I believe one day we’ll tell our children and grandchildren about the events of the “Great Recession.” We’ll recall the days of the Panic of 2008 just as my grandfather and father related the fabled stories of Appalachian life in the wake of the Great Crash of ’29. Many will have stories similar to those told by my grandparents, who saw their life savings destroyed in a wave of bank collapses and watched as banks foreclosed on local business properties and their neighbors’ homes. Just as jobs were precious and few for them, so they are today for many Americans. Similarly, just as Americans pinned their hopes on a new Democratic administration led by a charismatic leader’s ideals of societal reformation through a series of unprecedented programs and expansions of federal powers, so a modern generation facing a systematic collapse of asset prices and financial institutions has pinned their hopes on another charismatic leader promising “hope” and “change.”

Put this report by Guggenheim on your weekend reading list!

Key findings on the global foreign exchange market:

Read the full report

Check out this chart of 5yr Greek CDS spreads. Just as wide as ever…Implied default probability remains extremely high (and seems to be rising).

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The Canadian Centre for Policy Alternatives released research on the Canadian housing bubble. They issued the following press release:

OTTAWA – For the first time in 30 years, a synchronized housing bubble has spread to six red-hot real estate markets in Canada, says a report by the Canadian Centre for Policy Alternatives (CCPA).

Canada’s Housing Bubble: An Accident Waiting to Happen examines trends in house prices in Toronto, Vancouver, Calgary, Edmonton, Montreal and Ottawa between 1980 and 2010 and finds price increases in those cities are outside of a historic comfort level.

On average, inflation-adjusted house prices in these cities have historically held stable at between $150,000 and $220,000 in today’s dollars, but current housing prices in all six major markets are now over $300,000, on average.

“The bursting of housing bubbles is a rare event in Canada, but the steep rise in house prices in so many cities displays all the hallmarks of an accident waiting to happen,” says the report’s author David Macdonald, a CCPA research associate.

Historical trends indicate Canada’s hottest six real estate markets are more unstable than a generation ago, especially after steep house price increases between 2002-07. Before 2000, house prices tended to hover within a narrow range of between 3 and 4 times provincial annual median income. Today, house prices are anywhere from 4.7 to 11.3 times the median income.

“As house prices rise outside of their historical range they become much more susceptible to mortgage rate changes,” says Macdonald.

“The hottest six real estate markets could be in for a correction at best or, at worst, a bubble burst. Rate setters at the big banks are in the driver’s seat now as mortgage rates inch up. They need to hit the brakes lightly.”

Canada has only had three housing bubbles burst, twice in Vancouver and once in Toronto. The study simulates the conditions of the two most recent bubbles, as well as the 2006 housing market collapse in the U.S., to assess how bad a correction might be. It predicts homeowners in Edmonton and Montreal could be hardest hit, losing 38% to 34% respectively of their property value in under three years in a worst-case scenario. Vancouverites would be worst hit, in dollar value, losing almost $200,000.

Read the full research

LINK TO WEBCAST ARCHIVE

LINK TO WEBCAST PPT PRESENTATION

Here are 6 reasons why we’re probably already in a double dip or probably never left the first dip:

1. According to the Congressional Budget Office, 4.5% of Q2’s 1.6% GDP figure was due to government spending. So excluding government payments, the economy shrank in Q2. Isn’t shrinking GDP evidence enough? In case it’s not, here’s more…

2. U-6 unemployment rate is just under 17% and has hovered around at that level for the past year. The unemployed don’t spend money. And the employed are scared to spend money because they live in fear for their jobs.

3. The US consumer is still drowning in debt. Today’s average household debt-to-income ratio at 130% is still 65 percentage points above its long-run average. Consumer deleveraging remains a daunting force in today’s economy. Consumers are squeezing every penny out of discretionary spending to pay down debt.

4. Nearly 25% of the US population with a mortgage is underwater. Approximately 5 million homeowners are now either in the foreclosure process or are delinquent. While home purchases have a positive knock-on effect on the economy, home liquidations have a negative effect. This trend will continue until home prices and personal debt-to-income ratios align with historical averages. This could take years, depending on the level of government tinkering with the natural market process.

5. 86% of small business owners fear a double-dip recession. A potential self-fulfilling prophecy. Anxious small business proprietors won’t hire, and since small businesses are the engine of American economic growth aggregate employment won’t rise and GDP growth rise until small business owners feel comfortable.

6. The little improvement that is seen actually reinforces the deflationary pressures. The unemployed that are able to find jobs are doing so at lower than previous wages. Aggregate income is an important driver behind consumption, and as incomes fall so too does consumer spending.

The market has acted rather poorly following Friday’s ramp. Despite all the bullish contrary indicators it trades heavy and has the feel that it wants to go lower still. I mentioned in my prior post some of the nagging doubts I had about the final bottom being in. Again, I respect the notion that we can make a bottom right here and now because we are seeing some rare extremes in sentiment indictors but the market isn’t confirming the bullish case right now.

Based upon what I see out there, bulls out there like Cramer are feeling very frustrated and hopeless. Trader types are shrinking their holding periods more and more as headlines are dominating the action. These 2 notions are telling me that the buy and hold strategy is going to come back into favor soon and we are close to hitting a LT bottom. Yup you heard me buy and hold is going to be the right way to go soon! Does it make you sick to your stomach to consider buying and holding right now? If the answer is yes then it means that odds are high it’s the right thing to do! I find that the queasier I feel when taking a position the higher the odds of me being right. Anytime I’ve made a trade or comment about the market and felt completely comfortable it tends to be wrong! Does this not happen to you?

This atmosphere of hopelessness and gloom right now reminds me a lot of early 2009 whereby the market was making its final sell-off of the bear market. If you bought stocks starting in February of 2009 you would have felt pain for about a month but it ended up working very well if you held. That’s kind of where I see us right now. If you put a gun to my head I think we will get one last push lower to the July lows or even lower, then at that point I think the market is going to make a solid bottom. Do we do this now or after a big bounce? That’s tough to answer. This is a very, very tricky tape with so much noise action in both direction but I think we will indeed see a flush towards the July low.

My plan of action is to selectively build long positions with minimally market correlated equities as an “out” in case the market does make a final cathartic sell-off. I will also attempt to play this downside flush that I think is going to happen. I stress the word attempt because I’m mindful of the upside potential and the noise of the tape. If in doubt I will stand aside.