How likely is default with this state? Consider that unemployment there is currently pegged at over 11% and that for the three major metro areas in CA, home prices are off 43% from the peak reached three years ago. This is a *big* issue: if California was a country it would have the eighth largest GDP in the world.

Happy Canada Day, folks.

Japanese goverment debt is 180% of GDP, to 80% in the US. I think they can do a LOT more bailing out. Don’t forget that with control of the printing press they can do whatever they want. Of course a side effect could be currency devaluation and subsequent inflation but that would actually benefit the US from a trade perspective. Before everyone beats me over the head with this, I am just saying what I think the government will do and what I think they will get away with in the short term, not something I by any means advocate.

http://www.businessinsider.com/japan-gdp-drops-catastrophic-13-2009-2

“Kind of a winning a pyrrhic point, wouldn’t you say?”

I think not. Negligible inflation is not widespread deflation. Also, the same CPI report points out that bulk of the weakness was on year over year comparisons in energy. Without energy, it was up + 2.3 percent. Right now we are comparing current energy with peak energy of last summer. This is very temporary. As the next few months unfold, we’ll be comparing the weaker energy prices of fall and winter with what will probably similar prices to now.

Mark, Consumer price index (annual % change in April/May):
All-items +0.4 / +0.1
All-items excluding food +0.8 / -1.2
Shelter +0.2 / -0.2 (‘It was the first drop since July 2002′ — StatsCan)
Transportation -8.0 / -8.2 (‘Continued price drops for gasoline and passenger vehicles’ — StatsCan)
Goods -2.0 / -2.1
Energy -17.5 / -18.3

So yes, officially ‘Canada’ avoided a deflation in May, although I’d hardly consider 0.1% ‘mild inflation’, as you put it. More like negligible inflation, and borderline deflation. Kind of a winning a pyrrhic point, wouldn’t you say? At the same time, “The inflation rate was minus 1.1% in both Prince Edward Island and Nova Scotia, while Alberta had 0.7% negative growth and New Brunswick declined 0.2%.”

I’d venture a guess that deflation in some of the top key energy-producing provinces in this country is fairly significant – even if I can’t foresee what the exact long term ramifications are. Regardless, you made your point: some economists and I obviously got it wrong for May.

and this has to do with what? i renovate most houses i buy, houses that need renovation. quite the opposite of a slumlord actually. if you still want to call me that, you’re expressing more of a prejudice against a neighbourhood, not the way I do business. so if you’re going to attack me personally, you should probably have a better idea what you’re attacking. why not stick to the point.

you said there was ‘widespread deflation’. there hasn’t been. end of story. Next month may be different, but not yet.

Me, I think the Middle Class here and in North America as a whole will have a lower standard of living compared to the last few years.

George, “The reason for that would be because of the all time high levels of debt and uncertainty.” Are we not approaching (if not already there?) record consumer or household debt? I would agree that the US is in far worse shape economically, and things do seem to be getting desperate – but as our largest trading partner, at least some of this will have a direct adverse effect on our economy. You mention the trillion dollar credit card elephant in the room; he already has company in the form of the trillion dollar commercial real estate hippo and the trillion and a half dollar Alt-A gorilla. If we reach the point where a second stimulus is needed, would we even have the financial capability at that point without having to pay an extremely high rate of interest on the borrowing? At the end of the day, do people not realize that all of this money does eventually have to be paid back…?

If there is a second stimulus, it means that the first one did not work as told to the public and the markets would reflect that. Retesting the March lows soon? But then another climb.

Obama is in a tough position with California. Doing nothing could mean bankruptcy for the State, and with other States, cities and counties following suit. A deflationary spiral would follow. Bailing California out, would also mean bailing out the other places as well. How much bailing out can they do? The Trillion dollar elephant in the room credit card debt is soon to follow. He is in a damned if you do and damned if you don’t position. Worst case scenario is that this mess wrecks more in the markets than the banks last fall. Best case scenario is that Mickey Mouse will not be feeling very good for a few years.

Kind of hypocritical of you to be preaching deflation on the one hand, and then higher interest rates when the argument suits you. If you think there’s deflation ahead, don’t go around saying interest rates are headed up, it makes you lose credibility.

George,

My view of the second stimulus package is that it should be positive for the stock market, no? What it does is put a floor under the economic destruction which contributes to business confidence. Without some kind of stimulus it’s hard to imagine just how bad things can get. When people think that things are bad but the government will keep it from going to zero, they are still willing to make some form of investment and hiring which further limits the damage. At least that’s how the theory goes.

I don’t personally see an actual bankruptcy happenning in California. Now they are certainly effectively bankrupt but my view is that Obama will drum up some more cash to keep them afloat. A statewise bankruptcy would be just too devastating to the bond market right now. I don’t have much evidence to back this up, just my gut feel.

Based on the recent strength in the US dollar (over the past year) and the decent appetite for US debt, it looks to me like the US will get away with things, at least one more time.

One could also argue that I’m just a “realist: a person who accepts the world as it literally is and deals with it accordingly.”

Here’s another one to consider, though: “slumlord: a derogatory term for landlords, generally absentee landlords, who attempt to maximize profit by minimizing spending on property maintenance, often in deteriorating neighborhoods. They may need to charge lower than market rent to tenants. Severe housing shortages allow slumlords to charge higher rents. It is not uncommon for slumlords to buy property with little or no down payment, and also to receive rent in cash to avoid disclosing it for tax purposes, providing lucrative short term income. A slumlord may also hope that his property will eventually be purchased by government for more than it is worth as a part of urban renewal, or by investors as the neighborhood becomes gentrified. Some slumlords are more interested in profit acquired through property flipping, a form of speculation, rather than rental income…” (full Wiki definition here)

You have your opinions, and I’m certainly entitled to mine. If you want to debate the finer merits of my points, please do so without the ‘labels’ and the rhetoric. I’ve shown you the courtesy and respect of not openly slamming you personally, and would appreciate the same.

George, if that scenario unfolds, we are definitely going to see a US-style housing crash. Just as US banks found themselves leveraged and unable to lend, so too are we now starting to see similar cracks appear in our ‘rock solid’ financial institutions (the preferred share warnings and downgrades being only one recent example). Psychologically, I think the stark reality of “you owe more than you think” will be very hard for some to absorb.

Didn’t we just have reports last week stating Canada still had inflation, though mild, not deflation. We don’t have ‘widespread deflation’, yet that is exactly what you just said we had! Stop fear mongering. In fact, you yourself last week linked to a report saying how the canadian numbers soon to come out would show deflation. However, when the actual numbers came out a few days later and didn’t show deflation, you didn’t link that news. Figured you wouldn’t. So I did. Same news site, same data, but you like deflation news and when it doesn’t pan out, you don’t follow up. We do not have ‘widespread deflation’, not yet at least, so stick to the facts. Feel free to argue that we have asset deflation, or commodity deflation, but that was last fall and winter, both real estate prices and oil prices have also been rising the past few months.

This might be a good website for some people to bookmark. I hear that business is booming in Calgary for repo’s.
http://www.bankruptcycanada.com/bankstats1.htm

Just noticed House of Tools is closing
http://www.canadianbusiness.com/markets/cnw/article.jsp?content=20090618_194502_0_cnw_cnw
Unfortunate for the workers, at least there are jobs here. I am expecting more bankruptcies and I am totally watching California and some other States. I don’t think the markets are gonna be good with this unfolding, nevermind the possiblity of another stimulus package in the States this fall.

If I were you, and you were me, I find it hard to imagine that I would feel it appropriate to drop Garth Turner quotes and link backs on your site repeatedly.

I was seriously considering revisiting preferred shares until I read this… (something didn’t sit right when they were first issued a few months back) and I’m glad I just took my 1% in short-term GICs and steered clear.

Garth has an interesting entry on his Greater Fool blog:
Dominion of debt
http://www.greaterfool.ca/2009/06/30/dominion-of-debt/
“‘We’re still in shock,’ she says. ‘I mean, we listened to the real estate guy, and read the papers about housing getting more and more expensive, so we did what everybody was doing – what our parents wanted. We got a mortgage from the bank and they gave us a gift of money just for closing, to help pay for it. We just wanted a nice new house with stainless and granite and stuff. How were we supposed to know mortgage rates would go up and house prices go down, so after, like, a year we owed more than the place was worth. We couldn’t afford to sell it, and with Vache losing his job at the airport, we couldn’t afford to stay. So we came here. I mean, it’s all their fault, right? The politicians. I hate the bloodsuckers.’”

Thank you for those links, btw- they’re very interesting.

Canadian banks’ preferred shares downgraded
http://www.financialpost.com/news-sectors/story.html?id=1747151
“DBRS downgraded the preferred shares of the major Canadian banks Tuesday morning because of what it called the ‘elevated risk’ that the dividends could get cut. In the wake of the financial crisis Canadian banks have been issuing record amounts of preferred shares in a bid to shore up balance sheets hurt by exposure to the turmoil.”

Moody’s threatens banks with the chop
http://www.financialpost.com/news-sectors/story.html?id=1748123
“Still, some of them continue to significant losses and have been selling record amounts of securities to shore up their capital ratios.”

So far, that has been the case, Jason. Bond yields are down pretty significantly this week, though (2.47), well under the spike we saw early this month. It’s not impossible that interest rates may stay low for longer than we think. I agree it’s just a matter of time before they increase more than most expect, but it may not be soon.

Some would also argue that in a severe recession (borderline depression) how is it possible for interest rates to be going up, when we’re still seeing an economic contraction and widespread deflation? Yet this is exactly what’s happening.