As the U.S. Energy Information Admin EIA.gov noted in their December 12, 2018 report:
"...concerns about the pace of global economic growth in coming months have led to related concerns about the pace of oil demand growth."
The Canadian Dollar continues to plunge. That means our import costs go up and our net trade has been negative 8 out of the last 11 prints; ie: we Canadians buy more than we sell which is ok if we have the income to service the debt, but as the Chinese economy slows and they buy less of our resources, our incomes as well as other countries incomes are going to diminish.
As Rick Ackerman reminded his clients on December 30, 2018:
A further, significant strengthening in the dollar will tell us when the Deflationary endgame for the global economy is gathering force. It will crush debtors, bankrupt creditors and lop at least four or five zeroes worth of funny money from the banking system’s quadrillion-dollar shell-game. I have written extensively on why hyperinflation is extremely unlikely to settle debts that have become vastly too large to repay. If you cannot understand why, let me pose this question: Do you actually believe the banksters will let you pay off your mortgage with a few hundred-thousand-dollar bills that you’ve peeled from your wallet? If you answered in the negative, you are implicitly a deflationist.
Since the start of ZIRP and NIRP it has been difficult to "be a deflationist" as we watched the global bubble of everything inflate; resource assets, equities, debt and of course real estate which Canadians with the help of foreign laundry services have pushed real estate prices into the top tiers of global pricing. In November 2018, I posted "Dirty Real Estate" which highlighted the "Vancouver Model" that has spread throughout Canada.
The C.D. Howe Institute study estimates of money laundering in Canada range from $5 billion to $100 billion. C.D. Howe Report, September 2018
e don't even know what the "value" of the crime is, but we know what the effect has been in terms of FOMO debt taken on by Canadians. Real estate prices have peaked in Canada and as they drop, the FOMO crowd has a tough choice to make: turn debt into equity quickly by selling the asset or stay in for the long haul and meet the amortization obligation. If it's the former, look for price drops to happen quickly as vendors compete for a diminishing supply of buyers; if it's the latter look for a slow Japanese style deflation and a return to savings as noted in my 2012 post "What Do You Do During a Housing Bust".
A return to savings will eventually allow the pendulum of capital investment to return to productive use. But asset deflation is in view now and we don't yet know it's future length of trend.
One asset class that retains value and even grows during a broad deflationary event is precious metals; and that canary in the coal mine is happening now. See my ongoing chart study of "real" gold and real estate.
And below, see Chris Kimble's
December 31, 2018 note to clients:
Why The Stock Market Is Heading For Disaster
Hat tip to Jesse Colombo for the following 14 minute video that includes the following 20 long term charts:
Trump Is Completely Misguided On Interest Rates
If the Fed or other central bank voluntarily abandons further credit expansion (most commonly by raising interest rates), the credit and asset bubble will experience a deflationary bust. Deflationary episodes entail credit busts, falling consumer prices, bear markets in stocks and housing prices, and falling wages. If the central bank decides to never put an end to the credit expansion (for example, if the Fed never raised rates), however, the result would be a runaway credit and asset bubble that leads to a severe decrease in the value of the currency and high rates of inflation. The latter scenario is what would occur if President Trump got his way – hardly a desirable outcome for the economy. To summarize, the Fed is crazy – they’re crazy for creating such a large bubble in the first place via loose monetary policy, but not for raising interest rates and normalizing their monetary policy. Jesse Colombo, Oct 17, 2018
"New lending activity and refinancing have contracted significantly since the beginning of 2018, a culmination of regulatory pressure, enhanced scrutiny following the banking royal commission, and the self-fulfilling consequence of slowing house prices driving an investor pullback... A rising cost of credit represents a blunter instrument for slowing lending, since it impacts both owner-occupiers and investors in parallel,"JP Morgan's Henry St John
that's not a quote about Canada;
but these are:
Canadian real estate sales are feeling the pinch of higher interest rates, and consumer credit isn’t far behind. Bank of Canada (BoC) numbers show household debt printed a new record high. Despite the record high, the rate of growth continues to slow for consumer debt levels. The decelerating growth is yet another indicator that the credit cycle has peaked. Better Dwelling, July 2018
Market Rate Outlook: One more hike this year plus two more hikes next year. The market is not fully pricing in the next BoC rate increase until December... Canadians are now more sensitive to higher rates than ever before. That means consumption is slowing faster with every 1/4% BoC rate increase. RateSpy.com Sept 2018
Canada's economy is set to slow down even with a NAFTA deal, economists say:
"Our research finds that even with a NAFTA deal in place, the long-desired rotation in growth towards exports and business investment will be sluggish and won't offset the coming slowdown in household spending and housing activity," Royce Mendes, senior economist at CIBC Capital Markets
Sal Guatieri, senior economist at BMO Capital Markets, is also expecting growth next year to slow to 1.8 per cent, as reduced consumer spending and housing activity will weigh on growth.
RBC senior economist Nathan Janzen said the bank doesn't publish forecasts for 2020, but agrees that growth is shifting lower.
"We do expect a more modest pace of consumer spending going forward, and while housing activity should remain a contributor to growth, this sector as well should see more modest growth relative to the past," said Brian DePratto, senior economist at TD Bank.
Quote Sources: CBC News Sept, 2018
And as my long term chart study of Canadian Debt, GDP, Foreign Direct Investment and Balance of Trade shows, since the credit crash of 2009, Canadian's awesome consumption via debt has not led to higher wage employment production in Canada but to lower wage warehousing and transportation of goods and services that we import to maintain our lifestyles.
"The one-million square foot Toronto centre will be Amazon’s sixth facility in Ontario and ninth in Canada." Financial Post, July 2018
"Stabilization should not be interpreted as the start of another strong rally," they warned (TD Bank economists Derek Burleton and Rishi Sondhi). That's because mortgage rates are on the rise, and home affordability levels have reached their worst levels in a quarter century... in fact historical data shows that over the past half century, inflation-adjusted house prices in Toronto fell for about a third of the time. huffingtonpost.ca, Sept 2018
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.
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!
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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
History, Charts & Curated Readings
Balance Of Trade
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