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

Canada-US-Mexico Wages

9/26/2016

Manufacturing wages in Canada, USA & Mexico

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While we wait for the Clinton Trump toss up at Hofstra U. tonight, let's look at some data that affects everyone on the continent, ie: manufacturing wages measured in USD since the gloom of 2009 in Canada, the U.S. and Mexico. I have been showing for some time now, that Canada's net Federal Direct Investment balance has been negative for nearly 20 years and last year it widened significantly.

Clearly, capital likes to go where the return on investment is high especially in productive sectors like manufacturing where competition for buyers is cutthroat.

The chart above shows that Canadian manufacturing wages have jumped 21% in the last 7 years while in the U.S. they have gone up only 12% and in Mexico they have DROPPED 7% to US$2.10 per hour. (no typo - that's US$2.10/hr)

Canadian households have become highly indebted (168% debt to income) via government insured credit and animal spirit peer pressure. The IMF has been sounding the alarm bell at least since 2011 "Households, however, already have done enough borrowing, at least when it comes to real estate. Any further buildup of debt only risks a painful collapse." That's what they said 5 years ago.

Canadians are just $200 away from being overwhelmed by debt, new survey finds Financial Post September 28, 2016

> Calgary-based MNP LLP, said 56 per cent of those polled — up from 48 per cent surveyed six months ago — are close to facing negative cash flow should they take on up to another $200 in monthly debt.

>The online survey of of 1,502 Canadians conducted between Sept. 6 and Sept. 12 also found 31 per cent are already not paying their bills on time, making them technically insolvent, MNP says.

> A survey this month from TransUnion found 718,000 Canadians can’t even absorb a 25-basis point increase in interest rates without being in a negative cash flow situation. One percentage point would drive 917,000 over the edge, the credit rating agency found.

> In another recent study, the Canadian Payroll Association said 48 per cent of Canadians couldn’t make ends meets if they missed just one paycheque – a dire picture of a country living paycheque-to-paycheque.

> MNP said there is some positive news about debt costs. More Canadians now say they are concerned about their debt: 52 per cent, up from 43 per cent six months ago.

And here we are now trading real estate to each other at prices far greater than most places on the planet and that has attracted global capital into Canada to buy our hovels (speculative consumption). It's kept the F.I.R.E. service sector fully employed but has done very little for long term productive investment because long term bond yields cannot compete with flipping real estate. In the last 43 months, Vancouver single family detached house prices have gone up 1.7% per month or 20.4% per annum for nearly four years!

The latest sales/inventory ratio suggests that the risk of sentiment change is occurring in Vancouver (not yet in Toronto); but our very high labour cost relative to our U.S. and Mexican trade channels is going to put pressure on the Bank of Canada and the Federal Government to let the CAD/USD continue dropping (Bloomberg May 2016) "Currency depreciations would help many of the U.S.'s G7 partners (Canada, France, Germany, Italy, Japan, UK, & EU) a lot while hurting the U.S. little, if at all. In other words, a G7 currency war would be fine as long as the U.S. remained a pacifist."

A lower CAD/USD will help Canadian exporters to some degree but not enough to compete directly with Mexico and other low labour cost and low-bar regulatory regimes (China, Vietnam, Indonesia etal). A lower CAD/USD will also put more inflationary pressure on import costs into Canada reducing disposable consumer income that will affect consumption of domestic services including the demand for credit while debt repayment schedules may have to have their amortization terms lengthened especially if earnings growth slows.

ITEM: BlackBerry Abandons Its Phone New York Times September 28, 2016 - In recent years, BlackBerry has cut thousands of jobs and closed several operating centers, including one in this city (Halifax), over the last three years. A company spokeswoman declined to discuss any future layoffs.

A lower CAD/USD will not be favourable to the foreign buyers of Canadian real estate who purchased in the last 7 years if their own currencies do not drop as much as the CAD. Will they continue to hold a wasting asset that produces a negative cash flow?

The hysterical mania of buying real estate in Canada will come to an end when we see listing inventories rise, perhaps in 1Q 2017 if a shift from greed to fear manifests.

And from CNBC, September 27, 2016:

"Vancouver in Canada has been identified by Swiss bank UBS as the global financial center with the riskiest housing bubble."

"Currently, house prices in Vancouver seem clearly out of step with economic fundamentals, and are in bubble risk territory."

In the meantime, "The OECD warns that a low-growth trap has taken root, as poor growth expectations further depress trade investment, productivity and wages." Sept 21, 2016

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Made in America

6/16/2016

Savings Rate, Retail Sales & Home Ownership

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Did we import a Boom?
As the mashup of charts of Canada & U.S. Savings Rate, Retail Sales and Household Ownership demonstrates, Canadians have gone all in on the consumption industry errr... I mean the construction industry. Well that's what housing construction is. Yes it does produce a finished product but essentially it is an assembly of imported commodities that we put together just like in our automotive "industry"(ironically, oil is near the top of the import list).

We are not assembling productive capacity; it's a one-off affair selling depreciating assets financed with debt that depreciates much slower than the object of our desire. As the Household Debt and mortgage chart illustrates, we are approaching, if we have not already, peak household debt and as the mashup of charts above show, we are burning through our savings with so little disposable income left that the retail sector is showing signs of a potential contraction. The late stage rally to "own" real estate in Canada looks like it may also be facing a momentum challenge that occurred in the U.S. a decade ago.

"COUNTRY PRICING"
The Cost of Being Canadian
even when the CAD/USD is near par
CBC Marketplace

The Bank Job

3/18/2015

Canadian Retail Sales, Balance of Trade & the Current Account

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Are Canadians Spent?

Canadians are being lured once again with a new record low 5 year fixed mortgage rate at 2.79% (CBC News, March 17, 2015). The creditworthy are going to take advantage of the potential to leverage this new helicopter drop.

But according to the charts above, they suggest that the remaining productive Canadians have already spent their future earnings and are liquidating their savings.

The top panel shows Canadian Retail Sales with and without auto sales since the Pit of Gloom in March 2009. The lower panel shows the Canadian Balance of Trade as well as the Current Account in the same time frame as retail sales.

Notice in the top panel that retail sales ex-auto have plunged and are nearly at the March 2009 Pit of Gloom lows. It might be cheaper than last year to drive to the mall but when you get there, imported goods (including refined fuel) require more of those 78 cent dollars. If Canadians are not in the stores buying stuff, employers will reduce labour costs (fewer hours or more automation) and manufacturers will produce less for this market.

In the lower panel, the Canadian Balance of Trade is plunging into deeper negative readings than at the pit of gloom as the export trade gets swamped by higher import costs on a low CAD.

The Current Account overlay remains at pit of gloom lows and the only way to reverse the deficit trend is to increase exports, decrease imports, depreciate the CAD, increase domestic savings or reduce domestic and or national borrowing or a combination of the above.

Mortgage debt requires a long term transfer of savings to transform the liability into an asset. A $100,000 loan at 3% with monthly payments over 25 years requires a repayment of $142,263.39 and does not account for increases in interest rates over 25 years.

The additional $42,263.39 of interest payments is coming out of savings but not going into productive investment. A mortgage is not an investment or a savings plan.

If the collateral securing the mortgage depreciates faster than the loan principal outstanding, debt revulsion will trump consumption desire.

The Storys - Money (That's what I want)

Dollar Depreciation

2/18/2015

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Dollar Depreciation Canada Edition

Stats Can Headlines via Trading Economics:

> Canada Trade Gap increased in December of 2014
> Canada Trade Deficit Widens in November 2014
> Canada Trade Surplus Narrows in October 2014

4 of the last 6 months of Canadian
trade balances have been negative

Big media has been spinning the low CAD as a net positive for Canada. But it's not working out and probably explains in part the sudden decision by the Bank of Canada in cutting its key lending rate another 25 beeps on January 21, 2015, depressing the CAD/USD even further, but:

"There is considerable uncertainty about the speed with which this sequence (increased foreign demand, stronger exports, improved business confidence, investment and employment growth) will evolve and how it will be affected by the drop in oil prices. Canada’s weaker terms of trade will have an adverse impact on incomes and wealth, reducing domestic demand growth." (Bank of Canada)

Export countries want their currency to be valued less than their customer's currency so that they can 1) undersell the competition and 2) try to increase inflation (which increases tax collections). Neither is working. While exports rose 1.5% in December 2014, imports rose 2.3 percent with gains in 8 out of 11 import sectors. The main contributors to the increase in imports were energy products, motor vehicles and parts, as well as metal and non-metallic mineral products. Although Canada is a net energy exporter, its economy measured by GDP is that of producing 30% goods and 70% services (Stas Can Nov 2014).

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Global oil demand growth remained at a relatively suppressed 585 kb/d y-o-y in 4Q14. There are several reasons why lower crude oil prices so far seem to have failed to stimulate demand. Those include heightened deflationary risks in both Europe and Japan; adverse revenue impacts on net-oil-exporters; a global trend towards reductions in energy price subsidies and/or increases in oil consumption taxes; and the heavy falls experienced by many currencies, versus the US dollar, negating the impact of lower crude prices in domestic currency terms. Reflecting the downwardly revised macroeconomic backdrop, mid-January saw the World Bank revise down its 2015 global economic growth forecasts to 3.0%, versus 3.4% in June 2014, still an acceleration on 2014 (+2.6%) but notably less-so than previously assumed. (International Energy Agency‌)

New Record Lows on the Baltic Dry Index Chart

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"When inflation expectations are solidly anchored, as is now the case in Canada, there is no reason to fear deflation." said senior Bank of Canada deputy governor Agathe Côté, and yet many analysts are expecting the Bank of Canada to lower its central bank rate again at its next scheduled rate announcement on March 4, 2015. (Canadian Press via CBC News Feb 19, 2015)

Foreign Exchange

4/11/2014

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U.S. Dollar Strength

From the early 1990's to the early 2000's, the USD/CAD was trending up and increasing Canadian import costs on a weak CAD relative to the USD (top panel of chart). After 10 years the trend reversed and for the next decade to 2013 the CAD unit was strong against the USD allowing Canadians to buy more stuff at cheaper prices.

Now the trend appears to be reversing once again with the USD on the ascendant. For the Canadian exporters who took advantage of a strong CAD and who used the FX advantage to invest in machine independence technology (IT & Robotics) as well as reducing middle management; they will probably transition well if the global slowdown is still in an early phase of a trend change (Bloomberg March 24/14 "China’s manufacturing industry weakened for a fifth straight month").

But for exporters who rely on import materials and for all Canadians who shop for imported goods, CAD depreciation is going to depress consumption, lower aggregate demand, reduce wage growth and deflate unproductive asset values at the margins as participants liquidate in order to reduce debt, repair balance sheets and try to maintain lifestyle in a rising import price environment.

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As I noted this month in the updated TSX chart (March data), the Canadian commodities index is attempting a breakout to the upside.

The first 2 weekly April data points are up as well CCI).

Dollar War

2/25/2014

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The 2 Sided Loonie

The chart mashup shows the difference in labour unit cost between Canada and the U.S. in the top panel and the steady drop in the CAD relative to the USD since 2011 (middle panel) and the Canadian balance of trade in the bottom panel.

Only about 30% of Canada's GDP is derived from exporting and most Canadian exporters will enjoy the CAD falling against the USD because most of their export trade (75%) is to the U.S.

But the Loonie remained relatively high against the USD for 5 years (2002-05) and that led to purchasers of Canadian exports to look for alternative sources and that led to more layoffs in Canadian production plants (Bombardier cut 1700 jobs, Kellogg cut 500, Heinz cut 740, Blackberry cut 4500 - Bloomberg).

Layoffs are not easily reversed, and as the top panel of the mashup shows, the Canadian unit labour cost is 14-15% above the U.S. making it that much harder to sell into the U.S. or anywhere else (IMF via Reuters).

As a consumer society, disposable income is also shrinking in Canada as the price of everything we import goes up against the falling CAD and a falling safe haven status compounded by the end of the Canadian Immigrant Investor Program this month which only attracted 130,000 people since the 1986 inception (Globe & Mail).

The foreign investor class has good reasons to look at their Canadian asset portfolios and high on the list will be negative yielding real estate bought in the last 10 years. We could see some drama on the MAR-MOI charts this year if real estate inventory for sale surprises to the upside.

Neo-Colonialism

1/27/2014

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Oil and Money Flow

Canadians like to assume that Canada is a large exporting resource laden land mass; yes and no. The Wall Street Journal observes a different market; "Canada an Emerging Market? Yes, for U.S. Oil Exports". Light crude imported into Canada from the U.S. increased 520% from 2008 to 2013 and is expected to rise another 61% by 2015 (top panel of chart mashup).

As the U.S. becomes more energy self sufficient, Canada becomes more reliant on imported fuels. For more background information see the blog discussion between Andrew Leach and Robert McClelland etal.

Canadians don't build energy infrastructure because of a) expense; it's short term "cheaper" to import other nation's value added products, b) trade agreements; our small relative market size keeps us compliant and acquiescent at the bargaining table and c) policy void; it's easier politically and corporately to let a+b=c

Now look at the bottom panel of the chart mashup above. When the price of imported fuel spikes so does the volume of Canadian imports AT THE HIGHER PRICE!

Meanwhile in Canada:

CLICK CHART TO ENLARGE (1)

CLICK CHART TO ENLARGE (2)

CLICK CHART TO ENLARGE (3)

In Canada services account for more than 70% of GDP. Within services the most important are: Finance, insurance, real estate, rental and leasing and management of companies and enterprises (21% of total GDP); Retail and wholesale trade (12%), Health (8%) and Public administration (6%). Manufacturing accounts for 13% of the output and Construction for 6%. Mining and oil and gas extraction constitute only 4% of GDP, yet Canada is a net exporter of energy. Also, although Agriculture, forestry, fishing and hunting account for 2% of output, the country is one of the world's largest suppliers of agricultural products.
In Canada, Productivity is the real value of output produced by a unit of labor during a certain time. It is used to measure efficiency of the economy.
The Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid).