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WEDNESDAY, MARCH 19, 2014

American Delusionalism, or Why History Matters

One of the things that reliably irritates a certain fraction of this blog’s readers, as I’ve had occasion to comment before, is my habit of using history as a touchstone that can be used to test claims about the future. No matter what the context, no matter how wearily familiar the process under discussion might be, it’s a safe bet that the moment I start talking about historical parallels, somebody or other is going to pop up and insist that it really is different this time.

In a trivial sense, of course, that claim is correct. The tech stock bubble that popped in 2000, the real estate bubble that popped in 2008, and the fracking bubble that’s showing every sign of popping in the uncomfortably near future are all different from each other, and from every other bubble and bust in the history of speculative markets, all the way back to the Dutch tulip mania of 1637. It’s quite true that tech stocks aren’t tulips, and bundled loans backed up by dubious no-doc mortgages aren’t the same as bundled loans backed up by dubious shale leases—well, not exactly the same—but in practice, the many differences of detail are irrelevant compared to the one crucial identity. Tulips, tech stocks, and bundled loans, along with South Sea Company shares in 1730, investment trusts in 1929, and all the other speculative vehicles in all the other speculative bubbles of the last five centuries, different as they are, all follow the identical trajectory: up with the rocket, down with the stick.

That is to say, those who insist that it’s different this time are right where it doesn’t matter and wrong where it counts. I’ve come to think of the words “it’s different this time,” in fact, as the nearest thing history has to the warning siren and flashing red light that tells you that something is about to go very, very wrong. When people start saying it, especially when plenty of people with plenty of access to the media start saying it, it’s time to dive for the floor, cover your head with your arms, and wait for the blast to hit.

With that in mind, I’d like to talk a bit about the recent media flurry around the phrase “American exceptionalism,” which has become something of a shibboleth among pseudoconservative talking heads in recent months. Pseudoconservatives? Well, yes; actual conservatives, motivated by the long and by no means undistinguished tradition of conservative thinking launched by Edmund Burke in the late 18th century, are interested in, ahem, conserving things, and conservatives who actually conserve are about as rare these days as liberals who actually liberate. Certainly you won’t find many of either among the strident voices insisting just now that the last scraps of America’s democracy at home and reputation abroad ought to be sacrificed in the service of their squeaky-voiced machismo.

As far as I know, the phrase “American exceptionalism” was originally coined by none other than Josef Stalin—evidence, if any more were needed, that American pseudoconservatives these days, having no ideas of their own, have simply borrowed those of their erstwhile Communist bogeyman and stood them on their heads with a Miltonic “Evil, be thou my good.” Stalin meant by it the opinion of many Communists in his time that the United States, unlike the industrial nations of Europe, wasn’t yet ripe for the triumphant proletarian revolution predicted (inaccurately) by Marx’s secular theology. Devout Marxist that he was, Stalin rejected this claim with some heat, denouncing it in so many words as “this heresy of American exceptionalism,” and insisting (also inaccurately) that America would get its proletarian revolution on schedule.

While Stalin may have invented the phrase, the perception that he thus labeled had considerably older roots. In a previous time, though, that perception took a rather different tone than it does today. A great many of the early leaders and thinkers of the United States in its early years, and no small number of the foreign observers who watched the American experiment in those days, thought and hoped that the newly founded republic might be able to avoid making the familiar mistakes that had brought so much misery onto the empires of the Old World. Later on, during and immediately after the great debates over American empire at the end of the 19th century, a great many Americans and foreign observers still thought and hoped that the republic might come to its senses in time and back away from the same mistakes that doomed those Old World empires to the misery just mentioned. These days, by contrast, the phrase “American exceptionalism” seems to stand for the conviction that America can and should make every one of those same mistakes, right down to the fine details, and will still somehow be spared the logically inevitable consequences.

The current blind faith in American exceptionalism, in other words, is simply another way of saying “it’s different this time.” Those who insist that God is on America’s side when America isn’t exactly returning the favor, like those who have less blatantly theological reasons for their belief that this nation’s excrement emits no noticeable odor, are for all practical purposes demanding that America must not, under any circumstances, draw any benefit from the painfully learnt lessons of history. I suggest that a better name for the belief in question might be “American delusionalism;” it’s hard to see how this bizarre act of faith can do anything other than help drive the American experiment toward a miserable end, but then that’s just one more irony in the fire.

The same conviction that the past has nothing to teach the present is just as common elsewhere in contemporary culture. I’m thinking here, among other things, of the ongoing drumbeat of claims that our species will inevitably be extinct by 2030. As I noted in a previous post here, this is yet another expression of the same dubious logic that generated the 2012 delusion, but much of the rhetoric that surrounds it starts from the insistence that nothing like the current round of greenhouse gas-driven climate change has ever happened before.

That insistence bespeaks an embarrassing lack of knowledge about paleoclimatology. Vast quantities of greenhouse gases being dumped into the atmosphere over a century or two? Check; the usual culprit is vulcanism, specifically the kind of flood-basalt eruption that opens a crack in the earth many miles in length and turns an area the size of a European nation into a lake of lava. The most recent of those, a smallish one, happened about 6 million years ago in the Columbia River basin of eastern Washington and Oregon states. Further back, in the Aptian, Toarcian, and Turonian-Cenomanian epochs of the late Mesozoic, that same process on a much larger scale boosted atmospheric CO2 levels to three times the present figure and triggered what paleoclimatologists call “super-greenhouse events.” Did those cause the extinction of all life on earth? Not hardly; as far as the paleontological evidence shows, it didn’t even slow the brontosaurs down.

Oceanic acidification leading to the collapse of calcium-shelled plankton populations? Check; those three super-greenhouse events, along with a great many less drastic climate spikes, did that. The ocean also contains very large numbers of single-celled organisms that don’t have calcium shells, such as blue-green algae, which aren’t particularly sensitive to shifts in the pH level of seawater; when such shifts happen, these other organisms expand to fill the empty niches, and everybody further up the food chain gets used to a change in diet. When the acidification goes away, whatever species of calcium-shelled plankton have managed to survive elbow their way back into their former niches and undergo a burst of evolutionary radiation; this makes life easy for geologists today, who can figure out the age of any rock laid down in an ancient ocean by checking the remains of foraminifers and other calcium-loving plankton against a chart of what existed when.

Sudden climate change recently enough to be experienced by human beings? Check; most people have heard of the end of the last ice age, though you have to read the technical literature or one of a very few popular treatments to get some idea of just how drastically the climate changed, or how fast. The old saw about a slow, gradual warming over millennia got chucked into the dumpster decades ago, when ice cores from Greenland upset that particular theory. The ratio between different isotopes of oxygen in the ice laid down in different years provides a sensitive measure of the average global temperature at sea level during those same years. According to that measure, at the end of the Younger Dryas period about 11,800 years ago, global temperatures shot up by 20° F. in less than a decade.

Now of course that didn’t mean that temperatures shot up that far evenly, all over the world. What seems to have happened is that the tropics barely warmed at all, the southern end of the planet warmed mildly, and the northern end experienced a drastic heat wave that tipped the great continental ice sheets of the era into rapid collapse and sent sea levels soaring upwards. Those of my readers who have been paying attention to recent scientific publications about Greenland and the Arctic Ocean now have very good reason to worry, because the current round of climate change has most strongly affected the northern end of the planet, too, and scientists have begun to notice historically unprecedented changes in the Greenland ice cap. In an upcoming post I plan on discussing at some length what those particular historical parallels promise for our future, and it’s not pretty.

Oh, and the aftermath of the post-Younger Dryas temperature spike was a period several thousand years long when global temperatures were considerably higher than they are today. The Holocene Hypsithermal, as it’s called, saw global temperatures peak around 7°F. higher than they are today—about the level, that is, that’s already baked into the cake as a result of anthropogenic emissions of greenhouse gases. It was not a particularly pleasant time. Most of western North America was desert, baked to a crackly crunch by drought conditions that make today’s dry years look soggy; much of what’s now, at least in theory, the eastern woodland biome was dryland prairie, while both coasts got rapidly rising seas with a side order of frequent big tsunamis—again, we’ll talk about those in the upcoming post just mentioned. Still, you’ll notice that our species survived the experience.

As those droughts and tsunamis might suggest, the lessons taught by history don’t necessarily amount to “everything will be just fine.” The weird inability of the contemporary imagination to find any middle ground between business as usual and sudden total annihilation has its usual effect here, hiding the actual risks of anthropogenic climate change behind a facade of apocalyptic fantasies. Here again, the question “what happened the last time this occurred?” is the most accessible way to avoid that trap, and the insistence that it’s different this time and the evidence of the past can’t be applied to the present and future puts that safeguard out of reach.

For a third example, consider the latest round of claims that a sudden financial collapse driven by current debt loads will crash the global economy once and for all. That sudden collapse has been being predicted year after weary year for decades now—do any of my readers, I wonder, remember Dr. Ravi Batra’s The Great Depression of 1990?—and its repeated failure to show up and perform as predicted seems only to strengthen the conviction on the part of believers that this year, like some financial equivalent of the Great Pumpkin, the long-delayed crash will finally put in its long-delayed appearance and bring the global economy crashing down.

I’m far from sure that they’re right about the imminence of a crash; the economy of high finance these days is so heavily manipulated, and so thoroughly detached from the real economy where real goods and services have to be produced using real energy and resources, that it’s occurred to me more than once that the stock market and the other organs of the financial sphere might keep chugging away in a state of blissful disconnection to the rest of existence for a very long time to come. Stil, let’s grant for the moment that the absurd buildup of unpayable debt in the United States and other industrial nations will in fact become the driving force behind a credit collapse, in which drastic deleveraging will erase trillions of dollars in notional wealth. Would such a crash succeed, as a great many people are claiming just now, in bringing the global economy to a sudden and permanent stop?

Here again, the lessons of history provide a clear and straightforward answer to that question, and it’s not one that supports the partisans of the fast-crash theory. Massive credit collapses that erase very large sums of notional wealth and impact the global economy are hardly a new phenomenon, after all. One example—the credit collapse of 1930-1932—is still just within living memory; the financial crises of 1873 and 1893 are well documented, and there are dozens of other examples of nations and whole continents hammered by credit collapses and other forms of drastic economic crisis. Those crises have had plenty of consequences, but one thing that has never happened as a result of any of them is the sort of self-feeding, irrevocable plunge into the abyss that current fast-crash theories require.

The reason for this is that credit is merely one way by which a society manages the distribution of goods and services. That’s all it is. Energy, raw materials, and labor are the factors that have to be present in order to produce goods and services. Credit simply regulates who gets how much of each of these things, and there have been plenty of societies that have handled that same task without making use of a credit system at all. A credit collapse, in turn, doesn’t make the energy, raw materials, and labor vanish into some fiscal equivalent of a black hole; they’re all still there, in whatever quantities they were before the credit collapse, and all that’s needed is some new way to allocate them to the production of goods and services.

This, in turn, governments promptly provide. In 1933, for example, faced with the most severe credit collapse in American history, Franklin Roosevelt temporarily nationalized the entire US banking system, seized nearly all the privately held gold in the country, unilaterally changed the national debt from “payable in gold” to “payable in Federal Reserve notes” (which amounted to a technical default), and launched a flurry of other emergency measures. The credit collapse came to a screeching halt, famously, in less than a hundred days. Other nations facing the same crisis took equally drastic measures, with similar results. While that history has apparently been forgotten across large sections of the peak oil blogosphere, it’s a safe bet that none of it has been forgotten in the corridors of power in Washington DC and elsewhere in the world.

More generally, governments have an extremely broad range of powers that can be used, and have been used, in extreme financial emergencies to stop a credit or currency collapse from terminating the real economy. Faced with a severe crisis, governments can slap on wage and price controls, freeze currency exchanges, impose rationing, raise trade barriers, default on their debts, nationalize whole industries, issue new currencies, allocate goods and services by fiat, and impose martial law to make sure the new economic rules are followed to the letter, if necessary, at gunpoint. Again, these aren’t theoretical possibilities; every one of them has actually been used by more than one government faced by a major economic crisis in the last century and a half. Given that track record, it requires a breathtaking leap of faith to assume that if the next round of deleveraging spirals out of control, politicians around the world will simply sit on their hands, saying “Whatever shall we do?” in plaintive voices, while civilization crashes to ruin around them.

What makes that leap of faith all the more curious is in the runup to the economic crisis of 2008-9, the same claims of imminent, unstoppable financial apocalypse we’re hearing today were being made—in some cases, by the same people who are making them today. (I treasure a comment I fielded from a popular peak oil blogger at the height of the 2009 crisis, who insisted that the fast crash was upon us and that my predictions about the future were therefore all wrong.) Their logic was flawed then, and it’s just as flawed now, because it dismisses the lessons of history as irrelevant and therefore fails to take into account how the events under discussion play out in the real world.

That’s the problem with the insistence that this time it really is different: it disables the most effective protection we’ve got against the habit of thought that cognitive psychologists call “confirmation bias,” the tendency to look for evidence that supports one’s pet theory rather than seeking the evidence that might call it into question. The scientific method itself, in the final analysis, is simply a collection of useful gimmicks that help you sidestep confirmation bias. That’s why competent scientists, when they come up with a hypothesis to explain something in nature, promptly sit down and try to think up as many ways as possible to disprove the hypothesis. Those potentials for disproof are the raw materials from which experiments are designed, and only if the hypothesis survives all experimental attempts to disprove it does it take its first step toward scientific respectability.

It’s not exactly easy to run controlled double-blind experiments on entire societies, but historical comparison offers the same sort of counterweight to confirmation bias. Any present or future set of events, however unique it may be in terms of the fine details, has points of similarity with events in the past, and those points of similarity allow the past events to be taken as a guide to the present and future. This works best if you’ve got a series of past events, as different from each other as any one of them is from the present or future situation you’re trying to predict; if you can find common patterns in the whole range of past parallels, it’s usually a safe bet that the same pattern will recur again.

Any time you approach a present or future event, then, you have two choices: you can look for the features that event has in common with other events, despite the differences of detail, or you can focus on the differences and ignore the common features. The first of those choices, it’s worth noting, allows you to consider both the similarities and the differences. Once you’ve got the common pattern, it then becomes possible to modify it as needed to take into account the special characteristics of the situation you’re trying to understand or predict: to notice, for example, that the dark age that will follow our civilization will have to contend with nuclear and chemical pollution on top of the more ordinary consequences of decline and fall.

If you start from the assumption that the event you’re trying to predict is unlike anything that’s ever happened before, though, you’ve thrown out your chance of perceiving the common pattern. What happens instead, with motononous regularity, is that pop-culture narratives such as the sudden overnight collapse beloved of Hollywood screenplay writers smuggle themselves into the picture, and cement themselves in place with the help of confirmation bias. The result is the endless recycling of repeatedly failed predictions that plays so central a role in the collective imagination of our time, and has helped so many people blind themselves to the unwelcome future closing in on us.

“Pot Calling the Kettle Black” Classic: Fed Researchers Slam Dishonest Economists | CYNICONOMICS

December 19, 2013 1:46 pm / Leave a comment

“Pot Calling the Kettle Black” Classic: Fed Researchers Slam Dishonest Economists | CYNICONOMICS.

An economist recently recommended that I read a paper by three Fed researchers titled: “Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis.” It was presented at a major conference last year and made the rounds again in the economics blogosphere this year with generally positive reviews. It seems to have been influential.

The authors – Christopher Foote, Kristopher Gerardi and Paul Willen – argue that the financial crisis was caused by over-optimistic expectations for house prices, while other factors such as distorted incentives for bankers played only minor roles or no roles at all. In other words, it was a bubble just like the Dutch tulip mania of the 1630s or South Sea bubble of the early 1700s, and had nothing to do with modern financial practices.

Then the authors make absolutely sure of their work being well-received by those who matter. The financial crisis is surely a touchy subject at the Fed, where the biggest PR challenge is “bubble blowing” criticism from those of us who aren’t on the payroll (directly or indirectly). But Foote, Gerardi and Willen are, of course, on the payroll. They tell us there’s little else that can be said about the origins of the crisis, because any “honest economist” will admit to not understanding bubbles.

Here’s their story:

[I]t is deeply unsatisfying to explain the bad decisions of both borrowers and lenders with a bubble without explaining how the bubble arose. …Unfortunately, the study of bubbles is too young to provide much guidance on this point. For now, we have no choice but to plead ignorance, and we believe that all honest economists should do the same. But acknowledging what we don’t know should not blind us to what we do know: the bursting of a massive and unsustainable housing bubble in the U.S. housing market caused the financial crisis.

We don’t often critique papers like this (who cares about Fed research outside of academic economists?) But what the heck, the bolded sentences above – in particular, the hypocritical reference to “honest economists” – deserve at least a few words of rebuttal.

We’ll limit our comments to two areas. First, we’ll offer a redline edited version of a key section in the authors’ conclusion, mostly to share a different perspective on the financial crisis. Second, we’ll point out an example of dishonesty from these economists who brazenly claim that their own perspective is the only one that can be called honest.

Where did the bubble come from?

In practice, the authors don’t completely “plead ignorance” about the causes of bubbles as they claim to do. They offer a few “speculative” ideas about the housing bubble, writing:

One speculative story begins with the idea that some fundamental determinants of housing prices caused them to move higher early in the boom. Perhaps the accommodative monetary policy used to fight the 2001 recession, or higher savings rates among developing countries, pushed U.S. interest rates lower and thereby pushed U.S. housing prices higher. Additionally, after the steep stock market decline of the early 2000s, U.S. investors may have been attracted to real estate because it appeared to offer less risk. The decisions of Fannie Mae and Freddie Mac may have also played a role in supporting higher prices…

This smells to us like a strategy of gently acknowledging criticism (of the Fed’s interest rate policies), while at the same time attempting to neutralize it. The authors imply that low interest rates were an unavoidable byproduct of the Fed’s recession fighting, and then shift some of the blame to foreigners in developing countries before moving on to other possible explanations.

But even if you believe the Fed’s anti-recession measures were worthwhile, the authors’ story is nonsense. It needs corrections for the facts that the Fed continued to slash rates nearly two years after the 2001 recession and then maintained an ultra-easy stance for a few years after that. It also begs the question of why the Fed responded to high foreign savings rates – which were the flip side to U.S. current account deficits and primary source of disinflation – with even greater stimulus. Moreover, there’s much more to the Fed’s role in the housing boom than these factors.

As we see it, the financial crisis validated certain principles that aren’t reflected in mainstream models but feature in fringe areas such as Austrian business cycle theory orbehavioral economics. Economists in these areas offer far more detailed explanations for the housing bubble than the “speculative story” above. For example, recent Nobel Prize winner Robert Shiller filled a whole book with bubble theories. While Foote, Gerardi and Willen would presumably call these economists dishonest, we beg to differ. Borrowing from non-mainstream ideas, here’s our edited version of the excerpt:

If this version is accurate, the Fed’s failures include three whoppers:

Monetary policy was too stimulative throughout the boom.
Two decades of Greenspan/Bernanke “puts” created a mentality that risky bets couldn’t lose (moral hazard).
The Fed applauded rather than stopping the deterioration in lending standards, blithely disregarding its status as only institution that was mandated to set nation-wide lending requirements.

As you might expect, Foote, Girardi and Willen weave a story that either denies or diverts attention from all three failures. One part of the story is their claim that bubbles can’t be explained and anyone who thinks otherwise is dishonest. If the defining feature of the crisis can’t be explained, then it can’t be blamed on the Fed, right?

Other parts of the story are embedded in 12 “facts” that are said to describe the crisis. As written, many of the “facts” are strictly true. Some may have even added to the public debate because they weren’t widely known in policy circles, even as they were understood in the fixed income business. Others, though, can only distort that debate. The worst of the so-called facts are somewhere in between flat wrong and technically accurate but interpreted in ways that don’t stand up to scrutiny.

Lending standards didn’t really change during the boom?!?

We’ll point out a single example, from pages 9-11 of the paper and sub-titled, “Fact 4: Government policy toward the mortgage market did not change much from 1990 to 2005.” In this section, the authors deny that policymakers dropped the ball on lending standards. They don’t mention central bankers explicitly (that would be too obvious?), choosing instead to absolve the Clinton administration of blame for its ill-fated National Home Ownership strategy. Of course, their argument also exonerates the Fed if you happen to believe it.

The argument depends partly on a history lesson that begins like this:

It is true that large downpayments were once required to purchase homes in the United States. It is also true that the federal government was instrumental in reducing required downpayments in an effort to expand homeownership. The problem for the bad government theory is that the timing of government involvement is almost exactly 50 years off. The key event was the Servicemen’s Readjustment Act of 1944, better known as the GI Bill, in which the federal government promised to take a first-loss position equal to 50 percent of the mortgage balance, up to $2,000, on mortgages originated to returning veterans.

The authors then tell a nostalgic tale about loan-to-value (LTV) ratios in the 1950s and 1960s, before skipping ahead to the 1990s and 2000s. For the latter period, we’re told to believe that lending standards didn’t decline in a meaningful way:

Figure 6 shows LTV ratios for purchase mortgages in Massachusetts from 1990 to 2010, the period when government intervention is supposed to have caused so much trouble … But inspection of Figure 6 does not support the assertion that underwriting behavior was significantly changed by that program [Clinton’s National Homeownership Strategy].

Here’s the key chart that goes with this claim:

Here are a few reasons why the thesis doesn’t fit the reality:

The authors share data for only one state (Massachusetts), while failing to mention that it didn’t have much of a housing bust. Consider that Boston is one of only four cities (out of 20) in the S&P/Case-Shiller Home Price Index for which prices didn’t fall by more than 20%. During the bear market period for the full index, the Boston component fell only 16%, less than half the 34% drop in the national index.
The authors’ sweeping argument relies on not only a single state, but also a single indicator (LTV ratios). You might wonder: What were the credit scores of borrowers at each LTV level? How did their incomes compare to monthly mortgage payments? Were their incomes verified? These types of questions need answers before you can draw general conclusions about underwriting behavior.
Even the cherry-picked data – Massachusetts LTV ratios! – doesn’t support the authors’ conclusions. It shows that the incidence of ratios greater than 100% tripled during the housing boom, from about 8% of all Massachusetts mortgages to about 25%. The claim that this change isn’t significant is incredulous.
LTV ratios in the 1950s and 1960s, while interesting, are irrelevant to the early 21^stcentury housing boom. Different era, different circumstances, different implications.

Needless to say, the authors’ attempt at defending fellow public officials falls well short. Lending standards declined sharply during the boom, and this was encouraged by both the federal government and the Fed. No amount of data mining can change these facts.

Overall, the Fed staffers’ paper fits a common pattern. It’s stuffed with enough data to be taken seriously, but inferences are based more on spin than objective analysis. The approach aligns conclusions with an establishment narrative, while protecting the authors’ establishment status. The last thing you would call this paper is an honest piece of research.

Bonus edit

As long as we’re at it, here’s an extra edit, this one offering another perspective on Foote, Gerardi and Willen’s conclusions about our knowledge of bubbles (from the first excerpt above):

Manufacturing’s Decline A Bigger Problem Than Housing Bubble: BMO

December 13, 2013 7:39 pm / Leave a comment

Manufacturing’s Decline A Bigger Problem Than Housing Bubble: BMO.

Heinz shuts down its plant in Leamington, Ont., laying off more than 700 and ending a 104-year-long presence in the town. Three weeks later, Kellogg’s shuts down its plant in London, Ont., erasing 500 jobs. Days after that, drugmaker Novartis announces its pharmaceutical plant in Mississauga will shut down, taking 300 jobs with it.

Add it all up, and what you have is the largest medium-term threat to Canada’s economy, BMO chief economist Doug Porter said in a client note this week.

Porter noted that Ontario has lost 4 per cent of all its manufacturing jobs in the past year — something he understatedly describes as “not good.” Canada overall lost 2.5 per cent of all its manufacturing jobs this year, the Wall Street Journal notes — and that’s despite a recent rise in manufacturing output.

There are now more jobs in health care in Ontario than there are in manufacturing; as recently as 2000, there were twice as many factory jobs as health care jobs.

bmo jobs chart

The decline of factory jobs is taking place even as manufacturing around the world, particularly auto manufacturing, is experiencing a boom — one that appears to bepassing Canada over.

“It would seem to us that this is a much bigger issue for the medium-term Canadian outlook than the more hyped housing bubble/household debt concern,” Porter wrote.

The Bank of Canada appears to disagree, once again reiterating this week that it sees high house prices and record high consumer debt levels as the dominant domestic risk to the economy.

But maybe those two risks aren’t entirely unconnected. As manufacturing employment wanes (even with manufacturing output growing), the real estate boom has picked up much of the slack, and construction employment is at or near record highs in Canada today.

But few market observers, even those optimistic about the future of the housing market, expect this juggernaut to continue. That’s why economists are constantly looking to external demand (i.e. exports) to pick up the economic slack from a housing boom that’s expected to level off.

On that front, there is some hope for good news, BMO economist Robert Kavcic says.

“With the high-profile job cuts in Ontario’s manufacturing sector piling up, there might be some reprieve coming from the weaker loonie and stronger expected U.S. growth,” he writes.

“But keep in mind that a weaker currency won’t help overnight — the impact tends to filter through over the course of at least two years.”

So here’s hoping the housing construction boom keeps up for a few more years, or Canada could get a nasty surprise in future unemployment reports.

BoE Survey Shows Growing Fears Of House Price Crash | www.goldcore.com

November 20, 2013 9:04 am / 2 Comments on BoE Survey Shows Growing Fears Of House Price Crash | www.goldcore.com

BoE Survey Shows Growing Fears Of House Price Crash | www.goldcore.com.

Today’s AM fix was USD 1,271.50, EUR 939.69 and GBP 787.11 per ounce.
Yesterday’s AM fix was USD 1,272.25, EUR 942.13 and GBP 790.12 per ounce.

Gold fell $0.30 or 0.02% yesterday, closing at $1,273.40/oz. Silver slipped $0.09 or 0.44% closing at $20.32/oz. Platinum climbed $3.40 or 0.2% to $1,411.40/oz, while palladium rose $3.75 or 0.5% to $718.47/oz.

Gold in GBP, 1 Year – (Bloomberg)

Gold in sterling terms is testing strong support at the £775/oz level. A breach of this level could lead to gold testing the next level of support at £740/oz and below that at £700/oz which was resistance in 2009 (see 5 year chart below).

Gold was trading in a tight range until it suffered another very sharp concentrated sell off at 1126 GMT which led to prices falling from $1,272/oz to $1,259/50 in seconds. The selling was so furious and concentrated that it led the CME to stop trading for a significant twenty seconds. Some entity appeared determined to get the gold price lower and they succeeded – for now.

Gold failed to make any headway despite dollar weakness after more dovish comments from exiting Fed Chairman Ben Bernanke about the bank’s bond purchases.

Bernanke said yesterday that the Fed will maintain an ultra loose U.S. monetary policy for as long as needed and will only begin to taper bond buying once it is assured that labour market improvements would continue.

The assumption that QE will be trimmed is like a lot of assumptions – wrong. There are strong grounds for believing that the weak state of the U.S. economy may lead to Bernanke’s even more dovish successor, Yellen, increasing the QE programme.

Physical demand continues at these levels but is not at the very high levels seen in recent months.

Many bullion coin and bar buyers have accumulated their allocation of gold and silver and are waiting for higher prices. There is a real sense of the calm before the storm in the gold market. How that will manifest and the catalysts for a resumption of the bull market is yet to be seen.

Gold in GBP, 5 Year – (Bloomberg)

The Bank of England’s Systemic Risk Survey semi annual report to quantify and track market participants’ views of risks to, and their confidence in, the UK financial system shows increasing concerns of a house price crash.

The report presents the results of the 2013 H2 survey, which was conducted between 23 September and 24 October 2013 with 76 financial services companies.

Fears that a house price crash could damage the financial system have risen sharply in the last year, the key Bank of England survey shows. Increased concerns were expressed by the participants over ultra loose monetary policies and the extended low interest rate period.

Concerns about a property price bubble rose and were mentioned by 36% of respondents, up 21% from 14% since the previous survey in the second half of 2012. Concerns were concentrated almost exclusively on the residential market, where responses focused on the risk of a house price correction.

As we know house price corrections tend to feed on themselves and often lead to house price crashes.

Other Key Risks To The UK Financial System:
• Perceptions of the two main risks to the UK financial system remain sovereign risk and the risk of an economic downturn, although citations of both have fallen: 74% of respondents mentioned the former (-3 percentage points since May 2013) and 67% (-12 percentage points) the latter. Concerns over sovereign risk continue to focus on Europe, but unsurprisingly given the uncertainty surrounding the U.S. debt ceiling negotiations that prevailed during the survey period, there was a sharp increase in concerns around U.S. sovereign risk.

• For the second survey in succession, risk surrounding the low interest rate environment was the fastest growing, with 43% of respondents citing it, up 17 percentage points since May 2013. Over half of the responses emphasised risks around low rates, with the remainder referring to risks associated with a snapback in those low rates to more normal levels. Perceived risk around property prices also rose, being mentioned by 36% of respondents, up 11 percentage points since the previous survey. Concerns were concentrated almost exclusively on the residential market, where responses focused on the risk of a house price correction.

• Other top risks include regulation/taxes (cited by 41% of respondents, up 1 percentage point since May 2013), financial institution failure/distress (+4 percentage points to 30%) and operational risk (+1 percentage point to 25%).

Outside of the top seven, geopolitical risk has grown in prominence, with concern focusing on instability in the Middle East.

The report may have led to GBP weakness upon its release as the pound fell against the dollar, euro and gold.

UK Rightmove Regional Avg Asking Price Greater London, 2002-Today – (Bloomberg)

Interestingly, also on Monday came news of a sharp 5% drop in London property prices in what could portend a bust of the London property bubble.

Values in the U.K. capital dropped 5%, or 26,956 pounds ($43,500), from the previous month to an average 517,276 pounds, Rightmove PLC said Monday. Across England and Wales, average prices declined by 2.4%.

Estate agents and property industry blamed the falls on a seasonal pre-Christmas decline, however valuations are extremely stretched with very low yields and the hot money that has fueled the huge increase in London property prices may be pulling back.

UK Rightmove Regional Avg Asking Price Greater London, 2006-Today – (Bloomberg)

“This is different” and “this location is different” is the mantra of every property bubble. We will soon see if the London property bubble is truly different or will suffer the fate of bubbles throughout history.

Of the four charts in our market update today, which ones do you think show characteristics of a bubble?

Those diversifying and buying gold in the UK today will be rewarded in the coming years. The smart money is reducing exposure to overvalued London property and increasing exposure to undervalued gold.

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Canadian Housing Bubble? 9 Signs We’re In For A Major Correction

November 11, 2013 7:38 pm / Leave a comment

Canadian Housing Bubble? 9 Signs We’re In For A Major Correction. (source/link)

Maybe Canada doesn’t have a housing bubble.

Maybe this time, it really is different. Maybe life expectancies have grown, and with them, people’s willingness to take on more debt. That would mean house prices could stay up higher than history would suggest.

Maybe interest rates aren’t going back up. If there is no inflationary pressure, either in Canada or in the U.S., there isn’t much reason for central banks to push interest rates back up.

Maybe we’re in for an endless housing boom. Maybe. But if history is still any guide to go by, then folks, it looks like we have one whopper of a housing bubble on our hands. Because just about every single indicator that warns economists of trouble in the housing market is now flashing red.

Investment bank Goldman Sachs and British business paper the Financial Times are the latest to throw in with the “Canada has a housing bubble” crowd. Goldman put out a report last month saying that some parts of Canada are suffering from overbuilding, and given the excess construction, a “price decline can be quite significant.”

Meanwhile, FT declared Monday that Canada’s “property sector is perched precariously at its peak.”

UK Home Prices Hit All-Time-Highs As BOE Sees “No Bubble” | Zero Hedge

October 15, 2013 7:10 am / 3 Comments on UK Home Prices Hit All-Time-Highs As BOE Sees “No Bubble” | Zero Hedge

UK Home Prices Hit All-Time-Highs As BOE Sees “No Bubble” | Zero Hedge. (FULL ARTICLE)

U.K. house prices rose to a record last month as easier access to credit drove first-time buyers back to the market. As Bloomberg reports, the second phase of the government’s Help to Buy program was introduced this week, providing government-guaranteed mortgages to buyers with smaller deposits. The acceleration has fueled further concerns that the initiative may stoke a bubble. But have no fear…

*BOE’S CUNLIFFE SAYS U.K. HOUSING NEEDS TO BE WATCHED CAREFULLY
*CUNLIFFE SAYS DOESN’T AGREE U.K. IS ENTERING A HOUSING BUBBLE

What could go wrong? – “Demand has increased significantly in a short space of time, and raced ahead of the supply of homes.” Now where have we heard that before?

Via Bloomberg,