Saturday, February 26, 2011

Why have bears been wrong for so long?

We were right with respect to the US and Spain and many other over-priced countries, but Canada keeps on trucking. We were right for a brief time in late 2008 and early 2009 when there was a flash crash. But the Feds and BoC brought that to an abrupt end, and up and away we went.


There are many reasons..low rates, the CMHC, irresponsible mortgages etc But there are others and ironically I found some of them in today's Vancouver Sun, particularly in the business section.


First, the front page storey was about Middle Class Mainland Chinese buying Greater Vancouver Real estate, with one RE company that has offices in Beijing claiming to have sold 500 units to Chinese investors in Toronto and Vancouver in the last two months alone.

500 by one company in two months, in two cities, is significant. Our RE has basically become a commodity like our wood, gas and oil. That is a fact which we (us bears) had not accounted for. The government decided not to allow export of our water, however they have no concern over who owns RE, even if they are absent.

RE bears looked at local factors. Average after-tax salaries and what they could afford and did not account for the major and persistent buying power of Mainland Chinese investors.


The article below was about the turmoil in the middle east driving up oil prices, hurting some and benefiting others. As we all know, we are in the midst of a rip-roaring commodity boom, and fortunes are being made daily by the penny stock scammers and legitimate promoters and deal-makers. The most ever in fact.


Then on page two- there is David Baines' excellent expose of two stock fraud schemes that have made the promoters Ten of Millions in illicit gains.

I suggest everyone read it Those accused are from as diverse places as London and Israel, but end up here. Why do they operate out of BC? Because it is no secret that Canada is 'soft' on stock manipulating and insider trading and white collar crime. Charges are few and far between, convictions even rarer and jail time is almost unheard of.

Those charged in these cases were by the US SEC (a pretty weak toothless body too- but superheroes compared to our fractured ineffectual regulators).

This is another factor that us bears did not account for in the average income/price calculations. The huge amount of hot money that flows into our Province. It isn't just foreign money that sloshes in with little account, it is our own home-grown fraudsters who seem able to move Tens of Millions in and out of the country with impunity -whatever happened to FINTRAC?


Then there is of course our huge drug trade, which is estimated at $7 Billion by the Economist and employs ten of thousands of people.

All money that does not show up in the 'average income' numbers.

So what does this all mean? Well it means that we cannot come to simple calculations based on average income to try and work out what prices are reasonable. there are just too many unknown variables that cannot be accounted for.

Does it mean we will never have a correction in BC? Of course not. But it does mean that unaffordability in itself will not be enough to bring this circus to an end.

It may require the prefect storm of a slow-down in China to reduce outside speculative buying and reduced commodity prices. That or some 'black swan' event like Quebec separatism to raise our rates. Otherwise I do not see how this come to an abrupt end.

I don't think our new Premier Christy Clark, regards outrageously high house prices as a problem to be curtailed. In fact she probably regards it as a sign of strength (and there are probably many around her that will sure that is the only opinion she hears)

As to the Feds and the B of C. Despite their bleating about the high levels of debt - which is almost all RE based AND caused by them, they have no will to reverse the mess they have helped create.