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.

TTM.

 

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!

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).

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 dot.com 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.