Sunday, October 21, 2012

Growth Expectation Nullification

So, would you mind if I take a moment for myself? Being a simple blogger and amateur trend forecaster, all I really have to provide you any reason to continue reading this blog and my take on current trends about Canadian and World events is to have some sort of a track record.

I came across a couple of articles today:

Don’t expect Canada’s housing market to have U.S.-style meltdown
Carney’s track record: Not as good as one might think 

These are really great examples of "news", if you read my blog you already know everything contained within these posts. However, I'd like to highlight a few points.

From the first article:
There won’t be a rate hike – not yet, anyway. But the betting among some Carney watchers is that the bank governor will drop his implicit projection of higher rates soon, or at least modify the bank’s now-familiar pledge of “some modest withdrawal” of rock-bottom rates and monetary stimulus.
Mr. Carney is facing an unusually uneasy global economic environment. China’s potent economy is slowing. Europe’s debt crisis continues to fester. And while U.S. prospects are looking up – most notably in housing – the uncertainty surrounding the November election and the looming fiscal cliff have economists and investors on edge.
But it is the home front that is probably keeping Mr. Carney up at night. For the first time in five years, he has a major domestic problem to fret about – housing.
It was inevitable. When the average price of a home in Vancouver hit $1-million, it was pretty clear that prices had finally outstripped the ability of most buyers to pay.
And yet debt, particularly mortgage debt, continues to rise. Canadians are suddenly flirting with the same debt danger zone that triggered real estate crashes in the U.S. and Britain. New figures from Statistics Canada show that households are carrying a record level of debt relative to disposable income – 163.4 per cent in the second quarter, up from 161.7 per cent at the end of last year.
 Despite the Bank of Canada’s international reputation for prescience, its calls suggest it’s struggling, like all central banks, to figure out the correct course in challenging economic conditions.
Back in April, I wrote a post 'Canada's fantasy economic outlook is at odds with reality'. Here's my favorite part:
The interest rate fear monger

Mark Carney has been in the news a lot lately preaching about the
"inevitable" interest rate hike. I've already written a post on why I think he's bluffing and as long as those fundamentals remain true we will not see an interest rate hike. The fundamentals may even be worse than I originally thought as it appears that mere talk of a rate hike results in stronger Canadian dollar. That's the "free market" for you: central banks making announcements and the people thinking they mean something important.
Talk can net big results, and the amount of talk Carney has been doing I believe is to drive fear. He can not in reality raise interest rates as I've pointed out, however the 'fear' of rising interest rates is what I'm betting he is banking on. I now strongly believe that the interest rate hype is meant to illicit a response from consumers in hopes that they get their debt under control themselves as the central bank can not make any meaningful changes to it physically. Canada is stuck between a rock and a hard-place. High energy prices are driving up the cost of living which is being supported by consumer spending that's fueled by cheap lending which is leveraged on an overvalued housing market. This problem then compounds when you consider that a large portion of Canada's anticipated GDP is based on this consumer spending. To add insult to injury the effects of peak oil on oilsands production that I've been telling you would happen are now happening.
I always wanted to say this: "You heard it here first, folks!". Anyway, there you go.

One step closer to reality

As we move further and further along I really am finding it hard to blog about our present condition. To me, this is all plainly obvious. It was obvious back in April. It was obvious last year. It's been obvious since the current crisis began.

I really would think that by now, the problems would be obvious to pretty well everyone. Then, my hopes get demolished as I read crap like this.

The authors conclusion?
"Given the current economic data and low inflation, the prudent move for Mark Carney is to lower the overnight rate by 25 basis points."
Seriously folks, is nobody noticing that world-wide: low interest rates and stimulus are doing jack shit? Keep in mind this suggestion is coming after Flaherty "tightened" the mortgage rules. Still think everything is going as planned? That the housing collapse can be attributed to Flaherty's "tightening"?

What you are seeing play out before your eyes is the "housing conundrum" I also described back in April. Now, I ask you oh great mainstream economists: What does it mean when the government sends a signal to tighten monetary policy and the central bank in response makes the money cheaper? Maybe this would describe it:
Canadians are now out of wiggle room. The Canadian economy is now literally at war with itself.
Canadian authorities are stepping up oversight of the nation’s housing market even as lenders such as Bank of Nova Scotia warn that tougher rules could threaten the economic recovery.
So we're afraid the housing market will stop growth? Well that would would be bad but...
Policy makers, including Finance Minister Jim Flaherty, have said that parts of Canada’s housing market have become overvalued as consumers add to record debt levels, encouraged by some of the lowest mortgage rates in decades.
So we're also afraid of more growth? ok...
Scotiabank (BNS) chief executive officer Richard Waugh warned about making reforms to CMHC that could have “unintended consequences” and cause the market to slow too much.
Oh I see, we want the overvalued housing market to grow, but not too much.
It must have not grown, too much.

Now, mixed within the two articles I linked at first are various remarks by Carney about our sound financial system, etc, etc. The usual clap-trap. Why the hell would anyone believe this stuff? It's all a confidence game folks! I hear people constantly refer to our deposit insurance corporation like it's some sort of demi-god. You know, folks, the U.S. had one of those too. The FDIC. Guest what? It went bankrupt. Viva-La-Bailouts! So how's ours doing?

According to the CDIC's 2010 Annual Report, CDIC protects $590 billion CAD in total eligible deposits, and has $1.95 billion CAD in assets to meet insurance claims.[4] This amount represents 0.33% of total eligible deposits. The CDIC is also authorized to borrow up to $17 billion if necessary from the federal government or the financial markets, and may request further funds from Parliament.
So it can meet 0.33% and afterward can borrow money or needs a bailout. Super.

Are you starting to get the picture folks? Prepare prepare prepare!

What's to come

Interest rates will be going up, but if it happens it will be in concert with the same sort of announcement in emerging markets. The currency war that's currently in full force will eventually see one of these countries completely reverse their interest rate policy. Appreciation of their currency will shortly follow. The only markets really in a position to attempt this maneuver are the emerging markets. Or rather, I believe they are attempting to position themselves so that they can do such a maneuver. I believe Canada is strategically trying to predict who the winner is going to be, and right now all of their money is on the emerging markets horse.

Now, I'd like to be clear here as it can be confusing. Decoupling from the USD and no longer using it as a reserve currency are very different. What it means is that our currency would greatly appreciate above theirs creating a large trade imbalance. This would become necessary if the emerging markets were to do the same action if we intend to trade with them as the same trade imbalance the U.S. would experience would also be experienced by us. It is this action which will trigger the switch from deflation into hyperinflation as the USDs world wide rapidly lose value as one by one they are sent back to the U.S. in a snowball effect that will quite likely reshape the world. When this happens, anyone still on a USD standard and pairing their currency to the USD will experience the same increases to cost the U.S. is going to experience. Europe too, the Euro's fucked. Exponential growth is dead, and there are no more frauds or bubbles left beyond the USD itself to grow ourselves out of this mess.

Canada's GDP is going to start taking hits as the housing credit drys up. Lower and lower interest rates won't bring an infinite amount of debt, Canadians are tapped. This GDP interruption is going to then come back around full circle, hurting expectations,and voila: Canada's own period of great deflation will have begun.

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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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