Officially I started this blog in June 2009. So that really doesn't give you any history of my predictions. I was searching through my email yesterday and I found a couple informal emails sent to a close friend. Both were written in July of 2008 when oil peaked at over $140 a barrel and US Q2 GDP was reported at 3.8%. A little later in this post I reflect on democracy, capitalism and government. Please note that I'm not a financial adviser. The information below was a matter of opinion and not intended as financial advice:
Email sent July 24, 2008:
“Edmonton real estate sales are already falling at 24% annualized and this hasn’t even started. Vancouver, Victoria and Kelowna will crash even harder – especially in their detached residential sector. Victoria is currently falling at 7% a year, and Vancouver just flatlined and just started its fall at 3.6% annualized. In the coming months these annualized percentages will begin to accelerate, turning in some markets to 50 or 60%.
And as far as work goes, stay away from employment or investments in the banks. Keep your money out of shares in the financial sector. The world is about to go into a global credit meltdown as this real estate bubble is about to deflate internationally. Also, think of possibly investing in gold to hedge your risk.
From my research it shows that the Canadian government promoted 30, then 35, then 40 year amortizations, interest only loans, zero downs and allowing RRSP contributions to down payments just a month after the US housing bubble popped in the beginning of 2006. This allowed Canadian real estate to inflate to unheard of values even in the face of a real estate meltdown south of the border. So why did the Canadian government do this risking young people’s retirements, their savings and putting them in debt that for some will require bankruptcy of at least take over a decade to get out of?
Well I can only guess that the US knew right away that this was a bubble, not only when it popped but a year before, that it was going to create a global credit crisis since the real estate bubble was international. The leaders of all the countries may have possibly met and discussed this issue behind closed doors (have no evidence of this, but it would appear to be orchestrated with England, Australia, Japan, Spain, Canada, G8 etc.), about how they could soften the landing for residential real estate and the impact it would have on the worlds financial system which stands a chance right now of completely melting down. So they increased loose lending practices in the rest of the world while the US took the first big blow – thereby softening the landing for the world’s financial system which would go completely belly up if global real estate fell at the same time.
The Banks in the US won’t be able to survive this same issue around the world, as lending will dry up and interest rates will skyrocket, further adding to the number of defaults in the mortgage industry. This is bad news. Real estate may never approach the values you see today – possibly never again. The result of deflating assets may actually destroy the middle class in the industrialized world leading us to a depression not seen since the Great Depression. This is due to many factors including the income affect, whereby if you owe more than your worth, you stop spending on everything but the bare necessities of survival. This final blow to "wealth", which was merely created out of thin air by artificially inflating asset values, will be one of the big blows of comparable wealth between the east and the west industrialized nations."
I wonder if my hunch about the G8 trying to prevent a global meltdown was true? When I wrote this letter it would have sounded reminiscent of conspiracy theory, which I actively try not to subscribe to. But given the unprecedented cooperation amongst the G8 starting in October 2008, it would not be that hard to believe.
Sent July 21, 2008
* China has enough production capacity to make every product consumed by every person around the world. There is too much manufacturing capacity in the world. Manufacturing is about to go belly up.
* Both dot.com and the Real estate bubble were created by Alan Greenspan. The bubbles gave wealth, which meant people had something to borrow against. This allowed them to continue to spend. Now these people are bankrupt.
*This could quite possibly be the beginning of the end of the US empire. My guess is you will see them start to sell their resources and crown corporations in the next couple years. Believe it or not, but Washington is currently filled with lobbyists arguing for them to create the next bubble in order to save the American economy. What do you think it will be?
* America owes 44 trillion dollars. Including debts that will become due in the next ten years, that figure is 88 trillion. At the same time over 80 million Americans will retire in the next ten years putting that debt onto fewer tax payers, who by all measures will see their salaries drop. With the bubbles deflated, most of these Americans will have negative wealth going into retirement.
* America has no choice but to print more money."
I like the last prediction there. Ok Ok most of you are saying "duh".
Some other predictions:
By January of 2009 I was banking on a housing rebound. One only needed to look at a mortgage calculator to know what was about to happen (and that's exactly how I made the prediction). Canada's was too aggressive with their interest rate reductions - they did not let the market move into a more severe but necessary corrective phase. Therefore they dumped cheap money on a population who was still bullish on housing - a recipe for disaster.
In December of 2008 I explained to a Vice President at RBC Investments that in my opinion stocks had not hit bottom. He had been advising his clients to get in (not necessarily bad advice in hindsight). I told him that there were still severe issues with credit, trade was collapsing, that people were optimistic because of Obama, and that colder weather was on its way to the North East (where TSX and NYSE are based). Those factors were sure to weigh in on stock valuations. I explained to him that there would be a bottom within a few months and I was going to buy back in then.
I also informed him that the only stock I was interested in was Petro Canada since it was severely undervalued (at the time around $22 a share) and now that the Teacher's Pension Plan was involved, they were going to shake up the 'crown' style management. It's amazing how soft the teacher's expect taxpayers to be on them, yet when the ball is in their court and it is their money, they are amazingly ruthless. I think the VP took that advice to heart as he was really interested in hearing about it. Petro Canada ended up getting merged with Suncor in March, providing a 3 month return of 50%.
Believe it or not I ended up moving back into stocks the day the market bottomed (within hours). That probably was good luck. I didn't have the balls to stay in the market though and ended up selling about a week into the market rally. Honestly I didn't think the fundamentals supported it.
Enough bragging you say. True. But I made some good calls. More importantly I've learned some lessons.
Lessons:
Since then I've learned a great lesson. In a speculative market, don't take actions based on fundamentals. You take actions based on short term decisions. Everything is just a ponzi scheme so don't try to make sense of anything. Just don't be the last one in, or the last one out. Emotions rule. Reality is meaningless until the day the market corrects itself.
And of course this last paragraph sums up what I now write most often about. It's why lax monetary policy not only fails, but creates the problem in the first place. It's why capitalism is a victim of a fascist system. How dare it be blamed for the financial collapse.
Before I get further into this, it will help if I define what democracy is to me:
"A transparent system that fosters the freedom of each citizen, unborn and alive, to come to their own conclusions, and make choices how their resources are spent, have equal influence over their environment, and to be protected by laws that ensure honesty and fairness."
Capitalism thrives in democracy. Unfortunately we do not live in a democracy.
Our system works to make the citizen docile. They accept the world around them because they feel they have no influence. This allows special interest groups, most notably government, unions (especially government unions), corporations, minority groups, and crown businesses to lobby the government and take control.
The biggest threat to democracy is government itself. At one point in time, perhaps a couple centuries ago, this would have sounded like an oxymoron. Today most would accept that statement as true, however. Without the government, these special interest groups would have noone to lobby to, but well you. They'd have to earn their influence one citizen at a time.
Conclusion
If 2008 didn't prove how worthless money really is, then I'm sure we'll learn it soon enough. Real wealth is tangible. It can be described. It provides real benefits that improve our lifestyle. Capitalism, operating under good laws that enforce transparity, competition along with a non discriminatory minimal tax structure can provide the wealth that we seek.
Minimal government fosters democracy, which fosters honest capitalism. By keeping money in the taxpayers hands, we get to decide what is of value to us. We permit a level of wealth that encourages a lifestyle of recreation, time with family, the arts and music, and a passion for unique interests. Taxing people and then treating culture as a government affair is not democratic or effective. It in fact destroys culture.
None of this means turning our back on those that are incapable of providing for themselves or their families. But it does mean that we force those who are "capable" to make their own decisions and pave their own path. It also means that that those who are incapable are forced to go to their community for help, at least as a first resort, not some distant government. Decisions made by millions are far better than those made by a few men.
The actions the government has taken for the past thirty years, and for that matter since the Great Depression, has severely injured democracy. Whatever the casualties, we should not be scared to reclaim democracy. We should only be scared of slipping further away from that ideal.
Jonathan Tonge
www.americacanada.blogspot.com
Comments are open to the public. Please share your opinions, links and ideas with other readers.
