This Is Not 2008 Again
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With the recent crash in commodities prices, including everything from corn to copper, to crude oil, many are starting to wonder if we’re seeing a repeat of 2008. In Alberta, they rely heavily on oil for the province’s revenues and economy, and have seen many downturns over the past 40 years. So much so, that veteran energy workers have become used to it and don’t worry much when the price of oil falls, as it’s done lately.

That same thinking permeates the American energy industry, particularly in Texas and other oil rich states. “Been there, done that” is the motto. You’ll find this same attitude in many financial services offices, board rooms, and political offices. Having survived the last few shocks, most business people are perhaps overconfident that we’ll always survive them. Let me explain why this time just may be different.

The financial crisis of 2008 began with a big scare, the insolvency of Lehman Brothers, along with the subprime crisis, the two were linked. The real economy at the time was in reasonably good shape, outside of the subprime loans and risky derivatives being packaged as AAA product.

So when the shock of Lehman hit, it was just that, a shock. The system froze up, money wasn’t flowing, bankruptcies ensued, and the entire financial system was on the edge of collapsing. This is a clear example of just how important confidence is to our financial system. Even a relatively strong economy can be brought to its knees when confidence is lost. This is because our financial system is built on credit, and credit requires confidence. As much as I’d love to delve into this topic, it’s an entirely different discussion.

Suffice to say, 2008 was a big scare, a shock, brought on by the failure of a big bank and some fraudulently promoted financial products. This time around, we’re facing a different animal altogether. The world has increased its total debt by 57 trillion, or about 25%, since 2008. That’s an astounding figure for only 7 years. The reason? Fighting off the collapse of the system in 2008.

In 2008, the crash began with the stock market, and was followed by commodity prices, and the“real economy.” Demand for products slowed dramatically, jobs were lost, businesses went bankrupt, etc. This time, we’re seeing the opposite play out. Commodities have crashed, businesses are quietly going away, note all the retail closures of late, in Canada and the US. Most people believe everything is fine because the stock market is at all time highs and house prices are climbing ever higher. Both of these are the result of the lowest interest rates in history, not a strong economy.

Governments know the real economy is still weak, which is why they’ve lowered rates to the all time lowest in history. This is also why we’re seeing new cars sell so well, cheap financing. So, your government wants you to buy lots of stuff on credit, because it knows you can’t afford it with cash. And people are, in droves. This is not a strong economy, this is a loose credit fueled bubble.

And we’re fast approaching the end of this bubble, where there simply aren’t enough people to keep feeding it, regardless of how low rates are. All things come to an end, and this will too. What happens when we get to the end of an epic bubble, which was created to disguise a critically injured economy, and we have no more financial “levers” to pull? Levers like lowering rates and printing money, which have been done to such excess the past 7 years, there’s been no time in history which even comes close as a comparison.

2015 won’t be the shock induced crash, it will be the crash where we’re dragged, kicking and screaming against our will down a financial abyss. We’re seeing it already in fact. These things always start somewhere, and this one started in the oil industry, which is doing everything it can to stave off the effects of $50 oil. The real estate markets in these areas are in trouble, but the real estate boards, are of course telling us “this will all be over soon, come buy at a discount.”

It won’t be over soon, I guarantee it.

In fact, it will spread, and it already is. Toronto now has the highest inventory of unsold condos in 21 years, and it’s growing fast. In Vancouver, they’re building high rises they don’t need, and the vacancy rate is climbing fast. Some buildings are near completion and have only 25% of the building tenanted. Both these cities rely on real estate as a main industry, and in both cities, real estate is faultering.

In 2008, the crisis struck while the economy was strong, in 2015 the crisis will strike while the economy is very weak and fragile. This time, we won’t see a “V-shaped” recovery where we snap right back. Last time, people responded, fearing the worst, this time, people are apathetic, overconfident. That will only make it worse.

Thankfully though, 2008 taught people a very valuable lesson and many still talk and write about it today. There’s no shortage of articles on the 2008 crash, complete with full analysis and historical comparisons. Those who choose to, can be well educated and much better prepared. These articles can be found anywhere from financial resource sites, to personal blogs, like the Vancouver Blogs in my hometown. I choose my information sources carefully, and find the information on this Vancouver Blog to be relevant and credible.

2015 won’t be the same as 2008, the conditions are completely different, as are the attitudes of the people, who have become complacent. Find a good source of info and stay informed, it could save you from financial disaster.

Street Talk

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