HISTORY & READINGS at Brian Ripley's Canadian Housing Price Charts & Plunge-O-Meter

What do you do during a housing bust?

12/20/2012

WHAT TO DO DURING A HOUSING BUST

Japan as we know has been in a 20+ year (and still counting) housing price deflation.

As housing prices fall over long time spans, households have to make decisions about how they are going to turn the debt they acquired on the way up into equity.

There are two basic choices; get in front of the falling price curve and sell at a either a loss or gain depending on timing, or if the household has the income, pay down the debt over time as a forced savings plan. The former allows for greater savings and re-investment and the latter is a suicidal prison term chained to one price decaying asset.

In either case, households turn to saving and away from consumption.

The charts above and below are from an article by Jack Crooks of Black Swan Trading where he argues:

1) The demand for dollar liquidity in a world where the European banking system is desperately deleveraging and many in the private world are doing the same likely means the world reserve currency remains supported, even though it is likely Ben Bernanke would like to push the buck lower.

2) The commodities super cycle is behind us. This doesn't mean all commodities go lower; agricultural commodities could spike again and are subject to lots of volatility. But even the Australian Central Bank believes there has been a peak in the mining cycle in Australia.

3) The credit crunch (2008-09) really was a sea change. Massive personal balance sheet over-leverage, coupled with the decline in the biggest personal asset, real estate, seems to have triggered a sea change in both real consumption and attitude toward future consumption. This means more savings. More savings tends to mean more money in fixed income (keeping yields low).

4) The knock-on effect of a change in reduced global consumption and increased savings is the catalyst for rebalancing the current account deficit nations with the current account surplus nations. It is especially bad news for those with export-dominated growth models who will take the brunt of the adjustment domestically; and we know who you are: China, Germany, Japan...

AND CANADA... it's already happening; Canadian exports peaked July 2008 at 44.1bil and have dropped 13.6% to 38.1bil in October 2012 (Source). See also Ray Dalios Mega Trend and John F. Carlucci's Trend Regression. The complete Jack Crooks, Black Swan Trading article is here.

THE CYCLICAL NATURE OF COMMODITY PRICES ~ BOOMS & BUSTS

Ray Dalio's Mega Trend

12/7/2012

CLICK TO ENLARGE Canada Balance of Trade

Canada's Balance of Trade has been dropping since the Tech Bubble blew out in 2000

Over 70% of our exports are sold into the U.S. The U.S. Output has been in decline since the end of WW II. China and the Emerging Markets are growing their shares of World Output. According to the charts below the long scale cyclical shift began 60+ years ago.

Meanwhile in Canada we have been engaged in a massive 10 year debt fueled real estate bubble that is in its early phase of collapsing. The boom did create employment and consumption in the 'FIRE' economy but now real estate equity is disappearing and savings are being depleted and highly leveraged Canadians are left with the long term chore of converting their debt into new equity either by repayment or by default. Canadians are going to have to retrain themselves to compete with skilled productive foreign workers; a difficult task to accomplish under the burden of extraordinary long term private sector household debt. A national educational policy would help, but is not likely; as Ray Dalio says:

"Because these cycles evolve slowly over long time frames – over at least 100+ years – they are imperceptible to most people. They are also essentially irrelevant to rulers who typically have time horizons of a couple of years. As a result, they are not controlled, which is the main reason that they are destined to occur. If human nature was different so that debt growth doesn’t outpace income growth and income growth doesn’t outpace productivity growth, these cycles would be pretty much eliminated."

CLICK TO ENLARGE Output as % of World Output by Ray Dalio June, 2011

Shifts in Relative Wealth and Power Tend to Occur via Very Long Cycles Lasting Five Generations or More.

SOURCE: Why Countries Succeed and Fail Economically Ray Dalio June, 2011 © 2012 Bridgewater Associates, LP

These cycles have occurred through all recorded history going back to Rome and before, though they have become more sophisticated over time. While many influences contribute to these shifts in relative income and power, we believe that the two most powerful of these are 1) the psychology that drives people’s desires to work, borrow and consume and 2) war. Throughout history, these two influences have changed countries’ competitiveness and indebtedness which have caused changes in their relative wealth and power. Since different experiences lead to different psychological biases that lead to different experiences, etc., certain common cause-effect linkages drive the typical cycle. While we will describe what we believe is the typical cycle, of course no cycle is exactly typical.

Now about half of world GDP (53%) is produced in what we now call the “developed world” (US, Europe, Japan, UK, Canada and Australia) with about equal amounts being produced in the US and Europe, and about half of world GDP (47%) is produced in what we now call
“emerging countries” with a bit less than half of that being produced in China and India. Russia produces 3% of global output.

For reasons explained later, we believe that in another 15-20 years emerging countries will produce about 70% of global GDP, China will produce about 25% and India will produce about 12% as they did in the mid-19th century. Russia will produce around 8% as it did in the
mid-19th century.

READ: The complete Ray Dalio analysis here.
Definition: Purchasing Power Parity Adjusted

CLICK TO ENLARGE Share of Real World GDP by Ray Dalio June, 2011

The Donald says "No Gazundering"

12/7/2012

Toronto Trump Tower developer suing 7 disgruntled investors to close deals they now regret.

By Susan Pigg Business Reporter theStar.com

Dozens of purchasers of suites in the 65-storey luxury hotel are now trying to get deposits back and renege on final payments averaging over $500,000.

Other buyers, some too frightened of the legal ramifications to walk away from deals penned up to seven years ago, say they are finding themselves in a crippling Catch-22 — unable to sell the units or secure mortgages on balances due to Talon Nov. 29.

One mortgage company asked me (a buyer), "How could I give you a mortgage on a property that is losing money every single day?" said one devastated buyer, a blue-collar worker who borrowed the $175,000 down payment from his immigrant parents and owes $750,000 at month’s end.

Nov 19/12 Full Story Here and Dec 4/12 Follow Up Here

Talon International Development Inc. was advised that after a thorough review of the matter, Ontario Securities Commission Staff have determined not to pursue regulatory action against Talon. (Full Press Release Here) The closing dates are December 13, 2012

Gazundering Defined Here
REMEMBER, if you are going to gezunder, do it before your 'subject tos' come off the contract!