Wednesday, February 24, 2010

Update: Greece

More on the Greek crisis:
A one-day general strike crippled Greece's transport and public services on Wednesday but is unlikely to halt government austerity measures to tackle a debt crisis that has rocked the euro zone.
As tens of thousands of strikers marched through Athens to protest against EU-prescribed tax hikes and pay cuts aimed at reducing a double-digit deficit, Athens and Berlin traded accusations about World War Two reparations.
Greece is the first domino.  Greece itself is insignificant, but that's not the point.  The point is this will cripple the EU.  We've already seen sovereign debt problems in places like Iceland, Dubai, Latvia...but Greece is the first within the EU.  If Greece gets a bailout, Spain, Ireland, Portugal and Italy will soon be in line.  Divisions will obviously arise from sensible prudent players being forced to bailout the ridiculousness of the PIIGS.
The Socialist government hit back at European criticism of Greece's fiscal management, accusing European Union partners of double standards and poor leadership.
Deputy Prime Minister Theodoros Pangalos said Italy, France and Belgium had used the same techniques as Greece to mask their true deficits to qualify for the euro zone.
He said Germany was ill-placed to criticize Athens given its conduct during the Nazi occupation of Greece in World War Two, including the looting of central bank gold reserves, prompting a reaction from Berlin.
Obviously Greece isn't the only player in this mess, they're just the canary in the coal mine (that's assuming you previously ignored Latvia, Iceland and Dubai).  The cracks are there, and soon enough the other players will be exposed for the games they were playing as well.  For everyone declaring the US dollar dead...wake up.  The US has it's problems, for sure, but their problems pale in comparison to those of Japan, and the sovereign debt problems of the EU, along with the even higher levered European banking system. 

Naturally, the unions are at the forefront of the Greek problems:
The public and private sector unions, which together represent half of Greece's workforce of 5 million, want the government to scrap plans to freeze public wage, hike taxes and increase the retirement age.  
"Today, Europe's eyes are turned on us," said Yannis Panagopoulos, head of the private sector union GSEE. "We ask the government not to give in to the desires of the markets, to set people's needs as a priority and adopt a mix of economic and social policies that won't lead to recession but to jobs."
What planet do these imbeciles live on?  Do they understand that if the government get's its money to pay its union members from the lending of bondholders, then they derive their paychecks from the market itself. Sure,  they can do as the unions suggest, and say "Fuck you" to the market, which will result in nobody in their right mind buying Greece's worthless public debt which will cause the cost of borrowing to skyrocket, and Greece to implode.  But maybe the EU will bail them out...after all, if the market won't, it's clearly the responsibility of German and French taxpayers...

On a much more relevant note:
Canada 7 Russia 3.



Sunday, February 21, 2010

Dumb and Dumber

Ah, the hypocrisy of politicians.  Jim Flaherty has been adamant that there is no Canadian housing bubble.  Then why do we need a  task force studying why Canadians are financially illiterate?  Maybe because you know there's a massive problem, but it's easier to blame the stupidity of Canadians (I'm not disputing this is a problem),  than admit any of the retarded policy blunders that have encouraged this reckless behaviour in the first place.
The task force will release its “Leveraging Excellence” consultation document Monday as a starting point to discuss issues including managing debt, saving and investing, retirement planning and pension reform.
That's an awesome name for the report, must be an inside joke...since leverage is precisely why many Canadians are racking up monstrous debt levels.  Has a better ring to it than "Borrowing away our future".  But that's why these guys get elected I guess.

Let's be clear, the government realizes there is a massive housing bubble, and retirement savings debacle coming but they're scared to actually admit it, lest it cause consumer confidence to plummet.   So instead, they lie, and assume we're retarded (which I guess is accurate, based on the actions we're seeing). 

Not only are consumers piling up debt at record levels, many also have virtually no savings.  When reams of boomers start moving into retirement, the government is going to have it's own problem with mounting government commitments to social security, as well as mounting health care costs.  They don't need to worry about the prospect of people not having anything saved for retirement on top of that.
The group is examining a survey of more than 15,000 Canadians that suggests that one-third of the population is struggling financially. The data also suggests that Canadians don't fully grasp their financial picture, or are overly optimistic. Half of them say they are confident that they will enjoy a comfortable retirement, but very few can explain how they plan to get there.
Most peoples "plan" involves their principle residence appreciating rapidly in value. And that has happened largely due to rates being cut to zero and the Canadian taxpayer assuming the risk of all of these high-ratio loans due to CMHC.  CMHC might as well stand for "Can't Make Houses Cheap"...since it has basically managed  to do the polar opposite of what they are mandated to do - increase housing affordability for Canadians.  It's bad enough they've ramped housing prices, but the fact they've done so by protecting banks from mortgage defaults on the back of Canadian taxpayers is unconscionable.  This pig needs to be slaughtered - Canadian bacon time.
“Time and again we see behaviour by people – we are talking highly educated, high income people – who are making less than ideal financial decisions for themselves and their families,” said one source. “Other countries that have developed a strategy have focused on education in high schools. This task force has come to the early conclusion that, while enhanced financial education is vital over the long term, it is insufficient.”
The task force is delving into behavioural science and looking for ways to nudge Canadians into adopting better financial practices, such as saving more. Committee members have had discussions with experts on the psychology of money, such as Richard Thaler, the author of “Nudge,” in the hunt for ideas.
The task force is also concerned that if it limited its strategy to education in school, it would not help immigrants or aging Canadians who are struggling with retirement.
Tell me, how does cutting consumption taxes like the GST in place of cutting income taxes provide a "nudge" in adopting better financial practices?  How does engaging in ridiculous Keynesian stimulus plans encourage Canadians to save?  How does interfering in the market forces for mortage rates?  The only people potentially more ridiculous with their finances than average Canadians are Canadian politicians. 

As for the education argument, you can't rule out providing better education because it doesn't help seniors and immigrants.  We need to show the next generation how utterly incompetant the previous generations were and why they're being asked to pay for their parents and grandparents retirement.  We need to tell them that they're going to be taxed at higher rates than previous generations, and the services they'll receive will be in decline because the government cannot afford otherwise.  People need to realize that retiring at 65 may not be the norm anymore (hell when I grew up everyone talked about freedom 55).  People need to realize that there's a big difference between having to save enough to fund 10 years of retirement vs 20-25 years.

In short people need to do a bit of math and actually start thinking about their own situation and then start doing something about it, instead of ignoring the problem and hoping it will go away.

Or we can fill a Samsonite briefcase with IOUs...after all, those are as good as cash!

Friday, February 19, 2010

Coming to a Boil

The cracks are there.  People are angry.  And if policymakers refuse to deal with the corruption in the system, the public will take matters into their own hands (for better or worse).

A small plane was flown into an IRS office building in Austin, TX yesterday.  Reuters had the boring lack of details article, but if you want a more detailed insight into the story, I suggest checking out Karl Denninger's post.

I don't have much to add, because let's face it, the Ticker Guy is a far more eloquent ranter than I am.  But reading the murder/suicide note, there's a few things you can take from it:

1) This guy wasn't a complete wackjob, indeed he was an educated, and seemingly articulate writer.  Angry for sure; batshit crazy, no.
2) If anything, the note screams of endless frustration and disillusionment with the ideal vs. reality of American justice.  The elite play by one set of rules and everyone else by another.

I'm not condoning the actions, but it's not hard to understand them either.  We've all felt similar fits of rage at our breaking points, the difference here is that eventually you push the wrong person past their tipping point and they snap.  And with the multitude of angry, disillusioned, unemployed US workers, it's highly probable that this won't be the last act of violence.

The US has enough of a problem with foreign terrorists, does it really need to add domestic to the list as well?  After all, if you're managing to not only piss off foreign extremists on a global scale,  as well as the citizens you're supposed to be serving...who does that really leave the government to be taking care of (besides the politicians themselves and the interests of their corporate partners).

Tuesday, February 16, 2010

Canadian Household Debt: Pass the Crack Pipe

To much lesser fanfare than the announcement on the new mortgage rules, the Vanier Institute for Families released the annual report on Canadian household finances.  To summarize: Canadians are credit junkies that just can't get enough. Link to the entire report (worth reading).

A few "highlights":
The debt to income ratio moved up to 145% at the end of the third quarter 2009. This is another new record. Given the trends evident in the first part of 2009, the Bank of Canada estimates that this ratio could be up to 160% by the end of 2012.10 This ratio has been found to be a key determinant of personal bankruptcies.
A more precise indicator of the burden of debt has been developed by the Bank of Canada. In the third quarter 2009, about 6% of all Canadian households (about 825,000 households) had a DSR (Debt Service Ratio) that exceeded 40%. The DSR measures the percentage of gross income spent on household debt plus payments on the principal. These high DSR households are in a very vulnerable position and the Bank of Canada model assumes that one out of every four households in this situation will eventually default.
The Bank of Canada created two scenarios to see what percentage of households would be in this vulnerable situation given current trends in the debt to income ratio, and if the average cost of borrowing increased by the end of 2011. In the first scenario, interest rates increase by about half a percentage point, and, in the second scenario, they increase by about one percentage point.
Under the first scenario, there would be about 1.1 million households with a high DSR at the end of 2011. Under the second scenario, there would be approximately 1.3 million households with a high DSR at the end of 2011. These are increases of 30% or 50% from the third quarter 2009 situation.
As worrisome as these numbers are, the average cost of borrowing could easily increase by much more than the percentages assumed in these two scenarios. A two percentage point hike could easily cause the number of households with this dangerously high DSR to climb to 1.5 million or so. This would represent an increase of about 80% from the situation in the third quarter 2009 in the number of households with a dangerously high DSR.
And this is only considering the immediate implications of higher rates in the coming year or two.  Remember, as Canadians don't have the luxury of locking into 30 year fixed rate mortgages, we have to renew our terms, typically every 5 years.  Rising rates are going to cut into affordability massively, couple this with government attempts to balance budget and you're looking at higher tax rates, meaning less disposable income.  In short, rising debt levels to service with at best stagnant incomes, and more likely declining disposable income due to tax increases.  Oh, and that debt you're holding, it's a recourse loan as well, so no walking away from your ill conceived plunge into a ridiculously bloated housing market.  How's that vice feeling?

Credit card and mortgage delinquencies rose (somehow we never seem to hear about these things in the media, ever).
The number of consumer insolvencies was up by 26% (3-month moving average) in October 2009 from a year earlier. The year to year increase had been as high as 42% in mid-summer 2009.
Delinquencies rose. Mortgages held by chartered banks, which are 90 or more days in arrears, were up by over 50% in October from a year earlier. Visa and Mastercard credit card holders, who were delinquent for at least 90 days, were up by over 40% in July from a year earlier.
The relevant chart below (click to enlarge):

In general, if you're 3 months delinquent on your mortgage, you're defaulting.  You're not making those payments up unless you come into a family inheritance or win the lottery.  Let's cut the crap and call it what it actually is, which is a gauge of soon to be mortage defaults.  Keep in mind the chart above is the percentage change from the previous year, so that dip you see does NOT indicate that delinquincies are falling.  They are still increasing, just at a slightly slower pace.

So how much have we lost in this debt fueled debacle?  Canadian average net worth, is still below it's peak. (click to enlarge).

As of the end of the third quarter 2009, the average net worth (total assets minus total debt) per household stood at about $390,000 in constant 2007 dollars. This was down by approximately 6% from the peak of about $416,000 in 2007. That is a substantial decline of $26,000 per household. The decline was much deeper at the end of the first quarter 2009, but was reduced by a rapid improvement in share prices and the rebound in house values.
(Emphasis mine).  That's right, despite a massive equity party from the 2009 March lows AND a 19% increase in home prices in 2009, household equity is still $26000 below the 2007 peak.  Where would we be without the market rally and house price explosion due to a combination of zero interest rates and massive government stimulus?  It's scary to think, yet this is the direction we are most likely headed back towards.  Unless maybe you think a 50% increase in the stock market and 20% increase in home prices is sustainable annually.  Brace yourselves.

And finally, the best chart of the report (click to enlarge):

Hmm...let's try to determine when housing prices came unglued from incomes...might it have something to do with crashing interest rates due to the bubble collapse + 9/11?

Central banks: blowing bubbles decades at a time...until they can't because the weight of the debt taken on is too much.  We're at that point now.

Popping the Bubble? Not really.

This morning, Ottawa announced new rules to tighten lending standards.  It's a start I guess...but as expected it isn't really a bold move by Ottawa, more a move so they can claim to save face when things tank.

Let's look at the rule changes:

1) Banks must now approve CMHC mortgages based on a 5 yr fixed rate, rather than a variable rate mortgage.  Indeed, many banks were already basing mortgage approvals based on debt service ratios for 5 year fixed rates, but this at least clarifies the requirements "across the board" for CMHC insurance qualification, as opposed to CMHC approving any 5% downpayment mortgage.  For many banks this will not impact their lending practices at all.

2) Maximum refinance amount lowered from 95% to 90%.  This is a symbolic move only.  It may send a message, but it still lets borrowers use their houses as ATMs, they just get back a bit less.

3) 20% downpayment required for CMHC backed mortgage insurance on investment properties.  This seems reasonable as a move to curb speculation.  Better yet, why provide CMHC insurance for 2nd properties at all?

The problem isn't speculation on 2nd properties, the problem is speculation on their primary residence.  60% of working Canadians have no pension plan, and 4 in 10 Canadians have no retirement savings whatsoever.  Yet homeownership is at record levels.  This results in the bulk of Canadians net worth being tied up in one asset: their home.

The new rules take effect April 19th.  Really, they do very little; it's more about the Feds attempting to save face.  When the bubble (which still doesn't exist) bursts the Feds can then choose to play it as "we warned you, and tried to prevent this".  They won't actually take credit for popping it, because then they'd be the bad guy...

I still stand by my previous post, Gutless.  This move is designed to appear that they are making tough choices...the reality is far from it.

Monday, February 15, 2010

Greece Bailout - A Quick Summary

The whole Greece bailout crisis is starting to wear on me.

Here's the "quick" rundown:

1. Greece decides it's going to run a 12.7% of GDP budget deficit, more than 4x EU limits.
2. Bondholders refuse to buy Greek bonds, driving up borrowing costs for Greece.
3. Panic sets in as Greek may default, Euro dives, pressure on EU to bail them out.
4. Mainstreet media articles/Greece PM announces "Everything is OK, EU will save us."
5.. Germany responds to #4. with "Fuck that, we can't afford to bail those deadbeats out."
6. Repeat 4, 5 ad nauseum.

 So, will they or won't they?

First off when people say the "EU" will bailout Greece, what they're really saying is Germany and France will bailout Greece.  And they neglect to mention that if Greece gets bailed out, Ireland, Portugal, Italy and Spain will soon be lining up for their handout.

Germany and France cannot afford to bail out everyone else, it's sheer idiocy. 
“If we start now, where do we stop?” Michael Fuchs, a member of economy committee of the German parliament's lower house, told the Welt am Sonntag newspaper. “I can't explain to people on unemployment benefit that they won't get a cent more but Greeks can draw a pension at 63.”
Ms. Merkel raised Germany's retirement age form 65 to 67 in an effort to trim the country's deficit. Greece's maximum retirement age for men is 65, and 60 for women. The Socialist government of Greek Prime Minister George Papandreou plans to raise retirement ages, freeze public sector wages and boost fuel taxes to bring the deficit down, but has provided few details on the strategy. The effort will take several years.
Indeed due to the global recession Germany has its own budget worries:
Germany’s no-bailout position is almost certainly being influenced by its own deteriorating finances. Its budget deficit is expected to grow to 5.5 per cent of GDP this year. The country’s economy failed to grow in the last quarter, raising fears of a double-dip recession. The euro zone as a whole grew only 0.1 per cent in the same quarter, after growth of 0.4 per cent in the third quarter.

Comically enough, the Greek PM has called the EU "timid" for failing to deal with the crisis.  This coming from a PM that refuses to deal with his county's own budget crisis and instead preferes to blame bond "speculators", the EU, and anyone else that will listen to his sob story.  The idea of responsibility and accountability is clearly a long lost memory.   Fuck rational behaviour.  Clearly "normal" now is to blame anyone else and hope somebody else will fix your problem for you.   Seriously, maybe we should be teaching our kids to lie creatively, steal, and mooch off others...while setting up someone else to take the blame...that seems to be the norm today.

Indeed, I'm not the only one pissed off about the incompetancy of the Greek government.
In Europe, this is causing a chain reaction, where images of striking workers make Greek politicians skittish about agreeing to move more quickly to rein in spending, which renders German voters reluctant to see their government aid in any rescue. The net result is a weaker euro and another display of how difficult Europe finds it to solve its problems internally.
Why should Germany bail out Greece when Greece isn't making any cuts or tax increases to rein in its budget deficit.  Indeed I don't understand how Greek citizens can be protesting to maintain the status quo.  The status quo isn't an option, either they cut spending and jack taxes, or they get booted out of the EU and their borrowing costs rocket.  Contrary to popular belief, you can't just do whatever the hell you want and not accept the consequences.

Then the article seems to go way off base and parallel Greek angst over potentially raising taxes/cutting spending with American angst with reappointing a tool of a central bank chief.
The populist backlash in the United States came close to cutting short Ben Bernanke's tenure at the helm of the U.S. Federal Reserve Board, as lawmakers looked for an easy target after Republican Scott Brown's surprise win in a former Democratic stronghold put a focus on voter rage percolating across the country.
Trouble is, replacing Mr. Bernanke might have threatened the economic rebound by spooking financial markets; just as a failure by the EU to come up with a solid, realistic route out of the Greek debt mess could too.
First off, there's a reason Ben Bernanke should have been replaced, and it's not just "angry voters".  There's a reason voters were angry.  You know, a central bank head that couldn't see a housing bubble that he was involved in blowing.  How do you miss the shitty lending standards?  How do you miss the skyrocketing prices?  How do you miss the fact you cut rates to nothing?  Not to mention, how do you justify bailing out a bunch of insolvent banks that caused this mess with a massive taxpayer bailout as your "solution" to the problem (aided by a Treasury secretary that used to head one of those banks).   And if anyone asks to take a look at the Feds books, you politely tell them to piss off.  Can't imagine why the public might think you were at best incompetant, and at worse complicit in this taxpayer scam...

Secondly, reappointing him just because you're worried it will "spook the markets" is not a valid reason.  The stock market doesn't equal the economy dumbass, let it be spooked.

Just as the Democrats ignored their constitutents' hunger to see Mr. Bernanke's head roll and voted for his reappointment, so Greek and other European policy makers would be wise to ignore opinion polls until the EU has reviewed a progress report that Greece will submit on March 16.
No.  The US voters have a reason to be angry at the Democrats reappointing "Helicopter" Ben. Ask the Democrats if ignoring the voter works out come midterms.   Greek voters similarly have a reason to be angry at the ridiculous spending habits of their government...but if they're protesting to "maintain the status quo" then they're completely offside.

Wednesday, February 10, 2010


This describes the current state of most politicians, everywhere, ours included. 

Read this and tell me you don't want to punch somebody (or several people) in the face.
The head of ING Direct Canada, the country's sixth-largest mortgage lender, is warning Ottawa not to pull back too quickly on mortgage rules, lest that causes the very thing everyone wants to avoid – a swooning housing market.
Really? In my previous post, Canadian Banks want WHAT? the big 6 wanted TIGHTENED lending rules.  Now piss ass #6 is doing an about face, Seriously, the "save your money" guy from TV.  I'm fucking sick of banks DICTATING to politicians what they should do.  Seriously, any politician with balls would say "Thanks for the advice, now shut the fuck up."
“High level, one-stroke fixes are too simple, and can have a very large impact,” said ING Direct chief executive Peter Aceto. “I worry about government-based tightening of the mortgage rules creating a much worse reaction – too fast of a cooling, which is not really good for anyone.”
Bullshit. It's certainly good for homebuyers in that maybe we could actually restore housing affordability to Canadians.   And while we're at it, was the high level one-stroke fix of dropping interest rates to historic lows a problem? How about throwing money at homeowners in useless tax credits to build a deck?  How about allowing CMHC to cover next to every high ratio mortgage in the country?  Oh right, those are all "good" fixes.  Hypocrisy's a bitch, ain't it?
He stopped short of saying Canada is in a housing bubble. Still, the market “is hot and we are seeing some irrational behaviour” such as people engaging in bidding wars and waiving all conditions in buying a new house, he said.
Right, everything is just FINE as long as we don't use the B word.  Don't say it.   It doesn't exist if we don't say it does.  Seriously, don't say that fucking word or the shit will hit the fan.  Yes...we'll just say that homebuyers might be a little irrational, and that banks are being accomodative.  Problem solved...just don't say that know...the one we talked about...rhymes with trouble...SHHH.
"You can't go from 100 km/h to zero in a nanosecond without suffering harsh consequences," they wrote. "Newton's third law is the best caution that can be served up with respect to abruptly altering Canadian mortgage rules as per some of the whisper talk leading up to the March 4th federal budget after the currently government sharply liberalized the mortgage market in early 2007."
No shit.  We're talking about taking our foot off the gas and possibly braking, not about know, before we run into a giant fucking brick wall of DEBT which WILL stop the car when we run into it at 200kph.   The bigger we blow this bubble the more pain in popping it, so maybe we should stop talking around the issue,  pretending it doesn't exist,  and actually deal with it.

Pop it.  Prove you're not a bunch of gutless cowards.

Tuesday, February 9, 2010

CREA - "We know best"

In, Monopoly on Information - CREA, I ranted about the lack of access to information.  Apparently I'm not the only one to take notice.
The bureau has asked the federal Competition Tribunal to strike down a series of rules CREA adopted in 2007 that tightened the MLS listing requirements. The rules state that an agent must handle all aspects of a transaction using the system, from the initial listing through to acceptance of offers.
Competition Commissioner Melanie Aitken said the rules restrict competition, because real estate agents are unable to hive off certain services within the system and offer them on a flat-fee basis. Agents who want to offer such services have been excluded from the MLS by CREA, she said.
“What that means is consumers don't have any choice, it's either all [services] or nothing,” she said.
Exactly.  God forbid someone just wants to list the property, pay a flat fee and not pay the full commision to a realtor.  You either play by their (anti-competitive) rules, or they take their ball and go home.

Naturally, CREA isn't taking this lying down; after all, they have a monopoly to protect.
Mr. Ripplinger said the country's 100,000 real estate agents already compete fiercely for business, with many offering cut-rate services even when using the MLS. Agents find it "offensive" that the bureau believes they are trying to keep prices high by restricting the type of services that can be offered.
"I can say CREA isn't to blame for any of this," Mr. Ripplinger said. "There is nothing that we do that isn't in the best interest of our clients."
The douchebaggery of the last line astounds me.


It's not our fault that we have to provide "full-service" to our clients because they're a bunch of idiots that will pay a huge commission if we do all the random "confusing" work for them.  And while we're at it, we make sure they know how confusing it is (so they have to pay us).    At the same time, we expect to present "simple" offers to these peons and have them turned around and signed in a few minutes "All you have to do is sign in triplicate in 10 spots and fingers crossed, they accept your lowball 10% over asking bid (you cheap piece of shit)!"  What? You want to READ it?  What are you CRAZY, there's NO TIME, buy buy buy!  Besides, you can trust us, we're "professionals".

End rant...for now.

Sunday, February 7, 2010

Canadian Banks Want WHAT?

I'll admit, I read this and was mightily confused. The big 6 Canadian banks are lobbying the Canadian government to tighten lending standards in order to prevent a housing bubble. The big question is why?

Higher required down payments and shorter amortizations would curb housing prices by cutting the amount most Canadians could bid for a house.

Such changes would also mean smaller mortgages and lower interest payments over the life of the loan - in other words, less money for the banks.

Don't get me wrong, this would be a fantastic idea to reduce risk to borrowers by allowing them less leverage by raising down payments and shortening amortizations. After all, it's CMHC that has to insure any home purchase where there is less than a 20% down payment. These actions would reduce the risk to the government. It would also reduce the number of prospective buyers as people would actually be required to save for a down payment. This would be a catalyst for a Canadian housing price correction (among others, such as the HST, rising interest rates, etc).

But why do the banks care?

The bankers' effort is all the more notable given the unique structure of the Canadian mortgage business. Banks get the profits from mortgages with their decades of interest payments, but have little risk of direct loss because of mortgage insurance.

Consumers cover the premiums and, because most mortgage insurance is underwritten by CMHC, the federal government ultimately takes the risk.

They aren't assuming the risk, the taxpayer is. I'll propose a few potential ideas of why the banks might suggest doing this:

1) They're actually worried about the secondary impacts of a housing bubble correction, and it's impact on other types of credit (non-secured loans, lines of credit, credit cards). The article assumes this is the big driver as well:
It's not the potential of big losses on mortgages that scares banks, says Mr. Routledge of Moody's. But if there were a spike in foreclosures in Canada, as has happened in the United States, consumers would likely struggle to make payments on other loans that aren't insured, such as credit card debt. Such a situation would also likely cause a big economic slowdown.
As Canadian mortgages are recourse, homeowners can't walk, and as such people should put their payments towards their house first. Banks may be a little leery of the prospect of people defaulting on their non-secured loans in order to make their mortgage payments, which banks would have to take a significant loss on (in many cases 100%).

2) Public relations. Banks sense the coming backlash worldwide as the US and the G7 in general are proposing banking taxes. This may be a game of "look we're responsible, don't tax us". Banks may also prefer to have the government take the lead in potentially pricking this bubble (so they can take the blame), as opposed to letting (eventually) rising rates correct things.

3) Counterparty risk of CMHC. Just because we assume the banks have "no risk" in their lending models doesn't mean that's the case. It's just been transferred to CMHC. If the banks realize that CMHC isn't prepared for the coming defaults and isn't adequately capitalized, changes will come. Either the CMHC will have to raise mortgage insurance premiums, the government will have to assume CMHC's losses in the form of deficits (and tax increases), or the goverment may decide to remove CMHC's taxpayer backstop (removing the banks no-risk play). I'm sure banks don't want to see an end to their no-risk lending model, so it's in their interests if CMHC doesn't implode.

4) Falling home prices might actually increase demand for mortgages amongst credit-worthy borrowers that are currently priced out of the market by marginal high-risk borrowers.

5) Do the banks have prop trades shorting the Cdn housing market? I'm not putting my tinfoil hat on here, but let's face it, we've seen this behaviour in the US before, pimping the product you're selling, while quietly positioning yourself for the opposite.

6) They're just really nice corporations that aren't interested in their own profits.

Of the 6, I'd think 1 is the primary reason, with 3 being a reasonable concern on the longer-term, and 2 in the near-term. But if this is the case, how much exposure must the Canadian banks have in their non-secure loans to justify taking this step?

It will be interesting to see how this plays out, and yes, this is yet another catalyst for a Canadian house price correction.

Saturday, February 6, 2010

Lies, Damned Lies, and Statistics

"Oh, people can come up with statistics to prove anything. 14% of people know that."
-Homer Simpson

The latest US non-farm payroll report was all over the place. It's like they have a bunch of monkeys throwing shit at a dartboard, and whatever sticks is the number they come up with. The headline number was that unemployment dropped to 9.7%, even though there were 20K job losses.

The revisions are the ridiculous part though:
The figure for November was revised higher, however, to show a gain of 64,000 jobs. That was initially reported as a gain of 4,000.
Well, you were only off by a factor of 16. Seriously...why bother reporting the initial numbers when the "revisions" are orders of magnitude larger ? Wouldn't it be simpler just to say "We don't know, it's a complete guess"? Or at least clarify your initial statement, "We think that the economy added about 4 thousand jobs, give or take a few million or so."

I also find it amusing that the G&M reported only the November upwards revision, "Good news, yay...people are happy!", without mentioning that December was revised downwards nearly double the intial estimate, from 85K job losses to 150K.

All in all, revisions between Nov. (+60K) and December (-65K) resulted in a net loss of 5000 jobs.

Here's the scary part though...
The department also revised its past employment estimates to show that job losses from the Great Recession have been much worse than previously stated. The economy has shed 8.4 million jobs since the downturn began in December, 2007, up from a previous figure of 7.2 million.
You "missed" 1.2 MILLION jobs somewhere? Whoops. You can bet your ass that if the revision was the other way and they had overblown the recession and "found" an extra 1.2M jobs, this would have been a headline, instead of a throw away comment buried in the middle of the article.

On a more amusing note:
The federal government has begun hiring workers to perform the 2010 census, which added 9,000 jobs. That process could add as many as 1.2 million jobs this year, though they will all be temporary.
Clearly they need all the help they can get based on the "numbers" they've been releasing lately. Here's a start, maybe you should start hiring people who can count. Hell, I'm sure there's plenty of unemployed Americans with stats degrees that would be thrilled to show your current crack team of monkeys how.

Friday, February 5, 2010

Canadian Moral Superiority - Stable Banks

From my previous post you might assume I place the blame for the current Canadian housing bubble solely on the consumer, the truth is far from that, however. While it's widely proclaimed that the Canadian banks make prudent lending decisions, and that's why Canada has avoided a housing collapse as in the US, I would differ on that assessment.

It takes both irresponsible borrowers AND lenders to create a bubble; after all, if borrowers are taking on too much risk by overextending themselves, it's the lender that's saddled with the added risk of missed payments or default.

Well, sort of. At least that's how borrowing and lending is supposed to work. But due to "financial innovation", banks have found miraculous ways to mitigate their risk, often by securitizing mortgages and selling the MBS to other people. Keep in mind that the risk is STILL there...but they've paid rating agencies to say that it has vanished! Cool eh? Some poor bagholder gets stuck holding these junk mortgage backed securities that get rated AAA, and they get to take the loss...and on top of that the banks get paid to securitize the mortgages.

So...who's buying all this crap? Among others, CMHC. And they're buying LOTS.

CMHC's charter supposedly is to provide Canadians with affordable mortgages, so if a borrower who would otherwise not qualify for a typical bank mortgage (requiring a 20% down payment) but who would still like to buy, can pay CMHC insurance on top of their rate.

Ask the majority of Canadians what CMHC insurance is for, and I assume at least half would get it wrong. Is this to protect the borrower because he's taking a risky mortgage due to the high amount of leverage? Hardly. It's so that if the borrower defaults, the lender can get reimbursed via CMHC. As such, the creditworthiness of the borrower is now made a bit pointless...since CMHC is covering their risk.

When I say CMHC is covering the risk, what I mean is that the federal government is covering the risk, which is ultimately backed by you and I, the Canadian taxpayer.

OK, so higher risk borrowers get stuck paying the CMHC insurance, and this is the risk premium they pay, right? Except if that was the case, why can't banks just charge higher rates to these sketchy borrowers? While it makes a lot of sense that the highest risk borrowers should pay the highest rates, in practice there's a tipping point where this will not work because the highest risk borrowers are the ones least able to afford the higher rates. As such there is a line where a bank simply won't lend to you because you're too big of a risk of default.

If banks could make money charging higher rates to these borrowers, wouldn't they? Or is it more likely that CMHC is charging insufficient rates for mortgage insurance for the risk of default that they're (or should I say we're) insuring. Is CMHC adequately capitalized? Or do banks even care about the counterparty risk since CMHC is backed by the taxpayer? If and when we start seeing price drops and mortgage defaults, we'll find out.

For a good description of the CMHC time bomb, I highly recommend Jonathan Tonge's blog post "CMHC-Canada's Breaking Point"

Over 1999-2008 Canada's charter banks increased their residential mortage credit from $241B to $469.6B, an increase of 94.9%. Over the same period CMHC MBS increased from $23.5B to $197.3B, a staggering 739.6% increase.

Are Canadian banks "prudent" lenders, or have they cleverly managed to offload all of their risk quietly onto the taxpayer, who is already saddled with enormous household debt from credit cards, car loans, and monstrous mortgages, not to mention the prospect of higher taxes (HST), and increased borrowing costs.

Are the banks to blame? Or have they simply been enabled by irresponsible politicians who are goosing the housing market through cheap credit? What happens when the Canadian housing market inevitably much is this going to drive up deficits (and subsequently taxes)?

Is it just me, or is this post full of unanswered questions? (yes that's another one). Seriously, I'm more agitated writing this NOW than when I started. The simple answer is, "We don't have the answers yet but the questions and potential consequences scare the shit out of me." Maybe it's time some of our elected leaders (I'm using that term loosely) started asking some of the same questions before this problem detonates. Tick tock...

Wednesday, February 3, 2010

Canadian Moral Superiority - Prudent Homebuyers

As Canadians, we pride ourselves on not being American, at least when it suits stoking our Canadian egos (hey you don't really want to get into a pissing contest with the sole superpower unless you're going to define the rules right?).

Case in point: the perceived "stability" of the Canadian housing market. We're lead to believe by Stephen Harper, Jim Flaherty, Mark Carney, and the mainstream media in general, that the reason we haven't had a US-style housing price collapse is because we have a combination of prudent, less risky banks, and responsible borrowers.

I'd challenge that on both points.

First off, let's start with borrowers. The average Canadian house price is 337,410 CAD. The median Canadian household income before taxes is 70,800 CAD. This leaves us with the average home to gross household income ratio of 4.77. Canadian housing prices are at record levels, seeing an unprecedented 19% increase YOY in 2009, despite the fact we just escaped the largest post-war recession to date.

At the peak of the US housing bubble, median US household income was 50,000 USD, with the peak housing price being 230,200 USD. This would put the ratio at the peak of the US housing bubble at 4.60. And yes, we're still inflating our bubble, US prices have collapsed significantly, bringing affordability back into many markets in the US. Meanwhile, the Canadian market continues to ramp to infinity thanks to cheap mortgage rates, panicked buyers that actually are buying into the "buy now or buy never" mentality that's pushed by the real-estate industry, and lazy media publications that print everything that's spoon-fed to them by the CREA (or the NAR in the US).

The rule of thumb (in the US) is that a house should cost no more than 3x household income. Keep in mind, this is the rule in a country that pays generally less in taxes, can deduct the cost of their mortgage interest from income taxes, and where consumers have the option to lock into a 30 yr fixed rate mortage, whereas Canadian consumers typically lock in for 5 year terms, and then face the risk of rising rates at renewal time. In general, the cost of carrying a mortgage in Canada should be higher than that of the US (and hence, it would be prudent to borrow less).

The scary part is, the prospect of higher interest rates, and the soon to be introduced HST on housing (coming in July), is actually motivating buyers to rush out and buy before these 2 events happen! Seriously, if you buy the day before the HST hits, and then try to sell the day after, do you really think that you can sell for the same price you paid, and just assume the buyer will pony up the extra 13% in taxes...or does the seller eat the difference?

As far as rates go, I swear it might be easier to explain the theory of relativity to some buyers than try explain the inverse relationship between mortgage rates and home prices.

Are Canadian homebuyers smarter than Americans?

If some dipshit jumps off a cliff and breaks his leg when he doesn't realize the water is only 6 inches deep, you laugh and say, "Holy shit dude! You OK?", you take him to the hospital, laugh about his stupidity and shitty luck and get the poor fucker fixed up.

If some other idiot that saw what just transpired does the EXACT SAME thing less than 5 minutes later...isn't your reaction more likely to be "Holy shit! What the hell is wrong with you?", and you leave the idiot screaming in agony just to teach the stupid ass a lesson.

That's us...idiot number 2.

Tuesday, February 2, 2010

Spending Freezes, Obama Style

I wish I could propose a "budget" like that in my personal finances and get some idiot to fund it.

Seriously, the math is staggering. The US is projecting spending $3.72T this year and $3.83T next year. To put that in perspective, they're spending 172% of revenues this year and 150% of revenues next. It's not like they "just missed", they're not even in the same ballpark.

While we're on these figures, the deficit projection for next year, seems to assume that government revenues will increase from $2.16T to $2.56T. This is a staggering 18.5% increase in revenues. I'm not entirely sure where that is coming from. I guess they're really counting on that immediate recovery that absolutely NOBODY is projecting. Good luck with that.

Seriously, what are the Vegas odds on this "actually" occuring? I mean REALLY. The 18.5% revenue increase is about as likely to happen as pigs flying. The only way they raise revenues that much in a year is if the US military seizes it from the sheep by force. And as for the second bet, it's pointless betting on this, not so much that that the US government will choose to reign in spending, it's a matter of when the bond market will tell the US government to reign in spending.

Mr. Obama's budget offers tax cuts for businesses, including a $5,000 tax credit for hiring new workers this year, help for the unemployed and $25-billion more for cash-strapped state governments.

Really? Businesses are not going to hire people because your bribe them to. You hire people because you need them to do the job you're paying them to...or you don't hire. The only thing this tax cut will do is reduce revenues to the government by cutting taxes being paid by companies who were going to hire anyways.

The deficit for this year would surge to a record-breaking $1.56-trillion, topping last year's then-unprecedented $1.41-trillion gap, a number which had dwarfed the previous record of $454.8-billion set in 2008 under former President George W. Bush.

Congrats, not only have you tripled Dubya's (record-setting at the time) deficit, you've managed to do this 3 straight years...

The deficit in 2011 would total $1.27-trillion, the third straight trillion-dollar-plus imbalance. The deficit would fall to $828-billion in 2012 but would remain at levels surpassing any previous deficits through 2020.

...epic fail. The US is lucky they can rely on the strength of the world economy to provide them all this money to waste in their time of...WHAT? THEY need money TOO? Well, FUCK ME!

The deficit for this year would be 10.6 per cent of the total economy, a figure unmatched since the country was emerging from World War II. The administration does not trim the deficit below 3.6 per cent of GDP for any year in the next decade, failing to meet its goal of lowering the deficit to 3 per cent of GDP by 2015.

Par for the course...of course it won't come to this, because SOMETHING will force a change of course long before 2020.

Mr. Obama's new budget attempts to navigate between the opposing goals of pulling the country out of a deep recession and getting control of runaway deficits. The administration insists that once the recession is history, the government will turn its attention to attacking the deficits.

WTF. "Technically" the recession already ended with 2009 Q3 growth. So deal with the deficit! Unless they're talking about when the NEXT recession ends...

This is my favourite part of the budget though:

In a bow to worries over the soaring deficits, the administration proposed a three-year freeze on spending beginning in 2011 for many domestic government agencies. It would save $250-billion over the next decade by following the spending freeze with caps that would keep increases after 2013 from rising faster than inflation.

Military, veterans, homeland security and big benefit programs such as Social Security and Medicare would not feel the pinch. Federal support for elementary and high school education would get what the administration termed the biggest increase in history. The Pell Grant college tuition program which would see an increase of $17-billion to just under $35-billion, helping an additional 1 million students.

A 3 year spending freeze, YIPPEE! Except it doesn't apply to about 90% of their expenditures.

Following such a courageous decision, I will BOLDLY propose my own 3 year spending freeze on the following:

Feminine hygiene products, tofu, beanie babies, Miley Cyrus albums, flights to Antarctica, plutonium, pocket lint, and time machines. (Actually, fuck that, I would totally buy a time machine if I could). It'll be tough, I know. I'll have to tighten my belt, but with some strong fiscal discipline, I think I can get by.

On a minor note, over the same period, I endeavor to fly first class wherever I go, leave my car idling whenever possible (and I'm filling up with the high octane shit now), buy a new car every 1-2 months, hire a personal chef, triple my alcohol consumption, and generally apply and max out every fucking credit card I can get my hands on.

But at least I have my spending freeze in place.