Thursday, August 9, 2007

Have No Fear...

The Bank of Canada is Here!
In light of current market conditions, the Bank of Canada would like to assure financial market participants and the public that it will provide liquidity to support the stability of the Canadian financial system and the continued functioning of financial markets.

These activities are part of the Bank's normal operational duties relating to the stability and efficient function of Canada's financial system. The Bank is closely monitoring developments, and will deal with issues as they arise.

Now correct me if I am wrong, but isn't this just the bank stating "don't worry, if interest rates have got you down, we'll just print more money to keep things flowing"?

I'm no economic expert. All of my formal economics training has come in the form of a single 300-level Canadian Political Economy course at UVic. But I don't see how this could possibly be celebrated as a good thing. Let's look at what's happened in markets over the past 5-6 years:
  • Dot Com burst leads to liquidity issues
  • September 11, 2001 creates market uncertainty
  • US Fed, quickly followed by BoC, drop interest rates (in the US almost to nothing; Canada bottoms at 2.25%)
  • Corporations and individuals borrow and spend
  • Stock market rises considerably over a 3 year period
  • Housing markets in the US and Canada go on a wild ride up where not only month over month inflation but year over year inflation numbers are so mind boggling that 24-year-old would be Donald Trumps borrow excessively, lie on mortgage applications and artificially inflate neighbourhoods
  • Housing markets in Victoria go on a wild ride upwards fuelled by 65-year-old would be Donald Trumps spending like Victoria Beckham on third, fourth and in some cases even fifth speculative non-rental pool properties, thus artificially inflating property values
  • 2007: bottom falls out of loose lending practices in the US, sub-prime market blamed
  • Later 2007: sub-prime woes quickly blamed for foreclosures on properties held by prime mortgages (you know, the zero risk folks) who would simply rather not own a declining asset and get stuck paying for ridiculous over-inflated prices
  • Cramer calls Armageddon, demands Fed drop rates, Fed doesn't, markets plunge
  • Stock markets start bouncing around like a 2-year-old blowing raspberries on a jolly jumper; traders continue making money hand over fist
  • BoC says: "don't worry, we'll print more money, nothing to see here, but we're going to raise rates none-the-less"
Am I the only one left scratching my head? Seems to me the writing is on the wall, the BoC is acknowledging it, but no one is bothering to read it.

Forgive my tongue-in-cheek brief, historically inaccurate, based-on-truth synopsis of market activity into 12 points, but you get my meaning, non?


vg said...

I'm scratching my head too HHV,are they basically predicting what we all knew as the worst case scenario of a major meltdown as a real possibility so prepare yourselves ?

If the subprime isn't our(Canada's) problem as all the so called experts have been harping on then I say BS,the BOC is being honest and giving warnings that rough seas are ahead just as they have been raising interest rates to ward off inflation. The next while here will be very interesting and an historical moment in world finance. But should we be suprised ? all our research for the past few years have said this could get ugly.

The part that bothers me is the US markets didnt have a problem the past year as bad news leaked out in steady streams and they kept pumping the DOW up higher day after day. There was no acknowledgement,no slight market corrections,just throw caution to the wind cause their aint no problems,everyones a real estate millionaire,time to pay the piper.

PS i am reading an article that todays French bank problems are related to derivatives,the scariest scenario cause they are like all the mortgage backed securities no one really knows who owns what where.

Anonymous said...

At the moment, the BOC is reacting to a perceived liquidity crisis, and doing it because the US Fed reacted to the European Central Banks injection of about 95 billion Euros into the market earlier today. It is related to the US sub-prime affair, but not exactly the same. The markets are volatile, and will continue to be so. Too early to say if it is the beginning of the end, or the end of the beginning.

vg said...

Just looking at some important indicators on the Volatility index known as the VIX to those not familiar with it. The past 3-4 years it has been at lows not seen since the 90's when the tech boom was in full speed ahead mode. If it breaks higher than 25 up to 30 range it will indicate some serious market corrections ahead as it moves up to the 50's which was the general area in the 1998-2002 area til the easy credit came in to play.
Makes you feel like going out and buying a condo don't it ?

Village said...

Free money for all!! It seems to be this could have the reverse effect. They talk a lot about calming the market, and managing 'expectations'. To me, this looks like acknowledgment there is a larger problem then what everyone has been saying.

Psychology is a funny thing. If the demand for debt dries up. Does it matter what happens to the rates?

olives said...

I am sorry I am so uneducated: How does the Bank of Canada increase liquidity? Are they lowering bank reserve requirements? Are they printing loonies? How do they do this? Help!

olives said...

okay I see they have increased the monetary base by loaning the banks money, thereby increasing the banks' reserves.

Well isn't more credit and debt just getting created? How does this help?

olives said...

For anyone else who needs an explanation:

Read "Sudden Demand for Cash"

House Frau said...

Here is an article on Canada's housing marekt Cooling. It says the same stuff they said about the U.S. I think it will be fast and ugly.

Anonymous said...

I don't know about you folks, but I just moved my entire stock market life savings today to supposedly risk free T-bills in the money markets with guaranteed interest rates.

Next, I'm going to put my Victoria house on the market, and then I'm just going to sit back (hopefuly after I sell the house) and wait for the big crash.

Good luck everyone!

Anonymous said...

Anon 5:20.

I would love to sell our south Oak Bay House but we have 4 kids and finding a large enough house to rent might be a problem. I would love to sell it and move to a trailer park in the meantime.

I think you are doing to the right thing.

vg said...

Smart move anon 5:20, my investments are holding up well but if things change in the next few days I will be going all to cash,capital preservation is key. Monday has the possibility to be a Black Monday scenario according to a stock site I subscribe to so be cautious out there.

Anonymous said...

Speaking of Black Mondays, check this out.


"Black Monday is the name given to Monday, October 19, 1987, when the Dow Jones Industrial Average (DJIA) fell dramatically, and on which similar enormous drops occurred across the world. By the end of October, stock markets in Hong Kong had fallen 45.8%, Australia 41.8%, the United Kingdom 26.4%, the United States 22.68%, and Canada 22.5%. (The terms Black Monday and Black Tuesday are also applied to October 28 and 29, 1929, which occurred after Black Thursday on October 24, which started the Stock Market Crash of 1929.)

The Black Monday decline was the second largest one-day percentage decline in stock market history."
"In 1986, the United States economy began shifting from a rapidly growing recovery to a slower growing expansion, which resulted in a "soft landing" as the economy slowed and inflation dropped. As 1987 wore on, it seemed that recessionary fears were not warranted and that boom times would continue. The stock market advanced significantly, peaking in August 1987 at 2722 points, or 44% over 1986 closing at 1895 points. There were a series of volatile days that caused widespread nervousness leading up to the crash, with the market ultimately sliding downward."

Hmmm, gee... that doesn't sound like anything that's been happening lately does it?

hhv said...

Notice the dates though... it's still summer, many are away from actively looking at the markets, isn't it strange to see such volatility in historically quiet times?


I'm not sure about cash right now... I'm looking for fundamentally under-valued positions: buy low, hold, sell high... there are some good deals to be had during crashes, if you have the ability to weather the storm (time) we we have in abundance. I'm thinking 60/40 equities to cash holdings should be balanced enough. Really nervous, just reverse the split.

Prairieboy said...

Here's the link to the ROB article that House Frau pointed out.

Anonymous said...

hhv said "I'm not sure about cash right now... I'm looking for fundamentally under-valued positions: buy low, hold, sell high... there are some good deals to be had during crashes, if you have the ability to weather the storm (time) we we have in abundance. I'm thinking 60/40 equities to cash holdings should be balanced enough."

Well, if this is a mini-crash (4-8%) that might be ok and you can probably recoup an 8% loss on 40% of your stock within a year; however, if it's Black Monday kind of crash, it doesn't matter what stocks you are holding, they will highly likely going to take a significant hit that will take you much longer to recoup.

Remember, a lot of people out there buy mutual funds, and when they sell those funds, even the individual stocks being held that are no-brainer-gainers will take a hit as they are part of the mutual fund portfolio that was sold off.

Essentially, Black Monday kind of crashes aren't about logic or fundamentals, they are about mass panic. And what's different this time around if it happens is that we are now far more than ever in a Global Economy. This is why when US subprime issues arise, France is affected, and when France freezes accts worth 2.x Billion, Canada, USA, and most other major stock markets go into panic mode. It used to be that when one market went down, others would be ok, but these days, everything is interconnected and moves like one big wave. Some might be at the base of the wave and get less affected, others at the top, but essentially all move together and get impacted within a short amount of time.

If you want to buy low / sell high, then wait for the crash to settle, and when you start seeing the market going back up, then buy back in and reap the profits.

Taking a 3 to 7% overall loss by selling off today, will be a smart move if come Monday (or within the new few weeks) the market dips an additional 20-40%.

"You gotta know when to hold 'em, know when to fold them, etc etc lalala"

Anonymous said...

As I was just saying...

It's world wide:

"Investors fear the damage caused by the U.S. subprime meltdown runs deeper than originally estimated and will put an even tighter squeeze on credit markets worldwide.

The central bank actions calmed money markets, but more subprime problems are likely to surface in coming weeks,"

Note the usage of "MORE" in the above sentence. More of the same = more overall major stock market index losses.

Anonymous said...

One last post, just to actually prove my point about all major world wide stock indexes being extremely interconnected these days. Go to this link:

At the top under "The Markets" you will see the "World" tab. Below that you can click on Americas, Europe, Asia/Pacific & Africa/Middle East.

When you click each of those, the major stock indexes of each of those continents appear below.

Take a look at the synchronicity of the "Change %", and how they all either go up or down together over the next few days... for ALL continents! You can also click on the pretty graphs and compare the history.

It doesn't get more obvious than this.

Panic'ing and selling off sounds like a negative thing, especially if you've taken some losses recently; however, when a house is on fire, the first to panic and get the hell out, are the least burned!

Anonymous said...

And on CNN front page business news:

"Dow takes worst hit of 2007"

"Stocks have been selling off globally, despite an injection of liquidity by central banks around the world."

The banks injecting massing amounts of money into the markets are pretty much the last line of defence, if people ignore this, it's all over baby!

"There will be little economic news to distract investors from their credit fears. A report on import and export prices is due Friday, but is unlikely to move markets, and the calendar is light on earnings reports."

The "wall of worry" has started world wide people, GET THE HELL OUT NOW! Or come Monday, you'll be looking for a 3rd job!

Good luck!

Village said...

I'm holding about 30% of my meager portfolio in cash. I'm hoping commodities/precious medals take a beating. Long term, I feel they are a good bet. But short, I expect them to be sold to cover other loses.