The ripple effect of a housing downturn
When house prices get pushed up beyond their fundamentals it doesn’t take an economic downturn to cause prices to drop, they can drop simply due to exhausted demand and a smaller pool of buyers due to lack of affordability. Unfortunately this in itself can lead to an economic downturn as the ripple effect takes over and less money changes hands leading to leaner times to all types of connected and seemingly not-so-connected businesses.
There’s a scary article on MSNBC right now about how this seems to be playing out in the US, where home prices peaked two years ago and have been soft or falling since.
The Sun Belt city of Fort Myers saw real estate and construction grow to dominate its economy, accounting in recent years for nearly one out of every four jobs. That meant the housing downturn hit swiftly here, making it a kind of early and extreme indicator of what might happen to the U.S. economy as a whole.The effect could be less dramatic in places like Washington, where government contracting and other industries may provide a cushion. What the Federal Reserve is trying to determine, as it decides Tuesday how much to cut a key interest rate, is to what degree the rest of the U.S. economy will behave like that of Fort Myers.
How much of our local economy is based on temporary boom-time employment due to construction and infrastructure projects that will be completed in the next couple of years? What happens when those jobs disappear, will there be others to fill their place and will they pay as well?
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September 25th, 2007 at 9:29 pm
Chief,chief,chief…..
September 25th, 2007 at 8:02 pm
thanks every body love you all
September 25th, 2007 at 7:54 pm
Cheif,
Thanks cheif you also appeared second last day before friday was above to beging next day.
Thanx
September 25th, 2007 at 7:52 pm
Asalvary,
I like to say special thanks to asalvary appearance,to move forward jamed titanic from that friday.he provided lots of assistance when our own bloggers were cheating with their soul.
thanks asalvary
September 25th, 2007 at 7:48 pm
Freako,
when you say”google should be under scaner that was actually under scanner that time.
September 25th, 2007 at 7:46 pm
Tulip,
when you think you are right,you should have reverse those trend when more people are coming to vancouver.instead people should be leaving from Vancouver if our city is expensive,inflation is higher or counter tops are expensive,people should not be coming to Vancouver.easy that way
September 25th, 2007 at 7:43 pm
Solipsist,
Do you remember that song bye-bye-my friends good bye,but you brought me back from vhb.than last time when you say”satv is real our user got confused,hey every body solipsist mean to say real is true in sense of commentary,and Solipsist I also congrats you to provide fair representation and let me pour my engrish here.finally I wanted to say people who were in affordable situation should have taken advantage instead some body else buy before them,and sell them later they should have done that.
for all your life all the best Solipsist.
heartly thankful to you.
satv b4sat@yahoo.com
September 25th, 2007 at 7:32 pm
The pope,
I appreciate your hard work to run lots of issue to understand fundamental,and tonz of issues through the term really appreciate that.
your site provided us very big plate form to put our thoughts in the thread.more than two year of hard work, I hardly can express my thanks in words.
wish you all the best for your future hope you full fill all of your dreams.
your site has provide very fair representation for all type of induviduals not just one sided thought.
heartly thanking you,
satv- b4sat@yahoo.com
September 25th, 2007 at 7:19 pm
FINAL ASSISSTANT
—————-
Help your self to translate the graph for this post.Electricity wires then lightning collision projected over vancouvercondo.info
September 23rd, 2007 at 7:14 pm
Carry trades have relatively low risks percentage-wise, but they only make real money by running at very high levels of leverage. They are a classic “everything is great! until it isn’t…”
Well, my thought is that they underestimate the risks of low probability catastrophic events. I mean, why not cancel your fire insurane and pocket some easy cash? Free lunch? Hell no.
September 23rd, 2007 at 6:24 am
Optimus_subprime said:
In addition, for whatever reason the classification within the index changes… ie: fresh fruit could mean a whole wack of different things such as 2kg’s of red delicious apples or 3kg’s of spartan’s…
I said:
But the classification had never changed. What had changed was that fresh fruit of 20 or 30 years ago isn’t classified the same as fresh fruit of today. The definition of fresh fruit means fruit devoid of artificial means of cultivation and the use of foreign insecticides, aka organically and manually grown fruits. They actually taste a whole lot better than fresh fruits cultivated offshore and imported in by modern means!! But these fruits cost a whole lot more. For health reasons, would you want to consume organically grown and fresh fruits or chemically grown? Some people puts a high price on their own health you know. I do, but do you?
Organically grown fruits is a big and growing industry, but I think their prices are muted by cheaper and less quality imported fruits, so yes, the index can be skewed. That’s why I use it as a reference.
Optimus said:
The justification for changing the formula for calculating the CPI is that as prices rise, consumers switch from higher priced products to alternatives that are more reasonably priced. Thus, the CPI formula should reflect this by weighting higher priced products that have less demand and place more weight to those cheaper products that have higher demand.
I said:
But these demand changes were in part made for us, NOT BY US. You see, we all keep saying that we support domestically made products, but rarely do they put the money where their mouth is. Case in point were with domestically made socks sold through Woodwards’ house brands. Those were made by mills in Vancouver, BC. They are not closed. 20 to 30 years ago, most electronic and consumable goods were made from their country of origin. Nowadays, the same brands are made offshore.
Take Jantzen swimwear. They had a licensed mill in Vancouver, BC, Canada since the 1920. Survived through the great depression. BUT it did not survive the great modern price deflation. So, it was closed in the late 80s. Same with mills for Arcteryx and mills for Serratus! These are not cheap brands as you might want to imply.
They are good brands. And curiously enough, when they switched to Asian mills, the prices reflect it too. My Serratus Canadian jacket of 15 years ago is “MORE” expensive than the current Chinese made of the same genre jacket. Same with Arcteryx. Same with computers and digital cameras of Canon and Nikon. Components in them rarely are made by Hynix of Korea, Texas Instruments or National Semiconductor of the great US of A. They are all licensed Chinese, Korean, Taiwanese, India or Indonesia subs.
The recent Mattel scare with their Chinese made dolls containing lead paint is not limited to just Mattel. Little do you know that other products that use the same paint on laptops and cameras were also secretly recalled. Or maybe not. Remember, don’t chew on your laptop or camera.
Makers are willing to do everything to keep prices low and profits high. Why? To keep this imaginary CPI index as low as you can.
But, this is like comparing apples and oranges because goods made today are simply of a different quality and genre of the past!
If you want to compare apples with apples, you need to find a comparable domestically made item of the same genre, which is not easy to find. It’s all relative.
You are right in saying that consumers will make alternative choices based on price alone. Stores like Wal-Mart supports this. But there is a grass root movement to stop that with short movies like China Blue that showcase the exploitation of Chinese workers in sweat shops. As long as you buy stuff in Wal-Mart, you are supporting these shops no matter how these guys massage these index numbers or corporate hedge hogs excuses that they are actually trying to help these Chinese become wealthier through the free market economy. But we are all adults. We make choices, sometimes not the best.
Optimus said:
And that is why I am saying energy and food is excluded from the CPI because they do not include “reality” in the calculations.
I said:
It’s interesting that you said that, because during the interview between Alan Greenspan and Charlie Rose about his book, the Age of Turbulence, he said quite the opposite. He said the Gulf War was really about oil and that, if the major industries were deprived of energy, there would be total mad chaos and rampant inflation.
Another thing you lacked mentioning is that, all the trinket items we buy today were made by people and machinery that need food and energy to power them. People need food in a form of complex carbohydrates, protein and fiber, whereas machinery needs electricity.
I mentioned China in my earlier messages, but it seems you didn’t get my message at all or did not really understood it too well.
You see, China’s inflation is very very high, much higher than us do.
So, it is not inconceivable that if they have a high rate of inflation, goods made there and exported will also carry a high rate of inflation? But isn’t it not the case. The currency for one is keep artificially low, but what you don’t realize is that and is quite the norm in Asian factories is that, food and shelter are provided in a subsidized form. Energy consumption is regulated by not relying too much on modern machinery but rather more on manual labour in which China has an abundance of. In the Chinese movie, “The CEO”, which was actually shown in Vancouver subtitled about a couple of months ago about the Haier Group’s early struggle exemplified this.
Before modern machinery came to be, we were highly labor dependent. We don’t even have a strong dominant textile industry anymore. Even the auto industry is beginning to suffer the same fate.
Our CPI rate is conceived by policy makers to follow a path of least resistance. We all accept a mild 2% inflation rate to be the norm. We all know that this is sometimes impossible to achieve without some external factors’ help.
We all make choices, so that’s why we usually don’t agree with the CPI’s status quo.
Personally, I don’t believe with all these hogwash government explanation because our inflation is caused mostly by fiat money. It always had since the 1914.
September 22nd, 2007 at 2:00 pm
Sorry it was not intended to be confrontational, I just wasn’t sure which one you meant to be true.
There are no “free money” trades.
Period.
Full stop.
Carry trades have relatively low risks percentage-wise, but they only make real money by running at very high levels of leverage. They are a classic “everything is great! until it isn’t…” position as we’ve seen with numerous hedge funds over the summer – and they are ideally suited for use with Other People’s Money.
September 22nd, 2007 at 10:20 am
SATV:
Just how stupid are your cohorts?
Rather than selling when the market is good, they plan to sell when it’s a good time for them.
Problem:
They will all try to sell when the demographic, economic, and finance, conditions will be at its worst in decades.
The rich kids from Kits have all purchased, with the help of mom and dad, and cheap teaser rates.
The new immigrants just don’t make enough money working in retail and tourism.
The Fed is so concerned that it is willing to take steps so drastic; it almost seems they are taking advice from economists who ran Argentina and Russia into the ground.
Tick Tock, Tick Tock
September 22nd, 2007 at 8:52 am
Interesting article in the Sun this morning. You may remember some complaints in the past about construction workers abusing drugs on the job:
http://tinyurl.com/3cw8zl
September 22nd, 2007 at 7:19 am
BC FAMILIES:THE BREAK DOWN
*a couple with children include married or common-law 26.32%
*a couple include married or common-law without children 29.58%
*one person house holds 28.03%
*other house hold types 16.07%
VANCOUVER
*a couple with children include married or common-law 28.53%
*a couple include married or common-law without children 25.74%
*one person house holds 28.41
*other house hold types 17.32%
September 22nd, 2007 at 7:18 am
*Bernanke pluged in wires into spidermans net
*Did he spin the global map?
Greenspan said in an interview with Austrian magazine Format that low interest rates in the past 15 years were to blame for the house price bubble, but that central banks were powerless when they tried to bring it under control.
The Federal Reserve began a series of interest rate increases in 2004. We were hoping to bring the speculative excesses in the real estate sector under control. We failed. We tried it again in 2005. Failure,” he said.
*Bank of canada is being force to cut the interest rates.
http://www.cbc.ca/money/story/.....rates.html
September 21st, 2007 at 8:54 pm
You seriously have no clue WHAT you are talking about do you.
Well apparently you do, so fill me in Jimbo. Please explain how the carry trady offers free money without strings.
September 21st, 2007 at 7:13 pm
Freako Wrote:”You are arguing that the carry trade is free money, few strings. I don’t think it is.”
You are such a dweeb freako. You seriously have no clue WHAT you are talking about do you.
September 21st, 2007 at 10:39 am
Regarding inflation – it would seem the actual inflation number is far less important than having a more or less stable, predictable inflation number. 1% – 3% – 5% -8% – whatever – so long as it remains stable.
Yes, it is unexpected inflation that is the problem. The problem with unpredictable inflation is that it increases the uncertainty for long term lenders and borrowers. As long as it is stable, and low enough that the hyperinflation isn’t a concern, it it is not a stealer of wealth, but a zero sum game. And the more stable it is, the less redistribution.
Back to the low long rates, I think the risk of a deflationary spiral is priced in.
September 21st, 2007 at 10:35 am
You’re posting to the wrong guy, Freako, I agree with many of your comments to optimus.
Sorry it was not intended to be confrontational, I just wasn’t sure which one you meant to be true.
September 21st, 2007 at 6:35 am
You’re posting to the wrong guy, Freako, I agree with many of your comments to optimus.
Regarding inflation – it would seem the actual inflation number is far less important than having a more or less stable, predictable inflation number. 1% – 3% – 5% -8% – whatever – so long as it remains stable.
They’re all just zeros in a computer somewhere anyway…
September 21st, 2007 at 5:09 am
It cannot be both “free money” and a danger of “biblical proportions” at the same time.
Well, which is it then? And please note that I said “inefficiency” not “danger”, these are not necessarily the same thing.
September 20th, 2007 at 9:39 pm
Damir,
Thats what I like to hear, for best place life is expensive,
Vancouver is worlds best liveable city.more and more people want to live here,no wonder how high this city can go.so far from 2001 to 2006 Vancouver population increased by 1,29,152.00,and countinue to come ever after regardless type of counter top,kitchen,bathrooms and many more future like cost of living etc,etc.
September 20th, 2007 at 8:49 pm
I don’t care what the inflation numbers are, I wouldn’t trade living today with living in 1914 for *anything*. If the incredible life expectancy (20 extra years!) and ease of life (private bathrooms for every family!) are in any way dependent on inflation – bring on more of it.
The carry trade is a classic derivatives trade. It cannot be both “free money” and a danger of “biblical proportions” at the same time.
September 20th, 2007 at 8:17 pm
“DO U SMELL WHAT INFLATION IS COOKING”
A “basket” of goods and
services that cost$100.00 in 1914
that cost now: $1,861.67 in 2007
Per cent change: %1,761.67
Number of Years:93
Average Annual Rate of Inflation/ % 3.19
Decline in the Value of Money:
CPI for first year(Aug 1914) 6.0
CPI for second year:(Aug 2007) 111.7
oh my…….
September 20th, 2007 at 7:51 pm
As “they” bought with borrowed money and the “assets” rose in value,
How is that any different from RE?
You are arguing that the carry trade is free money, few strings. I don’t think it is.
Agreed that the carry trade can supres long term rates.
Nearly $500 trillion and counting…that’s the number of outstanding derivatives – biblical proportions?
Well which is it? You say that the carry trade is large enough to signficantly suppress long term rates (no small feat), but also small enough as to not not be biblical. Literally true, but come on.
Anyhow, it was the magnitude of the inefficiency I was referring to. Near risk free returns that are 600% of the risk free.
Ahhh you are correct on the negative correlation after 1997…
You’re friggin unbelievable. Whatever I post, you have black and white answer. Did you have a point when you mentioned the .8 correlation? And doesn’t the negative correlation for the last 10 years invalidate it?
Mymy… this is the third time we are back at the fed funds rate argument. I pasted the link twice and here it is again….
Well here is what you posted on the 17th: “the Fed has allowed it’s Fed funds rate to average some 30 basis points and as much as 70 basis points lower then their target rate of 5.25%”
Ok, let’s go by daily close as just pointed out is the right thing to do. On the 14th it was right on the money, at 5.25. On the 17th it was 5.33. Where is your 30 to 70 point discount?
The correlation on the surface may seem negative, but in reality it is still very much positive…(financial engineering has drained the best minds out of other industries)
Like WTF? If I told you gravity is real, you’d come up with some reason why it isn’t. So I find evidence that contradicts yours (and I didn’t look that hard), and now its “only on the surface”.
I’ll find more on productivity once I come back from my trip.
Am I not believable in my arguments?
There are truths to your argument, but not to the extent that you suggest. I don’t think CPI is too far off. And I don’t think the long term debt market is as inefficient as you suggest. I belive the opposite, that it has accurately priced in RE related recession.
You keep me on my toes in explaining things i’ll give you that…
I know that this comment was meant to be goodnatured, but comeon. “Explaining”. As if you own the truth and we just arent’ getting it. Try justifying.
Which translates to “I will find a way to invalidate my suggestion that productivity is not down”?
September 20th, 2007 at 5:31 pm
“You are assuming that “I” control the market. If the world worked like that, why wouldn’t it work for say RE? My “I” buy real estate, and if it ever starts going down “I” buy more so it goes up, and then I use the equity to buy more.
I don’t think it is that simple. You are describing market inefficiencies of biblical proportions. “
If you read my post I said the yen/carry trader would do as I described. As “they” bought with borrowed money and the “assets” rose in value, those parties could and do borrow more money against the assets to buy increasingly more. Nearly $500 trillion and counting…that’s the number of outstanding derivatives – biblical proportions?
“I have tried to verify four of your claims, and NONE of them have checked out. The fed funds was trading above target. Productivity was strong recently, not poor.”
Mymy… this is the third time we are back at the fed funds rate argument. I pasted the link twice and here it is again….
http://www.ny.frb.org/markets/omo/
dmm/fedfundsdata.cfm
Intraday highs and lows don’t mean much… I mean intraday lows can go as low as 0.01…the daily close is what you need to look at and the fed funds were trading well below acceptable target levels.
Ahhh you are correct on the negative correlation after 1997…I can’t post interoffice articles but the correlation after 1971 is 0.8. So what on the surface changed in 1997? Answer is credit crunch. One can argue that the credit crunch back in 1997 touched off a serious of events which has led to the outstanding derivatives to reach $500 trillion and the yen/carry trade to reach overdrive. The correlation on the surface may seem negative, but in reality it is still very much positive…(financial engineering has drained the best minds out of other industries)
I’ll find more on productivity once I come back from my trip. What about what I have said about CPI being understated? Am I not believable in my arguments? You keep me on my toes in explaining things i’ll give you that…
September 20th, 2007 at 3:18 pm
“It works on paper, but not in the real world.“
I’d argue that it doesn’t work on paper, and is in fact intentionally dishonest. If consumers are substituting products because of rising prices, that to me is the very definition of inflation.
It works the other way too, though. The reason the Case-Shiller index shows house prices largely tracking inflation while the median rises faster than inflation is that the median house has gotten bigger and fancier.
To me, if you want to talk about price changes and trends, you need to compare apples to apples. Don’t compare a solid oak bookcase in 1950 with a pressboard Ikea special today.
September 20th, 2007 at 10:38 am
Not really… should the yen ever appreciate versus the dollar, I would purchase more of the U.S dollar denominated bonds. As more and more are bought, it becomes a self fulfilling cycle of yields getting lower and bond prices rising, thus with the appreciation I would get overmargined and continually buy more.
You are assuming that “I” control the market. If the world worked like that, why wouldn’t it work for say RE? My “I” buy real estate, and if it ever starts going down “I” buy more so it goes up, and then I use the equity to buy more.
I don’t think it is that simple. You are describing market inefficiencies of biblical proportions.
Stocks and bonds have a correlation of 0.8 since the end of the gold standard but prior to that had a negative correlation
I have tried to verify four of your claims, and NONE of them have checked out. The fed funds was trading above target. Productivity was strong recently, not poor.
Now you claim that bond/stock correlation is higher now than before gold standard. Bretton-Woods collapsed in 1971. Here is a link to a chart showing correlation between bonds and equities since: (sorry for poor quality)
http://tinyurl.com/2bt6b3
Note the negative correlation since about 1998.
September 20th, 2007 at 6:41 am
Freako,
“Well if CPI is crap and real inflation is much higher, then not really.”
If we were to use the “geometric mean” not seasonally adjusted calculation of CPI then real all time high in gold is somewhere around $2,400/oz…
Now if inflation were calculated using the “arithmetic mean” not seasonally adjusted I think the number is closer to $4,000/oz…
Now why are long term bond yields so low? Now as someone on the board has pointed out the recycling of foreign curency reserves has a lot to do with it. More specifically however the yen carry trade (though at times would unwind a little due to margin calls would never completely unwind). I spoke with a bond/currency trader who basically explains this as such:
Borrow from the yen and put it into higher yielding treasuries (U.S) with maximum leverage. Is there a currency risk? Not really… should the yen ever appreciate versus the dollar, I would purchase more of the U.S dollar denominated bonds. As more and more are bought, it becomes a self fulfilling cycle of yields getting lower and bond prices rising, thus with the appreciation I would get overmargined and continually buy more. Hedge funds do this over and over and over again and it’s basically a guaranteed 15-20% return per year. It is somewhat similar to a penny stock manipulation. It can be easily done if you have enough money to throw at it and no one big enough is on the otherside. The size of the yen carry trade is huge and there is no number out there to know how much exactly. Basically, continuous buying pressure drives long term yields lower then it should be…
So with that I am saying that all asset classes in relation to not only gold but other commodities like oil, copper etcetc..are overvalued. (There really is only 4 asset classes in total. Equities, bonds, and housing) Stocks and bonds have a correlation of 0.8 since the end of the gold standard but prior to that had a negative correlation.
September 20th, 2007 at 6:04 am
Sorry, short on time, will respond later, but here is a quick one:
I’d like to say that by 2010 olympics, gold will be at $1,500/oz heading towards its real all time high…
Well if CPI is crap and real inflation is much higher, then not really.
September 19th, 2007 at 10:29 pm
thevanman,
“Or are you reading a different report than I am?”
I am reading the same CPI report as you but what you miss is the footnote regarding the seasonal adjustments to discount the “volatile food and energy sectors” . Basically, what this adjustment means is that extreme values and/or sharp movements which might distort the seasonal pattern are estimated and removed from the data prior to calculation of seasonal factors (why would they want to take out the volatility? volatility exists within the food and energy markets).
In addition, for whatever reason the classification within the index changes… ie: fresh fruit could mean a whole wack of different things such as 2kg’s of red delicious apples or 3kg’s of spartan’s…
A big change that happened over 10 years ago was that the CPI now uses a “geometric mean,” which measures the price of a group of products by weighting the price of each product, instead of the previously used “arithmetic mean,” in which you simply added up all the prices of the items. The justification for changing the formula for calculating the CPI is that as prices rise, consumers switch from higher priced products to alternatives that are more reasonably priced. Thus, the CPI formula should reflect this by weighting higher priced products that have less demand and place more weight to those cheaper products that have higher demand. It works on paper, but not in the real world. Many consumers prefer to stay with specific products, “brand loyalty,” or there may be no substitute products, like gasoline. Oil prices have continued to soar, but their impact is understated in the new CPI formula. Consumers are expected to make unreasonable substitutions, for most average households, like busing, biking or walking to work. These are the alternatives the average consumer must face in order for the government to justify a lower inflation number by a simple formula change…
And that is why I am saying energy and food is excluded from the CPI because they do not include “reality” in the calculations.
September 19th, 2007 at 9:03 pm
FREAKO….PLEASE DONATE THE HUNDRED DOLLARS YOU OWE ME TO THIS ORGANIZATION…THANKS
September 19th, 2007 at 11:20 am
I just don’t think that CPI is an accurate measure of the cost of living. A simple example would be to look back 30+ years ago. A man could afford to buy a house, feed his family, put gas in his vehicle, and pay for a college education for his kids, all on one average income.”
As we all know on this forum, house prices are unaffordable because of an asset bubble. Were it not for this buying would be no more expensive than renting, as it has been historically.
That said, it is more expensive to rent a house today because real rents track real household incomes, and 1-income households used to be the norm. But you have to go back more than 30 years for that. Try 50.
Apart from that, I would say that just about everything that a family spends money on today is cheaper in real terms than in the 1950’s. I was around back then, and people lived a lot more modestly than they do now.
Another thing is that going to university back then was only for really smart or rich kids. We have too many people going to university, with the result that they are competing for each other for jobs that used to only require high school. Call it “credential inflation”. Going to university is only a ticket to a really good job if most people don’t do it (apart from professions which require specific training).
If everyone went back to one wage earner per family today we would have a higher stardard of living than people had in the 1950’s, albeit lower than today. But people wouldn’t be willing to do that. They have to keep up with the Joneses, and they don’t want to give up their toys, foreign vacations, etc.
September 19th, 2007 at 11:04 am
The CPI numbers are an exercise in creative statistics.
Thankfully the market ultimately decides the cost of long term borrowing, and when the dust settles, mortgage rates may in fact be twice what they are now.
But more importantly to note is the fact Greenspan has recently admitted the Fed has lost any control it had on “influencing “‘the long term bonds, it did attempt to get mortgages rates up but failed in the last couple of years.
Don’t crack the cork yet, when the bond holders realize the risk, and the true inflation numbers, they will demand more yield, if they have any appetite at all for MBS.
September 19th, 2007 at 8:16 am
finally some update on inflation and CPI
Inflation drops to 1.7% on lower gas prices.
On a month-over-month basis, the cost of living actually fell 0.3 per cent from July, mainly because of the decrease in gasoline prices. That’s the biggest monthly drop in the CPI in almost a year.
full article on cbc.ca
September 19th, 2007 at 6:43 am
FedFunds target rate is similar to the MSRP (Manufacturer’s Suggested Retail Price) published by manufacturers as a guide. It’s just that, a guide!
No retailer is forced to mark its products on the shelves at MSRP.
Likewise, the FED publishes the target rate and if it does exceed it, it will honor the rate by injecting more newly created money.
That’s all. But what’s interesting is that, in normal times the FedFunds rate usually hover within the target rate, give and take a few basic points. But by officially lowering the target rate again, the FED simply have to increase the supply of newly created money to honor its new target rate. More fiat money in the system is not good.
As for CPI, Optimus_Prime said:
CPI does not include energy and food because as the statisticians who put this index together point out that they are too volatile and need not be included.
I said:
Then why would the latest Statscan Report as of Wed Sept 19th, 2007 listed All items as
Food, Shelter, Transportation, Health and Personal Care, Clothing and Footwear, Recreation, education and reading. There is all items CPI and there is all items excluding food and energy. I care more about general CPI (all items) as listed very clearly on the latest Statscan report. Or are you reading a different report than I am?
Last but not least, the reason I am referring to China, because their inflation rate is double digit. In the last 70s to early 80s, we also had double digit inflation as well.
What’s interesting is that, for the most part, inflation on stocks and property prices in China were made with real cash and rarely from borrowed money. In China, there’s no such thing as sub-prime. So in effect, it is real cash that was not deployed many years ago during the tight communist regime is now allowed. It’s like a reservoir full of water. When you open the gates, water flow like a tidal wave. The pressure has to release.
This is why China is observing such impressive growth.
Our inflation rate however is based solely on borrowed money. Assets that are now inflated were built up by the increase in cheap liquidity.
Canadians don’t have hoards of cash. They never did, because all they did was spend spend spend! Canadians are negative savers and so do the Americans. During any recession, capital are reclaimed and people save, so real capital (cash)can be redeployed for the next boom, aka China. However, the last few recessions were mild, and Canadians kept spending, inflating asset prices. During a downturn, Chinese who bought assets with cash usually don’t have to sell. No creditors will chase them.
Canadians who bought assets with borrowed money, however, will have to face music. I will be interested to see during a tough recession, what would be China’s CPI compared to our Statscan.
I think China’s CPI will fair much better.
September 19th, 2007 at 5:17 am
Just want to point out that bond traders do not set bond prices (i.e. interest rates), any more than RE agents set RE prices, or the TSX sets stock prices.
Bond prices are set, like any other, by the intersection of supply and demand, i.e. savers and borrowers.
Correct you are. Most bonds are not bought and held directly by individuals, but institutional investors. However, as you point out they do so in response to demand from their clients. Still, I assert that there is enough discretionary decision making by professional investors that bond prices respond quickly (and accurately) to new data. That would not be the case if bonds prices were merely a function of demand for borrowing and saving.
IMHO I think the rank of efficiency is:
1. Bond market
2. Stock market
3. RE market
Why is that? Simply put, amateurs don’t get brokerage accounts in order to play the bond market. RE mostly made up of non-investors.
SOP’s views requires so many parties to be deaf, blind and dumb that it is simply implausible. It also puzzles me that he has a black and white answer for every point he is challenged on. It is if he is working off a sales script that has a preconceived answer for every possible counterpoint. We are not debating, we are being led somewhere.
September 19th, 2007 at 4:40 am
“I just don’t think that CPI is an accurate measure of the cost of living. A simple example would be to look back 30+ years ago. A man could afford to buy a house, feed his family, put gas in his vehicle, and pay for a college education for his kids, all on one average income.”
Maybe the issue is not understated inflation, but the failure of wages to keep pace with inflation. For much of the last 30 years, real wages have remained relatively flat.
September 19th, 2007 at 1:45 am
Bond traders are not stupid, but they are human. The bond market is just that. It’s a market
Just want to point out that bond traders do not set bond prices (i.e. interest rates), any more than RE agents set RE prices, or the TSX sets stock prices.
Bond prices are set, like any other, by the intersection of supply and demand, i.e. savers and borrowers.
The difference of course is we are not dealing with a physical asset, but one whose supply can be influenced by central banks.
But ultimately the bond market estimates the real return of capital going forward, which becomes the real interest rate. Add in the market’s estimate of inflation and you get the nominal interest rate.
September 18th, 2007 at 10:31 pm
There has been some argument that the cost of owning a home should not be included in the CPI figures (it used to be),
Sure about that? As for inclusion in CPI, house prices are included (in Canada), but land isn’t. And land really shouldn’t be included because it isn’t consumed in the tradtional sense. Including land in CPI makes as much sense as including the TSX. Clearly an absurdity.
Bond traders are not stupid, but they are human. The bond market is just that. It’s a market. And any market (bonds, stocks, RE, etc.) can become overvalued or mispriced during certain periods of time.
Oh I can buy that in the general sense. I just don’t buy any argument which requires just about every market in the world to be inefficient to prove that gold is undervalued.
September 18th, 2007 at 10:16 pm
Freako,
“Yup, you’re a certified gold bug. Why don’t you just accept that fact that you were wrong in 1980″
I’m not a perma-gold bull, and I wasn’t even around in 1980, but a gold bull only recently – probably much like rentah. I have not been swayed by the ever in your face approach of the perma bulls (I work with enough of them already) but have come to the conclusion that gold & commodities shall outperform all asset classes for at least another 5 years (it has already for 6 years).
“With regards to long term rates, I do think that they may be underpriced to some degree. But the simple notion that CPI is understated, bond holders are idiots and gold will triple is arrogant.”
I never said bond holders are idiots, and CPI is a useless metrics in terms of measuring inflation. Funny thing is gold tripling from today would equal the 1980’s “inflation adjusted” high. Now as for your question on long term debt pricing I’ll need to speak with someone more experienced in the debt market as for that reasoning. I’ll try to have that answer shortly as I would like to know why myself…
“Might as well agree to disagree right now.”
I’m not sure we have much of a disagreement. I agree that housing is set to decline. I just further expanded the argument by including real value instead of nominal value. U.S housing will fall on a national basis by another 10% nominally but as a real value measure = ?% The nominal bottom would probably occur late next year or early 2009, just as inflation, and expectations of inflation spike upwards. My guess is as good as anyone but it will be painful. Likewise with Vancouver being nominal declines coupled with bigger real declines.
For the record I own the roof under which I live and I have flipped condos in both Vancouver and Calgary, so i’m not a housing perma-bear. I just decided to switch sides. I have one more condo remaining to flip in Van and I’m having heck of a time getting rid of it despite a 12% haircut in price thus far. I’m getting near the point of basically taking the bare minimum in profit because the longer I wait, the more I lose out on gold.
September 18th, 2007 at 10:14 pm
I would have to agree with Optimus about the inflation rate being understated. I don’t believe that CPI is misstated, the numbers that they report are exactly what they are measuring. Freako and I have had a similar discussion regarding this some time ago.
I just don’t think that CPI is an accurate measure of the cost of living. A simple example would be to look back 30+ years ago. A man could afford to buy a house, feed his family, put gas in his vehicle, and pay for a college education for his kids, all on one average income.
Today, this is no longer possible on a single average income, it takes two incomes and more. So while the cost of many consumer goods, electronics, and long distance phone rates has decreased over the years, the costs associated with what has long been considered a “normal” lifestyle, have increased a great deal more than some politicians would have people believe.
There has been some argument that the cost of owning a home should not be included in the CPI figures (it used to be), and there is merit to that argument. But, when nearly 70% of households own their own home, it definitely should be factored into a cost-of-living statistic. The cost of owning and operating a vehicle is factored in (because the majority of people own one) even though people aren’t buying new cars every other week, so should the cost of owning a home, IMHO.
With regards to the debate on long term bond yields being artificially low, and/or bond traders being stupid. I’ve argued before that certain central banks continue to recycle their foreign currency reserves (current account surpluses) in order to keep their domestic currencies from appreciating against the value of their chief customers’ currencies. The way that they do this is by increasing the supply of their own currency to match the money supply growth of their chief customer. They then use that newly created money to purchase their customer’s currency, and then recycle their customer’s currency into treasury bonds denominated in that currency.
This has resulted in double digit money supply growth in much of the world, and lower long term bond yields than would otherwise be the case. The so called yen-carry-trade has also contributed to this. Borrowing at an extremely low interest rate in yen, and using the proceeds to purchase longer dated (and much higher yielding) treasury bonds denominated in U.S., Canadian, or New Zealand dollars, has added strength to these currencies (and other higher yielding currencies), as well as helped keep long term interest rates low.
Bond traders are not stupid, but they are human. The bond market is just that. It’s a market. And any market (bonds, stocks, RE, etc.) can become overvalued or mispriced during certain periods of time. At this point in time, things are uncertain. Are we headed for deflation, or hyperinflation? Arguments can be made for either possibility. A few weeks ago, the bond market didn’t see a problem with asset-backed-commercial-paper either.
I guess the argument comes down to whether one believes that monetary inflation reflects the true inflation rate, or whether consumer price inflation reflects the true inflation rate. Right now, we have low consumer price inflation, but high monetary inflation. I happen to believe that monetary inflation figures more acurately reflect the true inflation picture, because the more dollars that are in circulation, the less that the ones I already hold are worth in the long term. My 2c.
September 18th, 2007 at 9:37 pm
thevanman,
I don’t quite understand what you are saying.
“The target rate for federal funds, the rate which banks lend money to each other overnight is just that, a target rate. It is the rate, when breached, and it had been twice in June up to 7% and again on Aug 3 at 6.5% by the actual free market FedFunds rate, at which time the FED “WILL” intervene and buy a financial asset with “NEWLY CREATED MONEY”, thereby lowering the FedFunds rate. This intervention reassures bankers that the FED will honor its target rate. In effect, Mr. Freako is absolutely correct. The Fed Funds rate had already been lowered since June! The target rate, however, has just recently been lowered.”
Ok I’ve already replied to this. Go copy and paste my URL to the fed funds daily rate table and you shall see that for over a month the daily CLOSE rate is some 30 basis points lower on avg then the target rate. I know that it can spike intraday to 6.5% or 7% but it can also go as low as 0.01%. Read the chart!!! It was me who said that the Fed Funds rate had already been lowered prior to today’s announcement. The memo was never sent out!
thevanman,
CPI does not include energy and food because as the statisticians who put this index together point out that they are too volatile and need not be included. This goes the same with new items ie: IPhone, BluRay players or in 1980 that Mac computer. Hope that clarifies a few things.
Could you please clarify on the rest of your post. I don’t quite understand what you are saying.
September 18th, 2007 at 9:09 pm
Fair comments rentah. Again, my beef isn’t with the asset, but the messenger.
With regards to long term rates, I do think that they may be underpriced to some degree. But the simple notion that CPI is understated, bond holders are idiots and gold will triple is arrogant.
September 18th, 2007 at 8:58 pm
There are a few false perceptions on BC rentals.
First of all, rents are capped up to 4% per annum, although most landlords rarely would go that far per year.
They would rather have stable renters signing long leases rather than have rent shoppers. It’s easy to collect rent. It’s not easy to look fill in rental vacancies.
Secondly, renters in BC have one of the best benefits and rights, more so than a condo owner. It’s close to impossible to evict a tenant short of demolishing the apartment, so trying to get rent to go up to inflation parity is very difficult.
Thirdly, there’s a grandfather rule whereby the old tenant can transfer the rental unit to his or her family members or relatives and take over the old rent cost. For example, a grandma ready to be re-located to a retirement home can let her grand daughter or son take over the unit and pay the old rent!
So if grandma pays $600 for a single bed in Kits (not uncommon) for living there more than a decade, the grand daughter or son will need only to pay $600!! Yeap, it’s done all the time especially boomers are leaving their rental nests.
The only time a landlord can jack up the rent would be to wait until grandma kick the bucket and having no one close to her claim the unit.
They can then re-rent the unit out to the market at current fair market price.
Therefore, with the glut of these grandfathered rentals out there, there’s every reason why landlords’ rental prices lag very much to current inflation rates. The laws protect BC renters. The laws don’t protect BC homeowners who are close to foreclosure.
September 18th, 2007 at 8:47 pm
freako, I agree on all points, including the way you characterise the archetypal ‘bug.
I came to gold because my reading led to me seeing it as the antithesis to the tech boom.. it made sense, and it represented a sane anecdote to the falsity of that bubble. It was also very very undervalued, and selling for less than average production cost (1999).
I’m not very attached to the ’stuff’ itself and actually own almost none of it. I trade the shares. If a more persuasive speculation opportunity presents itself, I’d shift to that. But I think the gold bull still has legs, and I’ve got to know it and it’s shares, and generally how they behave.
–
Now, with regard to your ongoing point re the bond market ‘vigillantes’:
I really, really don’t know.
Your point makes perfect sense, and we all know that the bond market is bigger and badder than any other, and that the bond-traders are unlikely to be sitting on a very inefficient discounting machine….
However, at the same time I know that the money supply has been going crazy everywhere and that the CPI is massaged++ and that asset prices are going nuts.
So, I have a lot of trouble really connecting this all, I can imagine it playing out either way. I even find merit in both the inflationary and deflationary arguments.
I find it really difficult because we don’t have the same ‘feel’ for all the variables that we would have if, for instance, I gave you an object and asked you to lob it over a nearby wall. in that case you’d weigh up innumerable variables (weight object, height wall, windspeed, distance from wall, usual strength, how you’re feeling that day, etc etc..). But, with the markets, there may be something we’re grossly misestimating with regard to the relative importance of one of the variables..in other words we may be underestimating or overestimating the wall height by 200% without knowing it. So, (phew), I really don’t know.
((This’d also bring me back to our discussion of TA, which we haven’t had for awhile, but I’ll leave that for another time..))
September 18th, 2007 at 8:04 pm
Oh, not quite done. Rentah, you are right you have to call it as you see it. Do you share sop’s views that inflation is grossly understated, and implicitly that long term debt is grossly mispriced? Just curious.
Also, note that a sizeable portion of gold’s lustre is actually the U.S. dollar going down versus world currencies. How has gold traded in Canadian dollars?