HISTORY & READINGS at Brian Ripley's Canadian Housing Price Charts & Plunge-O-Meter

Oil <23

12/31/2018

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As we wait for the December real estate data, let's look at some year end charts.

First up is Henrik Zeberg @HenrikZeberg who is suggesting that the price of oil is headed down to less than USD$23.

Notice where oil was trading in 2001-2002 and 2016.

As the U.S. Energy Information Admin EIA.gov noted in their December 12, 2018 report:

"...concerns about the pace of global economic growth in coming months have led to related concerns about the pace of oil demand growth."

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The economic slowdown in China is on, being driven by "risky lending and a rapid rise in debt levels". That sounds familiar to me and I have plotted it out on my Canadian Household Debt, GDP, Balance of Trade and FDI chart.

After decades of sharp expansion, the Chinese economy is slowing down. Growth in 2018 is set to be the weakest since 1990. And 2019 looks even worse. The world's second largest economy is feeling the effects of a darkening trade outlook and government attempts to rein in risky lending after a rapid rise in debt levels. "The drivers of China's slowdown have yet to have their full impact on the economy, and the combination of both is unprecedented," analysts at Moody's wrote in a research note this month. "This creates a high degree of uncertainty and risk. CNN Business December 30. 2018

The Canadian Dollar continues to plunge. That means our import costs go up and our net trade has been negative 8 out of the last 11 prints; ie: we Canadians buy more than we sell which is ok if we have the income to service the debt, but as the Chinese economy slows and they buy less of our resources, our incomes as well as other countries incomes are going to diminish.

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The USD which is the "senior currency" continues to go up in value when measured against other currencies. That is having a profound effect on global foreign debt holders that have to raise US dollars to repay their loans with their "depreciating" local currencies.

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As Rick Ackerman reminded his clients on December 30, 2018:

A further, significant strengthening in the dollar will tell us when the Deflationary endgame for the global economy is gathering force. It will crush debtors, bankrupt creditors and lop at least four or five zeroes worth of funny money from the banking system’s quadrillion-dollar shell-game. I have written extensively on why hyperinflation is extremely unlikely to settle debts that have become vastly too large to repay. If you cannot understand why, let me pose this question: Do you actually believe the banksters will let you pay off your mortgage with a few hundred-thousand-dollar bills that you’ve peeled from your wallet? If you answered in the negative, you are implicitly a deflationist.

Since the start of ZIRP and NIRP it has been difficult to "be a deflationist" as we watched the global bubble of everything inflate; resource assets, equities, debt and of course real estate which Canadians with the help of foreign laundry services have pushed real estate prices into the top tiers of global pricing. In November 2018, I posted "Dirty Real Estate" which highlighted the "Vancouver Model" that has spread throughout Canada.

The C.D. Howe Institute study estimates of money laundering in Canada range from $5 billion to $100 billion. C.D. Howe Report, September 2018

e don't even know what the "value" of the crime is, but we know what the effect has been in terms of FOMO debt taken on by Canadians. Real estate prices have peaked in Canada and as they drop, the FOMO crowd has a tough choice to make: turn debt into equity quickly by selling the asset or stay in for the long haul and meet the amortization obligation. If it's the former, look for price drops to happen quickly as vendors compete for a diminishing supply of buyers; if it's the latter look for a slow Japanese style deflation and a return to savings as noted in my 2012 post "What Do You Do During a Housing Bust".

A return to savings will eventually allow the pendulum of capital investment to return to productive use. But asset deflation is in view now and we don't yet know it's future length of trend.

One asset class that retains value and even grows during a broad deflationary event is precious metals; and that canary in the coal mine is happening now. See my ongoing chart study of "real" gold and real estate.

And below, see Chris Kimble's
December 31, 2018 note to clients:

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Strength in Gold of late has it (the Gold/USD ratio) breaking above the top of this trading range at (2). What the ratio does at this resistance test will send an important message to the metals sector for the next few months.

CLICK HERE if you want a free trial of Chris Kimble's peerless financial market technical research.

Looks Like Canada

9/21/2018

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"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
ABC.AU NEWS Sept 2018

The above sounds like it, but no,
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

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"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

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Inversion Report

1/27/2018

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In December 2017, the 10yr less 2yr Canada Government bond spread narrowed to just 32 beeps away from inversion.

In April 2006 it was 33bps away and narrowing until it was fully inverted in May, June and July of 2007, and then central banks panicked and goosed the spread to widening again and by November 2007 it was 31bps again.

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.

The Macro Model" chart below is from Crescat Capital with a few of my notations about Canadian debt levels which are at historical highs. NILS JENSON from Crescat Capital on January 27, 2018 made the observation that:

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.

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Here's Who Could Lose the Most in a U.S.-China Trade War
Bloomberg, January 23, 2017

Sure Thing

5/8/2017

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Investment decisions are made because one believes there will be a reward. Globally, both corporations and households are drawing down their savings and making investments. But In Canada reward seekers are heavily conditioned.

The "Sectoral Savings as a Percentage of Global GDP" chart suggests that households since the mid 1980's have been using up their savings to maintain lifestyle and since the start of ZIRP and NIRP in March of 2009, households with renewed zeal, have been moving cash out of their dwindling low interest savings accounts paired with record low borrowing costs to chase yields at risk.

Corporations since the mid-80's have amassed savings into record levels and after the smoke cleared in 2010, they resumed investment as well.

But in Canada as my Household Debt chart with overlays of GDP, Net Trade and Federal Direct Investment plots show, Canada has not been a net positive target for offshore investment money for the last 20 years. As we know the Alberta tar sands' appeal is troubled:

Carlos Murillo (Conference Board of Canada economist), predicts Canadian (oil sector) industry costs will jump by an average of 13 per cent per year between 2017 and 2021... the peak investment level was $62 billion in 2014... " The Canadian Press March 13, 2017

And the recency bias among households is working itself into heat exhaustion according to Bloomberg (May 8, 2017):

Expectations for Canada’s housing market are heating up, with more than half of respondents in a weekly telephone survey predicting home prices will rise, the first time the measure has topped 50 percent in records dating back to 2008... “Consumer sentiment on real estate has gone from hot to hotter,” said Nanos Research Group Chairman Nik Nanos... The latest burst of housing momentum has led policy makers to question whether it’s being led by supply and demand or by speculation.

If one is willing to leverage up and buy a negative yielding asset while the attendant stakeholders from government to loan creators are lining up to take a piece of the action, sellers will simply show up and sell it to you. That's a sure thing, just like the Canadian real estate market is speculative 101.

ITEM: "Toronto Homeowners List Detached Homes For Sale At A Record Pace - Toronto homeowners are listing detached homes for sale at a rapid pace, with new listings soaring over 61% last month." BetterDwelling.com May 10, 2017

ITEM: China Commodity Crash Accelerates As Traders "Forced To Destock" ZeroHedge May 9, 2017

As Citi warned over the weekend, "We suspect that a good number of physical traders that are financially leveraged up to five times have been forced to destock due to rising short-term borrowing costs and the recent sharp price corrections... "Citigroup isn’t alone in saying that some traders may be compelled to sell holdings into a falling market as China tightens. Shanghai Cifco Futures Co. said this week signs are emerging that traders are dumping their holdings.

Imagine having to sell real estate in a falling Canadian market.

St. Germain - Sure Thing

Don't Fight Forces Use Them

10/23/2016

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The Sharing Economy
Like most people in Canada, I'm conservative on fiscal issues, liberal on social ones and when it comes to what we do in our own homes, I'm perhaps libertarian as long as harm is not being done to those who dwell there or to our neighbours who also deserve their right to quiet enjoyment.

Airbnb (I track Airbnb, Kijiji and Craigslist rental listings here) is successful because of the demand for income in a state enforced "zero" interest rate economy where the incentive to access credit is greater than the need to manage one's balance sheet risk. It's all good if cash flow remains positive. There is nothing new or radical about Airbnb other than the technology that makes it possible to attract income from a wider network of sources. It's an inevitable outcome from the application of software and governments want their share of the private cash flow that has been drained away from the easier to tax business of commercial hotelier services.

The problem is not that Airbnb, Uber, Amazon, and all the transnational corporations have figured out a way to scrape off income from across national boundaries, but that our internal tax collection system needs to be modernized instead of the current model of punishment and reward. Long time readers of this space will recall my posts on the Automated Payment Transaction model where a micro fee of less than ±1% on every financial transaction is collected automatically at the source terminal doing away with all filing of personal and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes not to mention accountants, bookkeepers and lawyers hired to insure conformity to government agency rules since those government leviathans will disappear.

It's software folks and it's coming to a country near you sooner or later. So stop bitching about Airbnb and Uber and let loose the regulatory shackles. As Buckminster Fuller quipped: "Don't fight forces, use them."

Meanwhile the warring factions are at it:

New York Governor Cuomo signs bill that deals huge blow to Airbnb NY Post Oct 21, 2015

An investigation of Airbnb rentals from 2010 to 2014 by the state attorney general’s office found that 72 percent of the units in New York City were illegal, with commercial operators constituting 6 percent of the hosts and supplying 36 percent of the rentals.

Toronto drafting Airbnb regulations as available units soar
Globe and Mail Oct 19, 2016

Toronto city bureaucrats say Airbnb rentals in Toronto doubled from 2014 to 2015, with 9,460 rooms or entire units rented via the site that year at least once – as well as hundreds more listed on other sites such as HomeAway, VRBO, FlipKey, Roomorama, Craigslist and Kijiji. In some cities across North America, short-term rentals are allowed but licences are required and only primary residences can be used. In some places, the number of nights a year a unit can be rented is capped; in Seattle, it is 90 nights.

Neighbour complaints led Vancouver to sue over Airbnb rental
CBC News Oct 18, 2016

Chief Vancouver Licensing Inspector Andreea Toma said more lawsuits may be in the works against homeowners who are essentially running commercial enterprises in the form of black market hotel suites. The city of Vancouver wants an order prohibiting the rental of the suite for periods of less than one month.

City of Vancouver files lawsuit to shut down Airbnb host
Globe and Mail Oct 17, 2016

Although almost 5,000 listings appear on the Airbnb site for Vancouver, both city officials and Airbnb agree that the number of people who rent out units on a year-round basis is much lower.

And from Fortune Magazine Oct 21, 2016

In Berlin, Airbnb is fighting a city demand that it turn over information to help enforce a new law imposing fines of up $110,000 on people renting out more than 50% of their homes for less than two months—among the strictest regulations worldwide.

In Barcelona, Airbnb’s third-largest market in Europe, the city is imposing fines that exceed $65,000 for listings without proper licenses.

In Amsterdam city officials in April started scraping data from Airbnb and other short-term rental websites to root out illegal hosts because Airbnb will not turn over details on violators.

In Los Angeles, a study by the pro-labor Los Angeles Alliance for a New Economy found that property owners with two or more listings generated 44% of all Airbnb revenue in Los Angeles.

In New York City, the state Attorney General found that, between 2010 and 2014, more than 300,000 Airbnb reservations violated the law, representing about $304 million in booking revenue, with about $40 million of that going to Airbnb.

Airbnb Home Rental Nightmares

The Future is 10 Years Away - Uber Freight

To start, the Uber Freight marketplace will eliminate that middleman and offer shippers real-time pricing of what it will cost to move their goods based on supply and demand. Source: Business Insider October 26, 2016

How long before we see real estate
middle men disappear?

Uncertain Uncertainties

10/13/2016

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"Whatever the cause..."
The WTO in their concluding paragraph from their September 27, 2016 Trade Statistics and Outlook is not sure why global trade growth is declining.

A number of reasons have been advanced to explain the decline in the ratio of trade growth to GDP growth in recent years, including the changes in the import content of demand, absence of trade liberalization, creeping protectionism, a contraction of global value chains (GVCs), and possibly the increasing role of the digital economy and e-commerce, but all have likely played a role. Whatever the cause, the recent run of weak trade, and economic, growth suggests the need for a better understanding of changing global economic relationships. The WTO, and other international organizations, are working hard to understand this current evolution and its implications for continued growth.

The bottom line is that the buyer sets the price and if the vendor agrees, the sale completes. The pitiful Softwood Lumber embargo is a case in point CBC News October 13, 2016. The U.S. does not want Canadian lumber at Canadian prices.

Notice on the WTO chart above that despite the last 90 months of ZIRP & NIRP, global trade growth relative to GDP has recently plunged and both variables have been well below their respective highs all during that 90 month or 7.5 year period. State promotion of credit expansion has worked perfectly at expanding credit and now the borrowers have the job of turning debt in equity via the long process of amortization or the quicker route of liquidation. If borrowers are preoccupied with debt repayment as the competition for income (sales) increases then sellers better plan on more price and currency competition as well.

The WTO projects that export growth in 2016 from North America will drop from their April 2016 guess of 3.1% to their current forecast of 0.7%.

I have been tracking Household Debt, GDP, Foreign Direct Investment and Balance of Trade and it's clear that for the last nearly two decades, net investment capital is outbound from Canada and in the last 7.5 years of ZIRP & NIRP, Canadian net trade has been mostly negative.

Investment capital travels to where the returns are high relative to risk. The cost of Labour is a key expense and sleepless AI labour is a direct competitor. ITEM CBC News June 15, 2016 "42% of Canadian jobs at high risk of being affected by automation, new study suggests"

On a provincial basis, Ontario has the lowest proportion — 41.1 per cent — of jobs at high risk of automation, while P.E.I. has the highest with over 45 per cent of jobs at high risk of automation over the next 10 to 20 years.

My affordability page has always used the Bank of Canada "bank rate" as an input for debt service ratio calculation. My back of the napkin calculation for a current stress tested 5 year term, 25 year amortization fixed mortgage relative to average provincial earnings is that in Vancouver 5.5 wage earners are required to qualify for an 80% loan to value mortgage when buying an average priced single family detached house. In Toronto 3.3 buyers are required. In Calgary 1.6 earners and in Montreal 1.1 earners are required.

The current levels of peak housing prices in Vancouver and Toronto requires much more labour input from a labour pool that must compete for income not just locally but globally as well and that competition is going to won by those with better education and mobility resources than their peers.

For those of you thinking of getting off the grid, here you go, the home farming robot:

Bob Dylan wins Nobel Prize for Literature
BBC News October 13, 2016

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The world’s first commercial drone delivery service has launched in Rwanda. The service is operated by Zipline, a US robotics and drone company who will make between 50-150 deliveries per day to 21 clinics in the western half of the country. QZ.com Oct 14, 2016

Canada-US-Mexico Wages

9/26/2016

Manufacturing wages in Canada, USA & Mexico

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While we wait for the Clinton Trump toss up at Hofstra U. tonight, let's look at some data that affects everyone on the continent, ie: manufacturing wages measured in USD since the gloom of 2009 in Canada, the U.S. and Mexico. I have been showing for some time now, that Canada's net Federal Direct Investment balance has been negative for nearly 20 years and last year it widened significantly.

Clearly, capital likes to go where the return on investment is high especially in productive sectors like manufacturing where competition for buyers is cutthroat.

The chart above shows that Canadian manufacturing wages have jumped 21% in the last 7 years while in the U.S. they have gone up only 12% and in Mexico they have DROPPED 7% to US$2.10 per hour. (no typo - that's US$2.10/hr)

Canadian households have become highly indebted (168% debt to income) via government insured credit and animal spirit peer pressure. The IMF has been sounding the alarm bell at least since 2011 "Households, however, already have done enough borrowing, at least when it comes to real estate. Any further buildup of debt only risks a painful collapse." That's what they said 5 years ago.

Canadians are just $200 away from being overwhelmed by debt, new survey finds Financial Post September 28, 2016

> Calgary-based MNP LLP, said 56 per cent of those polled — up from 48 per cent surveyed six months ago — are close to facing negative cash flow should they take on up to another $200 in monthly debt.

>The online survey of of 1,502 Canadians conducted between Sept. 6 and Sept. 12 also found 31 per cent are already not paying their bills on time, making them technically insolvent, MNP says.

> A survey this month from TransUnion found 718,000 Canadians can’t even absorb a 25-basis point increase in interest rates without being in a negative cash flow situation. One percentage point would drive 917,000 over the edge, the credit rating agency found.

> In another recent study, the Canadian Payroll Association said 48 per cent of Canadians couldn’t make ends meets if they missed just one paycheque – a dire picture of a country living paycheque-to-paycheque.

> MNP said there is some positive news about debt costs. More Canadians now say they are concerned about their debt: 52 per cent, up from 43 per cent six months ago.

And here we are now trading real estate to each other at prices far greater than most places on the planet and that has attracted global capital into Canada to buy our hovels (speculative consumption). It's kept the F.I.R.E. service sector fully employed but has done very little for long term productive investment because long term bond yields cannot compete with flipping real estate. In the last 43 months, Vancouver single family detached house prices have gone up 1.7% per month or 20.4% per annum for nearly four years!

The latest sales/inventory ratio suggests that the risk of sentiment change is occurring in Vancouver (not yet in Toronto); but our very high labour cost relative to our U.S. and Mexican trade channels is going to put pressure on the Bank of Canada and the Federal Government to let the CAD/USD continue dropping (Bloomberg May 2016) "Currency depreciations would help many of the U.S.'s G7 partners (Canada, France, Germany, Italy, Japan, UK, & EU) a lot while hurting the U.S. little, if at all. In other words, a G7 currency war would be fine as long as the U.S. remained a pacifist."

A lower CAD/USD will help Canadian exporters to some degree but not enough to compete directly with Mexico and other low labour cost and low-bar regulatory regimes (China, Vietnam, Indonesia etal). A lower CAD/USD will also put more inflationary pressure on import costs into Canada reducing disposable consumer income that will affect consumption of domestic services including the demand for credit while debt repayment schedules may have to have their amortization terms lengthened especially if earnings growth slows.

ITEM: BlackBerry Abandons Its Phone New York Times September 28, 2016 - In recent years, BlackBerry has cut thousands of jobs and closed several operating centers, including one in this city (Halifax), over the last three years. A company spokeswoman declined to discuss any future layoffs.

A lower CAD/USD will not be favourable to the foreign buyers of Canadian real estate who purchased in the last 7 years if their own currencies do not drop as much as the CAD. Will they continue to hold a wasting asset that produces a negative cash flow?

The hysterical mania of buying real estate in Canada will come to an end when we see listing inventories rise, perhaps in 1Q 2017 if a shift from greed to fear manifests.

And from CNBC, September 27, 2016:

"Vancouver in Canada has been identified by Swiss bank UBS as the global financial center with the riskiest housing bubble."

"Currently, house prices in Vancouver seem clearly out of step with economic fundamentals, and are in bubble risk territory."

In the meantime, "The OECD warns that a low-growth trap has taken root, as poor growth expectations further depress trade investment, productivity and wages." Sept 21, 2016

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Death & Taxes

7/29/2016

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Last week I spotted Ted the 40-year-old Vancouver man at Jonathan Rogers Park (West 8th & Manitoba St) who has been parking his $300 Craigslist shed on wheels in various Vancouver parks along with the rising number of homeless people. July 22, 2016 Metro News

"OSFI tells some banks to test for sharp drops in Vancouver, Toronto housing markets" July 26, 2016 CBC News

“B.C.’s 15% tax on foreign homebuyers could drive money to other parts of Canada” July 26, 2016 Financial Post

"Tory won't rule out a tax on foreign real estate buyers in Toronto" July 28, 2016 Toronto Sun

"Chinese-language media up in arms over B.C. foreign buyer tax" July 28, 2016 Globe & Mail

“Does this set a dangerous precedent in the minds of foreign investors across Canada?" July 29, 2016 Mortgage Broker News

It must be my age, but when I see politicians trying to solve problems via blunt taxation, I move even closer towards being a grumpy old man - death and taxes - they suck, literally. Here are a few ideas while we wait for the July housing numbers to come out next month.

PART I - The Need for Tax Reform

In November 2011, I came across the idea of the APT, the ‘Automated Payment Transaction Tax’ which eliminates the need to file tax or information returns. A year later I posted links to the APT and since then I have continued to encourage media, politicians and potential influencers to at least look at the thesis.

To my dismay I have had insignificant response. I think this is because we have too much tax and are immersed in its complexity and we have not enough death of tired old ideas that should be retired with every generation.

The Automated Payment Transaction Tax

In its simplest form, the APT tax consists of a flat tax levied on all transactions. The tax is automatically assessed and collected when transactions are settled through the electronic technology of the banking/payments system.

The APT tax introduces progressivity through the tax base since the volume of final payments includes exchanges of titles to property and is therefore more highly skewed than the conventional income or consumption tax base.

The wealthy carry out a disproportionate share of total transactions and therefore bear a disproportionate burden of the tax despite its flat rate structure.

The automated recording of all APT tax payments by firms and individuals creates a degree of transparency and perceived fairness that induces greater tax compliance. Also, the tax has lower administrative and compliance cost.

Think about the desirability and feasibility of replacing the present system of personal and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes with a single comprehensive revenue neutral Automated Payment Transaction tax.

Implementation of this elegant and simple idea in Canada would allow Canadians to create an original, authentic social organization that would eventually be copied by other nations. Let's apply the power of the internet to get this Automated Payments Transaction Tax idea into the public square of discussion and then into application.

Canadians, write your Member of Parliament." Foreign readers take this idea back to your jurisdiction and spark the conversation there. Some country will be first in the implementation of the APT thesis.

In my opinion the APT or a variant of it will happen one day as sure as Uber, Airbnb and Torrents have arrived and driverless freeways will eventually emerge. It’s a peer to peer thing; it’s the internet, it’s inevitable. “Software is eating the world.” Marc Andreessen.

A micro tax on all financial transactions reduces the burden on all individuals and allows our governors to manage our spending requirements in a transparent progressive way. The APT thesis calculations were based on U.S. taxation revenues and expenditures from the late 1990’s. The potential tax base has increased significantly since then; think of the machine initiated equity, fixed income and commodity exchange transactions that go on day and night. Here is a snippet from the 41 Page PDF authored by Edgar L. Feige, Professor of Economic Emeritus, University of Wisconsin-Madison:

The APT tax rate from the original study publication in 2000 achieved the goals of replacing the present system of personal and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes with a single comprehensive revenue neutral Automated Payment Transaction tax of only 0.15% on each side of the transaction for a total of 0.3% on any financial transaction.

The APT tax proposed is designed as a revenue neutral replacement for the present tax system. It is emphatically not intended as an additional source of revenue. It proposes to broaden the tax base by eliminating all implicit tax expenditures, all exemptions, deductions and credits while adding to the tax base the enormous volume of transactions representing exchanges of property rights to real and financial assets and liabilities. The flat rate tax required to maintain revenue neutrality is estimated to be in the neighborhood of 0.6 percent if total transactions volumes fall to half of their current levels.

PART II - The Need for Policy Reform

Clearly, a 15% provincial tax on Vancouver housing purchases by foreign buyers will simply move what little demand there is from this sector to other jurisdictions. Hot speculative money whether clean or dirty is transnational.

Look at Canada’s record of Federal Direct Investment; in full year 2015 there was a huge spike in FDI OUT such that for every $1 of FDI coming into Canada there is $1.31 going out to get a better return on Capital and Labour. In short, our Canadian investor class, like most other global players, looks for leverage and arbitrage opportunities outside of Canada. This is a trend that has been widening and unbroken since 1997 throughout the last five federal governments (4 Liberal, 1 Conservative).

Meanwhile after seven years of nitro-fueled Zero Interest Rate Policy, we have only increased our consumption habits and widened our debt load across both private and public sectors. While the private sector binges on low cost credit, our multi-level governance is shifting more to fiscal policy since monetary policy has not worked as promoted. Yes - CPI remains muted, No - we have no control over what consumers will do with easy credit especially since competing governmental departments encourage minimum equity positions when borrowing. After seven years, the Bank of Canada is still trying to figure it out:

With the next renewal (of the “Inflation Control Target”) approaching in 2016, the Bank is focusing its review and research in the following three areas:

1) The Level of the Inflation Target
2) Financial Stability Considerations in the Formulation of Monetary Policy
3) Measuring Core Inflation

We have a failed Canadian central bank policy of ZIRP and NIRP threats that ape the U.S. Fed policy as well mirroring many other central banks since the pit of gloom in March 2009. It’s been a race to the bottom, and here we are.

We have the outdated 20th Century wild west mortgage insurance liability of CMHC which was created in 1946 as an elaboration of previous housing incentives beginning in 1919 (Wikipedia).

We have an irresponsible overpriced exclusionary and predatory real estate industry that obfuscates, monopolizes and fails at basic fiduciary behaviour.

This combination of patchwork policy has failed to get capital investment into productive employment. Instead we have asset valuations that exceed the worst possible, measured globally, and we have settled for consumption and waste. Asset values may look good on a balance sheet in terms of credit worthiness, but the social contract does not serve our collective needs.

Nowhere is there public debate or care about tomorrow except in the tedium of blogs and anonymity. Governance has clearly failed and the media is busy chasing sirens and shootouts. It’s shameful. It’s time for reform and modernization using the tools we already have.

PART III - The Need for Land Entitlement Reform

“The social state is advantageous only when all have something and none too much.” A paraphrase of Jean-Jacques Rousseau from his Du Contrat Social ou Principes du Droit Politique of 1762.

The APT does not solve the problem of the current historic asset valuations in Canadian housing prices which are at crisis proportions and which cannot now be easily solved with ZIRP, NIRP or a revolving door of political ambitions.

Let’s consider the end to private fee simple land ownership and move all our land and territorial limits into the hands of all of us.

Here’s how I see it:

All land and territorial space inside the jurisdiction of Canada (the Land) would be owned by the Canadian Government (the State) on behalf of Canadian taxpayers (the Tenants).
The land would be leased to the tenants.
The state would set the value of the land lease and term according to use.
Only the improvements allowed on the land are owned by the tenant or transferable to another tenant in an open and free market place.

This simple idea would put an end to the endless inflation of the cost of land since the value of the land would be set by the central organizing body of the state which would assess the needs of the community of tenants and the responsibilities of all of us towards the wellbeing of our health and environment.

The improvements on the land would by definition be valued by their utility and composition of materials all of which are readily assigned value by an open marketplace and would be more prone to deflation than inflation because improvements have to be maintained to retain value.

Valuations would be rational, transparent and immediate. Affordability would be easily controlled. Tenancy agreements on the land would be available to both domestic and foreign users and when combined with the ‘Automated Payment Transaction Tax’ outlined in PART I above, all land lease revenue and all improvement transactions would trigger APT revenue to the state for reinvestment.

How economic inequality harms societies - Richard Wilkinson
"If you want to live the American dream, go to Denmark.”

We humans have accomplished a lot of ambitious and technically challenging projects and have expanded our knowledge base to a degree that suggests we should be able to transform our puny little financial problems in a politically impartial way free of ideology to the benefit of the greater good.

I don’t expect that this post will trigger any change during my remaining lifetime to the status quo of 20th century and older ideas that we remain wedded to, but I publish this because ideas precede action and I am not the only one thinking about this.

According to this December 2015 study by Azoulay, Fons-Rosen & Zivin “Does Science Advance One Funeral at a Time?”, Max Planck’s observation is indeed the way our knowledge base and idea implementation grows.

“A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it."

Real Time with Bill Maher
Michael Moore – Where to Invade Next

China Shop Bull

6/23/2016

CLICK CHARTTO ENLARGE

While we wait for the Brexit vote, here is Patrick Ceresna's hour long video explaining in detail his argument for what will trigger the Canadian real estate market selloff. My bullet points from the video are below and the chart (left) shows credit is tightening.

Are You Ready For a Canadian Real Estate Crash?
Patrick Ceresna Chief Derivative Market Strategist
LearnToTradeGlobal.com (1 hr. 4:35 min)

Bullet Points from the Video Above

MACRO EVIDENCE OF PENDING CRASH

Currency affects commodities, the bond markets and real estate.
Price discovery is a function of liquidity not fundamentals which are a long term attribute.
Prices are created by positive or negative feedback loops.
Bubbles deflate to their fundamental base.
Tech 1995-2003 (up 100%, down 90%)
Silver 2001-2012 (up 100%, down 40%)
U.S. Homes 2001-2012 (up 100%, down 40%)

COMPONENTS OF A BUBBLE

A believable idea (potash 2007-08 "everyone has to eat")
There is a surplus of funds and shortage of opportunity (low interest rate prompts a search for yield).
The idea cannot be disproved.
The idea shifts from the minority to the majority view.
The overvaluation is justified as the new paradigm (it's different this time).
A widespread fear of missing out ensues.
Rampant financing schemes occur.
A cult obsession (everyone has an interest).
The bubble becomes unbelievably long.
Objective people begin to believe the story.

THE BUBBLE BURSTS

Prices drop and supply grows.
Investors see risk.
Credit dries up.
Frauds are exposed.
Governments intervene.

THE MINSKY MOMENT

An exponential rise in price occurs as the cycle ends.
A trigger is needed to reverse the positive feedback loop (China).
Prices drop, rates rise and commodities are weak.

CHINA WILL BE THE TRIGGER

The U.S. housing crash was triggered by the ARM (adjustable rate mortgage) reset.
This time the events will be international triggered by China and its USD$4 trillion in foreign currency reserves.
Chinese commercial banks increased credit from USD$4T to USD$34T in 10 years increasing the bank debt to 3 times GDP with an estimated USD$1T in non performing loans. (In the U.S. housing crash, their banks had created USD$16T in bank debt which was only 1 times GDP with non performing loans at less than 1/2 trillion USD$.
China's 4 big banks are bigger than the 6 largest global banks.
A massive credit orgy has been created and easy credit misallocated into unproductive end results (ghost cities etc).
The IMF warns that China's credit risk is systemic.

WHY SHOULD CANADIANS CARE?

The commodity sector is in a bear market.
There is a currency war going on.
Slow growth is deflationary (see my debt chart).
China will not have a new credit cycle (The PBOC warns of an "L" shaped landing).
China's Yuan is pegged to the USD forcing them to buy and sell USD and the PBOC wants to un-peg.
The USD rally has the Yuan up 45% against the CAD and there has been a USD$1 trillon of capital outflow from China chasing Canadian and other weak FX country's real estate.
Un-anchored buyers from China etal have bid the real estate market up and out of equilibrium.
The China window is closing, they are stopping their capital outflow with restrictions against funding loopholes (Hong Kong, Macau, Bitcoin etal)

BASE CASE SCENARIO

The Chinese Government will implement their Yuan devaluation.
it will be a huge macro event as the Chinese bubble deteriorates.
The PBOC will bail out their banks.
The Yuan/CAD will plummet.
The positive feedback loop in Canadian real estate will turn to a negative feedback loop.
More sellers will emerge as credit tightens.
Real estate prices will drop to fundamentals regressing to 2010-11 levels.

DELAY SCENARIO

USD rallies but Yuan does not devalue igniting a second wave of capital outflow.

June 9, 2016: Bank of Canada Governor Stephen Poloz cautioned that climbing real estate prices have outpaced local economic fundamentals like job creation, immigration and income growth.

June 13, 2016: Financial markets are worried about China because its debt has surged to a record 237% of gross domestic product.

Here's Why China's Economy Will Be So Hard to Fix

"The real problem has been... that in a Bubble,
everyone gets in trouble
at the same time"
Bob Hoye, June 16, 2016

Capital Flight

4/27/2016

CAD Household Debt, FDI-FDO, Net Trade & GDP

CLICK CHART TO ENLARGE

CLICK CHART TO ENLARGE

FDI-FDO Gap Widens

I updated my Canadian Household Debt Chart that has GDP, Net Trade and the FDI In and Out data plotted as well.

The 2015 Federal Direct Investment data just came out and the gap between investment capital flowing into Canada and out has widened dramatically such that for every $1 of investment coming into Canada, $1.31 is leaving for jurisdictions that provide greater tax incentives, better yields or cheaper labour.

Canadians for Tax Fairness crunched the numbers and found that Canadian corporations invested almost $40 billion last year in the top 10 tax haven destinations for Canadian capital — taking investment totals since 1990 to $270.2 billion.

Barbados has been the top destination, attracting $79.9 billion in total while seeing its numbers climb 14 per cent in 2015.

Four other countries in Canada's top 10 — Cayman Islands, Bermuda, Switzerland and Hong Kong — all saw year-over-year increases of at least 34 per cent last year.

"The money doesn't just stay there, it goes on to somewhere else," Dennis Howlett, the CEO of the Tax Fairness advocacy group, said in an interview.

"But (corporations) route it through tax havens usually because there are tax advantages for doing so. The returns on the investments get booked in the tax havens so then companies don't have to report it as profits in Canada."

The direct foreign investment figures released Tuesday don't include the billions of dollars that individual Canadians appear to have socked away offshore.

The parliamentary budget office is currently in a battle with the Liberal government over access to tax information that would help it measure the "tax gap" — the amount of revenue lost to Ottawa through a variety of tax dodges, including offshore accounts.

The long-standing issue has been thrust into the international limelight again by the release of the Panama Papers, more than 11 million leaked documents that detail offshore accounts in the Central American country — including, reportedly, hundreds held by Canadians.

Direct foreign investment routed through tax havens "may not be illegal tax evasion but it is most definitely related to tax avoidance, or minimizing taxes paid here in Canada," said Howlett.

"So it does translate to much lower revenues for both federal and provincial governments."

Canadians for Tax Fairness would like to see corporate tax rules tightened up, including requiring that any offshore subsidiaries be more than shell companies by proving they have staff and capital investments such as plants and equipment.

Canada should also follow the lead of some other countries and cap how much corporations can pay in interest to subsidiaries. Corporations with high capital needs frequently borrow from their own subsidiaries at above market rates in order to shift profits offshore, said Howlett.

Since 2000, the federal corporate tax rate in Canada has been cut from 28 per cent to the current rate of 15 per cent.

In 2015-16, corporate income taxes were budgeted at $38.8 billion — or 20 per cent of total federal tax revenues — according to the most recent federal budget. In 2000-01, corporate taxes brought in $28.2 billion, or 24.5 per cent of total federal tax revenues.

CBC News via The Canadian Press, April 27, 2016

Oil <23

Looks Like Canada

Inversion Report

Here's Who Could Lose the Most in a U.S.-China Trade War
Bloomberg, January 23, 2017

Sure Thing

St. Germain - Sure Thing

Don't Fight Forces Use Them

Airbnb Home Rental Nightmares

The Future is 10 Years Away - Uber Freight

Uncertain Uncertainties

Bob Dylan wins Nobel Prize for Literature
BBC News October 13, 2016

Canada-US-Mexico Wages

Death & Taxes

Real Time with Bill Maher
Michael Moore – Where to Invade Next

China Shop Bull

Are You Ready For a Canadian Real Estate Crash?
Patrick Ceresna Chief Derivative Market Strategist
LearnToTradeGlobal.com (1 hr. 4:35 min)

Bullet Points from the Video Above

Here's Why China's Economy Will Be So Hard to Fix

Capital Flight

History, Charts &
Curated Readings

Archives

Categories

Here's Who Could Lose the Most in a U.S.-China Trade War Bloomberg, January 23, 2017

St. Germain - Sure Thing

Airbnb Home Rental Nightmares

The Future is 10 Years Away - Uber Freight

Bob Dylan wins Nobel Prize for Literature ​BBC News October 13, 2016

Real Time with Bill Maher Michael Moore – Where to Invade Next ​

Are You Ready For a Canadian Real Estate Crash? Patrick Ceresna Chief Derivative Market Strategist ​LearnToTradeGlobal.com (1 hr. 4:35 min)

Bullet Points from the Video Above

Here's Why China's Economy Will Be So Hard to Fix

History, Charts &Curated Readings

Archives

Categories

Here's Who Could Lose the Most in a U.S.-China Trade War
Bloomberg, January 23, 2017

Bob Dylan wins Nobel Prize for Literature
BBC News October 13, 2016

Real Time with Bill Maher
Michael Moore – Where to Invade Next

Are You Ready For a Canadian Real Estate Crash?
Patrick Ceresna Chief Derivative Market Strategist
LearnToTradeGlobal.com (1 hr. 4:35 min)

History, Charts &
Curated Readings