Insider Report on the Credit Crunch

I just recently read that foreclosures are starting to cause trouble beyond the confines of the subprime mortgages.

To investigate this phenomenon, your erstwhile blogger recently met a disguised banker in trench coat and dark glasses in a shady roadside diner. How, I asked, did all this happen, and what's the likely effect.

The banker whispered over to me ... "I can tell you, but I have to speak in code. Here, you can use this keyword code card afterwords to figure out the analogy I'm about to give you."

"Our money wizards assured our bank executives that this new lending would be like driving a new CAR, and that we'd be FASHIONable everywhere. We were even handed a nice clean MAP.

Unfortunately, it seemed like we ended up driving too fast, and a CRASH ensued. We looked around, and there was nothing but a WRECK left.

In the end, my friend, I don't want to tell you what our balance and income statements will look like, because I respect you too much to BORE you with all the details."

The banker glanced around, and quickly stole away. I was left scratching my head, until I remembered the keyword code card he'd handed me. I looked at it:

• CAR = Careful Assessment of Realty
• FASHION = Forward Appreciation Stereotyped High In Our Nation
• MAP = Mortgage Applicants Poor
• CRASH = Crisis Revolves Around Suspect Homeowners
• WRECK = Wobbly Realty Eviscerating Capital Keepers
• BORE = Bank Owns Real Estate

Now it all made sense ... reporting from the front lines of the credit crunch, I remain, yours truly, the Confused Capitalist.



JW

The Confused Capitalist

Editorial: Why a Responsible Fed Won't Lower Rates Anytime Soon.

Notwithstanding the perceived subprime "crisis", a responsible Fed can't lower rates anytime soon. Why?

Because the consumer is finally being told, in no uncertain terms, to smarten up, stop spending more money than you have, and save a little bit. With this message, (and a puncturing of the home-ATM cash-machine) inflation will finally begin to get tamed.

Any loosening of the money supply at this point, while mitigating the short-term damage that will soon become evident in bloated housing markets, will only move that day of reckoning into the future. A future time which which would then have bleaker, more uncertain and more unstable fundamentals, from which to try making essentially the same maneuver.

No, dear readers, this is the medicine that great-great-grandmother used to force down great-grandmother's throat: a nasty-smelling, foul-tasting, herbal concoction that nearly gagged the dear girl. But medicine that helped the patient recover sooner, and more robustly.

To lower interest rates at this time is the equivalent of turning up the heat in the house, so that the feverish patient may feel comfortable. Foolish. Understandable to some, with the child whining so loudly but, all the same, foolish.

And a responsible Fed just won't do that.


JW

The Confused Capitalist

Canadian Real Estate Still Charging Ahead

The latest statistics show that Canadian residential real estate prices are still charging ahead.

Since last December, the average home across the country has increased by 11.8%, (a 23% rate if annualized) which is phenomenal since our prime rate too has been increasing over that period. Sales volumes too are up, by 3.6% on a year-over-year basis.

The average house price across the country is now $304,328 (about $272,000 USD), which compares to about $231,000 (USD) for America.

Price increases are being led in oil-rich Alberta, which is facing rises of 40% annually. Although prices have seen a dramatic increase, most market commentators say that the Canadian market, overall, isn't as vulnerable to a downturn as the US market, for two reasons:

1. If Alberta is stripped out of the price picture, the average price increase is much more sensible, and
2. Interest rate increases have been subdued here, and our prime rate about 2% below the US prime rate.

JW

The Confused Capitalist

Canada: What Housing Bubble?

Well, apparently unlike the US housing market, even after a strong five years of house price gains, housing in Canada remains undervalued.

According to recent research by Merrill Lynch economist David Wolf, the Canadian housing market is, on average, undervalued by 10-20%. Mr. Wolf ran his model based on average incomes and the cost of debt, and in only one (Victoria) of the 15 major markets measured, was the housing over-priced - and even then it was just a modest 4%.

To check his model accuracy, he ran current prices and incomes in the major US cities (yes, most were over-priced, according to his model), and also ran it against the frothy 1990 Canadian markets (again, his model suggested they were then, in fact, over-priced).

One of the more surprising findings was that even in oil-rich Alberta - after years of very strong gains - the major cities of Calgary and Edmonton were amongst the most-undervalued cities in Canada.

According to Mr. Wolf, Canadian prices can rise by an average of over 4% annually for the next four years before they'll achieve full value.

In the meantime, those worrying about a Canadian housing bubble can relax ... relax ... relax ... relax ...


JW

The Confused Capitalist

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Canada: Let the Good Times Roll!

Due to the continued strength of the world economy and the need for basic commodities such as oil and metals, Canada's economy moves from strength to strength.

The latest report shows Canadian unemployment down to a generational low of 6.4%, a rate not seen since the mid-1970s. Some places, like oil-rich Alberta whose unemployment rate is only 3.1%, is experiencing a shortage of workers of all sorts, but particularly those whose skills are needed in the oil patch. The average hourly wage in Alberta is now some $21.39 per hour, and expectations are that this will continue to rise.

This economic boom is expected to be continued to be fuelled by proposed investments of up to $25 billion to turn areas near Edmonton into a refinery hub to rival areas along the Gulf Coast of Texas (sans hurricanes of course). Other areas of the province are booming along with the massive incoming investments, to such an extent that even basic service jobs, like those in fast-food restaurants and grocery stores, are going unfilled.

This too is drawing workers from the long-suffering Atlantic provinces, some 3,000 miles distant into the Alberta economy. While young people have for some time left the region in search of employment, now the chance to earn $5,000 weekly is drawing fathers away from their families for extended periods, as they work in oil fields camps for several months, and return quarterly or semi-annually to get re-acquainted with their wives and children.

In other areas where these resources don't play such a large part in the local economies, such as people-rich Ontario, Quebec and the Atlantic provinces, the angst is palpable, as the soaring Canadian dollar has made it more difficult for manufacturing-dense Ontario and Quebec to import into the US market. There has been much hand-wringing over the fate of the manufacturing region of the country and whether Canada will be subject to the so-called "Dutch Disease".

In any case, while there's some local disruption, there's also no doubt that the boom as a whole is a net economic benefit to Canada, and more particularly, to Alberta.

Aside from the obvious stock market plays into the oil and gas sector, and the mining sector, different Alberta-based public companies should enjoy extended periods of super-sized profitability. These would include those involved in the real estate sector. Three such companies include ALberta-based land developers Melcor Developments Ltd., which trades on the Canadian TSX Exchange under the symbol "MRD", and Genesis Land Development Corp. which trades under the symbol "GDC", and the Boardwalk Rental Communities REIT - the largest owner of residential rental suites in Alberta. It too trades on the TSX index, under the symbol "BEI.UN".

Canada - not just a place that cold fronts come from!


JW

The Confused Capitalist