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 17th, 2007 at 6:07 am
I think a huge portion of Vancouvers economy probably close to 40 % is based on housing/condo related construction. It is also the highest paying sector of the economy, where a construction trade will always make well in exceess of for example a Property Manager, teacher or nurse!
In that article you quoted they interviewd a real estate agent and carpenter couple who both lost their work. I can think of quite a few couples who’s entire income in Vancouver is generated by the real estate/building industry. Scary!
September 17th, 2007 at 7:04 am
The secret’s out on phantom bids:
Chief, Satv, etc read
“”Phantom bids can be used by selling agents to spark extra rounds of bidding or to spook potential buyers into rushing or raising offers. The practice is considered a breach of ethics under the Real Estate and Business Brokers’ Act of Ontario – administered by the Ontario council – and realtors who are caught can face hefty fines.”
September 17th, 2007 at 7:08 am
As I recall, on the old VHB there were employment stats indicating that a large amount of the job growth in BC was construction related. When construction stops, a lot of these jobs will disappear. Given the multiplier effect, there will be a lot of spillover.
In terms of replacing construction jobs with something else, if we had been building manufacturing plants rather than condos we might be in good shape. But, seeing as that was not the case, any job growth will primarily be in the service/hospitality sector.
Given current demographics, there will likely still be a fair number of openings. Unfortunately, these sorts of jobs do not pay what construction does, and tend to have less benefits too.
September 17th, 2007 at 7:09 am
Just an academic exercise, because the Vancouver Realtors, don’t do this right Satv?
September 17th, 2007 at 8:31 am
The tax man is watching,
I know!.. I still owe you a tax to purchase those engineered ground wires;to eliminate the bubble!now, I have brought a back pack to pay you off;the owning amount.please count carefully;’……
British Columbia Finance Minister Carole Taylor said Friday the province’s surpluses continue to grow, and the economy remains relatively isolated”from the
economic woes of the United States”.
B.C. Finance Minister Carole Taylor delivers her first quarter financial report Friday, saying provincial surpluses continue to grow.
(B.C. Legislature Channel)
Taylor has delivered a first quarter financial report, forecasting economic growth of three per cent this year and 2.9 per cent next year.
The budget surplus for this year has jumped to $1.6 billion, up from $400 million.
for full article log on to government of bc,so tax man, I owe you nothing unless you deliver further notice.
thanks!taxman=robsnumber;’.
September 17th, 2007 at 8:56 am
Why is everyone so fixated on what the Fed will do trm? If the Fed doesn’t cut by 50 basis points there will be a massacre in the markets… why??? Well since Aug.8 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%
Basically, the Fed was not taking part in open market operations to bring the Fed funds rate back to the target. The rate has already been cut, they just never announced it…
I actually think that U.S housing may not fall much further. Perhaps another 10%?? I’m saying this because the Fed and the U.S Govn’t are going to open up the taps and let the money flow. I’m not saying that housing has bottomed, but that in a nominal sense U.S housing is near its bottom… What the U.S is experiencing right now is both inflation and deflation at the same time. Deflation in seeing house prices drop while inflationary at the same time as oil, wheat, soya beans, corn, copper etcetc… gets more and more pricy in U.S dollar terms. In real terms housing will do reallyreally poorly as the U.S dollar falls off a cliff and everything else gets more and more expensive. If home prices fall another 10%, no biggy, but if oil doubles, wheat quadruples, soya beans, electronics, cars all gets priced 100% more, that’s where it will hurt!
Saying things in a nominal sense really has no barring, but the MSM and small retail investors seem to give it more credit…
What about vancouver? Well in nominal terms yall SHOULD be right that we’re due for a correction, perhaps in the area of 20%? However, in real terms, this correction should not be to harsh because by this time next year our loonie vs the dollar should be 1.20+ U.S/Cdn…keep things in perspective!
Housing as an investment is finished… buy gold, buy silver, buy anything that is tangible (and no housing does not fall in that category because it is your asset but someone’s liability)
Nice board by the way, some intelligent comments, and some not so intelligent…any comments?
September 17th, 2007 at 9:27 am
Satv, Chief,Mr. Relator X
You have made a good living at fast talking and confusing the issues, but your reader’s digest version of knowledge is easily detected.
How in the world will the provincial government’s surplus
(Which is just another name for over taxation) going to prevent a real estate crash?
Stick to the basic plan, Mr. Realtor,
shift from:
” Vancouver Re will always go up”
To:
” It’s a good place for the kids” or something warm and touching.
The last slide didn’t have the grease, the internet and bloggers will provide this time,
It will get bad.
September 17th, 2007 at 11:30 am
Tax man
Vancouver dosn’t need such practice
cos as soon as a shitty smelly shack along hasting and main putting for sale,buyer will flock to the site fighting for a pc.
September 17th, 2007 at 11:43 am
optimus..
..any comments?
yes, when you say 1.2 for US/CAD conversion rate, does it means 1.2US = 1CAD? If yes, can you please provide some data (or insight) why would it happens?
Personally I believe that we would see parity (sometime new year) and the trend would reverse..
September 17th, 2007 at 12:06 pm
I actually think that U.S housing may not fall much further. Perhaps another 10%?? I’m saying this because the Fed and the U.S Govn’t are going to open up the taps and let the money flow.
The only thing the Fed can do is lower rates, and doing so also lowers the dollar and increases inflation, which carry their own set of problems. You predict that the US dollar will ‘fall off a cliff’, but you don’t follow through with the ramifications thereof.
Also, lowering rates won’t stop a housing crash — only drag it out like Japan. Once you remove the speculative motive, the housing Ponzi scheme collapses.
However, in real terms, this correction should not be to harsh because by this time next year our loonie vs the dollar should be 1.20+ U.S/Cdn
“real” dollars are current (or indexed) Canadian dollars, not Can dollars compared to US dollars. A 20% drop in Can prices is still a 20% drop, even if it costs us less to buy gas and trinkets in Bellingham.
What the U.S is experiencing right now is both inflation and deflation at the same time. Deflation in seeing house prices drop…
Those terms refer to changes in general price levels and money supply, not price changes in specific asset classes.
September 17th, 2007 at 1:37 pm
“The only thing the Fed can do is lower rates, and doing so also lowers the dollar and increases inflation, which carry their own set of problems.”
Not true. The Fed has many other options open to them other then lowering and raising of TARGET rates. I have already said that the Fed lowered rates beginning last month…its just that the general public didn’t get the memo… For instance the Fed can influence money supply via sale and repurchase agreement or reverse repo’s and like we have seen in the past few months, the infusion of liquidity, change of reserve requirements and even the classification of what is “collateral” when using repo’s… For the general public there is a fixation on the Fed Funds rate which is a guideline!
“Also, lowering rates won’t stop a housing crash — only drag it out like Japan. Once you remove the speculative motive, the housing Ponzi scheme collapses.”
I don’t doubt that housing prices will see a substantial haircut in REAL terms, but comparing the current situation to Japan would not be the best analogy. Japan’s problem was that they refused to realize the losses on their books and it was more of a localized problem being only in Japan. The current situation would better be compared to the IMF crisis of 1997 (East Asian Currency Crisis)…if you would like me to explain why, I shall do so at a later time. For the countries that got hit the hardest during that time, their nominal price in real estate acutally went up (Thailand, Malaysia, Indonesia, Phillippines, Singapore) but they experienced a significant (some places got nailed by 50%) drop in currency values that made their nominal gains meaningless. There was enourmous consumer price inflation at the same time due to higher import prices.
“”real” dollars are current (or indexed) Canadian dollars, not Can dollars compared to US dollars. A 20% drop in Can prices is still a 20% drop, even if it costs us less to buy gas and trinkets in Bellingham.”
Import prices will go down. The problem is this will not happen till there is a bigger move downward in the U.S dollar index (Since all commodities are priced in U.S dollar terms prices within the consumer price index are likely to experience a disinflation) Likewise, retailers are unable to adjust their prices constantly to match the respective exchange rates. A drop of 20% in cdn real estate would sound bad, but coupled with a corresponding drop of 10% in imported goods would lessen the impact for a home owner (although ppl seem to pay more attention to home prices). However, if you have more then 1 home, being your own residence then good luck to ya!
“Those terms refer to changes in general price levels and money supply, not price changes in specific asset classes.”
That depends on what theory of economics you use. Classical economists would refer to inflation and deflation as changes in the general price level whereas Austrian School of economics believe inflation and deflation as a relation to the money supply. I’m referring to the Keynesian school of thought which puts a clear distinction between consumer goods and producer goods. It is all quite possible to have inflation in consumer goods and deflation in producing goods at the same time.
September 17th, 2007 at 2:09 pm
“yes, when you say 1.2 for US/CAD conversion rate, does it means 1.2US = 1CAD? If yes, can you please provide some data (or insight) why would it happens?
Personally I believe that we would see parity (sometime new year) and the trend would reverse..”
This is more of insight. Despite the lifting of foreign content limits in RRSP’s beginning July 2005, and having record purchases of foreign funds since then (don’t know the exact figures but it could be around 100billion), our loonie has appreciated nearly 20% when compared to U.S dollar. Naturally, people have become accustomed to having a weaker loonie when compared to the U.S dollar so they would think that this must end soon and decide to purchase foreign denominated equities/assets.
The number one performing asset class in the last 6 years post 9/11 has not been housing. The best performing asset class is commodities. Canada is an exporting nation. Under previous conditions, commodities were primarily cyclical and rose and fell with the economy. This time it is different (different from the 80′s to present, but similar to the 70′s). The difference this time is the U.S dollar. The underlying fundamentals of a fiat currency backed by nothing and holds record amounts of debt (trade deficit, social security, medicare) by all accounts would lead to a drastic revaluation at some point. This revaluation all depends on when the foreigners decide to monetize their debt (ie: dump bonds).
Now couple this with peak oil, and china and india awakening, (which at some point have internal driven growth) all bodes well for the canadian currency for the next little while.
I don’t think that the U.S dollar will fall off a cliff like the 97 currency crisis in East Asia, but more like roll down a hill gradually. The Canadian dollar will do well versus the U.S dollar but the best performing currencies are those that have the least to do with the U.S ie: New Zealand, Australia
Just wait till people start talking bout gold and silver and other commodities related stocks at cocktail parties = )
September 17th, 2007 at 2:18 pm
comparing the current situation to Japan would not be the best analogy. Japan’s problem was that they refused to realize the losses on their books
I have read the same and wasn’t suggesting a specific correlation re. Japan; merely making the point that falling rates may prolong the downfall but won’t reignite the fervor nor save the profligate.
drop of 10% in imported goods would lessen the impact for a home owner (although ppl seem to pay more attention to home prices)
As you suggest, nickle-and-dime price drops on daily goods are a poor sop for tens of thousands of dollars in lost equity.
I’m referring to the Keynesian school of thought which puts a clear distinction between consumer goods and producer goods.
Understood, thx for clarifying.
September 17th, 2007 at 2:25 pm
Greenspan: Interest rates need to go to double-digits
I guess when the time comes to renew ARM’s in Vancouver,many will just turn the keys over to the bank.
The Bank will offer to renew the mortgage with 45yr terms.
Still not a good situation to be paying for a leaky condo for 45 years.
Funny, Greenspan is surprised by the consequences of his experiment, while most of us on this board knew exactly what was coming.
Tick Tock, Tick Tock
September 17th, 2007 at 2:26 pm
All the information you have stated regarding the US/CAN exchange is not secret information and you are one of many who feel that way, therefore it is already reflected in the current price probabilistically.
September 17th, 2007 at 2:33 pm
More evidence that i don’t understand this world. Quote from article:
“”How quickly things can change
William Coleman, 50, who was a senior superintendent at a home builder, learned how quickly things could change. He lost his job in January. Now he’s pouring concrete in a parking lot. His income dropped from $100,000 to $60,000. But Coleman says he feels lucky. His new employer had 250 workers last year. Now it has 30.
“I had to take the only job that was available,” he said. “Everybody’s looking for work.”"
The guy had to take the only job available and he STILL earns US$60k. AND, he pours concrete in a parking lot.
Is there more to “…pouring concrete in a parking lot…” than meets the eye?
It appears to me that in the US housing prices throughout this boom have remained significantly below those of Vancouver, AND the US income levels have been much higher.
They should try living in Vancouver and then they really would be singing the blues.
September 17th, 2007 at 3:41 pm
Currently there are tons of construction projects scheduled to last beyond 2010 or start after 2010, such as the Gateway project, Evergreen line, broadway rapid transit plan, and some of the condos that started late, among other stuff. Of course, all this depend on the Olympics covering itself with ticket sales and broadcasting rights. There is a contingency fund, but it’s pretty thin compared to the total scope of Olympics. Therefore, if the Rich Asians(TM) doesn’t show up to buy all the condos for the Olympics, a lot of the scheduled construction will take a hit.
In other words, the current economy of GVRD has factored in all the up side, but none of the down side. Even if the Olympics is a total financial success, the current constructions alone can crush the RE market. The probability of an Olympics covering itself is pretty slim, however. Just for reference, the 2008 Olympics will be a massive financial loss, in the order of tens of billions, as the estimated cost range from 20 to 30 billion. But the Chinese government has a trillion dollar foreign reserve ready and willing to cover it. Will the federal government bail BC out of this Olympics?
September 17th, 2007 at 4:44 pm
200K jobs, or about 8% of total workforce jobs, in BC are directly related to construction.
Include property developers, Realtors, and mortage related services and you can add around 50K more.
That’s 10% of the jobs. Not 25% like in that specific part of Florida. Nevertheless, 10%, with all the other sources of jobs in BC, is pretty significant.
September 17th, 2007 at 5:03 pm
Putting that in perspective, Alberta has about 10% of jobs construction related (BC is 8%). All other provices are 6% or less.
September 17th, 2007 at 5:15 pm
How in the world will the provincial government’s surplus
(Which is just another name for over taxation) going to prevent a real estate crash?
SURPLUS:is a forever green song for bc government already invested in lots of projects,after 10 will be time to make profit.
going to prevent a real estate crash?
that is sickness for “poor”bears so I think government can not prevent that,for “bulls”their is no crash so government have no issue of that kind.
” Vancouver Re will always go up”
don’t you know that’s already up 125 per cent in last 5 year.and will be countinue……
here is a cut out list for condo market for METRO VANCOUVER
2007: $314,471 (+7.2%)
2008: $327,163 (+4.0%)
2009: $341,116 (+4.3%)
2010: $352,800 (+ 3.4%)
2011: $365,491 (+3.6%)
September 17th, 2007 at 8:11 pm
Of course, all this depend on the Olympics covering itself with ticket sales and broadcasting rights.
Covering the Olympics’ operating expenses was never in serious doubt. The Olympics are a party for the rich, and rich are with us always. And I think the TV rights have already been sold.
The question is whether all the economic “spinoff” which is supposed to pay for all the capital investment is going to happen. The way things are looking, that’s looking less likely by the day.
Therefore, if the Rich Asians(TM) doesn’t show up to buy all the condos for the Olympics, a lot of the scheduled construction will take a hit.
I do hope that was intended as sarcastic. The Winter Olympics are not very big with Asians, and at any rate, Olympic spectators, no matter how flush they are, don’t buy RE just so they can have a place to stay for 2 weeks.
September 17th, 2007 at 8:25 pm
I actually think that U.S housing may not fall much further. Perhaps another 10%??
I say you are wrong, but you need to be more specific. I presume that you meant national numbers. Housing has lots to fall, and nationally 10% is a lot. California will see 25-30% nominal IMHO.
Not true. The Fed has many other options open to them other then lowering and raising of TARGET rates.
Same sh*t different pile.
Despite the lifting of foreign content limits in RRSP’s beginning July 2005, and having record purchases of foreign funds since then (don’t know the exact figures but it could be around 100billion), our loonie has appreciated nearly 20% when compared to U.S dollar.
The Canadian dollar tracks oil very well. If in doubt, chart them.
The underlying fundamentals of a fiat currency backed by nothing and holds record amounts of debt
All currencies are fiat, though I imagine that some are more fiat than others. In the case of U.S., it is backed by the U.S. economy, which is racking up productivity gains. I agree that all is not well down south, however.
Now couple this with peak oil, and china and india awakening,
This is starting to sound familiar.
September 17th, 2007 at 8:55 pm
BILLIONS WITHDRAWN MONDAY
September 17th, 2007 at 10:05 pm
Is SATV on drugs? Like hell the market will keep going up. Try listing your property with a RE agent and they will tell you it’s going down as we speak. Don’t believe me. Just call one up and list your property and tag on 5% more than the recent sale price and see if they will help you market it.
September 17th, 2007 at 11:03 pm
“I say you are wrong, but you need to be more specific. I presume that you meant national numbers. Housing has lots to fall, and nationally 10% is a lot. California will see 25-30% nominal IMHO.”
I do agree that housing will fall, albeit in real terms, and yes nationally. It seems this board is divided between bulls and bears (more bears) each giving their own arguments. I will 100% agree with all the bears’ arguments but I am not discounting what the real estate bulls have to say. Both you guys are right and wrong. However, I find that the bulls have been right for the wrong reasons. A house on east hastings going for 1 million is certainly not out of the question provided that I see a grande coffee at starbucks going for $10 and gasoline prices going for $2.50 a litre…
As I am writing this WTI spot oil has made another all time nominal high yet just barely a blip on the MSM. Last year it was a huge story.
“Same sh*t different pile.”
No they’re not the same.
“All currencies are fiat, though I imagine that some are more fiat than others. In the case of U.S., it is backed by the U.S. economy, which is racking up productivity gains. I agree that all is not well down south, however.”
Yes fiat currencies are ugly, some more so then others. But the most meaningfully ugly fiat currency is the U.S. Now given that our currency tracks oil as you pointed out, the path of least resistance and probability of moving is up for oil. In addition, since the loonie as a fiat currency is less ugly then the U.S dollar, it is not hard to figure out which way the loonie will go by this time next year…
U.S productivity gains are meager when compared to the double digit days of the late 90′s or even post 9/11 recovery. Until there is some sort of technological breakthrough, productivity gains are most likely from the further utilization of idled equipment/resources or a reduction of excess unproductive labour in the manufacturing sector. (we all know someone who’s left their job and become a realtor, mortgage broker… had to take a shot at them)
As for the China & India story, it is indeed an incredible story of 2 Billion ppl entering the world economy. However, them entering the world economy does not equal housing prices continue to appreciate… I’m saying once they’ve acheived the ability to grow internally, our commodity driven economy shall shake loose our strong bond with the U.S…
September 18th, 2007 at 12:07 am
“The question is whether all the economic “spinoff” which is supposed to pay for all the capital investment is going to happen. The way things are looking, that’s looking less likely by the day.”
As I have likely mentioned before, the arguments for this were based upon notions like increases in tourism over a twenty year period after the games, due to Olympic exposure. I doubt most proponents of the games even believe this, but many of these had pretty strong financial incentives to trumpet it.
September 18th, 2007 at 2:55 am
I do agree that (US) housing will fall, albeit in real terms, and yes nationally
Get out of that cave Rip Van Winkle. Housing in the US is already down in nominal terms almost everywhere, including upscale NYC suburbs.
The biggest bubble areas, such as Florida and California Central Valley, are already down over 20% nominal and will see 50% nominal IMHO.
US as a whole will probably see about 20% nominal, but that’s hiding a lot of carnage in those places and elsewhere.
September 18th, 2007 at 3:12 am
A house on east hastings going for 1 million is certainly not out of the question provided that I see a grande coffee at starbucks going for $10 and gasoline prices going for $2.50 a litre…
I presume that your point is that value is in the eye of the beholder. However, RE spending is a little less discretionary, and does require the cooperation of lenders, who may not agree with your perception of value. Now, why are rents lagging badly?
As I am writing this WTI spot oil has made another all time nominal high yet just barely a blip on the MSM.
Dunno, maybe the MSM realized that in nominal terms, oil prices will CONTINOUSLY break records, and got tired of the story. If I recall correctly, real prices have been higher.
No they’re not the same.
For all practical purposes, how is it different?
Earlier you said: “Basically, the Fed was not taking part in open market operations to bring the Fed funds rate back to the target. The rate has already been cut, they just never announced it…”
Have you checked the news lately? What happened to rates already being cut?
http://tinyurl.com/2lznak
“So far this week, fed funds, the main U.S. short-term overnight lending market among banks, have traded at their session highs above 6 percent, or a full 75 basis points above the 5.25 percent target rate the Federal Reserve sets.”
Now given that our currency tracks oil as you pointed out, the path of least resistance and probability of moving is up for oil.
If it was that simple, why is the oil futures market so dumb?
U.S productivity gains are meager when compared to the double digit days of the late 90′s or even post 9/11 recovery.
Are you shooting from the hip on these? Productivity is strong from a historical perspective.
http://tinyurl.com/2zvwsf
I am not saying that I disagree with you on all counts, but you have some fairly strong opinions about how things will go down, and when I poke around, there are quite a few holes in your case.
September 18th, 2007 at 7:59 am
http://tinyurl.com/2lznak
“So far this week, fed funds, the main U.S. short-term overnight lending market among banks, have traded at their session highs above 6 percent, or a full 75 basis points above the 5.25 percent target rate the Federal Reserve sets.”
Sorry don’t have a whole lotta time today to give a reply since i’m so busy at work but that article is flawed in so many ways. What I said earlier is that the fed funds rate has averaged between 30 and 70 basis points lower then the target. Now if you want to talk about highs or lows within a trading day well on August 14, the low was 0.50%
http://www.ny.frb.org/markets/.....dsdata.cfm
See the fed funds rate can spike up or fall down lower then the target rate on any given day but it’s the Feds job to have the daily close around the target rate + or – 5-10 basis points at most. MSM spin as usual, and just because it’s on reuters doesn’t mean that it is true…
Now as for fed tools, as you may have already heard they’ve tried other things besides cutting the posted fed funds target rate. They’ve changed the definition of what is collateral in repo agreements, injected liquidity, lowered the lending rate and if that doesn’t work perhaps they can change the reserve requirements or raise the federal deposit insurance amounts. Many other options at their disposal…
“Now, why are rents lagging badly?”
I’ve thought about this for a while and can’t come to a conclusion.
My guess is inflation reported at 2.4%ish is completely false. Now since rents are calculated within the CPI, it would show very little movement. Inflation on the other hand should not be measured by CPI. Inflation is typically a monetary issue, and the world’s money supply has gone amuck. There is a huge disconnect between CPI and money supply growth. If inflation is reported using a different method other then CPI our interest rates would be much higher, possibly 8-9%. However, since most govn’ts use some form of fudged numbers, interest rates are kept lower then they should be, thus people choose to purchase homes subconsciously as a way to battle inflation. (Buy now or forever be priced out type argument). If inflation is reported as it should be, rents would be higher and wages would be higher, but home prices would be lower. That is my take….
September 18th, 2007 at 8:38 am
K-FINANCIAL,”desperate buyer”.A Model for this room,buy low sell high theme.kfinancial good to see you back after three months,here is little back up on this former “bull”.
kfinancial sold his condo last year in fear of “crash”.then he start predicting crash in hope to early the crash will come, he can buy low again then he will predict up trend,but his own sold unit has gone up from 50k-100k.
now he has become desperate and beggging for crash.hey k financial, I hope you did not assist your parents to sell their unit,or you did?
September 18th, 2007 at 9:46 am
Is that true Satv? If so, good job Kfinancial, you got out right near the peak. I have a friend who sold her house in the spring for 1.2 mil after buying at 650k about eight years ago. They’re currently on an around the world trip and home schooling their kids on the profits they made and will be back in a year or two to buy another house or perhaps rent for another year or two if the market isn’t completely settled yet.
I find it kind of amusing that you are holding on to your properties satv, I wish you no ill but I am kind of looking forward to you losing a bundle just so you’ll shut the hell up.
September 18th, 2007 at 10:46 am
Jeez. Fed cut by 0.5. Punch bowl refilled!
September 18th, 2007 at 10:58 am
Now watch the Canadian dollar go over par with the U.S. before October!
September 18th, 2007 at 11:01 am
If inflation is reported as it should be, rents would be higher and wages would be higher, but home prices would be lower.
Hello? Reported inflation, or more precisely CPI, is just a statistic based on a market basket. Now just how does the methodology used to calculate a statistic affect actual wages and prices?
That’s like saying changing the statistical definition of obesity would affect people’s weights.
And the reason rents aren’t higher isn’t mysterious at all. Provided supply keeps up with the number of households, rents will track household incomes. And supply is actually outpacing the number of households.
September 18th, 2007 at 11:19 am
Many other options at their disposal…
At their disposal to achieve what?
that article is flawed in so many ways.
Not sure I follow. You argued that a rate cut has already happened in everything but name because of the fed funds rate. I pointed out that more recently it has traded well ABOVE the target rate. I don’t quite get your response where you call the article flawed and point to MSM spin. Do you doubt that the fed funds rate has been trading above rather than below target recently?
My guess is inflation reported at 2.4%ish is completely false.
Why then are long term rates historically low? Is the bond market also stupid?
There is a huge disconnect between CPI and money supply growth.
Yes, and the difference can be attributed to growth of the economy rather than hidden inflation.
If inflation is reported using a different method other then CPI our interest rates would be much higher, possibly 8-9%.
Long term debtholders don’t give a rat’s ass about official inflation. They can see right through that. Unless you are going on record as stating that they are really dumb and you are really smart. In that case, I do hope you are loaded to the gills with derivatives. I do think long term rates seem artificially low, and lack liquidity/risk premia, but nothing along the lines of what you suggest.
thus people choose to purchase homes subconsciously as a way to battle inflation.
Let me get this straight. Professional bond traders are oblivious to hidden inflation, but Joe Average learned about it in a dream?
If inflation is reported as it should be, rents would be higher and wages would be higher, but home prices would be lower. That is my take….
A second ago you said that people buy real estate to hedge hidden inflation, but now you say that home prices would be lower if CPI clued into this? Can’t say I follow.
Second, what does CPI have to do with rents being higher? Aren’t rents determined by supply and demand rather than government statisticians? Or did you mean only mean rents in the context that it is tracked by CPI? When I said that rents are lagging, I am talking about market rents.
Not trying be cheeky or give deliberately give you a hard time, but I just can’t reconcile your views with reality. IMHO of course.
September 18th, 2007 at 11:26 am
Canadian dollar at 98.746 cents right this moment…
Gold is climbing…
Markets are up…
And here’s an interesting one: the Japanese Yen is UP against the US dollar. The Euro’s way up against the JPY. I wonder what caused the JPY to weaken all of a sudden?
September 18th, 2007 at 12:16 pm
“Hello? Reported inflation, or more precisely CPI, is just a statistic based on a market basket. Now just how does the methodology used to calculate a statistic affect actual wages and prices?
That’s like saying changing the statistical definition of obesity would affect people’s weights.”
Now with most jobs, wages increase yearly based on the reported inflation rate or CPI. Most union jobs have contracts that stipulate wage increases are based on CPI. If you have followed the definition of the CPI, it has indeed changed periodically. Reasoning behind doing so is of course new goods would need to added to the basket and old goods that no one purchases anymore would eventually fall out of the basket. Look deeper into the methodology into the definition of the CPI and you’ll see that it is an arbitrary measure, yet it is used greatly as a measure of inflation. As I have stated before a better metric for measuring inflation is the rate of money supply growth, or as I would like to measure is how much a good would cost per oz. of gold.
CPI does not measure the true rate of inflation and thus any conclusions based upon its methodology is flawed. The Bank of Canada basis its monetary policy on arbitrarily made numbers such as CPI, PPI, core inflation etcetc… why do you think the U.S Fed stopped reporting M3 money supply last year?
September 18th, 2007 at 12:23 pm
drachan,
june 23,2007-kfinancial,
My dream is far from over. I’ve got my reward already buddy. You wanna pay so much for real estate, take it. I sold my place for a pretty good gain. Thanks to people like you SATV. Guess what, my parents are selling their place too. You wanna buy it? It’s just simply economics. And do you know how the homeless issue is going to drive the market? DOWN!!!!! Why? Because the government is going to buy and build more homes for them. That takes away the stress on the demand curve, hello!!!!!! This will also lower the demand on the rent. Thus producing more negative cashflow for those real estate investors. You like it or not. The market is going to crash!!!
Originally, I had a mortgage on my place. But when the market crash, I’m gonna have a paid off place, sweet!!!!
Some the people that bought high is gonna have a huge mortgage with negative equity. That must be fun!!!!
And SATV, going up, Whatever!!! Even if it does, like I said, by how much? Borrow at 7% to gain 5% does not make sense. Nice and simple. Even if the market is going to gain 8% year over year, you not gaining anything. The Agent is going to eat away any gain made.
I totally agree with Wg2c. I don’t beleive 50% is excessive at all. Just simply do a cashflow analysis. 50% drop is not even the break even point yet. The bubble is form by speculation. Once speculation is gone, it’s back to basics. In fact, it will shoot downwards past equilbrium point. Markets tend to overshoot, both upward and downward.
In addition, developers have built way too many homes. BC’s net migration is not very high. It barely covers our natural shift in demographics.
6/23/07 3:57 PM
September 18th, 2007 at 12:26 pm
drachan,
that house you talking about is touchin 2 million mark,so your friend will never ever able to buy that again,and for next vocation they have to borrow loan.
September 18th, 2007 at 12:57 pm
Freako,
“Not sure I follow. You argued that a rate cut has already happened in everything but name because of the fed funds rate. I pointed out that more recently it has traded well ABOVE the target rate. I don’t quite get your response where you call the article flawed and point to MSM spin. Do you doubt that the fed funds rate has been trading above rather than below target recently?”
Sorry I’m not sure how to post url’s for websites like I did on the previous post.
If you go to http://www.ny.frb.org/markets
and find Federal Funds Data with its daily closing price you’ll see that the Fed Funds have been trading well below its target rate for over a month! You go back further in the daily close rates and you’ll see that Fed Funds daily close doesn’t deviate more then 5-10 basis points away from its target. Sure it can trade at 6… but it can also trade at 0.01 as well on the low end… the daily rate is the better indicator. What happened today with the rate cut was not that big of a surprise. They’re language on the otherhand indicates that further rate cuts would be needed, thus equities/bonds/currency/gold has adjusted accordingly in anticipation.
“A second ago you said that people buy real estate to hedge hidden inflation, but now you say that home prices would be lower if CPI clued into this? Can’t say I follow.”
Interest rates would be much higher if a more realistic approach of measuring inflation is used reflecting the true rate of inflation. It has been kept artifically low. You’re right professional bond traders don’t give a rats ass about hidden inflation. So long as the joe average believes the govn’t rhetoric then there is no problem – they’re along for the ride (expectations on inflation). If real interest rates decline, bonds do exceptionally well. Keep inflation down, and keep gold down and the game can continue.
I’d like to say that by 2010 olympics, gold will be at $1,500/oz heading towards its real all time high…
“Not trying be cheeky or give deliberately give you a hard time, but I just can’t reconcile your views with reality. IMHO of course.”
I appreciate your views and others, it keeps me questioning my views and conclusions. However, my reality is, I’ve parlayed my housing gains into gold. I may not be 100% correct in my views, but thus far my portfolio agrees with my views (i’m not the only commodity/gold bull around).
Housing will decline both nominally and in real values. However, more attention should be payed at the real value.
September 18th, 2007 at 1:50 pm
satv
“drachan,
that house you talking about is touchin 2 million mark,so your friend will never ever able to buy that again,and for next vocation they have to borrow loan.”
What have you been smoking? It sold for 1.2 in late spring, YOY is around what 5-7% this year? How on earth does that equal 2 million? Even if you multiply the price gains by a factor of ten you’re still way off. This kind of statement just goes to show how you have no clue whatsoever when it comes to mathematics or putting a logical argument together.
I generally try to avoid talking to you and Chief precisely because of your fanatical faith in the RE market. It’s like a religion for you and you will continue to believe beyond any reason until it slaps you in the face (perhaps even then).
September 18th, 2007 at 2:06 pm
Most union jobs have contracts that stipulate wage increases are based on CPI
Pensions yes, but union contracts, no. Clearly CPI is a factor, but, contracts are negotiated with fixed increases going forward. For example 3,4,4 etc. Bringing us back to the issue of implicitly calling people dumb, are you now doing this for employers and employees? If CPI is hogwash, such a fact will be taken into account during labour negotiations.
Look deeper into the methodology into the definition of the CPI and you’ll see that it is an arbitrary measure, yet it is used greatly as a measure of inflation.
Agreed. Arbitrary is a strong word, but there is definitely subjectivity involved.
As I have stated before a better metric for measuring inflation is the rate of money supply growth
And as I already mentioned, I disagree. Money supply can grow at a decent clip without causing any inflation. Whether inflation would result would depend on the growth of the economy and the demand for money (velocity etc).
… why do you think the U.S Fed stopped reporting M3 money supply last year?
You are to entering fringe conspiracist gold bug territory here.
Interest rates would be much higher if a more realistic approach of measuring inflation is used reflecting the true rate of inflation.?
The Fed does not control long term rates. Are you suggesting that long term debt holders are unable to see through official CPI figures?
You’re right professional bond traders don’t give a rats ass about hidden inflation.
Nope I meant the other way around. Professional bond traders would be hip to hidden inflation. Unless you think they are stupid. Why is long term debt at historically low rates if inflation is as high as you suggest?
So long as the joe average believes the govn’t rhetoric then there is no problem – they’re along for the ride (expectations on inflation).
What ride? The ride of giving money away?
I’d like to say that by 2010 olympics, gold will be at $1,500/oz heading towards its real all time high…
Yup, you’re a certified gold bug. Why don’t you just accept that fact that you were wrong in 1980 (now I am being cheeky).
You do seem well educated on the issues and you argue your case well, and I presume that you debate in good faith. But I am sorry, I have had enough jousting in the past with myopic gold bugs that I know it is as senseless as debating intelligent design. Gold bugs come armed and endless supply of facts that suggest that they know the inner workings of the Fed and you don’t. When cornered logically, one of these jargon ladened arguments always come to the rescue. As you can tell, I am definitely not debating in good faith, because that faith was used up a long time ago. Might as well agree to disagree right now.
September 18th, 2007 at 3:32 pm
Been a while since I posted, last time was when I had just sold my place in Yaletown almost a year ago. Anyway, still renting and happy other than the August stock market hickup that took off some of my paper gains… alas, I’m still ahead in my model even with the price increases since then!
Anyway, what spurs my post is a mailing I got from a friend of a friend that decided to become a real estate agent just over one year ago. When this individual decided to leave their well paying job and become an agent, I knew the market was done…
Here is what it says in the “why you should be buying now” mailer they sent me (verbatum):
“Many articles on the BC housing boom cite the strength of our economy as one of the main reasons the market remains so strong, and what a boom it has been! Total residential sales reached 3,873 units in July 2007, a thermometer-breaking 41.8 percent increase when compared to 2,732 sales in July 2006 and an increase of 5.0 percent when compared to 3,687 sales in July 2005
Part of that economic strength comes from the jobs created from and the spending associated with homepurchases such as: moving costs, new appliances, furniture, renovations by buyers, professional services and taxes.
BC leads the country with nearly 1 in 55 jobs being generated through the real estate industry; the national average being 1 in 100. For each MSL sale, $40,450 in consumer spending is injected into our economy. According to a recent report for the Canadian Real Estate Association, the resale housing industry in Canada generated more than 158,000 jobs and an average of $15.3 billion from 2004-2006″
Whoa, the agent prints this kinda thing and doesn’t worry about a fragile propped up market? The RE market is booming because of the booming economy which is booming because of the RE jobs due to the booming RE market….I hear the porthole glass cracking on their submarine.
Sorry for the long post.
September 18th, 2007 at 4:08 pm
ytboomer,
That’s hilarious. If you just change the title to “why you should NOT be buying now”, the rest of it would pretty much make sense.
September 18th, 2007 at 4:16 pm
drachan,
yeah if you know yoy,mom per-cent accordingly by location, then you can learn more lesson.
September 18th, 2007 at 5:28 pm
BC leads the country with nearly 1 in 55 jobs being generated through the real estate industry…
I think that our provincial unemployment rate will soon be going up by 1.5% or so…
September 18th, 2007 at 6:59 pm
…why do you think the U.S Fed stopped reporting M3 money supply last year?
Because there is no accurate way to measure M3. “Everyone” already bitches about CPI inaccuracies – estimating repos and eurodollars is at least an order of magnitude more difficult.
September 18th, 2007 at 7:18 pm
freako said: But I am sorry, I have had enough jousting in the past with myopic gold bugs that I know it is as senseless as debating intelligent design. Gold bugs come armed and endless supply of facts that suggest that they know the inner workings of the Fed and you don’t. When cornered logically, one of these jargon ladened arguments always come to the rescue. As you can tell, I am definitely not debating in good faith, because that faith was used up a long time ago. Might as well agree to disagree right now.
freako, you know we respect your normally well considered arguments, but I would humbly submit that you have a ‘lacune’ where gold is involved… in fact, one could argue you’re simply the flip side of the same coin of which the die-hard guns-and-PMs-under-the-floorboards gold-bugs are made.
So how about some fair consideration for the asset?
Is it perhaps telling us something?
Any chance of revising your relationship with gold?
—-
Disclosure: I don’t think that optimus is that out of line suggesting pog $1500 at some point. I’ve traded pm stocks since pog was $250, so another 100% doesn’t seem that insane. Especially since we haven’t had broad public participation in this gold bull yet.
I suppose that puts me in the crazy gold bug camp, too, but you have to call it as you see it.
September 18th, 2007 at 7:52 pm
Optimus_subprime said:
Freako,
“Not sure I follow. You argued that a rate cut has already happened in everything but name because of the fed funds rate. I pointed out that more recently it has traded well ABOVE the target rate. I don’t quite get your response where you call the article flawed and point to MSM spin. Do you doubt that the fed funds rate has been trading above rather than below target recently?
I said:
Optimus, maybe you are in need of a firmware upgrade?
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.
Optimus_Prime said:
“Hello? Reported inflation, or more precisely CPI, is just a statistic based on a market basket. Now just how does the methodology used to calculate a statistic affect actual wages and prices?
That’s like saying changing the statistical definition of obesity would affect people’s weights.”
I said:
Except with people’s weight, there is a standard based on BMI (Body Mass Index). It’s not statistical, rather it’s scientific..
CPI is a very elusive number and you are right, it tries to measure a basket of markets. Usually, it’s something that we couldn’t live without. Which means, transportation because our essential needs to life depends on it. Why? Because, if transportation ceases to function, who will supply our food, medicine and essential services since most of them are foreign provided. Oil prices has risen and so does wheat!
That’s general CPI.
But we also have our own CPI as well. Food, clean water and medicine are 3 essentials that we can’t live without. No food, you die. No water, you die and no new life saving modern medicine, you suffer or die. If these items go up in price, you will be forced to pay up and the increase in prices reflect inflation. We all know this to be true.
However, not all items go up. We know that today’s computers are cheaper. Mac Lisa in the 1980 retailed for about $10,000. Now, you can get an Intel Core Duo iMac for $1299 which has a lot more power than the Lisa!
Cost of a new car with Bluetooth/MP3 and the works are ever more affordable?!? These features were only available on high end vehicles of the past.
I can go on and on, but some items do go down due to cost productivity and product technology used to derive lower costs.
Besides, we adults make certain choices, mostly for status.
Iphone is not a life and death choice. It’s expensive, but give you that “status” edge. And so does an iPod Touch.
A BMW or a Lexus is not a life and death choice either. They’re expensive, but give you that “status” edge as well.
A $500,000 or up 550 sqft Vancouver Condo in Yaletown or a 1 million dollar East Van home is not a life and death situation either. There are places in Kits that rent for $910 to $1200. Certainly beats $1800 a month on a 550 sqft box! And yet, people make this choice even when an alternative choice can be made. Yes, you don’t get the “status” of living in Yaletown, the bling bling.
So should CPI reflect that? People who own expensive homes bought with questionable loans, have non-callable line of credit (yes, there’s A LOT of them) used to finance fancy cars and supplement their over-extended mortgage and an iPod Touch?!? with ordinary jobs?
And then have the balls to ask for outrages increases, because Vancouver is an expensive place to live in? Vancouver maybe an expensive place to live in, but ordinary jobs have to have wage parity with jobs available in other towns or cities when normal CPI is factored in. The current civil strike in Vancouver are definitely asking a bit “MORE” than normal.
What if the economy suddenly turns?
It certainly happened in 1982.
In China, almost 83% of homes are bought with cash, albeit at insanely inflated prices. But in Canada, most homes are bought with borrowed money, albeit at insanely inflated prices. Who do you think will be a faster price depreciation??
If you borrow money, eventually you will need to return it back.
If you use cash, it’s yours. That’s the difference.
The CPI in China reflects for the most part, the inflation index caused by the return of cash, whereas the CPI in Canada reflects for the most part, the inflation index caused by the return of fiat money.
September 18th, 2007 at 7:58 pm
… in fact, one could argue you’re simply the flip side of the same coin of which the die-hard guns-and-PMs-under-the-floorboards gold-bugs are made.
So how about some fair consideration for the asset?
Is it perhaps telling us something?
Guilty as charged. I am totally closed minded about this, and I can’t help it. It is not the gold itself. I am not particularly keen on it, but there’s not much more to say about aspect. What goads me to no end is the messenger, the archetypical gold bug. There are probably gold investors who don’t fall into this category (such as yourself). But then there are the ones who argue like as if they spend their childhood at the Federal Reserve, using all the jargon. If they are not to subtle they link to outlandish conspiracist websites. But they always always without fail bring up the “why did the Fed stop tracking M3″. To me it is cultish.
If inflation is so understated, why is long term debt so cheap. Heck, goldbugs, screw gold and short bonds with maximium leverage. But for the love of god, stop trying to recruit into your flock. Gold bugs proliferate and join internet forums of all kinds, and before you know it all conversations turn to gold, gold gold. And that is all I have to say about that.
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?
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 8:58 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 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 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 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 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 10:31 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 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 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 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 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 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 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 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 9:03 pm
FREAKO….PLEASE DONATE THE HUNDRED DOLLARS YOU OWE ME TO THIS ORGANIZATION…THANKS
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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 7:43 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 7:46 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 7:48 pm
Freako,
when you say”google should be under scaner that was actually under scanner that time.
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 7:54 pm
Cheif,
Thanks cheif you also appeared second last day before friday was above to beging next day.
Thanx
September 25th, 2007 at 8:02 pm
thanks every body love you all
September 25th, 2007 at 9:29 pm
Chief,chief,chief…..