New
I would like to extend my thanks and gratitude to you for writing
these series of articles concerning the financial systems as well as the impact
of the sub-prime debacle, which I believe will stay with us for some time.
I have a
question for you, maybe you would be able to explain this to me as well as
others. This deals with Canadian real estate market. I would like to understand
the potential impact of the US and international banking crisis. The media here
in Canada (Toronto) keep telling us that our real estate market is structured
differently than the US and hence we are safe.
However, it seems that we are dealing with worldwide crisis. Just
look at the Australian and the British real estate markets as an example of
lack of immunity from the worldwide housing bubble.
The media here in Canada tells us that unlike their American
counterpart, the Canadian banks keep most of these real estate related loans on
their balance sheet. Is that true? Can they do that and stay compliant with
Capital Adequacy requirements (Basel II)?
For the banks machines to keep on cranking these loans, don't they
have to sell them to someone, as you explained, though the securitization
process, and if there are no buyers for those CDO can the banks keep so many
loan on their books and stay compliant with Basel II. Wouldn't these illiquid
securities affects the banks' money supply and in turn money supply available
from banks to originate new loans to the Canadian real estate market.
Consequently, this would exert downward pressure on sales prices of homes.
What am I missing here? Why the Canadian market is immune to all
this?
I look forward to hearing your thoughts on this.
Sa'd
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Aswer
by R.T.:
The real estate market is subject to worldwide influences, but
follow also local conditions. It usually follows an 18 year cycle, with about
12 years of rising prices and 5 or 6 years of stable or declining prices. The
previous top was in 1987 and the last top was in the spring of 2005. National
markets where a price bubble has taken place are more prone to deep price
declines. In Canada, the bubble was less intense than elsewhere, except maybe
for Calgary and Vancouver. If the price of oil drops after Bush's departure and
after the 2010 Olympics, these markets can also correct.
I personally expect the bottom of the current cycle to occur in
2010-11.
As far as Canadian banks and institutions are concerned, it is
true that they are more concentrated than in the U.S. But, they also carried
SUV debt off balance sheets through subsidiaries. They also sold CDOs to money
market funds and they had to retrieve them to salvage their reputation. I
expect Canadian banks to suffer large declines in net earnings and possibly
losses in 2008.
There has been recently an agreement (the Montreal agreement) to
transform unperforming CDOs into 6 or 7 year debentures, so that banks and
other institutions would not have to inscribe losses on their balance sheets
for 2007. The settlement date is mid-March '08. We will see if the agreement
holds up, since most of the large Toronto banks have refused to participate.
Therefore, it is not true that the Canadian market is immune to
the crisis as it will unfold with a vengeance in 2008.
New
As both a Canadian and economist, I was
wondering if you take seriously the so-called Amero currency, apparently being
devised as a follow-up to the Federal Reserve Note, Canadian Maple. and Mexican
Peso? I cannot for myself not think that President Bush, with his hair-brain
costs to perform Middle East wars, does not have at the core the attitude of
defrauding first the United States, taking the parity of the current American
and Canadian currencies and dashing these(somehow together) ultimately taking
these to parity with the Mexican Peso.
What in your view would bring about
this scenario!
Dave
Answer by R.T.:
No, I do not take the amero seriously. This would spell disaster for a resources-based economy such as the Canadian economy.
I do take seriously, however, the danger that the U.S. would like
to put its hands on Canada's natural resources and oil fields.
New
Reading your recent article prompts me to wonder about a couple of
things from a Canadian perspective. Is it possible that, despite the
possibility of a recession, global or otherwise, that 'Peak Oil' and 'Peak Natural Gas' could put a floor
under high-priced hydrocarbons and that their prices will remain elevated? As
the Bank of Canada has been injecting new money into the financial system to
mitigate the ill- effects of a seizure in Canada's ABCP market, does this
imply more inflation appearing in
the Canadian economy? Will Canada "be caught with an overvalued currency while pursuing an export-led
growth strategy" and will
this worsen Canadian economic conditions should the American recession be severe? Since "irresponsible
lending practices" are not as prevalent in Canada as in the U.S., will
this lessen the impact, on Canada, of failures in the American financial
system? Does the appointment of a relatively young and inexperienced Mr. Mark
Carney, a former Goldman Sachs executive, as the new Governor of the Bank of
Canada, imply that Ottawa is intending to pursue a de facto peg to the U.S.
dollar? Does this new Bank appointment suggest that Canada's financial and
governmental elite are determined to draw closer to Wall Street at the expense
of the Canadian economy? Thank you, Doctor.
Your articles are always a pleasure to read.
Peter
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Answer by R.T.:
You raised many interesting and fundamental points, not the least
the Carney appointment and the Harper government's evident decision to join the
New American Empire.
It is certainly possible for the Bank Canada to try to stabilize
the Canadian dollar at par with the US dollar for a while. I think they will do
that for the next few months.
But, as I mentioned in my piece, if Bush were to start bombing
Iran sometime in 2008, or if there were another big geopolitical shock of the
same nature, then watch out, because the price of oil will explode and the US dollar
will sink further while the Canadian dollar, a petro currency, will rise also.
Presently, the US dollar is somewhat oversold on exchange markets
and many central banks, including the Bank of Canada, are buying it in order to
prevent their currencies from appreciating too much and hurting their exports.
That is why I think the US dollar is presently rebounding against the euro, the
Canadian dollar, the Australian dollar...etc.
As for peak oil, it will come sometime after the economic slowdown
that I see coming until 2010-11. Then, it will fuel the next inflation round
with a vengeance. This does not preclude a price correction for oil if there is
an economic slowdown and if there is no hot conflict involving Iran or the
Middle East.
As to the
subprime crisis in Canada, it is severe, but it is more concentrated and will
likely be easier to manage than in the U.S.
New
As always, I enjoy reading your work. Thank you for continuing to include
me on your mailing list.
However, I have a question regarding a remark you made in response
to Question 8 posed by the Turkish Daily News. You state, “the U.S.
dollar could rebound in the months ahead”.
I wonder how fiat money, now being created at an almost
exponential rate, (while M3 is no longer reported by the Fed, some analysts
believe 2007 growth was somewhere north of 12 percent) representing a US
economy that by the US government’s own data will not surpass 3.5 percent
for the year, can “rebound”?
Must we depend on an outbreak of sanity in
Washington to drastically cut spending to achieve this renewed interest
globally? If so, we Americans are truly doomed!
Moreover, central banks globally are already reducing their US
Dollar reserves. The recent OPEC summit in Saudi Arabia concluded with an
initiative to examine its Petrodollar policy – meaning members, other
then the Arabs, would like to be paid with non-depreciating money.
Could you please elaborate on the
economic or geopolitical actions or policies that could foster the reversal you
mention? Thank you.
Answer by R.T.:
You are right that the US dollar is a completely fiat currency
since August 15 1971, as are all the other currencies. But, as for all
declining markets, there are technical "dead-cat bounces" from time
to time.
Presently, the US dollar is somewhat oversold on exchange markets
and many central banks have started buying it in order to prevent their
currencies from appreciating too fast and too much, which could hurt their
exports. That is why I think the dollar could rebound against the euro, the
Canadian dollar, the Australian dollar...etc., in the coming months. This does
not mean that it cannot pursue its decline later on.
One has to
remember, also, that the US economy is still very resilient (even if growth
next year will be less than 2%) and the low dollar is going to spur US exports
in the months and years ahead. Also, foreigners will likely want to cash in on
their currency capital gains and start investing in the US. Presently, the US
stock markets are partly sustained by foreign buying. All this could help the
dollar to stabilize for a while. Long term, however, the dollar seems to be on
a secular downtrend.
Nouveau
J'ai lu l'article "Questions et réponses concernant
l'actuelle crise financière" sur le site www.alterinfo.net.
Je suis technicien productique et dispose d'une petite somme
d'argent en Euro.
Je voulais acheter un appartement au Maroc mais malheureusement
les prix se sont envolés ces 2 dernières années, et comme
je ne veux pas emprunter, je n'ai encore rien fait.
Voici mes questions :
- pensez-vous que la crise actuelle de l'immobilier va se
généraliser aux autres pays ?
En cas de crise généralisée, voir de
récession aux US, l'Euro risque-t-il de perdre de la valeur?
________________________________________
Réponse
de R.T.:,
La décision d'investir dans une propriété
dépend de nombreux facteurs personnels et circonstantiels. L'euro
étant très fort présentement, cela peut constituer un
facteur pour investir à l'étranger.
Quant à la crise financière centrée sur
l'immobilier, elle est plus forte dans certains pays que dans d'autres, mais
elle s'inscrit dans un long cycle de 18 ans (12 ans de hausse des prix et six
ans de baisse) qui ne devrait trouver son plancher qu'en 2010-11.
New
I presume you are monitoring the crisis in confidence in the
Florida (and Montana) state funds.
It seems their short term money investments ended up with some
exposure to SIVs and so on, leading to panicking withdrawals by local governments
and authorities (like school boards). Florida has frozen withdrawals, making
for a high profile situation (teachers may not get paid and so on).
Should this panic spread to other states, or beyond, it could be a
significant event. I would guess that there is furious action behind the scenes
to contain this brushfire, something like the Montreal Accord or Super-SIV, but
perhaps even more wide-ranging. It will be interesting to see what they've come
up with by Monday morning!
All the best, John (back in Halifax and still trying not to pay
attention to this stuff -- Reuters & Forbes has a story that even PayPal is
slightly SIV-positive ... geesh!)
John
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