This stock gives us a glimpse of what we should be expecting from quite a number of stocks in the future. This is an absolutely perfect E-wave. 5 up and then a large (irregular) A-B-C down with C subdividing in 5 separate waves. Whether or not it has bottomed remains to be seen but is not at issue here considering the total range it has already travelled.
In December we opined that the beyond part of this stock was in doubt. At the time the stock appeared to be about to complete a wedge (at $65, give or take). We got that wrong. It was not a wedge but a triangle. The following chart shows the wedge (in blue) and the triangle (in black).;
The wedge morphed into a triangle and added about 5 months before a top was reached, roughly $10 higher than expected. It made up for the difference in a single days trading. First target is the lowest point of the triangle at $49/48. A lot lower after that.
When you open the flood gates it is impossible to know where the water will flow, other than that it is always downhill. Our CB has the difficult task of balancing the macroeconomic needs of Canada (such as avoiding the “Dutch” disease), with the micro needs of certain segments of the market, specifically housing. Just as a liar needs an exceptionally good memory, distorting the market requires ever increasing regulations and meddling. The CB cannot do all of that so the Dept. of Finance is recruited to do the minute fine tuning. Today , for the 4th time, the rules of the mortgage market were changed such that “prophylactic” beneficial effects will reduce the risk of the non-existent housing bubble from imploding. Among other things, the 25-year amortization period is back and no more than 39% of (gross?) income may be spent on housing ( if that includes insurance and real estate taxes is not entirely clear).
Median family income is $75.829 in Toronto. 39% of that, on a monthly basis is about $2.464. The cheapest 5-year fixed mortgage rate is about 3.25% today. That allows for a mortgage of $500.000 , roughly. In Toronto the benchmark price of a single family home is now $606,000. up 50.3% from Jan. 2005.($499.800 for all of Canada) Our young family has not eaten yet, not paid their taxes, not taken maternity leave etc. etc. so they may decide to rent instead. Here is the chart (it is hard to get updated info!).
Clearly there is nothing to worry about. It gets better when we look at an OECD report done in 2008 and dated to 2007;
Japan, started its descend in 1989, roughly when this chart started. That ratio has dropped by half and home prices by about 80%. The US is not even close when it peaked in 2006. The only other countries on this chart that went up in tandem are the UK, Ireland and Spain. Ireland has already imploded and Spain is in the process of doing so. The UK started to go up again, why is not entirely clear but it may be the foreign component that thinks nothing of buying mews in Mayfair at 5 mln. pounds a shot in order to have a pied a terre , something that is probable very significant in Toronto as well. It would seem that Canada is following the Maestro, he too could not see a bubble. The irony is , of course, that it is this very same government that first introduced 40 year maturities etc. etc. and has now brought them back to 25 years. First they help create the bubble and then they have a hand in its collapse.
Yesterday’s comments from the Fed were anything but reassuring. Anyone watching the Q&A session would be hard pressed not to get the impression that Bernanke is a little unsure of himself. GDP was expected to grow less than before, inflation was expected to be lower than before and is once again dangerously close to deflationary levels, and job growth was essentially expected to be marginal at best. So the response is a little more “twist” about $267 bln. worth of it. This does not add any reserves, all it does is flatten the yield curve, which is already pretty flat considering that the 10-year at about 1.65% is roughly 1% more expensive than the 30-year.
Interestingly, when asked about the “liquidity trap” (a condition that in the vernacular of economics is better known as “pushing on a string”) by a Japanese reporter referencing his home country’s experiences, Bernanke took exceptional pains not to repeat that characterisation in his response. One cannot expect the chairman of the Fed. to concede that that is where we in fact are! Leading a horse to water is one thing, making it drink is an entirely different story.
Accommodative policies can take the form of monetary stimulus, fiscal stimulus, or in other areas by , for instance waging a war that is inevitable running a deficit. The US and now also the ECB, Japan, China, Brazil and basically every country in the world are being accommodative to excess. Here are a few, randomly chosen, charts;
US meddling in the supposedly free capitalist markets by the Fed and the Treasury dept. went from about $400 bln in 2007 to $6 trillion now. At the same time government spending almost doubled, or is expected to double despite the alarming fact that the US spends $1.40 for each $1 it collects. This is a worldwide phenomenon;
The one on the right is updated to today, more or less. For the first time the ECB has surpassed Japan which country has been at this now for more than 22 years. Collectively central banks have now thrown more money at the problem than the GDP of the US for a whole year. Something will need to change and in due time it will. If it is the psychology or mood of the market that we are concerned about, perhaps higher interest rates would give a little more confidence.