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

Melt Up

3/31/2018

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As we wait for the first week of April to unfold and the March real estate data to come in, questions about the stock market's melt-up comes via @anilvohra69

Anil, a retired UBS rates options trader, quotes investment strategist Jeremy Grantham:

Bubbles have a blowoff phase lasting 21 months. Using a 5% threshold, the run from Feb 16 to Dec 17 was 22 months.

Hence the question "Have we seen the melt-up?" It certainly appears that way for Toronto Real Estate (as of February 2018 data) and the March data may add even more weight to the thesis.

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During Toronto's 21 month "melt-up", listing levels crashed as the fear of missing out kept sellers out of the market.

Post melt-up, Toronto sales are testing the lows as buyers fear getting in.

Markets are related. Real Estate valuations are not immune.

Weak hands will offer up their assets first and in Canada we have a lot of household debt that eventually will face term renewals and the official stress test which is the greater of either the Bank of Canada’s five-year benchmark rate, now 5.14%, or the rate offered by a lender plus another 2%.

If you are thinking of 'buying the dip' make sure your income is amortized over the length of your mortgage. In a melt down, the erosion of net worth will shift a lender's risk management exercise to more closely examine the strength and security of your net income.

As we know employment income growth is facing profound challenges.

Global Risks 2018
According to the IMF, over the past three decades 53% of countries have seen an increase in income inequality, with this trend particularly pronounced in advanced economies. Furthermore, today’s economic strains are likely to sow the seeds for longer-term problems. High levels of personal debt, coupled with inadequate savings and pension provisions, are one reason to expect that frustrations may deepen in the years ahead. We highlight four concerns: (1) persistent inequality and unfairness, (2) domestic and international political tensions, (3) environmental dangers and (4) cyber vulnerabilities. We conclude by reflecting on the increased dangers of systemic breakdown. World Economic Forum

Strongest 'Bubble Burst'' Alarm Just Went Off
Jeremy Grantham 2018

Boom or Bust Interest Rate Edition

2/28/2018

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Chatter on Twitter was heavy yesterday about potential rate increases for 2018. I mash-upped the CoreLogic chart to the left with yesterday's spike in the 2 and 10 year yields (via ZeroHedge 2yr chart and 10yr chart).

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.
Andrew LePage, CoreLogic, February 15, 2018

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
"yield curve has been a problem in past when Fed got behind and had to raise rates quickly; that's not the case now"

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

The central bank has raised interest rates three times since last July, amid a robust job market and solid economic growth, but policymakers have said repeatedly they will be cautious in considering further hikes. Leah Schnurr, Reuters February 27, 2018

Today, February 28, 2018 the Canadian 10yr yield is ticking down as traders bet on higher prices not higher yields:

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Bob Hoye, financial market historian, sent out a note to his clients yesterday that U.S. 10 year futures traders should now be positioned to buy, not sell.

So rate watchers, you may want to hedge your bets; chronic low rates may be with us for awhile and if the 10 year yield starts dropping relative to the 2yr, the potential inversion may start signalling a recession rather than a boom.

As Bob has noted from a September 2012 report to clients:

Another unsupportable econo-myth is the notion that a Fed cut will keep a boom going. Short-dated market rates of interest go up in a boom and down in a bust. And the most dramatic declines only occur during the initial post-bubble crash. In 1873 the discount rate at the senior central bank plunged by 650 basis points. During the 1929 crash the Fed cut the discount rate by 450 beeps as was the case in 2000 and in 2007.

If you want to sample Bob Hoye's work, request it here

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

Guessing Game

3/17/2017

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Thanks to @Hutchyman for the sale and BC Assessment data in the mashup above.

On the way up in price it was easy. Make an offer higher than list price with few conditions if any and provide the vendor with everything they wanted and voilà, you own the asset if you managed to out-guess the competitive bidders lined up on their phones.

Liabilities were an unimportant consideration because in a few days, a similar property would sell for even more and your balance sheet then became even more credit worthy; check and check.

On the way down, guessing the price that a vendor will agree to is still a requirement; is the vendor holding a property with too little of his own equity and perhaps reluctant to take a loss at this time, or is the property being offered for the first time in let's say the last decade? A single family detached house in Vancouver has increased in price by over 120% in the last 10 years (over 160% in Toronto). The vendor's equity position is an important clue in the guessing game.

Is the vendor attempting to sell in order to repurchase in the same market? That would suggest an end price is required similar to the current snapshot of market comparable sales if trading sideways is the objective. Is the vendor an estate looking to settle accounts for multiple parties? That implies that the end price is not as "sticky" because VALUE can be defined outside the parameters of "comps".

At some point definitions of value might again include an appraiser's use of the "income" approach. Investment real estate cap rates in a city like Vancouver are among the lowest in Canada and so a buyer must determine if there is value in the price. Potential investment capital can dry up and move very rapidly out of a declining market and seek out better (lower risk) returns elsewhere. Low cap rates are tolerated in a rising market but not so much when price momentum shifts to the down side. Vancouver prices peaked July 2016

A declining market requires more work on the buy side and exposes the potential purchaser with risk not seen on the way up.

The CBRE in their 2016 Report list cap rates for "A" class apartment buildings in Vancouver at 2.5-3% (in Toronto 3.25-3.75%, in Calgary 4.5-5%). This week the Bank of Canada benchmark 10 year yield is 1.76% similar to the full month of February plot on my yield curve chart.

What we don't see in the CBRE report is what expense items are used in the developing a theoretical cap rate (Net Income / Asset Purchase Price). I suspect that only the minimum data of property tax, insurance, maintenance and actual expenses paid out are used for a given year in these surveys. Is a vacancy allowance included? Not all tenancies are reliable. Is a management fee included? Someone has to spend time taking care of the asset. Is the asset subject to sudden strata fee spikes or revelations of past due maintenance? These are important questions that any real estate investor who has been playing the game for at least one cycle trend change will ask.

In my 2013 case study, I had to lower the purchase price by 25% to get a return that piqued my interest because I included vacancy and management.

With a 25% drop in sale price, the GRM has dropped nearly 6 points (lower is better) and the CAP Rate has gone up 40 basis points (higher is better) which not a huge move but the yield on investment (ROI) has increased to more than twice the 10 year bond return and that provides an investor the incentive in a ZIRP environment to buy and hold and allow other people's money (the tenant's) to turn debt into equity.
(2013 Case Study)

Owning real estate has risk attached both at the individual ownership level and in the broader market place. It's 2017, if anything, real estate as an investment is even more fraught with unknown risk.

Thanks to Steve Saretsky, Realtor for his
Vancouver Real Estate Market Update February 2017

China Shop Bull

6/23/2016

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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

Credit Cycles

12/10/2015

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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.

In the chart above, the top panel shows U.S. non-financial corporate debt to GDP at levels where credit defaults start hitting the front page. The lower panel shows the cumulative flow of investment funds in the U.S. and illustrates that institutional money is way ahead of private client money in getting out of the way of market risk to the downside.

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.

The full article is worth reading for Canadians who are also heavily leveraged and require employment earnings to satisfy debt repayment on assets that have insufficient equity to refinance.

Credit lines drying up for oil companies?

Notice the comments about the competition between Sunni (Saudi Arabia) and Shia (Iran) oil.

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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.

$35 Oil Stress Test

12/2/2015

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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.

The bottom chart is Bloomberg's energy sector projections from their annual New Energy Finance Summit, April 14, 2015.

SCENARIO 1:
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

"How do you store the energy generated by turbines when the wind isn’t blowing, the power from solar panels when the sun isn’t shining?” Read the Globe & Mail June 2015 report.

Worried

11/17/2015

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Worry Worry Worry
The chart to the left shows the GDP growth rate in Canada, the U.S. and Japan since before the 2009 Pit of Gloom to 3Q 2015

I was prompted to compare the three after reading Michael Sankowski's "Crazy Talk: Raising rates while Inflation is near 70 year lows." and Beowulf's comment "...Congress should go ahead and pass a law locking in rates..." (Monetary Realism July 2015)

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Japan has been at it for decades using the "stimulus" of low bank rates but inflation is at historic lows and globally it looks like more DE-flation according to the Baltic Dry Index downtrend and a new low set today.

So will the U.S. Fed begin to raise rates at their next meeting, December 2015 with Canada following soon after? The Fed is not answering the question but is leaving room to wiggle: "The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run." (FOMC Oct 28, 2015)

Hello Japanada. I think what has to happen before rates rise is that inflation has to show up in wages alongside of higher employment rates and then we will see the general CPI overtaking the target mandate (2%-ish). Look again at the top chart comparing Canada, the U.S. and Japan... the 3 plots are similar rising and falling in concert and the question is, will the U.S. GDP start going negative. There is a good chance of it because the USD continues to strengthen against other currencies and the net trade deficit year to date increased 3.9% Y/Y as exports decreased 3.8% and imports decreased 2.4%. (US BEA, Nov 4, 2015).

Meanwhile in Canada average earnings are under pressure. (my Earnings & Employment page)... and credit creation is stalled.

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Why do the hot Canadian real estate markets continue to outperform? Certainly low rates are an inducement to buy since they lower the qualification bar on the credit worthy at the margins, but qualifying for credit does not mitigate risk when the real estate object of desire is a negative yielding asset. It's all good in a rising price environment, but if prices correct for any reason the spotlight will turn to earnings and cash flow.

The chart above are the Canadian 90+ days delinquency rates. Trouble spots continue to be auto loans and credit cards. The average auto loan climbed 2.87 per cent from a year ago to $19,649 while the average credit card debt was up 3.04 per cent to $3,745.

I did a back of the napkin ownership cost on a mid range vehicle ($49,000 plus taxes, fees and documentation of $6,500) financed with 10% down and only 2% financing over 3 years. That $49,000 car ends up costing close to $60,000 by the end of the third year and has depreciated by 50% to be worth only $30,000. If the car is sold in month 37, the cost that the consumer has paid is approximately $833 per month to drive a new car for 3 years without even adding in maintenance ($100/mo?), insurance ($100/mo?), parking ($100/mo?) repairs ($?) or disposal cost ($?) of the vehicle.

SEARCH MODO

I belong to Vancouver's best and biggest car sharing non-profit society MODO and my cost for having access to over 400 vehicles as well as using taxi's and public transport is less than $150/month for two people.

Japan-ification

8/31/2015

Inflation Rate Canada, US, Germany, Japan

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While we wait for StatsCan to release new national economic monthly data beginning September 1st and for the various Canadian metro real estate boards to publish their sales and price data later in the week, here are a few charts (above) tracking inflation data. Since the 1980's inflation highs in Canada, the U.S., Germany and Japan the inflation trend has been falling and now flirting with negative rates. The MIT Billion Prices Project is indeed in a negative state Y/Y.

Governments and the private sector want inflation to offset the cost of converting debt into equity, but Mother Nature is not obliging. As I reported last June "We are leveraging the lowest priced credit for the most expensive non-productive real estate at the worst possible time in history.

Over at Bloomberg, Tom DeMark talks about the outlook for the Chinese and U.S. stock markets. "...we're heading into that period of the year when the market is susceptible to market declines September and October."

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Chart Above: The biggest stock market declines since the 1980s:

How bad was Monday's stock market crash?
by Timothy B. Lee (Vox.com) on August 24, 2015

On Monday, August 24, 2015 the stock market posted its largest decline in years, sparking fear that the US is on the verge of another recession. After initially plunging 6.4 percent in a matter of minutes, it recovered some ground and ended the day down 3.6 percent.

The chart by Javier Zarracina is dominated by October 19, 1987, when the stock market plunged by 22 percent. This huge drop wasn't followed by a recession, and the market recovered the lost ground within two years.

There were big declines in October 1997 and August 1998. Again, these proved not to have any broader significance, as the bull market would continue until 2000.

There were three big drops during the 2000-'01 bear market that preceded the recession of the early George W. Bush years.

The stock market suffered 11 big drops in the last four months of 2007, during the Great Recession that was officially under way by then.

In August 2011, the stock market panicked over the possibility that President Obama and congressional Republicans would be unable to resolve the debt ceiling fight, leading to three big declines.

So sometimes a big stock market decline is a sign of deeper economic problems. Other times, it's not. It's too early to say which category Monday's crash is in.

Dollar Pinching

7/14/2015

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Spending Slowdown
On both sides of the border, manufacturer's inventory levels are rising and retail sales are dropping; the trend is accelerating.

Why Bank of Canada’s rate cut may have less impact than Poloz hopes The Globe and Mail July 15, 2015

"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

<<Previous

Melt Up

Strongest 'Bubble Burst'' Alarm Just Went Off
Jeremy Grantham 2018

Boom or Bust Interest Rate Edition

Inversion Report

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

Guessing Game

Thanks to Steve Saretsky, Realtor for his
Vancouver Real Estate Market Update February 2017

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

Credit Cycles

Credit lines drying up for oil companies?

$35 Oil Stress Test

Donald Sadoway "Science Serving Society"

Energy 2064 with Professor Donald R. Sadoway

The Bill Gates Backed Canadian Building a Better Battery

Worried

Japan-ification

Dollar Pinching

Alberta's Boom Time Hangover
VICE NEWS June 1, 2015

History, Charts &
Curated Readings

Archives

Categories

​Strongest 'Bubble Burst'' Alarm Just Went Off Jeremy Grantham 2018

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

Thanks to Steve Saretsky, Realtor for his Vancouver Real Estate Market Update February 2017

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

Credit lines drying up for oil companies?

Donald Sadoway "Science Serving Society"

Energy 2064 with Professor Donald R. Sadoway

The Bill Gates Backed Canadian Building a Better Battery

Alberta's Boom Time Hangover VICE NEWS June 1, 2015

History, Charts &Curated Readings

Archives

Categories

Strongest 'Bubble Burst'' Alarm Just Went Off
Jeremy Grantham 2018

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

Thanks to Steve Saretsky, Realtor for his
Vancouver Real Estate Market Update February 2017

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

Alberta's Boom Time Hangover
VICE NEWS June 1, 2015

History, Charts &
Curated Readings