All posts by crashcow

Few macro observations today

Quick roundup of tidbits I collected:

First, notice the striking correlation between the %YoY change in Canada and Australian home price indexes:
AUD vs. CAD home price indexes

Graph sources:
AUS Price Index (fig 1)
CAD Price Index (comminuques->april)

Second, look at the similarities between today and summer 2008:
– Both Aus & Canada %YoY home price trends are following the trend set in ’08.
– USD index came within a hair of its summer ’08 lows and has started to rally
– Commodities have started to tank and have registered their largest 1 week plunge since ’08

Third, QE2 comes to a close end of June. No more $4 billion of liquidity pumped into the markets daily to goose commodities and other risk assets. This also gives further fuel to the USD rally.

A crash this time around would be uglier as interest rate ammo worldwide is thin. So buckle up and let’s get the remaining world housing bubbles popping at warp speed scotty!

Submitted by crashcow

But, it’s different here!

Why did Canada’s housing market not suffer (yet) as much as the US? The media will tell you it’s our top-notch banks, prudent lending system and strong fundamentals. But take a close look at the graph below:


The US and Canada both had an uninterrupted housing boom that lasted 7 years, with US starting and ending roughly 2 years before Canada. After US banks began failing and world stock markets collapsed in Oct 2008, unprecedented stimulus measures were taken simultaneously by Canada and US.

The key point the above graph illustrates is that by the time stimulus was started, US home prices had already been falling for 3 years while Canada had just started their decline 1 year prior. As a result of the shorter stimulus response time in Canada, our housing prices and banks took a smaller hit.

Notice how similar the effects of this stimulus have been to home prices in both countries. By slamming interest rates to the floor, injecting $110 billion into Canadian banks ($65B from the Insured Mortgage Purchase Program and $45B from Bank of Canada) and creating home buyer incentives (US), housing demand was dragged forward and created a temporary rally in home prices. Even more interesting is how the stimulus effects have started to wear off at the same time in both countries.

And are our banks really more prudent than those in the US? As Ben Rabidoux noted on his blog, take a look at the bank leverage ratios (courtesy of Eric Sprott):


The media is right – it’s different here. It’s worse.

submitted by: crashcow

Parable of Treeland

In the late 1700s, Europeans first discovered a largely unpopulated area with a temperate climate (although annoyingly rainy) and rich in resources of lumber, copper, gold, zinc, coal, petroleum, natural gas and fish. Reflecting that forests covered more than half its area, they named the broader area “Treeland” and it’s major city “Racoover.”

In the mid-1800’s, news broke out that there was gold on the banks of the Fraser River and over 25,000 prospectors swarmed in, hungry for instant wealth. Several towns instantly sprang up. To help maintain law and order, the government incorporated the colony of Treeland. But within a few short years, the frenzy of the gold rush fizzled out.

When Racoover officially became a city, it had 1,000 people. The first mayor was Realtor® McLean. One summer day, a brush fire got away and burnt the city to the ground in less than 30 minutes. McLean, knowing the value of real estate, got rebuilding going in a matter of days.

With its rich resources, Treeland was rapidly developing into a great province. The economy was based primarily on forestry, nicknamed “green gold”, and accounted for over one-third of export earnings. Mining and fishing were also major contributors to the GDP. These export earnings were used to build infrastructure using very little debt. New public facilities included the CP railway line, Granville Bridge, electric streetcars and the first skyscraper. The world’s largest indoor ice rink was built for the Racoover Millionaires, the city’s first hockey team. Beaver Place Stadium inflated up and became the world’s largest air-supported bubble.

Treeland had very little debt and banks prudently provided secured, low leverage, tight amortization, fixed-rate loans on sound homes and vehicles to be used by industrious citizens who lived within their means. There was no speculation flipping in highly leveraged investments.

But even a province as sound as Treeland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant when Treeland’s forestry industry got hit with multiple problems. First started the rampant forest fires and pine beetle epidemic, spreading over 15 million hectares. Then came rising energy prices and exchange rate with Eagleland, Treeland’s main trading partner. Times suddenly changed and forestry jobs started disappearing fast. Tens of thousands of jobs vaporized and it became hard to keep track of the mill closures.

In Sep 2001, Eagleland suffered a tragic foreign attack. In response, Chairman Greyspan sought to stimulate the economy and ordered banks to give away gambling chips at low interest rates. Treeland quickly followed suit with this plan. As their affluence and leisure time grew, Treeland’s citizens more and more whiled away their time in the excitement of casino gambling. With the low interest rates, low down payments, long amortizations, gambling chips insured through CHMC, and an obscene amount of chips created thanks to fractional reserve banking, the banks flooded the economy with chips and made all gamblers steadily and increasingly rich.

The winnings of the casinos eventually amounted to 40% of Treeland’s GDP, while 10% of the gambling profits were paid to persons employed by the casinos (many of whom were needed elsewhere in more productive jobs). So much time was spent at casinos that it amounted to an average of several hours daily for every citizen of Treeland. To satisfy the gambler’s addiction and to create new gamblers, the HGTV television network was formed. Social gatherings were alive with feverish, eye-popping discussion about how much winnings were made that week in the casinos. Many of the gamblers started placing bets with a new product called presale assignments, similar to the reckless leveraged futures contracts used in Eagleland.

In 2004, Racoover was selected to host the biggest circus in the world. This fuelled the casinos even more. Soon, there were three-day line-ups just to get into the casinos. Some visited three casinos per night while sending their spouses to a different three. Some speculated that even foreigners were participating in Treeland’s roulette wheels. The gamblers all religiously chanted the three tenets of gambling: “Everyone wants to gamble here,” “Casino winnings always go up,” and “Treeland is the best place on earth.”

A few unspoiled souls, the Savers, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders and citizens to avoid gambling addicts. They cried desperately for the madness to end. Their reasoning was echoed by international reports which showed the world how irrational Treeland’s behaviour had become.

Then in late 2008, all of Eagleland’s gamblers suddenly went bankrupt within weeks and caused a viscous downward spiral that permeated around the world. No one could foresee (so the media said) that Eagleland’s economy was a house of cards that eventually bust, severing Treeland’s exports and economic engine. The Savers, who had been patiently waiting for the madness to end, finally got their break. The stats showed a plunge in casino visitors and the Savers celebrated wildly each time another 10 casino halls became empty. But after a few short months of healing, the governments slammed interest rates to the floor. Gambling activity roared back but the resource industry dwindled and unemployment still remained at record highs. The winnings of the casinos eventually accounted for every single penny of real GDP. How was Treeland supposed to adjust to this brutal new reality?

The circus came to Racoover the following year but the circus folk, puzzled by the madness of the locals, did not participate in the casinos as the gamblers had hoped. The exorbitantly priced Circus Village that was built for the circus clowns could not be sold and went into receivership.

Then the Good Father sounded the alarm bells that Treeland’s gambling chips exceeded those in Eagleland, which was now on life support. He strongly urged Treeland’s citizens to stop their casino gambling and began reinstating shorter amortizations and higher interest rates. He knew this change was sure to induce vomiting and hallucinations in the addicts and suggested that citizens cheerfully embrace their fate. And sure enough, the casino owners and employees (“pimps”), who strongly believed in the beneficence of hyper-gambling, were hostile to change. They petitioned to the Good Father to make gambling easier. However, the pimps’ efforts failed and gambling restrictions became tighter.

By 2010, the gamblers stopped making profits no matter how hard they tried cranking the slot machines. Even some players of the Racoover Millionaires (now renamed Canucks) got caught in the casino mess and suffered heavy losses. By 2013, roughly half the gamblers went bankrupt. The remainder were wiped out by 2017. Much counterproductive governmental action was taken, and the land’s credit was reduced to tatters. Treeland is now under new management and has been renamed: Brokeland.

Submitted by: Crashcow

Reference & inspiration: Basically, It’s Over

Field Report from UBC condo projects

May 29, 2010
by Crashcow

I woke up this morning with a massive hangover. Wow, what a 40% sales-to-list party that was! But with today being Alumni Weekend, I decided to check out my Alma Mater and tour the empire of new condos she’s been feverishly building.

Even though we’re now essentially in June, the day was cold, wet and wintery. But as any Vancouverite will tell you, this only a small sacrifice to live in the Best Place on Earth. A minor inconvenience, if you will.

As I entered into UBC and drove passed some new buildings, I became confused. My navigation sense turned dismal. If you haven’t visited UBC in over 5 years, chances are you will not recognize this place either. Entire communities the size of the Olympic Village have recently been built multiple times over. According to U-Town, there are now eight emerging communities, with Wesbrook Village being the largest. Talk about inventory glut.

The Sales office at Wesbrook Village sat empty. Balloons walloped in the wind. I saw no people and no amenities, except for a Save-on-Foods. The villages felt like ghost towns; it was quite the sobering contrast to Rennie’s sunny and euphoric circus at the Olympic Village. But then we ran into a friend that I hadn’t seen in ages. It turned out she was living in one of these new communities and had an interesting story.

She is a first-time buyer that entered the market a few months ago during the climax of the buying frenzy. After getting bruised several times in bidding wars, she toughened up to outbid the hounds. Victory was hers, as were the keys to a new UBC condo for over $600/sq.ft on leased land. The conversation was very insightful:

Me: “What shaped your decision to buy in UBC?”
Her: “I bought this condo as an investment. UBC is quickly becoming a world-class university and is increasing its student capacity. There is always going to be strong housing demand from students and families. My goal now is to build a portfolio with as many condos as possible. You should really take this opportunity to own here.”
Me: “Actually, I’m really enjoying renting at the moment. I did own a condo, but then sold it in fall of ‘07.”

This comment stirred a puzzled reaction in her.

Her: “Why? Do you think the market is going to…”

For some reason, she had trouble finding the next word. Any one of “drop”, “fall”, “correct”, “tank” or “crash” would have done just fine. Instead, she silently motioned a dive with her hand. This was clearly a fragile person.

It utterly amazes me that someone with higher education would consider leveraging themselves to the moon in order to snap up as many condos as possible without even seriously considering a drop in prices. It’s no surprise to us that politicians, real estate agents, brokers, bankers and developers have failed us. But it’s sad that our academic institutions have not equipped us with the most basic of financial street smarts.

I look forward to The Great Cleansing ahead.