CLICK CHART TO ENLARGE

​Bill Gross of Janus Capital commented on... his recent investors’ letter (emphasis added is ours Macro-Ops.com): ​“What readers should know is that the global economy has been powered by credit – its expansion in the U.S. alone since the early 1970’s has been 58 fold – that is, we now have $58 trillion of official credit outstanding whereas in 1970 we only had $1 trillion.”

​There is a phase in the debt cycle when revulsion sets in.

​At the end of the business cycle there are three forces at work:
1) Rising interest rates sap demand and raise the cost of capital.
2) At the same time, according to capital theory, future returns decline due to over capacity.
3) While demand is decreasing and there’s a glut of supply, the herding nature of market participants create euphoric sentiment that drives expectations (and market prices) well past likely outcomes.
This process is what forms a market top. Alex Barrow Co-Founder of Macro Ops

CLICK CHART TO ENLARGE

The household debt service ratio, measured as total obligated payments of principal and interest on credit market debt as a proportion of household disposable income, edged up to 14.9% in the first quarter (2019), as total obligated debt payments grew at a faster pace than disposable income. Mortgage interest payments (+4.0%) have outpaced mortgage principal payments (-0.4%) as a result of higher interest costs, continuing a trend since the second quarter of 2018. Household credit market debt as a proportion of household disposable income remained at 177.6% in the first quarter, as debt and income grew at similar rates. In other words, there was $1.78 in credit market debt for every dollar of household disposable income. ​StatsCan June 13, 2019,

Ray Dalio's Economic Machine

​‘Maxed out’: 48% of Canadians on brink of insolvency, survey says.

Whaaaat?

48% - of Canadians are $200 or less away from financial insolvency every month.

35% - say an interest rate increase would move them towards bankruptcy.

54% - worry about their ability to repay debts. 

40% - said they won’t be able to cover all living and family expenses in the next 12 months without taking on more debt. 

​55% - say they are $200 or less away from the financial brink in Atlantic Canada.

51% - say the same thing in Quebec.
​
48% - say the same thing in Ontario.

CLICK TABLE TO ENLARGE

​But this is not new news because since the July 2008 commodity peak, the Canadian Balance of Trade has been negative for 77% of the time (monthly prints). Also the Federal Direct Investment metrics have been negative for the last 20 years and the spread has widened in the last 3. CLICK CHART TO ENLARGE

...and the Yield Curve

The flattening of the yield curve is a signal from the bond market that it is worried about the economy and its ability to continue to grow. In addition, it is a signal that future inflation is nowhere to be seen. One outcome of an inverted yield curve is a weakening in bank lending as banks begin to earn less profits from making loans. In the most recent earnings announcements, the banks have already made this clear as they expect net interest margins to contract. This is because a bank’s role is to borrow funds at usually lower short-term rates and lend those funds at usually higher longer-term interest rates. The spread between these two rates represents the banks’ profits.

However, with an inverted yield curve, the spread between the short-term and long-term rates narrows and the banks’ incentives to lend are greatly reduced. Not only is the profit margin eroded by the yield curve, but the banks could become worried about the possibility of an economic slowdown. As banks become less incentivized to extend credit (make loans) to their customers, it results in a vital lifeline of the economy being choked off. PacificaPartners.ca

CLICK CHART TO ENLARGE

CLICK CHART TO ENLARGE

The Bank of Canada acknowledged that our current economic slowdown is now “more pronounced and widespread” than it had previously forecast.

Global economic momentum is slowing.

Our economic slowdown has been sharper than expected.

Housing and consumption have slowed, and business investment and exports haven’t picked up the slack as the BoC had hoped.

Inflation expectations have been lowered.

Uncertainty is increasing.

Our output gap is widening because debt is choking off growth, and that is a powerful, long-term headwind, which will continue to exert itself long after global trade networks have been re-established.

CLICK CHART TO ENLARGE

Peak Consumption in Canada
appears to be at hand.

Feeble savings may also signal that
consumption-led growth has nearly reached it’s end, as
Canadians are spending by drawing down savings.​
​From Bloomberg via TheStar.com ​December 1, 2018​
Hat Tip to TradingEconomics.com for the Charts

CLICK CHART TO ENLARGE CLICK CHART TO ENLARGE CLICK CHART TO ENLARGE

The low rate leaves Canadians more vulnerable to an economic shock, according to Brian DePratto at Toronto-Dominion Bank. “It’s concerning that households aren’t building up buffers and prepping for retirement like they used to,” the Toronto-based senior economist said by email. “The extent to which Canadians turn around their priorities when it comes to their financial situation could also mean less money for consumer spending.” “It doesn’t bode well for consumption spending moving forward,” National Bank Financial’s Krishen Rangasamy

CLICK CHART TO ENLARGE

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.

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

CLICK CHART TO ENLARGE

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
​

CLICK CHART TO ENLARGE

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. CLICK CHART TO ENLARGE

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. 

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

CLICK CHART TO ENLARGE

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 CHART TO ENLARGE

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 embedded in the 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

CLICK TO GO TO ORIGINAL POST

CLICK TO GO TO ORIGINAL POST

China’s Slower Credit Growth
Underscores Worries Over Economy
​Bloomberg, Aug 2018
​

CLICK CHART TO ENLARGE

CLICK CHART TO ENLARGE CLICK CHART TO ENLARGE

Our Future is filled with Dumb Canadians Angus Reid July 2018 31% cannot afford for their kids to participate in after-school sports or music programs 41% haven’t been able to save any money for their children’s post-secondary education 45% say they could not afford to pay for a tutor if their child was failing at school ​​The public has been goosed into historically high leveraged balanced sheets that looked ok at the peak of Canadian housing prices in 2017 but now a year later, with interest rates and CPI rising (3% CPI at July 2018), and animal spirits fractured by Trump's war on our imports into the U.S., lenders are now purging out the marginal from the credit worthy. Our zeal for consumption is in the cooler. ​

CLICK CHART TO ENLARGE

Half of Canadian jobs will be impacted by automation in next 10 years

​"...a growing demand for “human skills” will be more crucial across job sectors. In particular, critical thinking, coordination, social perceptiveness, active listening and complex problem solving — described in the report as “human skills” — were identified as being key characteristics Canadians should develop to prepare for changes to the workforce." Global News March 2018
​

CLICK CHART TO ENLARGE

What is the link between education and earnings?​
Conference Board of Canada March 2013

"Canadians with a university degree earned $165 for every $100 earned by Canadian high school graduates. Those with a college degree earned $110 for every $100 earned by high school graduates, and those who did not graduate from high school earned only $80 for every $100 earned by high school graduates... The relatively lower financial returns on university education in Norway and Canada may be due to the dominance of their energy sectors, which offer relatively high-paying jobs that do not require university educations."

"Between 1998 and 2010...students skills deteriorated somewhat. The proportion of students with high-level reading, math, and science skills dropped, while the proportion of students with low-level reading and math skills increased."

"Canada needs to improve workplace skills training and lifelong education. Canada’s adult literacy skills are mediocre, with a large proportion of adults lacking the literacy skills necessary to function in the workplace. Canada gets a “C” and ranks 10th out of 15 peer countries on the indicator measuring adult participation in job-related non-formal education."

"Canada also underperforms in the highest levels of skills attainment. Canada produces relatively few graduates with PhDs and graduates in math, science, computer science and engineering. More graduates with advance qualifications in these fields would enhance innovation and productivity growth—and ultimately ensure a high and sustainable quality of life for all Canadians."

"Canada’s middle-of-the-pack ranking on university completion may reflect the fact that the financial return from investing in university education in Canada is also middle-of-the-pack at best. Many other countries (and the individuals in those countries) get much better returns on their tertiary investments."

"While not reflected in the report card due to lack of data and measurability challenges, there is a “learning recognition gap” in Canada. What this means is that people may hold knowledge and skills that are not formally recognized (through academic credits or trade/organization/professional certification) by employers or credential-granting institutions." 

"An obvious example is immigrants whose foreign credentials are not recognized in Canada. The Alliance of Sector Councils stated that “every Canadian is affected by inefficient recognition. Canadians across the country are short of doctors and other health care workers, while thousands of highly educated newcomer health care workers are not allowed to provide the services that so many Canadians want. People with prior learning gained through work and training are similarly hindered by a lack of learning recognition, as are those who transfer between post-secondary institutions or, in the case of licensed occupations, between provinces."
​

Is Canada’s workforce sufficiently skilled?
Conference Board of Canada June 2014

No. Given that Canada is a leader on post-secondary educational attainment, one might reasonably expect that the country would also be a leader on adult skills. Yet Canada and most provinces do relatively poorly on adult literacy, numeracy, and problem-solving skills, earning mainly “C” and “D” grades.

What accounts for Canada’s poor performance on adult skills? One reason is that literacy and numeracy skills are not “fixed” forever—individuals can lose skills after they leave school, through lack of use.11 The longer someone has been out of the formal education system, the more impact other factors will have on their proficiency, such as their work and social environment. On average, the younger cohort, aged 16–24, have higher literacy scores than adults aged 45–65, and these results hold no matter what level of education the person has.12 In the absence of continuing education or workplace training, it appears likely that, on average, the skills of Canada’s workers diminish over time.

The country’s grades on adult skills, however, are weak and have deteriorated over the past decade. Canada’s other weaknesses are its low numbers of students graduating with PhDs and with degrees in science, math, computer science, and engineering.

China Might Beat The US in Artificial Intelligence
Eric Schmidt November 2017
"LET THEM IN"

CLICK CHART TO ENLARGE

"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

​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

"The one-million square foot Toronto centre will be Amazon’s sixth facility in Ontario and ninth in Canada." Financial Post, July 2018

CLICK INFO-GRAPHIC TO ENLARGE

​"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

CLICK CHARTS TO ENLARGE

CLICK CHART TO ENLARGE

My recent update of Foreign Direct Investment on my Canadian Household Debt, GDP,  and Balance of Trade chart demonstrates that Canadian Capital would rather flee than fight.

​The Canadian Imperial Bank of Commerce anticipates it will issue half as many new mortgages in the latter part of the year as it did in the same period of 2017 amid cooling in the real estate market. Times Colonist May 23, 2018

David Rosenberg: Ottawa created the debt monster that Canada now faces.
"47% of residential mortgages
​are set to roll over for renewal next year."

David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, joins BNN Bloomberg to provide his take on the Canadian economy as Bank of Canada Governor Stephen Poloz sounds the alarm on household debt in this country. Originally aired on May 2, 2018 on BNN Bloomberg

CLICK CHART TO ENLARGE

"With portfolios still weighted towards equity, but overweight in cash and shorter-duration fixed income, we can afford to sit still into next week and allow the market to choose its path."

Intermediate-Term Picture Remains Bearish

​On a intermediate-term basis, both of our weekly “sell signals” remain, and as shown below, the market once again failed at its overhead trend line last week as well as the downtrend resistance from the previous peaks. These failures keep downward pressure on the market as prices continue to follow the “path of least resistance.”

The weekly chart also shows the rare “buy” and “sell” signals issued on a longer-term basis. Currently, as the market struggles with its current correction process, it is also very close to triggering a more important “sell signal” which could indicate a further correctionary process over the next several months.

Over the last 25-years, these sell signals have only been triggered 5-other times.

1. At the peak of the market prior to the “Asian Contagion”
2. Just prior to the peak of the market in 2000
3. At the peak of the market in 2007
4. At the peak of the market 2011 as QE-2 ended and the U.S.was facing the “debt ceiling debate.” 
5. Near the peak of the market from the collision of the end QE-3, the “taper tantrum” and “Brexit.”

CLICK CHART TO ENLARGE

It is clear that some sort of correlation exists between stock values and real estate values.  Stocks started their recent bull run in 2009.  As you can see from the chart above, real estate values didn’t start moving up steadily until 2012.  So there is a lag here.  But what is interesting is the correction in stock values in 2008 matched up with real estate values.  In fact, real estate values started trending lower before the market crash. DoctorHousingBubble.com

In ​January 2018 the S&P 500, DOW and TSX peaked.

Toronto real estate peaked in 1Q 2017 although condo prices hit a new price high last month. Vancouver prices peaked 3Q 2017 and like Toronto, strata prices are still peaking as of last month. ​ Calgary prices peaked 2Q 2017 with condo prices hitting their high back in 3Q 2016

​U.S. vs Canada Private Debt to GDP

CLICK CHART TO ENLARGE

Steve Keen "Can we avoid another financial crisis?"