Step Away From the Fiat

Two days ago I postulated that basically, EITHER the move in gold wasn’t for real, or the move in stocks wasn’t for real.  The move in Gold is very real, and will likely sustain well into the third phase of the bubble.

To prove it, we really needed oil to start discounting the inflation coming and potential growth – like stocks are doing.

Two days later, front month oil is up 4.5%, confirming, stocks are indeed being bid up on inflation, demand for risk is climbing, and world growth is really going to start to chug.

I think oil, could really get some legs over the next 9 months.  I wrote some Oct 15th $75 puts today.

If i’m right, not even the FED will be able to stop the crash coming in the long end of the yield curve, the second the market thinks the FED is done buying.

There isn’t a Treasury Holder living between the Pacific and Atlantic, that didn’t notice the dip a 9:15 this AM.  Bonds start discounting more inflation, by the end of Q1 2011.

Lots of anecdotal evidence out there, suggesting we’re in the beginning of phase 3 of the gold bubble. 

Turk saying shorts are just now going to start to cover, getting squeezed out of gold, as cash on hand moves into gold on dips.

Hendry saying gold and bonds melt up together, while Japanese corporates will suffer on capital chasing negative marginal returns on wealth destroying GDP growth in Asia.  That man is a gifted analyst.

Stocks are being bid up, by people who don’t want to invest in paper, paper, or paper taking the other side of the POMO but don’t know what else to do. 

I think I’ve been reading too much ZH. 

Nobody’s talking about oil.  It’s the last piece in the dissolving dollar puzzle.  Oil’s not moving higher.  This means one of two things.

The move in gold is not for real.  The move in stocks is not for real / manipulated.  The move in bonds is manipulated.

Or.

(Longer dated) Oil is about to move higher.  The move in stocks is for real.  The move in bonds is not for real / manipulated

…a central bank push rates to zero then successfully turn it around?

I’m actually asking.

UPDATE: Added Zero Hedge Links, the first one, is a must read – for any investor, trader, and breathing human on the planet.

It’s been a steady 6 month ramp up, of chatter, on the short JGB trade.

People are looking for options.  They are finding the TSE data, easily accessible via Interactive Brokers, and apparently Options Express.

Mad Hedge Fund Trader, Dr Volatility, Kyle Bass, and Jay over at Marketfolly, and of course Zero Hedge are all covering the trade…new commentor Loris and I chatted, and I mentioned some of my qualitative observations as well as introduced the notion of simply buying N225 volatility.

GL Trade, owned by Sunguard, is the name you need if your broker isn’t Interactive Brokers.

Apparently, Eris Exchange is getting into Swaps, and it might include some exchange traded products on the JGBs.

…any North American Trader, might find this amusing, however my figures on Japanese Housing Prices per sq meter, were incorrect.  Check out the latest data on Japan Real Estate.

1. Interest rates creep higher, then sky-rocket

2. Interest rates stay here, for what will feel like forever.

In both cases, where does the inflation go?  I can make arguments for homes crashing and energy costs doubling.  I can make arguments for homes taking off in price, with energy costs hitting all-time lows.  The one thing I can not make a case for, is stocks crashing, energy crashing, and homes crashing.  Similarly, energy, stocks and homes all can’t take off in price.

There is no recovery ahead.  Only money flow.

Straddle oil.  Straddle stocks.  Straddle the long-end of the curve. (?)

Information.

I am more and more of the opinion, that forecasts are worthless.  Markets are more efficient than they were yesterday.

That means, anybody with a forecast on the direction of any asset class, who doesn’t accept the fact that they are likely only 50% right, including the author of this post, is simply a juvenile when it comes to markets.

That leaves me with stating the corollary  is that the only arbitrage left, is information.  Those with more information, used to be able to forecast better.  As more and more market participants have more and more access to more and more information, the arbitrage opportunity is declining.

That means my view on Toronto real-estate, is actually “It could go either way.”  That means my view on stocks, is actually “It could go either way”.  That means my view on volatility, gold, oil, bonds, the dollar – “It could go either way”.

…of course, I’ll keep on trading, and ignoring the aforementioned thesis.

Based on the public CPI data, inflation adjusted, single family home prices in Toronto have outpaced inflation.

I have 4 questions, present this chart, and leave my 3 readers to draw conclusions.

1. What if the government CPI data is too low, what if they are off, by say, 20 basis points?

Toronto Inflation Adjusted House Prices

2. How much price appreciation is appropriate, given the fact that living in Toronto is arguably more desirable due to a wider selection of leisure activities.

3. How much price appreciation is appropriate, given that it is now more expensive (time and fuel) to commute into the city?

4. What if home prices, were just undervalued before – and the current price is where it’s finding an inflation adjusted equilibrium/fair value?

Bonus Question: According to the Globe and Mail, how much higher are inflation adjusted Toronto home prices today, than they were in the market peak of 1990? ONLY about 2%.  That’s right, Toronto is only 2% above a 2 decade old inflation adjusted price record.  The bears will point out, on that fact, we at thus at an extreme on the upside, and so prices will fall back towards averages.  The bulls will point out, sure, we likely will fall back towards inflation adjusted averages.  But, add inflation, and there is no bloody crash coming in price anytime soon.  I say, that’s what makes markets, inflation adjusted, it’s a coin toss from here.

Canadian Dollars are fiat.  Oil is not.

The average price of a single family home in Toronto, in 1966 was about 6734 barrels of oil.

The average price in 2009, was 5458 Barrels.

The average for 2010 to date, was 5508 Barrels.

The 44 Year average is 6665 Barrels.

The 10 Year average is 6697 Barrels.

The number of barrels of oil required to buy the average single family home in Toronto

I’m sorry, but I need to disclose my data before 1997, is not very reliable.

The Globe & Mail has some great charts out today.

I’m not supposed to copy them, for now, they are available here.

One shows the price of Canadian homes in the 5 major cities plotted against the “average worst 9 US cities” from 1997 to today.  Assuming, what they mean is “average worst [performing] 9 US cities [by price, since the peak]“. 

The US cities tripled (+200%) in 9 years.  The same group is now up only +80% in 13.5 years.

Calgary took 12 years to triple.  Calgary is now up only 175% in 13.5 years.  So, Calgary, the #1 performing city, experienced a slower climb, and in the long-run out performed.

The rest of the cities are all individually at all-time highs, up between 85% and 135% since 1997.

To review, some facts:

• The best 5 performing Canadian cities have climbed higher with less volatility than the worst performing 9 US cities in 13.5 years.
• 9 cities in the US were more volatile collectively, than any single Canadian city over a 13.5 year span.
• In causal linear systems, overshoot is correlated to undershoot.

Perhaps both systems are going to oscillate towards a steady state.  Doubt that.   But the largest 9 US cities do have 24.45M people.  Canada’s top 9, have 16.2M.  My point there, is by population we still have a long way to go before being compared to the American market.

And, how insulting to compare my nations top 5 cities, to the worst 9 in America.  I don’t know which cities were included in ’the worst’, but does Toronto really compare to Detroit, New York?  Does Vancouver really compare to Las Vegas, Los Angelas?  Does Montreal really compare to Miami?

Like my title suggests, I do have a contrarian signal for the bears to mull.  Of the 106 comments posted to the Globe & Mail article, I counted bullish and bearish posts.  71.4% were bearish.  That’s bullish.  It’s those 71.4% of people, who will be bidding on any dip in prices.

Long the Loonie.  Long Canadian Real-Estate.  Long Canada.

I was contemplating how to increase my exposure, to wall-street stupidity greed.

I conjectured one way.  Buying a 4-month out $120 straddle on CRM.  IV is way under-priced.  It goes against everything I believe in, to go long plain-vanilla, but there’s an earnings IV pump in 2 months, combined with fiscal multipliers starting to orbit earth, as the stock is making new highs after an IV crash. 

An easy 2%.  Buy the January 2011 $120 straddle for under $26.  Sell it for $26.50.  I’m going to bet my tesla on this, tomorrow AM, provided CRM gives me a couple minutes at $120.

The average price of a home sold in Bowmanville, Ontario, was up 11.2% to $272,769 in August YoY, outperforming the east end GTA which was up 8.9% to $331,002 YoY.  The median price in Bowmanville, was up 8.67% YoY, compared to the east end of the GTA’s median up 8.63% YoY.

During August, mortgage rates in Ontario, dropped by approximately 40 basis points on a five year fixed.  So, rates falling half way through the month, likely was was pushed prices higher, slightly.  September home prices, will be much more indicative of the health of the Ontario economy. ie. Will buyers come out, in response to lower mortgage rates?