"History, real solemn history, I cannot be interested in.... I read it a little as a duty; but it tells me nothing that does not either vex or weary me. The quarrels of popes and kings, with wars and pestilences in every page; the men all so good for nothing, and hardly any women at all - it is very tiresome." Jane Austen spoken by Catherine Morland in 'Northanger Abbey'
Currency depreciation on top of foreign buyer taxes and real estate sales that are plunging against a backdrop of rising inventory is evaporating paper profits for would be Canadians.
Locals whether they own or rent are not spared either. A dropping CAD is raising import costs while the Trumpster builds a wall of worry out of trade tariffs and that worry is especially provoking to the over leveraged in Canada.
Is King Dollar Creating A Bullish Head & Shoulders Pattern? by Chris Kimble June 28, 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.
15% mortgage payment increase? That's gonna cut into renovation plans and dreams of a new truck in the driveway.
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
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
Today, February 28, 2018 the Canadian 10yr yield is ticking down as traders bet on higher prices not higher yields:
"Liquidity is the most under appreciated risk factor out there. We've seen the bond market reprice to an understanding that liquidity is not as abundant as all that, and I would just worry about the liquidity risk... At some point down the road, fundamentals have to validate these high prices." said Mohamed El-Erian, Allianz Chief Economic Advisor May 18, 2015"
At 2.2 minutes in the brief interview snippet, El-Erian posits that "You can't kick the can for the whole global economy. The longer we are in this new normal of low growth and equities are propelled by new cash, the greater is the risk of financial stability down the road."
In a word; valuation.
In the chart above I have highlighted the Government 10 year yields for Canada, the U.S. and the Euro area as well as an overlay of the USD/CAD ratio.
Rates have bottomed in North America and Europe since April 2015, and the first leg up in repricing risk has put rates up to a potential new floor as noted by the coiling action in May.
The USD/CAD ratio has turned up this past week. A strong U.S. Dollar will mute U.S. inflation since domiciled U.S. producers will have a more difficult time setting export prices, and that leads to headlines like "HP plans to eliminate 55,000 jobs by the end of 2015".
In Canada, we can expect our main activity of consumption to be dampened by rising import prices. We may have to switch from Ikea to Craigslist to stuff our condos with.
The Class Divide
Consumer confidence depends on where you live, what you are employed at, the availability of goods and services and the affordability and benefits of the above.
Clearly the experience is much different across the class divide.
Canadian Dollar Inflation
On several occasions on this blog, as recently as the "2014 Resolution" post, I have voiced my dismay at Canada's unwillingness or maybe its inability to use its great natural resources and citizenry to produce physical and intellectual value.
The recent "Unemployment Update" and "Share of Wealth" posts underlined the educational problems. This chart mashup highlights the inflation break out in Canadian Dollar terms. A falling $CAD relative to the $USD unit is going keep Canadian exports to the U.S. attractive to U.S. buyers, but our much bigger reliance on consumption to generate an economy is going to produce a lot of inflation and consumption barriers to the Canadian Consumer (Feb 10, 2014 post) who is at peak debt levels.
Equity risk rises as inflation eats away at disposable income.
It's different in Canada
The Economist has a useful user input tool for comparing different real estate markets. This 4 pack looks at the difference between the U.S. and Canadian real estate markets from 1Q 2009 (the pit of gloom) to 2Q 2013 with respect to real values (nominal less CPI) and relative to incomes and rents.
The Canadian real estate market diverged from the U.S. market path after the 2009 interim bottom (chart below) and for the last 4+ years thanks to 1) the government price fixing of interest rates and 2) tax payer funded insurance of high ratio debt to equity financing and 3) credulous buyers willing to bid up prices on the promise of price inflation without the experience of wage inflation; Canada has extended its bull market in housing. If you are looking for negative yield, Canadian real estate fits the criteria.
U.S. Dollar & Wage Trend
The top half of this mashup is the U.S. CPI for 200 years.
Inflationists are still waiting for a big surge in prices and while they might be determined to bid up prices of real estate, collector cars and discretionary baubles bangles and beads, general price inflation is in a 1%-3% per year range in both Canada and the U.S.
In the U.S. we are seeing uptick moves to the top of the CPI range along with what appears to be a solid uptrend in wages since 2012. The wage trend also fits nicely with a definite uptrend in the USD/CAD ratio that's been on since 2011. A stronger USD helps American wage earners buy more stuff which encourages employers to hire more people.
On the Canadian side, CAD wages rose along with the strong CAD$ out of the 2009 pit of gloom and by 2011 according to the charts above, the gears shifted and as Canadian wages continued to accelerate, U.S. wages slumped until the USD/CAD ratio hit its last low in late 2012. Now for the past year the US$ has been in a solid uptrend and U.S. wages have been moving up as well with higher highs and higher lows.
A lot of global debt is priced in US$ and so the demand for US$ may not be anywhere near exhausted.
Canadian wages seem to be forming a cap (? on chart above) and in a range that might correct. If the USD/CAD ratio continues to climb the wall of worry, it is going to change a lot of portfolio construction globally and locally as Canadian real estate value perception falls against a rising U.S. dollar.
We know that overpriced Canadian real estate is a negative yield generator (case study). If the Currency markets sell the Loonie and rush to the senior currency (the US$), get ready for real estate markdowns in a Canadian neighborhhood near you.
Vancouver is the giant, and I have drawn a couple of lines on the chart where I think we will see a lot of action.
History, Charts & Curated Readings
"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