Demographia defines affordability:
Affordability is the ability for any urban household to be able to rent a dwelling for less than a 25% of its monthly income, or to buy one for less than about three time its yearly income. The mobility and affordability objectives are tightly related. A residential location that only allows access to only a small segment of the job market in less than an hour commuting time has not much value to households, even if it is theoretically affordable.
Here are some quotes from Fernando Medina the Mayor of Lisbon from the July 26, 2020 report from The Independent:
> More than a third of properties in the centre of the city (Lisbon) are currently taken up by holiday lettings.
Here are some quotes from the August 13, 2020 NYmag.com Intelligencer report "The European Cities Using the Pandemic As a Cure for Airbnb"
> Now Lisbon is taking advantage of that situation, in order to push some of these units back into the long-term housing market. The city government is renting empty apartments directly from property owners, and then turning around to rent them to Portuguese workers and students at subsidized rates.
Here are some quotes from the April 1, 2020 Bloomberg report "Will Airbnb Become Obsolete After the Coronavirus?"
> Over the past decade, the app that connects fly-by-night tourists and short-term renters to “cozy” lofts and five-star “experiences” morphed into a gig-economy nightmare for cities like Paris, Amsterdam and Barcelona.
Santa Monica has effectively wiped out 80% of its Airbnb listings...
Thanks to Greg The Analyst's April 22, 2020 blog entry "Why I view this cycle as deflationary, not inflationary." for his unsourced reproduction chart of the "Income Share of Top 1% Relative to Bottom 90%" since 1920 (chart left).
I added to the chart mashup the closest comparison I could find to reflect Canada's wealth gap. The two countries track the same trend in income disparity rising from the early 1980's when state mandated interest rate inflation peaked, to now the end of 2Q 2020 when our new Bank of Canada Governor, Tiff Macklem said on June 22nd, "Our main concern is to avoid a persistent drop in inflation by helping Canadians get back to work."
"avoid a persistent drop in inflation" oh oh... apparently the members of the The Canadian Club of Montreal who are mainly from the business and professional communities addressed by the Governor are not to be exposed to the apparently scary noun... "deflation"
I will highlight below the main points of Greg's argument. We are indeed beginning to see the elements unfold for another great cycle of deflation, not official yet, but the evidence mounts.
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.
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.
- Kondratieff investment "Seasons".
- U.S. income share of the top 1% relative to the bottom 90% since 1920.
- U.S. Dow Jones industrial price index with notations of Fed action and market reaction 1920 through 1932.
- April 2020 forecast of U.S. job losses by sector.
- U.S. share of wealth of the top 1% relative to the bottom 90% from 1960 to 2014.
- U.S. distribution of wealth from 1917 to 2017.
- U.S. velocity of M2 money stock since 1960.
- U.S. corporate profits and employee compensation as a percentage of GDP since 1947.
- U.S. milk production output since 2001.
Argument Bullet Points: Why Greg's view is that this cycle is deflationary, not inflationary.
- (Chart 1) Disinflation periods see asset prices and debt levels rise as CPI, interest rates, fixed income yields drop and commodity prices drop eventually leading to stock market drops (equity share pricing).
- (Chart 1) Deflation periods see asset and consumer prices drop along with consumer confidence as rising unemployment leads to consumption and production drops as well as debt repudiation, credit contraction, spiking interest rates and currency repricing.
- (Chart 1) Inflation reignition requires demand to be much greater than supply which requires deflationary deleveraging (turning debt into equity).
- (Chart 2) In this last cycle of Disinflation, production supply became much greater than demand consumption and as the stock market equities boomed the ongoing transfer of wealth accelerated towards the top 10% leaving the bottom 90% of earners stuck at late 1990's real wages producing a collapsing middle class and no further possibility of inflation. Hard deflation rebuilds the middle class.
- (Chart 3) In the Great Depression of the late 1920's and early 1930's, the Fed tried its then version of QE but it did not prevent the Dow from a 2+ year crash. Very low operating margins from overcapacity (high supply exceeding low demand), coupled with high levels of debt creates the scenario of weak hands capitulating.
- (Chart 4) Commodity prices, manufacturing, retail and wholesale trade, service industries and the travel, accommodation and food service sectors have all been hit by Covid 19 wiping out a decade and more of high employment.
- (Chart 5+6) A key feature of the early 1930's depression was, as it is today, the wealth gap and the broken structure of the middle class. (see my June 20, 2020 post "Household Net Worth")
- (Chart 7) The slow down in the velocity of money results from the deflationary transfer of wealth from the middle class to the top 10% which produces a change from a productive economy and investing in people to unproductive investment in financial engineering. (see my June 11, 2020 post on "CDOs Then CLOs Now")
- (Chart 8+9) The commodity super cycle ended in 2011 and by 2012 as a percentage of GDP, employee compensation crashed and corporate profits peaked. QE bailouts of corporations and the bond market by central banks over the last decade have not been inflationary for employment wages but has only exaggerated the wealth gap and increased the supply side. Inventories have spiked while demand has been dropping and now has plunged with the plague. Booms and over supply lead to busts. Rebuilding the middle class demand leads to productivity.
Reopening Canada: 3 stages of recovery
(✓) = now occurring in various global economic centers.
Depressions are characterized by their length, by abnormally large increases in unemployment (✓), falls in the availability of credit (✓) (often due to some form of banking or financial crisis (✓)), shrinking output (✓) as buyers dry up (✓) and suppliers cut back on production and investment (✓), more bankruptcies (✓) including sovereign debt defaults (✓), significantly reduced amounts of trade and commerce (✓) (especially international trade (✓)), as well as highly volatile relative currency value fluctuations (✓) (often due to currency devaluations (✓)). Price deflation (✓), financial crises (✓), stock market crash (✓), and bank failures (✓) are also common elements of a depression that do not normally occur during a recession. (Wikipedia)
US leveraged loan downgrade ratio hits staggering 43:1 as COVID-19 stalls market
S&P Global Market Intelligence JUN 4, 2020
"In their optimistic scenario — where restrictions lift in May and life gets back to normal by June — 9% of leveraged loans would default within a year. If lockdowns are in effect until June and normalcy returns at the end of August, defaults would hit 14% of loans, they said. In the worst case — the virus keeps returning in waves until the middle of next year — UBS sees the rate at 22%."
- "Collateralized loan obligations, the largest investor segment in the $1.2 trillion U.S. leveraged loan asset class, are exceeding their structural limits for lower-rated debt at eye-watering numbers."
- "As a leading indicator, rising downgrades also typically precede a period of increased defaults."
- "The downgrades that have come at breakneck speed are also predominantly at the lower end of the ratings spectrum, changing the composition of the B- cohort significantly."
- "At the lower rung, Morgan Stanley strategist Srikanth Sankaran expects that nearly a fifth of the loan market could transition to CCC as a result."
The Looming Bank Collapse - The U.S. financial system could be on the cusp of calamity. This time, we might not be able to save it.
by Frank Partnoy The Atlantic JUL-AUG 2020 Issue
Like a CDO, a CLO has multiple layers, which are sold separately. The bottom layer is the riskiest, the top the safest. If just a few of the loans in a CLO default, the bottom layer will suffer a loss and the other layers will remain safe. If the defaults increase, the bottom layer will lose even more, and the pain will start to work its way up the layers. The top layer, however, remains protected: It loses money only after the lower layers have been wiped out.
Despite their obvious resemblance to the villain of the last crash, CLOs have been praised by Federal Reserve Chair Jerome Powell and Treasury Secretary Steven Mnuchin for moving the risk of leveraged loans outside the banking system. Like former Fed Chair Alan Greenspan, who downplayed the risks posed by subprime mortgages, Powell and Mnuchin have downplayed any trouble CLOs could pose for banks, arguing that the risk is contained within the CLOs themselves.
These sanguine views are hard to square with reality. The Bank for International Settlements estimates that, across the globe, banks held at least $250 billion worth of CLOs at the end of 2018. Last July, one month after Powell declared in a press conference that “the risk isn’t in the banks,” two economists from the Federal Reserve reported that U.S. depository institutions and their holding companies owned more than $110 billion worth of CLOs issued out of the Cayman Islands alone. A more complete picture is hard to come by, in part because banks have been inconsistent about reporting their CLO holdings. The Financial Stability Board, which monitors the global financial system, warned in December that 14 percent of CLOs—more than $100 billion worth—are unaccounted for.
Read the hole story by Frank Partnoy at The Atlantic
Currencies May See Wild Swings if Slow Growth Breaks CLO Market
HOW CAN A GLOBAL SLOWDOWN TRIGGER A CLO COLLAPSE?
As global demand wanes, consumers begin to spend less, business revenue streams dry up and investors pivot away from chasing yields and more toward preserving capital. Corporations that took out these covenant-lite loans – that were then securitized into a CLO – then face mounting pressure as their ability to service their debt is compromised. The probability of an onslaught of defaults then becomes considerably higher.
Furthermore, companies that are on the hook for these loans may attempt to cut corners or lay off employees as a way to trim losses and stave off insolvency. However, in the process, they may end up breaching their covenant(s), consequently giving the lender the right to declare a default on the loan. This in turn could make many of the income-generating tranches in the CLO worthless and bring down the overall value of the security
The CLOs would then shift their position on the balance sheet from assets to liabilities, potentially putting financial institutions outside the regulatory parameters of capital requirements. This may then force them to start selling other assets to compensate for the losses they incurred on the CLOs. Consequently, a selloff iterated across multiple institutions could trigger broad-based panic and hurried liquidation across global financial markets.
HOW WOULD FX MARKETS RESPOND TO A CLO UNRAVELING?
In the event of a downturn, which is further exacerbated by a CLO collapse, anti-risk assets like the US Dollar, Japanese Yen and US Treasuries would likely gain at the expense of cycle-sensitive currencies like the Australian and New Zealand Dollars. Cycle-sensitive commodities like oil – and currencies that frequently track its movement like the Canadian Dollar, Russian Ruble and Norwegian Krone – may also suffer.
While many central banks could lower rates to combat the downturn, the exact simulative effect of further cuts may not be sufficiently conducive in restoring liquidity and confidence. Other central banks with rates at or below zero like the ECB and Riksbank may have to resort to unconventional monetary measures, though even those are sometimes not effective enough to raise inflation and stave off a slowdown.
CLOs may not be the next trigger for a recession, but they could exacerbate an economic downturn. Furthermore, the average recovery rates for defaulted loans have fallen to 69 percent from the pre-crisis levels of 82 percent. Indirectly-connected players like banks that lend to firms that are holding these instruments or have exposure to them could be at risk.
The exact extent of the CLO web remains unknown. However, what the 2008 financial crisis taught the world is that highly integrated markets are efficient but also incredibly vulnerable. This then risks an element of contagion whereby a system-wide disruption could occur. A web of interconnectedness is often welcome by all – that is, until along comes a spider.
Read the Full Report with Charts Here by Dimitri Zabelin Analyst, MAR 2019
The junk debt that tanked the economy? It’s back in a big way.
The Washington Post JUL 2018
Earlier this year (2018), after complaints from banks and dealmakers reached sympathetic ears in the Trump administration, the newly installed chairman of the Federal Reserve and the Comptroller of the Currency Office declared that previous “guidance” against lending to companies whose debt exceeded six times their annual cash flow should not be taken as a hard and fast rule.
The CLO market got an even bigger boost this year when an appeals court in Washington struck down a regulation issued under the Dodd-Frank financial regulation law that required all securitizers — the firms that bundle loans of any kind and sell pieces of the packages to investors — to retain 5 percent of a deal.
Michael Barr, a professor of law and public policy at the University of Michigan who served as point man on the financial reform effort for the Treasury in the Obama administration said, “we have now re-created the condition that led to the last crisis by making it easier to aggregate loans that are not good for investors.”
The three judges who signed on to that opinion were all appointed by Republican presidents, all have a long track record of skepticism toward regulation and regulators, and all have a long association with the conservative Federalist Society.
THE BUYOUT OF AMERICA by Josh Kosman
Marquee private equity firms such as Blackstone Group, Carlyle Group, and Kohlberg Kravis Roberts, have grown bigger and more powerful than ever. They have also become the nation’s largest employers through the businesses they own. Journalist Josh Kosman explores private equity’s explosive growth and shows how its barons wring profits at the expense of the long-term health of their companies.
He also explores the links between the private equity elite and Washington power players, who have helped them escape government scrutiny. The result is a timely book with an important warning for us all, which unfortunately in 2020 is starting to play out. JoshKosman.com
In his 2009 book The Buyout of America: How Private Equity Is Destroying Jobs and Killing the American Economy, Josh Kosman described Bain Capital (started in 1984 by Mitt Romney and partners) as "notorious for its failure to plow profits back into its businesses," being the first large private-equity firm to derive a large fraction of its revenues from corporate dividends and other distributions. The revenue potential of this strategy, which may "starve" a company of capital, was increased by a 1970s court ruling that allowed companies to consider the entire fair-market value of the company, instead of only their "hard assets", in determining how much money was available to pay dividends. In at least some instances, companies acquired by Bain borrowed money in order to increase their dividend payments, ultimately leading to the collapse of what had been financially stable businesses. Source: Wikipedia
And in Canada
Covid-19 MAR 27, 2020
The incubation period (time from exposure to the development of symptoms) of the virus is estimated to be between 2 and 14 days. A very long incubation period could reflect a double exposure. 24 days represented an outlier observation that must be taken into consideration in the context of the main finding of the World Health Organization study.
The February housing data for Calgary shows that the average price of a condo is trading at prices from nearly 15 years ago and two and a half years before the July 2008 WTI Crude Oil peak.
The Canadian Federation of Independent Business released their March 2020 "Business Barometer" suit of charts:
"The index now stands at a record low 30.8, well under the previous lows near 39 recorded in both the 2008 and 1990 recessions. The scale of the negative perspectives appear pretty consistent across industry groupings..."
Earlier this year, Jason Kirby via Macleans.ca released their 6th annual "Most important Canadian economic charts to watch in 2020." Note the Calgary trend changes unfolding since February 8, 2016 when WTI Crude Oil prices hit USD$28.49.
Alberta’s Double-Dip Recession?
"Oil producing provinces have faced a difficult five years. Low oil prices cut into revenue, investment, employment, wages, and overall economic activity. Government budgets are increasingly strained, unemployment is stubbornly high, social assistance enrollment is at record highs, and the end is not yet in sight. In fact, a second recession might (just might) be in Alberta’s future. As this graph illustrates, my index of monthly economic activity in Alberta has been negative for most of 2019 – signalling a possibly contracting Alberta economy. A worsening economy in Alberta affects employment and growth throughout Canada, but the ripples go far beyond the dollars and cents. Rising frustration and disappointment are increasingly directed at perceived failures of the federal government and Alberta politicians are happy to oblige. A second recession may exacerbate these tensions and further strain Canada’s confederation. For these reasons, and more, this indicator will be one to watch in 2020." Chart above thanks to Trevor Tombe, associate professor of economics, University of Calgary and research fellow at The School of Public Policy.
CANADIAN EMPLOYMENT RATES
in Vancouver, Calgary, Toronto, Montreal and their Provinces
See also my previous posts with charts related to DEFLATION and what to expect:
Asset Prices Drop
Investment Spending Drops
The Savings Rate Rises
Debt Delinquencies Rise
The Credit Boom Turns to Bust
ITEM: "People are hitting the wall’:
Delinquency rate highest since 2012 GlobalNews.ca MAR 5, 2020
"Canada’s so-called 90+ day delinquency rate on non-mortgage payments climbed to 1.2 per cent in the final three months of 2019, an 11 per cent jump compared with the same period in 2018, Equifax data shows... Delinquency rates had been “marching higher” for much of 2019 and will likely keep going up in 2020... The trend is strongest in British Columbia, Ontario and Alberta, where delinquencies are now back above their 2016 level."
Canada sees rising numbers of consumers defaulting on their debts even amid a healthy economy and solid job market. Consumer insolvencies were up more than 10 per cent in January 2020 compared to the same month in 2019, according to the latest figures from the Office of the Superintendent of Bankruptcy.
Scott Terrio, manager of consumer insolvency for Hoyes, Michalos Licensed Insolvency Trustees said "much of the debt he sees from clients filing for insolvency is much older than two years... "We’ve run up debt for most of a decade... Some borrowers are simply getting to the end of the runway... That may be especially true among renters, who, according to Terrio, made up more than 90 per cent of debtors who filed for insolvency with Hoyes Michalos over the last couple of years... While sky-high home prices allow many homeowners in expensive cities to keep borrowing against their home equity, renters have fewer options to keep borrowing and consolidate debt."
“Outside of mortgages, we have seen a significant pullback in demand for credit,” Johnston noted. Consumers, Terrio said, are “entering a period here of self-policing.”
ie: DEBT REVULSION
"Deflationary Spiral" - The Khan Academy
"EMPLOYMENT DRIVES DEMAND"
TEXT FROM VIDEO ABOVE Created by Sal Khan: So in a normal economy we know that employment will drive overall demand. If we have high employment or low unemployment, then people are going to have more jobs, and they're going to have higher wages, and that will have higher demand. Or if the other way goes around, if they lose their jobs, demand is going to go down, wages will start to go down, and people aren't going to have money in their pockets. So employment drives demand. And we can view the demand-- and I'm making a huge simplification here-- demand will drive production. Or maybe we could think of it as supply. It'll drive supply, and it can also be a driver of price. And of course, there is a little bit of a negative feedback loop for both of these things. If the demand is high and the price goes high, that might produce a little bit of negative feedback on the demand. Instead of an arrow, this line here means negative feedback. I'll put a little negative sign here. And let's say the demand is high and then the supply goes high. Well actually, the supply going high would drive the price going down. So maybe I should draw a negative feedback like here. High supply would mean lower price. But that's not what I want to focus on in that video. And we could keep adding more lines here. But this is roughly simple take on it. But the general idea is supply and price will then drive corporate profits, or just profits in general, even for an individual business owner. And then profits are going to drive employment.
Now, let's imagine a scenario. We are in a bad economy, maybe a depression-like economy. So in that situation, you could start really at any point in this circle. I'll just start at employment. So let's say employment is really low. That's going to make demand really low. And if demand is really low, then supply is going to go down, and price is going to go down. And then that's going to make profits go down. And that's going to make employment even lower. And so what we find ourselves in this kind of recessionary or depression area environment, this would be called a deflationary spiral. And it's a spiral because a bad economy is driving lower prices, which is in turn driving a bad economy. And to make matters worse, if this continues long enough, or if these price declines are severe enough, you could imagine people saying, look, I have this dollar in my pocket. I'm not going to spend this dollar because, one, I might lose my job at any moment, and I know that that dollar is becoming more powerful, that I can buy more every minute that I wait. So as the price goes down, so as all of this scary stuff happens-- so the employment is going down, profits are going down, prices going down-- this makes people not hoard goods the way that they would do in an inflationary spiral. But it makes them hoard money.
And why it's ultra scary for central bankers or for governments is they start to not have as much control over the economy. They can't just run the printing press and try to stimulate the economy in this situation, because if they did people are so conservative right now-- You could imagine maybe a depression is going on for years and years and years. And let's say that they take some type of a helicopter-- And this isn't how you actually distribute money to the money supply, but it's just to show an extreme example. So they take a helicopter, and they start dumping cash on people. They print cash, and they start dumping it on people. So every man, woman, and child in the country gets a $10 bill. Well, if people are really scared and really afraid, they're just going to take that $10 bill and stuff it into their mattress, and it's not going to change anything. That dollar isn't going to actually enter into the money supply. The velocity on it will be 0."
Today we see fear in the headlines. Fear in the Party of Trump (Bolton's book is leaked), fear in the contagion pipeline ("At this time, it’s unclear how easily or sustainably this virus [Coronavirus] is spreading between people...” the CDC says. [2700 confirmed case and 60 million Chinese residents in lockdown provinces] via CNN JAN 27th) and fear in the stock market indexes (1st chart left).
The second chart to the left shows the "un-growth" of Canadian Labour Productivity since the peak in the 1980's punctuated by two major global stock market selloffs (fear). In OCT 1987 "Black Monday", every major world market experienced a decline. Measured in USD, 8 declined by 20-29%, 3 by 30-39%, 3 by more than 40%.
In OCT 2007 through MAR 2009 (17 months) during the Global Financial SubPrime collapse, the Dow Jones Industrial Average dropped 53%.
Chuck Schumer speaks following leak of Bolton book excerpt
“Commenting on the flash PMI data, Tim Moore, Economics Associate Director at IHS Markit said: “August’s survey data provides a clear signal that (U.S.) economic growth has continued to soften in the third quarter. The PMIs for manufacturing and services remain much weaker than at the beginning of 2019 and collectively point to annualized GDP growth of around 1.5%. “The most concerning aspect of the latest data is a slowdown in new business growth to its weakest in a decade, driven by a sharp loss of momentum across the service sector. Survey respondents commented on a headwind from subdued corporate spending as softer growth expectations at home and internationally encouraged tighter budget setting. “Manufacturing companies continued to feel the impact of slowing global economic conditions, with new export sales falling at the fastest pace since August 2009. “Business expectations for the year ahead became more gloomy in August and remain the lowest since comparable data were first available in 2012. The continued slide in corporate growth projections suggests that firms may exert greater caution in relation to spending, investment and staff hiring during the coming months.” Tim Moore
Meanwhile Canadian Net Trade has been negative
in the last 10 out of 11 quarterly prints (July 2019 data)
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.
The Canada Mortgage and Housing Corp. (CMHC) defines a household as being in
“core housing need” if it “falls below at least one of the adequacy, affordability or suitability standards and would have to spend 30% or more of its total before-tax income to pay the median rent of alternative local housing that is acceptable (meets all three housing standards).” thecanadianencyclopedia.ca
The chart above shows the number of homeless people living in Vancouver based on homeless counts conducted between 2005 and 2019. City of Vancouver Data via Global News
The homelessness data in Canada according to Nathalie Rech, (thecanadianencyclopedia.ca) April 29, 2019 are...
"estimated that approximately 35,000 Canadians experience homelessness on any given night, and at least 235,000 Canadians are homeless in any given year." AND According to the Canadian Observatory on Homelessness, mass homelessness in Canada emerged around this time (1987 Conservatives) as a result of government cutbacks to social housing and related programs starting in 1984 (Conservatives). In 1993 (Liberals), federal spending on the construction of new social housing came to an end. In 1996 (Liberals) the federal government transferred responsibility for most existing federal low-income social housing to the provinces.
The chart below is from George Marshall, a research analyst with Statistics Canada’s Insights on Canadian Society published June 26, 2019. Their conclusion follows the chart.
Conclusion from Statistics Canada’s Insights on Canadian Society.
Using data from the 2016 SFS, this study looked at the association between the debt-to-asset and debt-to-income ratios and financial distress, while controlling for various socioeconomic characteristics. Three financial distress indicators were considered—missing non-mortgage payments, missing mortgage payments and taking out a payday loan.
The varied results call for a nuanced interpretation. The first point to note is that the debt-to-asset ratio tells a more consistent story than the debt-to-income ratio. Across all three distress indicators, people in the highest debt-to-asset groups have a higher probability of reporting distress. However, after controlling for other factors, the debt-to-income ratio is not associated with the measures of financial distress since the results are not statistically significant.
The debt-to-asset ratio might be a more predictive indicator because debtors can often sell assets to make debt payments, even if they do not have the income to make payments. Alternatively, those who own homes often have access to home equity lines of credit. These results are important because they suggest that the debt-to-asset ratio is a better indicator of financial precariousness than the debt-to-income ratio.
Additionally, some demographic groups face relatively higher probabilities of reporting financial distress, including lone-parent families, and “other” family types. Conversely, families whose major income earner had a university degree, were less likely to be in financial distress. Similarly, homeowners with or without a mortgage were less likely to miss payments or take out payday loans.
Financial distress has many dimensions and can take multiple forms. Future measurement should provide additional details, such as the frequency at which specific financial services are used when under financial duress. More research will be needed to better comprehend the extent to which Canadians are facing financial difficulties.
As Cities Grow, So Do the Numbers of Homeless
If your capital is tied up in assets that are dropping in value, your lifestyle will come under the scrutiny of your bookkeeper, accountant and banker. And this reappraisal, if your net worth is shrinking, will lead to decisions focused on turning debt into equity. Sell the asset or accelerate the payments on debt principal; either way, your lifestyle will change. If for any reason your cash flow is trending towards negativity, the need to sell assets quickly becomes the first choice. As we know, Canadians are all in on the debt side of their balance sheets with household obligations at record debt to asset levels.
- ITEM JUN 2019 Bloomberg: Delinquency rates rise in Canada as consumers add more debt: Equifax
- ITEM MAY 2019 CBC News: High household debt, possible housing market shocks are main risks to the economy: Bank of Canada
- ITEM APR 2019 Better Dwelling: Canadian Household Debt Is Growing Much Faster Than Asset Values
- ITEM MAR 2019 The Insurance Journal: Many Canadians say they will liquidate assets to pay down debt in 2019
Prominent Canadian economist David Rosenberg is warning that record household debt levels in the country will hinder economic growth...
(ie: your income, your cash flow, your ability to service your debt)
Bill Gross of Janus Capital commented on... his recent investors’ letter (emphasis added is ours Macro-Ops.com):
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
Looking at Federal Direct Investment in Canada, future returns are moot if there is a continuation of the last 20 years of foreign direct investment in Canada that has remained negative relative to Canadians making direct investment offshore to get a better return on capital and labour. Global over capacity means that our export markets for goods and services are price marked to global markets.
With respect to the third point above and concentrating on the wrecked affordability of housing in Canada, the FOMO herd is facing waning sales and waxing inventory and the current low cost of borrowing is no longer a stimulus to enter into risk positions. And this is playing out now in Canada's poster province ground zero metro and Demographia's international runner up: Vancouver.
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.
Ray Dalio's Economic Machine
Credit booms are followed by credit busts and as the chart shows, Canadian Residential Mortgage Credit (%Y/Y lending) has been shrinking dramatically since the July 2008 Crude Oil Peak and the Crash into the March 2009 Pit of Gloom (6 Metros Chart).
It's been 10 years since the 2008-09 crash which is difficult to even remember now after 10 years of watching our housing prices more than double. But as Hilliard Macbeth points out in the chart above, when residential mortgage lending momentum approaches and dips into a negative metric, housing prices tumble and recession metrics begin to appear. In the two biggest FOMO markets, Vancouver and Toronto, prices indeed have been dropping in the 7-9% per year range after peaking 18-20 months ago respectively (Plunge-O-Meter).
As Hilliard further points out:
"There hasn’t been a serious economic downturn in Canada since the 1990s; the last time that mortgage credit grew as slowly as now. Unfortunately bank lending is pro-cyclical, so lenders will tighten credit conditions just as real estate borrowing stops growing, which will make the downturn worse. This boom/bust cycle is inevitable as long as lenders focus on lending for real estate investment and speculation rather than more productive investments. To change that focus, a new set of rules and regulations that govern lending is needed.” Quote included in Jason Kirby and MACLEAN's Most Important Charts to Watch in 2019
Canadian Banks on "Credit Doomsday Watch" CIBC
The CIBC analysts said that Canadian banks appear to be headed for their weakest credit cycle since the oil price collapse, which caused related loan losses to jump in 2016. While their prediction is “not a coming apocalypse,” the report said the banks’ loan losses last quarter had a “one-off feel to them” that could become more frequent. “For reference, the actual doomsday clock sits at two minutes to midnight,” the analysts said.
Well it could easily be one o'clock in the morning as weak hands cut their losses. Hat Tip to @Hutchyman
It's important to remember that our housing and credit boom is part of the global credit boom and it's fading. Hat Tip to @TaviCosta
History, Charts & Curated Readings
Balance Of Trade
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