Housing, Mass Psychology and Contrarian Investing

Some more observations on the Canadian housing situation, mass psychology and illustration of the statistical value of being a contrarian investor - a great article by Ben Rabidoux on his Financial Insights Blog.

Canadian Housing Prices - Bubble?

Canadian House prices seemed to have peaked in the Spring of 2010 (see nice chart here)  and some observers, including myself, think that real estate in Canada is poised for a much bigger fall. A very detailed analysis of the Canadian housing market, courtesy of Alexandre Pestov, can be found here.

Economic Sugar High Fading Fast - Revised Aug 24

A recent raft of indicators support the view that the sugar-high from massive stimulus (sovereign printing, borrowing) programs has begun to fade rapidly and that the U.S. economy along with many others is re-entering a nose-dive.
Today the Federal Reserve Bank of Philadelphia released a humdinger. The following chart says it all:

Of course, there are many other indicators from various sources, like the following:

So, hold onto your hats, we're going for a heck of a ride! Oh, and get ready for more sugar coming from Tim and Ben.

New: Existing-home sales plunge 27.2% - Released August 24th, 2010

Mutual Fund Equity Outflows

Recently, in spite of attempts to talk the economy up (see my previous post), various indicators are highlighting increasing stress in monetary, financial, equity and real estate. A potentially very serious problem relates to the 3 plus month consecutive outflow from equity funds which seems not to have been reflected in actual stock price levels. This begs the question of who, then, has been buying or how have the markets managed to stay level. A good commentary on this issue from Zerohedge here suggesting manipulation, HFT, etc., although I personally believe that the federal Reserve/Treasury, through its agents, are also supporting the markets at crucial times as well.

Keynes versus Hayek

The debate over deficit spending versus austerity continues globally. Both camps ultimately converge on the necessity of bringing spending, deficits and debt under control. Keynesians just don't think now is a good time whereas the von Hayek crowd wonders when have Keynesians ever thought it was a good time. The Brits under Cameron have seemingly joined Germany in the austerity camp. The U.S. under Obama is firmly in the "let's spend our way out of this mess" camp. Of course, spending one's way out of debt would probably cause even (or maybe especially) a 12 year old to be frightened by such logic. "Dad, I know you've already given me a year's advance on my allowance, but you see, I'm currently a little out of sorts so now would not be the best time to cut back on my spending and start paying you back and, besides, I'm hoping to spend my way out of my problems". H'mmm.

To me, the problem with Keynesians is that most are dishonest. They are supposed to spend more during tough times (deficits) and sock assets away (surpluses) for the rainy days in good times. The first part is easy. The second part rarely happens because it is the tough part and very unpopular. So there are few true Keynesians. Same goes for Communists. Most believe in sharing when it is the other fellow who is giving.

Anyway, some great discussion on the Keynes (deficit spending) versus Hayek (austerity) by Brady Willett and Dr. Todd Alway here.

Precious Metals Manipulation Entering Rough Waters?

The gold/silver manipulation game may be entering another stage as it appears that the increasing difficulty of securing physical delivery is leading to extraordinary measures by the London Bullion Market Association Banks (LBMA) to obtain bullion and to further obfuscate trading, delivery and inventory data - see LBMA Closes Off Public Access To Key Bullion Bank Trading Data

Double-Dip Gaining Traction

The mainstream press is belatedly starting to talk double-dip in the economy as a near-certainty as opposed to the 10-20% likelihood oft quoted earlier. Of course, this outcome was predicted at the outset by independent observers on the basis that the best that the stimulus could do was to postpone the day of reckoning at huge taxpayer expense. So we may now be entering the same situation but with considerably deteriorated public/private finances.
With a few exceptions, most Central Banks and Treasuries around the world will nevertheless likely pursue the same discredited and philosophically and morally bankrupt policies of the past, so we can except Quantitative Easing 2 (QE2) and associated stimulus and bailout policies to emerge shortly. My guess is that the amounts involved this time will dwarf QE1 by a considerable margin. In the process, national/sovereign debts will skyrocket to new levels and the world's financial system and underpinnings will decay further and tremble anew. These folks continue to peddle the notion that the answer to problems created by excessive debt, leverage, fraud and make-believe accounting is even more excessive debt, rigged accounting and rigged markets, be it bonds, equities, real estate or commodities. Be very, very wary of all markets!