Alberta Bubble

Painful Lessons

2009-02-15T07:23:00.000-08:00

In the feel good world of Canadian news, employers have taken a big clue from the politicians. Instead of laying off hundreds or thousands of employers in one go, most employers, at least in Alberta, are laying off people in smaller batches of 30 to 50 every day. Engineering firms are the primary culprit. Others are likely to join them in this 'non sensational', 'feel not too bad' way of laying off people.
I ran into three friends during the last week who work for engineering companies. The story is the same everywhere. EPC companies have vacated 'floors and floor's of engineers who used to work on the energy industry projects. His own concern was, "How would they pay their mortgage?"
Good question. But asked a bit too late.
During the last three years, the overwhelming attitude in Alberta (or indeed worldwide) was that bad times had been defeated forever. Much like those talking about the 'End of History', the idea of conquest of the business cycle proved a bit premature.
In several parts of Alberta, new immigrants or those who recently moved to Alberta, got themselves into huge mortgages, driven by the propaganda of the usual suspects (realtors, realtor associations, banks, mortgage brokers, newspapers etc). Most of these people have not seen even one real business cycle. That is, they have never tasted the pain that usually follows any huge boom. The bigger the boom, usually the bigger the bust is, especially if there were speculative elements built into the boom.
I had first hand experience of this while working in the IT industry during the dot com bust. But that bust was confined to a specific sector of the economy and was 'cured' by the magic potion of cheap credit, which at that time, had already been in good circulation. The central bankers merely increased it dosage to extreme levels and ended up creating a cure far worse than the disease.
Thousands of engineers are in the process of getting laid off in Alberta and lot of these engineers have huge mortgages to pay. These are all well paying jobs, with a good multiplier effect. The pittance of EI will not even cover the basic mortgage for most of these people, increasing the chances of bankruptcy and foreclosure.
Not to mention the case of all speculators who have multiple properties and were so far insulated by the relatively good rental market. The rental market is becoming softer everyday (the layoffs have something to do with it) and will pressure a lot of these speculators.

Until a few decades ago, people's hands would tremble before they committed themselves to a 20 or 25 year long mortgage. Now, it's just become a no brainer activity and an absolute essential thing to do as most people try to keep up with Joneses.
The real meaning of paying $2000 to $3000 to your banking masters, no matter what-rain or shine, health or sickness,good times or bad, strong economy or weak, fruitful employment or despairs of unemployment- over a really long period of time has been lost. For people have forgotten that the borrower is a slave to the lender. When times are good, not too many borrowers recognize this (Even though more than half of their pay cheque goes on to pay the interest over their deprecating assets such as cars and houses), but when the pay cheque stops, the reality begins to sink in. Too bad, in this day and age, you have to be a heretic to not have a mortgage when you can easily afford to.
The real estate complex has been incredibly successful at luring people by all means- fear, deceit, greed and specious economic reasoning. Buy now or be priced out. Smart people buy houses. Renting is throwing money away. Houses have appreciated at over 7 per cent per annum since the dawn of civilization.
As job losses mount and foreclosures increase and new employment opportunities continue to dwindle, a whole generation of people is about to get painful lesson on the basics of economics. That those in the media lie. Realtors lie. Bankers lie, cheat and swindle. They lie because they are in the business of selling their services and lying comes as a part of their training.
If you- the individual or the family-does not take care of affairs on your own by being economically literate and proactive, you will keep on getting painful lessons.
Once this fresh generation of 'suckers' get their lessons, speculation in real estate will freeze for a decade or more. Until the next generation of freshly minted (by immigration, emigration or from our glorious education system) 'suckers' is ready to take their place and the story begins again.

Weekend Open Thread

2009-02-06T05:35:00.000-08:00

As almost every realist knows, unemployment situation is getting grimmer by the day worldwide. Specifically in Canada, we shed over 129,000 jobs last month. That's a huge number. More than the specific economic damage these numbers do to the economy of the region, the bigger damage is done to the psychology of the consumer who will put off purchasing big ticket items, heck even small items. The regions west of Thunder Bay seem to be holding on the best so far. But for how long? Once the gravity of global slowdown is fully priced in to the commodity markets, the bust here will rival that of the manfucating towns of the Central Canada or even worse.
The US fared far better than us on Per capita basis, losing 'only' 598,000 jobs. This way we have lost more than twice the number of jobs than the US last month.
The Official Unemployment rates in both Canada and the US are at 7.6%. How quickly have we caught up with our southern neighbour. I can't help but reminiscence the conversation I had with Honda Car Dealership Manager a few months ago when she said, "But this is an American problem. Our economy is strong here." Hopefully by now she has waken up to the reality that few are insulated from this global slowdown and by every characteristic this looks like a totally different beast. Much different than any other recession most people have seen in their lives.
What is the way out? People are waking up to the reality that almost everyone whose opinion they thought they could trust, has been lying to them. The elected demagogues, real estate agents, central bankers, economists, company CEOs, mainstream media and almost anyone with any shred of authority. Before this is all over, people will trust themselves more than they trusted 'Suzzanne' or their friendly neighborhood mortgage broker.
We need to watch out for ourselves. It's a very simple thought, but too many people have forgotten what it means to take care of their own affairs. A little paranoia is not bad, as Andy Grove used to say 'Only the Paranoid Survive.'
We need to excel at our own jobs so that in a globalized workforce environment, we can offer more value while in Canada than those in other parts of the world. This is most relevant for the 'information workers', that is all those whose jobs can be taken offshore with a click of mouse. We need to have huge savings so that we can ride out the downturns in a better way, without expecting too much from the government. To give you some perspective, some of my friends save over 75% of their net income. They do make comfortable six figure incomes, but I think it's got more to do with the attitude towards savings than with the specific dollar amounts that people make.
Almost every idiot urging you to go out and spend is doing so to promote their agenda. Real value and real economic activity is created by real savings and not by debt. We have had almost no savings in this part of the world for the last decade or so. Wtihout real savings, there cannot be meaningful investments and no real job growth. Speculation driven investments in commodities and real estate disappear sooner or later leaving very few real jobs. But I doubt if too many people in the right places will suddenly develop an urge to do anything about this. Instead, they will push people to take on more debt, annihilate more of their savings on bad home upgrade projects and push them further into perpetual wage slavery, albeit at wage rates with an equilibrium point determined by third world level wages.
Talking about the specifics of Alberta real estates seems almost a detail in the midst of the global turmoil. The prices of almost everything are way too high across the province. They will fall. Unemployment will rise and so will the foreclousres. Those buying at this time either 'must buy' (not sure who they are) or they are incredibly naive. Or they still have faith in what the Bank of Canada governor who believes in magical second quarter turaround. May be in next life, due to accumlated bad karma, Mark will be born as a realtor association economist that believes in a perpetual second half rebound.
And while, the economy is going to hell, bankers are fleecing billions and potentially trillions in dollars from the tax payers, Canadian are expressing outrage at a 60 year old woman giving birth to twins. No wonder fleecing the masses is trivial-it's too easy to distract people from the real issues! In 21st century, it's more than bread and circus- it's bread, circus and drama!
Have a good weekend everyone.

Thoughts on the Budget

2009-01-27T21:55:00.000-08:00

The budget is out and there is nothing meaningful there. Opportunity to cut taxes substantially or even send some stimulus checks that are commonplace in the US and heck even in Alberta, at least in circa 2005 has been squandered. Keynes would have been delighted had he been alive today at the tremendous following his works are getting worldwide. Canada will issue over 85 billion in debt to finance this increased spending. So much for the 'better fiscal shape' of Canada. And the consequent prospects for rise in the loonie. I think deficits will be even worse than the current projections as the full magnitude of commodities collapse trickles down to the various sectors of the Canadian economy and the government tax and royalty revenues.

In addition to the above, at tax payers expense, the government will buy more of toxic garbage, this time not confined to only homes but securities backed by used Hummers and Dodge Durangos.

It’s clear that the only trick known to the government worldwide is the one taught to them by the bankers and that is-credit is everything.

There’s no point of putting money directly into people’s pockets even as hundreds of billions are given to bail out inefficient and corrupt bankers.

And by the looks of it, I doubt very many people are going to be impressed by the little tax cuts that are offered.

Looking at the budget, all I see is future tax increases for our progeny while we get little if any benefits out of it.

Your thoughts?

Weekend Canadian Delusion Edition

2009-01-23T07:00:00.000-08:00

This morning while perusing some Canadian news, I come across a headline "Home Depot buys its way out of project." Sure, bad times mean such decision are likely. But this is what I find instead as an explanation:

"Home Depot's decision is further proof some Canadian retailers are paying a high price for the economic woes south of the border, some observers said.

"They're (Home Depot Canada) definitely getting pressure from their U.S. parent just because things are so bad in the U.S.," said Michael McLarney, editor and publisher of the Canadian online home improvement retail magazine, Hardlines.

Are these guys for real? Don't they still see any problems with Canadian economy? When will they admit Canada is for twice the pain as the US.

Continuing on the topic of bigger pain, I think Canada experienced two bubbles while most other first world economies (Except say Australia and New Zealand) experienced just one. Our first bubble was the housing bubble and our second bubble was the commodity bubble. Which is why we are likely to be hit twice as hard in terms of falling employment exacerbated by falling commodity prices leading to further problems with the housing market.
The symptoms of deflation are here in Canada: "Canadian consumer prices fell a third consecutive month for only the second time since 1931 as energy prices plunged, giving policy makers room to lower interest rates to revive the world’s eighth-largest economy." They still believe in the infallibility of the central bankers and their ability to cut rates and force the economy out of the mess. The falling loonie will give some encouragement to Canadian 'inflationists' but purely Canadian items such as housing and wages will continue to fall further. A friend of mine in IT recruitment said that she has change a sea change in the attitude of lot of job seekers since November.
Your thoughts?

Who could have thought this? Suncor making loss

2009-01-20T07:41:00.000-08:00

It's probably an aberration as the prices plunged a lot faster than they had time to adjust their cost base. But it doesn't' bode well for Capital spending that a lot of Edmonton and Fort McMurray bulls had their expectations tied to.

The board this month approved a revised 2009 capital spending program of C$3 billion, with about one-third of that for “growth projects” and the remainder for the “base business,” Suncor said in the statement. An October plan had targeted spending of C$6 billion this year, 21 percent less than in 2008.

And as we have said numerous times in the past, clinging to historical highs is stupid. Suncor CEO admits,

“I think there’re some people hanging on to the history of it rather than the go-forward basis,” George said during the call.

What's the plan B for Alberta's future prosperity?

Weekend Open Thread

2009-01-17T08:03:00.000-08:00

Based on the amount of spam left on previous thread by someone not too happy with the existence of this blog, it seems the blog is still serving a purpose. I've been incredibly busy with a few project deadlines and will resume posting more frequently soon.
I'm working on getting a better comments system in place so that the spammers' IP Addresses will be banned and publicly posted on this blog.
Just as I've mentioned a number of times in the past, as soon as resource revenues fall, there's going to be a big trouble with provincial government employment levels. The big guys are finally admitting it and we know it won't end happily. The funny thing is that nobody questions how the governemnt was able to generate massive surpluses a few years ago with oil prices at $35 and now the same governemnt is going to be solidly in red at the same prices of oil. Perhaps the natural gas prices are the factor but they haven't admitted it yet.
Have a good weekend.

Few will escape this unscathed

2009-01-14T09:18:00.000-08:00

Residents of Alberta island, especially those with strong vested interests in high commodity and real estate prices are about to wake up to a harsh reality. The falling prices of oil were affecting the future prosperity and project based construction and engineering employment. But now there’s another potentially dangerous animal circling on top of Alberta economy-falling natural gas prices.

A lot of people don’t pay much attention to natural gas prices, but they are the bread and butter of the province, especially of big corporate in Calgary and the provincial government royalties. Oil royalties are merely a drop in bucket as compared to what the Alberta government collects from natural gas (by a factor of 6).

Today natural gas prices fell to 2 year lows of around $5. Should the natural gas prices fall further, as they just might in face of severe demand contraction, there will be massive further fallout from this in provincial government and corporate employment levels in the province.

Natural gas business is the cash cow for most businesses in the province while oil sands was the future growth business.

The growth business is now in dumpster and the cash cow will likely come under severe duress. There’s no way this will have a happy ending for the provincial economy.

Right now it’s hard to find a sector of economy that is booming or even going steady, bankruptcy specialists excepted.

If worldwide demand continues to fall across the board as it has, there’s no one that will escape unscathed.

Despite a significant fall in the oil prices, there was a noticeable decline in consumption of gasoline in the first week of this year. Unemployed people don't take skiing trips , take extended vacations or go for frequent shopping trips to the mall. Those who are fearful of losing their jobs show similar behavior.

Everything ranging from dental hygienists to entertainers will feel the pinch of this slowdown. A lot of demand of everything in last several years was just as fictitious as the NINJA loans and demand for virtually everything is falling apart worldwide. In face of this, Canada’s (and Australia, Brazil, New Zealand’s ) economy cannot remain insulated.

It wouldn’t take a genius to figure out what a further collapse in commodity prices will do to Canadian economy and Alberta real estate.

Those who are contemplating buying in this environment at ridiculously inflated prices will have severe cases of post purchase dissonance for many years.

Weekend Open Thread

2009-01-09T06:11:00.000-08:00

Some thread starters:

NFP in the US is bad, but could have been worse. Still the year ended with an unemployment of 7.2 per cent. Very few except those on the 'lunatic fringe' had predicted such a high rate by the end of 2008. It's very likely that we'll see 2009 end pretty close to double digit unemployment in the US.
Closer home, the unemployment jumped here as well, with the biggest fall in construction activity. The quintessential migratory worker to Alberta- single male in early 20s-will soon find Alberta to be too expensive, too cold and with too few job opportunities in an area of his expertise. Result: falling demand for rental units, putting further pressure on residential prices.
From the same report, Alberta recorded the largest loss of full time positions (-16000). Alberta still has the lowest unemployment rate in the country but one must wonder for how long. I guess some of us had it right when we saw the commodity bust coming. This is only going to increase foreclosures and make rentals even cheaper.
It should be little surprise that with all the negative news firmly getting entrenched in the minds of consumers, sales have ground to a halt in Calgary and Edmonton. People fearful for their jobs and prospects don't buy overpriced shoe boxes. Especially when they have to pay part of it from their pockets in the form of higher down payment.
And coming from the 'heard from friends' section, layoffs are affecting Calgary's engineering workers. Jacob's, Colt, Bantrel and others. Most mining projects have been delayed by six to 9 months and a severely truncated workforce is keeping the projects alive so that if the oil prices do bounce back (another on the wish list of most Albertans), the projects can be brought back online quickly. So much for the 'long term' and strategic thinking of the Alberta Energy companies. You can go through the entries in this blog and see what a lot of Alberta RE bulls had to say about the energy sector- this time they are doing things differently. And short term price fluctuations don't impact the long term, 'peak oil' driven perspective these companies have taken. But guess what, all that stuff amounts to zilch when it costs $60 to produce something and you can only get $40 for it in the market. The economically unviable operation will soon cease to exist no matter what the company's 'long term plan' says.
And in another return to fundamentals, a quick perusal of Kijiji shows asking rents are falling steeply and based on my personal responses to some of the ads, most of the 'landlords' have come down from their high horses. You can negotiate rents down by upto 10 or 15% off from the asking prices. And falling rents don't make the underlying properties more attractive.
Another variety of salesmen is having a good time selling the fix for the forthcoming gloomy conditions. But despite what you read here on this blog, I'm not afraid of the gloom and doom that is being used to sell some of the 'life saving' things. If one has spent certain amount of time in Africa or the poorer parts of Asia, what is being termed as 'catastrophic' in Canada will be taken as business as usual. Power failures are common there and so is a lack of potable water and sewage. But life goes on. People live and are happy. And the same is the case with this recession, severe recession or depression. There will be pain, unemployment and other problems. But our system in Canada, with all its flaws, is still amongst the best in the world and will prove to be a lot more resilient than some think.
Have a great weekend.

Five years undone

2008-12-19T08:49:00.000-08:00

Readers of Bill Booner’s daily missive will recognize a term that he widely used during last five years or so. He used to call the boom as a ‘crack boom.’ A boom in which nothing useful was created but everything was merely an illusion. Just like an eastern scripture says, ‘all that is visible is illusory.’ There was illusion of wealth and prosperity.Of achievement and triumph. Of mastering the business cycle by artificial setting of interest rates by a committee.

And now with oil falling below $35, we have undone almost 4.5 years of speculative and artificial demand of a product that would have made Alberta and Canada the Energy superpower of the world. Demand that was fostered by free credit, rampant speculation and excessive greed. Demand that disappeared as soon as the Hummers were repossessed, the McMansions foreclosed and factories closed down in China.

Too bad, that in one stroke OPEC agreed to reduce the oil production by the entire projected supply of the Oil Sands (by 2020).

This morning sitting in my office with a windchill of -35 outside, I am just wondering how could so many people around the world have been so naïve. The naiveté varied across cultures, continents and locales, based on some sort of fundamental underlying belief that ‘we are different.’ The 'weather in California', 'oil sands in Alberta', ‘Olympics in Vancouver’, ‘Microsoft/Boeing Economy of Seattle’, ‘BRIC magic of Mumbai’, ‘Manufacturing prowess of China’, ‘Financial juggernaut of London’….the list is endless. Every city had its own way of overpowering reason and common sense.

And now, we have to confront reality.

The consequences won’t be pretty. As most of Canada and several parts of the US go through a major cold weather streak, I can’t help but think what would have happened to natural gas prices if this were year 2005 or 2007. But then, until the ‘master thieves of universe’ started placing massive bets in the commodity markets on 50 to 1 leveraged funds, periods of massive spikes and volatility in prices were few and far between. Peak oil was merely an interesting theory and not a call to action for the doomsday crowd. Yet, a good majority of people who believed in a housing bubble did not believe there was a commodity bubble. Or bubble in oil and gas.

The entire Alberta Government and the oil and gas chieftains of Calgary or Houston did not believe that oil prices will fall again. But time and again, the unbridled optimism of investors and market participants is undone by Mr Market. This time is no different. Many on this blog ridiculed me for being a pessimist and believer in gloom and doom. Reflecting on this, I think I had been too optimistic for I did not know the extent of corruption, fraud and deceit in the underlying financial economy.

The reality of Alberta’s economy is that it is entirely dependent on the Energy sector. Once the energy sector slows down, as it is now, everything else will follow. Foreclosures, lay offs, bankruptcies will all rise leading to the prairie land version of rust belt. At least until the next wave of liquidity lifts the sunken boats of commodities. And the coming months and years will illustrate how inane the claims of diversified Alberta economy were.And perhaps for next few decades people will think numerous times before spending half a million dollars on a tiny shoe box.

Happy holidays to everyone.

Weekend Open Thread

2008-12-05T05:54:00.000-08:00

I woke up this morning to hear not so positive news on so many fronts. The chicken are coming home to roost now and the years of credit excesses, leverage, denial, 'Greenspan Put' and speculation are clearly hurting the mainstream economies both in Canada and the US.

US unemployment rose by over a whopping half a million. Worst since 1982. Bye Bye Goldilocks economy. Bye Bye quick recovery.
Canadian unemployment rose by 77,000, a much worse number than the US if we account for population.
The West is fairing better at this time, but it's only a matter of time. Layoffs are occurring at GE, Jacobs etc and the full effect of the ensuing commodity bust is only starting to getting felt.
Oil is at $43 and more importantly natural gas is below $6. A fall to $25 and $4 will kill the economy of West in a replay of 1982. But 1982 will look like a picnic as compared to what's unfolding right now. Just for perspective, the 1982 recession was 18 months long. This recession is already 12 months old and until recently leading economists did not even admit that there was a recession. And Canada is only in a 'technical recession' as per our esteemed leaders. Expect things to get much worse on the employment front with a double digit unemployment rate a very real possibility.
With manufacturing tanking and the commodities bust about to show its ramifications, what's going to happen to the real estate? Not a very pretty picture.
The bust is here. It can't be wished away and most readers of this blog knew what was coming. Yet a few delusional ones bought and even had the chutzpah to lure others into buying by making specious arguments. With a grim employment picture, it won't take much convincing to anyone to put off buying homes. Or will it? When people have sleepless nights before signing on the mortgage papers and committing themselves to a debt for 25 years, we'll know the market has become normal.
Finally, the loonie is down to 77 cents and change. The true companion of $25 oil would be a 65 cents loonie. So much for the collapse of USD.
And here's a little bit of humour on this otherwise gloomy news day(from Calculated Risk blog comment post):

Lawrence Livermore Laboratories has discovered the heaviest element yet known to science. The new element, Governmentium (symbol=Gv), has one neutron, 25 assistant neutrons, 88 deputy neutrons, and 198 assistant deputy neutrons, giving it an atomic mass of 312. These 312 particles are held together by forces called morons, which are surrounded by vast quantities of lepton-like particles called peons. Since Governmentium has no electrons, it is inert. However, it can be detected, because it impedes every reaction with which it comes into contact. A tiny amount of Governmentium can cause a reaction that would normally take less than a second, to take from 4 days to 4 years to complete. Governmentium has a normal half-life of 2 to 6 years. It does not decay, but instead undergoes a reorganization in which a portion of the assistant neutrons and deputy neutrons exchange places.

Have a great weekend everyone.

What will Oil and Gas Bust do to Alberta real estate?

2008-12-04T10:17:00.000-08:00

Several months ago, there was a poll on this blog that talked about the ramifications of lower oil prices on Alberta. The consensus then was that anything below $50 would be bad. If $50 were bad, what would $25 oil do to Alberta? And what will be the impact of $3 or $4 natural gas?
Many educated commentators on this blog have long made the case that the Alberta real estate boom had less to do with the commodity prices but more with the rampant construction activity and easy credit/speculation.
But we can't deny that at least there was some component of the increased demand from people who moved to Alberta in search of work. Now that it looks an oil and gas bust is a fairly probable if not likely event, what will happen to all the new Albertans who moved here just for jobs? They will likely move to places (in east or west) that have somewhat more diversified economies.
I've a few friends who moved to Calgary in EPC companies from all over Canada during the last few years. The EPC companies (Colt, Jacobs etc) recruited massively in the last few years in anticipation of the hundreds of billions of oil sands spending that everyone was counting on. With almost all the upgraders now canceled or indefinitely delayed and the spectre of $25 oil seriously threatening mining projects in Fort Mcmurray, I expect massive layoffs in EPC sector soon.
And that is just the start. Even though there are still lots of jobs in Calgary, almost everything in province is built around oil and gas. We have discussed in the past how our half trick pony energy industry manages to kill everything in the boom years that is developed during the bust years.

If the commodity bust really unfolds as I am afraid it will, expect the following:

Sharp fall in provincial government resource revenue (this will be impacted more by natural gas prices) leading to fall in government spending, hiring freezes and potential layoffs in government. Let's hope it won't be 1992 all over again for government employees.
Very few oil sands projects will continue to produce leading to sharp fall in profitability of oil and gas sector and consequent retrenchment of workforce.
Since everything in Alberta is built around the energy industry, everyone ranging from accounting firms to staffing agencies will be impacted.
A sharp slowdown in construction employment sending the transitory labour force home.
Rental vacancies climbing and reaching 10 per cent or more.
Flippers, speculators and others in the same genre who have been saved so far by a strong rental market will start hemorrhaging cash and will run to exits.
Start of noticeable foreclosure activity in Alberta at this stage.
Combination of layoffs, falling employment, tighter credit, foreclosure will pull the prices further down.
And the vicious cycle will continue.

Of course, this is not a chronological forecast of things that are about to unfold but a likely scenario that can play out in several different ways but will most likely feature most of above mentioned items.

In most of the posts in the past, I avoided making a case for collapsing values in Alberta real estate based on the fundamental economic factors. But the dreadful bust scenario is now knocking on the doors of Alberta and the last few years of greed, speculation, excesses, lack of public policy will only exacerbate the problems.
It looks like the fat lady has sung on Alberta's most recent boom.

Anyone who is thinking of buying at this time is either too rich or too stupid.

Is the beginning of the second leg down in prices?

2008-12-02T10:24:00.000-08:00

Residential Sales plummeted across the board in Edmonton and Calgary last month. The first drop in prices last summer was preceded by a sharp contraction in sales volumes from the bubble level sales.

While condos in both Edmonton and Calgary saw a sharp drop in prices, an across the board massive drop in value hasn’t occurred yet. Like a ten per cent fall in SFH values in Calgary or Edmonton in a month.

With the psychologically important oil prices below $50 and environmental pressures mounting in the face of an ultra liberal government, oil sands might not be the saviour of Alberta Real Estate after all.

If sales fall further in December from the levels seen last year, it’s possible that we are now going to see the second leg down for the real estate prices. And if the macro economic picture and commodity bust unfolds as I’m afraid it might, the spring bounce that so many sellers and realtors are counting on (yet again) will be more ephemeral than a mayfly.

How much will you pay for your next house?

2008-11-27T11:24:00.001-08:00

Garth has an interesting post on becoming a property vulture. One of the reasons we stayed away from buying a house was the arrogant attitude of builders, realtors and pretty much everyone else in the real estate food chain. Hopefully, the last 15 months will have given them some idea of what's about to come. But certainly, by the time we reach a bottom in terms of economic activity, housing, commodity prices and morale, almost everyone in this country will begin to treat their customers with respect.

Moving on to the main point of the post, the most important question that one must ask is-what is the fair value of house? How much will you pay for the house?
As I've mentioned in a couple of posts last year, the following metrics will be of help:

Cost per square feet. I think $100/sq feet is a very reasonable number. Accordingly, for the links that bearclaw posted for 1700 sq ft properties, they will be fairly priced in the $175k range. Some might find the price outlandish, but for me it's merely the representation of a cookie cutter shoe box on a tiny lot in the middle of prairie with harsh winters, half trick economy and no recreation other than a big mall.
Price to Rent Ratio. The old school fair value of a property was 100 times monthly rent. Assuming the current rental rate of this property at $1700 , it values the property at around $170k. But given the current level of elevated rents, the actual rent in the not so great times might be only $1300. So based on this metric, the fair value will be $130k.
Cashflow positive etc. A lot of 'investors' buy properties based on this metric. I'm not a huge fan of this method.
Historical values. Some say 2002 prices will never return to Edmonton. Perhaps. But to get a true sense of 'normal times', we must go back to the years when Edmonton used to be associated more with 'block heaters' and 'rednecks' than prosperity and oil sands. 2002 is a good year for making that comparison. Economy had started getting out of the gutter of late 1990s bust and things were beginning to sell. Builders were selling fairly priced homes that were affordable and had good quality. A friend of mine bought a similar home (to the ones shown above) in 2001 for around $165k in south Edmonton. You could buy similar homes in the $160-$190k price range until 2004. And then the caravan trips began.
Buy versus rent metric. Don't use the calculators provided by the realtor organizations. The best ones I've seen is from NYT and using the calculator.

You can guess that the time for me to buy is quite a bit away. I won't rush into buying inasmuch as even if prices don't fall beyond a certain point, they are likely to languish there for a while.
For most people a house purchase will be the biggest purchase they make in their lives. Most people unfortunately, spend too little time on this. They won't haggle, negotiate or simply walk away from the purchase. And the consequences of such nonchalance are seen in years and decades ahead.

Your thoughts?

$50 Oil is here....

2008-11-20T05:42:00.000-08:00

and is very likely to overshoot on the downside. Is $40 or even $30 possible. Why not? If 3 months ago anyone questioned that oil could go below $60, he or she was termed fool, like several posters here. Too bad people have such short memories. Even the champions of doom and gloom such as Garth Turner buys into 'higher long term energy costs' while we are in an ocean of deflation. But just yesterday, the DOT reported that the number of miles driven has fallen by around 5 per cent in the US in September. People are now saying, "anytime you drive your vehicle and it's not for work, you are wasting money." Ouch. With the prospect of a multi year bust and double digit unemployment, where is the demand for oil going to come from? The Chindia bull is dead for the moment, but who knows.
In the mean time, our province faces more fundamental problems- What will Alberta do once the oil sands engine is cold? Not much. All the diversification attempts have come to a naught with a merciless exodus given to all non oil and gas companies. Intutit, Dell, TD Call Center and many more have left the province(or even Canada).
Now that the bubble inflated by artificial supply of credit and fake demand for worldwide commodities has burst, are we going to revert to our core competency of selling cheap manufactured goods to the US, attracting US tourists based on a 70 cent loonie and handing out film tax credits? It should not be outside the realm of possiblitiy. It was after all only 4 short years ago that Dell when opening its Edmonton location even refused to pay for training its new recruits. Such was the state of desperation for new jobs in Edmonton. Any big corporation will now be extremely reluctant to take advantage of massive unemployment and cheap loonie anywhere in Alberta after our success in driving out most non-energy companies out of here. And for that, the primary reason was wage inflation driven by high cost of living created primarily by the high cost of housing. Perhaps Alberta government should do something about reining in the speculation in Real estate based on subsidized mortgage products.

Welcome to the New World

2008-11-17T23:14:00.000-08:00

We are back after spending a week in the US. The US has changed quite a bit since our last visit almost a year ago. From waitresses in Manchester, New Hampshire who offered suggestions on getting special combo deals for breakfast as ‘every cent counts’, to the sales clerks in Wrentham, MA who hugged me to buy lots of things on the Veteran days sales, it seems like the deflation reflected only in the asset prices so far has finally found its way into consumer items as well. Hotels have become a lot cheaper as well. We stayed in decent Holiday Inn and Mariott rooms for less than $70. Of course, unlike most Canadian hotels, these were large, nicely furnished rooms with flat screen TVs and included breakfast. In booming West though, you only get a roof over your head for this much price, that is if you are lucky.

A retail sales associate in Nashua mall checked on me at least three times to make sure I found what I was looking for. Obviously, with low sales volumes, everybody is scared of losing their job. And what better way to ensure job security than actually doing what you are paid for! What a novel concept. I don’t really recall sales reps being this good in the last ten years. Of course, Albertans are still living in their fantasy land and the nonchalance of sales reps is still very conspicuous in almost every place where I shop. While taking the delivery of my Accord I casually asked the sales manager if their sales were declining and she remarked, “Yeah, there’s a little slow down, as some people see all this gloom in the US and get worried. But it’s their economy and not Canadian economy!”
Of course, she will be learning some painful lessons in economics and firmly grasp that ‘we are all dependent on the US economy’ the coming months as oil prices drop below $50 in the coming weeks and months.
A friend of mine who has family in India says things are getting gloomier there by the day. Perusal of the economic press there talks about major reduction in workforce, fall in real estate, stocks and pretty much every other asset class.
Remember the decoupling theory? Nobody wants to talk about it anymore. It is in graveyard along with the titans of Wall street. It was the ray of hope for the world after the US housing bust, even though the entire world’s growth was piggybacked on the insatiable US (and perhaps other first world) consumers. Remember India was going to save Alberta. And China too. Now that these countries are looking for their own saviors, who is going to save Alberta? Yes, the OPEC production cuts. But didn't we have the second largest reserves in the world? Can't we do something about it? I guess almost every oil company is going to do something about it and the answer won't be to the liking of anyone whose fortunes are tied to high oil prices.

When I look back at things, I could never have imagined they would get this bad. I thought the biggest swindlers and crooks on Wall Street still had everything in control. But I guess with TARP firmly showing up on their balance sheets, they couldn’t care less for the fate of the main street or the rest of the world.

In the coming months and years(hope not), those who possess cash will be in a lot better shape than those who don't. The inflationary period characterized by too much money chasing too few goods (houses, stocks, oil, cars, labour, art work, RVs, boats, carry trade currencies) is definitely over. In the new world, cold cash will rein supreme and those who possess it will have the upper hand over those who have no cash but possess too much of stuff (stocks, cars, houses, debt, art work, RVs, boats etc). The latter group unfortunately represents bulk of world’s population today (exceptions in some parts of Europe, Asia etc).
Too bad nobody in Canada will wake anyone up on what’s about to be unleashed on everyone pretty soon-government hiring cuts, tax hikes (GST going back to 7%, when?), budget deficits, falling loonie, house prices cut in half, high unemployment….
After all, it's only today that the economists in the US have managed to agree that the US is in a recession. So much for the foresight and wisdom of the dismal scientists.
The list is long and painful. Only those who were characterized as the doom and gloomers (including yours truly) who have had nothing but cash in their account for the last several years have been proven right. Not that I’m happy about it.

How did we get here? And where do we go from here?

2008-11-08T07:30:00.000-08:00

Things have changed so much since this blog was started in February 2007. There was euphoria in the markets at that time. The housing bubble in the US had burst, but the sheer magnitude of the devastation it would unleash, as well as its ramifications on the rest of the world had not been anticipated by most observers. Only those in the 'borderline insanity' category had the prognosis of the disease whose symptoms are now becoming visible.

The disease was easy credit abetted by the viruses of greed, speculation, leverage, stupidity, lax regulation, hubris and ignorance. In almost every asset class in almost every part of the world, there was an asset bubble. From the trailer homes in Fort McMurray to the art market in Eastern Europe, from the high end apartments in Bombay to the stocks in China. Easy credit of last twenty years gave high hopes and ‘can’t go wrong with xyz’ mentality to almost everyone. There was 'death of risk.' Even know, despite all that has transpired, morons are dime a dozen, who want to borrow and invest in Canadian stocks.

The period of easy credit is over. And so is the period of feigning low risk by absurd mathematical models created by armies of glorified economists. When I try to put a perspective on the massive oil sands related investments that had been planned for Alberta, I see that they were fueled more by the easy credit and low risk environment than by any fundamental factors. Most readers are familiar with Warren Buffett’s comments (paraphrased) on oil sands that ‘you could be the best mining engineer in the world, but if you are not sure that the price of oil would be in the $120 range, oil sands may not be the best investment.’ Of course, the temporary high prices speciously bolstered by the doomsday scenarios (but fundamentally caused by speculation and leverage) gave enough reasons to almost all underwriters to finance the billions of dollars of projects easily. As the price of oil comes down further, oil sands will be get hit twice as hard inasmuch as they are very high risk investments (environmental, economic, currency) amortized over very long periods. In easy credit environment such investments could be financed easily but in tougher environment where cash is the most precious thing anyone wants to possess, such projects become akin to financing etoys.com in year 2001. Not impossible (there are always some fools around), but very hard. I trust bulls in Alberta and Canada have at least that much intelligence to figure out the ramifications of significantly depleted oil sands investments on the province, the loonie and Canada as a whole.

Cash really will be the king, as I have tried to mention numerous times in the past. Deflation really is strengthening its hold and there’s nothing central banks can do about it. The sins of past have to be absolved for; and the time to do that has arrived. You just can’t weasel your way out of the bad karmas of credit orgy so easily.

Being early in the deflationary bust cycle is one common mistake most people will make. Yesterday, even I committed such a mistake. No, I didn’t buy a house, but I did buy a new car. I thought I was getting a great deal-Almost $5k off the sticker price of a Honda Accord. But giving up almost $25k in cold cash from savings account did not feel very good. But my rationalization was that my old civic is almost ten years old now and hasn’t been reliable. And I needed to reward myself (yeah, the same North American malaise that leads to the current mess)…Perhaps, I will look at my Accord whenever the temptation of buying a house comes to me in the next few years.

Now the mainstream media is catching up with the sea of negative news that was predicted here and at so many other blogs. Pretty soon, it will be self reinforcing cycle. An economy that is driven 70% by consumption will feel the pain when people stop buying cars and houses, reduce their vacations, minimize eating out, stop buying expensive clothes and desert the malls. Businesses will start laying off people and the anti-goldilocks economy will be at work. Businesses dependent on retail companies (IT, Human Resources staffing etc) will cut down their investments and hiring, making things even worse. And all this while the central banks have interest rates at zero.

Yet, all this is necessary for the revitalization of the economy. The inefficient and diseased corporate hierarchies of North America and much of the first world need cleansing. The FIRE based economies of First World need real savings, real production and real wages.

The coming bust will be a hard one. Unemployment will be high, bankruptcies will soar. A lot of generation X and Y kids will learn painful but much needed lessons. By the time this is all over, savings in bank accounts will not be derided upon.

I’m flying to Boston for a week long vacation to escape from everything for a while. Have a great weekend.

No Subprime in Canada yet Sales Plummet in Calgary

2008-11-03T08:28:00.001-08:00

I've been very busy last week or so....this post from 'rjt' puts things into clear perspective:

If you read my posts over the past couple of months, I predicted that the end of 40 year mortgages and zero down mortgages would create a major gap in buyers. I figured that since 40% of mortgages originated in Calgary in 2007 were the 0-down, 40 year variety, when these went a way, sales would drop substantially.

Well, the numbers are out, and while there are other factors in play, it appears that sales volume did fall off a cliff in Oct 2008.

Sales Volume (old criteria of combined SFH and Condo, from BT’s site)

Oct 2001: 1821
Oct 2002: 1930
Oct 2003: 2021
Oct 2004: 2135
Oct 2005: 2584
Oct 2006: 2122
Oct 2007: 1944
Oct 2008: 1442

How about days inventory?
- This is calculated based on month end inventory from BTs site, divided by monthly sales, multiplied by 30

Oct 2001: 101
Oct 2002: 95
Oct 2003: 121
Oct 2004: 100
Oct 2005: 46
Oct 2006: 96
Oct 2007: 154
Oct 2008: 226

Look at Days Inventory over this year. Impressive October!

Oct-07: 154
Nov-07: 148
Dec-07: 148
Jan-08: 134
Feb-08: 131
Mar-08: 148
Apr-08: 162
May-08: 171
Jun-08: 159
Jul-08: 160
Aug-08: 167
Sep-08: 161
Oct-08: 226

A huge number in October 2008, way above anything we’ve seen in Calgary since at least Jan 1999, which is where my data set begins. The second closest month had days inventory of 171 (May 2008).

People, disregard the spin from the media about a “balanced market” and “normalization” and all those other bullsh-t sales pitches. If you are in the market for a house, make sure to low-ball big time, as you are likely the only potential buyer by a mile.

More of the same?

2008-10-27T05:49:00.000-07:00

What has changed since last week? Not much I guess. In our 'super power island', things are crawling to a halt in terms of sales, at least in Calgary. There is now 7 months of inventory for SFH in Calgary as per CREB ticker. This is perhaps the highest since the deflation of this bubble began.
Not unexpected at this time of the year, but it's likely to be worse than previous years if you account for the short term boost that the days before the end of 'subprime lending' gave to the sales.
The important thing is that even with oil at around $60 and natural gas a little over $6, no major bad news has hit Alberta yet in terms of lay offs and the employment picture. But for how long? People are still confident that they will ride through this storm unaffected. Perhaps the Canadian smugness will save them.
In other parts of the world, Aussie dollar has taken a brutal hit and is down all the way to 60 cents. At this point, the currency markets are pointing to something other than inflation for the world economy and it begins with a capital D. Can our loonie go to 65 cents or so?

Weekend Open Thread

2008-10-24T06:33:00.000-07:00

Doesn't look like a happy Friday for the markets.

Terrible day in India with Sensex down by a whopping 10 per cent. What was the second country after China who we were counting on so much for the perpetual $120 price of oil?
Doesn't look like a promising start for the North American markets, but anything can happen. What was it, don't fight the fed or whatever....
Loonie below 79 cents....Over 33% of those who took the poll here said loonie could tumble in the below 75 cents range. It looks very likely it will happen. Just for record my cash position is 40 per cent in USD and more than half of our income is in USD as well.
The cartel armies are trying desperately to keep their massive cash flows intact. Looks like they are failing as oil is touching $63.
The moral of the fiascoes we have witnessed since 1998: Don't trust the economists. Don't trust the political leaders. Don't trust the bankers. Don't trust CNBC, Jim Cramer, Globe and Mail, Financial Post or Mainstream Media. They are the tools by which sheeple are led for shearing. Don't trust the lawyers. Don't trust realtors. Don't trust mortgage lenders. Don't even trust bloggers here or anywhere else. Most have no clue. Appeal to Authority is for losers. Trust yourself. Even though most on this blog already do this, form your own well reasoned opinions. Study the markets. Study Austrian economics. Save money. Spend only when necessesary to reduce your footprint on the world. If it doesn't make sense, don't invest. Cash is not trash. It's the old fashioned way (before the fiat currency and free lending for all reared its ugly head), rather the only way to make investments to fuel growth. Enough for today. It's all captured in the cartoon below:

Have a great weekend.

The Princes of Alberta Island are now running scared....

2008-10-23T05:13:00.000-07:00

as Suncor cuts its spending by a third. Yes, a whopping third.
“Our aim is to ensure we are living within our means during a time of market uncertainty, while also making the strategic spending decisions that will allow us to continue our growth path,” Suncor chief executive officer Rick George said in a news release.

Living within our means, how relevant and appropriate. Expect something similar from all the oil sands majors, minors and the expectants. Consumer spending will be the next shoe to drop in a big way even as the falling loonie makes big tickets purchases even more expensive. And the signs of it are clearly imprinted in the August Sales report.

"Alberta was the only province in the country in August to register an annual decline in retail sales."

Any specific reason? I think it's got everything to do with the MEW(or the house ATM or the home equity loans). Alberta was the only province to have registered an YOY decline by August this year and we can see how phony the 'growth story' was. It was never the oil money as we had been clamoring but the retail spending and construction money. Very much like in other parts of the world.

This can't bode well for the $400k shoe boxes in the prairie land, on either side of Lloydminister.

Right now, the loonie is in a free fall and so are oil prices. The other 'kings of the world', Goldman et.al are chopping their workforce by 10 per cent....I think this is just the first step in cuts that will deep, prolonged and painful.

I consider myself to be bearish, but the rapid rate of fall of crude oil, stocks, loonie and everything other than USD has shocked even me. But I can't say there were no warnings.

The Falling Loonie

2008-10-21T06:17:00.000-07:00

is making new multi-year lows today....can't help but mention my call again to move the cash to USD. Canadians overall are going to feel really bad about the fall in loonie as pretty much all their assets have taken a significant beating on the world stage. The only saving grace is that we are doing better than the Australian dollar whose dollar has fallen more precipitously than ours.

To put things into perspective, from the days of parity:

those in cash are down about 17 per cent in USD terms.
those in TSX are down by about 35 per cent in CAD leading to a total USD decline of (.83*.65) around 46 per cent.
Those in Alberta real estate are down by about 20 per cent in CAD leading to a total decline of (.83*.8) around 33.5 per cent.

What will this do the Canadian consumer confidence? Not a whole lot of good. People will begin to feel poorer as months go by. The Canadian retailers can resume the blatant gouging without having to do any token service of bringing down the prices.

Most export businesses will be happy with this in as much as their revenue side will be intact(of course the slowdown in the US is the other impact, along with demand destruction for the oil patch) but their cost base just plummetted by a whopping 20 per cent or so. One of the big challenges of Canadian economic policy was just cured by markets in 15 days.

Where do you think the loonie is headed?

Weekend Open Thread

2008-10-17T00:06:00.000-07:00

Some discussion starters:
-And why not begin with the favorite of both bulls and bears- the price of oil. Some in the deflation camp are talking of $40 oil, the price that was considered 'good' just 4 years ago.
-Some 'financial wizards', in their tradition of 'cash is trash', are arguing that if you keep money in bank account, you would have lost roughly 15 per cent of purchasing power in terms of US Dollar. That's true, assuming one did not convert to USD and used the ATB protection, but even if someone didn't convert to USD, those in straight cash have fared so much better than those in any other asset class over the last 15 month period. TSX is down by 35 per cent or so, Alberta real estate by 15 to 25 per cent, oil is almost half of its peak value...and cash is well, still the same, so long as you are within Canada.
-The Greater Fool as applied to the stock market bubbles.
-Edmonton SFHs and condos have erased all the gains made during 2007 (plus more). It took around 15 months (Aug 2007 to October 2007) to give up the gains of 7 months (Jan to July 2007). Does it mean that we can be back to 2005 prices in 2 years? Or could it be even sooner, given the commodity bust, credit crunch, potential job losess and otherwise tough economic climate? We'll find out....

And finally:
- While imitation is the sincerest form of flattery, I am not too pleased with excessive usage of exclamation marks in my writings. Now some people do like their exclamation points, I'm not one of those. The imitator of 'Gloria White' on other blogs, should note that.

Have a great weekened everyone.

No Banker Left Behind

2008-10-14T06:19:00.000-07:00

Happy days are here again....let's go out and buy some more toxic garbage. The first $25 billion was merely the prelude.
Too bad, in the garb of 'regulatory arbitrage', the sound Canadian banks will be 'bailed out' for the maximum possible impact. The Canadian federal debt is a little south of $500 billion. These guarantees alone are going to be worth $225 billion.

In this cold harsh world where free markets hurt so much, No banker should be left behind.

In a strict free market environment, the insolvent financial system in much of North America and Europe would have ceased to exist in its present form. Instead, it's being nourished and nurtured in ICU at enormous cost to the taxpayers. Mish describes it best as:

The method of recapitalization is best described as robbing Taxpayer Pete to pay Wall Street Paul. In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed.

And now that every country is willing to do 'whatever it takes' to help their elite class of bankers, Canada will be forced to up the ante as well. Otherwise, the 'regulatory arbitrage' will come into play and capital will flow away away from Canadian banks.

Please do go out and vote and try to make whatever difference one vote will make.

Weekend Open Thread

2008-10-09T22:52:00.000-07:00

Update: So much for only talking about buying back mortgages. They are now buying $25 billion worth of garbage to ease 'liquidity' concerns. Too bad that our 'pride' and 'faith' in our financial system will lead us down. No debate, no policy discussions. At least in the US they ran through a charade of democratic process. Not here....the hockey season has started for sure.

Brent crude below $80. How long before we see $60, or dare we say $50 oil?

Roubini warning of ‘severe global depression’ if radical measures are not taken. Too often government actions only exacerbate the problems. I think the train of pleasing the markets by rate cuts and simple fiscal measures has long left.

Loonie continues to plummet and is now going at a princely 85 cents. Days of rejoicing in Ontario won’t be too far, provided there is too much demand left in the US to keep the factories in Ontario running.

Canadian banks are safest ones in the world, but based on similar surveys, so were Lehman Brothers and WaMU. And if everything is well with Canadian banks, what’s the need for ‘Paulson style’ recapitalization using the CMHC as the buyer of last resort? There’s bound to be lot of toxic garbage on the books of these banks. After all, someone lent to all the ‘property barons’ of Alberta, BC, Ontario and Saskatchewan during the ‘last commodity boom’ (if I may take the liberty of calling an end to the boom, or am I too early?). So how will this work? Apparently, the exchange program will work the same way as in the plan of Dr Evil himself- the AAA rated CMHC bonds (which we discussed a while ago here) will be swapped for the 40 year NINJA variety loans (read an anecdotal example here- international students in Edmonton buying $300k condos) so that the banks’ balance sheets are strengthened and lending to Canadians is not impacted. As if we really need more debt to buy overpriced condos, twentieth iPod and the third gas guzzling SUV in five years or take the cruises to the Caribbean.

And on a personal note, we have not bought anything on credit since recognizing the perils of buying on debt when we bought our first new car ten years ago. And we are still driving it. And we will positively pay all cash for our house as soon as sanity returns to the markets (like it is returning to stock markets).

As and when the markets begin to bottom, there’ll be some great opportunities for those who have a fat savings account at ATB. I don’t know when this will occur, but that day will arrive eventually.
And finally, a happy Thanksgiving to all of you-bulls, bears, readers, optimists, pessimists and realists. Good health and strong families are way more important than material wealth. Let's count our blessings and get ready for another down week (not)!

What Now?

2008-10-09T14:14:00.000-07:00

I’m not a big fan of doomsday scenarios, but what has transpired in last week is nothing less than astonishing. The markets worldwide are in free fall. Loonie just lost 10 cents in a week (my call of going into USD was pretty good I think). The shine is about to wear off of the strength of the Canadian economy. The commodities will fall further and could push Western Canada into a deep slump. Ironically, Eastern Canada could benefit again in the backdrop of a weaker loonie. This scenario is increasingly likely to play out as the deflationary forces strengthen their grip on world economy and hapless central bankers and debt ridden governments and consumers watch the show like meek spectators.

Master Card recently recorded a 9.5 per cent fall in US gasoline sales in September 2008 versus last year’s numbers. Canadian sales held up a little better and were down only 5.4 per cent in August. I won't be surprised if sales fall further off in the coming months. October is likely to be worse. People who have just taken a 50 per cent of more haircut on their 401k and RRSP’s won’t exactly be jumping out to vacations and burn gasoline in gas guzzlers. Don’t expect Asia to be savior either-Japan is falling into its gazillionth recession in the last 20 years, China is slowing down and India isn’t fairing too nicely either.
As unemployment rises further in the US (some people are forecasting a double digit unemployment rate by the time everything settles), there will be further reduction in gasoline and commodity demand. This demand destruction will outstrip any, if at all, demand increases from the emerging economies.

The big questions are- if the clock rewinds to 2004 in terms of asset prices, commodity prices and job opportunities are you sufficiently prepared? Can anyone even imagine another bust in Alberta when most of the people around you are drowning in debt and falsely insulated by the 'home equity' gains. Or by the illusion of 'secure jobs' in the Oil/Gas industries and pretty much everything else that services it. I can't think of any industry that will pick up the slack employment wise if Oil and Gas sector fizzles again. The government depends too much on the tax and royalty revenues that basically stem from the oil and gas industry.
Too bad that Alberta manages to kill all the diversification that occurs during the bust years in less than 3 years of a boom…