Wednesday, August 22, 2007

Maybe this time it really is different?

I have to admit that four straight days of TSX increases has got me in a bit of an ignorant stupor. Beginning last Friday, when the US Fed dropped its short term interest rate by 5o points (0.5%), the markets have undergone a bit of stabilizing and a subsequent rally that has the TSX recovering 50% of its recent drop.

A recent Decima poll produced some rather unexpected (on my part) results:

The Canadian Press-Decima survey found that 55 per cent of respondents didn't think the market troubles herald a recession, compared with 22 per cent who were pessimistic. It also found that 66 per cent of respondents reported being unaffected by the financial tumult.

Another four per cent said they'd lost a lot of money, 17 per cent reported losing some money, and five per cent said they'd made money.

Almost half of the people surveyed said they felt the worst was over and the market will rise again soon, while 28 per cent said markets will continue to fall in the next few months.

I don't wish financial hardship on anyone. I think that savvy investors, both RE and equities, can avoid losing money in most market cycles by paying attention, getting good advice, and trusting their instincts. That said, from watching the markets with more care and attention, mostly due to this blog, for the past 8 months I'm surprised that more people aren't concerned about both over-inflated markets.

I consider myself fairly risk friendly. I like to play poker and I don't mind losing. I've found that by learning and paying better attention, I lose far less often. I have a similar outlook on the equities market: I'll take a chance with a percentage of my portfolio, rarely exceeding 20% speculation. The rest of my investments I consider value. That means I look for good deals. My favourite ratio is price to sales. I like to think that for every dollar of my own, I should get at least a dollar of the consumer's.

During recessions the pickings are slim for this philosophy, mostly because the peeps aren't a buying. During periods of high inflation (like now, and yes I know that's unsupported) the pickings are also slim because stock prices are hyper-inflated. Long story short, I have some cash in my trading account that I can't find a suitable place to park. Usually in transitional markets the choices are plentiful. I don't believe that this market is in a transitional phase. And I do believe that is a direct result of Central Banks' irresponsible actions over the past few weeks... even years.

Take this headline for example: Central banks are stealing from the average citizen.

What happens when fiscal irresponsibility gets rewarded with bailouts? You get more fiscal irresponsibility.

But as our credit bubble undergoes an ugly unwinding, it's dawning on folks that central banks lie at the epicentre of the problem.

Andy Xie (Financial Times) writes: "The global credit bubble is bursting. This bubble is primarily leverage financing for owning risky assets. The people who were responsible for what happened played with other people's money, marketed arcane financial products with false promises of fat profits, but stuffed their own pockets with big bonuses. Neither these masters of the universe nor their greedy but naive investors deserve to be bailed out. They deserve what is coming to them.

"The central banks should focus on price stability, not financial market stability, and should provide liquidity only to contain the multiplier effect of the bubble bursting on the economy. Nor should central banks stimulate to avoid recession at any cost. Business cycles are not bad. Excesses must be followed with cleansing...

"Markets have been taking more risk than they should because they believe that central banks will come to their aid during times of crisis, like now. The penchant of Alan Greenspan, former U.S. Federal Reserve chairman, to flood the market with liquidity during financial instability is the genesis of this 'central bank put.' As long as this expectation remains, financial bubbles will occur again and again. Now is the time to act. Let the crooks go bankrupt. Central banks should bury the Greenspan 'put' for good."

Now to paraphrase Mr. Wheaton (sorry couldn't resist one last poke): one person's opinion does not an expert analysis make. So I'll give you this one too, also from the same article:
U.S. Comptroller General David Walker was quoted Tuesday (also in the Financial Times), as follows: "Drawing parallels with the end of the Roman empire, Mr. Walker warned there were 'striking similarities' between America's current situation and the factors that brought down Rome, including 'declining moral values and political civility at home, an overconfident and overextended military in foreign lands, and fiscal irresponsibility by the central government.'"
I'm not suggesting that the doomsday scenario is imminent, but is it not telling of a considerable problem when federal financial leaders split on economic policy so diversely? What is it going to take for the markets to start paying attention? Given how interconnected the RE and stock markets have become since the dawn of the ABCP debt-funded retirement mutual fund mess, something drastic needs to take place in the stock market for the drastic correction I'm looking for in the local real estate market.


Village said...

I say everything with no authority, no economics degree just opinion. =)

I agree with your high inflation scenario. I view inflation as monetary(M3) inflation. Price I believe is just a symptom of that. Before the US stopped publishing it's number, I think it was running around 10%+.

It seems to me, that because of this. Stock markets numbers, though large are just representing the rapid decline of the fiat currency these last few years. All this newly minted wealth needed to go somewhere, houses and commodities seemed to be the place. People wanted tangible (I can touch) items after the tech bubble.

Since I don't expect central banks to take their medicine and flush out the system. I prefer to try and predict the next bubble formation. Personally I'm betting on oil/energy and precious metals.

This doesn't mean I don't expect the stock markets to take a beating. I think we are in the calm before the storm. Too much money was bet on subprime/alt-a loans that are going to go bad. The numbers they are talking, I just don't believe it's possible not to have a greater fall out into the general economy. Hell, even if housing doesn't crash. The amount of money it's costing people to service their mortgages comes out of their starbucks/old navy shopping budget.

Somewhere, someone is going to get hit by this bus. Probably me, when I've finally capitulated that this time it is different.

Sorry for the long diatribe.

Anonymous said...

It's easy to get down somedays but my thinking is the credit tightening rules is going to be huge,think of all those people that won't qualify. I bet 50% of the FTB's won't cut the mustard with nothing down unless they are making over $100,000,it just needs to filter thru over the next couple of months.

Last weeks smack down was a wake up call and this is far from over but in the end the world will still function and a recession will happen,remember September and October are notoriously harsh months especially when bad news is every where.

The early 90's recession was so slow you didn't notice it,you were too busy calculating out Freedom 35,then boom,a pullback of 15 % then flat for 7 years when lots of stuff was still getting built,people were still buying cars,and TV's,they just slowed their pace and supply/demand took over.

Chin up HHV,the markets never tanked huge in the early 90's and I dont recall any massive stock market declines in 81 where they were jumping out windows, they just simply stopped buying cause they couldnt afford it and new lending standards will be the catalyst and higher interest rates are inevitable in Canada though that may be set back a couple months.

I'm playing the oil & metals angle too cause those are areas that the world will always need,you just have to be picky on what you buy and play the trends.

There's another diatribe for ya. :)

renter said...

i have a friend who just bought a condo downtown, and she's convinced that it's going to go up and up and up in value. she mentioned something the other day about being sure that it would be up $50,000 in the next few months (it's a $260,000 condo). i think people are really unwilling to believe that anything bad could happen, and they're clinging to that.

Anonymous said...


"Countrywide's CEO sees housing- led recession"


Anonymous said...

"i think people are really unwilling to believe that anything bad could happen, and they're clinging to that."

Bad for them that is. It will be GOOD for me, lol.

Village said...

Coventree and other non-bank owned funds failed to roll over most of their asset-backed commercial paper last week as mounting losses on U.S. subprime mortgages led investors to shun all but the safest government debt. The funds have assets of almost C$40 billion in debt due within a year in a market worth about C$120 billion, according to ratings company DBRS Ltd.

Looks like we're going to start feeling out own credit crunch.

hhv said...

I'm wondering if Fisgard Financial is going to get hammered here, locally? Anyone know anything about their mortgage business?

vg said...

more recesion coming in the US talk this morning,when you hear it first thing in the morning the story usually has some legs to it.