"History, real solemn history, I cannot be interested in.... I read it a little as a duty; but it tells me nothing that does not either vex or weary me. The quarrels of popes and kings, with wars and pestilences in every page; the men all so good for nothing, and hardly any women at all - it is very tiresome." Jane Austen spoken by Catherine Morland in 'Northanger Abbey'
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 | Homeownership Survey Canadian Young Adults (18-24) Less Optimistic Than American Counterparts (see full report) |
Justin Havre put together a survey comparison of Canadian and U.S. Millennial's opinions of when they think home ownership is possible. The takeaways are:
- American young adults (18-24) are more optimistic about owning a home than their Canadian counterparts.
- Millennials are the largest generation on the planet and make up 35% of the American workforce.
- This is the fastest growing group of homebuyers.
- There is a big market in changing minds of Millennials who don't feel home ownership is possible, especially in Canada.
- Many Millennial's buying, spending, and savings habits have been a result of the mortgage crisis of 2008-2009.
- They may have deferred major life decisions but they are making them in increasing numbers.
 CLICK CHART TO ENLARGE | One possible reason for Canadian Millennials being not as optimistic as their American counterparts is the level of consumer debt that individuals have created which is much greater in Canada by perhaps a factor of 5. Canadian lifestyles are dependent on debt. Not only is there interest rate risk, there is also a USD/CAD exchange rate risk (see my June 27 post) and increasing import costs. |
And as I have been tracking on my Household Debt chart, there appears to be a structural change in Canada that has led to:
- The widening spread between total household debt and household mortgages means we are borrowing even more to maintain lifestyle.
- Foreign Direct Investment OUT higher than IN over the last 20 years means Canadian companies are investing outside of Canada to get a better return on Capital and Labour. For every $1 of investment coming in to Canada, $1.36 leaves (full year 2017 data)
- Since the 4Q 2008 crash into the Pit of Gloom, the Balance of Trade has been negative for 70% of the time which means that our debt obligations continue to provide more stimulus to offshore than onshore producers.
And we still don't know about the net effects of Trump's Tariff-O-Nomics. So if you are going to leverage a home purchase with the maximum amount of debt allowed under the new stress test qualifiers, make sure you have your income contract term lengths matching up to your debt obligations.
 CLICK CHART TO ENLARGE | The Canadian Dollar hit a new low today in it's path to a bottom. This is not good news for foreign buyers who bought real estate in the FOMO craze since the pit of gloom in March 2009. |
Currency depreciation on top of foreign buyer taxes and real estate sales that are plunging against a backdrop of rising inventory is evaporating paper profits for would be Canadians.
Locals whether they own or rent are not spared either. A dropping CAD is raising import costs while the Trumpster builds a wall of worry out of trade tariffs and that worry is especially provoking to the over leveraged in Canada.
Locals whether they own or rent are not spared either. A dropping CAD is raising import costs while the Trumpster builds a wall of worry out of trade tariffs and that worry is especially provoking to the over leveraged in Canada.
 CLICK CHART TO ENLARGE | Canada is a country of consumers of U.S. production and services and as the USD rises in value so will our cost of living. For the moment total CPI remains at 2.2% (StatsCan) but the Canadian Yield Curve warning mounts and as Chris Kimble notes below, a U.S. Dollar breakout "...would likely effect the portfolios of investors around the world". |
Is King Dollar Creating A Bullish Head & Shoulders Pattern? by Chris Kimble June 28, 2018
King Dollar is a major player in the financial markets. And its moves are especially important to commodities and emerging markets.
Well, portfolio managers and traders in those markets may want to pay attention to today’s chart because the US Dollar may be setting up for a big move. Back at the end of February, we highlighted why the US Dollar was ready to bounce.
That post was written just as King Dollar was testing a confluence of support and nearing resolution from a bullish falling wedge pattern (point 1 on the chart below). Here’s an excerpt:
FROM A TECHNICAL VIEW, THE DOLLAR IS ATTEMPTING TO POKE ITS HEAD ABOVE A BULLISH FALLING WEDGE PATTERN. THIS ALL OCCURRING AFTER HITTING A CLUSTER OF PRICE SUPPORT.
Well, the Dollar did bounce higher. And if today’s chart pattern is a precursor, King Dollar may be ready to morph this bounce into a full-blown rally.
We are testing lateral resistance at the November 2017 highs (point 2). Could this resistance prove to be the neckline of a bullish inverse head and shoulders pattern? It’s currently an incomplete pattern, but even the slightest pullback could form the right shoulder.
In any event, a breakout here would be very bullish for the Dollar (NYSEARCA:UUP). And this would likely effect the portfolios of investors around the world. Stay tuned!
Or get a FREE TRIAL discount to Chris Kimble's peerless financial market research
CLICK CHART TO ENLARGE
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My recent update of Foreign Direct Investment on my Canadian Household Debt, GDP, and Balance of Trade chart demonstrates that Canadian Capital would rather flee than fight.
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The chart above adds more to the story. Since the dot com bust in 2000, net trade has plunged and to preserve lifestyle, household debt to income has soared to recent highs. Then with the credit collapse in 2008, import prices began to soar while the employment rate dropped against rising productivity and a savings rate that has plunged since the 1981 interest rate spike (Trading Economics Chart). Why bother saving when the government monetary policy is to leverage one's way to prosperity and let time and asset price inflation take care of balance sheets. It's a global trend and the fear of missing out has been a powerful input.
But peak debt may be upon us in this business cycle as banks begin to report a drop in mortgage demand.
But peak debt may be upon us in this business cycle as banks begin to report a drop in mortgage demand.
The Canadian Imperial Bank of Commerce anticipates it will issue half as many new mortgages in the latter part of the year as it did in the same period of 2017 amid cooling in the real estate market. Times Colonist May 23, 2018
The ranks of the credit worthy are thinning. Debt retirement is either a slow process of repayment, or a quick liquidation of assets. Your balance sheet is the clue to your future. Governments demand stress tests; individuals should as well.
David Rosenberg: Ottawa created the debt monster that Canada now faces.
"47% of residential mortgages
are set to roll over for renewal next year."
David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, joins BNN Bloomberg to provide his take on the Canadian economy as Bank of Canada Governor Stephen Poloz sounds the alarm on household debt in this country. Originally aired on May 2, 2018 on BNN Bloomberg
CLICK CHART TO ENLARGE
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Libor’s spread over the overnight index swap rate, known as Libor-OIS, has widened... another sign that banks face steeper funding costs. Bloomberg March 12, 2018
As noted on the charts: "About $350 trillion of financial products and loans are linked to Libor, with a large chunk hinged to the dollar-based version of the benchmark." Bloomberg March 12, 2018, and...
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"...the widening nevertheless reflects an increasing scarcity of dollar funding..." Bloomberg March 20, 2018.
Scarcity of Dollar funding means we should prepare for a rise in the $USD:$CAD pair. In terms of Canadian real estate I chart it in USD here. A strengthening USD means higher import costs for Canadian consumers at a time when interest rates are trending up.
Our Canadian national proclivity to fund our lifestyles via debt rather than income continues to produce a negative Net Trade and FDI, a flattening GDP and growing record household debt levels, charted here.
Scarcity of Dollar funding means we should prepare for a rise in the $USD:$CAD pair. In terms of Canadian real estate I chart it in USD here. A strengthening USD means higher import costs for Canadian consumers at a time when interest rates are trending up.
Our Canadian national proclivity to fund our lifestyles via debt rather than income continues to produce a negative Net Trade and FDI, a flattening GDP and growing record household debt levels, charted here.
Why Consumer Debt is Canada's Greatest Economic Risk
"Consumption to Top Off" Bloomberg March 15, 2018
CLICK CHART TO ENLARGE
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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.
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.
CLICK CHART TO ENLARGE
Here's Who Could Lose the Most in a U.S.-China Trade War
Bloomberg, January 23, 2017
CLICK IMAGE TO ENLARGE
Pictured here is Finland's first high-rise wooden apartment.
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Cross-Laminated Timber |
Hey Canada - we have lot's of trees and lots of land!
In this Finnish model, tenants have the right after a 20 year amortization to own their unit with a 7% down payment and a twenty year state backed loan.
Canadian housing should be affordable and this is an idea that we hewers of wood can do. The University of BC has one up now.
In 2010, Canada was the second-largest exporter of forestry products globally. WikiPedia
Instead of exporting to the highest bidder, why not add value and produce our own housing remedies?
Only Canadians will solve our housing mess. So lets get on with it.
Snippet from "What the U.S. wants from NAFTA talks"
Globe & Mail July 17, 2017
As part of changes to trade laws, the U.S. proposes to eliminate the NAFTA global safeguard exclusion as well as the Chapter 19 dispute settlement mechanism. These panels have regularly ruled in Canada's favour, including on the long-running softwood lumber dispute, and have been long disliked by some Americans who see them as an abdication of U.S. sovereignty.
Snippet from "Freeland calls U.S. NAFTA demands 'troubling' and 'unconventional'" CBC News October 17, 2017
"You have to ask yourself whether the Americans are preparing the ground for an abrogation that will be triggered by someone other than them," "So they can blame someone for the collapse other than themselves, even though it's their outlandish proposals that may trigger the demise of the negotiation." Derek Burney, Canada's ambassador to the United States from 1989-93
Snippet from "What is Donald Trump's NAFTA plan? Canadian experts take their best guess" National Post Oct 16, 2017
“The White House says that it is focused on using trade policy to reduce bilateral trade deficits, but this goal is impossible to achieve through even radical rewrites of existing trade agreements,” House said. “The U.S. will continue running a trade deficit with the world so long as its people consume more than they save.” Brett House, Deputy Chief Economist at Scotiabank
The last quote above “The U.S. will continue running a trade deficit with the world so long as its people consume more than they save.” applies to Canadians as well who are prized by the rest of the world as consumers with lots of available credit. See household debt chart.
The Lumberjack Song - Monty Python's Flying Circus
CLICK CHART TO ENLARGE
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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.
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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.
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.
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
CLICK TO CHART TO ENLARGE
CLICK CHART TO ENLARGE
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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
 CLICK CHART TO ENLARGE | 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 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.
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"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
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