First Greece, now Ireland. Does the likelihood of requiring a bailout increase directly with how easy it is to stereotype the country? Unfortunately, one of the world’s favorite countries gave up the grudge yesterday and slurred of their government and bank bonds what we all knew: “SULLY!! MURPH!! We don’t have nearly enough fuckin…..fuckin…. potatoes n’ shit to pay this fucker off”. So, after denying for weeks that they would need any international assistance, they asked the European Central Bank and the IMF for somewhere in the neighborhood of 80 Beeeeellion Euros to pay off their bills and provide a backstop for their banks. Now 80Bn EUR (roughly 110Bn USD) sounds like nothing compared to the batshit crazy numbers getting thrown around in Washington (roughly 2 Trillion in 2008 + this latest 600 Bn QE2 fooferah), but consider that Ireland is a scant 5 million people… the size of the GTA, compared to the 300+ million in the US, and you get an idea that this is gonna be one of the biggest motherfuckers out there. Just to give you an idea of the numbers, the average Irish family owes 132,000 Euros to the bank. That puts debt rates in Canada and the US right the fuck to shame.

The Irish had a sweet little run going on in the late 90s and 2000s and were one of the most rapidly developing European nations, but the same thing happened to them that happened to the American’s; they left the cheap money punchbowl out for too damn long and believed that prices of everything would just be able to magically go up forever. Even worse, when cracks started to appear in 2008, they just brushed it off and just kept flogging each other with shilaylays or however you spell that (that’s business as usual there right? That’s the point I’m trying to get across anyways).

So the issue now is who ends up footing the bill for this? Well who else, the big swinging wanger of the Euro-Zone: the Germans (with a little bit of help from the much smaller, war-losing wanger: the French). After bailing out the Greeks earlier this year, as well as the monster tally of the combined bank bailouts in 2008, how much more can the relatively healthy countries in the European Union handle? It comes down to a question of confidence; remember the flaccid economic sex doll? If the healthy countries do not bail out the weaker countries in this situation, confidence in the whole European banking system gets compromised, which affects the strong banks. The biggest reason for this is because of the currency union and the fact that should one member of the currency union collapse, the value of the Euro would be monstrously affected.

Now that Ireland is crossed off the list, those vicious motherfuckers ‘confidence’ and ‘time’ look to be after Portugal next, then Spain, then who the hell knows what other European nations. The bottom line is this: the Euro as a currency faces some serious challenges because by definition, the strong need to support the weak. However how much longer can the strong remain strong? Germany, and the rest of the relatively more ballin’ (ISBA: solvent) EU nations are rapidly overextending themselves and if there is the slightest chink in their armor or questions surface about their Government’s balance sheets and boom, fffssssssssssssssssssssssstttttttttt. Flaccid sex doll.

So where does this leave us now? With the future of the Euro uncertain and the printing presses rapidly being cranked up to support busted ass nations, the Euro currency has been gettin jooked since the announcement and this has lead to:

-          A rebound in the USD as nervous-ass mofoers flee from the Euro into the “flight to safety” that we talked about in the currency war article

-          A fall in commodities as the USD strengthens (see QE2 article or Currency war article for an explanation on this).

  • This fall in commodities also had to do with China stepping in to try and slow its growth to prevent rampant asset bubbles and inflation (again see QE2 article for further ‘splaining)

-          A big upswing in the demand for long term American government bonds as people run to safety again away from both China and the Euro-zone

-          AND just to dump on everyone’s fun a little more North Korea decided to get all Mortal Kombat: TE and launch a Haiduken on South Korea. Needless to say crazy people with nukes and small man syndrome get the world a smidgen riled. Another reason for the flight to safety.

Remember back in the very first intro post I said “the force that simultaneously binds the world together and tears it apart is finance, and it’s time you knew more about it than that talking condom mug your drinking out of?” That’s never more true than in times of crisis like this. EVERYTHING impacts everything else, the list above is but a few effects of millions that these actions have. I never feel great about the way these macro posts end cause I’d love to be able to roll it all up and say “whammo, buy Oil, short the Danish Kroner, love your children and don’t forget to have your pets spayed and neutered GOODNIGHT!” but it’s impossible. All I can say is, as I’ve said a few times before, stay diversified, stay long term, and it’s gonna be a damn interesting decade.

There’s been a war brewing the past few days between Chiquita Brands International (famous for Chiquita Bananas) and the Alberta Oil Sands. There is another war brewing between the spokepeople for both sides and common sense and IT. IS. ON!

Chiquita first proclaimed that they would avoid “where possible, fuels from the Oil sands and encourage their transportation providers to adopt a strategy of continuous improvement towards the elimination of those fuels.” Very nicely put, but to many activists on both sides it is being  real life retweeted and broken telephoned as “BOYCOTT!!” which has raised the ire of the industries defendants and placed several bees in several bonnets.

While the interpretation of Chiquita Bananas statement is open for debate, what’s not so ambiguous is the response by said defendants:

  • Ethicaloil.org has called for a boycott of all Chiquita products saying “….apparently they like oil from OPEC dictatorships instead…. this boycott is rich coming from a company with a history of human rights abuses that was just fined millions for supporting terrorist organizations in Colombia. Ethical oil says: stand up to this foreign bully and don’t buy Chiquita Bananas or Fresh Express Salads at your local grocery store.” 
  • Immigration minister Jason Kenney said “I gather than Chiquita has no issues with Iranian oil, but is boycotting Canadian oil? No more Chiquita Bananas for me”
  • Public Works minister Rona Ambrose called for Canadians to “send Chiquita CEO a note to tell him his stand is wrong” and notes her support for the ethical oil boycott.

Nor was there any ambiguity or room for debate by others on Chiquitas side:

  •  The blog ForestEthics.org is challenging Dole to join the boycott saying “Dole is using dirty Canada Tar Sands Oil to ship you rotton tar sands bananas–Chiquita just ditches toxic Tar Sands fuel why can’t you?”

Cue the race to the bottom. No arguments or facts for why the “boycott” is wrong or pro oil sands stuff, just xenophobia and blame passing. Chiquita has yet to respond, but their supporters chimed in with some solid hyperbole, boldly proclaiming ” facts? hah. Persuasive rational arguments? please. Buzzwords and sensationalism? You better believe it!”

I definitely am not anti Oil Sands, far from it, it’s Canada’s biggest economic engine and its expansion and success is awesome for us, but it is a dirty business sure and it could probably stand to reduce emissions. I am on the other hand anti inflexibility and… uhh…. black and white casting…ery…..

"whaaaaaaaaa they boycotted us? Dictator supporting, racist, slave mongers! Non impactful reverse boycott BEGIN!"

“Whoa someone boycotted something I already commited to hate? Hey other co

"DISENGAGE LOGIC CIRCUIT! If you don't join this boycott that I just decided was a boycott then your business is as bad as the boycottees despite doing nothing at alllllllll. Hippie barf hippie barf hippie barf"

And how the hell are you going to boycott tar sands (I know I started out this article saying that Chiquita didn’t even necessarily say boycott but it’s easier to term it that) fuel anyways Chiquita? Have you thought of the logistics of this? The statement says you will encourage your transportation providers to blah blah pseudo boycott. So are you relying on them? How will that be monitored? Do you think Motor Tony’s Truck Maker Go-ers are going to follow through on your pie in the sky pledge? Sure you can pressure people, but it just seems so fluffy.

Boycotting Chiquita Bananas seems equally as crazy, you have no fundamental issues with Bananas I assume? You are not boycotting due to their OPEC enjoyery or the Colombian terrorist organization supporting that you just dug up via a google search into their 2010 annual report that was PUBLISHED BY CHIQUITA therefore not a secret I assume? It’s just a straight spite boycott and not productive.

I just wish that this could be discussed by the parties involved, without any radical organizations piggybacking and crazifying the whole process, valid arguments from both sides could be acknowledged, and something useful done. Or even if something useful didn’t come out of it, just acknowledge the other sides right to have opinions that aren’t identical to yours! That’s what this boils down to, that and boycotts are silly, and bananas are delicious….. and activisits aren’t good arguers…… and that I shouldn’t write articles over lunch hour anymore.

Crotch Grab to VivSMAASSSHHHHH for the idea!

Till next real article.

The SRB

A rich anthropomorphic dog with a pipe in his mouth once told me “it’s good to own land…. and people”, he was a racist, but the land part always stuck with me. Up until about 3 years ago it was the cornerstone of financial prudence: Buy a house and you’ll never be poor!! It was a fixture in the American Dream ™. “Own land. Own a house. Wear monocles. Mock the pooooooooor.” The dream has lost some of its luster over the last few years with many homebuyers portrayed as either poor naïve idiots who were lured in by the big bad man at the bank with his anti matter NINJA mortgages and his baby blood filled pen, this guy: 

"my wallet may or may not be made of face"

Or they were portrayed as lazy entrepreneurs who didn’t want to do real work so they got into the business of flipping homes because real estate never goes down right? The Greater Fool theory is a key piece in any bubble, when asset prices lose all touch with reality and people only buy them knowing that they will be able to sell them to someone else at an even more ridiculous price….sound familiar? Anyways after a monster crash in Real Estate prices in the States (not Canada as this masterful witty article points out), Real Estate is no longer the no brainer it once was. I am here to repair some of damage done to my homeboy RE.

"More like FO real estate eh?" - The Wisecracking Gangster

 1. A major problem for equity investors doesn’t apply with Real Estate

I’ve written before about the importance of loooooong term investing and how your portfolio returns can get ripped apart if you get spooked by “IS THIS 1929 AGAIN? NOTABLE ECONOMIST SAYS MARKET PRIMED FOR BUTT EXPANDING CRASH! NO MORE HANDYS FROM HOT CHIXXXX!” type headlines. So you read that, you go running to Questrade, clickity clack a button or two, and boom you are out of the market just in time for the Fed to announce QE Bajillion and melt your face up 4% in a day. Stocks are too liquid for their own good sometimes. With real Estate on the other hand, the biggest safeguard against pulling the trigger to soon is that is bloody hard to get out of your investment.

You can’t exactly go to http://www.sellmyfuckinghouse.com and kablam you’re homeless with some money in your account from a faceless stranger like stocks. No you gotta get a real estate agent (or figure it out yourself), deal with people farting in your abode during open houses, negotiate face to face and play mind games with prospective clients, live and die waiting for offers, move your full size popcorn maker and other assorted garbage out and make sure you find all the panties you flung in the vents from those, 40s, sweatpants and Viagra parties you had. It’s a bitch and the sheer bitchery of it is a huge factor in deciding to sell, which means you are way more likely to hold on to it for a proper amount of time (10+ years) and let it appreciate.

2. People actually look at what they are buying with a house

An offshoot of the factor above is that because it’s so easy to buy stock, people don’t put enough research into it. “Well Jim Cramer threw a squeaky bull toy in the air and did a back flip while bells went off so this shit must be legit” typity type clackity clack, you own a 100 shares of Angela’s Asses. Congratulations. But with a house, man I can’t be so cavalier! I gotta live here for like 20 years! We gotta check out the neighbourhood, figure out where is up and coming, get experts to inspect the foundation and plumbing n stuff, talk it over, fight about it, have makeup real estate fight sex, the process takes MONTHS of due diligence. This is compared to people spending more time deciding which director’s cut of The Dark Night they want to watch first rather than what stocks to buy.

3. Easy and relatively safe leverage

Leverage is another thing that has become a dirty word in the mainstream media. You hear of banks “levering up” 40 to 1, which in laymen’s terms means that for every dollar in the company that belongs to the owners free and clear (equity), there are 40 dollars which are owed to someone else by a certain date (debt). The reason companies do this is as follows: -

  • Say Franks Fountain Dr. Pepper Fountains needs 41 dollars of capital to operate.
  •  If the owners put up the whole 41 dollars and they make a dollar of profit then the owners see a (1 / 41 = 2.4%) return on their investment. Not great, but if they lose money well the owners are pissed, but no one is going to force them into bankruptcy.
  • But say instead they borrow 40 of those dollars required for a year and only invest 1 dollar (a.k.a. they are levered 40 to 1) and they still make 1 dollar of profit. Now the owners see a return of (1/1 = 100%) on their investment. A little more gnarly than 2.4%. But if they lose money, they still owe that 40 bucks to the lender at the end of the year and if they can’t pay then they go into bankruptcy and the lender takes all their stuff 

GUYNANCE BANKRUPTCY XTRANORMAL INTERLUDE!

  •  So leverage can increase returns, but also will increase risk proportionally. 

 Back to real estate, during the shit in 2008, people were levered to infiniti in mortgages. Literally, think about the downpayment on your house as the dollars the investors invested above and your mortgage as the debt. People buying houses with 0 down had NO equity at all invested in their house, you can’t even calculate a leverage ratio for that. Lenders would advertise “0 down low low rate for the first year….what happens after the first year……..a nice warm glass of shut up and sign! That’s what!” and people bought them cause they didn’t care about the long term as they were just planning on selling it anyways. So you buy a house with nothing down and sell it 6 months later for 40 grand higher than you bought it and boom you have an almost infinite return on investment as well. Easy to see why people got so wrapped up in flipping houses eh? But when the market for those houses evaporates as it did, a ton of people are left holding the bag with a mortgage with awful terms (after the sweet teaser rate) and no way to pay them. Cue meltdown.

“This housing market raps like its parents jerked it” – The Financially Savvy gangster circa 2008.

It did kind of sound like Eric Sermon…. the generic version, you are right fictional 2008 rap man. So reasonable rational people put kinda 10-15% down on their house, enough leverage so that increases in your house value give you a great return, but not so much that the banks get jacked up to do some MOllestin’ toniiiight. Now why is it better to use leverage in an investment like real estate rather than say stocks? Well you can use leverage with stocks (which is called buying them “on margin”), but with stocks they are valued every second, so if your portfolio drops too much the brokerage you bought from gets nervous and says “….scuse me brosef, your portfolio looks like an old alcoholics diaper, you’re gonna need to give us more cash collateral or we’re selling your stocks at a loss and you can GTFO.” It’s called a “margin call” and is one of the major reasons that stock markets drop so dramatically sometimes. Stocks go down, brokers call their clients for more collateral, clients do the thing where they turn their pockets inside out like the monopoly man and make the confused puppy “baroo?” noise, brokers force them to sell their stocks, selling pressure causes stock prices to drop further. With real estate and mortgages, your house is very seldom valued, and margin calls just don’t exist. Imagine your real estate agent rolling up on you in the middle of the night with a 12 gage saying “you need to cough up 20ginos by tomorrow morning or we’re selling two bedrooms essay!” Never happen.

"Forced liquidation only happens from mah dddiiiiiiiiicccck" - The annoyingly fiscally responsible gangster

4. Condo vs. House

Condo’s are cool. You get to be urban and wear deep V neck shirts and go to all the cool downtown coffee stores with no parking and get sweet views from your 45th floor balcony etc etc etc. No one is debating these facts. What is up for debate, and I haven’t made up my mind on this yet, is the fact that when you buy a house you are getting the land that does along with it. No matter how shitty your house is or if it blows up or is infested with panties from previous Boner In Sweatpant Parties, you will always have the land. In a condo…. you own about a square foot of land, and it might be a shitty foot at that. If something goes wrong, there isn’t really a fallback plan or a safe store of value…… but they are cool….. more on this later as I liveblog life changing decisions.

5. What’s the government gon do

Governments love houses and having their citizens live in them. As such, they can either go the “endorsing their institutions to drastically overextend credit to unworthy recipients and keep mortgage rates ridiculously low” route a-la Fanny Mae and Freddie Mac and the US govn’t in the run up to the 2008 crisis (this will be a whooooole nother article at some point), or, more prudently, they can offer various tax incentives to consumers to help them make said house purchases.

In the States, most interest on mortgage payments are tax deductible (meaning they reduce your taxable income and increase your “yessssssssssssssss new piranha tank” refund), however in Canada you have to do some fancy footwork involving asset swapping called The Smith Manoeuvre (not the sex position) in order to get a tax deduction from your interest. Also in the States you can exclude up to US 250K of capital gains (increases in the value of your house) from being taxed when you sell your primary residence as long as you lived there full time for 2 of the past 5 years. Canada you need to have had your house as your primary residence for every year you owned it in order to be exempt from capital gains tax. The one other bone the Canadian government gives you (as opposed to the boners they are often also found delivering) is that it allows you to withdraw up to 25K (50K if you’re shackin up with another baller) from your RRSP tax free for a downpayment. This means you can stuff money into your RRSP tax free (for a Guynance ™ mind devouring knowledge tornado on RRSPs go here), have it grow faster, pull it out (hehe), buy a house, and not have to worry about replacing it in the RRSP for up to 15 years. Great way to grow your down payment savings.

6. Paying rent is making someone else rich, paying a mortgage is making you rich

…….That’s pretty much it….. plus landlords are usually dinks.

Next up: How Canada got it’s ass in gear and got out of debtpocalypse territory in the late 90s.

Till then honkys!

The SRB (a.k.a. The Sergeant of Margin) ….say it out loud it makes sense