Canada, France and Switzerland stood alone among nine markets measured in recording annual price gains in home prices, based on second-quarter data, with inflation-adjusted price increases of 5%, 5% and  4%, respectively, compared to declines of 6% in the U.S., the U.K. and Australia, 10% in Spain and 14% in Ireland. In fact, Canada’s home prices have escalated 44%, on average, since 2005 – and 68% in Vancouver – and they are up 7.7% in the past 12 months! Words: 1244

Reports by Canada’s Bank of Nova Scotia, National Bank (see here) and the Canadian Real Estate Association (see here) paint a rosy picture for the housing scene in Canada over the past decade with no declines foreseen, on average, in the near future. Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) has amalgamated the findings of these three reports and comments on said reports as found in the Globe and Mail into this article to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. 

1. Senior economist Adrienne Warren of Canada’s Bank of Nova Scotia says in her report that:

Canada’s Home Prices (Major Cities) Went UP 5.27% in Last 12 Months

Scotiabank expects housing demand around around the world to remain moribund until the recovery picks up and, while Canada’s real estate market is notable for its resilience and longevity, Warren anticipates, on balance,  a modest slowdown in the volume of sales transactions heading into year-end, alongside relatively flat prices.

 

2. The latest Teranet-National Bank National Composite House Price Index reports that: 

Canadian Home Prices Have Jumped 44.27% Since 20o5

As the chart below shows Canada has not experienced a housing bubble with prices continuing an almost uninterrupted advance as seen in the chart below:

 

Since Teranet first started tracking prices in June 2005 with a base level of 100, home prices have jumped 44.27%. The Vancouver index leads the pack at 167.77, suggesting prices have gone up 67.77% since 2005. Toronto, meanwhile, has the lowest index rating at 131.26, meaning prices have accelerated “only” 31.26% in that time.

House Prices Went UP 1.3% in July in Canada’s Major Cities

Prices were up in five of the six major metropolitan markets surveyed in July:

• Calgary led the pack with a 2.3% increase (+0.9% y/y),
• Toronto was up 1.7% (+4.8% y/y), 
• Ottawa came in at +1.o% (+4.1% y/y),
• Vancouver was up 0.9% (+8.5% y/y), yes, 8.5%!,
• Montreal rose +0.5% (+6.0% y/y) and
• Halifax -0.9% (+3.3%y/y).

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3. The latest Canadian Real Estate Association reports that:

Canada’s National Average Home Price is $349,916 (Canadian dollars)

The national average price for homes sold in August stood at $349,916, down from $372,700 in June. Despite the slowdown, however, prices have nonetheless gained 7.7% in the past 12 months. This number is at odds with the Teranet-National Bank National Composite House Price Index number of 5.27% because that report tracks prices in only 6 of Canada’s largest metropolitan cities whereas the Canadian Real Estate Association (CREA) numbers reflect the sale price of homes in every community across the country regardless of population.

CREA’s chief economist Gregory Klump says,

Earlier this year, the national average price was being skewed upward by sales in some expensive Vancouver neighbourhoods, but this factor is now diminishing. Upward skewing of the national average price is also shrinking due to overall sales trends in Vancouver, and most recently in Toronto…Economic and financial market headwinds outside Canada are keeping interest rates lower for longer [and] those headwinds will likely persist until, and indeed after, fiscal quagmires in the U.S. and Europe are resolved. In the meantime, the Bank of Canada will have ample reason to delay raising interest rates further, which is supportive for the Canadian housing market.

 *http://www.theglobeandmail.com/report-on-business/three-charts-to-start-your-week/article2188519/?utm_medium=Feeds%3A%20RSS%2FAtom&utm_source=Home&utm_content=2188519

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Buy-and-hold gold and silver and [the stocks and long-term warrants of quality] precious metals miners – and sleep well at night. [Let me explain why that is the case.] Words: 731

So says Jeff Nielson (www.bullionbullscanada.com)  in edited excerpts from his original article* which Lorimer Wilson, editor of www.munKNEE.com (It’s all about Money!), has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Nielson goes on to say:

Understanding ‘Buy and Hold’
While short-term movements are highly unpredictable and short-term predictions are extremely unreliable, this pattern reverses over the long term. Put simply, the longer the time horizon (and the larger the data stream) the more predictable are the movements of companies, commodities, and overall markets. This is an elementary fact of statistics… [As such,] given this context, what are investors to make of the “new reality” for portfolio management where even the most-conservative portfolio managers are regularly heard pontificating that “buy and hold is dead”? Very simply, it means that these ”advisors” no longer have confidence in the investments they are recommending to their clients.

In contrast, I know of no precious metals advocates who have any reluctance to recommend gold and silver as being good long-term investments – and by “coincidence” many of the “experts” who previously shunned precious metals are now conceding that every portfolio should have at least some precious metals component.

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The other reason why making short-term “calls” on gold and silver is even more dubious than in other sectors is because these are our most-manipulated markets. The reason for this constant manipulation is also part of the reason why gold and silver are considered such good long-term investments. Precious metals are the truest “barometers” for economic conditions, and most particularly inflation. As the only true “money” in our societies, the nominal prices of these commodities will always reflect the level of inflation in an economy, over the long-term. Lying about inflation is a goal of most governments, and an obsession with some – most particularly [that of] the United States. Part of this campaign of lies is to suppress the prices of gold and silver – so that soaring gold and silver prices do not reveal the magnitude of their lies regarding inflation.

The precise reason why predictions are so unreliable over the short-term (constant manipulation) is also the reason why there is so much certainty about the long-term predictions for this sector: the longer a price/market is held down, the longer and higher it will bounce once such price-fixing inevitably fails. This is why it is so vitally important that precious metals investors acquire the most-elusive of all qualities: patience…

No one knows what precious metals markets are going to do over any short-term span…[but] there are occasions where sharp spikes or dips create obvious buying and selling opportunities. As such, placing open buy and sell orders still allows people to take advantage of those extremes – and without risking getting swayed in their tactics by the emotions which dominate short-term trading. In other words, let the market come to you.

Conclusion

Reckless money-creation, and even more ridiculous near-zero interest rates, guarantee [that] a wave of inflation will impact the global economy. The real beginning of the “big move” for precious metals is still ahead of us because government policies continue to make the long-term fundamentals for this sector even more bullish. Maybe that big move will start tomorrow, [maybe not, but] the point to keep in mind is that if precious metals were to trade sideways again, or even pull-back, this makes the long-term picture more bullish, not less so.

*http://www.bullionbullscanada.com/index.php?option=com_content&view=article&id=3607:precious-metals-where-buy-and-hold-is-not-dead&catid=48:gold-commentary&Itemid=131

Related Articles:

1. Update: Why $300+ Silver is a Realistic Future Peak Price  http://www.munknee.com/2011/07/with-gold-at-10000-silver-could-reach-714/
2. Update: These 90 Analysts Believe Gold Will Go to $5,000/ozt. – or More!  http://www.munknee.com/2011/06/update-these-90-analysts-believe-gold-will-go-to-5000ozt-or-more/
3. The “Secret” World of Gold & Silver Company Warrants  http://www.munknee.com/2011/05/the-secret-world-of-gold-silver-company-warrants/
4. Gold Mining Stocks Are CHEAP Compared to Price of Gold  http://www.munknee.com/2011/06/gold-mining-stocks-are-cheap-compared-to-price-of-gold/

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above

Most signs point to a slow and steady recovery, but what if the pessimists are right, again? What if the United States isn’t in the slow-lane to recovery, but rather on the precipice of another decline — a double dip? [If so,] where might this re-recession begin? Words: 988

So say Derek Thompson and Daniel Indiviglio in an article* in this month’s isue of The Atlantic (http://www.theatlantic.com). Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, presents below further edited [..] excerpts from the article for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) The article goes on to say:

[Below] …we have imagined five financial earthquake scenarios, each with a single epicenter – housing, consumers, toxic assets, Europe, and the debt – …listed in order of likelihood.

1. Housing’s Mini-Bubble Pops
Perhaps nothing poses as big a concern to the U.S. economy as its housing market. [Did] …the government’s efforts to stabilize the market through a buyer credit, ultra-low mortgage rates, and mortgage modification programs pan out [or] did it just create another mini-bubble that’s beginning to pop now that the support has been withdrawn?

Here’s the scenario.
a) Weak home sales and continuing foreclosures result in climbing real estate inventory [causing:]
i) new homes [to become] even less attractive which further reduces construction jobs
ii) downward pressure on home prices, which makes it harder for struggling homeowners to sell their home to avoid foreclosure and keeps strategic default rates high, exacerbating the problem.
b) Lower home values encourage Americans to save more and spend less, since their wealth is effectively reduced.
c) The Dow drops and credit markets tighten even further, suffocating private investment just as homeowners bunker down and slash spending.
d) Growth turns negative.

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2. Increased Consumer Savings Break the Economy
You, the American consumer, are reloading savings after a debt-fueled decade [b]ut as any general will tell you, when an entire squad reloads at once, it leaves everybody vulnerable. It’s the same with the economy.

Here’s the scenario.
a) Consumer sentiment continues to fall slowly, and spending turns negative again.
b) Small businesses hold off replenishing their inventories or adding new workers.
c) Wages and hours freeze.
d) Unemployment takes a leap toward 10 percent in October.
e) Congress remains paralyzed, because it’s only weeks away from the mid-terms.
f) The stock market sees business revenue trending flat, joblessness rising and Congress doing nothing, and it sparks a 300-point sell-off.
g) Americans, frightful for their savings, cut back spending even more the next month.
h) Growth turns negative.

3. Toxic Assets Return
[In the previous] bank bailout]…the Treasury intended to purchase the toxic assets from banks which were the source of investors’ uncertainty concerning bank stability but couldn’t figure out a way to do this quickly enough to make it effective. As a result, the banks were largely stuck with these bad assets. We just don’t know how bad – yet.

Here’s the scenario.
a) The residential real estate market’s problems continue. Even once foreclosures begin to decline, we see waves of defaults, as modification program participants re-default at rates of 30% to 50%.
b) Commercial mortgage-backed securities continue to deteriorate, as some businesses struggle with weak consumer demand.
c) Home and commercial real estate values keep declining, and so do the value of the assets that back them.
d) Banks with exposure to these toxic securities see another round of losses, and investors question their stability.
e) The market plummets.
f) Credit freezes.
g) Growth turns negative.

4. Europe Falls Apart
Europe seems to have avoided an all-out collapse of confidence in its ability to pay back its debt [b]ut things can change – and fast.
Here’s the scenario.
a) Slow growth in weak Eurozone states like Greece, Spain, and Italy turns negative and spooks investors, who demand higher returns on government debt.
b) Europe’s bond rates spike.
c) Countries announce further austerity — tax increases and spending cuts — which strangles our biggest export market. d) The EU central bank responds by announcing a plan to write down troubled debt, which dings some Americans banks.
e) In a flight to quality debt, the dollar appreciates. This hurts our exports even more.
f) As the trade deficit gapes open and manufacturing’s good run dead ends, the stock market plummets, taking household wealth down with it.
g) Families looking to restore balance sheets cut back on spending, and the American producer loses the American consumer and the European buyer.
h) Growth turns negative.

5. Debt Finally Catches Up to Us
Interest rates on U.S. debt are low today for one big reason. Investors trust the United States, at least more than they trust other countries. If the people giving us money suddenly have as little faith in America as Americans, that could change – and quickly.

Here’s the scenario.
a) The bond market can strike without warning, as it did in Europe earlier this year. If uncertainty with our political process gets reflected in our interest rate, we’ll have a harder time affording debt, 55% of which has to be rolled over in the next three years.
b) Pension and mutual funds with government debt would be written down, causing Americans to save even more of their paychecks.
c) We’d be left with two bad choices: tax cuts to juice consumption or tax hikes to please our lenders.

At that point, it would be too late to avoid a double dip.

*http://www.theatlantic.com/business/archive/2010/09/5-doomsday-scenarios-for-the-us-economy/62445/

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It would appear that the U.S. is in an untenable position – between a rock and a hard place – in an inescapable debt trap – where the options are, at best, dire – hyperinflation or a deflationary depression! It would seem that all we can do is ride out the storm in a boat laden with gold. Words: 2283

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below edited excerpts from Jeff Nielson’s (www.BullionBullsCanada.com) original 7000 word speech* at the “World Money Show” in Vancouver for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Nielson goes on to say:

The U.S.’s severe debt problems which are exacerbated by its $70 trillion in unfunded liabilities to fund the social ‘entitlements’ of the mass of baby boomers who will be retiring by the tens of millions in the next few decades and there is NO likelihood of the U.S. government ever reducing those entitlements. Any attempt to do so would cause severe economic disruptions and civil unrest. In fact, there are numerous practical reasons why this will never happen:

1. The looming pension crisis
It is estimated that U.S. pension plans were underfunded by about $3 trillion as of the end of 2008 and even after the recent “rally” in U.S. equity markets that pension deficit still amounts to roughly $2 trillion. Thus, even if the U.S. government could somehow make full pay-outs on the entitlement programs which U.S. seniors will be relying upon, they would still have to raise an additional $2 trillion just to maintain their standard of living not to mention the consumption-level which this consumer economy relies upon for its survival. Why? Because, with over 40% of Americans having less than $10,000 in savings, Americans are more dependent today on these entitlement programs than any other generation of Americans in history.

2. The second coming of another housing bubble
With 75% of the “assets” held by retired and soon-to-be retired Americans consisting of real estate, they will need to dump roughly $2 trillion of real estate onto the U.S. market – the most over-supplied real estate market in history – in order to maintain their standard of living. To preclude such an event, the U.S. government has been desperate to ‘re-inflate’ the U.S. housing bubble – at any cost – to buoy up American ‘real estate’ accounts and bail out the banks holding the mortgages on houses in foreclosure.

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Nevertheless, I believe the U.S.will see a second housing bubble because:
1. the U.S. Federal Reserve has taken the interest rate all the way down to zero – and left it there
2. millions of U.S. properties have either been held off the market by U.S. banks, or are tied-up in U.S. foreclosure proceedings. Both actions have artificially reduced “inventories” of unsold homes by at least 50% putting in place a very temporary “bottom” in prices
3. the U.S. government agencies, which are responsible for all 90% of all new mortgages, have once again lowered their lending standards. In fact, when the government buyers’ “credit” is factored-in, more than half of all U.S. homes purchased in 2009 had zero down-payments.
4. the Federal Reserve has been buying up every U.S. mortgage bond in sight given the record default rates which currently exist in the U.S. In fact, more than 25% of all U.S. mortgage holders have “underwater’ mortgages and 15% of all U.S. mortgages are currently in default and/or foreclosure: an all-time record
5. buying all these “bonds” (with newly-printed dollars) has temporarily kept U.S. mortgage rates several percent lower than they would have been without this hidden and very expensive taxpayer subsidy. This has resulted in the Federal Reserve absorbing more than $2 trillion of “bonds” and securities which – to be polite – are of extremely dubious value and the moment the Fed stops buying-up all these debt-instruments, U.S. mortgage rates will shoot higher.

With all of the aforementioned occurring at a time when millions of “option ARM” mortgages are about to reset and more than 40% of the millions of Americans holding these mortgages have been making minimum payments
it follows that when these mortgages reset, borrowers could see their monthly payments not merely increasing by 40% or 50% per month, but by up to several times their current payments.

These millions of mortgage resets are occurring at the same time that long term unemployment in the U.S. is at its highest level in at least 70 years, and U.S. housing “real” inventories are at their highest levels ever. As such, once this second collapse begins, there will be no means of stabilizing this market because:

1. With interest rates already at 0%, interest rates can literally only go higher
2. U.S. homeowners have less equity in their homes than at any time in history
3. Retiring baby boomers will have to dump $1 to $2 trillion of real estate onto this market just to partially fund their under-funded retirements and much more than that, if entitlement programs should have their benefits slashed.

This will not only undermine the U.S. housing market for many years to come, but any reductions in U.S. entitlement programs will directly make the next collapse of the U.S. housing sector that much more severe – because it would force the sale of much more real estate.

3. The future cost of interest payments and “unfunded liabilities”
The Obama government has already admitted that over the course of this decade more than 50% of every new dollar of debt will be consumed in interest payments on old debt. Those interest payments, alone, will exceed $1 trillion/per year before the end of this decade. Added to this will be roughly $2 trillion per year of “unfunded liabilities”, which will now have to be funded. This means that over the course of this decade, the U.S. government will have to come up with an additional $3 trillion/year – above and beyond all current spending programs. This will roughly double U.S. government spending, and roughly quadruple current deficits.

Even the largest tax increases in history could only fund, at most, about 10% of this spending-gap. This means either cutting trillions per year in government spending, which would be totally impossible, or simply printing-up trillions and trillions of new dollars to pretend to “pay” those bills. This, in turn, guarantees hyperinflation.

4. The on-going political paralysis
The budgetary constraints which I have discussed above have all been of the “economic” variety. However, arguably it is U.S. political constraints which are an even bigger obstacle in beginning to address the massive, triple-problem of U.S. insolvency: debts, deficits, and liabilities.

Decades of “gerrymandering” have transformed roughly 80% of U.S. electoral districts into the permanent holdings of one or the other of the two, U.S. political parties. As such, the candidates of the favored party are essentially guaranteed a seat for life and this eliminates any incentive to produce positive results for their own constituents – other than bringing home the “pork”. As a result, partisan politics has taken precedence over any, and all, other considerations and, regretfully, the #1 rule of partisan politics is to never allow the party in power to accomplish anything (good) of significance.

The one exception to this scenario of total indifference is with respect to the American Association for Retired Persons (AARP) which is not only the largest voting bloc in the U.S., but it is comprised of the only segment of the U.S. electorate which has a constently high “turn-out” in every election. Not surprisingly, their two most important issues are Social Security and Medicare: the two social programs which are 100% certain to bankrupt the U.S. economy. Barring a complete “metamorphosis” of the entire U.S. political system, these “unfunded liabilities” are essentially carved in stone, since they are the only issues where doing something unpopular could threaten the security of the sitting politician and this leaves current and future U.S. government with nothing but terrible options. The questions they must ask themselves are:

1. Do they fully “fund” all these entitlement programs by printing up countless trillions of new dollars (the only possible way to cover those entitlements 100%)?
2. Do they slash entitlements – and lose their own, cushy positions – sucking trillions of dollars out of the economy and result in a debt-implosion which would make the death of the former Soviet Union look like a “picnic”.

If the U.S. does not commit to one course of action or the other, however, the U.S. will likely suffer the worst of both worlds: a “hyperinflationary depression”.

5. The preference for hyperinflation
Hyperinflation is more than just “soaring prices” – it also reflects a crisis of confidence with respect to the currency in question, and the beginning of a death-spiral for that currency.

When a currency starts to rapidly lose value the government is forced to print up vast quantities of new currency to subsidize the depleted wealth of its citizens – so they literally do not starve to death. Then, that excessive money printing leads to an even more rapid rate of devaluation for the currency, and this vicious circle gets more and more severe. In virtually every example in history, such currencies effectively go to zero.

For the reasons previously mentioned, many people will argue that hyperinflation is the inevitable course on which the U.S. is headed. Not only is the Federal Reserve under extreme pressure to continue to print countless trillions of new dollars, but hyperinflation “solves” the twin problems of massive, current debts and completely unpayable entitlement programs. The debts would get “paid”, and the entitlements would be “funded”. That being said, the paper used to do this would have only a minute fraction of its former value because, since hyperinflation causes a currency to move toward zero, all debts and liabilities expressed in that currency also become effectively worthless. Thus, a very strong argument can be made that the U.S. will choose the informal “default” of a hyperinflation, rather than suffer a formal default – and a resultant debt-implosion.

History is clear: the devastation of hyperinflation will destroy the wealth of average Americans to an even greater degree than through suffering the ravages of a deflationary implosion – although the former would preserve the “paper empire” of the Wall Street banks who have been dictating U.S. economic policy. As such, is there really any doubt as to what direction the government, unduly influenced by the country’s financial oligarchy, is going to take?

6. The current deflationary environment
In order to delay inflation from ravaging the U.S. economy, however, the U.S. government is currently playing a very dangerous game. It is essentially starving the entire U.S. economy of capital. Bank-lending is falling at the fastest rate in U.S. history because the banks refuse to lend money to U.S. businesses, despite their promises to do the exact opposite. They prefer to keep most of the bail-out money “on deposit” at the Federal Reserve in what is literally nothing more than a “savings account”. That’s where the Federal Reserve has been “borrowing” the money to buy-up trillions of dollars of worthless U.S. mortgage bonds. The rest of the bankers’ money is then used to “play the markets” with their “proprietary trading”.

7. The lack of a vibrant economy
Those who insist that the “mighty” U.S. economy will “bounce back” as it always has in the past – that the U.S. will “grow” its way out of its huge debt/deficit crisis – Don’t seem to realize, with more than 50% of every new dollar of U.S. debt simply being interest payments on the old debt, that the U.S. economy will not be able to grow much, if at all – let alone at the above-average rate which is required just to produce enough revenues to service all that debt.

The U.S. economy is supposedly growing at more than a 5% rate, which is equivalent to an “economic boom” for any economy other than China’s. However, to borrow an old line: “where’s the beef?” U.S. government revenues (for all three levels of government) are plummeting downward at an accelerating rate, so how can the economy be “booming” if no one is generating any tax receipts for the government? The fact is that, with the U.S. carrying the heaviest debt-load in its history, and an every-larger portion of every dollar consumed just paying interest, the overall U.S. economy would have to be operating at a higher rate of activity than is normal in the past, just to achieve average growth. Can anyone really suggest that the U.S. economy is currently stronger than normal?

A Debt Trap in the Making
With the U.S. economy currently carrying over $60 trillion in total public/private debt just raising U.S. interest rates even 1% would drain an extra $600 billion per year out of the U.S. economy in additional interest payments – an equivalent drop of 5% drop in U.S. GDP – and that would be the case even before factoring in the “multiplier effect” of sucking that much money out of the economy – and every 1% hike would inflict a similar, but compounded, amount of damage on the U.S. economy. Frankly, it is very likely that even a 1% increase in current U.S. interest rates would be enough to send the U.S. economy into an immediate deflationary spiral.

Talk about being between a rock and a hard place – in an inescapable debt trap – where the options are, at best, either a hyperinflation or a deflationary depression! Yes, it would seem that all we can do is ride out the storm in a boat laden with gold.

*http://www.bullionbullscanada.com/index.php?option=com_content&view=article&id=11900:debt-denial-and-default&catid=64:presentations&Itemid=141

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.

Do you recall where you were on September 18th, 2008? Do you remember that day? We can’t seem to recall it either, which is strange, because it was one of the most important days of the decade. October 7, 2008 is another day that should stick out in our memories, but we’re sure you don’t remember that day either – and we’re in the same boat. How is it, then, that we can’t recall where we were or what we were doing on the two days the entire financial system almost collapsed?!? It boggles our mind. Words: 2355

In further edited excerpts from the original article* Eric Sprott and David Franklin (www.sprott.com/main3.aspx?id=54) go on to say:

Those dates should have been emphasized in every “review of the decade” written at the end of 2009, but we’ve been hard pressed to find them mentioned in any mainstream publication. This is troubling to us, and makes us wonder if people are even aware of the incredible events that took place on those fateful days only eighteen months ago.

Is Hindsight Really 20/20?
The financial industry often prides itself on the hindsight principle. We may not predict the future with great accuracy, but when things fall apart we’re very quick to explain why and how it happened with authoritative aplomb. “Hindsight is 20/20″, as they say but is it really?

Despite our seemingly thorough analysis of past failures, the financial industry seems to have an uncanny ability to make the same mistakes over and over again. Perhaps this is due to the fact that we don’t properly review events passed. Our obsession with predicting future results impels them away into oblivion. The fact remains that a cursory look back on the last decade reveals an apparent cycle of asset bubbles that all grew and burst before our eyes, with little effort made to actually address the underlying causes that made them possible.

Looking back on the last decade from 2000 to 2009, are there any lessons that can provide some guidance for the next decade and are there any lessons that can be gleaned from September 18th and October 7th, 2008, when we almost lost the entire financial system? We certainly hope there are.

The Seeds of Our Current Financial Mess
The seeds of the financial mess we are currently experiencing began in the mid-to-late nineties. As we approached year 2000, the widespread belief developed that new technology would rewrite economic rules. The euphoric years between 1995 and 2000 blew the first asset bubble of the 21st century in the technology-heavy NASDAQ Index. Alan Greenspan first uttered his now famous “irrational exuberance” warning in December 1996 when describing stock valuations at the time. It wasn’t until mid-1999, however, that the U.S. Federal Reserve actually increased interest rates in an attempt to quell the overheated stock market. The Fed actually raised rates six times between June 1999 and January 2000 in an attempt to cool an already overheated economy. The dot-com euphoria burst on March 10, 2000, when the NASDAQ peaked at 5,132, representing more than double its value from only a year before.

a) The NASDAQ Bubble
In many ways, the NASDAQ bubble was somewhat conventional in that it was born out of over- enthusiasm for the prospects of new technology. The fact that the Federal Reserve actually tried to cool the bubble down, however feebly, in the years before its peak, is really what differentiates it from the bubbles that followed. The NASDAQ collapse is well understood now, ‘in hindsight’. This collapse compelled Alan Greenspan and the Federal Reserve to embark on the largest rate cuts in US history in an effort to soften its impact.

b) The Housing Bubble
The inability to face the economic pain of the market crash ultimately set the stage for the second bubble of the decade, this time in housing. The key point to emphasize here is that the Federal Reserve lowered interest rates thirteen times between January 3, 2001 and June 25, 2003 in order to cushion the economy. These rate cuts allowed for increasingly easy access to credit on a worldwide scale. It didn’t take long for the second bubble to develop, and it wasn’t hard to see the warning signs. Home prices rose at an annualized rate of more than 11% from 2000 to the peak on July 31, 2006 -more than doubling in that time period.

c) Financial System Crash
The financial sector became the US economy’s central economic driver, generating up to 41% of all corporate profits and making it the fastest growing sector of the economy. In July 2005, Greenspan described certain real estate markets as “frothy” and recommended that the Federal Reserve rein in lending standards. We wrote in response at the time that “(Alan Greenspan) should be careful what he wishes for… it may come true. It’s like throwing stones in glass houses. It may all end with the Federal Reserve having to bail out the financial system, as it did with the savings and loan crisis a decade ago.” We now know what transpired in the years to follow – we’ve all lived through it, and it ended with the biggest bailout in financial history.

So what’s the point, you ask? In hindsight, it’s very safe to argue that the Fed probably shouldn’t have lowered rates thirteen times between January 3, 2001 and June 25, 2003. It proved to be an extremely damaging policy. Artificially low rates created a lending mania of enormous proportions which dragged consumers along for a debt-fueled buying orgy.

In our January 2008 commentary, aptly entitled “Welcome to the 2008 Meltdown”, we opined that “There are meltdowns occurring everywhere: commercial real estate… car loans…credit cards. It was all a massive Ponzi scheme sustained by overleverage. Because this has been one of the most egregious bubbles ever, its impact is likely to linger longer than anyone expects. This is more than just a market failure. It’s a systemic meltdown.” It was but the meltdown happened so fast that it never seemed to burn into our collective memory. Everyone remembers that we went into a severe recession in late 2008, but do they know the details of what actually transpired? A quick review is needed to appreciate how close we really came to a full shutdown.

A Systemic Shutdown – Almost

a) September 15, 2008
It was the Lehman Brothers bankruptcy on Sept. 15th that set everything in motion. Most market participants will remember that date – Bank of America bought Merrill Lynch the very same day, so it was certainly memorable. What many people fail to appreciate, however, is the mayhem that took place during the following days in the US money markets.

b) September 16, 2008
The day after Lehman’s collapse, the Reserve Fund, one of the oldest and most high profile US money market funds, began to hemorrhage money as investors redeemed in panic. Large institutional investors soon began pulling money out of other major US money market funds fearing heavy losses from Lehman Brothers debt. Almost $173 billion was pulled from such funds over the next two days, threatening to collapse the entire US financial system.

c) September 18, 2008
The US financial system almost completely collapsed. The details of that day remain frustratingly murky. The imminence of complete disorder seemed to scare Congress into action, but we can only piece the story together through random anecdotes that have been partially revealed through subsequent interviews. In what has been dubbed ‘the Kanjorski meme’, Congressman Paul Kanjorski recounts a meeting that was held between Ben Bernanke, Henry Paulson and certain members of Congress where the conception of the “Troubled Asset Relief Program” (TARP) supposedly took place. To stem the flow of money out of US-based money market funds, Paulson had to provide an almost instant guarantee on all money market funds held within the US. Kanjorski recounts, “If they had not done that, their estimation was that by 2pm that afternoon (September 18th), $5.5 trillion would have been drawn out of the money market system of the United States, [which] would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed. We talked at that time about what would happen if that happened. It would have been the end of our economic system and our political system as we know it.” Further details of these meetings have been provided by Senator James Inhofe, who recounted that Paulson had warned of martial law and civil unrest if the TARP bill failed. It is interesting to note that while Henry Paulson mentions several meetings that took place on September 19th in his book, the discussion of ‘imminent financial collapse’ and ‘martial law’ was noticeably absent.

The official record of the events of September 18th, 2008 comes from a research report issued by the Joint Economic Committee. The reports states, “On Thursday September 18, 2008, institutional money managers sought to redeem another $500 billion, but Secretary Paulson intervened directly with these managers to dissuade them from demanding redemptions. Nevertheless, investors still redeemed another $105 billion. If the federal government were not to act decisively to check this incipient panic, the results for the entire U.S. economy would be disastrous.” Between the official record and the statements by members of congress and the senate, we can piece together an almost system-wide collapse that was potentially hours away.

d) September 29, 2008
Two weeks later, on Sept. 29th, investors sent the Dow Jones plummeting 778 points, representing the largest single-day loss in the history of the index. In hindsight, it was somewhat of a delayed response, because the real damage had by then been averted by the Treasury’s blanket guarantees on all money market funds.

e) October 7, 2008
The second fateful date to remember was October 7, 2008, when the UK almost collapsed. Bank of England Governor, Mervyn King, describes the situation: “Two of our major banks which had had difficulty in obtaining funding could raise money only for one week then only for one day, and then on that Monday and Tuesday it was not possible even for those two banks really to be confident they could get to the end of the day.” This was the justification given for the Bank of England to provide secret loans of £61.6 billion to The Royal Bank of Scotland and HBOS to maintain solvency. Amazingly, news of these loans was never revealed until November 24, 2009, more than one year later.

Recalling that fateful day, David Soanes, Managing Director of UBS Bank, and part of the group assembled to assist with the UK government’s crisis response, stated, “We only really knew by probably about seven o’clock at night (October 7, 2008), that we, that everyone was going to get through to the next day.” These revelations raise new questions about the true scope of bailouts undertaken by the major governments at the time. Lord Myners, the UK Financial Services Secretary, alluded to similar covert banking operations conducted by the European Central Bank and the US Federal Reserve. We have no idea what he is referring to, but we would certainly be interested to learn more.

The Unthinkable Almost Happened
This type of activity by the leaders of our financial system certainly helps to explain why those two dates are not more ingrained in our collective memory – strong efforts were obviously made to hide their severity. The fact that these details were left out of Henry Paulson’s memoirs strikes us as astounding. It also seems incredible that the best we can do to understand those fateful days is to cobble together comments made after the fact. It serves to be reminded that the events of September and October 2008 had previously been considered unthinkable, and we must never forget that the ‘unthinkable’ can happen again. A complete banking collapse would not be pleasant – and it’s certainly not an experience we would ever wish upon ourselves, but it must be remembered that WE ALMOST WENT THERE.

The Next Decade – More of the Same
So where does this leave us for the decade ahead? In bad fiscal shape. It seems as if we’re just making the same mistakes over again, and on a far larger scale. We have passed the debt obligations of the financial system onto the governments. We have liquefied the system beyond any rational explanation, more than doubling the monetary base since the collapse of Lehman Brothers.

Social Security, which was in balance in year 2000, is now underfunded by $15 trillion dollars. Total unfunded obligations of the US Government are now $104 trillion. If we add the $6 trillion of outstanding Fannie Mae and Freddie Mac debt and the $12 trillion of outstanding national debt, we arrive at a total US government debt obligation of $122 trillion. It’s a truly preposterous amount of money that will never be paid off in today’s dollars.

As we wrote in our October 2009 article entitled “Dead Government Walking”, the US Government is on a trajectory to default on their obligations, and the same can realistically be said for the UK and Japan. The answer put forward by the US, UK and Japanese governments? Quantitative Easing and 0% interest rates. Have they learned nothing from the past decade?!

(Our overarching macro view is strongly influenced by the Kondratieff Cycles. The ‘winter season’ began in the year 2000 and continues to this day. We have watched this cycle unfold, and have noted the Kondratieff Theory’s eery ability to predict the debt defaults and banking collapses that we witnessed over the past two years. Our analysis suggests that we are only half way through this Kondratieff winter, with another approximate ten years remaining. They will undoubtedly be an interesting ten years, and it should come as no surprise to our readers that gold is considered the ultimate asset class to own during the ‘winter cycle’. It has certainly served us well up to now.)

*http://www.industrymailout.com/Industry/View.aspx?id=194085&q=192323384&qz=ca6e2e (“Markets At A Glance” is a monthly investment strategy article authored by Eric Sprott and David Franklin. Each article is widely distributed throughout the financial community, focuses on one or more themes and discusses Eric’s views and expectations regarding global financial markets and economies.)

Editor’s Note:
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Governments the world over have spent the past year bailing out, backstopping, insuring, and stimulating their financial sectors and economies throwing around trillions of dollars, euros, yen, and pounds like Halloween candy. Officials have assured us there’s little risk to that strategy but I believe that the opposite is true – that if you borrow and spend too much, all you’re going to do is transform a Wall Street debt crisis into a Washington debt crisis. Words: 882

In further edited excerpts from the original article* Mike Larson (www.moneyandmarkets.com) goes on to say:

Lo and behold, the bill for all this global fiscal and monetary largesse is beginning to come due. Debt and deficit problems are going from bad to worse in many nations. That’s raising the very real risk of the unthinkable: widespread SOVEREIGN debt defaults!

Dubai
The first shot across the bow came when the tiny emirate of Dubai dropped a bombshell on the markets. A government-backed holding company, Dubai World, warned that it needed to restructure $26 billion in debts – all $26B – tied to its property development arm Nakheel PJSC and other subsidiaries.

Am I surprised? Not in the least. The Dubai debt crisis was a long time coming but the troubling thing is that Dubai is NOT alone.

Greece
Greece is part of the European Union, and it’s rapidly sliding down the slope toward default. Its budget deficit has exploded to 12.7 percent of GDP, the worst in the 27 EU countries, while its outstanding public debt load is on track to hit 125 percent of GDP in 2010.

In order to avoid stiff EU sanctions and penalties, Greece is slashing its operations budget by 10 percent. The government is also planning a 2010 hiring lockdown and a partial public salary freeze. Greece’s Finance Minister George Papaconstantinou says there is “absolutely” no default risk but those measures don’t appear to be comforting investors.

The Athens Stock Exchange General Index has plunged. Meanwhile, Greece’s two-year government debt has dropped in price by the most in 11 years. Fitch has already cut Greece’s sovereign debt rating to “BBB+.” That’s the third-lowest investment grade rating. Standard & Poor’s rates Greece “A-,” but that rating may be lowered soon.

Bottom line: We’re facing the very real possibility of a significant sovereign debt default or bailout in Europe.

Spain
At times like these, investors naturally ask themselves where the next domino might fall. My answer: How about Spain? S&P has lowered its credit outlook for that country to negative from stable. The ratings agency cited “pronounced deterioration” in the country’s public finances.

Spain is in trouble because it experienced its own gigantic housing bubble, one that has long-since popped. Unemployment is on track to top 20 percent in 2010, while the nation’s deficit is swelling toward 11 percent of GDP. The economy has shrunk for six straight quarters, prompting the government to spend billions of dollars to stimulate growth.

The U.K.
Then there’s the U.K. Its budget deficit is running at 12 percent of GDP, the highest in the Group of 20 community of nations. That’s forcing the government to impose a 50 percent tax on banker bonuses, and to boost income taxes. Despite those moves, the U.K. Treasury is still going to have to borrow billions more pounds than it originally planned to fund its deficit.

The U.S.
What about us? The fiscal 2009 budget deficit here soared to $1.4 trillion, the worst ever. That was equal to 9.9 percent of the overall economy — almost triple the level of a few years ago and the highest in the nation’s history, excluding years where deficits were bloated by massive war spending (à la World War II). Over the next decade, the Congressional Budget Office projects an additional $7.2 trillion-plus in red ink.

We are now borrowing record amounts of money, week in and week out, to underwrite our profligacy. Our debt load is rising so fast, Congress has had to raise the so-called debt “ceiling” yet again. Everyone knows the cap is a joke. Every time we come close to tagging it, lawmakers just raise it again but the frequency and size of those increases is getting totally out of control.

Nobody expects the U.K. or U.S. to lose their AAA debt ratings anytime soon but Moody’s has warned in a report that both countries’ ratings are at more risk than those in other triple-A rated countries like Germany and France and I don’t see any credible plan coming out of Washington to get our disastrous budget situation under control.

Given this environment, my advice for investors is simple: avoid investing in regions where sovereign credit risk is rising. Focus instead on countries where government debt and deficits are NOT a major threat such as China, Brazil, and Australia who are generally sitting on massive reserves, seeing healthy growth, and otherwise prospering.

You may also want to think about lightening up your risk a little bit.

*http://www.moneyandmarkets.com/sovereign-debt-defaults-the-next-shoe-to-drop-2-36832 (Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
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Many people the world over lived in a Ponzi bubble economy for more than a decade. They applied the Greater Fool Theory in the false belief that they would always be able to sell their house or their stocks or bonds or other highly leveraged assets to “bigger fools” than they were for buying them in the first place. Words: 1230; By: Lorimer Wilson

Bernie Madoff Ponzi Schemer

Who was Ponzi?
Charles Ponzi, a Bostonian with an eye for get-rich quick schemes back in 1918, identified an arbitrage situation which he promoted as being able to generate sizeable returns for those who invested with him. He delivered on his promise by making his close friends and a small circle of investors very rich, very quickly, and, as word spread among the wealthier citizens of Boston, they began lining up to invest. Regretfully, when anything looks too good to be true, it probably is and it was.

As a result of Ponzi’s infamy his name has been immortalized to describe any fraudulent investment scheme where the money from later investors is used to pay the early investors and so on right up until the moment the whole thing collapses on itself. Sound familiar? Yes, 90 years later the 50 billion dollar Madoff pyramid collapsed – a Ponzi scheme if ever there was one! Now may well be the time to lay the Ponzi name to rest and replace it with the infamous word ‘Madoff.’ Time will tell. 

But Ponzi and Madoff were not the only ‘investors’ who were conning those around them. We must not forget the tens of millions of Americans and others worldwide who were deploying their own ‘greater fool theory” that there was really nothing to worry about because there always would be a ‘greater fool’ than them out there somewhere who would still lend them money, buy their over-priced house, over-valued stocks, etc. to keep their financial house of cards from collapsing.

Below is my enhanced version of how Nouriel Roubini once described it*: 

The ‘Greater Fools’ Amongst Us
1. When you put zero down on the ‘purchase’ of your house and thus had no equity in your house (and re-financed your mortgage each and every time it went up in value) your leverage was literally infinite and you were playing a Ponzi game hoping a ‘greater fool’ than you would be there to buy your house when the time came for you to buy yet another house that you could not afford. 

2. When the bank sold you a mortgage for zero down on the basis of a NINJA (no income, no job or assets) liar loan, with interest only for a while, with negative amortization, and an initial teaser rate, the bank was playing a Ponzi game. They were hoping that you would stay employed; that you would be able to afford the eventual increased mortgage payment; that you would be able to sell the house for more than its original value; that you would always honor the terms of the mortgage. They were even ‘greater fools’ than you were. 

3. When private equity firms engaged in leveraged buy-outs with excessive debt-to-earnings ratios they were Ponzi firms playing Ponzi games – all “greater fools” hoping that future earnings would just grow and grow in future years with no likelihood of declining. 

4. When our government issues trillions of dollars of new debt to pay for a severe recession and to socialize private losses it becomes a Ponzi government hoping that the Chinese and other foreign purchases of their debt will continue doing so regardless of the value of the U.S. dollar vis-à-vis their respective currencies and the level of interest paid. How foolish to expect foreign governments to be ‘greater fools’ than ours. 

5. When our country spends more than it raises in taxes and thus runs an endless string of current account deficits and becomes the largest net foreign debtor in the world it becomes a Ponzi country hoping that foreigners will be even ‘greater fools’ and continue to finance their conspicuous consumption. 

6. When consumers consumed more than their income year after year (i.e. a household with negative savings; a government with a budget deficit; a firm or financial institution with persistent losses; a country with a current account deficit) they were playing the ultimate Ponzi game hoping that some ‘greater fool’ would come along and bail them out. 

These households, firms and banks and the government itself can be characterized as ‘Ponzi borrowers’ who need to borrow more to repay both principal and interest on their previous debt and, such being the case, need ever-increasing prices of the assets they have invested in to keep on refinancing their debt obligations. What fools they all were to expect that some ‘greater fool’ knight in shining armor would come along and wave a magic sword and make it all go away. Instead, they all must recognize that they will be forever poorer but, hopefully, more fiscally responsible in the future. 

With the average house having fallen in price to such an extent that it is no longer feasible to use it as an ATM to finance Ponzi consumption, with equity prices still below their levels in the spring of 2008 and with credit being hard to come by, the party is over for households, banks and non-bank highly leveraged corporations.

Gold Put ‘Foolish’ Investments to Shame in 2009
Most of the ‘wealth’ that supported the massive leveraging and overspending in the economy was nothing more than fake bubble–driven wealth perpetuated by society’s belief in the Greater Fool Theory. Thank goodness for hard assets such as gold bullion and other precious metals which stood up remarkably well during those tumultuous times: gold: + 24% in 2009 and silver: + 49%. 

Were You One of the ‘Greater Fools”?
Now that the bubbles have burst it is clear that the emperor had no clothes and that we were the naked emperor. A rising bubble tide was hiding the fact that millions of Americans (and others worldwide) and their banks were swimming naked and the bursting of the bubble was the low tide that showed just who had been caught with their ‘pants down’ i.e. just who really was the ‘greater fool’. 

As a result, many households, financial and non-financial firms and government, may well spend the next decade in debtor’s prison having to tighten their belts to pay for the losses inflicted by a decade of reckless leverage, over-consumption and risk taking. What fools we have been for living beyond our means all these years and taking no fiscal responsibility for our future well-being in the false hope that there always would be a ‘greater fool’ out there than us. 

Indeed, the American dream of Life, Liberty and the Pursuit of Happiness (and let’s not forget Wealth) has been nothing more than a glorified Ponzi scheme. Let us all look at ourselves in the mirror and finally admit, at least to ourselves, that many of us were the “greatest fools” imaginable!

*http://ftalphaville.ft.com/blog/2009/03/12/53535/nouriel-roubini-is-a-ponzi/

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A defining and vivid look at policymakers’ unprecedented response to the crisis. Wessel’s disconcerting conclusion: Out of necessity Bernanke is playing most of this by ear, loosely interpreting and appropriating arcane laws and creating new powers just to keep the system on its hinges. In Fed We Trust is persuasively told and richly reported. It is an absorbing read and will win awards and inspire copycats. Words: 665

In further edited excerpts from the original review* Roben Farzad (www.BusinessWeek.com) goes on to say:

The irony of there now being a halo above Ben Bernanke’s head is hardly lost on Wessel. The introverted academic was not the odds-on favorite to succeed Alan Greenspan. Yes, he parlayed his near-perfect SAT scores into economics degrees from Harvard and MIT, but to finance that pedigree he waited tables at a kitschy Mexican-themed truck stop in South Carolina. Bernanke made himself an expert on the Great Depression and in 1996 became chair of economics at Princeton, where he recruited Paul Krugman. In 2002, Bush & Co. tapped the soft-spoken scholar to work for the central bank; four years later he had replaced Fed Chairman Greenspan, often referred to as the world’s most powerful man. But Bernanke, writes Wessel, “didn’t think a Fed chairman should be a rock star. He wanted to avoid the cult that had attached to Greenspan, the perception that the chairman is the Fed. An economy shouldn’t rely so much on the instincts of a single man, he thought….”

But that’s the lopsided situation Bernanke inherited—and would have to perpetuate. As Wessel shows, Bernanke’s predecessor vastly underestimated the effects of keeping interest rates as low as he did for as long as he did (from 6.5% in 2001 to a 45-year low of 1% as late as June 2004). That easy money, we now know, fueled an epic housing and credit bubble whose bursting took down the global economy within two years of Bernanke’s ascension. In 2008, Bernanke had to log a string of all-nighters—and devote record sums—to contain the rolling meltdowns at Bear Stearns, AIG (AIG), Merrill Lynch (BAC), and beyond.

Between 2006 and the end of 2008, notes Wessel, the Bernanke Fed went from having $860 billion in supersafe loans and securities on its books to $2.2 trillion, much of it far riskier fare. By March 2009, the Fed was ready to commit an additional $1 trillion to its mop-up efforts. By then Greenspan, who got an $8.5 million advance for his book The Age of Turbulence, was well into his revisionism tour, asserting that it wasn’t his role to preemptively deflate asset bubbles. Wessel duly dubs one of his key chapters “Age of Delusion: What Greenspan Wrought.”

So much for overreliance on the instincts of a single man. Indeed, as Bernanke learned in the dark days of September 2008, a strong, central economic figure was exactly what the system needed. Wessel lays out why the failure of Lehman Brothers—perhaps the defining blunder of the crisis—was hardly preordained.

For starters, eight investment banks were willing to tag-team with the Fed to rescue the firm. Bernanke, writes Wessel, thought that letting Lehman die was “idiocy.” Even so, he wouldn’t go to bat for a bailout without the support of Treasury Secretary Hank Paulson, the former Goldman Sachs (GS) boss who “never thought much of Lehman.” So, responsibility set adrift, they let the bank go under, and the aftermath has cost multiples of the amount needed to save it.

In other words, Wessel illustrates how Bernanke might have used the superpowers he had acquired—however reluctantly—a little sooner.

*http://www.businessweek.com/magazine/content/09_33/b4143062874291.htm

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon.