‘Extreme Speculation’ – “The problem is that the diversion of resources into investments that are only justified by the stream of new money and artificially low interest rates will destroy wealth at the same time as it is boosting activity.”

The Vancouver RE market can only be understood as part of a global phenomenon of too-cheap money encouraging ‘extreme speculation’. -vreaa

“When the central bank pumps money into the economy and suppresses interest rates it creates incentives to speculate and invest in ways that would not otherwise be viable. At a superficial level the central bank’s strategy will often seem valid, because the increased speculating and investing prompted by the monetary stimulus will temporarily boost economic activity and could lead to lower unemployment. The problem is that the diversion of resources into projects and other investments that are only justified by the stream of new money and artificially low interest rates will destroy wealth at the same time as it is boosting activity. In effect, the central bank’s efforts cause the economy to feast on its seed corn, temporarily creating full bellies while setting the stage for severe hunger in the future.
We witnessed a classic example of the above-described phenomenon during 2001-2009, when aggressive monetary stimulus introduced by the US Federal Reserve to mitigate the fallout from the bursting of the NASDAQ bubble and “911” led to booms in US real estate and real-estate-related industries/investments. For a few years, the massive diversion of resources into real-estate projects and debt created the outward appearance of a strong economy, but a reduction in the rate of money-pumping eventually exposed the wastage and left millions of people unemployed or under-employed. The point is that the collapse of 2007-2009 would never have happened if the Fed hadn’t subjected the economy to a flood of new money and artificially-low interest rates during 2001-2005.”
– from ‘Setting the stage for the next collapse’, Steve Saville, The Speculative Investor, 22 July 2014

“Yellen will not use interest rates to head off or curtail any asset bubbles encouraged by the extremely low rates that might appear. And history is clear: very low rates absolutely will encourage extreme speculation. But Yellen will, as Greenspan and Bernanke before her, attempt to limit only the damage any breaking bubbles might cause. … I had thought that central bankers by now, after so much unnecessary pain, might have begun to compromise on this matter, but no such luck… The evidence against this policy after two of the handful of the most painful burst bubbles in history is impressive. But not nearly as impressive as the unwillingness of academics to back off from closely held theories in the face of mere evidence.”
– from Jeremy Grantham’s latest newsletter, GMO Q2 2014

30 responses to “‘Extreme Speculation’ – “The problem is that the diversion of resources into investments that are only justified by the stream of new money and artificially low interest rates will destroy wealth at the same time as it is boosting activity.”

  1. Seems to me like 2001-2009 was just a warm up act. Since the last correction, all the same mechanisms have either remained in place as they were or have been ramped up further while none of the underlying problems have been dealt with. It is truly amazing how many out there either believe all the troubles of the world (for the most part) have been “fixed” and that “it’s all good” going forward or simply don’t care anymore since they no longer have any skin in the game left. IMHO, the very same policies and practices (ie, too big to fail, extr speculation and so forth) that got us into this mess in the first place are still in place today. Since 2009 it’s really been business as usual for the 1% who have benefited tremendously while the poor have fallen further and further behind the eight ball. What was once a middle class has been effectively reduced to a pile of rubble and swept aside. Cities like Vancouver are morphing into luxury resort destinations solely for the “uber” rich where the average local is considered lucky just to reside somewhere within the city’s boundaries let alone afford a suitable enough detached home that would comfortably house more than 2 people. When does the house of cards come tumbling down? Who knows? Sure, the same cast of characters seem to think “something” is imminent, but time and time again we are all reminded that the folks pulling all the strings have an unlimited stack of get out of jail free cards to draw upon when needed, no questions asked not to mention all the taxpayers at their disposal to bail their a$$es out if and when it becomes necessary to declare another engineered “state of emergency”.

  2. I recuse myself from further comment on this specific topic due to bias of one form or another. Also I don’t pretend anymore to understand “macro”. If I did I would probably not be commenting on local blogs.

    • The secret of “macro”… is often [but not always, or exclusively] no more than carefully aggregated, granular “micro”, Dr. J…

      Here are two pieces of gritty “micro” which some here may find illustrative:

      [UK Guardian] – The pervasive power of Rupert Murdoch: an extract from Hack Attack by Nick Davies – In this first extract from his new book, the reporter who broke the phone hacking story looks at Rebekah Brooks’s 2009 wedding – and how it was a perfect display of the nature of Rupert Murdoch’s hold on British life

      http://www.theguardian.com/media/2014/jul/25/-sp-rupert-murdoch-passive-power-hack-attack-nick-davies

      [NYT] – The Typical Household, Now Worth a Third Less

      …”Economic inequality in the United States has been receiving a lot of attention. But it’s not merely an issue of the rich getting richer. The typical American household has been getting poorer, too.

      The inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36 percent decline, according to a study financed by the Russell Sage Foundation. Those are the figures for a household at the median point in the wealth distribution — the level at which there are an equal number of households whose worth is higher and lower. But during the same period, the net worth of wealthy households increased substantially.”…

      http://nyti.ms/1nHeXDv

      • Real Estate Tsunami

        As a “zero sum gamer”, this does not surprise me.
        It’s been very well documented that the rich are getting richer.
        Therefore, someone must be getting poorer.
        And not just in relative terms.

      • Typical households will find alternate means of displaying wealth; I think we’re a way’s off from the post-war Europe stories my parents’ generation tell, back when “poor” meant something altogether Serious.

        [Pulls up pants to shoulders]

      • next stop is vcc

        YVR Housing Analyst (@YVRHousing), agreed. Starvation and nearly dying from what is now easily treatable diseases in post-war Europe is still within living memory in my family.

  3. Here’s another example of how $hit works in this “Heads I Win, Tails You Lose” world where those in the know and close to the action always wind up betting on a sure thing (thereby leaving the extreme speculation for the rest of us chumps)

    http://www.telegraph.co.uk/news/politics/10986950/Putin-cronies-get-a-week-to-pull-their-cash-out-of-Britain-as-EU-drags-its-feet.html

  4. Real Estate Tsunami

    Off topic, but I hope you allow me to post this.
    After watching news about the Gaza situation, I came away thinking that in the long run, the Palastinians may just outlast the Isrealis.
    The shear number of children that are being produced in Gaza will make it eventually impossible for the Israelis to use physical force, as this will harm many children.
    And no one wants to be seen waging a war against innocent children.

  5. pfffft! is this characteristically canadian? … http://tinyurl.com/p4v6dsv

  6. whipmaster~kerthwhack

    You folks are ignoring the fraudulent acts of the banks involved in this catastrophe. It wasn’t just a case of overleveraging that collapsed the real estate market in the U.S. There was also fraud and sabotage which the banks profited handsomely by. You don’t understand the difference between the U.S. and the rest of the world if you don’t recognized the role of the banks. Don’t you get tired of being wrong all the time? I would.

  7. Did you get tired of being the only poster at RET?

    • next stop is vcc

      I found that thread by whipmaster. It’s a case study in mental illness. Poor guy.

      • bailinginbc

        RET used to be pretty good lots of back and forth between the bears and bulls – lots of things to learn from both sides until it got taken over by a few people full of bombastic bullshit.

      • The sadness is best left for Clara Hartree, whose banner ad is seen next to the primate faeces smeared over the padded walls of that half-abandoned forum.

  8. Whipmaster~kerthwhack

    Sorry, just trying to enlighten the real estate challenged. 🙂

  9. Haven’t called past this site in a very long time. Good to see some informed comments. Recent postings have been spot on, obviously with some intelligence behind them.

    What do we find. Whipmaster. So just ducked over to RET to have a quick look – poor excuse for a site these days. Whipmaster – you and Geezer still dont get it do you! The whipmaster spends half his time talking to himself on an empty forum, trying to gloat over perceived success, for reasons that don’t apply.

    Nothing has changed. You think it was just the US banks? You think that Canada is immune? And top of the list is Vancouver in property craziness and your doing it yourselves – not foreigners.

    The whole thing has been pumped up by record low interest rates, and massive amounts of cheap liquidity. You end up with property and stock bubbles, and meanwhile incomes go backwards.

    You don’t control your market anymore, the USFED does! So Whipmaster – you didn’t get it right. Nothing to do with the Vancouver market – USFED and the US debt is why the Canadian market hasn’t collapsed – but it will – don’t worry – be patient!

    If things had been normal, this would have reverted to the mean back in 2009 – 2010. The property bubbles would have popped years ago, and we would be back to normal. The fact that we are now witnessing the biggest economic experiment ever, is pretty frightening.

    When will it revert? Who knows but when it does its going to implode big time. And money printing always fails – eventually

    USA is losing reserve currency status, and when that happens they will lose control of interest rates. Two choices, USA defaults, or hyperinflation in the USA. (Either way world interest rates will spike and smash all the bubbles including property bubbles).

    Only two recommendations – get out of debt or if you cant fix as much as possibly can for as long as you can. During a crash, beware of the collapse of your LVR and demands for additional security.

    Id be nervous of holding large amounts of cash in Canadian banks. – Check your budget papers – eg a cyprus scenario.

    Nice to see VREAA with a few posts – but until Janet tells us what is happening we are all on hold. For those wanting to get out of debt, Janet has given you a window of opportunity to sell excess assets and pay it down. (Opposite to what most people are doing). Good luck all!

    • Whipmaster~kerthwhack

      hahahaha…. Geezer did a number on you. Nice of you to commit “hari kari” on RET by removing all your hot air posts.

      You are still the laughing stock of RET. Please come back if you have the guts.

      In the meanwhile, take a backseat to those who know something.
      The market could very well collapse tomorrow, but hopefully many of the people will be “home free” (clear title) by then.

      PS. Yes RET is nice and quiet. All you Bash’tards have almost been eradicated. It’s loovelay! 🙂

  10. Calling past the other day I had a huge laugh. You and your mate are still carrying on like a bunch of pratts even though i left….. – what 18 months ago! And you and your mate run around in silence haranguing posters who are no longer even there! Are you two losers or what!

    Your still too dumb to get it. You have no idea why i deleted the posts – but here is a hint – it wasn’t because of you and Geezer. Talk about having tickets on yourself.

    Your pretty slow – and only now are you starting to wake up. What was your post today? Will America collapse Soon? God your slow. Im years ahead of you sunshine. And now i’ve disappeared again. CYA blossom!

  11. Whipmaster~kerthwhack

    Sayōnara 🙂

  12. Taipan, you lost. Period. Not even remotely close. You embarrassed yourself badly. Move on.

  13. To make that comment you don’t even understand the game. Just another irrelevant flipper. Doesnt matter whether you are the flipper or the person earning a flipping commision.

    At any time in the last 150 years the market would have collapsed. The fact that it didn’t, reflects to a different point artificially holding it up. Again the fact that you don’t realise it shows your limitations.

    It also means that the handful of you that think this has always been about Vancouver real estate, have about as much economic perception, as a bloke with his hand in his pocket playing with himself, thinking all the girls like him.

    BTW how is that wasteland called RET. Where a few conceited posters pat each other on the back like winos who have finally got control or a large cardboard box. To be blunt, in my recent visit that is what you looked like.

    RET has become the urban wasteland of the net

    • whipmaster~kerthwhack!

      Taipan, unlike RET, I do not believe this site will allow you to “delete” your drivel. But keep brooding. 🙂

    • Taipan. You erased all of your posts. What kind of ego (or brutal insecurity), would drive someone to bother doing that?? You couldn’t even stand by your own arrogant, condescending words could you? And here you take a stand, yapping away like you have a drop of credibility left. LOL! Like I said, time to move on, bud. You lost, and the more you talk, the bigger the joke.

    • Everything Taipan posted at RET was truthful.
      He’s a successful Aussie developer with a recreational property in BC ski-country, just as he claimed.
      [verified by independent agencies; the matter is closed; please take any ‘debate’ on this back to RET].

      • Everything Taipan posted at RET was truthful? His gold theory absolutely tanked. Vancouver RE is still rockin’ and the Fall sounds like it will be more of the same.

        Sounds to me like he erased everything because he was completely wrong.

        Just sayin’.

      • Everything he posted about *himself* was truthful (those were the issues for which he was most frequently taken to task).
        As I’ve said: subject closed here; please take any further discussion back to RET.

  14. I find it comical that the owners of RET allowed one poster to take down an entire site.

    I understand that moderation is limited there, but its also amazing that Whipmaster was allowed to go on unchecked, and burned an entire online community to the ground – sad, really.

    Nearly as sad, however, is the amount of people sucked into the guys trolling. He’s completely incoherent and a fiend for arguing with no logic. The amount of intelligent people sucked into his psycho babble is confounding, but somewhat amusing when viewed from the outside.

    I for one would like to meet the guy, would be curious to see what personality type in the real world can create such a repulsive online persona.

    • whipmaster~kerthwhack!

      Hello Burt, on RET I simply pointed out the true, and hard, real estate facts
      and how the real estate bashers are now proven losers in this battle of asset wealth. The people with your limited understanding of the issues have bailed on the site because they know that I have been proven correct. The people who have some understanding of the issues just come to the site for a little “entertainment” and then they get on with their busy lives. Sorry to ruin your party. 🙂

      • I’m no Taipan, Ill keep it simple friend.

        If you’re the smartest guy in the room, you’re in the wrong room.

        Enjoy that sinking ship of yours, I see you’re already looking for life rafts.

  15. whipmaster~kerthwhack!

    Burt, even though your understanding of the topic is slim to non-existent , please stick to the topic of real estate. If you want to exchange insults, please come see me at RET. 🙂

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