% range. What is truly amazing is that despite all the fiscal, monetary, and bailout stimulus, the level of real economy activity, as per the M.A. monthly data, is still 2.5% below the prior peak. To put this fact into context, the entire peak to trough contraction in the 2001 recession was 1.3%! That is incredible.

As I stated in June:

I believe that double dip has likely started. Yes, I know that economists have solid growth projected for 2010. I listen to the market, which is speakly very loudly right now. By the time, these bookish economists wake up, the S&P will be at 850.

As the great Bob Hoye has researched, in a post-bubble credit contraction, the economy and stock market often peak at the same time. The high in the 1873 and 1929 stock market was was September, and the respective depressions started in October and August respectively. In 2007, the stock market peaked in October, the recession started in December.

This clear peak in April, if it holds and if the stock market continues to sell off, likely means that a double dip has either started or will start very soon.

Now, I incorrectly thought that we would hit 950 in July (the lowest was 1010), but I have not changed my view about 850 by October as a recession becomes factored in as a possibility by the economists on Wall Street. Currently, they are bringing their numbers down to the slowdown camp. There are few forecasting an outright recession at this point, despite the fact that Q2 GDP will be revised down to 1.5% and Q3 looks even worse.

Now that Macroeconomic Advisers has put out a negative number for May/June, this lends credence to what I stated. The horrible economic data of recent weeks is also further confirming my suspicion that as is typical in a post-bubble credit contraction, the economy and the stock market peak at the same time. Using ISM as a guide for monthly GDP, it peaked in April. So did the S&P at 1220.

A double dip recession is by no means confirmed, but it is becoming more and more likely by the day.

Disclosure: Positions in HSD, SDS and related options

The "New Normal"

2010-08-09T23:53:00.005-04:00

PIMCO has been saying that the economy is in a "New Normal" whereby the world economy will grow slower, be more regulated, have higher unemployment and continue to deleverage.

Earlier in 2010, when the cyclical rebound was in full swing, the New Normal was derided.

Bloomberg in January had an article featuring critics of the New Normal:

Christopher Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ in New York, who pegs potential growth at 2.6 percent. “We’ve had financial-market crises and big workforce changes before, and growth has pretty consistently come in around 2.5 percent over the past 50 to 60 years.”

I won't profess to know what the economy will do over the next 50 to 60 years. It is indeed possible that growth could come in around 2.5% or even better. What I do know is that the past 50 to 60 years have featured an incredible debt buildup, especially the second half of that period. If we do grow at 2.5%+, it will be not be fueled by bubble credit. That 2.5% will need to be based on a more sustainable and more efficient foundation.

The jist of Pimco's new normal is that the bubble credit that fueled growth the past few decades is over. The de-leveraging will lead to slow growth for at least 3 to 5 years. This is not your normal post WWII recovery (if it is indeed a recovery).

Is it normal that:

1) Nearly 3 years after the recession started, the unemployment rate is near 10%?
2) That trillions of dollars were used (wasted?) on quantitative easing (QE)?
3) That house prices and stock prices are 30% below their peak AFTER a one year rebound?
4) Interest rates are at zero and will likely remain there for an extended period?
5) Annual deficits are measured in TRILLIONS!? We used to shudder at a $200 billion deficit.
6) One year in to the recovery, we are contemplating a second trillion dollar QE?

And yet, despite these (and numerous other proofs), much of Wall Street plugs in typical 2.5% growth for the next few quarters and years, as if things are the old normal.

The debate about the New Normal will likely be resolved soon. Perhaps the economy will grow at 2.5%+ the next few quarters (I don't believe it will), but it likely will not be in the old normal way (where the recovery is self-sustaining). It would be based on more of the same short term solutions that will, at best, buy a little more time. The public is growing weary of these short term band-aid solutions that bankrupt the future for dubious short term gains (hence the Tea Party and plummeting Obama ratings). I believe that the November mid term elections may be very big this year, perhaps similar to November 1994.

Are Obama/Bernanke going to try to pull a few rabbits out of the hat the next few weeks in an effort to avoid a double dip and shore up the prospects for the Democrats? I believe that the American electorate is getting suspicious of the never ending stimulus, and this may lead to even greater voter anger in November. However, Obama seems to be in his own world right now, and sticking to his liberal agenda, despite the fact that US is not a liberal country.

Ultimately, another 2008 crash is coming, once the New Normal becomes the consensus, and we realize that all the gimmicks are not addressing the underlying cause of this mess (too much debt). Just not sure when that happens, but it is likely to happen around the same time as the public anger rises to a peak.

Double Dip Recession likely has started

2010-06-30T17:00:00.003-04:00

I believe that we are in the midst of a hurricane that will eventually take out the March 2009 lows, perhaps later this year or in 2011.

Since late April, the S&P has dropped about 15% from 1220 to 1030 at the close today. I expect that we will hit 950 by late July, and 850 or lower in August to October.

This started with Greece but is now much bigger than Europe. This is the market pricing in a double dip recession.

I believe that double dip has likely started. Yes, I know that economists have solid growth projected for 2010. I listen to the market, which is speakly very loudly right now. By the time, these bookish economists wake up, the S&P will be at 850.

As the great Bob Hoye has researched, in a post-bubble credit contraction, the economy and stock market often peak at the same time. The high in the 1873 and 1929 stock market was was September, and the respective depressions started in October and August respectively. In 2007, the stock market peaked in October, the recession started in December.

This clear peak in April, if it holds and if the stock market continues to sell off, likely means that a double dip has either started or will start very soon. Recent economic reports have been very bad (retail sales, housing, employment) and lend credence to this likelihood.

I will let John Hussman argue the case based on economic fundamentals:
http://www.hussmanfunds.com/wmc/wmc100628.htm

This double dip is being caused, in my opinion:

1) by the end of the natural cyclical rebound from the 2007-2009 GDP decline
2) the waning impact of a ton of stimulus and printing money
3) A slowing in European and Chinese growth
4) the reemergence of the underlying credit contraction that will take years to complete
5) the end of the US dollar carry trade that I had discussed for months

In 2009, governments were printing and spending money to no end. Now, in 2010, restraint (except in the US) is the name of the game. This restraint is ultimately healthy but will take years to restore government balance sheets. In the meantime, the natural rebound is winding up and the deflationary beast is back.

It is hard to predict how long this double dip will last, but my gut tells me about 12 to 18 months, therefore into late 2011. David Rosenberg has it right when he says that this depression will have a series of recessions. It appears that number 2 has started.

Disclosure: Position in SDS, Euro, US dollar

Black Thursday (1000pt down day)

2010-05-07T23:27:00.002-04:00

While there were glitches on Thursday, I don't buy the trader error story to explain why Accenture traded at 1 cent or PG was down 37% intraday.

The Yen was up about 3 Yen vs the USD (and even more vs the Euro) before any crazy trading happened in New York.

There is a lack of liquidity as the huge government bond market seizes up, especially in Europe. In addition, the huge moves out of the Euro (I think bank runs are part of this) and into gold, USD and Yen, is also putting huge pressure on leveraged equity players and hedge funds.

The electronic trading and the few remaining players in the game are also adding to the volatility.

I believe that Black Thurdsday was not a fluke but a warning shot that systemic risk is very much alive. Listen to the market. It is not healthy at all.

This is why I have written about Greece

2010-05-07T22:55:00.003-04:00

I haven't had much time to write for my blog due to work and family obligations. However, most of what I've written has been about Greece and the Euro.

Why such emphasis on a country of 11 million (the size of Ontario)?

Greece is the fault line. I have believed that the impending default of Greece, despite a "shock and awe" bailout that I didn't think would happen, is the catalyst for:

1) the end of the tight credit spreads for most insolvent countries. This is consistent with the history of great credit bubbles. This means a Seinfeldesque "no soup for you" to the international bond markets for Greece and the rest of the PIGS. There is too much debt out there, much of it will never be repaid.
2) the end of the Euro as we know it, and a huge dislocation in currency flows
3) A relatively strong US dollar
4) The re-start of the bear market that was interrupted for 13 months.
5) Another banking crisis as all that government debt becomes devalued and countries pull out of the Euro.

It is difficult to predict the future, but I am very worried that a redux of late 2008 is back.

There are still way too many bulls out there who think that this will be contained. I now fear that we have re-entered the September 2008 to March 2009 playbook where volatility rules and anything is possible.

I now believe that a quick 30% from the highs is possible over the next few weeks and months (mid 800s S&P), as things can unravel very quickly if the Euro goes to par in that time, and if multiple countries default, with bank runs and a powerless ECB.

One of my weakness is that I often see things before they happen. I had been worried about a bear market for years (pre-blog). I warned prematurely about a housing bubble bursting in Canada. I have been bearish on the Euro for years. I wrote about a currency crisis in 2008 that didn't fully materialize. I was looking for a huge bear market rally a few months early in 2009 and then I turned bearish too quickly.

This time I fear that I am being too slow in that I have not fully positioned myself for a 30% move that could happen in weeks not months.

I am not predicting this just yet, as the reversal is still new, but one possible doomsday short term scenario over the next 2 months:

Euro to par, maybe in the next few weeks. (Note that we almost hit my 1.15-1.25 range yesterday)
CAD to weaken to 85
S&P to 850
Gold to 1,500
Yen not sure

Risk is very, very high right now.

Disclaimer: I am currently long USD and CAD, short Euro, long gold.

Another month, another Greece bailout

2010-04-15T18:09:00.003-04:00

On February 11th:

“In theory, we will help Greece. But they haven’t asked for any money (wink-wink). Go about your business, quit speculating against Greece and let us get back to our bureaucratic plans to form a true European nation ”

Eventually, the market realized that this is just talk.

On March 25th:

OK, OK, we have a mechanism to bail out Greece and the IMF is involved, but we’re not giving you the EU taxpayer any details. And anyway, they haven’t asked for any money. There, that should end the matter!

On April 11th:

Alright then, you leave us no choice. Here are some details. We will sort of gloss over the fact that all EU members must approve this aid, and that it might even be illegal according to the EU charter.

That means that the German, Italian, Irish, Spanish and Dutch parliament (among others) must pass this aid BEFORE it gets disbursed. The IMF could lend without approval (meaning Canadian taxpayers are going to be involved) so perhaps the IMF would do the initial bailout and then the EU would kick in the rest. However, given my admittedly weak knowledge of the history of Germany, I have my doubts as to whether it would pass. What about the Irish parliament? They have taken draconian steps to balance their budget without a cent from the EU. Are their suffering taxpayers going to send money to the notoriously inefficient Greek taxpayer? All it takes is one government to reject the aid (think Meech Lake).

Greece said on April 11th:
The package “sends a clear message that nobody can play with our common currency and our common fate,”

Economic and Monetary Affairs Commissioner Olli Rehn:"There will be no default."

When Greece defaults, what will they say?

At this does is send a clear message that the EU, especially Germany, does not want to set a precedent here by bailing out Greece. It may have to, but it is scared. The IMF can do what it wants.

I believe that Greece will default and get an IMF (not EU) bailout. It needs to restructure its debt and then decide whether it stays in the Euro or goes back to the drachma.

Then the saga moves to Portugal…I am sticking with my 1.15-1.25 2010 target established back in December for the Euro. So far, the US dollar carry tread (negative S&P/USD correlation) has busted in 2010. Let's see if it continues if the Euro continues to sink.

Ironically, if Greece and other Club Med members left the Euro, one day (far, far away though) perhaps the Euro would actually be stronger.

Disclosure: Position in HSD.TO, SDS, EUO, US & Cdn cash

Little March Break

2010-03-15T11:43:00.003-04:00

I have not been able to post of late, as I have welcomed a new member to my family, and I have been a little busy (and sleep deprived) of late.

I plan on posting again soon. My big picture view has not changed but I must admit that I am amazed at the resiliency of the bulls. We are yet again at a possible inflection point, where the market can either go up to S&P 1230 or retest the February low/start a new downleg. March is often a key turning point in the markets (2000, 2003, 2008, 2009) as we approach the equinox and the ides of March.

Thanks for all the flattering comments. One generous reader noted that the Tip Jar was busted. I have fixed it now.

All the best....

Dominoes and Euro updated

2010-02-04T22:44:00.003-05:00

Euroland crisis: I posted my target for the Euro in 2010 (1.15-1.25) back in December when the Euro was near 1.50. It seemed far fetched.

Now that we are at 1.38 2 months later, it doesn't sound quite so outlandish. Morgan Stanley was correctly bearish at the time, and now dropped their target to $1.24 from $1.32. They feel that the Euro is overvalued by 19%. An overvalued currency in the midst of a crisis. The Euro is currently oversold and could bounce at any time, but I believe we'll see 1.30-1.32 pretty soon. The Euroland crisis was discussed further last month and now, the PIIGS are in freefall and have contaminated risk taking and destroyed the US dollar carry trade.

This is in my investment outlook for 2010 (not posted) and will be part of the unravelling of the USD carry/reflation trade of 2009. Currently, I see the S&P bottoming around 990-1020 over the next few weeks before bouncing a little. The real bear action will likely take place later in spring. I believe S&P 666 is going to fall in the second half of 2010, with new highs in the US dollar index.

What does Greece have to do with the Dow? Nothing per se, but the whole world has too much debt (much of it US dollar denominated) and is long risky assets (emerging markets, commodities, stocks). Greece's coming default/restructuring hurts risk appetites and is hurting the Euro and strengthening the US dollar. Since there are too many people with US debt, the rising value of the US dollar hurts those long risky assets. They sell the assets to pay off debt. Mr. Margin doing his magic after taking 2009 off....

Vancouver the biggest bubble in the world.

2010-01-26T23:50:00.002-05:00

A new report on world housing is out....

http://www.demographia.com/dhi.pdf

http://ca.news.yahoo.com/s/capress/100125/national/affordable_housing

Toronto housing severely unaffordable.

Montreal housing seriously unaffordable.

This excellent report uses housing prices to median family income as a measure. Now, I acknowledge that this measure does not take into account different tax policies, interest rates, demographics, weather, etc… However, big picture, this is an excellent tool to use.

In fact, Canada has poor tax policies, already rock bottom interest rates, poor demographics, tons of available space (we have one of the lowest population densities in the world), mediocre demographics, and poor weather in the opinion of most people.

If you adjusted these values to reflect these factors, our rating would be even worse. For example, the US has lower tax rates and a mortgage tax deduction, less available space, better demographics and better weather.

The report also has some unconventional thoughts on high-density versus low-density urban planning. This is beyond my area of expertise, so I will not comment, although I do like unconventional thinking, and moving back to the suburbs from the city, their arguments have a sympathetic ear in this blogger.

I take some issue with the report`s argument that the reason that many markets are unaffordable is land use policy (which roughly corresponds to supply). This is definitely a factor. However, the more important factor is that we are currently in a mammoth housing bubble. This bubble was caused by many factors, and land use policy is likely a minor factor in my view. The bubble was caused by a great credit boom that has spanned generations. Housing was (and still is, in Canada) psychologically deemed to be a safe investment that can not lose money. It is perceived to be the best investment class, despite little long term proof of that hypothesis. Over a decade or two, housing can be a good investment, but from today`s nosebleed levels, housing (or any other nosebleed asset class) is doomed to be a poor performer for years, and more likely, for decades.

By taking a snapshot at any given moment, we can make a determination (as this study does quite well) regarding whether housing is affordable or not. However, without the fullness of time or a full market cycle, it is nearly impossible to make reliable conclusions.

I believe that once the housing bubble in Canada deflates, it will bring housing prices back in line with affordability. In fact, periods of overvaluation are usually followed by periods of undervaluation. This same study done in 2000 or 2020 would yield very different results, and if it does, I doubt it will be because land use policies have changed materially.

I had suspected that Australia and Canada had the two biggest housing bubbles left in the so-called developed world. This report backs up this suspicion. Almost all other countries (UK, US, Spain, Ireland) have seen their bubbles deflate or start to deflate.

What do Australia and Canada have in common? Both are commodity countries.

The commodities and risk trade that reflated in 2009 (partly retracing the 2008 losses), has allowed Australia and Canada:

Strong export pricing which has lead to
Strong asset inflows and currency appreciation which has lead to
Low interest rates (as inflation is not an issue in this deflationary environment) which has lead to
“Relatively” mild recessions and relatively low unemployment which has lead to
No bursting of the housing markets (unlike the non-commodity housing bubbles)

I missed the call on Canadian housing in 2009, but I believe that both Australia and Canada will play catch-up in the coming years:

Why?

The commodity deflation and recession will restart in 2010 which will lead to lower export pricing and lower exports
Strong asset outflows and currency depreciation which could lead to
Higher long term interest rates as sovereign risk worries kick up (Not 100% sure about this one as the deflationary headwinds are quite strong)
“Relatively” severe recessions and relatively increasing unemployment (due to point 6)
A bursting of the housing markets as unemployment rises and personal savings increase and the same debt retrenchment that has happened in the US shows up in the Great White North.

The fact that Canada had a sharp recession in 2008/9 without its housing bubble and only a partial deflating of commodity prices is very worrisome for the next leg down.

Euroland Crisis

2010-01-11T23:21:00.001-05:00

We had a mini-currency crisis in late 2008/early 2009, when many currencies (Canada included) dropped about 20%+.

This currency crisis turned out to be relatively benign in most cases, not all, since it was accompanied by a credit crisis. The deflationary impact of the credit crisis and falling commodity prices meant that this currency crisis was actually welcomed by many countries, as it cushioned some of the impact of deflation. The massive collapse in global trade meant that many countries welcomed the falling currency.

Take Canada: Our loonie dropped to 77 cents, approximately 20 cents down from its summer 2008 levels. The Bank of Canada and many exporters were happy with this currency devaluation since it gave a temporary cost advantage to Canadian exports. In a normal situation, a 25% drop in the loonie in 2 months, may have called for emergency measures, including rate increases and would have caused the inflation rate to increase.

Despite the worries about Greece, the Euro remains quite high at $1.45, off from its $1.60 from 2008 and $1.51 in late 2009.

Why do we care about Europe? Besides being a huge economy that rivals the US, depending how you measure it, it has another impact. The Euro is 57% of the widely followed US Dollar Index (this weighting makes little sense but I digress).

A large drop in the Euro in the summer of 2008 preceded the Crash of 2008 by about a month. The Euro fell and so did commodities (as they are often correlated). At first, misguided bulls claimed that this was good as they wanted $147 oil to come down and lead the way out of the slowdown (what recession?). The Euro was dropping like a rock (from 1.60 to 1.45 from mid July to Labor Day). Pundits at the time claimed that this was because the European economy was slowing and rates were going to fall. Whatever, the reason, the rise in the US dollar was powerful and part of a cycle of a rising US dollar and falling asset prices. There is a ton of US debt out there, and when the US dollar rises, it makes that debt more expensive. Especially in 2010, the US dollar is a funding currency with 0% interest rates.

I believe that the Euro currency never made sense but needed a crisis to show this. The logic of the Euro is the following:

The strong countries (Germany, France) benefit since they no longer have to worry about the so-called PIGS (Portugal, Italy, Greece, Spain) devaluing their currencies against them, which would hurt their huge export driven economies. The PIGS and others benefit since they can easily borrow in a stable currency, the Euro, and hence, at lower interest rates. Win-win.

The problem: To greatly simplify, the PIGS took advantage of the lowest interest rates in their lifetimes to run up debt and in some cases, pile into housing. PIGS have lower standards of living, higher debt loads and higher inflation and yet a one size fits all currency and interest rate structure was the prescription.

The less efficient PIG economies have no way out of the current recessions. They can't cut interest rates (they are already near zero), they can't devalue anymore and most importantly, they can't spend their way out (the EU has strict rules on deficits, and these countries have massive structural deficits and looming funding problems). They have to do the opposite: cut spending and get their house back in order, which is a sure-fire recipe for union troubles, riots and social unrest, not to mention instant dismissal at the polls. The Euro is very unpopular as the cost of living in Euros is expensive in these countries.

The EU is not a country and as such, there is no national identity, no mechanism for bailouts between countries nor are there any transfer payments between countries.

Greece will be the test case, as they need to borrow over 50 billion Euros in 2010 and it is possible that they will not be able to do it via the bond market. If so, they may need to go to the IMF or the EU. If they do, they will likely be forced to impose draconian (by European standards) cuts to social programs. In addition, they will set the precedent for the other weak links. Are hurting taxpayers in Germany going to send money to Greece? In a country like Canada, there is a system for transfer payments between provinces. The EU has no such system. An IMF bailout would be a big black eye for an EU country.

I can't profess to know how this will play out. I do know that even if Greece dodges a bullet right now, there are too many holes in the EU dam that are leaking. Greece may be forced to go for some type of bailout as it would give political cover for the draconian cuts. However, it could start a run on other countries such as Spain (huge housing bubble and unemployment rate) and spill over to non EU countries such as Latvia. The EU could even decide to expel Greece if it deems that it does not have the ability to bail out member countries.

The timing is tricky (doesn't have to happen in 2010) but I don't think the Euro stays at its lofty levels. I believe that the Euro will not go away, but its luster will fade and investors will crave the security of the safe US dollar.

The next part of this bear market will involve currencies and sovereign debt concerns, I believe. And this currency crisis will involve the big guys (Euro and Yen- more on that one another day).

We are at a pivotal point for the US dollar and the Euro. A strong move that started 6 weeks ago, from 1.51 to 1.42 has now consolidated to 1.45. If the US dollar is truly in a bull market, it needs to move higher from here. Thus far, the S&P has shrugged off the higher USD, as it did for about 6 weeks back in 2008 before all hell broke loose.

My target for the Euro is $1.25 this year, but a move to $1 can not be ruled out if a 2008 crash develops this year or if we get some domino action (Greece, followed by someone else and with spillover to the usual suspects of Ukraine, Latvia, Iceland, Ireland, Hungary, etc...).

Disclosure: Position in USD, Euro, CAD

Helicopter had a “teaser rate” loan

2009-12-17T18:10:00.000-05:00

From Time.com, the extended Bernanke interview.

Q: Do you have a mortgage?

Bernanke: Oh, yes, we refinanced.

Q: Oh, perfect. When?

Bernanke: About 5%. A couple of months ago.

Q: Good time.

Bernanke: Yes. We had to do it because we had an adjustable rate mortgage and it exploded, so we had to.
Q: So, did you get a fixed rate at 5%? I think this might be the most valuable piece of information.
(Laughter.)

Bernanke: Thirty years fixed rate at a little over 5%.

With short term interest rates at zero, how does an adjustable rate mortgage (ARM) explode?

It explodes when you get a teaser rate. So a few years ago, in the housing bubble, Helicopter Ben likely took out a teaser rate (low rate initially/high rate after teasing period is over) and gambled that since his house would appreciate in value, he could refinance at similar or better terms at that time.

Wrong! Just like subprime would be contained.

He refinanced at a 5% 30 yr, a rate that low because of the Fed’s one trillion dollar purchase of Fannie/Freddie junk paper at a premium.

He didn’t go with another straight forward ARM at 4% and then switch to a 30 yr if 30 yr rates go lower. He clearly thinks that the 30 year is going up. It probably will as the Fed is scheduled to stop buying the junk in March and if the 30 year treasury yield goes up, as supply overwhelms demand.

However, given Helicopter’s track record, is it possible that that his 5% 30 year is actually a high rate and that rates are headed lower still?

Not saying it happens, just asking?

The guy can't even get his own mortgage right. Why do we think that he can manage the world's economy?

HT to Minyanville’s Branden Rife for pointing this out.

Dominoes

2009-12-09T23:11:00.001-05:00

The dominoes have started falling...

I don't expect them to be contained.

One of the amazing things to me is that after a ton of failures last year (AIG, Lehman, Citigroup, Merrill, Bear, Bank of America, Fannie, Freddie, GM, Ford etc..) and international disasters (Iceland), since March 2009, things have been very calm.

Until Thanksgiving weekend, when Dubai World basically announced a default prior to a four day Eid holiday.

Dubai World is technically not a sovereign, but basically the equivalent of a crown corporation of its government. The government of Dubai has stated that it will not bail out Dubai World. However, most reports have it holding the majority of Dubai's debt ($60 billion minimum of roughly $100 billion for the whole country- who really knows the true numbers?). Basically, a drop in the bucket in the grand scheme of things, but a possible domino in the interlinked global financial system. Losses in one asset class can lead to selling in other asset classes as leveraged investors sell good assets to pay for the losses, particularly in the case of those banks stuck with Dubai World paper.

My knee jerk reaction to Dubai (sorry, didn't get time to publish it) was that it would cause a short term sell-off until the "it's contained" bulls came out and bought. My thesis was that it would at temper the USD carry trade into risky assets by making people at least question default risk, especially in countries where the rule of law isn't quite as strong as in democratic countries. The market would then relax a little as long as the Dubai story stay contained.

And relax it did (much faster than I thought), and the USD completely reversed the flight to quality from Dubai. The S&P hit a new intraday high last Friday.

This week, Greece has been in the spotlight as it is basically running up too much debt after lying its way into the EU. Greece is another domino. Bigger than Italy, Portugal and Spain. The market now is pricing in a possible Greek default. It has a higher credit risk than Columbia or Panama. It is part of the Euro, so it can not devalue or cut rates to get out of its problems. Greece has to refinance or issue 47 billion Euros in 2010. Good luck with that! My guess is that the EU will force Greece to make massive cuts to its spending and increase taxes before even contemplating any bailout. The EU is reluctant to bail out Greece (and it has no official duty to do so) because it would create a moral hazard and the list for bail out candidates is very long.

Here is a list of other potential trouble spots:

1) Latvia is a small country, but it is on the edge of a devaluation of its Euro peg. Devaluation could spread to other Baltic and Eastern European countries, which have mindboggling debt loads. Where does most of the debt reside? European banks
2) Eastern Europe is a big mess. In the boom, credit was flowing to these countries (again European banks). Housing bubbles, euro mortgages for countries that don’t use the Euro, huge deficits. Ukraine may default and has a crucial election coming up in early 2010.
3) Spain has a bigger housing bubble than the US. It has likely yet experienced the worst of the implosion. Add Portugal and Italy to the list of suspects as well.
4) Ireland, the former Celtic Tiger, is in bad shape. It appears to be taking its medicine but you never know about aftershocks.
5) Dubai and the Middle East: Dubai has technically not defaulted, but realistically it has. It is the posterchild for debt excesses. If it can get bailout money from Abu Dhabi, maybe it can muddle through somehow. And all of this is with $75 oil. Imagine what happens if oil goes to $20!
6)Venezuela and Argentina are also possible trouble spots. According to the CDS market, they have a high chance of default.

Longer term dominoes:

1) China: I am not a believer in the China story. China’s economy is supported by exports and fixed investment. Exports are getting killed, obviously. However, consumer stimulus and fixed investment has more than picked up the slack. There is an investment bubble of epic proportions. Fixed investment is up 50% (!!!) over already inflated levels. Banks are lending with no realistic chance at a decent return. I see a lost decade coming for China at some point. With a rapidly aging population, China is rapidly becoming yesterday’s story and not tomorrow’s as 99.9% of the mainstream media would have you believe.
2) Japan has almost 200% government debt to GDP and is locked in the throes of severe deflation. It has been saved by rock bottom interest rates. If the market ever gets scared that Japan will not be able to pay its debt, interest rates would soar, making Japan’s debt load completely unaffordable. Japan has a ton of domestic savings, you say? Yes, it does, and that has saved it thus far. However, savings are dropping to near zero as its population ages while debt grows exponentially. This is a longer term domino but worth keeping in mind.

3) UK is in bad shape right now. If you get another financial crisis like 2008, good luck!
4) In the US, there is a huge reset in Alt-A and Option-ARM mortgages that is JUST STARTING. Combined with 10% unemployment, I expect foreclosures and defaults to soar in 2010, and house prices to continue to fall. Commerical real estate is a big mess. Budget deficits and growing intolerance for any new bank bailouts are going to make 2010 challenging for the bailout kings if things unravel once again.

Most of these dominos involve the same story. Too much debt, not enough savings.

What does this mean for 2010?

I have been looking for trouble abroad to be the next catalyst. I have laughed at those who have blamed the Americans for all of the world's problems. I even heard one analyst in Dubai blaming the US as the originator of the world financial crisis that has now washed up on its shores. Gimme a break! Dubai has built up a fantasyland in the desert with excess leverage. It was bound to fail eventually.

These dominos are likely to strengthen the US dollar especially versus the Euro, and tank commodity prices and stock prices as we go forward from here. I expect many sovereign defaults in 2010/2011 in addition to big problems with provincial and state debt loads in Canada and the US.

I am not sure how it plays out but I suspect that credit spreads are going to widen for most countries and it could even infect the safer credits of Japan, the UK, Germany and the US. The Dubai and Greece experience are going to make many bond investors look at the details of what they are holding (not sure why the experiences of 2007/08 didn't do that, but I digress). In addition, credit losses on defaults are going to hit, what else, the financial sector, with unknown further dominoes, including derivatives and/or bank runs.

In recent days, the US dollar has strengthened due to this return to risk aversion (and a strong employment report on Friday). The US dollar is the most hated asset class and everyone thinks it is going down. I think the dominoes are likely to send the Euro down to par over the next few years, and the US dollar is likely to be very strong in 2010 (target 1.15 to 1.25). This will unwind the carry trade with a steep drop for stocks and commodities. In addition, stocks are overvalued so a move to new lows in 2010 is very likely.

This does not even factor in the effect that an Israeli attack on Iran would have. That has a much higher chance of happening in 2010 than most are contemplating, I believe. (I will need to cover this in further detail at some point).

I suspect that with only a handful of trading days left in 2009, the bulls will keep things afloat for year end bonuses. Perhaps a move to new highs in January even. I fear that 2010 is looking to be a repeat of 2008.

Meanwhile, the useless mainstream economists (not Rosenberg or Krugman) will tell you that it is going to be a slow but steady recovery with GDP growth in 2010 & 2011 of 2 to 3%. When the catalysts hit, they will say "no one predicted X, no one could have seen Y" as their models can't cope.

Winds of Change in USD and SPX?

2009-11-04T16:58:00.005-05:00

I have warned about premature celebration regarding the economy.

What does this mean for an investor or a trader?

It is not crystal clear yet for me.

Personally, 2008 was relatively straightforward. As I warned many times over 2008, we were heading a lot lower. However, by late 2008 and early 2009, once we had crashed, the future was looking a big murkier to me. The problems are still there, but a 60% move in 17 months means that at least some of it was priced in. I correctly saw the potential for a bear market rally but I completely messed up the trading of it and did not allow the rally to run its course.

In recent months, now that the “easy" money (it is never easy) had been made on the short side in 2008, I realized that I needed to adjust my approach.

I began to distinguish my intellectually bearish stance (where I believe this entire rally to be false and doomed to fail) from trading on the bear side. Since August, I have been a lot more selective about waiting for confirmation of the bearish case to show up. I believe we at least have a bearish set up here and I am trading quite heavily from the short side (note that my stance could change tomorrow).

Since the September 23rd Key Reversal Day and more recently, the October 21st Key Reversal Day, the market has looked toppy. A number of technical indicators are at least flashing caution, and since September 23rd, I have played the short side carefully, with small positions and with small gains. We have had a bunch of double tops in key indexes (transports, Russell, SOX) and poor action in key sectors such as financials and homebuilders. Good news is no longer leading to gains, and bad news is met by selling. Volume has been heavy on down days and poor on good days.

In the past week, I have ramped up my short positions as confirmation of at least a correction have shown up. We may be in a selling stampede (Jeff Saut’s term) that normally last 17 to 25 days, and are interrupted by 1.5 to 3 day countertrend moves. By my calculation, we are likely in Day 12 on Thursday, and today’s FOMC reversal might have been the end of a 3 day counter trend move.

The setup is here, and I believe a move below recent lows of 1029 should lead us to 950/956 by around November 20th.

The bull case, in my opinion, is that we bottom around those levels and then rally back by year end or early 2010 to 1100 or higher.

The bear case is that we are going much lower than 950 and will take out the March lows, albeit not in 2009.

I believe in the bear case, but if we get to 950ish, I will pause and see the quality of any rally that develops.

Everybody is now discussing a new US dollar financed bubble (we covered this 2 months ago). If the dollar soars, as I think it might, S&P 950 is a slam dunk. However, to get the bear case to actually happen (beyond the current move to 1030ish), the US dollar needs to take Tuesday’s spike high and take out 77. A USD spike should kill the resilience that commodities have been showing and shave points off the TSX and S&P.

In addition, we need to see further strong selling (similar to what happened between 3pm and 4pm today) show up again this week. That will confirm to me that we are in a selling stampede that is about to get really chaotic.

Note that gold/silver, credit spreads, US long bonds and weakness in financials are all potentially warning of coming problems. Offsetting those signs are resiliency in oil, commodities and China.

I suspect that the market will decide this very soon. If we don’t go sharply lower soon, I will probably have to put away the bear case (again).

Positions in USD, CAD, Euro, QID, SKF, HMD, JPM, BMO, CM

While you were out celebrating the end of the recession…

2009-10-30T17:01:00.003-04:00

There have been a series of articles touting the end of the recession this week.

ECRI calls it the giant error of pessimism (the pessimism prior to a recovery)

ECRI and pretty much everyone now, thinks that we are going to see a stronger than expected recovery and that the recession is over. Q3 GDP came in at 3.5% (caused 100% by government spending, per Dave Rosenberg and others) and I would not be surprised to see positive Q4 GDP. However, this is not enough to declare an end to the recession. A quarter or two of positive GDP, especially with an avalanche of government stimulus, is not enough. The key, in my opinion, will be Q1 2010.

Bernanke and his clueless cohorts continue to cheerlead the recovery from a recession that they did not see coming.

Call me a realist.

I am wondering, where is continuing growth going to come from? The stock market is not always good at giving us guidance on the economy but in a post-bubble credit contraction, when it turns down or up, it can give us immediate clues to the health of the economy. In October 2007, the market topped and so did the economy a month later. In September 2008, the market tanked and so did the economy. Remember, until that point, all the so-called experts were not even conceding that a recession had started! In March 2009, the market rallied and the economy began to improve from a -6% clip to 3% in Q3 2009.

The same thing happened in 1929 when the economy shrunk in August 1929 and the stock market peaked in September 1929. Ditto for 1873 (hat tip Bob Hoye)

Let’s look at some important sectors that are not joining the celebration:

1) Restaurants: Most US based restaurants bottomed ahead of the market in November 2008. They led the rally since March. Many are down sharply in recent weeks. McDonalds, which is doing well and benefitting from the dropping USD, has said that customers are in retreat mode.
2) Housing: Sure, Case-Schiller is up for 3 straight months. Then why are housing stocks down almost 20% in the past month. There is a ton of foreclosed housing that is not even on the market yet. I believe that this recent rise in Case-Schiller is a blip.
3) Semiconductors: Again, another leading group that led the rally this year. Down about 12% in recent weeks.
4) Transports: A key sector, that has really stunk it up in recent weeks. Down 12%.
5) Russell 2000: Down 10%. This represents smaller companies that have little international exposure, and therefore, a good proxy for the US economy.
6) Financials: Key financials such as Bank of America, Citigroup, Wells Fargo are down over 20%. Also, credit continues to contract at alarming rates as consumers pay down debt and banks cut credit. Again, this is not your father’s typical recovery playbook.

Hat tip to Smita Sadana of Minyanville.com who has been tracking these groups.

So what is holding the market up here in the stratosphere?

1) US dollar. The sinking greenback has been giving fuel to commodities and the large sectors in the S&P. In addition, it props up the earnings of the multinationals that dominate the Dow and S&P. Finally, it is the fuel for the carry trade in which traders borrow USD at near zero and invest it is risky assets. In particular, corporate bonds have done very well, and I suspect that if the USD has put in a bottom, look out corporate and junk bonds. If the credit markets go, so will the stock market.
2) Large cap tech. Apple, Google, Microsoft and Amazon have had great runs of late keeping the Nasdaq strong. Any breakdown in the overall market will force these names to play catch up to the downside.

What is going to lead the recovery?

It does not look like restaurants, housing, rails, semis, domestic companies or the banking sector are going to lead 2010 growth, at this moment.

The sectors that are still holding on?

Energy/Commodities?
Multinationals?
Tech?

If the US dollar has put in a bottom, then I would expect commodities, multinationals and tech to enter a downleg, as revenues would fall and cost-cutting will not generate a recovery.

How about pharmaceuticals? These are a fairly steady sector of the economy that is unlikely to generate a strong recovery or start a recession at this time.

How about manufacturing and autos? Boeing and the automakers are struggling and don’t see a big near term pickup. This leaves the 3M, Duponts and Caterpillar. Jury is still out on these, and if the US dollar turns, good luck!

How about the consumer (70% of the economy)? See comments above on restaurants and hosuing. Unlikely, that retail will lead with housing and credit very tight and 10% unemployment.

How about government? This has been the single largest contributor to growth as stimulus and printed money have found their way in to the economy this year. Sustainable recoveries need more than government spending. And with $1.5 trillion dollar deficits as far as the eye can see, even if the Obama administration is somehow able to cobble another stimulus package for the economy, I believe investors are not going to be fooled again.

For a recovery to happen, you will need some participation from retail, banking and housing in my opinion.

Conclusion:

I understand the logic of ECRI's giant error of pessimism. I also understand the logic of the message of the stock market and the logic of an aging undersaving, tapped out consumer who is getting foreclosed. I also understand the logic that there is too much debt out there that needs to be extinguished once the banks "extend and pretend" shenanigans are "discovered".

If the US dollar has bottomed and the stock market has peaked, then I believe it is telling us that there was no sustainable recovery. Canada and the UK’s recent disappointing GDP reports only further confirm my suspicion.

$100 Billion: Not yet a tipping point

2009-10-22T17:19:00.003-04:00

Ontario $25B
Canada $55
Quebec $10 (I’m not using their fudged numbers- I’m using the increase in debt)
BC $3
Alberta $7

Total $100 billion (Let’s count the big guys for simplicity).

I warned about a return to deficits almost 2 years ago, when everyone was talking surpluses.

$100 billion is a lot of money. This represents about 7% of GDP. Similar deficits in the 90s caused a lot of belt tightening that was well absorbed by the economy during the booming 1990s. In the 1990s, the population was much younger (baby boomers moving into their peak spending and earnings), the technology bubble was just starting and credit was flowing freely as consumers were just getting started on the shop ‘till you drop mentality. In addition, there was a wave of deregulation hitting the Canadian economy. Remember Wal-mart only came to Canada in 1994, and you had no choice but Bell Canada for your wireline phone.

Now, we are an older population with a looming health care crisis. Health care spending is now almost 50% of most provincial government spending. Education is about a quarter. Consumers need to deleverage and start saving (unlike 1994), and housing is overvalued (unlike 1994).

TD Bank assumes that about $30 billion of this is one-time stimulus. However, to remove this, GDP would drop by 2%. To grow 3% next year as the BoC is expecting, the Canadian economy will need to grow 5% organically. Good luck with that! Therefore, expect the one-time stimulus to mostly remain for 2010 and maybe onward.

If one is optimistic and assumes that this is not a L shaped recovery, then some of this deficit will disappear as the economy grows and new spending is restrained.

However, just remember that during the recovery (again, assuming that there a recovery right now and indeed the recession is over), government revenues have to organically increase by $100 billion more than expenses over the next decade to arrive at a balanced budget. It is possible, as we did it in the 1990s (from about 10% of GDP) but as I mentioned, things were different then. Also, interest rates are historically low right now. Any increase in interest rates (something that should happen if the economy recovers) is going to make that task harder. In the 1990s, interest rates fell despite the boom. Those interest savings were passed on to taxpayers via tax cuts, as well as used to balance the budget and increase spending. Don’t expect that to happen this time!

If I am right and this recession is longer and more severe than most expect, we are going to go beyond $100 billion ($150, $200?) and we are going to reach a point of no return, where we can’t simply pretend that everything will go back to the way things were (I think we are still doing that, case in point the housing market).

There will then need to be draconian spending cuts, where the medicare system as we know it will no longer exist, tuition increases, large cuts to the payments to the poor & elderly and to the bureaucracy. In addition, tax increases and higher user fees will probably be attempted. If lenders do not wish to pay for our spending habits, long term rates could increase despite being in a deflationary world.

I believe we are heading a 21st century New Deal, where due to the current crisis, government will be forced to step away from the nanny state and focus on a few key services. The rest will be left to the private sector and regulated or managed by the government. It will not be ideology driven. It will be driven by realism. Ultimately, this will lead to a better Canada, but the next decade will be unpleasant.

All this with the shortest recession….

Horn tooting

2009-10-20T17:21:00.001-04:00

Mish-Krugman-ECRI

Last week, blogger extraordinaire Mish put out an excellent critique of ECRI’s recent record. As I was reading it, I thought to myself: this is very similar to what I wrote back in the summer (original and with ECRI comment). Then, I saw that Mish gave a hat tip to this blog (thanks!). He went even further than I did, and did an excellent analysis.

Apparently, Paul Krugman thought so too. While I often disagree with Krugman’s interventionist approach, I can not deny that he is a brilliant person and a Nobel prize winner. To see Krugman, the leading Keynesian of our day, agree with Mish, a strong proponent of the Austrian school is quite unusual.

Once the Mr. Krugman got into the game, ECRI had to do damage control, as it is doesn`t want Nobel prize winners questioning its calls or model. Any doubts about its calls or model can seriously hurt ECRI’s business, especially when that doubt it sowed by one of the preeminent economists of our day.

So ECRI put out a statement contradicting Krugman.

The Big Picture then commented.... Not sure, how it happened, but this little blog managed to write a piece that got the ball rolling and indirectly caused comment by a Nobel winner, 2 top bloggers and a top economic forecaster.

The funny thing is ECRI should be sitting pretty right now, as its April call for a strong economic recovery is being corroborated by the stock market which hit a new high this week. This doesn’t mean that it will ultimately be a good call, or that I agree with it. To ECRI`s credit, they came out boldly and early with the pronouncement.

Also, notice how none of this discussion took place in the mainstream media (unless you count Krugman’s NYTimes blog).

Questions on US dollar

2009-10-20T17:20:00.000-04:00

Question: is it the USD to watch or the Euro? Just that there appears to be an
inverse correlation between the EURUSD and US equities, gold, etc. I looked at
JPYUSD and didn't see the same correlate, and the 'commodity currencies' like
CAD, AUD, etc seem to rise & fall with commodity prices rather than what the
USD is doing specifically. While I agree that a spike in USD will likely
coincide with a drop in equities would a EURO sell-off coincide with that or
precede it?Does that make sense?
Also, I'm convinced this 'dollar doomism' that seems to be popular these days is rooted more in ideology than reality. Do you think perhaps, without getting into tinfoil hat territory, that there's a deliberate ploy to force the Fed to raise interest rates prematurely?

Not a stupid question at all. Euro is over 50% of the USD index (comprised of a basket of currencies including the loonie). Yen has been the strongest currency since the credit crunch started in mid 2007. I have been long it at times, but not sure if it will do as well in the next phase. Big movements in commodity currencies can influence USD. I watch the Euro religiously. It needs to break down for any sell-off to be meaningful in my opinion (as a sign of unwinding of the carry trade). The Euro is very, very overvalued in my opinion.

I agree that the doomism is more rooted in ideology than reality. Don`t see a ploy. Only ploy is borrow in USD, go long risky assets. A classic carry trade. I believe that since everyone hates the USD and likes the Yen, and there is no difference in interest rates between the two, the USD has replaced the Yen as the carry trade currency of choice. This will result in a soaring US dollar if asset prices drop once again. I no longer think that the Yen will soar the way it did last year, although I think the Euro and commodity currencies will take the biggest hit.

Disclosure: Positions in US, Canadian and Euro cash.

The second biggest bubble in the world: Canadian housing

2009-09-24T10:15:00.000-04:00

A mea culpa is in order. After a good 2008, my predictions on Canadian housing for 2009 are going to be a disaster. I admit it.

However, nothing I have seen to date tells me that the longer term direction of housing in Canada is going anywhere but down.

Due to government manipulation (see this excellent blog posting) which has surprisingly worked and record low interest rates, the Canadian housing bubble has reflated. Reflating bubbles are extremely rare, especially when combined with a stock market crash and a recession. Nonetheless, here we are.

Longer term, the housing market is going to go much, much lower. I believe that this echo bubble is completely nonsensical. Why? We are in a world of deflation, folks. Asset prices, incomes and wages are all either stagnating or dropping. Not just for months but years. Due to this echo bubble, the Canadian housing market has avoided the vicious circle of falling prices that create foreclosures (for now) which create lower prices (California).

However, the amount of debt in Canada is way too high. Despite what has happened to the rest of the world's housing, Canadians still believe that a 4% mortgage with 5% down for 35 years is completely sane. Based on the past decade, they have been correct. When this bubble truly deflates, a very similar experience will happen.

Forget all the explanations of subprime etc.... Those are revisionist explanations and symptoms of the problem. I look at time and price. When time is up on this boom, price will deflate. Canadian prices rose as much or more than US prices, and now for much longer.

Read this G&M article and tell me if it makes sense:

Why, after all the building of the past decade and the unlimited space that we have in this country, is there a perception of a shortage of housing?

The Canadian housing bubble is becoming as bad as the American one. A generational or lifetime high price in housing is happening as we speak and the bears have been capitulated. I plan on writing more on this as time permits.

US carry trade

2009-09-16T16:51:00.006-04:00

Art Cashin stated months ago that the US dollar carry trade was ruling the roost. I think he was 100% right. The key thing to watch will be the US dollar. As long as it is sinking at an orderly rate, everything else (commodities, credit, stocks, all other currencies) is going up. The world is long assets and short USD.

When it reverses (and I believe it will; a number of technical measures are moving toward a reversal, but not quite yet), this will crush these asset classes. I am watching the USD carefully. A move above RSI 55 may be the key (it is currently 31) and above its previous resistance around 78. First we may need a mini-crisis (perhaps a quick drop to the low 70s) in the near term to trigger the reversal.

Disclosure: Positions in USD, Euro, Cdn cash, positions in select SPY puts, JPM puts, IBM, CM.TO, BMO.TO, TCK-B.TO

The Towel

2009-09-16T16:39:00.006-04:00

In a post a couple of weeks ago I posted:

4) USD bottomed in early August?
5) Credit market topped in early August?
6) Gold/Silver doing a double bottom in late August?

Oil and commodities did a double top in early/mid August?
Stock market topped late August?

We need confirmation from the USD (rally to 80+), gold/silver to take out 70/72 and credit markets to tank.

This would likely confirm a top in commodities and stocks and allow for a substantial correction at a minimum and even possible a break/test of the March lows. To this list, I would also watch:

A) Financials
B) Yen
C) TLT (proxy for long term treasuries)

We know know that

4) USD headed lower and still sinking

5) Credit markets are doing just fine (for now)

6) Gold/silver ratio is heading to new lows

Financials are behaving fine (for now), TLT is doing OK and the Yen is soaring (normally a warning, but may be simply a reflection of every currency up vs the dollar).

All, in all, I have to respect what I wrote that day:

If we rally back over S&P 1040 right now after today's move to 998, then the bearish case may have to wait until 2010.

We got no confirmations from any of that list.

S&P hit 1068 today. I closed out almost all of my shorts around 1030ish, and I am in wait and see mode. I don't think the bearish case will wait until 2010, but anything is possible here as the bulls are in the driver seat. It remains to be seen if the car is heading off a cliff, though. Almost all major asset classes are at critical levels (gold, USD, Euro, stocks, etc...) and I believe the reversal will be incredible. However, for the short term, I need some sign of a reversal. Thus far in 2009, I have either been wrong or very early. I still believe that I am just early, but once again, I will wait for confirmation. A blow off move has ensued and a move to 1100-1120 is very possible. I still believe that new lows are coming and that this depression is a multi-year process. For now though, discipline must trump conviction.

The position that has caused me the greatest problem this year has been holding too much US cash.

Disclosure: Positions in USD, Euro, Cdn cash, positions in select SPY puts, JPM puts, IBM, CM.TO, BMO.TO, TCK-B.TO

Winter Update

2009-09-01T21:56:00.002-04:00

On July 6, I stated that I thought winter had started and that a top had been formed in mid June. On July 13, I recognized that a short term bottom was in, and a week later, when it became clear that a bull stampede was in place, that the real move down (ie winter) might have to wait until August.

It's OK to be wrong, in my opinion. Just try be wrong small. Easier in practice than reality, but that is another story.

In my July 6 piece, I identified why a top was in. Clearly it wasn't at that time. I thought it would be a good idea to update (in red) those items:

1) Lowry's Report. Basically, they are saying that the underlying demand and supply of the market is much worse than what the price action of the indexes is indicating. Their head Paul Desmond recently went on CNBC to say this and he expects a break of the March lows. A big change, as Lowry's has become a cautious bull. Therefore, this point is no longer valid for the time being.

2) The gold/silver ratio is warning of trouble ahead (thanks Bob Hoye) by jumping to 70 from 61. A similar jump happened last August. We all know what happened in September 2008! This ratio often leads in a crisis. Signal reversed after hitting 72. It has since dropped to 63, a level which it hit in August and now. Bears watching carefully. I want a move to 72+ to confirm ideally.

3) The US dollar appears to have bottomed. Another nail in the coffin of the bulls if it is true. Another false bottom but recently the US dollar has shown signs of turning up. Again, not clear yet. I want a move to 80 in the USD index with a daily RSI of 55+.

4) Commodities appear to have peaked. Another nail. Commodities rallied but look to be weak again. A true bottom in the USD is necessary for this to be confirmed.

5) Jeffrey Cooper from Minyanville.com, one of the best out there and a master of cycles analysis, has been warning of impending trouble from mid August onward. I agree. Still warning, and looking for a real sharp move down in September/October.

6) The green shoots were a myth. The proof is overwhelming that all you had was a slower decline in GDP not a return to sustainable growth (ie underlying demand, not inventory building). You could conceivably have green shoots at some point. I just don't see them yet. The biggest green shoot is the stock market. Yeah, that worked out real nicely in October 2007, when the S&P hit a new high, a month before the recession started, didn't it? Also, last month's US unemployment figures were horrible (while better than earlier in 2009, they were worse than anything in the last recession, including the period after 9/11- remember all those airline layoffs!). Consumer spending has also been atrocious of late. No real change in my view. Inventory building is taking place but final consumer demand looks to be getting worse not better. Case in point, retail sales in July stunk up the joint. Even with the cash for clunkers socialist gimmick, US retail sales were down 0.4%. Wal-mart comps were down 1% and then stated that they are taking market share (I believe it; when times are tough, people are going to Walmart). The stimulus effect is wearing off and there has been little or no positive impact on retail sales. Any recovery with the US consumer (70%) is suspect. If every other sector of the economy picked up (business investment, exports, housing, government), a recovery without the consumer would be possible. So far, That would be complete hope though as there is no sign beyond inventory rebuilding and government intervention that any of this is gaining any traction.

7) The history of monster bear markets is that they often have 40%+ rallies and then ultimately go to new lows. Look at the Nasdaq 2000-03. Ditto for Dow 1929-32 and Japan 1989-? Their purpose is to reset the shorts (by stopping them out or burying them) and suck in the bulls. Bear markets are as much a function of time as price. We have had a severe decline in price (although I think we need more). In terms of time, for a megabear market, this one has been quite short (20 months). More time is necessary to change psychology on a long term basis. No change, except that the rally went to 50%+, similar to the 1930 Dow rally. That rally failed and went down another 83%.

8) Sentiment has become almost universally bullish. It always does in a bear market rally after a crash. There are no shortage of people who have claimed that the worst is over. I believe the worst is coming. Even some of the bears are only looking for a retest of the March lows (the bulls are looking to 1000 to 1300 and laugh at the thought of a retest; they are convinced that a 40% rally means that a new bull market has started). I am looking for a break of the March lows. Sentiment hit 2007 levels last week. Bears are under 20% and bulls are over 50%. Very bearish.

9) International problems are likely to rear their ugly head (North Korea, Iran, swine flu, Latvia, Ireland, Chinese smoke & mirrors- I am a China skeptic). China is the biggest factor. Everyone is bullish on the emerging markets. China is down 24% in the past month. This needs to be watched, but without China, the emerging markets are suspect. Russia is already well off its rally highs. India and Brazil appear OK for now. This bears watching closely, and is related to items 3 & 4. Without China, commodities have headwinds. Without commodities, the S&P has problems.

10) The recent spike in long term interest rates is a possible warning shot of problems ahead. Higher interest rates are sinking the economy and are likely to cause further problems as they spread to non-government bonds. Nothing alarming yet. However, non-government bonds (corporates & junk) are below their recent highs, and again bear watching. Emerging market bonds have also sold off recently (see point 9). Government bonds are rallying.

I would like to add that I am watching the Baltic Dry shipping index, which gave a 1 month warning on the top in commodities last summer, which in turn gave a 1 month warning to the trouble in the main stock markets. This year, the Baltic Dry double topped in early June. This has not yet cracked the commodity markets but has formed a possible double top (June and August) and not allowed commodities to hit a new high despite the new highs in the stock market. In addition, the Baltic Dry has preceded the Chinese stock market top by 2 months. Unlike Chinese statistics, the Baltic Dry is driven by market forces.

I am also watching credit spreads (JNK and CYE are good proxies). These had huge runs since the spring lows and may be rolling over.

I have prepared a separate post on warning signs.

Conclusion: Where does that leave us?

In no-mans land for now (S&P 998). The time for the bear case is pretty much now or never (for 2009)

If we break above 1040, a move to 1120 is the most likely scenario. At that point, I would be forced to drop the bear case for at least a little while and maybe play the long side. If we break below 978, I think a move to 940/950 will be quick. If we take out 940, a confirmed fall sell-off is very likely.

Do we break the March lows? I am painfully aware that a move to S&P 666 is approximately -35%. Is it possible this fall? Yes, if we get some real ugly events (bank failures or country failures) like we did last year. Forecasting such events is perilous at best. I firmly believe that we are going to test and ultimately break those lows. Will it happen in 2009? I honestly don't know.

One scenario that I am grappling with is that we sell off to a higher low such S&P 800ish and then rally to a new high in early 2010 (1120?). This would gets people crazy bullish with a higher low and higher high. This would be a false hope and we could then crash later in 2010.

Another scenario is that we could hit 800 and then rally to a lower high, and then fall later in 2010.

The final scenario (and one that I still believe in, albeit less than earlier in the year) is that we crash this fall and take out S&P 666.

I strongly believe that a sharp move lower is coming over the next few weeks that should take us to the low 800s on the S&P for now.

When the move down is confirmed by the price action, I will revisit this whole "break the March lows" issue. To get to the March lows, you need the financial sector to be in shambles as was exposed in late 2008/early 2009. If the financial sector is able to avoid another debacle, then a higher low is likely.

If we rally back over S&P 1040 right now after today's move to 998, then the bearish case may have to wait until 2010.

Disclosure: Positions in SKF, QID, HOD.TO, FXP, SPY, EUO, POT, TCK-B.TO, HDU.TO, Cdn & US financials options and stock, US&Can cash

Checklist for market warnings

2009-09-01T21:55:00.002-04:00

I have prepared a checklist for intermarket warnings as most markets peak before the stock market, and all markets are interconnected. I have left out US treasuries for now as they haven't warned (yet?). They may in the future.

There were 6 major warning signals given last year that warned of the debacle in the fall of 2008. This year, 3 of them are giving warnings, and another 3 are still up for debate (in red). For a major top to be confirmed (S&P 1018 as of August 7th; currently 996 as of August 19th), the USD has to rally big-time and commodities and credit markets have to sell-off.

The remaining weeks of August into early September should be telling.

Summary of 2008:

May:
1) Credit markets peaked in early May. Major warning. Major problems continued into the summer.
S&P peaked at 1440 in mid May (2 week lead)

June:
2) Baltic Dry peaked early June. (Chinese stocks already topped in early January and resumed downturn before Baltic Dry in mid-May)

July
3) Commodities (incl oil) peaked early July (1 month after Baltic Dry).
4) USD bottomed in mid July (2 weeks after commodities topped)

August
5) Chinese stocks rolled over in early August.

6) Gold/Silver ratio soared in early August.

September
S&P topped Aug 11 and double top Aug 25 but was basically in a trading range until early September. It rolled over and did a waterfall decline into early October.

In 2009

June:
1) Baltic Dry peaked again in early June.
Gold/silver bottomed in early June.
2) Oil and commodities did a first top in mid June

July

Stocks bottomed in early/mid July and then embarked on a blow-off top into late August

August
3) Chinese stocks rolled over again in early August and head sharply lower.

(Baltic Dry down sharply)

4) USD bottomed in early August?
5) Credit market topped in early August?

6) Gold/Silver doing a double bottom in late August?

Oil and commodities did a double top in early/mid August?

Stock market topped late August?

We need confirmation from the USD (rally to 80+), gold/silver to take out 70/72 and credit markets to tank.

This would likely confirm a top in commodities and stocks and allow for a substantial correction at a minimum and even possible a break/test of the March lows. To this list, I would also watch:

A) Financials

B) Yen

C) TLT (proxy for long term treasuries)

Disclosure: Positions in SKF, QID, HOD.TO, FXP, SPY, EUO, POT, TCK-B.TO, HDU.TO, Cdn & US financials options and stock, US&Can cash

Moving

2009-09-01T21:39:00.005-04:00

I have moved within Montreal so I have been swamped and I haven't had the time to post.

Did I buy something? Nope.

I still believe that housing in Canada is in a huge bubble, and also for non financial reasons, I am still renting.

I really enjoy posting on this blog and I welcome all feedback, both positive and negative.

Thanks!

The biggest bubble: China

2009-08-18T22:12:00.002-04:00

Twenty years ago, when I was in high school, Japan Inc. was all the rage. Even in my university years (early 90s), Japan's version of capitalism was considered by academics and the mainstream media to be superior to the US.

Japan had keiretsu capitalism, whereby a group of companies were interlinked. The Japanese were hard working. They had to be forced to take vacations. They were smarter than Americans (or Canadians). They were buying up prized American assets. They had lifetime employment.

In reality, they had a huge stock market and real estate bubble. They had poor demographics (they did not enjoy the baby boom post WWII for obvious reasons). Their smart workers were not as creative as the "fat and lazy" Americans (look it up: that is what one official called Americans back in the early 90s; also a fantastic SNL skit with Mike Meyers). They are good at high end manufacturing (witness Toyota, Honda and Sony) but I'll be surprised if anyone can name any high-tech startup from Japan with any international significance. Keiretsu capitalism is now known as crony capitalism. Their banking system was insolvent. We now know that their system was not very adept at dealing with poor economic times, and their reaction to their depression was quite poor and not very dynamic.

All this is not to Japan bash. In fact, their story is remarkable. The Japanese are a smart and hard working people. They rebuilt their economy after the devastation of WWII (imagine the loss of millions of citizens and 2 cities being annihilated by nuclear weapons!) in one or two generations. I believe that things got ahead of themselves in Japan in the 80s and their system was not built to succeed for the 21st century (with creative and dynamic companies). I also believe that when this global recession/depression ends, Japan will fully participate in a recovery.

Again, when I was a young kid, the USSR was feared. Their hockey teams and Olympic teams were dominant. In Hollywood, their characters were always tough villains (think Rocky 4) or they were ready to launch nukes on us. On TV, their pre Gorbachev communist leaders were old and scary. Their military was very powerful and we were always worried about doomsday clocks and nuclear war.

In reality, the Soviet Union was a paper tiger. Yes, they had nukes but their economy was in shambles and much of their military was dysfunctional. We confirmed that totalitarian communist governments don't work. Their union was a joke and many of the countries that they kept in the Union by force either became separate countries or are still trying to get there. The Russian people were not to be feared and they wanted many of the freedoms that we have.

Why the history lesson from the eyes of someone born in the seventies? Because I am now old enough that I feel as if I have seen this story before. I am talking about China.

China has some strengths but unfortunately, it shares some of the worst qualities of Japan and the USSR.

China is a one party totalitarian government. To their credit, they have moved away from communism, but nonetheless, the central government has a ton of control over the economy. The recent stimulus is a case in point. The central government is also very involved in banking and fixed investment, which is supporting the economy at present, despite a huge drop in exports. We currently fear the Chinese military, although not to the extent of the USSR circa 1985. We all remember the disgusting Tienanmen Square massacre of 1989.

China is similar to the USSR in that it too is not truly a union. Tibet and Taiwan are two of the high profile cases. However, much of China is not homogenous. You have Christians, Muslims, Buddhists and different ethnic groups. You also have hundreds of millions of rural and mostly uneducated citizens as well as hundreds of millions of educated and urban Chinese that live centuries apart. All these interests are united by a totalitarian government. It is unlikely that China will stay together in the future. At some point in the future, China may well have the same problem that the USSR did and fragment.

China is also similar to Japan 1989, in that the West is so bullish on China, that they are suspending all rational thought.

Take a look at this gem of a quote from a survey discussed in Bloomberg:

Two-thirds of respondents say they are optimistic about India’s prospects, as are 70 percent on China. “The Chinese economy is run by the government, managed by the government, helped by the government,” says Omri Beer, an options trader at Nomura Holdings Inc in Tokyo. “It’s easy to be bullish.”

Or the Yuan as a global currency. It is not even the dominant Asian currency. It is not even freely traded. Even the respected Nouriel Roubini has been talking up the Yuan as a replacement to the US dollar. I vehemently disagree. One day, the Yuan may be considered in the same light as the Japanese Yen, but not as the senior world currency. Not any time before 2050 and probably not at all. It took the US dollar decades AFTER it surpassed the UK economy, and two world wars, BEFORE it became the dominant world currency. Even if China becomes the dominant world economy one day, it may take decades after that for the Yuan to become the dominant world currency.

Most in the West believe that the Chinese government is so wise and all-knowing. Their stimulus plan is genius. Their management of the economy is superior to a market based economy. They are combining the best of communism and capitalism. Their stockpiling of copper is genius, despite prices being historically high. Their GDP is growing while ours is shrinking.

The reality is very different. Have you seen their leaders? I wouldn't trust them to run a multinational company let alone one of the biggest economies in the world. Sadly, I could say the same about President Obama, but I digress.

I wouldn't trust any number coming from their government. Studies have shown that their GDP numbers are way too smooth given the relatively early stage of development that their economy is in. So when they report GDP, take it with a grain of salt. I will acknowledge that their stimulus appears to be "working". Yes, because they are forcing banks to lend, fixed investment to continue regardless of return on investment and people to consume. This can work for a short period of time, until the banking system is shown to be insolvent (Japan), the fixed investment ponzi scheme is exposed and the demand from consumers is saturated.

Their exports are mostly based on being the lowest cost and the quality is often suspect. Part of the low cost is the huge labor surplus and part of it is the manipulation of the Yuan. I suspect that China will attempt to move upmarket in the future, but I don't believe that the Chinese share the Japanese' love of quality. Also, there is again the same problem that the Japanese have with creativity and innovation. Name a truly international multinational coming out of China that is changing the way we live, like RIMM or Apple?

I have no idea when the China bubble will burst, but when it does, I think it will rival Japan's bust. It may not last 20 years but 10 years is a definite possibility.

I know the math about how China gets to be the dominant world economy. You take 4 times the US population and 25% of the GDP per capital of the US and presto, you get the biggest economy in the world. If only it were so easy. That population could shrink in a fragmentation scenario and their GDP is inflated by their own bubble. Again, I don't think the Chinese people are any different than you or me. They want the same freedoms and opportunities that we have. Many of them have immigrated to Canada, and they are a great asset for us. I just don't think that the Chinese system is superior and I believe that over the next decade, China will be derided for all of its mistakes.

Disclosure: position in FXP.

$17 OIL

2009-08-10T17:33:00.003-04:00

Last July, near the $147 oil & TSX 15K high, I put out an outlandish target of $60 oil and TSX 9000. Ultimately, in the depths of the winter despair, oil hit $33 and the TSX 7,500.

Now that we are about 100% up in oil ($74 was the high) and the TSX has rallied to 11K, and the bulls are strutting, I wanted to put this out.

Even prominent bears such as David Rosenberg believe in the commodity super bull market. He points that even at the lows of 2008/09, all commodities had higher lows than earlier in the decade (2001-2003). Take oil for example. It bottomed at $17 in 2001. It bottomed at $33 earlier this year.

My problem with that view, is that it assumes that those lows will hold. (And they might).

I take the view that the credit bubble that inflated profit margins, housing values, stock market valuations also inflated commodity demand. You could make the argument that things are worse today for the economy than back in 2002/03. Therefore, demand does not necessarily support prices at $74 let alone $33. I understand that BRIC demand is way up since then, but that does not compensate fully for the drop in G7 demand, nor does it preclude a continued drop in BRIC demand as their exports continue to get smoked. Also, the commodity boom allowed tons of supply to come on stream making supply much higher than it did back in 2002/03. Throw in all the consumers that got religion on energy conservation from years of high prices and the green movement. Heck, even I just bought a front load washer because I calculated that it will save me some money over its lifetime. SUV demand is not coming roaring back despite the 50% drop in oil prices. Companies are looking to cut costs, including energy costs.

If we are in a sustainable recovery, then I agree, forget about $17 oil. If we are in a L or W shaped economy, then $17 oil should be on the table. Even back in the prosperous days of 2005, with the Katrina effect, we didn't surpass $70 oil. And here we are in the steepest global recession since WWII, and oil prices are at $74. Inventories are at multi year highs.

Philip Verleger's view are right on, in my view. Not necessary that we get there in 2009, but I think that $17 or $20 is much more likely than $100.

Updated jobs prediction

2009-08-08T00:02:00.008-04:00

Back in early February, when economists were talking about 8% unemployment by year end (we hit that in spring!) and shuddering at 8% unemployment and 325,000 job losses by year end, I made this prediction that seemed somewhat alarmist:

For 2009, I would look for an average of 50-60K in job losses (600K-720K annualized). This is optimistic, and it could be worse. I project an increase to 9% or 10% unemployment by the end of 2009.

I also predicted

it (unemployment) will be at 8% in April. By mid year, at the absolute latest. 9% by year end is looking conservative. Remember in the last 2 recessions, unemployment went to 12%.

In this job loss hurricane for the next few months, 50 to 100K should be the range.

Let's revisit this:

When did it hit 8%? April. good prediction

9% by year end? That is now the consensus (doesn't mean it will happen, but no longer outlandish). 10% I address in my prediction below.

In the job loss hurricane (which ended in March, as I acknowledged on May 11th when the April numbers were out) 50 to 100K was about right.

So far in 2009, job losses YTD are 331K. That projects to roughly 662K by year end, again roughly in line with 600K-720K. Too early to say...

Notes on the July numbers:

Every month, we get tons of new self-employment jobs (75K and fluctuating wildly since October). That to me is complete BS. That number is way too high and volatile to be believable. Since my predictions thus far have been quite good on the jobs front, I am now going to make predictions excluding this number, as it seems silly. I will predict the numbers ex self-employment.

The July losses excluding self-employment were 79K. That is astronomical for an economy supposedly exiting recession. Even when you add the 35K of self-employment, the number becomes 45K. Now, some of the July losses were probably due to the fact that April and June were quite good. Perhaps August will be better. Also, interesting that Quebec finally had a bad month (-37K; more than 50% of the job losses since October). I live in Quebec and I am shocked and stunned by the complacency here. Quebec is on a different planet. Perhaps this report will take Quebec from a 2007 mentality to something closer to 2009.

Now for my new predictions:

1) Unemployment in the low 9% range by year end. 10% will only happen (I don't want it to happen) if we get a repeat of last fall's market carnage.

2) Lowering the job losses excluding self-employment to the lower end of the range (600K). We are close to 400K right now, so this is a deceleration from the first half. The 720K only happens if we get a repeat of last fall's market carnage.

3) The jobs report be relatively good for August & September as companies become more optimistic that the economy has bottomed and therefore, they don't lay off as many. October to December may be very bad though as I believe more people will realize that this optimism was misplaced, that this was not a regular recession and the recovery will be anemic. Again, this assumes no market carnage.

Go ahead, buy a house if you can handle it

2009-08-05T16:21:00.003-04:00

Interesting question from an anonymous reader. It would preferable to have a name and maybe some followers (on the top right of the site), but I digress:

I have been following your articles which stop me from buying a house.... and now the housing prices have been going up, up and up... I cannot even afford a house now... please tell me if the housing prices will ever go down again.. please...

Please don't use my blog for direct advice on buying a house. I'll leave those decisions to you and your family. I have my views, which I am sharing, but no one is always right and you will have to live with whatever decision you make.

I still don't see how housing in Canada can be immune (the only country in the world?) to the deflationary forces out there. Anything is possible, though. I suspect that CMHC and the oligopoly (govt & banks) are responsible for keeping credit flowing. Record low rates and prevailing sentiment that Canada prices aren't going down are keeping the bubble alive.

Does it make sense to me that the same house in Canada costs 2X a house in the US (a recent study showed this)? We have more land, less people, crummy weather, no interest deductibility on our taxes, lower salaries, higher taxes. Either our prices are way, way overpriced or theirs are way, way underpriced. I suspect the former. People in Canada are all esctatic that our prices haven't gone down much while US prices have gone down 30%. That tells me that maybe our prices are overpriced. Instead, the real estate industry tells you that this is automatically a good thing.

Believe me, I have everyone I know telling me the same thing: Canadian housing prices are not going down. You were wrong.

Perhaps, but only with the fullness of time, will we know. I am currently moving from one rental to another rental. I don't want to buy now for a few reasons but one of the reasons is that I am very worried about a 30% minimum decrease in my equity. That means if I put 30% down, I get wiped out. I personally have difficulty sleeping with that type of risk. I think that we are at or near lifetime highs in real housing prices (meaning after inflation).

Even if you don't buy my views, ask yourself what happens if housing prices decline 30% over the next few years. That would only take prices to where they were earlier in the decade. If you can afford a 30%+ decline in your house equity and still live a happy, healthy life, then go ahead and buy a house. I have family members who have bought in the past few years because they could answer yes to that question.

The fact that the question is posed in such a desperate way tells me that this a bubble as people are thinking that prices are running away from them again and that they better buy soon. Historically (based on US history however), Professor Schiller has demonstrated that after-inflation, housing prices basically do nothing over decades. I wish there were a similar Canadian chart (there is no frickin' info in this country!). We are probably at a very similar place to where the US was in 2006. If you wish to pay roughly 2X the real value of a house, then be my guest. Also, realize that overvaluation or undervaluation can last for years and even decades. I suspect that we are heading for a long period of at least fair value or undervaluation.

Hope this helps clarify my views. Read my blog and other blogs that are bullish. If my reasoning resonates, it may be because you have some of my worries. If you think that I am wrong, please feel free to read all the stuff coming from bullish blogs or CREA.

Thank you for the comment

Hard being a bear

2009-08-02T23:52:00.006-04:00

It is hard being a bear these days. The S&P has bounced to a new YTD high. Commodities and corporate bonds continue to improve. The overwhelming consensus is that the worst is over, even by some of the big bears who saw this coming, such as Nouriel Roubini. ECRI continues to talk about an imminent recovery and actually removing stimulus. The central bankers and politicians are all patting each other on the back about moving the economy away from another Great Depression (ironically after downplaying even a garden variety recession for much of 2008). Despite the fact that there a few real signs of green shoots, the bulls are optimistic and talk as if the recovery was already well under way.

Magazine covers (Newsweek) and many of the "man on the street" are all talking about how the recession is history (the Bank of Canada said so!). I am getting a lot of grief from people about "see Canadian housing prices have hardly dropped. In Montreal, they didn't even drop!". I am surprised by how much confidence there is right now and by the complacency.

I may be completely wrong about all of this (continued recession for 2009 & a breaking of the March lows this year) or all this optimism about an imminent and powerful recovery is the natural contrarian setup for that downturn.

The short positions that I reapplied between S&P 930-950 or about 5% ago (after thankfully covering for small gains around 890-900) have now been mostly covered for losses when the S&P broke through 985 last week, as a belated show of discipline over conviction.

We are now entering what I believe to be the critical month of August. I have long ago flagged this as a natural beginning to the next downleg. That window is now open and some of the research that I follow point to a possible blow-off top climaxing this coming week. Monday will be Day 16 of a classic buying stampede. Most buying or selling stampedes last between 17 to 25 sessions and are characterized by a clear trend with only 1.5 to 3 day counter-trend moves before going to new highs/lows (thanks to the bullish Jeff Saut at Raymond James for this). That translates to either this week or next. A number of important cycle indicators and historical patterns also point to this week as a critical week. We have a key employment report on Friday.

A key area is that former resistance of 940-956. I will be watching carefully to reapply my shorts (in an even bigger way) if I start to see signs of waning momentum.

Only time will tell, but the time for the bears to make their stand is within the next few weeks and months.

Carney: Recession is over!

2009-07-26T23:01:00.004-04:00

Mark Carney made headlines this week as he proclaimed that the recession is over.

This post will not be to critique his forecast, although as you may guess, I am skeptical. This post will cover how much it is dangerous to put too much faith any one person's forecast (including yours truly).

Carney is stating that GDP will grow this quarter and forever so by definition, that makes this recession over. Time will tell.

The combination of his declaration (and similar ones from Bernanke and other central bankers) combined with the sharp rally since March, with the new highs of this past week, has the bulls sitting pretty, and bears like myself, look very wrong.

A very close family member asked me today if he should reduce some of his high cash position due to this rally and Carney's comments.

Watch the bank economists get all giddy by Carney's words.

"It is there in black and white, that the recovery has effectively begun," said Douglas Porter, deputy chief economist at BMO Capital Markets. "I think it is astonishing how quickly the economy turned to the good in the last four or five months."

He may be right. Perhaps GDP will be positive this quarter. That does not necessarily mean that the recession is over. Recession can have positive quarters. Carney may also be wrong. We are only 25% of the way through the third quarter. There is nothing written in stone that this quarter will be positive. Recession ending? Let's wait and see, but I am very skeptical.

Let's also remember another bold forecast by Carney (again, he may be right this time):

From almost exactly 1 year ago today (July 17/08), from the Toronto Star:

today's update on the central bank's thinking, governor Mark Carney expressed hope that the worst might be over for the Canadian economy, which slumped badly in the first three months of 2008 but could slowly rebound in line with a recovery in the United States.

My comment: The worst hadn't even begun. Terrible forecast.

As a result, Carney indicated the bank, which held its trend-setting overnight rate at 3 per cent on Tuesday, will be no hurry to adjust rates up or down.

My comment: There was a hurry: to drop rates to zero.

The bank says "a gradual recovery in the U.S. economy" and other factors will help Canada's economy pick up steam early next year and return to normal growth in 2010.

My comment: How did that gradual recovery work out for you. Pick up steam? Yeah, the steam from a train going off the tracks!

But the 8-page "Monetary Policy Update" issued this morning concludes that "growth in the United States could also be weaker than expected, particularly in those sectors that are most relevant for Canadian exports."
The bank has consistently underestimated the impact of the U.S. economic slump on Canada's business conditions. At the beginning of the year, it forecast 2008 growth in Canada at 1.8 per cent but has now nearly halved that estimate to 1 per cent growth--the worst performance by the Canadian economy since the early 1990s.
Today, the bank said it missed the mark because growth in household spending fell short and a drop in inventory investment - after a buildup in late 2007 - was steeper than it had thought in April.
It also said today that, because of high oil prices, consumer price inflation in Canada will peak at 4.3 per cent in the first months of next year, a level well above the bank's target of 2 per cent.
But Carney predicted that as energy prices stabilize next year, inflation is likely to return to the 2 per cent level.

My comment: Oil prices plummeted, again not forecast by Carney & Co. Inflation was peaking back then and not in first months of 2009. Energy prices did not stabilize and fell to $33 early in 2009, from $147 in July 2008. They have stabilized around $60-70 (for now) but not at $147.

Again, this post is not to criticize Carney's current forecast, only to point out that his crystal ball is about as murky as they get. I have chosen July 2008 since it was exactly a year ago and it shows the danger of false hope.

Millions of Canadians, including family members of yours truly, are putting some faith in Mr. Carney's proclamation this week. I am just saying to have some healthy skepticism as he has made some poor predictions before, and he is basically a cheerleader for the Canadian economy. The history of these types of post-bubble credit contractions are such that the establishment types often proclaim victory at the most dangerous moments. Perhaps this time will be different?

Stampede

2009-07-23T10:26:00.004-04:00

The bulls are stampeding higher on "strong" earnings. Most companies have nicely beat earnings on the back of cost cutting (ie layoffs, drop in spending). This game can continue for a little while, but for the rally and the recovery to be real, either consumer or business spending is going to have to recover.

I have mentioned that often there are key turning points in the stock market around July 17-22 (look up charts on 1981, 1982, 1987, 1990, 1998, 2001, 2002, 2007 & 2008). As I write this on July 23, the S&P is stampeding higher to 968, breaking the January & June highs. Assuming that 2009 did not have a key turning point around July 17-22, this gives the market the opportunity to ramp into the first week of August. There are a number of cycle turning points that point to a significant inflection point around that time.

I would imagine that this time window of another 2 weeks would give the market time to get to 1000, which would equate to a 50% rally from the 666 low.

I have yet to hear from any major company (especially those that beat on their earnings) that there is anything more than a minor recovery in underlying end demand. In the past 2-3 quarters, companies have been hit a double whammy of by slowing end demand by customers AND a slashing of inventory levels by these customers. In the past quarter, the slashing of the inventory has mostly ended (and even reversed in some cases due to optimism about Q3 & Q4) and the drop in end demand has stopped and stabilized.

The hope is that inventory rebuilding is indicative of a coming recovery and the stabilization of end demand (or marginal pickup due to pent-up demand) will lead to some type of recovery in final end demand in Q3 & Q4. So far, IMHO, there is no proof of this recovery in final end demand beyond a possible blip due to demand that was suppressed during the Crash of 2008.

The other interesting thing is that companies are saying that they see little or no impact from the Obama stimulus. If you are bullish, you could interpret this as a positive since that impact may be coming, but if you are bearish, you could use this point as proof that this rebound is simply part of the ebb & flow of a super bear market. Also, much of the confidence in this rally has been supposedly caused by confidence that the government has saved the economy from the abyss, as President Obama took credit for doing yesterday.

What am I doing? As I mentioned, I called an audible and sold most of my ultrashorts around S&P 890ish. Unfortunately, I have bought them all back from roughly S&P 930 to 950, meaning I am underwater on them. Presently, I am planning to hold these and put aside discipline, as I have a strong conviction that August and September are going to be very, very ugly. I have room to add to my ultrashorts (and put options) but I will wait for some clear signs that the stampede is ending (think Wile E. Coyote off a cliff) before doing so.

I suspect that a slew of discoveries in the banking sector worldwide are imminent and when the "green shoots" talk is put to rest, there will be a very quick and deep drop in confidence.

Disclosure: positions in USD, Yen, CAD, ultrashorts in oil & various equity indexes, selected equities & puts, long gold.

Quick Update

2009-07-15T15:50:00.005-04:00

On Monday, I closed out all my ultrashorts for small profits (leaving individual shorts in place) once it looked like the market was done going down for the time being. According to some of the cycle analysis that I use, July 6/7 was a key turning point and when it looked as if the S&P 882 was going to hold (and we broke resistance at 888), I sold off all of my ultrashorts during the day (between S&P 890-900 approx).

However, beginning on Tuesday and especially Wednesday, I have begun to rebuild those ultrashorts once again, to the point where I am roughly 50% back. There is a possibility (again according to cycle analysis and key anniversary dates) that the top is unfolding this week or to roughly July 22nd. Many key turning points (both tops & bottoms) have transpired around mid July. Recent examples of key tops in mid-July were in 1990 & 2007.

Another possibility is that we continue to rally until the first week of August. Either way, I believe the sell-off will commence within the next few weeks, and that August and September are going to be very, very ugly.

I mentioned in my recent missive:

I now think that the real move lower started on June 11th when we hit S&P 956. I am not sure if we are going straight down from here or if we are going to rally a little bit first here and then go lower in August...

I may change my analysis tomorrow, so do your own homework...

Obviously, we did rally and it appears that the line in the sand for the bulls is around 870-875. It appears that the Goldman & Intel earnings have triggered an option expiration bull stampede. I don't believe this changes anything regarding the 10 factors I outlined in the previous post.

My plan is to continue to average down in these ultrashorts over the next few days and possibly, even go bigger now that this last gasp rally appears to be in place. The action of this past week seems to be impetuous (Canadian dollar rallying from around 85 to 90 in 3 sessions is a case in point).

Disclosure: positions in USD, Yen, CAD, ultrashorts in oil & various equity indexes, selected equities, long gold.

ECRI's reply to my post

2009-07-09T22:40:00.005-04:00

I am delighted and honored that Lakshan Achuthan, the Managing Director of ECRI, was kind enough to respond to my earlier post on ECRI. He has allowed me to post his comments (in blue) and my reply to his comments appear in red.

I don't have too much respect for the field of economics. There are many brilliant economists but, as a whole, I think that they rely too much on modelling and theory.

FYI, ECRI’s work is not based on econometric models.

There are a few great ones (David Rosenberg, for example). Others that I sometimes disagree with (Paul McCulley and Paul Krugman) must be read as they are brilliant thinkers. Even Alan Greenspan and Ben Bernanke are intelligent, although they have made many grave errors.

Until late 2007/early 2008, I had thought that ECRI (Economic Cycle Research Institute) was a star and I assumed that whenever the recession hit, they would be leading the call.

Why?

I believe that they are one of the few (or only?) major organization that correctly called the 1991 and 2001 recessions, without any false alarms. In addition, ECRI had a legend, Geoffrey H. Moore, as its founder. Click here for more details on Moore and ECRI.

In September 2000, ECRI warned of a possible recession while most (including yours truly, sadly) thought that the tech boom would last another decade. In March 2001, ECRI called a recession at some point in 2001 inevitable. Later it was determined by NBER (National Bureau of Economic Research) that a recession started that month (March 2001). Never mind that they gave no definitive advance warning of that recession (they stated some point in 2001 when in fact, the recession started that month). At least they were on the right side of the fence.

The 2001 call was borderline, in that it did not advance notice as they are supposed to predict cyclical turns.

I am reminded of what Geoffrey Moore once told us, viz., that if you could predict a recession just when it was starting, you were doing very well as a forecaster. By those standards, I think we did very well in predicting the 2001 recession. In fact, it is practically impossible to consistently predict recessions many months in advance in real time unless you are willing to issue a fair number of false alarms.

Also, if I may, I’d like to cite the precise wording we used in our September 2000 warning of recession danger to our subscribers: “Never in this expansion have the leading indicators been so close to forecasting a recession.” That’s more than a warning of a “possible” recession, wouldn’t you say?

Yet we also went on to write that “Luckily, underlying inflationary pressures have already turned down,” meaning that the Fed had room to cut rates right away, in September 2000. As we now know, the Fed waited four long months before staring its rate cut cycle, and by March 2001 our leading indexes were down so far that a recession was unavoidable. At the time, 95% of economists surveyed by The Economist magazine thought that there would be no recession, so if our March 2001 call about the inevitability of recession was “marginal,” we’re happy to take that, thank you!

This brings home another important point, which is that recessions are rarely as unavoidable in real time as they appear in retrospect. It is quite possible that if the Fed had slashed rates starting in September 2000 we wouldn’t have had the 2001 recession, despite the dot-com bust. As I discuss later, this was also true of the current recession.

For 2001: I take it back; You are correct, and I think that Mr. Moore was probably correct, in that there would be some false alarms.

However, I disagree with the whole Fed causing and preventing recession thing because that is part of the problem that got us here: The Fed as some type of godlike group that can manage the business cycle. As capitalists, we ridicule central planning and communism, yet we believe that some economists can manage the business cycle better than the market? That false belief by investors and government was part of the reason that we had so many bubbles in the past 15 years. The Fed does deserve some blame but this was a global phenomenon. I subscribe more to the Austrian school on this stuff. One need only to look at the fine work a private sector organization like yours performs, versus the shoddy leading indicators that currently come from the government. The Fed has some control over short term rates but often the market leads the Fed. In the above example, short term rates set by the market had already started dropping well ahead of the first Fed cut in January 2001. And even if you are right, and the Fed could have prevented the 2001 recession, I believe that recessions are necessary to clean up the excesses of the past boom, and preventing them leads to an even larger recession eventually. The shallowness of the 1991 & 2001 recessions and the quick fixes via stimulus/deficit spending/this false belief probably worsened the current recession. We had a great worldwide boom from 1992-2007, some of which was based on excess credit and inflated assets. I think it is to be expected that a great bust should follow.

I am willing to concede that this is probably conjecture.

The current recession was determined to have begun in December 2007 by NBER. In December 2007 (from ECRI's site):

"With Weekly Leading Index growth not far from its lowest reading since the 2001 recession, U.S. growth prospects have clearly darkened, but a recession is still not inevitable," said Lakshman Achuthan, managing director at ECRI.

OK, fine, let's assume that ECRI did not agree with NBER that the recession started in December 2007.

Not at all – we agree with the NBER that the recession began in December 2007. In fact, knowing that this was precisely what was likely if emergency action wasn’t taken, we wrote (http://www.businesscycle.com/news/press/1402/) in January 2008 that “a self-reinforcing downturn has already begun (italics mine). If allowed to continue, it will amount to the vicious cycle known as a business cycle recession.”

OK, at least there was warning of a downturn. I would have preferred a clearer call but at least, the self-reinforcing downturn was called.

In late March 2008, they gave the official call:

The U.S. economy is now on a recession track. Yet this is a recession that could have been averted.

I think it is clear, as it was then, was that this was not a recession that could have been averted. No amount of stimulus in late 2007 would have saved Lehman, Bear Stearns, AIG, nor would it have saved the US consumer , nor would it have prevented the US housing bubble from blowing up. No amount of stimulus would have saved the commodity bubble, nor would it have saved the record high profit margins of US corporations. This "averted" is simply a way of deflecting blame on a missed call.

The Weekly Leading Index turned down in early June 2007 in real time, six months before the recession began (please recall that in both the second and third quarters of 2007, GDP – a coincident measure -- grew at almost a 5% pace, matching a four-year high, confounding many prematurely pessimistic economists).

But our January 2008 note also explained why we believed at the time, and still firmly believe, that there was a highly unusual opportunity for immediate fiscal stimulus to push back the recession – with very different potential consequences, we believe, for Lehman et al, because resolving the credit crisis outside an ongoing recession is very different from trying to do so in the context of recessionary job losses driving up foreclosures and thus multiplying the “toxic” assets at the root of the crisis.

Of course, fiscal policy action in early 2008 would not have prevented the US housing bubble from blowing up – but the major top in home prices was in late 2005, two years before the recession began, meaning that the home price downturn was not joined at the hip with recession.

This recalls the larger point, that while business cycles cannot be abolished, recessions are rarely as inevitable as they are made out to be in retrospect. Many now blame the recession on the lax monetary policy of 2002-03. We don’t disagree, but once the Fed had made that mistake, are you saying there was nothing anyone could have done in the next five years to avert the current recession?

See above point- depressions happen usually once in a lifetime (assuming that this is a depression) partly since no one expects one since they never experienced it firsthand.

Perhaps Lehman et al would have bought some more time, but again, it depends on which side of the ideological fence you sit on. Lehman, AIG, Bear, Citigroup etc.. basically were insolvent and in some cases committed fraud via off balance sheet, no different than Enron. There is no free lunch. If they were illiquid, fine, stimulus may have helped buy time for them to raise capital. They were insolvent and overly leveraged.

A little late in my opinion, for an organization that is supposed to predict recessions, not call them in real-time time, or after the fact.

This is Strike #1 (i.e. no real advance warning again and quite possibly late by 4 months if you believe NBER, as I do).

Our March 2008 recession call was three months after the recession began in December 2007, right? But as we’ve already noted, we knew at the time, and wrote explicitly in January, that if emergency policy action was not taken, a recession would be judged in retrospect to have already begun before January.

Fair enough- thank you for the clarification

In fairness to ECRI, their leading indexes did deteriorate by December 2007, but perhaps not early enough or far enough to issue a call. Their leading indexes also did deteriorate in the fall of 2008 to multi-decade lows.

Strike #2:

The Economic Cycle Research Institute's Leading Home Price Index is "pointing to a bottom in home prices" and signaling a recovery in demand, said Lakshman Achuthan, ECRI's managing director.

This was written on May 2007 (on the ECRI site). Oops. Housing prices only really began to plummet after this call.

Actually, the data on both median new and existing home prices show that there really was a short-lived home price upturn from September 2006 to March 2007 that was correctly anticipated by the Leading Home Price Index (LHPI). But the LHPI then turned down after peaking in February 2007. The data available at the time I made that statement did not yet show enough of a downturn to indicate that a new cyclical downturn in the LHPI had indeed begun.

This I take issue with. If I was relying on your index to buy a home in 2007, I would be possibly in deep trouble. I acknowledge the short-lived upturn, but I think unlike the calls above, this one has to be judged, with 20/20 hindsight, to be dead wrong. Housing prices are down enormously since then. Also, I read your book and when a similar call that housing would hold up and even prosper in the 2001 recession (100% correct), you touted this call. If this call had been correct and housing did bottom, I suspect that you would tout this call as well. This is not correct, IMHO.

Strike 3?

Now, ECRI is saying the following (and to their credit, said this back in late April, before the consensus embraced this view):

"We'll definitely see the end of this recession this summer," ECRI managing director Lakshman Achuthan said Wednesday. "As unique and unprecedented as this recession has been, the transition to recovery is showing up in a textbook way in the leading indicator charts."

Achuthan acknowledged that difficulties such as unemployment and excess debt will take a long time to overcome, and that confidence is weak. That's to be expected.

"The general mood is probably overly pessimistic. That's quite normal in the wake of a crisis. There is almost always a giant error of pessimism," he said.

I suspect that their models work better with garden variety recessions, not credit and housing bubble induced depressions. If they blow this call, I think that this will be strike #3 in my book. I suspect we will learn the truth in the next few months, and if I am wrong, I will issue a full apology to ECRI for my criticism on this blog.

Our leading indexes should work not only with garden-variety recessions but also with jungle-variety panics, depressions and crises – because uniquely, ECRI’s indicator systems were originally built on that basis, and we have leading index data going back well over a century. Our leading indexes are even more emphatic now about a near-term end to the recession than they were in April, but we’ll have to wait for the dust to settle over the next few months before we know whether we were right to make the call.

On this, I agree, only time will tell.

While I think ECRI is wrong, I will admit that they are the only thing going for the bull camp in my book.

I wanted to add, that this exercise illustrates how great an organization ECRI is, in that it provides gutsy calls and more often than not, have been either 100% correct or way ahead of the 95% of economists cited above. I have picked on bank economists and central bankers as being way behind the curve and would never bother analyzing their calls to this degree since I would have to write a novel.

Perhaps ECRI has only 1 strike in my book (the housing bottom call) thus far. At least, their call to an end of the reession is backed by much more than the talking heads on CNBC. Time will tell if they are right on their end to the recession call.

Thank you so much, Lakshman, for taking the time to reply to my little blog and for your excellent work over the years. With clarification, some of my criticisms may have been a little too harsh, while I still stand by others. Nonetheless, I will always remain interested and read the work of ECRI.

I THINK THAT WINTER HAS RETURNED

2009-07-06T23:42:00.002-04:00

Not a weather discussion (although I will say that this summer sucks and I am a global warming skeptic).

On May 2nd (and S&P 877), I wrote the following:

I believe that we are nearing an inflection point here. A downleg is starting that should take us to approximately S&P 777ish over the four weeks. From there, we can either start a nice summer rally (back to current levels of S&P 877 or higher to 900-1000) or we can go right to a retest of the March lows. The real move lower will probably start in August 2009, but I am still not sure when. Ultimately, I believe the stock market is going to go a lot lower.

An inflection point did ensue on May 8th, when the S&P hit 930. From that day forward, the market stopped going straight up and basically stalled and entered a trading range between 878 and 956. Currently, we sit at 898 and tested the lower end of the range today.

I was wrong in that the market did not just roll over and sell off to S&P 777. I talked about a summer rally back to 877 or 1000. Obviously, that hasn't happened yet. Perhaps the two merged together? The bears (777 or lower) fought the bulls (summer rally to 1000) and we called it a draw for the past 2 months and we are now close to that 877 (we hit 886 this morning).

"The real move lower will probably start in August 2009, but I am still not sure when."

I now think that the real move lower started on June 11th when we hit S&P 956. I am not sure if we are going straight down from here or if we are going to rally a little bit first here and then go lower in August.

I do feel that a top is in. Why?

3) The US dollar appears to have bottomed. Another nail in the coffin of the bulls if it is true.

4) Commodities appear to have peaked. Another nail.

5) Jeffrey Cooper from Minyanville.com, one of the best out there and a master of cycles analysis, has been warning of impending trouble from mid August onward. I agree.

7) The history of monster bear markets is that they often have 40%+ rallies and then ultimately go to new lows. Look at the Nasdaq 2000-03. Ditto for Dow 1929-32 and Japan 1989-? Their purpose is to reset the shorts (by stopping them out or burying them) and suck in the bulls. Bear markets are as much a function of time as price. We have had a severe decline in price (although I think we need more). In terms of time, for a megabear market, this one has been quite short (20 months). More time is necessary to change psychology on a long term basis

9) International problems are likely to rear their ugly head (North Korea, Iran, swine flu, Latvia, Ireland, Chinese smoke & mirrors- I am a China skeptic).

There are plenty of other confirmations, including my own gut. The one fly in the ointment is ECRI. If the recession is truly over, I suspect that the March lows are not going to be retested and that I will be wrong.

Where do we go from here?

I am positioning myself quite heavily on the short side for the first time this year (and the first time since last fall). I am targeting a move to S&P 600 as my conservative target sometime this fall/winter. A move to S&P 444 is possible if things really unravel although that may be a target for later in 2010.

I realize that these numbers sound crazy, but these targets are consistent with other major bubbles (remember that the Nasdaq-100 lost 83% and the Dow lost 90% in the 30s).

I also remember writing this back on September 5th, 2008 (S&P 1242):

If things got really ugly in October/November and we sunk to say 770 S&P with a few bank failures, you could even have the end to the bear in terms of price.

While I retract the "even have the end to the bear in terms of price" portion, the S&P 770 was 38% below the price of that day and 50% from the all-time high. A move to S&P 600 would be a similar 38% move. A move to S&P444 would be a full retracement of the entire bull market move from 1994/95.

I also warned of TSX 9,000 and $60 oil back on July 8, 2008, when oil just finished peaking at $147 and the TSX hit 15,000. Didn't that sound ridiculous?

I am bullish on USD and Japanese Yen and that's about it for the time being. There will be few places to hide for the rest of the year, I believe. I see the loonie going to new lows and oil going to $20 or $30 eventually. Gold is likely to get liquidated as well, but may present a fantastic buying opportunity in the fall (I am currently long a little gold but I suspect that I will get stopped out soon).

I may change my analysis tomorrow, so do your own homework, but I just wanted to update the reader (if I have any left?) on my thinking.

Disclosure: positions in USD, Yen, CAD, ultrashorts in oil & various equity indexes, selected equities, long gold.

ECRI: Two strikes

2009-07-06T23:02:00.007-04:00

I don't have too much respect for the field of economics. There are many brilliant economists but, as a whole, I think that they rely too much on modelling and theory.

Until late 2007/early 2008, I had thought that ECRI (Economic Cycle Research Institute) was a star and I assumed that whenever the recession hit, they would be leading the call.

Why?

The 2001 call was borderline, in that it did not advance notice as they are supposed to predict cyclical turns. The current recession was determined to have begun in December 2007 by NBER. In December 2007 (from ECRI's site):

"With Weekly Leading Index growth not far from its lowest reading since the 2001 recession, U.S. growth prospects have clearly darkened, but a recession is still not inevitable," said Lakshman Achuthan, managing director at ECRI.

OK, fine, let's assume that ECRI did not agree with NBER that the recession started in December 2007.

In late March 2008, they gave the official call:

The U.S. economy is now on a recession track. Yet this is a recession that could have been averted.

A little late in my opinion, for an organization that is supposed to predict recessions, not call them in real-time time, or after the fact.

This is Strike #1 (i.e. no real advance warning again and quite possibly late by 4 months if you believe NBER, as I do). In fairness to ECRI, their leading indexes did deteriorate by December 2007, but perhaps not early enough or far enough to issue a call. Their leading indexes also did deteriorate in the fall of 2008 to multi-decade lows.

Strike #2:

The Economic Cycle Research Institute's Leading Home Price Index is "pointing to a bottom in home prices" and signaling a recovery in demand, said Lakshman Achuthan, ECRI's managing director.

This was written on May 2007 (on the ECRI site). Oops. Housing prices only really began to plummet after this call.

Strike 3?

Now, ECRI is saying the following (and to their credit, said this back in late April, before the consensus embraced this view):

"We'll definitely see the end of this recession this summer," ECRI managing director Lakshman Achuthan said Wednesday. "As unique and unprecedented as this recession has been, the transition to recovery is showing up in a textbook way in the leading indicator charts."

Achuthan acknowledged that difficulties such as unemployment and excess debt will take a long time to overcome, and that confidence is weak. That's to be expected.

"The general mood is probably overly pessimistic. That's quite normal in the wake of a crisis. There is almost always a giant error of pessimism," he said.

While I think ECRI is wrong, I will admit that they are the only thing going for the bull camp in my book.

Update July 9/09: I have made a few small changes to my posting, mostly to clarify a few points (as pointed out by an astute reader: ECRI was definitely not blind to the onset of the current recession). Their leading indexes did do a fairly good job, but either they did not sink far or early enough or the interpretation by Mr. Lakshman Acuthan was not accurate. Mr. Acuthan appears to be a very decent and very intelligent person, and this is not meant as a personal slight. It is simply based on the facts as I see them. I will send the link to this post to ECRI and see if they wish to comment.

Mish

2009-07-06T21:52:00.003-04:00

Mish Shedlock has a great blog. It is rare for an American blog to cover Canada, but once in a while, Mish covers the great white north.

An excellent entry today, which is in complete agreement with what I have been writing. Canadians are overextended....

http://globaleconomicanalysis.blogspot.com/2009/07/500000-canadians-90-days-behind-on.html

Fantastic article

2009-07-05T00:07:00.003-04:00

I wanted to refer you all to a great article that I just read on the Canadian housing market and banking system. This is the type of analysis that is sorely lacking in the Globe and Mail and mainstream media in Canada.

http://marketdepth.typepad.com/marketdepth/2009/06/sell-the-banks.html

In particular, I love the analysis on that Kremlin type organization, the CMHC, which I believe is a Fannie Mae Lite.

I agree pretty much 100% with this article, and it basically describes the shenanigans that CMHC is busy concocting in a doomed attempt to avoid a housing collapse.

Giving credit where credit is due

2009-06-29T00:47:00.003-04:00

Back in January, I asked whether Carney had lost it.

He had stated the following in his outlook:

magically, in July, the economy is going to grow 2.0% and immediately stabilize. Then, it will grow by 3.5% in Q4. Oh, and then it gets better: 4.7% in the first half of 2010 and 4.9% in the second half of 2010.

He recanted his view in April.

If he lost in January, he may have found it. He has finally understood that what happened here is no garden variety recession. Listen to him:

From Bloomberg:

Bank of Canada Governor Mark Carney said Canadian households are facing rising “stresses” that could lead to losses for banks, while repeating concern about the effect of a strengthening currency on the economy.
“Sharp increases in unemployment are raising the incidence of financial stress among households,” said Carney, 44, in the prepared text of a speech he gave today in Regina, Saskatchewan. An unemployment rate exceeding 10 percent “would lead to significant increases in losses for financial institutions,” he said.

From the Globe:

In recent speeches in Montreal and Regina, the bank governor was almost dismissive of indicators of economic improvement, warning that whatever good news existed was caused artificially by massive government and central bank stimulus. The private sector “is not there yet,” he cautioned.

And in a report from an off-the-record speech Tuesday at the Woodrow Wilson International Centre for Scholars in Washington, Mr. Carney broke with official Ottawa dogma in declaring Canada's recession to be as deep as that in the U.S.

All this is getting the Bank establishment angry. They are probably talking their books and probably don't appreciate the comment about "significant increase in losses for financial institutions".

“Nobody expects policy makers to be cheerleaders, but do they have to be naysayers?” asked Douglas Porter, deputy chief economist with the Bank of Montreal, who is among several who wonder at Mr. Carney's transformation from Mr. Sunshine to Dr. Gloom in four months.

I think Carney may have found it after a winter in fantasyland.

Some excellent news

2009-06-29T00:35:00.002-04:00

One piece of excellent news is that the savings rate in the US hit 6.9% in May, the highest since 1994. The savings rate has now rebounded from under 1% in 2007 and early 2008. The May rate was artificially inflated by stimulus from President Obama, but nonetheless, the savings rate has been trending higher over the past year. The savings rate and incomes rose while consumer spending was basically flat.

In the 1970s, the savings rate ranged from 8-12%. Credit cards were in their infancy and mortgages were relatively small (due in part to high interest rates).

In the 1980s, as interest rates dropped and the boomers were in their heydey, the savings rate dropped under 8%.

In the 1990s, as the stock market bubble developed, the savings rate dropped from 8% to 2%.

In the 2000s, the housing bubble finished off savings, which went to about 0%.

It is likely that the savings rate will drop a few percentage points once the stimulus wears off but I believe that we are heading to a permanent 10-15% savings rate over the next few years and it will last for the next decade at least. The faster we get there, the better in my humble opinion.

The fact that almost all of the stimulus was saved by US households tells us that there has been a sea change in attitude by US consumers. If they receive an extra dollar, they are saving it as opposed to spending it. That tells us two things:

1) When the Obama direct stimulus wears off later in 2009, consumer spending may fall further if it has been cushioned or improved even slightly by this stimulus.

2) It is hinting that as time goes on, the savings rate will continue to go up, given the sea change in attitude.

Now, all this flies in the face of the "green shooters" who feel that consumer spending will start to rise later in 2009. The only way that consumer spending, which is the lifeblood of the US economy, can recover is through job creation (nope), higher wages (nope) or less saving. The green shooters and all these Canadian bank economists who project a return to spending in the second half (as if this was all a bad dream) are dismissing this rise in savings as a temporary response to the stock and real estate market declines.

I am saying that this increase in savings is a long term phenomenon. In the short term, the rise from 0% to mid single digits is killing the retail and consumer based portions of the economy. The rise in the savings rate of almost 5% in one year is creating havoc in the economy. One man's savings is another man's income (the paradox of thrift popularized by Keynes).

Households are finally realizing that their stock, housing and pension assets were inflated and are rationally cutting unnecessary spending to build savings and reduce debt. The retirement age population is going to soar in the coming decade, due to the early baby boomers reaching 65 soon, and sadly, many have little savings. This realization is likely going to continue for years and possibly decades.

Savings need to be rebuilt for a sustainable and healthy economy and the good news is that the secular change in the private sector is well underway. Hopefully, governments will quit tampering so much with the extinguishing of debt. Governments are socializing the debt by running massive deficits and transfer private sector debt to the government (Fannie/Freddie, Citi, Bear Stearns, GM, TARP, mortgage security buyouts, etc...). I suspect that the public sector will also go through a sea change, forced by the bond market, in the coming years as well.

Positive May housing report

2009-06-18T00:01:00.005-04:00

A smart reader asked:

What I don't understand is with higher unemployment RE is not where it should be. I guess first time buyers have simulated the market with lower interest rates. It does not make any sense why average home prices are not declining.

I guess I don't fully understand it either.

First of all, let me admit, that I did not see this coming. If you had told me in the winter, that by May, CREA would report a positive YoY average sale price in Canada (and a record), I would have laughed hysterically. My forecasts for early 2009 were much too pessimistic as I underestimated the effect that super low mortgage rates would have on buyers.

Secondly, I am not going to revise my forecast for 2009 just yet, but I have to admit that it is looking too pessimistic. If you wish to dismiss this blog as overly bearish on housing, feel free.

I usually hate it when people who are wrong, blame others for being wrong. At the risk of doing this, here goes:

I did not think that a 50%ish drop in equity markets worldwide, a $115 drop in oil prices, a 30% drop in the Canadian dollar, a 30% drop in US home prices, a 2% increase in unemployment, a 10% drop in home prices in Canada in 2008, overprime, failing pension plans and a 7% drop in GDP in Q1 would rationally allow a "soaring" real estate market. Basically, the reasons that I outlined here prevailed over the factors that I mentioned above.

Either I am crazy (in being dead wrong in recent months) or that Canadians are crazy. (I think it is the latter). Now, I don't think the CREA numbers are that accurate (either in 2008 or currently) but they are what they are.

I have many people telling me "it's a good time to buy". I suspect that this has to do with the super low mortgage rates that were around until a few weeks ago. As Canadians, I think that when we think of buying a house, the only thing that we think about it "What are my payments?". Have we not learned anything about leverage in the past two years?

Few people are asking the following questions:

1) Why are mortgage rates super low? Ummm, maybe because we are in a severe recession or a depression.

2) What happens when my mortgage resets in 5 years if rates are higher? Your payments go up. This is what happened in the US with ARM resets.

3) What happens if I have to sell before the end of my mortgage (say in five years) because if me or my spouse loses a job? What happens to my mortgage in such a case if my house value drops by 20-30%? Ummm, it's called foreclosure. Look at US real estate sites with foreclosures. There are pages of them and the lists are increasing.

4) What happens to my house value if there are foreclosures galore in my area and I want or need to sell? Your house will sell for a lot less than you think.

5) What happens when all these baby boomers need to free up cash as for many their home is the principal source of retirement savings? Again, your house will sell for a lot less than you think.

6) What happens to house prices if we have a banking crisis in Canada? What happens to house prices if we return downpayments to 20 or 25%? Sound far fetched? We have an oligopolistic banking system in a country smaller than California. Anything is possible. In the US, downpayments of 25% are fairly common in 2009. Either a banking crisis or 25% down will send house prices a lot, lot lower.

Obviously, any of these things could happen in even normal times. These are not normal times! If you can handle some of these situations and still make your payments, then go ahead. I suspect that most Canadians have not even considered these questions or if they have, they smugly dismiss this as a US subprime problem.

I don't think the spring silliness in Canadian housing is sustainable for very long and I think this does little to change the longer term picture for Canadian housing. Canadians are foolishly ignoring the lessons of past real estate market busts and the lessons of most Anglo-Saxon countries of the present. If I was trying to sell my house right now, I would be thankful for this potential last chance.

Mortgage rates are already creeping up and some of the pent-up demand (caused by the virtual collapse of housing in the fall of 2008/early 2009) has now been relieved. I am not going to venture a guess as to when this bear market rally in Canadian housing will end, but I know that it will roll over and when it rolls over the next time, it will be very, very ugly for a very, very long time.

A brilliant article

2009-06-16T00:10:00.004-04:00

I came across a brilliant article written recently in the Atlantic titled "The Quiet Coup" (thanks to Bill Cara's excellent blog). It covers the ties between the financial services industry and the US government and compares the US to other . The article is written by Simon Johnson, former chief economist of the IMF. I am not a fan of the dismal science, but Johnson is clearly brilliant.

http://www.theatlantic.com/doc/200905/imf-advice

I suggest reading it but I wanted to highlight two important passages:

It (a scenario) goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

I agree with much of what Johnson has written, and I am planning to write an article soon on how I see this recession (depression) evolving over time. A hint: once again, almost everything in the mainstream consensus, especially in Canada, is completely out to lunch. Recent musings by CIBC economist Benjamin Tal had me both laughing and shuddering at the scope of the fantasy (I am planning a separate entry on this gem).

The scenario that Johnson has outlined above is quite plausible and is consistent with portions of my scenarios that I am developing. The European banking system (as well as others) are in horrible shape and I expect things to get ugly over the next few months and years. One of the current fault lines is in Latvia, and I would keep an eye on developments there.

position in SKF, FAZ, SPY puts, BAC puts, Canadian bank shares, QID

Government bonds are acting up

2009-06-11T10:43:00.007-04:00

On May 12th, I mentioned that I believed that mortgage rates and interest rates were going up, so the conventional and normally sound wisdom about never locking in a 5 yr mortgage may not apply this time.

Back in March, I mentioned that I thought that interest rates were heading up.

Last week, mortgage rates went up 20 beeps (basis points) and this week another 40 beeps, 60 beeps total. Sub 4% 5 yr mortgage rates in Canada are now gonzo... 10 year treasury bonds in the US are near 4%, up 2% from December. 30 year treasury bonds are inching closer to 5%. Mortgage rates in the US are up sharply as well. And all this despite the Fed buying bonds (at record prices I may add).

This is one of the big stories of the first half of 2009: government interest rates are increasing. I am in the deflation camp. So how do I reconcile my deflation views with my view that the 30 year US treasury bond could go to 7% or 8%?

As Bob Hoye of Institutional Advisors has pointed out repeatedly, in a post-bubble contraction, real interest rates soar, despite falling inflation. Investor risk aversion spreads to long term government rates.

Look at the looming trillions of treasury bond issuances. Who is going to buy up all this debt?

I am not a fan of Keynes, but even he said that governments should run surpluses in good times and deficits in bad times. Instead most G7 (Canada excluded) ran reasonable deficits in great times and are now trying to run enormous deficits in very bad times. There was a "free lunch" for the last few months whereby governments issued trillions in debt to replace the drop off in the private sector demand and tax revenues. That free lunch is ending as the bond market is catching on.

Imagine the impact that soaring interest rates are going to cause on a debt laden economy? If this happens, I am changing the title of my blog from The Great Recession to something with the word Depression in it, because that is where we are heading if interest rates rise to the levels that I suspect that they might.

Corporate bonds have done nicely in recent months as the risk/reflation trade has returned, but the turn in the treasury market could be a warning of problems to come in both the corporate bond market and stock market. Last summer, disasters in the corporate bond market preceded the carnage in the equity markets in the fall of 2008.

The US dollar may have bottomed last week, and that is also likely to lead to problems in the stock market. Last summer, the US dollar bottomed in mid July, roughly a month before the stock market peaked.

I should caution though, that in the short term, I think that the bond market is going to rally (I have no position in bonds right now) as the bond market is extremely oversold and should rise as corporate bonds, commodities and stocks fall in the coming weeks and months. I have initiated very small short positions (SKF, S&P puts) but I am waiting for further confirmation. I consider these signs to be an alert for trouble ahead.

Bank of Canada reversing course?

2009-06-02T23:47:00.003-04:00

As recently discussed, the Bank of Canada has pledged to keep interest rates at 0.25% for about a year. I mentioned that they may be forced to raise rates if there was ever an attack on the loonie. This happened in 1992, I believe, and in 1998 during the Asian crisis.

Recently, the opposite has happened. The loonie is soaring and it hit 92 cents today. My portfolio is getting hit as my high cash position is mostly in USD (horrible timing to move to USD on my part), so take the following opinion as talking my book if you wish:

The recent move from 77 to 92, most of which has happened in the last month, has to be causing concern for the Bank of Canada.

Why?

1) We are in a deflationary period and a rising loonie is going to make things even worse, by making the inflation rate even more negative. Deflation makes real rates high (even with 0.25% nominal rates). This makes it difficult for interest rates to be stimulative.

2) The strong loonie is going to hurt our exports, which are already devastated by the recession. Certain commodities that are priced in US dollars will be just fine, but in places like Ontario, the manufacturing base (and GM?) can not be enjoying this recent rise in the loonie.

3) The timing of this currency appreciation is horrible, at a time when the window for the "green shoots" theory to work is open. Currency appreciation also works against the stimulus in the works.

Don't be surprised if the Bank of Canada, at its June 4th meeting, tries something to knock the loonie down.

At the last meeting in late April, the BoC annouced:

1) Interest rates were going to stay at 0.25% for over a year.

2) It would not be implementing quantitative easing (QE) for the time being.

Since then, 4 big things have happened:

1) The loonie has especially soared since BoC announced that there was nothing imminent on QE. Speculators used the annoucement and the loonie's position as a commodity currency to play the reflation trade.

2) Flaherty news of a bigger deficit last week (and the $10 billion of wasted money on GM yesterday) gives them cover (ie economy weaker than expected, deficits bigger than expected) to start QE.

3) Even the hawks at the ECB are trying QE.

4) Of late, interest rates are soaring. Left unchecked, it will kill the so-called recovery. QE will supposedly help.

Announcing immediate QE or that they are more inclined to do it (sooner rather than later) could take some of the recent gains out of the loonie and at least make it seem as if they are concerned about rising rates. They could also say that the recent rise in the loonie is not completely justified by economic fundamentals.

Don't get me wrong, I don't believe in QE and deep down, I am happy that the BoC said no in April. I also think that the loonie will ultimately trade based on market forces, regardless of what the BoC does. An announcement of QE though could trigger the inevitable correction in the loonie, however.

Is the Bank of Canada reversing course on QE? And perhaps later in 2009, will the market force it to reverse course on interest rates, thereby reversing both its announcements of the last meeting?

Just asking...

Disclosure: Long USD cash and CAD cash. I think the loonie is topping here and heading lower in 2009, but I could remain wrong, and in the short run, anything is possible.

Housing recovery?

2009-05-25T14:50:00.003-04:00

March & April saw big pickups in sales activity in most major markets. Prices still fell YoY although they were up in April versus March. 4 of 6 NHL markets are still down YoY, as Ottawa has returned to positive in April. Montreal is still barely up.

The media and the real estate industry are portraying this as a recovery and the worst is over. I will be honest, the strength of the April report did surprise me.

What is going on?

IMHO, this is due to the following:

1) Low interest rate buyers. As I mentioned recently, a lot of people are drooling over low interest rates. They crunch the math and they come to the conclusion that their mortgage is affordable. Unfortunately, they are not looking at the real cost of interest, which is probably 10%+ once you factor in house price deflation.

2) We had a huge crash in sales from October to February (5 months). Some of the people who held off in the fall crash need to buy or sell, and as such, there was an element of pent-up demand. This pent-up demand may persist for a few more months.

3) The huge effect of the recent layoffs has only started to be felt in the housing market. It takes many months before unemployed workers fall behind in their mortgage payments. I expect this effect to show up in the fall.

4) Seasonality: Most Canadians buy or sell their homes in spring or fall. The summer is short in Canada, and most people take vacation in the summer. The summer market is slow. For people to move prior to the summer, they need to buy in April or May latest. Therefore, March was the beginning of the panic buying.

Where do we go from here?

Also, let me revisit some predictions from prior months:

From March 16th:

March is also a decent report (the rate of decline stabilizes in the high
single digits) and the bottom callers will start. Remember the same phenomenon
happened in the US housing market back in 2007.
By April, we are back to negative double digits again.

Boy, was I wrong. April YoY was only -3%. I am the first to admit when I am wrong, unlike CREA.

Where do we go from here?

The Canadian housing market is in its last hurrah. People who are buying here with heavy leverage due to low interest rates are making a big mistake, in my opinion. They are falling in the trap of looking at cheap monthly payments versus the amount of debt that they are absorbing. The numbers and the anecdotal proof that I see are telling me that Canadians are completely in denial. Canadians think that the US housing bust is unique to the US and that it can’t happen here. Canadians don’t even think about mortgage rate resets in 5 years (when their 5 year mortgage comes due). Canadians don’t even think that it makes no sense anyone to receive a mortgage with 5% down.

In my opinion, we are in a deflationary depression. All the printing of money by the governments is only adding more debt when there is already too much debt. While consumers and businesses are de-leveraging, governments worldwide are re-leveraging and completely offsetting the de-leveraging. I suspect that markets are wising up to this and about to force the hand of the bond market. Long term interest rates have started to increase sharply and no amount of buying of bonds by the Federal Reserve will change this. The world is swimming in debt and asset prices have dropped by trillions. The world has never been asked to finance $4 trillion of government debt in one year. And then maybe the same amount in 2010. Who is going to buy all this stuff?

I look for a few things to happen in the Canadian housing market this year:

1) Mortgage rates are going to increase very soon as the bond market is getting killed. This could increase 5 year mortgage rates.
2) The stock market is going to go a lot lower. This will kill the current “green shoots” myth.
3) Unemployment is going to 9% soon. A 3% rise in unemployment in roughly 12 months is going to make some people think twice before adding hundreds of thousands of dollars of debt. This will ultimately impact foreclosures.
4) It has been conventional wisdom that Canada’s oligopolistic banking system is fantastic. I am short conventional wisdom. I expect the Canadian banking system to also encounter problems, which will ultimately impact access to financing. When this happens, that will send home prices falling. I also expect 25 year amortizations, a 25% down to come back at some point. That will also send home prices falling.

This home price drop will take years. It will unwind a little slower than the US but it will be quite severe when it is all over. TD came out recently with a 24% peak to trough fall in housing. They have been criticized for that being too pessimistic. I suspect that when it is all said and done, that will be optimistic.

It is likely that this pickup in housing sales can go on for a few more months, but big picture, it is just sucking up some more demand from the future and making the next drop more painful. I may have been wrong about April, but I don't think that I will be wrong on the big picture in housing.

Disclosure: Short Canadian banks, US financials, Nasdaq, long S&P puts

Now it is the shortest recession

2009-05-22T10:58:00.010-04:00

First, it was no recession in the US or Canada.
Next, it was a recession in the US but only a slowdown in Canada.
Then, it was a severe recession in the US but only a mild recession in Canada.
Now, it is a severe recession in the US but only a short, sharp recession in Canada.

"Canada’s Deepest Recession Since 1930s May Be Short ", Bloomberg, May 20.

Canada’s recession, likely its deepest since the Great Depression, may also be its shortest.

Let’s go back in time to November 19, 2008 (AFTER the stock market crashed).

Jay Bryan of the Montreal Gazette wrote a laughable article, “Why Canada looks likely to escape severe recession”. This guy writes a horrible column in the Gazette every few days, where he basically bashes the US economy, promotes the Canadian economy and then finds a clueless bank economist to back up his view.

Quoting National Bank economist, Yanick Desnoyers: "I cannot exclude the possibility" that Canada will have a mild recession, he said yesterday, but if so, it will be much less painful than the one south of the border. In terms of the average Canadian worker, for example, Desnoyers expects to see the unemployment rate rise by perhaps one percentage point before job conditions stabilize late in 2009.

Cannot exclude the possibility of a mild recession? In mid November, it was already obvious that we were in a severe recession, and he is hedging on even a mild recession. The Canadian economy has already tacked on almost 2% points to unemployment, shrunk by 5% to 7% for 2 quarters.

Let’s go to July 3, 2008 near the peak of oil and commodities.

"Canada growth rate seen halved but no recession" - Reuters

High commodity prices will help Canada avoid a recession this year but a U.S. slump will pull down economic growth to 1.4 percent, about half last year's rate and below official forecasts, Royal Bank of Canada said on Thursday.After an unexpected contraction in the first quarter of an annualized 0.3 percent, the economy will fare better in the remainder of the year due to support from consumer spending, business investment, an easing of financial market pressures and high prices for energy and other natural resources, the bank predicted in its revised forecasts."Domestic demand is holding up and will more than offset the significant drag from net exports this year," it said.

Yeah, things got much better in the remainder of the year! How did that "easing of financial market pressures and high prices for energy and other natural resources" prediction work out for you?

Let's go back further in time still: January 2008

"No recession in Canada, bank economists say"

Canada's economic growth will slow down this year, but will avoid a recession, top economists at Canada's biggest banks agreed Wednesday.

No need to add comments to this gem.

The five economists don't see a recession in the U.S. either, although some say it will be close.

It is insanity to listen to these same people with their same useless logic. Right now, they are correctly forecasting that the worst quarter of Canadian GDP was in Q1 (for the time being anyway). Even IF we do have a positive quarter, and I'm not convinced that we do, this does not mean that the recession is over! In Q2 of 2008, the US economy had a solid showing (2.8%) before tanking in Q4 (-6.3%). Did the US recession end in Q2 2008?

If you notice the common element in their forecasts: the bank economists always assume that what is up will stay up (commodity prices in early 2008/domestic demand) and when something drops (as everything did in Q4 2008/Q1 2009), things will go back to normal later in the year. I think to these people, the whole recession was just a normal cyclical thing and once it is over, everything will hunky dory again.

Mortgage Rates

2009-05-12T10:19:00.003-04:00

Excellent question from a kind reader:

What do you think the 'closed 5yr' intrest rate for a mortgage will be in 5
years time? I have to renew and I have pre-approved for a 5yr closed rate for
3.95%.

I can't "do" advice here, but I will repeat what I said to a family member the other day and what I believe that the facts are:

1) Normally, it does not make sense to lock in for 5 years as you pay a premium.
2) However, these are not normal times
3) Interest rates are at multi-generational lows. Mathematically, mortgage rates can not go much lower, but they can go a lot, lot higher.
4) Those interest rates have begun to back up and I think that interest rates are going much, much higher at the long end over the next few years (ie 10-30 year government bonds) despite upcoming deflation as there is too much supply and not enough reward (ie yield) for the risk of default. I could be wrong on this
5) As we saw in the fall, when bank lending dries up and their cost of capital increases, prime and mortgage rates can vary from "normal". If we get a banking crisis in Canada, mortgage rates could soar even if government bond yields stay low.
6) A run on the Canadian dollar could send Canadian interest rates rising
7) Sleeping well at night and having a super low 5 year rate that can not change would be great to me.
8) My sense is that mortgage rates are going to creep up very soon, as the bond market has sold off sharply in recent weeks.

Job loss hurricane is over, for now

2009-05-11T17:13:00.003-04:00

In April, the Canadian economy created 36,000 jobs, almost entirely in self-employed. I am self-employed, but a structural shift of that magnitude does not take place in one month. More likely, you have a bunch of people looking for work who settled for some part-time work and call themselves self-employed.

Nonetheless, and it is risky to base this on one month of data, but it appears as if the job loss hurricane (50K to 100K per month) is over for now. The unemployment rate spiked from 6.2% in October to 8.0% in March, a huge spike of 1.8% for just five months.

As I mentioned back in early February, look for the following in 2009:

I would look for an average of 50-60K in job losses (600K-720K annualized).

I suspect that we are in the midst of a job loss hurricane that is tracking
the steep fall in GDP in recent months. Once this round of job cuts is finished
(spring?), we may get a lull for a few months where job losses continue but at a
much lower pace. Another round may begin in the fall once people return from
summer vacation and realize that the economy won’t magically pick up in
2009.

Welcome to that lull, as this round (357K in 5 months; 71K per month) appeared to end in March. Gut feel is that we now moderate our job losses to something in the 30-40K range for the next few months. That job loss hurricane was a reaction to the sharp fall in GDP in Q4 2008 & Q1 2008, and now that the economy is shrinking at a slower rate, the job market will deteriorate at a slower rate.

I think the risk will now be in the fall months. At that point, I think the stock market and economy will be still be sinking and companies will abandon hope of an economic recovery in 2009. The result will be a big wave of layoffs and a climb toward 9% unemployment. I hope that I am wrong on my estimate for job losses in the 600-700K range for 2009.

My two cents: If you are looking for a job now or to change jobs, hurry before the summer shutdown of July/August and the next round of layoffs in the fall.

Let's leave this blog with a great quote by an esteemed bank economist in February:

“The recession deepened at the start of 2009, and we are likely to see the
jobless rate rise above eight per cent by year end,” warned Benjamin
Reitzes,economist at BMO Nesbitt Burns.

My thought: At this rate, it will be at 8% in April. By mid year, at the
absolute latest. 9% by year end is looking conservative. Remember in the last 2
recessions, unemployment went to 12%.

Fact: It was 8% in March & April. Any tick up and Reitzes' warning will be as useless as most of the ridiculous statements coming out of the banks in recent weeks. A blog on that is needed and in the works...

May Day

2009-05-02T01:08:00.004-04:00

All this talk of new bull markets and green shoots has been ferocious in recent weeks.

I wrote in March:

My gut tells me that this is the classic bear market rally that will suck in a lot of people before ultimately going lower. This rally could last a lot longer than six weeks, however, and a sucessful retest at some future point, could allow a rally (or the March lows) to hold for a long period. I suspect that we should be fine until mid/late April and we could test or break the January highs (which would take us to roughly break-even for 2009 YTD). Expect a lot of congratulations by the establishment on their fiscal and monetary tactics as the rally extends. You will hear that the interest rate cuts, the gas price "tax cut", the quantitative easy and the stimulus is working (and it may for a short period).

I don't plan on "believing the hype!". Bear market rallies are not "stabilization" but the natural ebb & flow. I remain very bearish long term but I could change my mind on all of this tomorrow. I plan on discussing the catalysts for the next downleg in a future post, but expect soaring long term interest rates to be part of the problem. At first, sinking bond prices will be welcomed but our overleveraged economy can not survive high interest rates.

At the time, I was long TBT (ultrashort the US long bond). Unfortunately I got stopped out a while back at a loss. Had I held on, I would have had a nice profit.

Here is my roadmap. As I write this, the world is giddy that the end of the recession is near (summer or Q4 at the latest is the current mainstream view). Dow 10,000 talk is back and few talk of retests of the March lows.

I believe that we are nearing an inflection point here. A downleg is starting that should take us to approximately S&P 777ish over the four weeks. From there, we can either start a nice summer rally (back to current levels of S&P 877 or higher to 900-1000) or we can go right to a retest of the March lows. The real move lower will probably start in August 2009, but I am still not sure when. Ultimately, I believe the stock market is going to go a lot lower.

All the congratulations and hype mentioned above back in March are now present, but I am not believing the hype.

The conditions still remain for a severe bear market that will last more than 1.5 years. While 2008 may have been the worst % year of the bear, I do not expect 2009 to wind up positive. There are many factors that need to happen, in my opinion, before a new bull market can truly start:

1) We need a lot more debt to be extinguished. Debt levels are still astronomical. Unfortunately, this means more bankruptcies (Chrysler) and more foreclosures. The process took about 20-25 years, and will likely take at least five years to complete.

2) We need savings to increase. This also will take years.

3) We need the banking system to heal itself. This process has started but there are more failures ahead, including in Canada, I believe.

4) We need the passage of time. It will take a few more false starts like this year's bear market rally to pave the way for a new bull.

There are many other factors (these are the ones that come to my head right now).

I also see a stronger economy in Q3 (contracting but not at -6% or -7%) but I would not rule out some ugly numbers for late 2009 or early 2010. Why? Interest rates. The world has never seen the type of debt issuance that governments are trying to foist on the bond market. There is going to be $4 trillion plus of debt issued by governments this year. Where is the money going to come from to buy this debt? It has to come from other asset classes. Even if I am wrong about interest rates, I don't see how $4 trillion can be floated without hitting other asset classes such as emerging markets. That $4 trillion is an annual figure. Chances are 2010 will require just as much.

I don't think that long term interest rates can be controlled as Bernanke & Geithner are attempting to do. For that matter, I don't think there is much that Bernanke & Geithner (or their successors) can do to prevent the massive debt deflation that is happening. The last thing the world needs is higher interest rates, given the crushing debt loads out there and given deflation.

All this deflation should ultimately lead to weaker currencies versus the US dollar (with the possible exception of the Yen). Again, another "last thing" the world needs is a stronger US dollar, as this will make debt repayment hard for many who have borrowed in US dollars. And finally, the weak financial system, overleveraged and underemployed consumer will hurt the economy and stock markets.

Instead of a double dip recession, how about a double dip depression?

Risk is very high once again.

Disclosure: Long US dollars, Long Yen, short and long various Canadian banks (with intent of being net short one day), short US banks and long SPY puts. I have started shorting again, but very small at this point. I need a move below 850-870 to have me convinced that the top of this sucker rally is over.

Don't stress about stress tests

2009-05-02T01:00:00.003-04:00

All this talk of stress tests! The whole thing is silly. Similar to having a student (bank) and teacher (government) negotiate a grade for a report card. Another silly idea by Geithner that will do little to impress anyone.

A true stress test would find most financial institutions in the US to be insolvent. The "adverse" conditions laid out in the stress tests are a base case, while the base case is a joke (2010 unemployment at 8.8%, near current rates- even if you think that the economy is going to grow in 2010, unemployment usually peaks for 2 years after a recovery). There are so many assumptions involved that the test is being rigged.

Anyway, I think that the market is smarter than the stress tests, and that these stress tests will be a tool for government to either put more money in the banks or force the banks to do things that they may not have done otherwise. The bad banks (C, BAC) will need to raise money, but the market knows this. The market may well yawn at the results of this rigged stress test. I believe it is heading down anyway, and perhaps reporters will assign blame on the test, but I think much of the test has been leaked and dismissed as a big joke anyway. The real surprises are usually hard to forecast. Perhaps the banking sector surprises are going to come from non-US banks (Canada or Europe?), I believe, and they will not be telegraphed.

Right now, everyone thinks that JP Morgan and the Canadian banks walk on water. Somehow, I doubt that when this recession is finally over, people will be saying that.

That is the history of these things.

More Bank of Canada stuff

2009-04-29T00:29:00.003-04:00

Back in January, I asked: Has Carney lost it?

I won't rehash, but clearly he has tempered his ridiculous tune from three months ago, in his update last week.

The recovery has been pushed out a quarter and tempered a little for 2009, but 2010 remains relatively robust. I still think that he is guilty of dreaming in technicolor but the thing that stuck out for me was the following:

Conditional on the outlook for inflation (emphasis mine), the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.

He has now pledged to keep interest rates at 0.25% for 14 months at least provided that inflation stays in check. There is no mention of exchange rates. I am not quibbling with the rate cut or the statement, just wondering aloud:

This is not my forecast although it is a possibility in my view: What if the Canadian dollar drops back to 62 cents or worse (if falling commodity prices and stock prices continue later in 2009 and 2010)? Is there any scenario where the Bank of Canada would have to step in to raise interest rates to defend the currency? Is that price lower than 62 cents? Is it 50 cents? I remember a time in the early 90s when the Bank of Canada was forced to raise rates by 2% to defend the currency. Once again, I am not predicting this, but given the speed that the Canadian dollar dropped in the fall of 2008, a 62 cent dollar in this recession is not impossible. Obviously, if the Bank of Canada feels that it needed to raise rates, it would do so, regardless of the statement above. I am just wondering:

1) if it even has a plan for a run on the loonie (I suspect that it does)
2) if it does, did it purposely leave out mention of the loonie in its statement above because it would incite fear and would serve little purpose (I suspect this to be the case)?
3) Does this statement come back and haunt the BoC one day, if they have to reverse course, and/or does it give speculators the ammunition to launch an attack on the loonie since the BoC has pretty much ruled out an increase?

FYI: I am long both Canadian and US dollars but getting longer the US here and less long the loonie with every passing day. I see a move to the 76-77 range, and if that breaks, to the low 70s. I can also see a run at 62 cents, if the doom and gloom returns.

Six weeks is over

2009-04-20T10:26:00.001-04:00

The "mother of all bear market rallies" has now completed its sixth week with a 30% gain. As I stated in March, I would give this market the benefit of the doubt for six weeks. I am happy that as someone labelled as a perma-bear, I was able to see this coming.

However, Adil Burney the forecaster was much better than Adil Burney the trader.

-First of all, I got whipsawed out of most of my longs at the end of March on the sharp 2 day pullback. Certain things caused me to think twice and I was not able to reenter my longs as the market soared in April, as I had expected.
-My few longs have stunk (gold stocks), but I feel very bullish in the long term on this, so I am allowing some leeway for these.
-The good thing was that I converted almost all of my US dollars to Canadian dollars
-The best thing for a bear like me though was that I did not short. I suspect that we will hear of a few blowups on the short side (30% in 5 weeks will do that) in the next few weeks.

Where do we go from here?

-I think the "easy move" (it wasn't that easy!) is over. I don't think that we test the March lows or anything just yet, but after 6 straight up weeks (with only modest 2 day selloffs) and 30%, a nice Fibonnaci 38% retracement may be in short order. That would take us to S&P790-800ish (or about 10% off the top).
- I am still very bearish on the intermediate and long term, but I am weary of shorting just yet, as we must allow for a further rally later this spring/summer. The problems in the economy are too deep and there is way too much bullish sentiment out there in my opinion.
-I will watch the action in the coming days and make adjustments accordingly.

A new bull or more bull

2009-03-24T10:24:00.005-04:00

Mark Mobius. One of the most senior and most respected equity gurus in the world. Tons more money and way more of a following than yours truly.

Unfortunately, he is becoming synonomous with serial bottom calling. The history of great bear markets is such that they chew up the reputations of some greats (Remember Abby Joseph Cohen, Barton Biggs?).

Mark Mobius is stating that a "new bull" has begun. Too bad he said pretty much the same thing on September 23, November 17 and January 17 (thanks to Minyanville.com for the links). Every two months, he says the same thing from lower and lower levels... I agree that we are in a vigourous rally, but a classic bear market rally, in my opinion. Eventually, he'll be right, I guess...

As for yours truly, I am 35% long, as I added to positions last week. The only thing that I am short is the long treasury (TBT, which I am underwater on, thanks to Helicopter Ben's printing of money to buy the long treasury). Looking to add to my long position on the way up over the next few weeks. I am looking for this to be the mother of all bear market rallies, as we will probably take out S&P 944 in April, on the way to S&P1000 sometime later in the month.

Six weeks

2009-03-18T00:11:00.003-04:00

On March 3, I mentioned that the window on the rally had been shut by the ugly close of February 27th. I played a little on the short side until the big rally day of March 10th when I closed out most of my shorts, as the downleg appeared to be ending.

As of Friday, March 13, I switched to a net long position. I am now up to 12% long and looking to get longer if the positive action continues. I remain at about -1% YTD. Does it seem silly to be getting positive at S&P756 (Friday's close), which was about 14% above the "bottom"? Yes and no. Sure, if you are the best investor around, you could have bought at S&P666. However, I suspect that few did, when you exclude those who have been buying all the way down. There are probably a select few who have sat out the bear market (or profited) and who went long at S&P666ish. If you did, my congratulations as you are awesome. Personally, I know that I can not time the exact bottom. I do know that missing the 57% drop (and even being up in the bear market) has allowed me to be patient. Despite the 14% rise, we are only about where we were a month ago.

I am siding with the bulls here. There are many short term positives:

1) The market was hugely oversold at its low
2) There are lots of stocks and sectors that did not break their November lows
3) The ones that did (financials) have had a nice rally
4) We have had 3 big up days on generally good volume in the last 6 days. That hasn't happened in a long time.
5) Cooper, oil, retail and homebuilders are well above their November lows. These were some of the worst areas of 2008.
6) Bonds, the US dollar and gold are selling off, a sign that panic is dissipating
7) I believe that the market is starting to confirm that Q2 & Q3 GDP will not be as bad as Q4 2008 & Q1 were.

Six weeks. That is what I will give the bulls to make their case, as most of the bear market rallies in this bear have not lasted much longer than that. The subscriptions that I follow (which were all right big picture thus far) also confirm the recent bullishness.

My gut tells me that this is the classic bear market rally that will suck in a lot of people before ultimately going lower. This rally could last a lot longer than six weeks, however, and a sucessful retest at some future point, could allow a rally (or the March lows) to hold for a long period. I suspect that we should be fine until mid/late April and we could test or break the January highs (which would take us to roughly break-even for 2009 YTD). Expect a lot of congratulations by the establishment on their fiscal and monetary tactics as the rally extends. You will hear that the interest rate cuts, the gas price "tax cut", the quantitative easy and the stimulus is working (and it may for a short period).

I don't plan on "believing the hype!". Bear market rallies are not "stabilization" but the natural ebb & flow. I remain very bearish long term but I could change my mind on all of this tomorrow. I plan on discussing the catalysts for the next downleg in a future post, but expect soaring long term interest rates to be part of the problem. At first, sinking bond prices will be welcomed but our overleveraged economy can not survive high interest rates. (disclosure: long TBT, long various equities)

Dead cat bounce

2009-03-16T14:51:00.003-04:00

After months of disastrous reports, the February report was not a disaster. CREA reported that February home sales declined by only 9.2% YoY, a nice improvement over the -11.3% from January. Sales volume actually picked up from January's depressed levels.

Is the sign of a turn? Or is the typical dead cat bounce?

I suspect the latter. Anecdotally, it appears that many potential buyers are getting excited about falling interest rates. They are salivating at the “low” payments that these lower rates are promising. What these buyers fail to consider is that the real cost of interest has never been higher. To borrow at 4% to finance an asset that is declining at 9% a year represents a real interest rate of 13%.

Also, I went back and checked and it appears that back in February 2008, the YoY increase dropped to 5.7% from 9.7% in January 2008. That was the famous “It snowed too much in February!” month. February 2009’s decline was measuring against a very weak number. Also, in an ironic twist to CREA’s blame the weather approach last February, this February’s sales must have benefited from a relatively mild February in Central Canada versus a cold January. In addition, the snowfall in Toronto was quite moderate. Notice, no mention of the weather when it is a positive.

Therefore, this improvement is not as impressive as it seems at first glance. The sharp decline back in February of 2008 moderated a little bit as the March 2008 YoY only dropped to +4.8% while April 2008 YoY dropped to +4%. This means that the YoY comparisons for March and April will not be as easy to beat in March and April of 2009.

I suspect that this moderation will only last another month and that once this wave of buyers finishes, another leg down will begin. This is actually a very dangerous bounce. If it were a stock market rally, I would short it, since it is analogous to the bottom callers who proclaimed every dip in 2007 and 2008 as a buying opportunity. Once these bottom callers are proved wrong, there may be a big vacuum that shows itself towards mid-year.

5 of the 6 NHL markets are now negative as Ottawa has joined the slump. Montreal remains positive surprisingly.

Fearless predictions:
-March is also a decent report (the rate of decline stabilizes in the high single digits) and the bottom callers will start. Remember the same phenomenon happened in the US housing market back in 2007.
-By April, we are back to negative double digits again

Since we are on the topic of February 2008, let me just end with a paragraph from that entry almost exactly a year ago:

What happens if we get a full bear market, falling commodity prices, higher
unemployment and a US and Canadian recession, as I expect? Just remember, the
CREA or CMHC will never tell you that the real estate market is overvalued. They
will never tell you that house prices will fall.

We the People

2009-03-16T12:13:00.001-04:00

Who is the biggest culprit for this mess?

I don’t put all the blame solely on politicians such George Bush, Bill Clinton and Alan Greenspan (yes, Greenie was a master politician albeit an unelected one)

All of these men have some responsibility for the current mess. Bush’s overspending and tax cuts plus an expensive war in Iraq led to big deficits. The huge deficits, the tax cuts and all the 0% financing that cropped up after 9/11 likely caused a shorter and shallower recession in 2001 than would have been the case otherwise. This is probably leading to a deeper and longer recession/depression currently.

Greenspan also cut that recession short by encouraging an asset bubble in housing to replace the tech bubble.

Some of the current mess (Fannie, Freddie and the bank deregulation) began in the Clinton era. Also, the Mexican and LTCM bailouts were under Clinton’s watch. Those bailouts probably worsened the subsequent asset bubbles. Plus, Clinton reappointed Greenspan.

However, the biggest culprit in this depression is not the politicians or the banks, as easy as they are to scapegoat. The biggest culprit is us. We the people.

We the people were the ones who leveraged ourselves to the hilt in our houses, and stopped savings. All the subprime and leverage in the system was merely there to support over consumption.

People created a lifestyle for themselves that was unsustainable and not possible without credit and overvalued assets.

Even now, people are still clinging to a naive belief that in a few months, things will magically turn around. Things will turn around one day, but that day will be when assets are priced at a discount to their long term values (i.e. there is room for appreciation in the future) and when enough credit has been wiped out to allow the economy to grow again.

Blame the Americans

2009-03-16T12:09:00.001-04:00

It has become very fashionable to blame the US for this mess.

Many leaders have blamed US mismanagement (financial sector, subprime, hedge funds, etc…) for this crisis.

France President Sarkozy blamed the US back in the innocent days of late 2008.

British Prime Minister Gordon Brown stated in October:

"This problem started in America. They have got to sort it out," he said then.

Our PM said this last week:

"We will not turn the corner on this global recession until the American
financial sector is fixed," he said.

His buddy Tony Clement also blamed the Americans

“Only American consumers can save the flattened auto industry from extinction,
he said.”

With friends like this….

The foes of the US, if you can put China and Russia in this category, have also heaped blame on the US in recent months.

I vehemently disagree with the blame the US approach.

Yes, as the largest economy in the world, the US has played a large role in this mess.

However, let’s ponder the following questions. Did the US cause:
1. Northern Rock in the UK to go under?
2. Hypo Real in Germany?
3. Iceland to go bankrupt?
4. Dubai to be in big trouble?
5. Ireland to be in big trouble?
6. SocGen in France to lose billions in January 2008?
7. European banks to lend billions to Eastern Europe threatening the entire European system
8. Housing bubbles imploding in many countries all around the world
9. The Chinese stock market bubble
10. The Russian stock market bubble

I could go on….

The US was the biggest piece of the puzzle but all nations were part of this. The US and the other so called Anglo-Saxon countries, including Canada, (“USAF”- US and friends) all over consumed and under saved. The Asian countries all over saved and under consumed. The Asian countries exported to the Anglo-Saxon countries and then recycled the US dollars into reserves composed mainly of US treasuries. This lead to low US interest rates (and hence, global interest rates) which lead to more consumption by Anglo-Saxon consumers, and a virtuous cycle known as Bretton Woods II (BWII) continued for most of this past decade.

Everyone played the game and everyone knew of the inherent problems. The US ran huge trade deficits mostly to Asian exporters such as China and Japan. There were all types of weird things that should have been evidence of an unsustainable buildup of imbalances:

zero savings rates in USAF
huge trade deficits
continual pressure on the US dollar
Rampant asset price inflation, especially in housing
soaring commodity prices
soaring debt/GDP levels worldwide

When things were good, did all the blame gamers thank the US for causing their prosperity? Of course not. In reality, we all benefited from Bretton Woods II.

In Canada, these soaring commodity prices and housing prices allowed the economy to boom. Government spending and tax cuts were doled out and yet the budget remained magically in balance, thanks to the factors mentioned above. Now that BWII is now dying, big structural deficits are back in Canada. In Canada, we all benefited from the US housing bubble that created demand for our exports. Our aerospace sector benefited from the super rich US billionaires ordering business jets (Stanford ordered one).

Worldwide, everyone was greedy. People chased risky assets worldwide. People perpetuated the myth of a super commodity cycle. Scapegoating the US is easy. In reality, we were all part of the game. The US was the biggest player but Canada and others were all involved. Who told the Asian countries to become so dependent on exports to ASAF? Who told European banks to lend so aggressively to Eastern Europe? Was it the US?

The boom was long and global and the bust will be long and global.

Horrible employment report

2009-03-16T12:04:00.000-04:00

The unemployment rate jumped 0.5% to 7.7% in February. That was up from 6.2% just four months ago. The Canadian economy continues to lose jobs at an alarming rate (over 200K in 2 months), which is making my prediction of 50-100K per month look optimistic.

Hey, TD: How does this square with your prediction of 325K job losses for 2009? We’re more than 50% there in just 2 months! Amazing how these banks with their big budgets, big staffs and incredible access to real-time data can have their predictions blown away month after month by a part-time zero budget guy like yours truly!

Even worse, the headline number of 83K in job losses masked an even worse picture as the number of full-time job losses were 111K.

That is an economic earthquake that is send shockwaves into other parts of the economy. Housing and consumer spending are going to continue to get devastated by this news, and any fantasy about a strong fourth quarter (Hello Carney!) is now over.

Here goes our great central banker Carney recanting his delusional January forecast in the Star:

“When we laid out the projections in the update in January, we also laid out some upside and downside risks,” Carney said in an interview in Horsham, England, where he was attending a meeting of Group of 20 officials. “It’s safe to say the downside risks, particularly around the outturn in the global economy, have materialized.”

Talk about talking on of both sides of your mouth. The dude is changing his ridiculous story and making it seem as if he had identified this risk. His forecast of a hot economy for late 2009 and all of 2010 is now dead less than 2 months after he put it out. What a pathetic joke! This is worse than Cramer who at least sometimes admits he was wrong.

Harper seems to be the delusional one these days, according to the G&M:

Harper, in his address to a business crowd in Brampton, noted that "Canada was the last advanced country to fall into this recession. We will make sure its effects here
are the least severe, and we will come out of this faster than anyone and
stronger than ever." The crisis, ultimately, is an "opportunity to position
ourselves so that when the recovery comes, we're among the first to catch the
wave."

And just in case, it doesn’t work out according to plan, follow the script: Blame the Americans!

"We will not turn the corner on this global recession until the American
financial sector is fixed," he said.

Great to know that the 2 guys (PM and Carney) heading up Canada’s recovery efforts understand what is going on here!

The window is shut

2009-03-03T17:25:00.003-05:00

As I mentioned last week, with the close below 800, the window was closing. It is now closed.

This happened late Friday, once we took out the 741 on a closing basis, and especially on a weekly and monthly basis with the 735 close on Friday.

Risk is extremely high and the next downleg that I had forecast for sometime in March, has clearly started. The start of this downleg was too premature for my taste (as once again, I was not able to capitalize), and I got out of my small longs on Monday morning.

Thanks to the small percentage I had allocated to being long the market and with some nice profits on gold shares that I took over the past couple of weeks, I am -1% on the YTD. Not happy with that, but I can live with it, since the S&P is down 22%.

I am now mostly in cash and looking at shorting opportunities. I am hoping for a nice sucker rally here to get that chance, but it does not seem to be happening.

Risk is extremely high as systemic risk has reappeared once again. I outlined some of my fears in my posting last week.

The first down target is 660ish and then 600. If we break these, a move to 400 to 500 on the S&P can not be ruled out. The inability of the market to rally past early January given the carnage in the fall is very ominous. My doomsday target for this month is S&P 450. It could happen as soon as mid March, which would time nicely with the Bear Stearns bottom of 2008. It may take such a ridiculous low number (roughly the starting point of the 1995-2000 bull market) to finally kickstart buying, which has been lacking even in the rally of November-December.

The good news is that if we crash fast and furious, the next bear market rally may begin, and it should hopefully be a little more steady than the one from late November to early January.

BMO says "Worst likely behind us"

2009-02-26T22:46:00.004-05:00

Every once in a while, one of the Big Banks amaze me with their incredibly useless analysis of this recession.

Today in the G&M, it was reported ("Worst likely behind us: BMO", VIRGINIA GALT, Feb 26)

“Our current view remains that the Canadian recession will be somewhat milder than the past two major downturns … We continue to maintain the view that a recovery will take hold by the end of the year, despite the recent wave of downbeat economic releases.”
However, Mr. Porter said he believes the recession will not be as deep or prolonged as the recessions of the early 1980s and early 1990s for a number of reasons:
“First, interest rates were cut early and often in this cycle and are much, much lower than in the past two downturns…

“Second, stimulative fiscal policy is kicking in relatively early in this downturn.

“Third, corporate balance sheets were in much healthier shape heading into this recession than in the past two cycles.”

And, finally, the 20 per cent depreciation of the Canadian dollar relative to the United States dollar, “will offer some relief to industry,” he wrote.
He added that Bank of Montreal economists now predict a 2 per cent decline in Canada's gross domestic product this year, and project that the unemployment rate could average 8.2 per cent in 2009 – not as high as the unemployment rate of 13 per cent reached in December, 1982.

The recovery, when it does take hold, will be half-hearted and, to some extent, “will be force-fed by this wave of fiscal stimulus that we are seeing around the globe,” he said.

But for the stimulus efforts to work, the United States must first stabilize its financial system, he added.

“If that doesn't happen, of course we have got to start over again with the forecast,” Mr. Porter said.

“We don't need the U.S. consumers to go back to their free-spending ways, we don't necessarily need that. We just need the U.S. financial sector to sort of stabilize and we need their growth to stop falling before we can realistically look at a turnaround in Canada,” said Mr. Porter, who noted that U.S. Federal Reserve Board Chairman Ben Bernanke has also projected that the economy could start to recover by the end of 2009.

My thoughts:

Hmmm, a 2nd half pickup. Wait a minute, didn't this same Mr. Porter look for a second half pickup for 2008 in January of 2008? No one could have seen this coming back in early 2008, could they?

BMO economists aren't predicting a recession for Canada but expect the economy will grind to a halt by the second quarter before picking up momentum again in the second half (of 2008).
But there are positives amid all the doom and gloom, said Doug Porter, deputy chief economist with BMO Capital Markets.

U.S. core inflation remains relatively low, he said, giving the U.S. Federal Reserve room to aggressively cut interest rates if it needs to.

"There's room for Washington to cut taxes or to increase spending," Porter said. "It's not as if policy makers' hands are tied."

Sound familiar? Didn't see the recession coming, huh? This is the problem with most economists and many investors these days: they are relying on the same models that did not see any of this coming. They dismissed anything that happened before 1980 and dismissed the Great Depression as a series of policy errors. What do these esteemed models of Porter say?

1) Porter's model says: Interest rates are low, so the economy will pick up

2) Porter's model says: Fiscal policy is kicking in, so the economy will pick up

3) Porter's model says: Corporate balance sheets are great, so companies will spend and the economy will pick up

4) Porter's model says: The Canadian dollar is depreciating so exports will pick up, so the economy will pick up

5) Porter puts in a ridiculous qualifier on the US banking system so that he can blame it when his forecast inevitably falls apart.

6) Porter says that Bernanke says the US will recover in late 2009. The same Bernanke that said that subprime was contained and that didn't have a clue about any of this?

Porter's points are all true versus the 1980s and 1990s recession. However, he does not point out the negatives which ironically are the reason that many of these "positives" are happening.

Interest rates are low because the economy stinks and there is deflation. Low interest rates are a symptom of this fact.

Public money (Fiscal policy) is kicking in because private money is not spending.

Corporate balance sheets were in relatively good shape before the recession hit. However, consumer balance sheets are absolutely horrible with record debt levels and leveraged against bubblish assets such as housing.

The Canadian dollar is depreciating due to falling commodity prices (among other things). Canada needs those falling commodity prices like we need a hole in the head. Exports are tanking as world demand for everything is falling.

Porter also conveniently omits that there was no global stock market crash in the past 2 recessions. There was no global banking panic. There was no global housing crash. There was no fear of deflation. There was a far less leveraged consumer. Commodities did not drop by 80%. The demographics were more favorable.

I guess all this works in fantasyland where you get to use the same discredited model that makes symptoms of a disease appear as cures.

I hope when this recession/depression is over, that the economics community is thoroughly discredited. (I doubt that it will. I also realize that there are a handful of great ones such as Roubini, Paul McCulley, etc...It is the other 99% that I take issue with. Keep in mind that the consensus of the famous Blue Chip Economist survey in the US has failed to ever correctly predict a recession.)

Until the future arrives, I accept that Porter could be right and I could be wrong on this, and I also accept that one day there will be a recovery. However, on this issue, as Charles Barkely once wrote "I may be wrong, but I doubt it..."

Window for the bull case is closing soon

2009-02-23T23:07:00.001-05:00

As you may know, I have been short term bullish since late November, with admittedly nothing to show for it. I have been quite cautious about it (being only 20% long at my most bullish and currently less than 10% long).

I had mentioned that my target was around S&P 944 to 1000 recently, but that if we broke 800 all bets were off. That was way probably way too optimistic. Something close to 844 may even be stretching it, and unfortunately, I did not follow my own advice (as I didn't get to 0% long on the recent break of 800).

I subscribe to services written by people much smarter than me. They provide me with insights that I can not obtain on my own and are time tested and accurate. My interpretation of technical services that I subscribe to, such as Lowry's and others are getting more and more ominous of pending moves to new lows. Jeffrey Cooper at Minyanville.com is also speaking of upcoming cycles that point down as well. The esteemed Bob Hoye who has been on the money throughout this crisis is warning as well of upcoming danger, albeit in April or May.

My own readings tell me that the first chapter of the Currency Crisis (in late 2008) was not the last.

Overlooking the North American economy for a minute, there is pending disaster in countries such as Ireland and much of Eastern Europe including Russia. How can the EU deal with this stuff as it was not set up to do so?
$33 oil is causing havoc with the Middle East and other economies such as Venezuela. Dubai's economy is in big trouble.
The British, European and Japanese economies are falling as hard or harder than North America. The so-called (no offense intended) PIGS (Portugal, Italy, Greece and Spain) are particularly vulnerable.
Asian economies are generally very export driven and as such, are getting hammered by the global recession.
Most emerging countries have a lot of debt in the senior currencies (Yen, US dollar, Euros). As their currencies fall, this debt becomes more expensive, and in some cases, country defaults are a possibility.

Then you add all the obvious things such as the downward spiral of soaring unemployment and horrible banking systems in most countries to the mix and you get all the conditions for another ugly leg down.

Today we closed right near the November lows. These levels need to hold here right away. I had been expecting a retest (and failure) in March, but perhaps my timing was off. Alternately, perhaps we are now getting a retest and then we rally for a week or two and the bulls scream "successful retest" (maybe spiked with some government intervention, yet again?) before taking out these lows as the snow melts.

My target for the next downleg is S&P 600. Do we rally a little first and then get there or has the move already began? I am finding it very tough to decide, but it feels as if there is a level of despair here that may give rise to a fast and furious short term rally sometime this week.

Where am I planing on hiding? The US dollar & Japanese Yen and some selected shorts (if we get this rally). Even gold may sell off for a few months before resuming its upward journey.

The ultimate low in this bear market may be S&P 450 (roughly where the super bull of the mid 90s started from).

Disclosure: Long Yen, US dollars, Canadian cash, and a few longs

Another stinker from CREA

2009-02-13T13:31:00.004-05:00

CREA numbers continue to deteriorate -11.3% YoY in January. Recently, CREA projected a decline of 8% for 2009. In November, I conservatively forecast a -10%. Nice to see that they are getting a little more realistic (they had a -2% back then), but remember that my number was conservative. I have to crunch some numbers, but I plan to revise that number significantly lower. At the least the flagrant cheerleading by CREA has been toned down. This will lower the comedic value of their reports. Nonetheless, there is still some spin left....

CREA states:

“there are certainly buyers and sellers in the Canadian residential
market,” says the President of the Canadian Real Estate Association, Calvin
Lindberg of Vancouver.

My thoughts: All it takes is 2 buyers and 2 sellers to make that statement factually correct.

CREA states:

The supply of homes for sale remains high, but is trending lower nationally. The
decline in new MLS® listings is trending lower in line with sales activity
in many regions. The decline in supply to meet lower demand is expected
to help stabilize the resale housing market balance and put a floor under
prices.

My thoughts: I will agree that if the supply of homes is decreasing, this is a positive.
However, it remains to be seen if this will continue. I expect that since the large layoffs began in November, there will be a large increase in foreclosures with a lag of a few months. The same applies to the stock market crash of Sept to November. Therefore, if we assume a lag of six
months, there may be a large number of new listings in April or May, due to people forced to sell due to job losses or stock market losses. Until recently, sellers were taking advantage of high prices to sell their house. The next wave of new listings may be from sellers who have no choice but to sell.

Also, the CREA assumption assumes that all of this exists in a vacuum. This floor on price means nothing if buyers can not obtain mortgages or if buyers set their price levels lower (as
they are apt to do given the fact that we are in a depression).

In theory, there is a floor on price. I suspect that it is a lot, lot lower than anyone can fathom.

Other key points:

4 of the 6 NHL cities were negative with Calgary -13%, Edmonton -3%, Toronto -8% and Vancouver -9%. Ottawa and Montreal remain in la la land at +2%. Anecdotal information for Montreal tells me that the tide is turning here, and I suspect that Ottawa will turn negative soon as well.
13 of 25 markets were negative. Remember how CREA used to say that only 4 of 25 markets were negative, thereby attempting to spin. Now that the majority of markets are negative, conveniently omitted from the press release. Still, 13 is not bad, considering it will be probably 25 by year end.

All in all, another bad report and I suspect that given the lags in homebuying, some real disastrous reports are waiting for the springtime. In fact, if the housing market was a hockey game, we're still in the first period. The US is probably somewhere in the second period.

Pilots who can't fly

2009-02-11T12:12:00.003-05:00

Fantastic interview on Bubblevision (no thanks to the bubbloids with their lousy questions) this week with Nouriel Roubini and Nasim Taleb, two of the few who called this depression. Taleb thinks that we are very early in this debt unwinding and I believe that he is right.

http://www.cnbc.com/id/15840232?video=1027496846

Taleb mentions that he would like to see the responsible people out of office. Example, Bernanke. Someone crashed your plane and now you are giving him a new plane. He suggests that someone like Nouriel Roubini be called in to fix the problem. At least he saw it coming.

I am very disappointed that President Obama appointed Geithner as Treasury head since he was part of the Establishment that watched this happen. He talks about change and yet he has the “same old” (Summers & Geithner) running the show. Perhaps he should have appointed Former Fed Governor Paul Volker to the Treasury. Volker at least understands tough medicine and wrote a prescient article back in April 2005, that really stuck out at the time, a solid 18-24 months before the crisis began in earnest.

A great line in his article:

I don't know whether change will come with a bang or a whimper, whether sooner
or later. But as things stand, it is more likely than not that it will be
financial crises rather than policy foresight that will force the change.

The problem is that even with the current crisis, we are not forcing that much change. We are trying to use more debt to stimulate the economy, when the problem is already too much debt and consumption. Even Volcker seems to be going along with this crap in his current role as an economic advisor to Obama.

The same logic applies in Canada. Why do we listen to all these Big Bank and BoC economists, none of whom, with the possible exception of former NatBanker Clement Gignac, saw this coming? We are giving them our plane (our taxpayer dollars borrowed from our children). Even right wingers PM Harper and Flaherty, who are supposed to be conservative, are going along with all this stimulus crap. The electorate wants to bribed with its own money.

TD= TOTAL DENIAL

2009-02-06T12:14:00.000-05:00

The TD report released Wednesday on the economy for 2009: The number that many have talking about is a prediction of 325,000 job losses (or about 27,000 per month). In light of today’s report that the Canadian economy lost 129,000 jobs in January (and 234,000 in the past three months), I think even TD knows that their numbers stink.

I have been asked about this TD report recently and here are my thoughts:

In a January posting, I mentioned that the Canadian economy was losing about 50,000 to 100,000 jobs per month.

Where did I come up with this number? We lost 71K in November and 34K in December (average of -52K jobs per month).

I assumed that since the economy went south in the fourth quarter, the real ugly numbers would begin in the first quarter. Why? First of all, most companies do not just fire people before Christmas for obvious reasons and secondly, most companies did not have a -4% GDP planned in their internal budgets. To announce layoffs, it often takes companies a month or two to go through the payrolls, formulate plans for severances, get legal involved, etc…

TD assumed that job losses will just magically decelerate to 27K per month.

The good news is I doubt that we lose 129,000 jobs each month. I suspect that we are in the midst of a job loss hurricane that is tracking the steep fall in GDP in recent months. Once this round of job cuts is finished (spring?), we may get a lull for a few months where job losses continue but at a much lower pace. Another round may begin in the fall once people return from summer vacation and realize that the economy won’t magically pick up in 2009.

The unemployment rate has risen 1% in just 3 months (6.2% to 7.2%). This is the same 1% increase as in the US (Yes, as much as we keep claiming that we are doing better than the US, I don’t see it in the employment data). Using somewhat complicated calculations from the esteemed John Hussman, a 1% increase in unemployment PER QUARTER is perfectly consistent with a 5% drop in GDP, which is exactly what is happening right now.

Here is what these bank jokers had to say today after the report, as reported in the G&M:

“The recession deepened at the start of 2009, and we are likely to see the
jobless rate rise above eight per cent by year end,” warned Benjamin Reitzes,
economist at BMO Nesbitt Burns.

My thought: At this rate, it will be at 8% in April. By mid year, at the absolute latest. 9% by year end is looking conservative. Remember in the last 2 recessions, unemployment went to 12%.

“The fact that most of the job losses were in the private sector adds to worries
that the economy has significantly throttled back,” said Charmaine Buskas,
senior economics strategist at TD Securities.

My thought: Is it not obvious that the economy has significantly throttled back by now?

Canadian Imperial Bank of Commerce economist Krishen Rangasamy said in an
interview that economists “knew things were going to get worse, but they got
worse a lot faster than expected.”

My thought: Faster than you expected….

The Big Banks are either deliberating understating their predictions or they are using models based on recent recessions (early 80s and early 90s). When they are wrong, they are surprised. They will say this is unprecedented. It isn’t unprecedented. There is a precedent. The 1930s. The Great Depression. Their models can’t capture this, so they will keep on acting surprised every month.

Conclusion: For 2009, I would look for an average of 50-60K in job losses (600K-720K annualized). This is optimistic, and it could be worse. I project an increase to 9% or 10% unemployment by the end of 2009.

The job losses are not just in the US anymore. This week, there have been layoffs announced by many high profile Canadian companies (which are not even reflected in the January numbers).

In this job loss hurricane for the next few months, 50 to 100K should be the range. I hope that I am wrong but I think it is better to be realistic here. If you can, build up an emergency fund (I will have more on Emergency Funds in a future posting). If you are thinking of selling your house, sell now while you still have a nice profit. Pay down debt before deflation makes it even more expensive.

I laugh at Carney. How is the consumer supposed to come back in 2010? As I wrote recently, there is a secular trend at hand with the savings rate. To add fuel to the fire, the consumer is now getting hit by massive job losses. Even if you haven’t lost your job, you are starting to fell worried about losing it or you may know someone who has lost their job. That is going to affect your spending. Your portfolio may be down 40%. Your house may soon be down 30%.

Let’s be honest here. We are in a depression. Maybe(?) not the Great Depression, but definitely a depression. Expect the "surprises" to be negative.

Still in the bull camp?

2009-02-05T22:39:00.000-05:00

Since a huge reversal day on November 21st, the stock market has basically been in a “relatively” narrow trading range from 800 to 944. I mentioned that I had turned bullish back in late November (after a few failed attempts earlier in the month).

Am I still bullish?

Yes, but.

I am only about 20% long (mostly gold stocks, a little oil and a little SPY) right now and already planning my next shorting strategy.

Back on November 26th, I was looking for a rally to S&P 1000-1100 into late January to mid March. Now, I think, at the very best, we get to the lower part of that range. My gut tells me that we should test the 944 level we hit back in early January. It could even happen very quickly as a big rally day may be coming in the next few trading sessions. Perhaps ironically even on Friday, Feb 6th, when a horrible employment report is expected?

For now, as long as the S&P 800 level holds, I am willing to give the benefit of the doubt to the bulls. A high in mid March is still possible but I am now thinking that the top could be as early as mid February and as late as mid April. From that top, we would then drop sharply to test the November lows and I suspect that we take those lows out.

I will have much more to say on this later with better explanations, but my time is limited right now. I plan to post much more on my 2009 views next week…

Name is catching on

2009-02-04T11:15:00.004-05:00

It seems as if the name change from November 2008 is catching on....(I doubt these people read the blog though...)

U.S. May Be in for ‘Great Recession,’ Longest Postwar

By Steve Matthews and Timothy R. Homan
Dec. 2 (Bloomberg)

http://www.bloomberg.com/apps/news?pid=20601109&sid=ar0v6PP3HCpk&refer=home

There seems to be a bunch of sites using this term now. Perhaps, I'll have to change the name again to stay one step ahead. If anything, I think the term "recession" is being nice. Something with the word depression is more and more likely....

25

2009-01-26T22:40:00.006-05:00

As in 25%, As in 25 years...

Once upon a time, back in 1989, to buy a house in Canada, you needed to put down 25%. In the last housing bubble (1989/90), prices collapsed once the early 90s recession kicked in and as interest rates soared in an effort to kill inflation.

As prices soared, in 1990, 5% down payments were introduced to make houses more "affordable" (sound familiar?), with mortgage insurance to theoretically insure the lender (ie bank) from the risk of a loss. In 1992, the RRSP Homebuyers Plan was set up (post price collapse) to make it easier to make a downpayment, in an attempt to put a bottom in the Canadian housing market.

For decades, a 25% down payment was necessary. What was magical about 25%? It probably represented the hit that a bank would need to take to repossess your house and sell it via an agent. Banks don't want to be homeowners, and thus will take a hit to free up the capital. Plus, as anyone who has ever studied business knows, a bank is supposed to want the investor/owner to have some "skin in the game". Otherwise, at 5%, the bank is basically the real owner and the homeowner has little invested.

I don't believe that governments can stop the freefall that the economy is in right now, but that won't stop them from trying. I would look for:

1) An increase in the RRSP Homebuyers Plan at some point (tomorrow's budget?) from $20K to $25K. $20K in 2009 dollars is worth a lot less than $20K back in 1992. I doubt that this would cost much overall and it would be popular. Also pretty cheap given the billions that the government is likely to spend or waste in its stimulus package. The real estate industry is already lobbying for this.

2) The other thing that the government is loathe to do since it will get blamed for further hurting the housing market, is to curtail or end the 5% downpayment insurance scheme. I will admit that there are probably some people for whom a 5% downpayment makes sense. For example, a doctor who is ready to practice (and mint) and who has a lot of student loans. For most families, though, a 5% downpayment is risky. Perhaps the government will not tinker further with Overprime Lite, but I would imagine that the Big Banks are already planning to ask for more "skin". It all depends on how much these mortgage insurers are going to lose (ask Freddie and Fannie?).

3) Amortizations of 25 years were the maximum until recent years. Same logic as increasing the down payment. Too long an amortization means no skin in the game.

Before the housing market can bottom, I believe a 20% to 25% down payment is going to come back. I believe a 25 year (worst case 30 year) amortization is going to come back.

Can you imagine what this is going to do for first time homebuyers? The average Canadian house sells for about $300K (and much more in many major cities). A 25% downpayment on that runs you $75K. Right now, a 5% downpayment runs you only $15K, less than the price of a new car (assuming you actually bought it with cash). So if you are interested in the $300K house, you would have to spend years saving more money (pushing demand to the future), you could wait until prices fall further (again pushing demand to the future) or you could settle for a cheaper house, although not too many 25% houses that you could buy with only $15K ($60K house). Add about 5 or 1o years less amortization (ie higher mortgage payments) and you have a recipe for disaster.

Imagine a 25% in $800K Vancouver? Not many people could put down $200K!

Just this one change (that is apparently already happening in the US) could really kill the Canadian housing market, excluding all the other negatives out there.

Carney has lost it

2009-01-22T23:57:00.004-05:00

PM Harper, October 2008:

"Canada is not the United States, the situation is very different. The fundamentals of our economy are strong," he said. "We have a budget surplus. We have an economy that continues to create jobs. We're not experiencing a crisis in our financial system."

Harper also said that Stephane Dion was scaring people. Then in December, Harper starting mentioning that a depression was a possibility (he is right on that front) as his government nearly fell.

Today's G&M:

The government official told reporters that the Harper government would run a $34-billion deficit in the fiscal year beginning April 1 and a $30-billion shortfall the year after.

We then lost about 100K jobs in November and December. We now have huge deficits. We are experiencing a crisis in our financial system. Maybe this would teach Canadian leaders to stop comparing ourselves (in a favorable light) to the rest of the world, especially the US, or stop making ridiculous statements in the face of one of the worst economic situations since the 1930s.

Nope!

Today's GM re Bank of Canada head Carney:

Even as the central bank said economic output would contract an alarming 4.8 per cent this quarter, Mr. Carney boldly predicted Thursday that Canada's economy will rally to expand 3.8 per cent in 2010... he said the recession that began in the final three months of 2008 will end faster than did the contractions in the early 1990s and 1981-82.

This dude made a prediction on October 23 (after the stock market crashed) that the Canadian economy would GROW in the first half of 2009 (+0.4%) after shrinking by 0.4% in Q4 2008.

What does he say today: Whoops, -2.3% for Q4 2008, -4.8% for Q1, -1.0% for Q2. With that type of disaster, you would think the dude would tone it down a little. Nope, magically, in July, the economy is going to grow 2.0% and immediately stabilize. Then, it will grow by 3.5% in Q4. Oh, and then it gets better: 4.7% in the first half of 2010 and 4.9% in the second half of 2010.

He is entitled to his opinion and he may ultimately be right, but what is he smoking? We are losing maybe 50-100K jobs per month, the economy is expected to have one its worst quarters ever, the housing and commodity markets are imploding and all of a sudden, on July 1st, people will start to spend like its 2007 again.

How will things magically stabilize?:

Monetary policy (pat on the back?), fiscal policy (as Harper goes against everything he and the Reform party ever stood for and goes on a spending frenzy) and consumer spending.

I will need to expand on this in an upcoming post, but if there is one magical bullet that sums up this whole recession, it will be this one stat: the savings rate.

For decades, the Canadian personal savings rate average about 10%. In the past 15 years or so, Canadians decided to stop saving (0%). Why? In a nutshell, they didn't have to. The stock market and real estate market soared. They got richer without saving, so why bother with actual saving money. Just lever up your house and mint money. Jobs and credit were plentiful.

Then in 2008, both markets tanked. People began to feel poorer as their retirement savings and their homes began to lose value quickly. People felt less secure in their jobs. And, rationally, especially in the fall of 2008, people began to spend less. Less spending on cars and gasoline and flat spending on other retail for now (November retail sales were down 2.4%). With layoffs now accelerating (even Microsoft is laying off), expect people to feel even less secure in their jobs (assuming they still have one) and for consumer spending to tank in 2009.

This trend started a little earlier in the US and is a worldwide trend. Since consumers undersaved for about 15 years (at least), to expect them to return to their 2007 spending habits in July of 2009 is insane. Certifiable, I believe. I will expand on all of this later, but to summarize: It will take years for Canadians to get the saving rate to 10% again, especially since all those layoffs prevent savings. Once Canadians get to something around 10% in 2011 or 2013 or whenever, they may not stop there, as they may feel a need to oversave to compensate for 15+ years of undersaving. The savings rate could go to 15% for all I know. All that savings is good in the long run and could help rebuild the banking sector one day, but in the short term, one person's saving is someone's lost income.

So if you are expecting a nice rebound to consumer spending to make this all better, forget it. I can buy some positive contribution to GDP from monetary or fiscal policy, but consumer spending is going to be a big drag for years to come. Ditto for housing and exports (all that saving is going to hurt the China/Indias of the world and any export growth to those countries).

This recession is going to be at least as bad as the early 90s or early 80s and will likely take both of them out. While I can maybe buy some type of positive number for sometime in 2010, 4%+ is la-la land and someone needs to hold Carney accountable for this.

WSJ article exposing the lies of the housing industry

2009-01-16T12:31:00.003-05:00

Must-read excellent article by the WSJ on what happened to David Lereah, the cheerleader at the National Association of Realtors (CREA is the Canadian equivalent). The article talks about how he was supposedly "forced" to cheerlead all throughout the early days of the housing crash (06-07).

Very reminiscent of the kind of doggy doo-doo coming out of CREA, CMHC and the Canadian banks in 2008 and 2009.

http://online.wsj.com/article/SB123152099299568447.html