Canada's Economic Slide in Five Charts
If China is the Commodity Engine
The main driver of the 2005-09 surge in the BDI was linked to commodity prices, particularly oil. The index then plummeted back to historical levels and has remained weak. Many ships that were ordered during the "bubble years" have entered the market, providing capacity growth above demand growth. Bunker fuel accounts for about 40% of vessel operating costs with limited opportunities to mitigate them. Thus, a surge in oil prices is directly reflected in shipping rates, and if energy prices drop, the BDI can also drop. Source
Always provocative is Stephen Colbert and his guest last night was Elon Musk (Youtube not available in Canada, but here is Elon unveiling the New Version of the All-Wheel-Drive Tesla Model S with dual drive and auto pilot: Video From Bloomberg TV Oct 10, 2014).
The disrupters are innovation (Musk etal), a rising supply of energy (U.S. fracking & China's solar panel ramp up) and the strengthening U.S. Dollar. If you are making a leveraged bet on continuing price rises in Calgary housing, it would be prudent to match your amortization to your wage earning contract. A sudden shift down in tar sand grade demand would force the weak hands to sell their real estate. The collapse in the BDI is due to the real price of oil dropping, an over supply in vessels, a strengthening of the U.S. Dollar, a global trade slowdown and disruption via innovation as an old generation gets replaced with the new.
1980 Oil peaked at US$35 per barrel ($100 per barrel today) Source
1986 Oil dropped from US$27 to below $10 ($58 to $22 today)
1986 Average U.S. Inflation was 1.9% Source
2014 Average U.S. Inflation is 1.7% Source
1.00 2014 US Dollar = 0.54 1986 US Dollars (using GDP Defaltor)
1.00 2014 US Dollar = 0.47 1986 US Dollars (using CPI Defaltor)
US$ Index peaked at 164.72 in February of 1985 Source
"The high end has been bought by Europeans and Chinese trying to get off the grid."
Edited & bulleted from July 12, 2014 armstrongeconomics.com
- U.S. real estate market remains very diverse.
- U.S. high end bought by Europeans and Chinese trying to get off the grid.
- Chinese biggest buyers on price of U.S. real estate.
- Canadian biggest buyers on quantity of U.S. real estate.
- Prospects of bail-ins coming in Canada.
- Texas & Florida property cannot be seized even in a court judgment.
- Hawaii topping the list of U.S. price advances.
- Europe's real boom was clearly in London real estate.
- Germany’s house price rises slowing, yet are still positive.
- South German house prices are extremely cheap.
- Germany’s overall house price index slowed for 7th consecutive month at April 2014 after the September 2013 high.
- Lithuania’s demand for, and new construction of, property is recovering gradually as its economy has produced growth.
- Copenhagen and Denmark experiencing a real estate boom as prices rise and may soon surpass pre-financial crisis levels.
- Armenia’s property market recovering gradually following several years of falling house prices and now being driven by the inflow of wealthy Armenians from Russia and ethnic Armenians from Syria trying to escape political turmoil.
- Chinese average prices of new homes in 100 major cities fell 0.3% M/M (April-May 2014); the first decline since June 2012.
- China’s share markets peaked in 2007 and the bulk of domestic capital moved into real estate causing a great worry that banks would soon be overstretched with bad loans to developers as many projects were left vacant.
- Shanghai has a (low) supply problem. Demand keeps rising sustaining prices at high levels.
- China-style housing bubble is concerning.
- China's weaker real estate market means less cement being poured and less copper being purchased and that impacts the commodity prices in the West, which have declined.
- China's real estate market is similar to the land boom in the 1830's USA more than the 2007 bubble created entirely by bankers.
- Macau’s property prices continued to dramatically surge even after double-digit annual prices rises in recent years.
- Macau residential property prices skyrocketed about 50% Y/Y in 2013.
- Myanmar’s property prices and rents have surged with new government allowances since 2011 and from a sharp increase in overseas investors and persistent land and building shortages.
- South Korea’s house prices are rising after more than a year of falling house prices and a 2014 recovery of robust economic growth.
- Singapore’s house prices now starting to fall from the problem of hunting expats by Europe and American governments despite a reasonable rate of economic growth.
- Malaysian house prices continue to rise even following anti-speculation measures.
Canadians who import a lot of their news from U.S. wires and depend a lot on trade with the U.S. have a similar negative view about their children's future; nearly two thirds of respondents in a 2012 Pew Research poll in both countries believe the next generation will be financially worse off than themselves. Germans believe the same.
Three quarters of the British and Japanese and 90% of French respondents are bearish. On the flip side the bulls live in China, Brazil and Russia.
Hat Tip to Barry Ritholtz
Old time realtors who worked through the flat market of the 1970's and the 1980's bust in Canada will remember offers made on over priced listings that included some cash, some financing and lots of jewelry, boats, cars and overvalued art. It's what happens when over leveraged investors realize that a declining asset price without an income stream would be better traded for over priced real estate.
The chart above shows the share price of Sotheby's Auction business since the later 1980's. Five peaks have been set and the last three since the 2008 blowout have been on a trend of lower highs. In the pit of gloom of 2009, the BDI share price hit the 2003 and 1988 lows.
The chart captions on the 5 peaks refer to the 2011 New York Magazine article by Marc Spiegler; "Five Theories On Why the Art Market Can't Crash and why it will anyway." In brief Marc underlines the bull argument for investment in art:
1) The Expanded Art World
"...the global market is up to twenty times as large as it was in 1990."
2) The Art World’s Gone Global
"...the next big collectors will emerge from Russia and China, yes, but also India and various Arab emirates."
3) Art Is the New Asset Class
"...it’s a trillion-dollar asset class that in many ways works a hell of a lot like real estate."
4) Diversification As a Safety Valve
"...there’s a constant process of mini-corrections, as some genres rise while others fall.)
5) The Japanese
"...there’s plenty of other clueless money in the market... the hedge-fund guys are the new Japanese."
The chart above shows Sotheby (BID) and its anagram BDI (The Baltic Dry Index) heading south as the Shanghai Composite Index (SSEC) collapses into 2006 and 2001 lows.
The reversal is underway even as headlines trumpet new highs on selected pieces of art.
"Christie's racks up $745m in one night (a record) and the bubble keeps inflating: This week's mega-auctions are once again reaching obscenely high prices, with a Barnett Newman selling for $84.2m and a Bacon triptych close to that. Why is there no sign of a crash?" Jason Farago, May 14, 2014 TheGuardian.com
Jason answers his own question with:
1) There is only one art world now,
2) Enough people believe the hype,
3) You've got to put your money somewhere,
4) Art isn't part of the real economy,
I think he means "Hedge Fund guys are the new Japanese."
An observation from February 2014 on the Vancouver Gallery scene by artist Win Seaton:
Many of these properties (Art Galleries along Granville St) have been purchased by offshore owners and as a result the average gallery space on the street is more than $10,000 a month. This increase combined with the decline in art sales makes it is easy to see why the migration (of Galleries) away from the area. Of course a few of the major galleries remain run by the same owners, like Heffel Fine Art Auction House – the key word here being ‘auction’. Along with ownership changes of these properties, the market has changed to reflect the demands of offshore buyers with deep pockets.
The auction is replacing the gallery as an expedient method to monetize art. As Win points out "Rental fees for Canadian art is a tax deductible business expense and the purchase of Canadian art can be a depreciable asset."
Clips from the movie "Exit Through The Gift Shop"
The Asian Miracle is not going to be canonized this year.
The chart mashup shows that commodity returns can peak during war and the rumors of war.
Since the Arab Spring, the Tiger Mom has become Mommie Dearest.
"War" by Edwin Starr (Original Video - 1969)
Supply is Global
As the USD strengthens, the U.S. consumer inflation rate continues to drift down as it takes fewer greenbacks to buy imported goods. I guess it's too soon to yell deflation or pull out the Japan chart, but down is down.
Meanwhile in Canada and Australia where they dig the earth, the strengthening USD is producing the opposite effect, the CAD and AUD are weakening which is good for exporting the stuff coming out of the ground but with it comes more imported goods price inflation (buyers require more CAD & AUD dollars to buy the same amount of stuff) and that has egged on the real estate inflationistas who continue to drive the price of their local real estate up the left side of the Eiffel Tower. Sure, those imported countertops, appliance suites and appurtenances are going up in price; but that stuff is a wildly depreciating asset.
What about China? The bottom panel of the chart mashup above shows us that the CNY is also being depressed (via FX markets and the Princeling cliques) against the USD and that drives up their import costs on global resources and reduces the value of their already imported commodity stockpiles used to bankroll the shadowy (unregistered? - unregulated?) secondary financing market.
The weakening CNY is pushing imported Chinese consumer costs up and producer prices down. (March 2014: Chinese consumer prices were up 2.4% Y/Y and producer prices were down 2.3% Y/Y and down for the 25th straight month)
The Chinese housing index has rolled over on a steep dive (bottom panel of chart above and below is a China chart mashup from Bloomberg's Tom Orlik showing the ongoing Chinese deceleration).
The chart mashup shows China's national real estate development and sales decisively rolling over in 2013 which has in part led to Chinese import data plunging into April 2014. (Charts via Soberlook.com and NBS China)
Gordon G. Chang, a Forbes contributor has been cataloging the drama throughout March and April 2014 (selected quotes):
- Walmart will be closing marginal locations, about 9% of total in China.
- Hangzhou’s Grade A office buildings at the end of 2013 had average occupancy rate of 30%.
- Hangzhou (fourth-largest metropolitan area of 2.5+ million people) faces “burgeoning swaths of empty apartment units.”
- “It seems that the 30% price cut in Hangzhou (residential prices) has really changed the way Chinese people (nationally) think about real estate".
- The real estate market in Hangzhou looks like it has just passed an inflection point... people’s mentality has changed.
- Now, the problem of no buyers is spreading across the country... China’s residential markets are becoming inelastic. People aren’t buying because they believe prices will decline further.
- Rich Chinese, now interested in foreign holdings, are also shunning their home market. Middle class Chinese are also largely out of the market.
- Many private developers had gambled that property prices would rise faster than interest rates, but that now looks like a losing bet.
- China is at the point where problems are feeding on themselves. Pessimism about property, which accounts for about 15% of China’s gross domestic product, is beginning to affect the broader economy. “Without question, everyone thinks there is a bubble.”
- “The banking system and the shadow banking system are becoming concerned about exposure... and refuse to provide credit to developers... forcing them to cut prices. If this persists, it will turn into a vicious loop.”
And now a selected Chinese environmental report:
The extent of China's soil pollution, long guarded as a state secret, was laid out in an official report that confirmed deep-seated fears about contaminated farmland and the viability of the country's food supply. Nearly one-fifth of the country's arable land is polluted, officials said in the report, shedding unexpected light on the scale of the problem—a legacy of China's three decades of breakneck economic growth and industrial expansion.
In April 2013, the discovery of unusually high quantities of cadmium in batches of rice grown in Hunan—the country's top rice-producing region, as well as a top-five producer of nonferrous metals like copper and lead—set off worries about farmland and sent prices for Hunan rice tumbling by as much as 14%. Continue Reading at the Wall Street Journal.
VICE: The Devastating Effects of Pollution in China (Part 1/2)
VICE: The Devastating Effects of Pollution in China (Part 2/2)
Bloomberg News is reporting today that "Chinese real estate developer with 3.5 billion yuan (US$566.6 million) of debt has collapsed and its largest shareholder was detained. Zhejiang Xingrun Real Estate Co. doesn’t have enough cash to repay creditors that include more than 15 banks, with China Construction Bank holding more than 1 billion yuan of its debt. The real estate company’s majority shareholder and his son, its legal representative, have been detained and face charges of illegal fundraising, the officials said."
The lower panel of the chart mashup above shows the maturity structure of corporate bonds issued to LGFVs (Local Chinese Government Financing Vehicles)
Debt servicing is another potential source of vulnerability. LGFVs will need some combination of cash or financing to repay maturing debt. If refinancing, LGFVs could, depending on market conditions, have to pay higher interest rates. Over 50 percent of subnational government debt was expected to mature by the end of 2012 based on NAO 2011 (China’s National Audit Office). However, most infrastructure projects were not expected to generate significant cash flow for 10 years or even longer. Land sales, operating profits (such as highway fees), local fiscal revenues, or inter-governmental transfers could help repay part of the maturing debt. However, it is likely that a majority of the maturing debt was either rolled over or repaid by new borrowing. The recent update from NAO (2013) confirms that much of this debt was serviced with new borrowing (gross issuance was much higher than the increase in the stock of debt). Specifically, gross debt issuance was equivalent to more than 50 percent of 2010 local government debt stock in the past two years, but the net debt stock increased only by 13 percent. According to NAO (2013), about 40 percent of 2010 debt stock was either repaid or reclassified as private debt. It is not clear how much LGFV borrowing contributed to debt repayment, but given tightened credit restrictions on new LGFV loans in 2011–12, a fairly big share of LGFV borrowing likely went to servicing maturing debt.
IMF Working Paper Fiscal Affairs Department and Asia and Pacific Department Fiscal Vulnerabilities and Risks from Local Government Finance in China Prepared by Yuanyan Sophia Zhang and Steven Barnett Authorized for distribution by Steven Barnett and Martine Guerguil January 2014
A senior Chinese auditor has warned that local government debt is “out of control” and could spark a bigger financial crisis than the US housing market crash. Zhang Ke said his accounting firm, ShineWing, had all but stopped signing off on bond sales by local governments as a result “We audited some local government bond issues and found them very dangerous, so we pulled out,” said Mr Zhang, who is also vice-chairman of China’s accounting association. “Most don’t have strong debt servicing abilities. Things could become very serious.”
The International Monetary Fund, rating agencies and investment banks have all raised concerns about Chinese government debt. But it is rare for a figure as established in the Chinese financial industry as Mr Zhang to issue such a stark warning. “It is already out of control,” Mr Zhang said. “A crisis is possible. But since the debt is being rolled over and is long-term, the timing of its explosion is uncertain.”
Mr Zhang said many local governments had invested in projects from public squares to road repairs that were generating lacklustre returns, and so were relying on financing rollovers to pay back their creditors. “The only thing you can do is issue new debt to repay the old,” he said. “But there will be some day down the line when this can’t go on.”
History, Charts & Curated Readings
Balance Of Trade
Rent Or Buy