Canadian Dollar – U.S. Dollar Parity Theory

My previous post on October 13, 2009 predicted that the Canadian dollar and the U.S. dollar will hit parity again by April, 2010. And my prediction was correct! The loonie was at par with the greenback once again on April 6, 2010, and has since been flirting with parity a few times for the past week.

When it was trading at 97 U.S. cents to one loonie on October 13 last year, analysts were saying that the loonie could hit parity with the greenback anytime soon, perhaps the following month (November, 2009), or that even happen in the week following October 13, 2009.

But I saw it a bit differently. In my previous post, I wrote:

I have a theory: CAD hit parity (at par) with USD in 1974, and 33 years later in 2007, it did it again. Then again in 1976 (two years after 1974) it hit parity (at par with USD), and (here’s my theory) 33 years later in 2009 (which is two years after 2007), it will do it again.

Because of the timing difference, I am giving myself some leeway: I predict that CAD will be at or above par with USD any time now till April of 2010. Only time will tell if my prediction is correct.

And my theory is empirically correct!

A tale of two houses

Adam is a computer programmer in a medium-sized hi-tech company। Susie, his wife, works as an accounting supervisor in a small import export company. They have no kids, yet, because they want to save enough money as the down payment for a house so that their kids (when they have them) can grow up in the backyard of their own house. They can be said of a typical middle class American family.

They have just bought a house। After a few years of hard working and disciplined savings, they save enough for their first house. Actually, more than enough, according to their real estate agent. The money they save is good for 25% of the purchase price of their first house. They can buy a bigger house, according to their real estate agent, with less down payments or with higher mortgage banks are willing to lend. They decide not to, because they figure that with their current level of commitments, they can still keep their mortgage payments even if one of them loses a job.

The house next to theirs is a bigger house, owned by George and Betty। George and Betty also moved in at about the same time as Adam and Susie. During some casual chats in their front yard, Adam and Susie learn that George is a construction worker and Betty works as a part-time sales in a small nearby electronics store. They were able to put zero down for their house, because their real estate agent taught them to do so, and because of the recent housing market boom.

Then it’s November 2008। Banks are in big trouble – Lehman Brothers collapsed. Stock market has plunged great time. The housing market has collapsed. Numerous houses have been foreclosed.

Adam and Susie are still doing okay because they have saved up some money for the rainy days। But not George and Betty. George has not had any work for more than a month as developers are not building new houses. Betty has just been laid off because no-one is buying any non-essential things such as electronic games.

George and Betty have missed their last mortgage payment, and they feel that their house is en route to foreclosure। They know that Adam and Susie have some savings; they are thinking of stealing from them, or perhaps even rob them. But they are too timid to commit such horrible crimes.

Then out of nowhere, a white knight comes to the rescue। Even though he is a black person, but to George and Betty, he is really their white knight. Who is he? He is the newly elected president Barack Obama! Barack Obama has decided to use taxpayers’ money to save those who cannot afford their mortgage payments so that they don’t have to lose their homes.

George and Betty say, “Barack Obama is a godsend। Now we don’t need to rob or steal from our neighbor, the government will just do it for us. We don’t need to commit such crimes; it's illegal, but when the government does it, it’s all legal.”

Charles Dickens once wrote, “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way- in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”

Note: This post is a republish from A tale of two houses on wordpress and has been back-dated to refelct the original date of publish.

Welcome to the Great Depression Episode 2

With the financial situations getting worse and worse every day, everyone now admits that we’re already in recession. But not everyone, certainly not the governments, will admit that we’re in a depression.

The textbook definition of a recession is that when a nation’s economic outputs shrinks for two consecutive quarters, the nation is said to be in recession. This is a clear-cut criterion. Once when the GDP figures for the previous two quarters are available, it can easily be determined whether the country is, or is not, in recession.

For depression, that’s not so clear-cut because there is no straight-forward definition of depression. Generally speaking, a depression is a prolonged and severe recession. But there are no objective statistical figures that enable one to say with certainty that whether it is, or it is not, a depression.

While there were many recessions littered throughout recent economic history, there was only one depression – the Great Depression that started in 1929 and lasted for decades. Many economists quote figures from the period of the Great Depression (such as 25% unemployment rate) in order to characterize a recession as a depression. The unemployment figure is 7.6% (as of January 2009), so we’re not in a depression. When the Great Depression began, the unemployment rate was 8.7%, and eventually reached its peak of 25% a few years later.
My take is that we're in a depression – just the early stage of it. However, “depression” is a taboo word for governments. Governments would try to do anything but to declare depression because that will not only weaken the government’s reputation, it may also cause people to panic, and society may become unrest.

Some (I, for one) believe that we are sliding into a depression. Our current economy does not exhibit those figures – yet, because we are still early in the depression cycle. However, given the magnitude and the coverage of the current financial crises, I believe this depression will be even “greater” (read: longer and deeper) than the first one, the Great Depression of the 1930s, which I call the Great Depression I. Logically I call the depression we’re in now the Great Depression Epsiode 2.

Note: This post is a republish from Welcome to Great Depression II on wordpress and has been back-dated to refelct the original date of publish.