Below is a mashup of "FRED" charts on Velocity of Money and the Probability of Deflation. The Bank of Canada does not publicly publish those metrics. Money Velocity
M1 Money Velocity has been trending down since 4Q 2007 (the "Great Recession") as unemployment rates have been rising (the 10 year change in unemployment in Canada is up 38.4% on the May 2020 data chart). The unemployed consume less; hence they save more. As consumption rates fall, GDP drops: (from 4Q 2008 to 4Q 2009, GDP dropped 1.9% and with the Covid 19 shutdown the March 2020 GDP print is down 6.8% since 4Q 2019).
M2 Money Velocity was trending up until 3Q 1997 and both employment and greater consumption (inflation) increased. The first hit to consumption came with the DotCom crash in 1Q 2000 and the Consumer Price Index began to drop and then plunge into the March 2009 Great Recession. By 2011 the commodity super cycle peaked (see the Deflation Probability chart below and the TSX Indexes chart) The Bank of Canada's 2% CPI target and their policy framework (ZIRP & NIRP) is to "avoid a persistent drop in inflation". The most recent CPI print (April 2020) was negative at -0.2% via pandemic repricing. Deflation Probability
Theses are still early days in the pandemic. New deaths from the novel coronavirus today (June 28, 2020) are the highest in Mexico. The U.S. is ranked 7th and Canada is ranked 72nd (Worldometers). Trade wars are intensifying, supply chains are being disrupted and cash flows are being diverted towards turning debt into equity. Let's take a look at Greg The Analyst's argument and the charts he used:
Charts Used:
Argument Bullet Points: Why Greg's view is that this cycle is deflationary, not inflationary.
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While we wait for the July Canadian housing data to trickle out, let's return to Japan and their housing price experience after nearly 20 years of ZIRP and NIRP. I have posted charts about Japan since 2012 to illustrate the folly of global central banks and their monetary policies of instituting ZIRP & NIRP to stimulate inflation > consumption > production, the by-product of which, has been the manic search for yields as the underlying asset class values became stretched to perfection under pressure from the FOMO crowd. Instead of using fiscal policy which requires long term planning and socially cohesive agreements directed towards production and well being, the quarterly knob twiddling monetary policy has in part, along with the rise of a digitized global financial network, unleashed "megabyte" money laundering which the UNODC estimates at 2-5% of global GDP per year. It has also crushed the incentive to save for a future funding of investment into productive assets. The Household Saving Rate in Canada has decreased to 1.1% in the first quarter of 2019. |
Commodity Super Cycle - 10 Years into the Bear
Here is a chart I published in a 2012 post "What Do You Do During a Housing Bust". The answer is "save". If the CRB chart above has correctly identified a cyclical swing between bull and bear commodity production, then we should expect another "lost decade" of balance sheet repair especially in the over-speculated and now depreciating housing asset markets of Canada. |
As I have been pointing out on my chart of TSX INDEXES for Energy, Real Estate, Financial Services, Gold and the Bank of Canada Commodities in $CAD, that...
...the Thompson Reuters CRB chart shows that global commodities measured in USD has been dropping since 2008, although recently since September (2018), there has been a near term rally in commodities... BUT |
...since Oct 3, 2018, the Thomson Reuters/CoreCommodity CRB Index has been coiling down.
On my Twitter Feed from @hks55 came their chart suggesting that the commodity super cycle is poised for another leg down due to China's slowdown in credit creation that had spurred the commodity boom as Kyle Bass illustrates in this comparison between Chinese credit creation and their GDP (the link includes the 41 second video).
China’s Slower Credit Growth
Underscores Worries Over Economy
Bloomberg, Aug 2018
The OECD released their May 2018 Canadian Economic Forecast Summary. Their charts to the left conflates our usual obsession with "flation" which in Latin means to "blow". We worry about whether our investments in production and consumption are going to blow or suck.
Chris Kimble released a June 21st chart triptych "3 Key Economic Indicators May Be Flashing Caution Here" The monthly charts of Commodities, Crude Oil and U.S. 10 Year Treasuries are at "Long-Term” Fibonacci retracement levels at the same time and could be creating reversal patterns." |
"I have a simple goal for my investment research - help people to enlarge portfolios regardless of market direction by looking for patterns at extreme points of "exhaustion" with a high probability of reversing." Chris Kimble
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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
- 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%)
- 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.
- Prices drop and supply grows.
- Investors see risk.
- Credit dries up.
- Frauds are exposed.
- Governments intervene.
- 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.
- 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.
- 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)
- 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.
- 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
While we wait for the April real estate data to dribble in, let's look at the commodity sector that peaked in 2011 and is now threatening to break a major uptrend channel and possibly retest the 2006 lows; a time when the Yield Curve inverted and soon after the BoC and U.S. Fed etal went on a ZIRP to NIRP bender in an effort to spark inflation. Clearly low rates have not produced CPI inflation but a speculative frenzy for Yield.
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The top panel in the mashup above is the Thomson Reuters Commodity Index chart since the 1980's provided by Kimble Charting Solutions. The commodity index is made up of 18% Energy, 24% Metals, 29% Softs and 29% Agriculture.
The bottom panel is from ZeroHedge and their post underscores that energy junk bonds are at an all time default rate high.
...the energy high-yield default has soared to a record 13% rate, surpassing the 9.7% mark set in 1999, according to Fitch Ratings.
AND THIS from Bloomberg May 1, 2016 Saudi Arabia's determination to keep pumping more oil into global markets brings to mind its former oil minister Sheikh Yamani, who said back in 2000 that the Stone Age did not end for a lack of stones, and the oil age will not end for a lack of oil.Those working for him at the time, interpreted this as a warning to OPEC about the pursuit of high oil prices: namely, that it would just speed up the development of alternative technologies and drive away customers, leaving oil sitting beneath the ground without buyers.Sixteen years later, the kingdom's leaders seem to have heeded his warning. Both Deputy Crown Prince Mohammed bin Salman and oil minister Ali al-Naimi have said they will no longer subsidize high-cost oil production by limiting supply. If there's oil to be left under the ground, they're determined it won't be Saudi Arabia's.
Battery Powered Homes
First In ~ First Out
According to StatsCan, in 2001 after the dot.com blowout and the markets then turned to commodities, there were +/- 329,129 employees working in the Oil, Gas & Mining industries per year in Canada and in full year 2014 that number had increased by 60.8% to 529,248. This includes "support activities" but not the peripheral jobs in the general economy that depend on the spending by those oil, gas and mining employees. |
According to the New York Times December 8, 2015 "If It Owns a Well or a Mine, It’s Probably in Trouble".
“The world of commodities has been turned upside down,” said Daniel Yergin, the energy historian and vice chairman of IHS, a consultant firm. “Instead of tight supply and strong demand, we have tepid demand and oversupply and overcapacity for commodity production. It’s the end of an era that is not going to come back soon.”
Some energy experts are even beginning to express concerns that sovereign wealth funds of Saudi Arabia and other wealthy Persian Gulf and oil-producing countries will redeem their money from investment firms in the coming year to shore up their balance sheets. If they do, the moves could initiate more instability in global equity and debt markets.
Credit lines drying up for oil companies?
Distress (bonds trading over 1,000bps) has been spreading across the HY space. From its starting point in energy a year ago, it has now reached other commodity-sensitive areas such as transportation, materials, capital goods, and commercial services. But it did not stop here and is also visible in places like retail, gaming, media, consumer staples, and technology – all areas that were widely expected to be insulated from low oil prices, if not even benefitting form them.
In other words, what was until a year ago a purely "energy" phenomenon is now an "everything" phenomenon, despite promises by every prominent economist that plunging energy prices are great news for the economy.
Imagine $35 Oil for 5yrs
A US-Style Canadian housing correction possibility is a potential that CMHC's CEO Evan Siddall discussed at a private audience presentation in New York, November 30, 2015 if oil remained at an average price of USD$35 per barrel for 5 years. The top chart are oil prices since the OAPEC (Arab members of OPEC plus Egypt & Syria) oil embargo. Note the 22 year period of sub-$35 oil prices not long ago. |
Oil averaging $35/bbl for 5 years
- 26% drop in Canadian home prices
- 12.5% peak unemployment
SCENARIO 2:
Global deflation and a US-style Housing Correction
- 30-44% drop in Canadian home prices
- 12-16% peak unemployment
"Canada’s home price growth since the 2008 recession has outpaced that of the U.S., Australia, and the U.K. It also reiterated risks to housing include high debt-to-income and concentration of net worth in housing." Financial Post November 30, 2015 (My Household Debt and Earnings charts are updated monthly - BR)
Donald Sadoway "Science Serving Society"
Energy 2064 with Professor Donald R. Sadoway
The Bill Gates Backed Canadian Building a Better Battery
"The drop in oil prices looks as if it may be quite persistent. This will have a permanent effect on the spending decisions of the average Canadian, translating into a drop in real domestic demand. Total aggregate demand could only remain on its previous trend to the extent that net exports increase permanently. While they will recover from their disappointing recent performance, a permanent increase is unfeasible. Total demand is on a lower trend than before the oil price shock." Read the whole article by Steve Ambler.
Alberta's Boom Time Hangover
VICE NEWS June 1, 2015
This Bird Has Flown
Alberta's so called "progressive" conservative governments; 7 consecutive iterations since 1971, have squandered their provincial energy resources leaving their treasury with a CAD 12 billion dollar debt and a 500 million dollar deficit. (The Tyee) |
Data for the chart above came from Greg Poelzer's Macdonald-Laurier Institute's February 2015 Publication Paper "What Crisis? - Global lessons from Norway for managing energy-based economies."
According to estimates by the International Monetary Fund and Fitch Ratings, Norway needs an oil price of $40 to BALANCE THEIR BUDGET. (Institutional Investor, Feb 24, 2015)
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Strong societal consensus from the outset embodied in its “ten oil commandments.” | No consensus and much conflict between the federal and Alberta governments about how to manage petroleum resources. | |
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National public ownership and control of all aspects of oil production and distribution. | “Open door” to multinational oil companies. Let the private sector take the lead, with government providing subsidies and tax breaks to encourage resource exploitation. Foreign ownership very high. Federal and provincial ownership and control initiatives only in the Lougheed and Trudeau era–1974 to 1984. | |
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Maintained key policy tools to manage its resources. | Surrendered key policy tools under the Canada U.S. free trade agreement and NAFTA. | |
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Active industrial policies to encourage linkages to upstream and downstream petroleum related activities. | Active industrial policy measures, both federally and provincially, until the mid-1980s; since then they have been passive (subsidies, tax breaks, R&D assistance, etc.) | |
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State-owned oil company, Statoil, dominant player in the development of the oil industry. | Provincial and federal initiatives to develop state ownership did not last. Eventually private interests and their political allies defeated these initiatives. Petro Canada was fully privatised. | |
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National oil self-sufficiency was quickly achieved. | Eastern provinces forced to import oil even as exports to the U.S. expanded rapidly. Today they import more than 80% of their oil consumption. | |
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Has maintained full employment even during the global recession. | Canada’s unemployment rate has remained high since 2008. Alberta’s unemployment rate has been much lower on average, bumping up only during the recession. | |
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Has maintained low and stable inflation. | Canada has maintained low and stable inflation. Alberta’s inflation has been significantly higher than the Canadian average. | |
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Has maintained a stable exchange rate due largely to its centralized wage settlement policies and to its petroleum fund. | Has experienced a huge increase in its exchange rate, with major adverse impacts on non-petroleum regions. Neither level of government has a petroleum savings fund to offset the inflow of oil revenue and bitumen investment. The federal government has chosen not to take measures to offset the upward pressures on the exchange rate. | |
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The huge oil revenue inflow has been offset by the outflow to the petroleum fund. Has a huge trade and current account surplus. | Canada’s traditional merchandise trade surplus turned into a deficit after 2008. Its non-resource deficit is huge. It also has a very large current account deficit. Alberta maintains a large trade surplus due to its oil and gas exports to the United States. | |
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Economic and employment benefits have been widely distributed. Any regional disparities have been offset by a very effective income transfer system. | GDP and employment benefits are concentrated in Alberta. Petroleum related employment gains are outweighed by employment losses in non-petroleum related industries concentrated in the rest of Canada. Relatively small benefit going to the rest of Canada due to weak linkage effects and weak federal government income transfer mechanisms. | |
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The state captures the vast majority of net revenues, or economic rent, from petroleum. | Rent captured by the Alberta government is among the lowest of all petro states. The federal government captures a very small portion of oil rent through the general corporate tax rate. | |
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Maintained its level of non-petroleum taxes despite rising oil revenues. Its overall tax-to-GDP ratio is among the highest in the OECD. | Alberta lowered its non-petroleum taxes as petroleum revenue rose and now has by far the lowest taxes in Canada. Both governments lowered corporate income taxes including on petroleum companies by half over the last decade. | |
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Its diversified revenue base is not dependent on fluctuating petroleum revenues but rather on the more stable international financial returns to government coffers from its petroleum fund. | Alberta’s fiscal capacity is highly dependent on petroleum revenues, which go up and down as prices fluctuate, and often finds itself in deficit. Its savings funds to stabilize revenues are small and ineffective. | |
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Strong unions are in a balanced power relationship with business. High union density, centralized collective bargaining and wage settlements, consensus building approaches. | Declining unionization especially in the private sector. Only the public sector has high unionization rates. Collective bargaining systems are fragmented and adversarial. Alberta has the lowest unionization rate in Canada. Both governments have beenworking aggressively to undermine unions. | |
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Petroleum wealth, due to equitable labour relations, progressive taxes, and a generous social welfare system, is equitably distributed amongst the population and regions of the country. Has among the lowest income inequality in the world. | Since the mid-1990s there has been a rapid growth of income inequality driven by the 1% in Canada—now amongst the highest in the OECD. This has been accompanied by the reduction in social program spending. There has been growing interprovincial disparity in income and fiscal capacity with Alberta pulling away from the rest. Government redistribution mechanisms have been greatly weakened, exacerbating these trends. Inequality in Alberta has grown during the boom, and it is home to a rapidly growing share of Canada’s super-rich. | |
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Norway’s carbon emissions per capita are half of what they are in Canada. | If Alberta were a country it would have the highest per capita emissions in the world along with Qatar. | |
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A leader on climate change issues. | A climate laggard. | |
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Met its Kyoto commitments. Its Copenhagen carbon reduction commitments are the most ambitious in the industrial world. Plans to be carbon neutral by 2050 or sooner. | Compared to commitments of 6% below 1990 levels, was 24% above 1990 carbon levels in 2008. Withdrew from Kyoto and its Copenhagen commitments are much weaker and almost certainly will not be met. Rapid development of the oil sands takes precedence over climate concerns. Alberta’s plan aims to reduce emissions by just 14% below 2005 levels by 2050. | |
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Recently doubled its carbon tax to $66 per ton, and participates in the European carbon trading emissions regime. | Federal government refuses to implement a carbon tax or a cap and trade system for carbon emissions. Alberta’s $15 partial carbon tax is extremely low and ineffective. | |
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Tough environmental regulations govern the exploitation and transportation of oil and gas. | Alberta’s environmental regulations don’t meaningfully restrain the environmental impacts of rapid oil sands development. The environment department lack sufficient resources to effectively enforce regulations. The federal environment department has been gutted as has the federal environment regulation and review system. | |
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The Beatles - Norwegian Wood (This Bird Has Flown)
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