Credit Revulsion Update

05/14/2013

 
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Tapped Out Canada?

Thanks to Pacifica Partners Inc. we have an update on their chart series showing that Canadians have hit a heavy ceiling of debt acquisition.

If new borrowers don't show up then it's doubtful that cash buyers will bid up prices. Cash wants a high yield to offset the term risk of holding real estate in an expense laden environment.
We (Pacifica Partners Inc.) remain bearish on the Canadian real estate market with real estate appearing overvalued by approximately 30% in most major markets.  Canadian economic weakness, the expected contraction of outstanding consumer credit, and already heightened real estate prices serve as the basis for our bearish stance.
 

Capital Flight

09/08/2012

 
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Image Credit: MorgueFile.com
Capital Flight
Sentiment Change
Momentum Collapse

My thanks to Michael Pettis and his August 27, 2012 coverage of Capital Flight

Michael's ideas are worth presenting here as they relate directly to the historic run up in Canadian housing prices and the now evident trend change across Canada in collapsing sales, sentiment and price momentum. [square brackets] are mine.

"Flight capital is both a major result of declining credibility and a major cause of further declining credibility, and because it is so intensively reinforcing it is a major warning signal."

"Countries whose growth depends either on growth in Chinese investment [Canadian Resources] or growth in European demand are going to see significant deterioration in their trade accounts.　This will almost certainly lead to even more trade intervention, currency wars, and all the other beggar-thy-neighbor polices typical of a global demand contraction."

"Of course borrowing money to fund a real estate bubble is an important source of bad debt, but I have argued for many years, and continue to believe, that economically non-viable infrastructure investment has been a much greater source of bad debt, by which I mean debt whose servicing cost (excluding of course interest rate repression) exceeds the debt servicing capacity created by the investment (excluding subsidies and including externalities)."

"There are only three things you can do with your debt.　If you are solvent you can service it out of operating income.　If you are not, you can either default, or you can transfer income from some other source to cover the difference.　The cost of the debt, in other words, one way or another must be borne by someone."

"Since investors are aware of the risk, the worse the debt-enhancing impact of a devaluation, the more likely the devaluation is to occur, and the higher the external debt, the greater the actual devaluation will turn out to be." Read Michael Pettis' complete article.

And here is The Vig Shot (you are on the hook). Chart from Ben Rabidoux: theeconomicanalyst.com.
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Chart from Ben Rabidoux: www.theeconomicanalyst.com CLICK TO ENLARGE
 

The Danish Mortgage Finance Model

01/11/2012

 
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Danish Foreclosure Rates vs U.S.
The Danish Mortgage Finance Model (from Absolute Return Partners a London based private partnership www.arpllp.com September 2011). 

The story begins with the great fire of 1795 which destroyed nearly one quarter of Copenhagen. Funding was required to rebuild the city and some egghead came up with the idea of issuing bonds to fund the massive capital requirement. As a result, the first mortgage association was established in 1797. The adoption of the Constitution of the Kingdom of Denmark Act in 1849 provided the first regulatory framework and Danish mortgage financing has ever since been tightly regulated, ensuring an entirely unblemished track record with not a single default to report in over 210 years. Even in 1813, when the Kingdom of Denmark defaulted, the mortgage bond system survived intact. Even more impressively, the combined loss ratio for all Danish mortgage credit institutions (MCIs) has never exceeded 1% in any one year – a number most other countries can only dream of. 

Denmark has the best mortgage system in the world. It is transparent and inexpensive. The interest rate of a mortgage loan and the prepayment price are directly reflected in the price of the mortgage bonds funding the loan. And everybody can monitor bond prices daily – for instance in newspaper price lists. Interest rates mirror the prices investors pay for the bonds. And Danish mortgage bonds are attractive due to their high security level, leading to low mortgage rates. Read the Whole Report. 

Absalon Project (Absalon) will market the Danish Mortgage Solution on a worldwide basis. Absalon is an extension of a partnership between affiliates of VP SECURITIES A/S  and Soros Fund Management that was established back in 2005 with the purpose to implement the Danish Mortgage Model in Mexico. This project was successfully carried through with the creation of a mortgage servicing company in Mexico named HiTo that issued the first loans based on the Danish Mortgage Model just before Christmas 2007. Since then HiTo has introduced more loan types to the Mexican market and is issuing loans on a weekly basis, using the solution provided by Absalon. 
There are many more studies at the Absalon Project download page: http://absalonproject.com/downloads  
 


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