Juggling Dynamite

In the debate to overhaul financial regulation, Elizabeth Warren has divided Washington in her push to create a new consumer financial protection agency. I find it refreshing to hear from people who can't be bought. It seems they are few and far between these days. The banking/finance conglomerate is so often a self-serving sewer of greed and corruption. Warren's clips are hopeful because they remind us of the principles that should be governing our financial reform discussions from here. Watch this NY Times Video clip here.

This afternoon the familiar low volume “two guys trading” are driving stock prices higher again, supposedly based on Fed Chairman Bernanke's testimony today that the US economy is still weak and still needs emergency low rates to try and stave off a retrench into recession. Wow that is exciting!
The options speculation index today is back at record-breaking bullishness, about 30% higher than it was when the stock market peaked in 2007! We are living in wacky times indeed. I can't help but shake my head that we could be back in the wack so fast this time. Usually it takes at least 3 or 4 years for stock prices to soar this far past the realm of reality. This time, it has happened in record time albeit with remarkably few participants. This is precisely of course, what makes present price levels so incredibly dangerous for investors now. Week by week the market taunts a few more “sheeple” into the madness. Those who suffered heavy losses in 2008 are particularly vulnerable here. They feel desperate to regain losses. They want to believe in the market again. They want to somehow end the agony.
Stock markets are a mental game. They prey on those who are unable to ignore the taunts, those unable to sit tight and wait for attractive prices to re-appear.
But at times like this it is more important than ever to resist the temptation for wild abandon. Rational people must plug their ears and hum. They must say focused on rational facts in order to avoid the looming sink holes.
The facts are that government intervention notwithstanding, the US housing market and its dependent economy have stalled out again and are sliding back into decline. Today’s data shows that US new home sales hit a new record low in February. The emergency rescue has cost more than a trillion and failed in lasting effect: housing inventory is back towards 9 months supply and that is not counting some 5-10 million homes just heading into foreclosure. There are more than 18 million residential units sitting empty in the US today; homebuilders are on average taking more than 14 months after completion of new units to find a buyer. Meanwhile international markets are no better off; in fact some have more downside ahead of them than even the US at this point. Canada, New Zealand, Australia and China are blowing up their own latent credit and real estate bubble as I write. Most European countries are slipping back into recession and worse. Global demand is decelerating off its sugar high of the past few months. The Shanghai index has stalled since December and several other emerging markets have registered negative gains year to date.
Meanwhile the VIX has fallen back to 17 (the level it last touched btw at the S&P peak of October 2007 and the TSX peak of 2008).
Now is not the time to fall asleep with complacency in these markets. Protect yourselves. Remember crazy prices can go crazy for longer than we like; but that doesn’t mean they are right, good or rational. Protect yourselves. Think about your plans for summer fun. Then plug your ears and hum.

For the past 4 years I have been increasingly concerned about unsustainable trends in the Canadian housing market.
As I have mentioned many times, Canadians have been lulled into a false sense of security by mortgage rates that are now at their lowest level in 75 years. Our government mortgage agency CMHC has been underwriting the vast majority of Canadian mortgages for the past few years. Between 2007 and 2009 CMHC underwrote nearly 90% of all Canadian mortgages. They were able to fund this by issuing Mortgage Back Securities: the same weapon of mass destruction that eventually blew up US housing and credit markets in 2007.
A new 51 page report from Alexandre Pestov at the Schulich School of Business examines these trends in the Canadian market and comes to some stark warnings:
– “Bubbling” in the Canadian housing market over the past few years was no less intense in Canada than it was in the US
– the extent of the run up in major Canadian cities was at par with the 20 largest US metropolitans
– housing affordability in the four largest Canadian cities (Vancouver, Toronto, Montreal and Calgary), is currently at par or worse than that of US hotspots in their boom
– Canada has experienced the same real-estate bubble as the US did. It just hasn't burst yet:

“Canadians own no favours to Steven Harper, Jim Flaherty and Mark Carney. They did not prevent the bubble from bursting; they merely postponed it. There are no miracles in how the Canadian housing bubble managed to stay afloat. However, at the end, more homeowners will suffer from the upcoming housing market correction. The ballooning national debt due to the careless sub-prime lending of CMHC and wasteful programmes designed to re-inflate the housing bubble will be shared by all Canadians. According to the CMHC financial statements, the corporation has only $8 billion equity backing $200 billion in assets8. Once defaults rise, the Canadian government will have no choice, but to bail out CMHC. The scale of bailout will likely dwarf all other financial emergency responses done by the Canadian government in the history of Canada. Higher national debt, increased taxes and reduced social services will be the direct result of the Harper government’s intervention to maintain an illusion of the Canadian housing market health.”

Canadian mortgage rates will trend up as the government withdraws its emergency interventions. Many over-levered Canadians will face mortgage payments which become impossible to service. We are not nearly through this challenging period.
The full report is worth reading here: The Elusive Canadian Housing Bubble