Wednesday, May 9, 2012

The Flip Side of Fear

Fear and confidence make the markets go 'round (some mistake confidence for greed. Greed drives both fear and confidence. "You fear loosing money" or "You're confident you'll make money"). Most economic reports are intended to drive one or the other. The power of intention can be much more powerful than that of literal action, but it can also be a dangerous game. Flip-flop too much and you lose credibility, make too many contradicting assertions and through your own words people can find the truth.

Over the last few days I have noticed numerous "there's no bubble" and "household debt is shrinking" articles. As per usual "housing starts" are used as the evidence and within their little self-contained article bubble of hope with no outside reference what they say would appear to make sense. So let us recap recent events.

Back in April I first began pointing out Canada's housing problem, and noted that the problem isn't really in housing itself but in national GDP growth. The banks made it very clear that stricter rules could hurt our "economic recovery" (yes, even 4 years later we still refer to this shit show as a "recovery"). The reason it could hurt our recovery was that more than 1% of anticipated GDP growth is to come from consumer spending, spending that is funded by loans, that is leveraged on housing. It is the housing bubble that is providing the basis for our current level of consumer spending.

Shortly after, the interest-rate fear mongering began. I stated then, and I maintain this position that Canada's interest-rates can not rise as long as the U.S. keeps theirs low. A recent 'Canadian Business' article has just confirmed this:
Flaherty can count on his trusty herding pooch, Bank of Canada governor Mark Carney, to issue regular warnings about the hazards of reckless borrowing. But virtually nobody is suggesting Carney raise the overnight rate to make borrowing more expensive. U.S. Federal Reserve chairman Ben Bernanke has signalled he won’t raise American rates until late 2014 at the earliest. Should Carney move earlier, he could injure Canada’s exporters by driving the loonie up. Unsurprisingly, on April 17 the Bank of Canada again held the overnight rate at an anemic 1%. So the cheap loans continue.
Take note also that the article refers to the problem in the context of 'herding cattle'. The fear and confidence game must be carefully managed. You don't want too much fear, you don't want people to know there is a 'problem', only concerns. For a real problem might trigger a housing collapse faster than you can say Lehman Brothers. So now that they've driven fear, they have to restore confidence. Spending must continue, housing starts must continue, loans must continue, just slower.

So now, on the flip side of fear none of the above is a problem. In a period of just a few weeks the "financial experts" insist that the tables have more or less completely flipped. They are telling you that there is no housing bubble, household debt is manageable, and possible drops in consumer spending won't be a problem. They continue to insist that an interest-rate hike is coming, and perhaps it is but I believe our financial situation may have to significantly change for that to be the case.

Of course it is completely contradictory to expect that households can deleverage their debt and that housing prices can continue to climb at the same time without some sort of outside influence.
Overseas investors are snapping up properties in Canada's largest cities, driving up prices and pushing ordinary Canadians out of the housing market, observers say.
Well that might explain it right? The funds have to come from somewhere, if they're not coming from Canadian households then they must be coming from foreign investors.


The housing bubble isn't the real bubble, the real bubble is the consumer spending that has been leveraged on our housing market which Canadians are now being priced out of. Canadians who have watched as Canadian business is bought up overseas may now also end up paying rent to overseas housing investors. However housing prices can not climb indefinitely. As I pointed out in my last post an entire generation is essentially already priced out of the housing market. The higher we push this market without allowing deleveraging to occur, the harder the crash will be when it comes; and it will come.

As I've said before, Canadians are out of wiggle room. They are trapped between high energy costs, low-interest rates and zero saving incentive, over-valued assets, U.S. monetary policy and an economic expectation that they spend, spend, spend. The confidence isn't justified, and the European depression simply underscores this point. Japan is hurt, Europe is hurt, the U.S. will soon be hurt (again), and then it's our turn. That's the reality of having a global supply chain of which we depend.

The less wiggle room Canadians have, the less sense the 'cattle herders' tend to make. Manufactured confidence is the flip-side of managed fear.

UPDATE - The truth might hurt, but this is the reality:

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for CenturyLink

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

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