...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
...since Oct 3, 2018, the Thomson Reuters/CoreCommodity CRB Index has been coiling down (MarketWatch.com).
On my Twitter Feed from @hks55 came their chart suggesting that the commodity super cycle is poised for another leg down due to China's slowdown in credit creation that had spurred the commodity boom as Kyle Bass illustrates in this comparison between Chinese credit creation and their GDP (the link includes the 41 second video).
China’s Slower Credit Growth
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.
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
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"
The OECD released their May 2018 Canadian Economic Forecast Summary. Their charts to the left conflates our usual obsession with "flation" which in Latin means to "blow". We worry about whether our investments in production and consumption are going to blow or suck.
Chris Kimble released a June 21st chart triptych "3 Key Economic Indicators May Be Flashing Caution Here"
The monthly charts of Commodities, Crude Oil and U.S. 10 Year Treasuries are at "Long-Term” Fibonacci retracement levels at the same time and could be creating reversal patterns."
"I have a simple goal for my investment research - help people to enlarge portfolios regardless of market direction by looking for patterns at extreme points of "exhaustion" with a high probability of reversing." Chris Kimble
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.
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
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
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
In December 2017, the 10yr less 2yr Canada Government bond spread narrowed to just 32 beeps away from inversion.
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.
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.
Here's Who Could Lose the Most in a U.S.-China Trade War
Bloomberg, January 23, 2017
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)
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
- Currency affects commodities, the bond markets and real estate.
- Price discovery is a function of liquidity not fundamentals which are a long term attribute.
- Prices are created by positive or negative feedback loops.
- Bubbles deflate to their fundamental base.
Tech 1995-2003 (up 100%, down 90%)
Silver 2001-2012 (up 100%, down 40%)
U.S. Homes 2001-2012 (up 100%, down 40%)
- A believable idea (potash 2007-08 "everyone has to eat")
- There is a surplus of funds and shortage of opportunity (low interest rate prompts a search for yield).
- The idea cannot be disproved.
- The idea shifts from the minority to the majority view.
- The overvaluation is justified as the new paradigm (it's different this time).
- A widespread fear of missing out ensues.
- Rampant financing schemes occur.
- A cult obsession (everyone has an interest).
- The bubble becomes unbelievably long.
- Objective people begin to believe the story.
- Prices drop and supply grows.
- Investors see risk.
- Credit dries up.
- Frauds are exposed.
- Governments intervene.
- An exponential rise in price occurs as the cycle ends.
- A trigger is needed to reverse the positive feedback loop (China).
- Prices drop, rates rise and commodities are weak.
- The U.S. housing crash was triggered by the ARM (adjustable rate mortgage) reset.
- This time the events will be international triggered by China and its USD$4 trillion in foreign currency reserves.
- Chinese commercial banks increased credit from USD$4T to USD$34T in 10 years increasing the bank debt to 3 times GDP with an estimated USD$1T in non performing loans. (In the U.S. housing crash, their banks had created USD$16T in bank debt which was only 1 times GDP with non performing loans at less than 1/2 trillion USD$.
- China's 4 big banks are bigger than the 6 largest global banks.
- A massive credit orgy has been created and easy credit misallocated into unproductive end results (ghost cities etc).
- The IMF warns that China's credit risk is systemic.
- The commodity sector is in a bear market.
- There is a currency war going on.
- Slow growth is deflationary (see my debt chart).
- China will not have a new credit cycle (The PBOC warns of an "L" shaped landing).
- China's Yuan is pegged to the USD forcing them to buy and sell USD and the PBOC wants to un-peg.
- The USD rally has the Yuan up 45% against the CAD and there has been a USD$1 trillon of capital outflow from China chasing Canadian and other weak FX country's real estate.
- Un-anchored buyers from China etal have bid the real estate market up and out of equilibrium.
- The China window is closing, they are stopping their capital outflow with restrictions against funding loopholes (Hong Kong, Macau, Bitcoin etal)
- The Chinese Government will implement their Yuan devaluation.
- it will be a huge macro event as the Chinese bubble deteriorates.
- The PBOC will bail out their banks.
- The Yuan/CAD will plummet.
- The positive feedback loop in Canadian real estate will turn to a negative feedback loop.
- More sellers will emerge as credit tightens.
- Real estate prices will drop to fundamentals regressing to 2010-11 levels.
- USD rallies but Yuan does not devalue igniting a second wave of capital outflow.
June 9, 2016: Bank of Canada Governor Stephen Poloz cautioned that climbing real estate prices have outpaced local economic fundamentals like job creation, immigration and income growth.
June 13, 2016: Financial markets are worried about China because its debt has surged to a record 237% of gross domestic product.
Here's Why China's Economy Will Be So Hard to Fix
"The real problem has been... that in a Bubble,
everyone gets in trouble
at the same time"
Bob Hoye, June 16, 2016
First In ~ First Out
According to StatsCan, in 2001 after the dot.com blowout and the markets then turned to commodities, there were +/- 329,129 employees working in the Oil, Gas & Mining industries per year in Canada and in full year 2014 that number had increased by 60.8% to 529,248.
This includes "support activities" but not the peripheral jobs in the general economy that depend on the spending by those oil, gas and mining employees.
According to the New York Times December 8, 2015 "If It Owns a Well or a Mine, It’s Probably in Trouble".
“The world of commodities has been turned upside down,” said Daniel Yergin, the energy historian and vice chairman of IHS, a consultant firm. “Instead of tight supply and strong demand, we have tepid demand and oversupply and overcapacity for commodity production. It’s the end of an era that is not going to come back soon.”
Some energy experts are even beginning to express concerns that sovereign wealth funds of Saudi Arabia and other wealthy Persian Gulf and oil-producing countries will redeem their money from investment firms in the coming year to shore up their balance sheets. If they do, the moves could initiate more instability in global equity and debt markets.
Credit lines drying up for oil companies?
Distress (bonds trading over 1,000bps) has been spreading across the HY space. From its starting point in energy a year ago, it has now reached other commodity-sensitive areas such as transportation, materials, capital goods, and commercial services. But it did not stop here and is also visible in places like retail, gaming, media, consumer staples, and technology – all areas that were widely expected to be insulated from low oil prices, if not even benefitting form them.
In other words, what was until a year ago a purely "energy" phenomenon is now an "everything" phenomenon, despite promises by every prominent economist that plunging energy prices are great news for the economy.
Imagine $35 Oil for 5yrs
A US-Style Canadian housing correction possibility is a potential that CMHC's CEO Evan Siddall discussed at a private audience presentation in New York, November 30, 2015 if oil remained at an average price of USD$35 per barrel for 5 years.
The top chart are oil prices since the OAPEC (Arab members of OPEC plus Egypt & Syria) oil embargo. Note the 22 year period of sub-$35 oil prices not long ago.
Oil averaging $35/bbl for 5 years
- 26% drop in Canadian home prices
- 12.5% peak unemployment
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
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
Balance Of Trade
Rent Or Buy