The Profit Takers

So the Royal Bank posted its biggest profits ever this past quarter, of 1.3 billion.

that's 1,300,000,000 in 3 months... in profit. PROFIT.

the good news? royal bank is a public company, so buy some shares and get in on the madness!

the bad news?

companies like this control the market, and the people running these companies control the government.

let's back up a minute, briefly, to think about mortgage rates:

the price of homes is tied to the price of money (interest rates), so the cheaper it is for someone to rent money, the more of their money they are able to pay for a home.

someone is willing to pay $1500/month for a mortgage. at 5% (these figures are not exact, but bear with for illustration) they can buy a $300,000 home for $1500 a month.

at 10% interest rates, their $1500 a month will buy them a house worth only $240,000. the amount the buyer is willing to spend remains the same, per month, but the amont that it gets them in the long run changes. so the interest rates determine the price of a home, because people are always willing to spend X% of their income on buying a house.

if a house is worth $300,000 when the interest rates are 5%, there's a good chance that that house will be worth $265,000 if the rates spiked to 10%, because the amount someone like me would be able to afford would fall (relative to the 5%). unfortunately, the guy in the house with the mortgage for $300,000 is now sitting on a home worth $265,000.

the problem with interest rates right now is that they are trending higher, and so people that could afford their mortage when it was $1500 a month will be paying $2000 a month when they renogiate their mortgage on a house that's worth $35,000 less.

invariably, people will sell their houses as they will be unable to afford the payments. with a glut of houses on the market, and high interest rates, this will exert downward pressure on home prices even further, meaning that people will be forced to stay in a house that is worth considerably less than what they paid for it because they are tied into a mortgage that they have to pay off in cash, not in the equity of the home.

the banks lent you the money at 5%, but are now charging you 10%, because that's the price the bank of canada has set their lending rate to the banks at. nice deal for the banks. suck you in at 5, stick it to you at 10% (my parents were paying 21% during the recession of the early 90's)

when the interest rates get higher, people selling their homes end up owing money to the bank after they sell (ie - the house sold for 265,000, but they still owed 285,000 on the mortgage after 4 years).

supposedly, there is a strong chance that this day is approaching.

when those who control the market decide to engage in 'profit taking' (as it's called), they will begin to divest themselves of much of their excess property. when they all jump out of the market, and they will, there will be a massive amount of money (their profit) flowing into other sources while they wait on the collapse (ie - recession).

this place is often the bond market, a safe and simple way to earn a few percent on your dough. the economic indicators are leaning towards a recession because the money flow is moving towards these safe bonds --- those in the know, the profit takers, are getting out of the markets.

that's the idea.

doom and gloom.

if i were a businessman i'd offer you discounts on tickets to newfoundland, the land of the great oil and crab boom. perhaps sell you on a new burgeoning business idea someone had of grabbing those icebergs that float by to bottle and sell the water - no more wasted icebergs drifting down south to be harvested. if there's going to be global warming, let's get in on it.

but i'm not a businessman. i'm a guy who edits things that business people write. and what they have been writing about lately has been depressing.

record profits!
maybe a recession!

the other day the guy in the office beside me was overheard saying to an old college pal on the phone: "remember back in the day when we were making what, like, 100 grand". i nearly choked on my coffee. but i decided to choke on his, so i ran into his office and grabbed it and then choked on it. felt much better. if there's going to be profit taking, there's got to be some plain old 'taking'. that's where i come in.

i promise this will be my only work oriented post. you think this is dull? yeah. feel my pain!