Saturday, February 15, 2014

The Coming Crash & Buying Opportunity In Canada

During my wonderful pool time down in Puerto Los Cabos, Mexico last week I had a conversation with a very friendly couple from Canada. They were surprised to hear how negative I was on the United States economy and its future, considering we were surrounded mostly by the "1 percent" who are very happy with the way things are proceeding.

I discussed how I enjoyed diversifying into Canadian dollars whenever there was a large sell off in the currency markets.

As a quick side note, I am not some super nerd that only discusses finance in my personal life. They were the ones that continued to bring it up, so it was not my fault.

The Canadian housing market, outside of some ridiculously bubblicious cities in China, is arguably the most expensive housing market in the world.


The following shows the Canada House Price index vs. the United States. While prices in the U.S. fell in 2008 through 2012, Canada homes continued to rise.


Rising home prices increase the desire for citizens to take on more debt. This can be seen in the household debt to GDP ratio, which has continued to rise in Canada well past where the U.S. peaked back in 2008.


Canada's government debt to GDP is currently 84%, which is higher than most emerging markets but lower than many of the developed countries.


Why is the government debt to GDP important?

Federal mortgage insurance was introduced in Canada in 1954 to provide protection for the banks against mortgage defaults. Mortgage loans with less than 20% down require this insurance and some lenders even require it for loans with greater than 20% down.

While there was some question how the United States would handle its real estate meltdown (would they socialize the entire banking system and GSE's? - they did), in Canada there is no question. As soon as the losses begin, the government is on the hook.

This makes Canada's lower government debt to GDP important. As their real estate market crashes, the government will need to raise money both to fund bank losses and stimulate the economy. A large portion of their GDP is tied to real estate activity, which will contract as the real estate market crashes (7.5% of the Canadian workforce is in construction and 7% of the total economy is based on residential construction).

By the way, this is not what I feel their government should do. What they should do is remove the insurance completely going forward and step away from supporting the real estate market. Prices will crash and the economy will contract far more in the short term. Their toxic debt will cleanse. This will allow them to begin to grow again under a strong foundation.

Unfortunately, what should be done does not happen in our modern world today. There is not one (current) politician on the planet that is willing to make the tough decisions and do what is right for their country in the long term (the Iceland leaders being the exception). Therefore, I base all conversations around what will happen, not whine about what should happen.

While Canada's banks will be protected, the household sector will be crushed. My personal hope is that their currency will move far lower in the short term against the U.S. dollar as foreign investment flees their real estate markets. The coming sell-off will be a tremendous opportunity to diversify in to the Canadian dollar.

Depending on the magnitude of the sell-off in their real estate and stock markets there may be excellent opportunities in those asset classes as well. In the short term, stay on the sidelines.

Canada is not the only global real estate market that will soon face turmoil. For more see:

Rogue Wave 3: The Global Housing Bubble Is Back

h/t Trading Economics, Zero Hedge

The Facebook Fraud: Smoke & Mirrors Surrounding "Likes"

A few days ago Marc Faber commented that "social media stocks today are more overpriced than bubble internet stocks were back in January 2000." (See Marc Faber On Emerging Markets & Technology Stocks) This is a staggering comment as most of those stocks fell between 80% to 100% after their peak in March of 2000.

A portion of Wall Street's value in social media stocks, such as Facebook, comes from marketing dollars earned by gaining "likes" associated with pages. But how much is the true value of likes? The following fantastic video, titled "The Facebook Fraud," walks through what is actually behind a Facebook like.

If investors determine a large portion of the value behind a social media company (which determines how much you pay for the stock) is based on smoke and mirrors, then the price of that stock will plunge in breathtaking fashion. While Marc Faber warns the shorts on the timing, those that are both brave and lucky will make a tremendous amount of money on the opposite side of the social media trade.

The 1929 Chart: The Bulls & Bears Are Both Wrong

The following chart has been moving around the financial sphere the last few weeks. It has been used to argue that stocks will soon experience a 1929 like decline based on the similarities of the current price action.


I try to spend 50% of my time reading and listening to bullish articles, newsletters, books, radio shows and television segments. The other 50% I try to focus on the bearish argument.

I try to follow the same process for the inflation/deflation debate and other topics in the financial world. This sounds easy but it is not. Einstein said that one of the most difficult things you can do is hold two competing thoughts in your mind simultaneously. Your mind is a rationalization machine looking for one answer so it can move on, and after listening to an intense inflation/deflation debate it feels like there is a prize fight taking place in your head. It is exhausting.

This is why the absolute best authors and money managers have the ability to change course when new information comes into play. A great example of this is the peak oil debate in the United States. When the fracking process was first introduced, the best money managers in the energy field studied it relentlessly and changed course for their funds. The ones that did not have under performed.

What does this all have to do with the chart above?

It is a minor example of this psychological phenomenon. The "bearish" camp has used this chart to show why stocks will soon crash based on technical similarities with 1929 and today. The "bullish" camp has taken the time to completely discredit these thoughts and then discuss why stocks are heading much higher. While going through both arguments is beyond the scope of this discussion, you can read a bearish discussion here and a bullish discussion here.

Where do I stand?

Somewhere in between, which is where I try to always keep myself. I feel that U.S. stocks should fall significantly from here based on the fact that they are extremely expensive, sentiment is at record highs and analysts have an incorrect forecast on where the economy and earnings will move in the next 18 months.

However, if the market should crash in line with the chart above (based on the fundamental reasons just discussed), it will be coincidence; not causation.

For more see: 2014 Outlook: U.S. Stock Market

Stephen Roach: The China & United States Codependency

Thursday, February 13, 2014

37 Percent Of Working Age Americans Are Not Looking For A Job

Excellent graphic below from CNN money which shows that 91 million Americans over the age of 16 are not looking for a job. A portion of this group is in college and retired, but a growing part of the pie are Americans that have given up looking for work because there are no jobs available.

As machines continue to take over a larger and larger portion of the work in the years ahead, this will be a continued problem for the country. Emergency unemployment benefits are already beginning to be cut off. While the U.S. is still considered the richest country in the world, it would not take much for some areas to move quickly into social unrest.


Jim Rickards - Fed Will Pause On Tapering Mid Year

Wednesday, February 12, 2014

State Of The Union

The real state of the Union:


And where the "recovery" has been located in the United States. The 1% will be hit the hardest during the next cyclical decline as their stock, bond and real estate portfolios fall simultaneously:


Jim Grant Discusses How The Fed Has Nationalized The Yield Curve

Tuesday, February 11, 2014

Gambling Losses Worldwide

The following graphic from The Economist shows that last year citizens worldwide handed over $440 billion to "the house" in gambling losses. The largest payouts came from casinos, gaming machines and lotteries. Something to consider the next time you purchase a lotto ticket or head to a casino; the house always wins (huge) in the long run. Click for larger image:

Marc Faber On Emerging Markets & Technology Stocks