The 12 charts above reflect global real estate indices that have been grinding lower. The bears are not hibernating.
Why The Stock Market Is Heading For Disaster
Hat tip to Jesse Colombo for the following 14 minute video that includes the following 20 long term charts:
Trump Is Completely Misguided On Interest Rates
If the Fed or other central bank voluntarily abandons further credit expansion (most commonly by raising interest rates), the credit and asset bubble will experience a deflationary bust. Deflationary episodes entail credit busts, falling consumer prices, bear markets in stocks and housing prices, and falling wages. If the central bank decides to never put an end to the credit expansion (for example, if the Fed never raised rates), however, the result would be a runaway credit and asset bubble that leads to a severe decrease in the value of the currency and high rates of inflation. The latter scenario is what would occur if President Trump got his way – hardly a desirable outcome for the economy. To summarize, the Fed is crazy – they’re crazy for creating such a large bubble in the first place via loose monetary policy, but not for raising interest rates and normalizing their monetary policy. Jesse Colombo, Oct 17, 2018
The public has been goosed into historically high leveraged balanced sheets that looked ok at the peak of Canadian housing prices in 2017 but now a year later, with interest rates and CPI rising (3% CPI at July 2018), and animal spirits fractured by Trump's war on our imports into the U.S., lenders are now purging out the marginal from the credit worthy. Our zeal for consumption is in the cooler.
Half of Canadian jobs will be impacted by automation in next 10 years
"...a growing demand for “human skills” will be more crucial across job sectors. In particular, critical thinking, coordination, social perceptiveness, active listening and complex problem solving — described in the report as “human skills” — were identified as being key characteristics Canadians should develop to prepare for changes to the workforce." Global News March 2018
What is the link between education and earnings?
Conference Board of Canada March 2013
"Canadians with a university degree earned $165 for every $100 earned by Canadian high school graduates. Those with a college degree earned $110 for every $100 earned by high school graduates, and those who did not graduate from high school earned only $80 for every $100 earned by high school graduates... The relatively lower financial returns on university education in Norway and Canada may be due to the dominance of their energy sectors, which offer relatively high-paying jobs that do not require university educations."
"Between 1998 and 2010...students skills deteriorated somewhat. The proportion of students with high-level reading, math, and science skills dropped, while the proportion of students with low-level reading and math skills increased."
"Canada needs to improve workplace skills training and lifelong education. Canada’s adult literacy skills are mediocre, with a large proportion of adults lacking the literacy skills necessary to function in the workplace. Canada gets a “C” and ranks 10th out of 15 peer countries on the indicator measuring adult participation in job-related non-formal education."
"Canada also underperforms in the highest levels of skills attainment. Canada produces relatively few graduates with PhDs and graduates in math, science, computer science and engineering. More graduates with advance qualifications in these fields would enhance innovation and productivity growth—and ultimately ensure a high and sustainable quality of life for all Canadians."
"Canada’s middle-of-the-pack ranking on university completion may reflect the fact that the financial return from investing in university education in Canada is also middle-of-the-pack at best. Many other countries (and the individuals in those countries) get much better returns on their tertiary investments."
"While not reflected in the report card due to lack of data and measurability challenges, there is a “learning recognition gap” in Canada. What this means is that people may hold knowledge and skills that are not formally recognized (through academic credits or trade/organization/professional certification) by employers or credential-granting institutions."
"An obvious example is immigrants whose foreign credentials are not recognized in Canada. The Alliance of Sector Councils stated that “every Canadian is affected by inefficient recognition. Canadians across the country are short of doctors and other health care workers, while thousands of highly educated newcomer health care workers are not allowed to provide the services that so many Canadians want. People with prior learning gained through work and training are similarly hindered by a lack of learning recognition, as are those who transfer between post-secondary institutions or, in the case of licensed occupations, between provinces."
Is Canada’s workforce sufficiently skilled?
Conference Board of Canada June 2014
No. Given that Canada is a leader on post-secondary educational attainment, one might reasonably expect that the country would also be a leader on adult skills. Yet Canada and most provinces do relatively poorly on adult literacy, numeracy, and problem-solving skills, earning mainly “C” and “D” grades.
What accounts for Canada’s poor performance on adult skills? One reason is that literacy and numeracy skills are not “fixed” forever—individuals can lose skills after they leave school, through lack of use.11 The longer someone has been out of the formal education system, the more impact other factors will have on their proficiency, such as their work and social environment. On average, the younger cohort, aged 16–24, have higher literacy scores than adults aged 45–65, and these results hold no matter what level of education the person has.12 In the absence of continuing education or workplace training, it appears likely that, on average, the skills of Canada’s workers diminish over time.
The country’s grades on adult skills, however, are weak and have deteriorated over the past decade. Canada’s other weaknesses are its low numbers of students graduating with PhDs and with degrees in science, math, computer science, and engineering.
China Might Beat The US in Artificial Intelligence
Eric Schmidt November 2017
"LET THEM IN"
"New lending activity and refinancing have contracted significantly since the beginning of 2018, a culmination of regulatory pressure, enhanced scrutiny following the banking royal commission, and the self-fulfilling consequence of slowing house prices driving an investor pullback... A rising cost of credit represents a blunter instrument for slowing lending, since it impacts both owner-occupiers and investors in parallel,"JP Morgan's Henry St John
that's not a quote about Canada;
but these are:
Canadian real estate sales are feeling the pinch of higher interest rates, and consumer credit isn’t far behind. Bank of Canada (BoC) numbers show household debt printed a new record high. Despite the record high, the rate of growth continues to slow for consumer debt levels. The decelerating growth is yet another indicator that the credit cycle has peaked. Better Dwelling, July 2018
Market Rate Outlook: One more hike this year plus two more hikes next year. The market is not fully pricing in the next BoC rate increase until December... Canadians are now more sensitive to higher rates than ever before. That means consumption is slowing faster with every 1/4% BoC rate increase. RateSpy.com Sept 2018
Canada's economy is set to slow down even with a NAFTA deal, economists say:
"Our research finds that even with a NAFTA deal in place, the long-desired rotation in growth towards exports and business investment will be sluggish and won't offset the coming slowdown in household spending and housing activity," Royce Mendes, senior economist at CIBC Capital Markets
Sal Guatieri, senior economist at BMO Capital Markets, is also expecting growth next year to slow to 1.8 per cent, as reduced consumer spending and housing activity will weigh on growth.
RBC senior economist Nathan Janzen said the bank doesn't publish forecasts for 2020, but agrees that growth is shifting lower.
"We do expect a more modest pace of consumer spending going forward, and while housing activity should remain a contributor to growth, this sector as well should see more modest growth relative to the past," said Brian DePratto, senior economist at TD Bank.
Quote Sources: CBC News Sept, 2018
And as my long term chart study of Canadian Debt, GDP, Foreign Direct Investment and Balance of Trade shows, since the credit crash of 2009, Canadian's awesome consumption via debt has not led to higher wage employment production in Canada but to lower wage warehousing and transportation of goods and services that we import to maintain our lifestyles.
"The one-million square foot Toronto centre will be Amazon’s sixth facility in Ontario and ninth in Canada." Financial Post, July 2018
"Stabilization should not be interpreted as the start of another strong rally," they warned (TD Bank economists Derek Burleton and Rishi Sondhi). That's because mortgage rates are on the rise, and home affordability levels have reached their worst levels in a quarter century... in fact historical data shows that over the past half century, inflation-adjusted house prices in Toronto fell for about a third of the time. huffingtonpost.ca, Sept 2018
Justin Havre put together a survey comparison of Canadian and U.S. Millennial's opinions of when they think home ownership is possible. The takeaways are:
- American young adults (18-24) are more optimistic about owning a home than their Canadian counterparts.
- Millennials are the largest generation on the planet and make up 35% of the American workforce.
- This is the fastest growing group of homebuyers.
- There is a big market in changing minds of Millennials who don't feel home ownership is possible, especially in Canada.
- Many Millennial's buying, spending, and savings habits have been a result of the mortgage crisis of 2008-2009.
- They may have deferred major life decisions but they are making them in increasing numbers.
One possible reason for Canadian Millennials being not as optimistic as their American counterparts is the level of consumer debt that individuals have created which is much greater in Canada by perhaps a factor of 5.
Canadian lifestyles are dependent on debt. Not only is there interest rate risk, there is also a USD/CAD exchange rate risk (see my June 27 post) and increasing import costs.
And as I have been tracking on my Household Debt chart, there appears to be a structural change in Canada that has led to:
- The widening spread between total household debt and household mortgages means we are borrowing even more to maintain lifestyle.
- Foreign Direct Investment OUT higher than IN over the last 20 years means Canadian companies are investing outside of Canada to get a better return on Capital and Labour. For every $1 of investment coming in to Canada, $1.36 leaves (full year 2017 data)
- Since the 4Q 2008 crash into the Pit of Gloom, the Balance of Trade has been negative for 70% of the time which means that our debt obligations continue to provide more stimulus to offshore than onshore producers.
And we still don't know about the net effects of Trump's Tariff-O-Nomics. So if you are going to leverage a home purchase with the maximum amount of debt allowed under the new stress test qualifiers, make sure you have your income contract term lengths matching up to your debt obligations.
My recent update of Foreign Direct Investment on my Canadian Household Debt, GDP, and Balance of Trade chart demonstrates that Canadian Capital would rather flee than fight.
But peak debt may be upon us in this business cycle as banks begin to report a drop in mortgage demand.
The Canadian Imperial Bank of Commerce anticipates it will issue half as many new mortgages in the latter part of the year as it did in the same period of 2017 amid cooling in the real estate market. Times Colonist May 23, 2018
David Rosenberg: Ottawa created the debt monster that Canada now faces.
"47% of residential mortgages
are set to roll over for renewal next year."
David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, joins BNN Bloomberg to provide his take on the Canadian economy as Bank of Canada Governor Stephen Poloz sounds the alarm on household debt in this country. Originally aired on May 2, 2018 on BNN Bloomberg
Lance argues in the chart above that the...
Intermediate-Term Picture Remains Bearish
On a intermediate-term basis, both of our weekly “sell signals” remain, and as shown below, the market once again failed at its overhead trend line last week as well as the downtrend resistance from the previous peaks. These failures keep downward pressure on the market as prices continue to follow the “path of least resistance.”
The weekly chart also shows the rare “buy” and “sell” signals issued on a longer-term basis. Currently, as the market struggles with its current correction process, it is also very close to triggering a more important “sell signal” which could indicate a further correctionary process over the next several months.
Over the last 25-years, these sell signals have only been triggered 5-other times.
1. At the peak of the market prior to the “Asian Contagion”
2. Just prior to the peak of the market in 2000
3. At the peak of the market in 2007
4. At the peak of the market 2011 as QE-2 ended and the U.S.was facing the “debt ceiling debate.”
5. Near the peak of the market from the collision of the end QE-3, the “taper tantrum” and “Brexit.”
But I did find this chart here of the S&P 500 vs the Case Shiller U.S. Housing Index:
It is clear that some sort of correlation exists between stock values and real estate values. Stocks started their recent bull run in 2009. As you can see from the chart above, real estate values didn’t start moving up steadily until 2012. So there is a lag here. But what is interesting is the correction in stock values in 2008 matched up with real estate values. In fact, real estate values started trending lower before the market crash. DoctorHousingBubble.com
In January 2018 the S&P 500, DOW and TSX peaked.
U.S. vs Canada Private Debt to GDP
Steve Keen "Can we avoid another financial crisis?"
As we wait for the first week of April to unfold and the March real estate data to come in, questions about the stock market's melt-up comes via @anilvohra69
Anil, a retired UBS rates options trader, quotes investment strategist Jeremy Grantham:
Bubbles have a blowoff phase lasting 21 months. Using a 5% threshold, the run from Feb 16 to Dec 17 was 22 months.
Hence the question "Have we seen the melt-up?" It certainly appears that way for Toronto Real Estate (as of February 2018 data) and the March data may add even more weight to the thesis.
If you are thinking of 'buying the dip' make sure your income is amortized over the length of your mortgage. In a melt down, the erosion of net worth will shift a lender's risk management exercise to more closely examine the strength and security of your net income.
As we know employment income growth is facing profound challenges.
Global Risks 2018
According to the IMF, over the past three decades 53% of countries have seen an increase in income inequality, with this trend particularly pronounced in advanced economies. Furthermore, today’s economic strains are likely to sow the seeds for longer-term problems. High levels of personal debt, coupled with inadequate savings and pension provisions, are one reason to expect that frustrations may deepen in the years ahead. We highlight four concerns: (1) persistent inequality and unfairness, (2) domestic and international political tensions, (3) environmental dangers and (4) cyber vulnerabilities. We conclude by reflecting on the increased dangers of systemic breakdown. World Economic Forum
Strongest 'Bubble Burst'' Alarm Just Went Off
Jeremy Grantham 2018
The CoreLogic Home Price Index Forecast suggests U.S. home prices will rise less than 5 percent this year, but if some 2018 mortgage rate forecasts pan out the mortgage payments homebuyers face could increase closer to 15 percent.
Andrew LePage, CoreLogic, February 15, 2018
But as I noted in my previous post; in December 2017 the Canada 10yr less 2yr metric, which is a measure of a recession threat, narrowed to only 32bps away from negative inversion where the 2 year yield would be greater than the 10 year.
But the new U.S. Fed chairman Jerome Powell pitched their congress yesterday with:
"recent data has strengthened his confidence on inflation." and
"yield curve has been a problem in past when Fed got behind and had to raise rates quickly; that's not the case now"
The Fed's is planning on three rate hikes in 2018, but after the announcement yesterday futures traders reacted and began pricing in a 1/3 possibility of a fourth rate hike! Zoom zoom.
Meanwhile the Bank of Canada is not so sure about it's course this year:
Bank Of Canada To Take Cautious Path With Two More Hikes In 2018: Reuters Poll
The central bank has raised interest rates three times since last July, amid a robust job market and solid economic growth, but policymakers have said repeatedly they will be cautious in considering further hikes. Leah Schnurr, Reuters February 27, 2018
In December 2017, the 10yr less 2yr Canada Government bond spread narrowed to just 32 beeps away from inversion.
A year and half later the wide reached 230 beeps in May 2009, 2 months after the pit of gloom crash bottom.
We should start watching for further narrowing now especially with equity markets at their historical tops.
Market history is littered with downturns that followed new Republican presidents: Hoover (1929), Eisenhower (1953), Nixon (1969), Reagan (1981), and Bush (2001). The Trump bubble will likely prove to be the mother of all Republican presidential ebullience bubbles. Trade wars are not positive at all for the markets. They are what exacerbated the Great Depression and they should be one of the key triggers of the bursting of the China bubble.
Here's Who Could Lose the Most in a U.S.-China Trade War
Bloomberg, January 23, 2017
"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement; and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." George Santayana Vol. I, Reason in Common Sense
Balance Of Trade
Rent Or Buy