why I emphasize that investors not make investment decisions based on the headlines of the day. Almost 2 years ago, when speaking in Las Vegas at an investor’s conference, I made a clear case then why the U.S. real estate market was, in general, a high-risk proposition. Using economic and financial fundamentals that are a daily part of my research routine, I demonstrated why certain markets were about to fall and go through a very painful correction. One of the issues raised was the loose credit and lending practices popular at the time. It doesn’t take a genius to realize that when people are refinancing houses at unsustainable values, there’s inevitably going to be a fall from grace. This is part of the natural real estate cycle. Increase prices lead homeowners to be overconfident in their house value. This leads them to feel rich (the “wealth effect”), causing them to refinance their property to the max and spend the money on consumables. Lenders join the party, anxious to make the fees and interest, and soon everyone’s drinking the punch and acting as though it will continue forever. Real estate markets ALWAYS go through a cycle, and as predictable as they are, most people go into denial when the first signs of weakening appear, because they’re still drunk from the rise upwards. This was happening in 2005, but took until mid-2006 before anyone seemed ready to admit the problem. By that time, lenders started tightening their requirements, prices started to stagnate, and the wealth effect started to rear it’s head – people realized they weren’t wealthy if their house didn’t keep climbing in value. Fast forward to today, where the entire market is in full fear mode, and massive lenders are now starting to call for upcoming turbulence. What’s amazing to me is it seems like only recently that anyone noticed there was a problem developing, but the truth is that the evidence has been there for a couple of years. The psychological impact of the media’s daily doomsday reports is going to now cause significant volatility (read: major losses and loss of confidence) in not only some real estate markets, but more importantly, the financial industry as a whole. You can expect huge swings in the North American stock markets over the next several weeks and months, as more and more lenders admit their stupidity of lending 125% of the value of homes appears not to have been a very intelligent plan. Suddenly, with the U.S. real estate market facing the first decline in national home prices in 40 years, throwing money at undeserving borrowers with unfair and deceptive rate calculations is showing itself for what it is — a greedy cash grab by the credit and financial industry. So where is this going to lead? Well, I believe we’ll certainly see several lenders and financially-backed institutions pushed into receivership or bankruptcy because of their stupidity. This will create even further turmoil in the stock markets, and will lead to much tighter lending policies on behalf of other lenders. Expect this to continue for at least a couple of years from now, until a calm returns to the real estate market, and the industry actually believes that the worst is over for the U.S. real estate market. What does this mean in Canada? Not a lot. It’s striking how different the Canada and U.S economies are right now, and it has a lot to do with the past, as opposed to the present. While the U.S. has been printing money faster than it can spend it, leading itself into massive debt and trade deficits, Canada has largely been the responsible sibling and managed it’s growth and financial affairs much more responsibly. More specifically, Alberta continues to lead Canada with incredible growth and economic strength, thanks in part to the fact that the Alberta government retired it’s debt 2 years ago. Add to that the world’s never ending surge in thirst for oil, and you can bet that Alberta is one of the safest places to invest on the planet today. The rest of Canada, while not seeing the same strength as Alberta, will continue to experience either modest or strong growth, depending on where you look. If the U.S. financial crisis continues to grow, you can expect some of that psychological turmoil to cause some decisions to be made in Canada that will largely benefit investors. For example, while I fully expect the Bank of Canada to increase interest rates again in September by 1/4 of a point (bring prime rate to 6.5% in Canada), if we see enough fear and trepidation in the U.S., Canada’s leaders may hesitate in raising rates to see what the full impact of the U.S. problem turns out to have on the international markets. In any case, I feel that Alberta will continue to be the princess of Canada. And sitting here in Calgary, watching all the carnage on news reports is certainly a great study in economics and investing.]]>