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.
Worry Worry Worry
The chart to the left shows the GDP growth rate in Canada, the U.S. and Japan since before the 2009 Pit of Gloom to 3Q 2015
I was prompted to compare the three after reading Michael Sankowski's "Crazy Talk: Raising rates while Inflation is near 70 year lows." and Beowulf's comment "...Congress should go ahead and pass a law locking in rates..." (Monetary Realism July 2015)
Hello Japanada. I think what has to happen before rates rise is that inflation has to show up in wages alongside of higher employment rates and then we will see the general CPI overtaking the target mandate (2%-ish). Look again at the top chart comparing Canada, the U.S. and Japan... the 3 plots are similar rising and falling in concert and the question is, will the U.S. GDP start going negative. There is a good chance of it because the USD continues to strengthen against other currencies and the net trade deficit year to date increased 3.9% Y/Y as exports decreased 3.8% and imports decreased 2.4%. (US BEA, Nov 4, 2015).
Why do the hot Canadian real estate markets continue to outperform? Certainly low rates are an inducement to buy since they lower the qualification bar on the credit worthy at the margins, but qualifying for credit does not mitigate risk when the real estate object of desire is a negative yielding asset. It's all good in a rising price environment, but if prices correct for any reason the spotlight will turn to earnings and cash flow.
I did a back of the napkin ownership cost on a mid range vehicle ($49,000 plus taxes, fees and documentation of $6,500) financed with 10% down and only 2% financing over 3 years. That $49,000 car ends up costing close to $60,000 by the end of the third year and has depreciated by 50% to be worth only $30,000. If the car is sold in month 37, the cost that the consumer has paid is approximately $833 per month to drive a new car for 3 years without even adding in maintenance ($100/mo?), insurance ($100/mo?), parking ($100/mo?) repairs ($?) or disposal cost ($?) of the vehicle.
I belong to Vancouver's best and biggest car sharing non-profit society MODO and my cost for having access to over 400 vehicles as well as using taxi's and public transport is less than $150/month for two people.
Governments and the private sector want inflation to offset the cost of converting debt into equity, but Mother Nature is not obliging. As I reported last June "We are leveraging the lowest priced credit for the most expensive non-productive real estate at the worst possible time in history.
Over at Bloomberg, Tom DeMark talks about the outlook for the Chinese and U.S. stock markets. "...we're heading into that period of the year when the market is susceptible to market declines September and October."
Chart Above: The biggest stock market declines since the 1980s:
How bad was Monday's stock market crash?
by Timothy B. Lee (Vox.com) on August 24, 2015
On Monday, August 24, 2015 the stock market posted its largest decline in years, sparking fear that the US is on the verge of another recession. After initially plunging 6.4 percent in a matter of minutes, it recovered some ground and ended the day down 3.6 percent.
The chart by Javier Zarracina is dominated by October 19, 1987, when the stock market plunged by 22 percent. This huge drop wasn't followed by a recession, and the market recovered the lost ground within two years.
There were big declines in October 1997 and August 1998. Again, these proved not to have any broader significance, as the bull market would continue until 2000.
There were three big drops during the 2000-'01 bear market that preceded the recession of the early George W. Bush years.
The stock market suffered 11 big drops in the last four months of 2007, during the Great Recession that was officially under way by then.
In August 2011, the stock market panicked over the possibility that President Obama and congressional Republicans would be unable to resolve the debt ceiling fight, leading to three big declines.
So sometimes a big stock market decline is a sign of deeper economic problems. Other times, it's not. It's too early to say which category Monday's crash is in.
Deutsche Bank reveals 7 reasons why ‘Canada is in serious trouble,’ starting with a 63% overvalued housing market. Financial Post, Business Insider, Andy Kiersz, January 8, 2015
If Treasury Yields are a measure of price and wage inflation, it's just not happening.
The top panel shows Canadian Government Spending vs Labour Force Participation and the lower panel shows Canadian Jobs Added on an Annual Basis all since 2008.
The two biggest line items of Federal Government Expenditures as of 3Q 2014 are:
- Gross current expenditure on goods and services (63% of Total Expenditures, up 0.9% since 4Q 2011) and
- Current transfers to households (23% of Total Expenditures, up 0.7% since 4Q 2011)
- All other Federal Government Expenditures (14% of Total Expenditures since 4Q 2011) have dropped 1.5%
Government spending on itself and the household sector combined with ultra low borrowing rates have not yielded growth in Canadian Labour Force Participation.
Jerry Maguire - Show me the Money
In preparing for my recent BNN Interview (July 9th) the producers sent some queries in advance of the spot; one was "Is it time to rent or buy?". We never covered it on air but my response would have been:
It’s always a time to rent or buy unless you're Hikikomori.
One should look at the fundamentals of one’s present balance sheet and not rely on past performance or future speculation. If you are risk averse then buy or rent what you can pay for if the scenario of your household income were to suddenly drop. Contingencies are for the unexpected. Two income households may have a cushion, one income households have a greater risk.
I mashed up the chart above from Mercer via ZeroHedge which shows the high rent cities (petro-finance-centric) and I included Manhattan averages with or without doormen as well as the 3 hot Canadian markets of Vancouver, Calgary and Toronto.
The fundamentals don't support buying in Vancouver, Calgary and Toronto especially since interest rates are at a low (will they drop?) and rents and resale prices are at the highs (will they rise?).
There is little room for improvement on cash flow unless buying hot market real estate to rent out has some potential for improving the ability to increase the revenue. As I demonstrated in my case study last year of buying a Vancouver condo for investment, the risk of a negative return is only going to be alleviated by a 25% reduction in purchase price if comparison to a 10 year bond is rational. Also last year at the time of the study, inflation (CPI) was running at half of what it is today; a rising CPI erodes the bottom line.
Canadians who import a lot of their news from U.S. wires and depend a lot on trade with the U.S. have a similar negative view about their children's future; nearly two thirds of respondents in a 2012 Pew Research poll in both countries believe the next generation will be financially worse off than themselves. Germans believe the same.
Three quarters of the British and Japanese and 90% of French respondents are bearish. On the flip side the bulls live in China, Brazil and Russia.
Hat Tip to Barry Ritholtz
Messieurs Poloz, Flaherty, Carney, Bernanke and Madame Yellen et al are all on the record warning about leverage and the cost of it as a major risk going forward. Chris Kimble makes an interesting observation that the St Louis Fed Stress Chart is at the lowest historical levels just as it was in 2007 and 2000 when the S&P 500 was at its highest.
The North American story is that the U.S. economy is growing, recession has been averted, the business cycle is risk-back-on and Canada as a satellite exporter to the U.S. will participate in the new joyful inflation as central banks raise rates to make sure we all stay within the 2% CPI target and not get too hot nor stay too cold. Mr Harper continues to assure that the government will evaporate the deficit by 2015 (government workers are advised to start looking for private sector employment).
Aw shucks, all is calm, all is bright in the kingdom of managed inflation so keep buying more stuff because prices are going up; but just a little bit, 2% per year, no big deal. Rates might go up 25 beeps or so, but no big deal. Your employer can hardly wait to get pricing power advantage and more productivity out of you so he can raise your pay packet and not lose you to the head hunters in Alberta.
Wait a minute; the "risk" of rising interest rates is not really the BIG risk that central banks of countries, who are autonomous issuers of their own non convertible currency, lose a lot of sleep over lately. It's the "D" word that provokes insomnia in government and the private sector. As Chris Kimble points out in the chart above, the stress at the Fed could not be much lower than it is today and sleep should be effortless. But what if asset valuations decline? Is that not the greater risk over time?
Japan: Here is what 30 years of low interest rates looks like; and here is the effect on assets and behaviour.
Now that we are on the seasonal down ramp into the 2014 spring bottom for sales and listings, it might be worthwhile for those Canadians who are heavily debt encumbered to look at what happens to a "C" class income generating country after their real estate bubble gets pricked by a swift change in buyer sentiment.
As for The Irish Miracle "The case is clear: an economically challenged government, perniciously influenced by the interests of the housing lobby, blew it. The entire Irish episode will be studied internationally in years to come as an example of how not to do things." (David McWilliams Irish economist writer, broadcaster and journalist)
News Item CNN November 14, 2013: Three years after turning to the EU and International Monetary Fund for €85 billion in aid, Ireland is poised to become the first bailed-out eurozone country to make a full return to financial markets.
Notice the polar opposites of the U.S. (B Class GDP) and Japan (D Class GDP) since 1Q 2000 when the DotCom bubble burst; they also experienced severe housing price deflation; Japan's slide began a decade earlier. Timing is everything.
The October 2013 Credit Suisse Global Wealth Databook contains lots of comparitive charts on recent national and global changes in wealth. This one shows the change in household wealth between 2012 and 2013. The authors point out that since 2000, Canadian per capita wealth has been rising at about 3.7% Y/Y after discounting for exchange rates.
Relative to the U.S. Canada has a more equal wealth distribution with both a smaller percentage of people with less than US$10,000 and a larger percentage with wealth above US$100,000 and the Canadian wealthy account for 3% of the top 1% of global wealth holders, despite having only 0.5% of the world’s population. So far so good.
But look at the inset chart of the Canadian Trade Balance; since the pit of gloom in March 2009 the advances in wealth measures are at the expense of Canadian export production. We are not producing and selling stuff to other nations as our main activity.
As Credit Suisse points out; financial assets account for more than half of household wealth and so with fire sale credit available, Canadians have been deriving their wealth by consuming on margin fueled by their cohort bidding up financial asset prices. Indeed this wealth created by consumption is subject to all the agents continuing to agree on rising valuations. There is no room for depreciation in the model.
The plan might have looked good on a policy paper, but capital flight is not anchored to a national border and as it becomes more concentrated in fewer hands, it can very quickly flow towards markets that are deemed more exploitable. As Nassim Taleb conjects:
We have the illusion that the world functions thanks to programmed design, university research, and bureaucratic funding, but there is compelling—very compelling—evidence to show that this is an illusion, the illusion I call lecturing birds how to fly. Nassim Taleb "Antifragile: Things That Gain from Disorder"
We have lot's of "Eiffel Tower" price patterns to refer to that have a fully formed right side to the tower; Japan is a classic with a multiple decade reversion.
I have lined up the peaks of the Japanese, U.S. and Canadian stock markets with housing index overlays.
The Canadian pair looks to be at a crossroad and according to a Statistics Canada medium growth projection, net immigration along with net birth-death may also have a right side reversion.
History, Charts & Curated Readings
Balance Of Trade
Rent Or Buy