Collapse Update – Autumn 2012

Reading time: 4,357 words, 10 to 17 minutes.

After more than four years of financial crisis, none of the major causes have been addressed let alone fixed and the over-indebted global economy continues piling on more and more debt while, circling the drain, the next downturn has already started and will surpass the last recession in depth, duration and pain.

If you’re satisfied with a brief synopsis, that was it. If you want the gloomy details, keep reading. If you haven’t started preparation, it’s probably too late now. Bend over and kiss it good-bye because you’ve wasted five years and your future. On the other hand, there’s still enough momentum in most economies to give us another year (may two) before a complete economic collapse so anything you do is better than nothing.

But first …

Frankenstorm

Hurricane Sandy is slowly moving up the U.S. eastern seaboard on a crash course with a winter storm moving from the west and arctic air from the north. The collision is expected Monday with its peak impact some time Tuesday. The low pressure center over Iceland that usually pulls hurricanes toward the mid-Atlantic has all but disappeared and has been replaced with a high pressure system that is actually blocking the hurricane. This only occurs 0.2% of the time; something so mind-boggling rare that they may have to re-write meteorological text books. According to MarketWatch, “The Hydrometeorological Prediction Center … have had to manually adjust their official forecasts to tone down the exceptional scenarios that the weather models are currently showing.”

Having subscribed to Tropical Storm Risk for five years, I have NEVER seen a hurricane behave this way.

Unless something changes drastically, the eye of Hurricane Sandy is expected to veer toward the U.S. mainland between Washington DC and New York. This bodes poorly for New York. Storms in the northern hemisphere circle counter-clockwise so New York, being north of the anticipated eye, will have winds blowing ashore with an ocean storm surge blowing up the Hudson River and inland. This flooding will likely be exacerbated by the slow movement of the storm dumping an inordinate amount of rain especially as it collides with the winter storm. This couldn’t happen at a worse time to the Amerikan economy poised on the edge of another recession. Some ass media stories claim “New York faces most intense storm in history” Let’s hope they’re wrong.

Again, this could change but if the hurricane moves as anticipated, it will travel far inland. Toronto and Montreal and points in between could face a slow moving storm with an incredible amount of rain and flooding. This will not just be a New York problem. Trick or Treaters in eastern Canada could be slogging through high winds, rain or even snow according to a CTV report Frankenstorm could dump wind, rain and snow on Canada in a storm that is expected to cover up to 70% of Canada. “Based on the current forecast scenario, southern and eastern Ontario and western Quebec are likely to see the most rainfall from this system, with total amounts by Tuesday evening possibly reaching the 50 to 100 millimetre range.” However, weather is never easy to predict so the forecast could still change.

Broken Window Fallacy

There are some innumerate idiots who believe that Hurricane Sandy’s damage will be good for the Amerikan economy. Presumably, rebuilding will add to GDP. Such nonsense, known as the “Broken Window Fallacy”, was disproven more than a century ago but stupidity, it seems, is timeless. The classical argument is that replacing the Cobbler’s broken window stimulates the Glazier’s economy. In fact, it reduces the Cobbler’s disposable income and prevents him from purchasing assets such as leather, materials, tools, etc. thus impoverishing other industries. Replacing a broken window is maintenance that does not add value to the Cobbler.

If repairing damage was good for the economy then carry this to its logical absurdity; destroying the whole world would be to everyone’s benefit. The “Broken Window Fallacy” is sometimes used to discredit the notion that ‘war is good for the economy’. Only the brain-washed believe war is good for anything. War only aids the military-industrial complex; an exclusive club you are not part of. It directs goods and capital away from the production of goods to war-time destruction, higher costs and untold misery.

Baltic Exchange Dry Index

The Baltic Dry Index (BDI) is a reliable leading economic indicator because it cannot be manipulated by governments. In tracking the price of moving major raw materials by sea, the global economy slowed significantly in 2012 as I had forecast. This is NOT a recovery. In fact, 2013 will be a lot worse for everyone including the commodity powerhouses like Canada, Australia, Brazil and Russia which weathered the last downturn fairly well because China and India were buying. Now the economies of both China and India are slowing down. In fact, China has such a large store of commodities it may become a commodity exporter further driving down commodity prices to the detriment of commodity exporters

As you can see from the chart above, the BDI is ‘bottom bouncing’ and has sunk to the depths of the last ‘Great Recession’.

Your Survival Stockpile is at Risk

You’ve built a stockpile of food and gear for either emergency or survival purposes. You’ve done your best to protect it from looters and marauders. However, your biggest enemy isn’t the hungry hoards; it’s your own military, the police and security forces. As the ‘you-know-what’ hits the fan and governments get more desperate, expect the uniforms to be busting down doors to confiscate your food, weapons, ammo and gear. This will, of course, all be in the name of national security. Don’t for a moment believe it. It’ll be done to ensure the loyalty of the goons.

In other words, it’s one thing to have it, but can you hide it and hold it? Consider more than one stash. Leave one small sacrificial stash that’s easy to find and hope the uniforms stop looking after they uncover it. You need to hide your main stash yet still be able to access it when you need it. Each persons’ circumstances are different so I can’t give you more exact details other than warn you and implant this idea.

Fictitious U.S. GDP Growth

Friday saw the announcement of 2% U.S. GDP growth. You’d think this was a Presidential election year and the numbers are being cooked. Wait! This IS an election year and yes, the numbers are obviously cooked Minyanville says, “The leading driver of this surprise growth was the highest government spending figure in over three years.”

And, don’t forget that GDP numbers do NOT include the REAL rate of inflation as calculated by Shadow Stats in excess of 10%. This means the U.S. economy is shrinking every year, not growing.

Crafty Persians Iranians

I told you those Persians in Iran were crafty masters of brinkmanship capable of running circles around the U.S. and the UK. The New York Times Breaking News Alert on Saturday, October 20 is headlined “U.S. Officials Say Iran Has Agreed to Nuclear Talks”. Just as the USrael was chomping at the bit to bomb Iran back into the stone-age before the U.S. Presidential elections, those crafty Iranians just bought themselves more time by insisting they wait until after the election so they know which President to deal with. I suspect they’ll now insist until the President is sworn in so that’ll give them a few more months.

Amerikan Politics is Show Biz for Stupid People

Gerald Celente says Amerikans are faced with “a choice between an empty suit who can’t defend his record and a stuffed shirt with no perceivable plan or strategy.”

Being a Political Science major, I know better than to waste time watching the Amerikan election circus. It does NOT matter who gets elected. It doesn’t even matter if you vote. There is a popular perception that everyone should vote. I disagree with this juvenile civics notion.

First, if voting mattered, it would be illegal. Second, the more people vote, the more “mandate” the political clowns think they have been given and the stupider they become. Third, and most important is the lack of ‘informed’ voters. If you don’t know the background to the issues, how can you cast an intelligent vote? You can’t. If everyone stayed away from the polls our political overlords would realize that we all know the political system sucks the big one.

This isn’t just a dumbed-down Amerikan phenomenon. Even educated Canadians are being swept up in the Justin Trudeau mania – he being the son of the late Pierre Trudeau; the self-avowed communist who almost single-handedly wrecked Canada’s economy. The dynastic Prince Justin, a former school teacher with all of three years political experience sounds frighteningly similar to vacuous President Obama.

Phony U.S. Employment Reports

As I predicted, statistics are increasingly being fudged during the U.S. Presidential election circus. The U.S. Bureau of Labor Statistics shows 114,000 new jobs in September. This sounds good until you realize that 114,000 new jobs don’t even keep up with population growth and doesn’t even begin to recover the millions of jobs lost during the last recession. Furthermore, the majority of these jobs are lowly paid domestic service jobs that cannot be offshored. Manufacturing jobs declined by 16,000. There was also a 600,000 rise over the previous month in involuntary part-time workers. According to the BLS, “These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.”

They also reported a drop in the rate of unemployment from 8.1% to 7.8%. However, this so-called drop in the unemployment rate is entirely fictitious. It’s the result of not counting discouraged workers who are defined away as “not in the labor force.” 2.5 million people were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

Far more accurate is the employment (not UNemployment) chart below that shows the percentage of Amerikans who are left working.

That’s some recovery, isn’t it?

Inevitable Global Economic Downturn

An economic downturn is inevitable and already beginning. Just as during the last Great Depression, the second recession was longer and more drastic than the first. Look at the recent job cut announcements.

Keep in mind, the numbers below are NOT yet included in the unemployment statistics as these job cuts are planned but not yet enacted:

Colgate-Palmolive: 2,300
Dow Chemical: 2,400
DuPont: 1,500
Ford: 6,200 and reducing European capacity by 18%
Hewlett-Packard: 29,000
Chip maker AMD 15% of their workforce
Sony: 2,000
Sharp: 11,000
Cummins: 1,500
Applied Materials: 1,300
Zynga: 5% of their workforce
Lattice Semiconductor: 13% of their workforce
Alcatel-Lucent: 5,000
Siemens AG: 10,000
UBS: 5,000

Even, “Caterpillar, the world’s largest maker of tractors and excavators, slashed its 2012 forecast for the second time this year and warned the global economy was slowing faster than it had expected” according to Black Listed News

It’s not just Amerika. Look at the chart below for the world’s number two economy – China’s declining GDP.

You don’t need to be a statistician to see the downward trend.

More Statistical Bullshit

Unfortunately I cannot credit the unknown author of the numbers below but it is certainly demonstrates how the U.S. Federal spending has passed the ‘point-of-no-return’. First, let’s look at the U.S. Federal numbers. Admittedly, this is made difficult by all the zeroes.

* U.S. Tax revenue: $2,170,000,000,000
* Fed budget: 3,820,000,000,000
* New debt: 1,650,000,000,000
* National debt: 14,271,000,000,000
* Recent budget cuts: $ 38,500,000,000

Let’s now remove 8 zeros and pretend it’s a household budget to make the numbers easier to understand:
* Annual family income: $21,700
* Money the family spent: $38,200
* New debt on the credit card: $16,500
* Outstanding balance on the credit card: $142,710
* Total budget cuts so far: $3.85

Note the budget cuts on the last line. Does that illustrate the extent of the Amerikan problem? Bad news: most of the western world is in the same shape i.e. past the point-of-no-return..

U.S. Social Collapse

Read about the U.S. "Killing Fields" ONLY if you have a strong stomach. (Note: wonky website is hit or miss.)

Equally disturbing is Black Listed News “The Last Days Of America? 25 Signs Of Extreme Social Decay”

Now you’ll understand why Americans are on a gun buying spree for self-protection and why U.S gun manufacturers are one of the few manufacturers still making money. This chart below is from Zero Hedge’s Tyler Durden is gun manufacturer Smith & Wesson’s revenues over the past decade.

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Bursting Canadian Housing Bubble

‘Mean Reversion’ or ‘regression to the mean’ is a financial statistical term meaning that in the long run prices return to an average. In reality, the price of an asset that is too far from the average tends to over-correct. For example, a bursting real estate bubble usually means that prices fall below average before eventually finding the ‘mean’ or proper value.

Affordability is an excellent barometer for measuring a real estate bubble. On an ‘affordability’ scale a community with a price/income ratio of more than five is considered a “severely unaffordable” place to live. The following is from the 8th Annual Demographia International Housing Affordability Survey. “Canada: Housing in Canada is moderately unaffordable with a Median Multiple of 4.6 in major metropolitan markets and 3.4 overall. Housing was generally affordable in Canada as late as 2000. In the early years of the Demographia International Housing Affordability Survey, Canada was generally the most affordable nation. However, this year, Canada ranks third, behind the United States and Ireland.

“Among major markets, four were moderately unaffordable and two were severely unaffordable. Among all markets, 9 were affordable, 17 were moderately unaffordable, 3 were seriously unaffordable and 6 were severely unaffordable. The four most unaffordable metropolitan markets were in British Columbia (Table 7). Edmonton was the most affordable major market, with a Median Multiple of 3.5, while Ottawa-Gatineau had a Median Multiple of 3.7. Both of these markets were rated moderately unaffordable.

“Canada’s most affordable markets were Windsor (ON) at 2.2, Fredericton (NB) at 2.4, Moncton (NB) at 2.5. Other affordable markets were Saint John (NB) and Thunder Bay (ON) at 2.6. Yellowknife (NWT) and Charlottetown (PEI) at 2.9 and Saguenay (QC) at 3.0 and Trois-Rivieres (QC) at 3.0.

“Vancouver, which like Sydney has largely prohibited housing development on the urban fringe for decades, experienced a significant deterioration, with housing reaching a Median Multiple of 10.6, replacing Sydney as the second most unaffordable market in the Survey, following Hong Kong. Toronto was also severely unaffordable, at 5.5, a deterioration of 40 percent in housing affordability since 2004, as that metropolitan area’s “smart growth” program has taken effect. Montreal has been one of the worst performers in housing affordability, over the years of the Demographia International Housing Affordability Survey, with a Median Multiple of 5.1, up nearly 60 percent from 2004, at the same time as the land for development has been severely limited by an inflexible approach to agricultural zoning. Smaller British Columbia markets Abbotsford (7.0), Victoria (6.6) and Kelowna (6.6) were also severely unaffordable.”

Mish Shedlock in Canada Household Debt Approaches US Bubble Levels reports that Canadian debt-to-income ratio of 163% is comparable to the U.S. at its peak before the Amerikan bubble burst. In a remarkable display of insanity, RBC Chief Economist Craig Wright says that’s not cause for alarm. Canadian household debt “doesn’t strictly compare with the U.S. … About 70 per cent of [Canadian] household credit is mortgage-related … So as we move forward we hope (the debt) ratio will stabilize.”

Mish retorts that’s the whole point! “The more leverage one has in housing, the more susceptible personal finances and the economy will be to a sustained downturn in that area. What really takes the cake however, is Wright’s “hope (the debt) ratio will stabilize” in spite of falling home prices. In a recession (and one is on the way if not started), layoffs will increase and income will drop. Housing prices and the stock market will both take a hit as well. Thus, debt-to-income ratios will rise and net worth will plunge. Canadians should expect a double whammy.”

Incidentally, that 70% mortgage-related household credit is coincidentally the same as the Canadian home ownership rate. The Amerikan real estate bubble inflated when U.S. home ownership increased from 63% to peak at an alarming 69% and then the bubble burst. Canada is at 70%. Do you think it’s different this time? Then see the chart below for the widening Canada – U.S. house price gap.

Canada is the red line, the U.S. is blue. That’s some gap!

The following are from Garth Turner’s Greater Fool article Realtors. I quote Turner extensively rather than summarize because he says it better than I can.

The housing demand in Vancouver has “fallen for the last six months, off about 40% from the 10-year average, and on its way (it seems) to 2008 levels. So the conclusion is obvious – supply overwhelming demand, suggesting price reductions. And this is a pattern which is seldom broken, of sales declines leading to even more listings, higher days-on-market counts and cheaper houses.”

Writing in Too-Big-to Bail Garth Turner says after “we watched the US economy implode as its housing market collapsed…[Canadian] Mortgage rates spiraled lower and the greatest housing orgy in Canadian history began. Forty-eight months later we have more debt and higher home prices than Americans ever did.”

In Toronto selling prices in April and May were routinely 15% above the asking prices, today they’re 10% below.”

In Perspective he says “July 9th, the day most [Canadian mortgage] changes came into effect (a few are still taking place), marked the end of the boom real estate cycle as we knew it for at least four years. Sales are now tanking in leading markets, with the regional backwaters (Winterpeg, Skatch, Cowtown etc.) certain to follow…”

And in Toronto, “sales in September crashed by 21% from this time last year. In Toronto detached homes (resales) saw a 27% decrease. Last week I told you that sales of new homes (low-rise and condos) plunged by more than 64%.”

Sales in the [Vancouver] region fell by 8% from August and 32% from last autumn. And while demand dove from this time in 2011 by a third, listings have increased 14%. Sales of detached homes (that’s where the $1 million-plus inventory sits) crashed 38%. Overall, sales are now running 42% below the long-term, 10-year average. At this rate there are enough houses for sale to last almost a year, which means sellers better get used to six or ten months of open houses, and endless vacuuming.”

In Toronto “ GTA real estate sales fell 21% last month. Condos tanked 27%, and downtown deals declined by more than a third. Detached home sales were off 19%, and SFH prices in 416 are lower by 6% in five months.”

Garth Turner says we’ll know the full extent of the bursting bubble in One Hundred days. “Odds are the next 100 days will prove without a doubt that the Era of the House is kaput, at least for a few years. I have no doubt we’re on our way to that national price correction of 15% I’ve been blathering on about – which means 0% in places like Fredericton and up to 40% in Vancouver and Victoria. And that won’t be the end, either. Expect real estate to flatline at best or slowly melt for years after that. First we see a drop in the number of sales; then we see a drop in prices. Sales are now dropping. In a hundred days nobody in the media will be talking about sales volumes any more. They’ll be gobsmacked by prices.”

The triple whammy will be a rise in mortgage interest rates. Today, rates are as low as they can go. They can’t be held this low forever and they have only one way to go and that’s higher. It won’t be necessary for Central banks to raise rates. Turner says, “the bond market can do that all on its own, and will. As equities gain ground based on continued central bank intervention, improving labour markets, the likely Obama win and still-decent corporate profits, money will flow to stocks from bonds, depressing prices and raising yields.“ And, higher rates will make mortgages and renewals more expensive resulting in homeowners putting more homes up for sale in a downward spiral of a greater supply driving prices even lower.

Even Winnipeg is NOT immune. In Winniplop Turner reports that, “Real estate has appreciated by 158% in ten years, eclipsing even Vancouver … Last month sales crumbled by 14%, while the number of listings has increased 3.5%. That two-month supply of houses is now 3.5 months – still low by national standards, but an increase of 75% … We all know what’s happening in Winnipeg is exactly what’s now transpiring in most markets. Months ago this pathetic blog blurted out the obvious: given record high prices, debt obesity and crappy income gains, all it would take to crash housing everywhere was a tweak in financing. And we got it. Shorter mortgages, no cash-backs and tighter borrowing regs for the virgins did the trick.”

Turner implies we have met the enemy and he is us. “Winnipeggers also shoulder blame, as do people living in the other bubble cities. The unsupported run-up in prices brought on by vendor greed, realtor pumping, idiot virgin buyers, voracious mortgage lenders, predatory bankers and rotating helo-parents is equally at fault. The proof is simple, and clear. All it took was the equivalent of a 0.9% interest rate rise to screw over housing. So just imagine what’s in store when rates are two or three per cent higher.”

In Money for Nothing Money For Nothing Turner says, “Canadians have being buying houses they would not afford if (a) rates were at normal levels, (b) the feds weren’t willing to assume the risk for high-ratio loans and (c) the pay-back period was the traditional 25 years. Change one of those conditions, and the buying stops. Soon after, prices correct.”

Guess what? Ottawa changed the conditions. Amortization periods are reduced as are HELOCs and more. For more refinancing blues, see New mortgage rules could make switching or refinancing tougher

In Non-Cowboy he quotes Capital Economic’s David Madani; “Overall, this supports our bearish view that Canada’s housing boom is unsustainable and the eventual correction, which we think is already underway, is likely to have a material negative implications for growth,” Translation: we’re well and truly screwed. He rejoins with, “He’s right, of course. The Canadian middle class is trodding merrily down the same path that the Yanks forged. It ends in a cliff.”

Not surprizing but it keeps getting worse as time goes on. In Seasonally-Adjusted Turner writes, “Toronto sales plopped 20.5% last month and are weaker by 10.5% so far this month. GTA condo sales crashed 20% in the third quarter. Vancouver sales dumped by a third in September. Victoria down 8%, Edmonton off 12%, Hamilton lower 19.7%, all of Nova Scotia weaker by 13%.”

Furthermore, the bursting of the Amerikan housing market was not an explosion but a drawn-out affair. In another warning to Canadians, Turner writes, “The American market didn’t blow up. First deals tanked. For example, new home sales in the US fell 39.5% between 2005 and 2007. But prices rose 13% during that same period of time (a phenomenon I have written about here often, which realtors now try to use as proof the market is stable). Investors who bought into that ‘rising, healthy market’ were soon slaughtered. New home prices crashed 24%, and failed to touch bottom until four years later. Resales collapsed by 32% – a decline the National Association of Realtors failed to warn consumers about.”

Trying to inject Logic into an emotion-laden housing market, Turner says, “I think you can figure out what 2013’s going to bring. Steadily disappointing sales, swelling listings and eroding prices. Houses will turn illiquid in many markets as buyers do what they always do – retreat from a falling market. Don’t expect a crash, because it’s not going to happen. Instead, this housing deflation will be lengthy, insidious, relentless and destructive to middle-class wealth. Hardest hit will be those who have bought since 2010, the equityless virgins and house-heavy, cash-deprived Boomers. Plus, of course, poor BC.”

In Desire he quotes from RealNet Canada. “Here are the lowlights:
•Total September new home sales (condos and low rise) the 2nd lowest on record
•Total third-quarter sales the lowest ever.
•Total sales, year-to-date 13% below long-term average.
•Condo inventory at second-highest level on record.”

I’ve mentioned ‘Demographics’ so many times that I think I’m talking to the wall. So in Glory Days I’ll let Turner do the talking. Be warned, it’s not pretty. “Boomers are broke. Or damn close. Consider this: Over 70% of Boomers have no corporate pension. And yet over half of people aged 50 to 59 have accumulated less than $100,000. Almost 75% of people did not contribute to an RRSP last year. The average savings rate was 20% in 1982. Thirty years later it’s barely over 3%. Over 60% admit they’ve failed when it comes to retirement preparedness. Over 50% of folks in their 60s will be retiring with a mortgage to pay. Almost 30% expect to still have one at age 70.”

“A third of all Boomers say they’ve only one way to fund their retirements, which is by selling off their real estate … It’ll take a decade or so for the wave to sweep through, but it will likely happen as interest rates edge higher and house prices continue to be impacted by a slow economy, swampy incomes, tighter credit and off-the-chart levels of household debt. I’ve said before … demographics is the elephant in the room everybody’s ignoring.”

“Eighteen years ago I wrote a book pegging 2015 as the start of a retirement crisis based entirely on demographics and a Boomer love affair with real estate. Little did I know that in 2012 we’d have record home ownership and record debt at the same time. I never imagined the savings rate would collapse or half the people hitting 60 would have less than a hundred grand invested plus a mortgage in retirement. In other words, nobody listened.”

The lesson is clear. If you’re going to sell your home in the near future, do it yesterday.

There’s so much more to say but I have to stop somewhere. I’ll leave with Garth’s pithy “The Frankenstorm may miss us. Boomageddon won’t.”

Gerold
October 28, 2012

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About gerold

I have a bit of financial experience having invested in stocks in the 1960s & 70s, commodities in the 80s & commercial real estate in the 90s (I sold in 2005.) I am appalled at our rapidly deteriorating global condition so I've written articles for family, friends & colleagues since 2007; warning them and doing my best to explain what's happening, what we can expect in the future and what you can do to prepare and mitigate the worst of the economic, social, political and nuclear fallout. As a public service in 2010 I decided to create a blog accessible to a larger number of people because I believe that knowledge not shared is wasted.
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