‘Maxed out’: 48% of Canadians on brink of insolvency, survey says.
That's what the recent survey via BNNbloomberg.ca conducted by Ipsos for insolvency firm MNP Ltd. says.
48% - of Canadians are $200 or less away from financial insolvency every month.
The poll is conducted quarterly for MNP and surveyed 2,070 Canadians online from March 13-24... phew.
Fortunately for the rest of us, this is a small sample relative to our more than 35 million residents... but according to sciencebuddies.org a survey of 2000 random people will produce a margin of error of only 2.2%. Oh oh.
If this poll is a reflection of Canadian's ability to continue borrowing to fund lifestyle as they have for the past decade of accelerated leverage, then next up will be a slowdown in consumption which is Canada's major GDP input. The April 2019 IMF table of Global Economy projections is below; Canada's economy is indeed facing a challenge.
...and the Yield Curve
The flattening of the yield curve is a signal from the bond market that it is worried about the economy and its ability to continue to grow. In addition, it is a signal that future inflation is nowhere to be seen. One outcome of an inverted yield curve is a weakening in bank lending as banks begin to earn less profits from making loans. In the most recent earnings announcements, the banks have already made this clear as they expect net interest margins to contract. This is because a bank’s role is to borrow funds at usually lower short-term rates and lend those funds at usually higher longer-term interest rates. The spread between these two rates represents the banks’ profits.
My Canadian yield curve chart above with its 10yr less 2yr plot, shows inversion is only 8 beeps away on March 2019 data. The U.S. Fed's chart is similarly poised.
High household debt levels reduce consumption abilities which puts downward pressure on employment which is already facing the digital transformation of supplying goods and services. Lender and borrower risk leads to debt revulsion by both sides of the equation.
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.
Weak hands will offer up their assets first and in Canada we have a lot of household debt that eventually will face term renewals and the official stress test which is the greater of either the Bank of Canada’s five-year benchmark rate, now 5.14%, or the rate offered by a lender plus another 2%.
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
"While there is a lot of talk about how employment is becoming more temporary, this graph from joint work with Alex Thomson and Arthur Sweetman shows that the average time that the currently employed has been with the same employer has been almost constant at just over 100 months since 1976." Hat Tip to Macleans.ca
And for those of you who are under 40 years of age, you might end up changing employers 6 more times before you reach 70 years old.
That’s why, when you finance a real estate purchase, you should double check both your debt AND income amortization to see if they support each other.
If you have to move to a new city to get that better job, make sure your real estate asset can produce a net revenue stream.
Computer technology is already eating jobs and has been since 1990. To survive, get non-routine skill training. Thanks to Futurism.com for the chart below.
The Precarious Generation
Real estate depreciation is a worrisome event especially if the property is indebted to an arm's length party.
As this page has noted many times before, technology is redefining cash flow so that even if there is no real estate price correction and we all agree to continue to value this commodity at present values, there is still the growing threat to cash flow if you depend on employment for it.
Bloomberg News (Sept 24, 2017) reports that:
Vikram Pandit, who ran Citigroup Inc. during the financial crisis, says technological advances could make 30 percent of banking jobs disappear in five years.
McKinsey & Co. partner Jared Moon predicts that technologies sweeping through investment banks will relieve rank-and-file employees of about a third of their current workload.
Management consultant Opimas LLC says about four of every five Wall Street firms have already implemented, or plan to use, some form of AI, according to Greenwich Associates.
Take a look at Bloomberg's interactive info graphic on the Future of Employment: How susceptible are jobs to computerization? and see the probability of your job being replaced with a machine algorithm.
If your job requires repetitive actions during the course of your workday, your job may no longer have an amortization value in the eyes of your employer nor will your mortgage robot rep want to sign that term renewal on your loan without an increase in equity.
Automation Entering White-Collar Work
"I witnessed 40% of my department laid off"
Quote from a bank mortgage department employee
Source: CBC's The National, March 2017
The worsening of (housing) affordability in Q4 (2016) was the sixth quarterly deterioration in a row, the longest run in almost 20 years. National Bank of Canada FEB 8, 2017 Report
My long term chart study of housing starts vs population growth currently projects a 7% Y/Y decrease for full year 2017.
This suggests that indeed more starts could be consumed especially in this low interest rate environment.
Unfortunately the market place is skewed not to what is needed, eg: affordable family units close to appropriate services, but to what attracts non resident owners, flippers and FOMO driven investors who keep throwing greater amounts of leveraged capital at negative yielding and depreciating piles of steel, concrete and wood while governments at every level stand by in fear that they might lose this historic bonanza of property tax and transfer revenue.
My too-far-left radical idea of ending private fee simple land ownership is never going to happen in my lifetime as written. It is my expression of the frustration one feels at the polarity of choice:
Most people are at best only aware of two choices, two patterns, for land ownership – private ownership (which we associate with the industrial West) and state ownership (as in the Communist East).
The Idea of Owning Land by Robert Gilman 1984
"We don't have a national housing policy in this country and we should," "We're probably one of the few OECD [Organization for Economic Co-operation and Development] countries that don't have one."
TheTyee.ca June 2013
Budget 2017 includes new national housing strategy. Canadian Finance Minister Bill Morneau handed down a budget Wednesday, March 22 that includes a new $11.2 billion national housing strategy
Business Vancouver March 22, 2017
Meanwhile the market grinds on. I suggest that individuals should consider investment in themselves rather than negative yielding real estate because there is no guarantee that the debt positions currently being created will be transformed into equity. What is more enduring is the ability to leverage one's skill set into cash flow as the OECD studies show:
The evidence on how well countries are prepared for the digital economy is rather disturbing. The OECD’s Survey of Adult Skills (PIAAC) suggests that more than 50% of the adult population on average in 28 OECD countries can only carry out the simplest set of computer tasks, such as writing an email and browsing the web, or have no ICT (Information and communication technologies) skills at all. Only around a third of workers have more advanced cognitive skills that enable them to evaluate problems and find solutions (OECD, 2013). As a result, many workers use ICTs regularly without adequate ICT skills: on average, over 40% of those using software at work every day do not have the skills required to use digital technologies effectively (OECD, 2016a). Skills for a Digital World OECD December 2016
By 2016 almost 1.1 million IT jobs will have been sent offshore by 4,700 companies with annual revenue over $1 billion headquartered in the U.S. and Europe. In the U.S. advanced industry labour areas have plunged 61% in 33 years from 1980 to 2013 (top of chart mashup).
Canada's labour cost (2nd chart in the mashup) is running +/- 20% higher than Mexico's and the top source countries for importing labour into Canada are the Philippines, followed by Mexico, the United States, India and Jamaica. Notice the plunge in Canadian labour costs in 2012 as foreign workers become more appealing as hires.
Let's look at some bullet points and their sources:
The U.S. advanced industry platform has thinned out substantially and inordinately, so that less than half as many large metro areas have the density of advanced industry activity that they had in 1980. That means that on balance many fewer U.S. metropolitan areas now have the dense supplier bases and deep pools of technically relevant workers necessary to support new advanced industry growth.
That’s a problem. In an era when clustered capabilities matter as much as labor or energy costs, the United States has a lot of work to do to rebuild its network of regional industrial ecosystems.
Reshoring: Why It’s Not Easy
by Mark Muro and Siddharth Kulkarni, October 3, 2014
By 2016, corporations in the U.S. and Europe are expected to move an additional 750,000 business services jobs to low-cost geographies. This would bring the total of offshored jobs in finance, procurement, HR, and IT to 2.3 million – or one third of all jobs in these areas.
While nearly three-quarters of a million jobs is significant, the speed at which these jobs leave the U.S. will begin to level off in 2014 and slow considerably after 2016. According to the Hackett Group, “of the 5.1 million business services jobs remaining onshore at U.S. and
European companies in 2012, only 1.8 million could be moved offshore – and 750,000 of those will be gone by 2016.”
Offshoring? Reshoring? Nearshoring? How will global mobility change in the next 10 years? Report by Graebel, September, 2012
The snapshot view (bottom panel on the chart mashup above) on December 1st 2012 shows that there were 338,221 Temporary Foreign Workers in Canada, up 235% from 101,078 on December 1st, 2002. But the calendar view shows that the number of temporary foreign workers grew from 181,794 in 2002 to 491,547 in 2012 (170% increase); although a double count could occur if a short-term worker returns home and then comes back for another temporary position, but it does reflect the growing number of temporary workers who are in Canada for more than a year.
Inter-company staff exchanges or workers brought in under trade deals like the North American Free Trade Agreement are exempt from the LMO process (Labour Market Opinion), ie: The company opinion is: "We have to hire this foreign worker because we don't have a local worker to fill the vacancy".
The federal government also shortened approval times in some cases from five months to five days.
The jump in low-skill entrants to Canada comes at the same time that preliminary estimates show a decline in the total number of temporary foreign workers admitted from January to March 2014. That decline, though, is the result of a significant drop in the number of highly skilled temporary foreign workers granted entry. The low-skill group, meanwhile, grew across all categories, for live-in-caregivers, seasonal agricultural workers, and the low-skill pilot program that includes restaurant and hotel workers among others.
Canadian Employment Minister Jason Kenney offered an extensive defence of the vast majority of the program, arguing that legitimate exchanges of labour in a global economy should not be curtailed because of a "small number of problems".
Everything you need to know about Temporary Foreign Workers
by Bill Curry, The Globe and Mail, June 24, 2014.
Numbers of low-skilled temporary foreign workers rose despite...
by Joe Friesen, The Globe and Mail, October 27, 2014.
Robots will bring manufacturing back to the rich countries as machines are replacing workers and the cost of labour will not matter much.
In the Great Recession of 2008 we see a drop in offshoring activity in the US and Europe. But the activity quickly rebounded, increasing faster than before the crisis.
Intelligent machines will replace smart people rather than increase the demand for skills (capital bias rather than skill bias technical change) and as a result the relative price for skills (the skill premium) will decline.
The trend in the U.S. skill premium since 1999 has been almost flat suggesting that capital-bias technology has been driving this trend.
As the demand for skills declines, the wage gap between skilled and unskilled workers will decline as well.
Since the 1980s, the share of income going to labour has declined in all rich countries. It is now at about 58% of GDP. It used to be 70%.
It may well be that the ‘war for talent’ and the scarcity of human capital is an issue of the past.
Globalisation and the Rise of the Robots
by Dalia Marin, November 15, 2014
Left, Right or Down
Canada’s poorest 10% of the population saw their net worth drop some 150% since 2005. They have an average net worth of -$5,100, meaning on average the lowest earners have $5,100 more debt than assets, down from -$2,000 in 2005.
In the U.S. those in the lowest 20% quintile had a negative median net worth of -$6,029 in 2011, compared with -$905 in 2000. Those in the 2nd lowest quintile saw their assets drop by nearly half to a median of $7,263 in 2011 from $14,319 in 2000. (CNBC.com)
Deep and Persistent Wealth Inequality in Canada
Broadbent Institute September 2014
The Fading Redistributive Impact: Inequality and Poverty After four decades of relative stability, income inequality in Canada surged upward in the latter half of the 1990s. Between the mid-1990s and the mid-2000s, inequality increased more in Canada than in other OECD countries, and the redistributive impact of the tax-transfer system in Canada declined (OECD 2008, fig. 4.7). As we saw at the outset, by the mid-2000s, the redistributive impact of Canadian taxes and transfers was among the smallest among OECD countries (OECD 2011, 271).
The big surge in market income inequality began during the recession of the early 1980s and continued until the end of the 1990s. Rising market inequality reflects several distinct but powerful trends. Most attention has focused on the stunning rise in the proportion of income captured by the top 1 percent of income-earners, reflecting changing norms about compensation for the highly paid (Saez and Veal 2005; Fortin et al. 2012). The share of income captured by the top 1 percent is now approaching the levels reached in the “Gilded Age” of the 1920s and the Great Depression of the 1930s, generating an intense debate about the division between the rich and the rest, which was highlighted by the Occupy Movement in 2011.
However, other trends have also mattered. One is the loss of solid middle-income jobs as a result of a combination of technological change, outsourcing, and declining unionization. According to one analysis, “the young and the poorly educated have borne the brunt of these forces, but significant numbers of those previously in the middle and lower middle of the occupational skill and wage distribution have also been adversely affected” (Fortin at al. 2012, 133).
Finally, social changes have been important. Women and men increasingly choose spouses with similar educational levels, a process known as marital homogamy, or educational assortative mating. This trend tends to increase family income inequality as high-income earners increasingly marry each other and lower-income earners do likewise. Figure 1.1 captures the impact of these wider trends, demonstrating the strong rise in the real income of families at the 80th and 90th percentile, compared to the stagnation in the incomes of families in the middle and lower levels of the income distribution.
Read the whole Broadbent Institute study with charts here.
Bill Maher - Wealth Inequality in America
I continue to make the point that the bet on capital gains from real estate is not through inflation but through speculation. The speculation might be about inflation, but if inflation was the case, we would see employment earnings keeping pace, and they're not. From CBC News July 15, 2014 comes this "Microsoft expected to cut jobs in wake of Nokia deal." and quote:
“We will increase the fluidity of information and ideas by taking actions to flatten the organization and develop leaner business processes,” Satya wrote. “Culture change means we will do things differently.” said Satya Nadella, CEO of Microsoft.
The management will employ fewer people to give us feedback about our ideas by reducing the number of different levels of employment pay so that our cost of doing business is reduced on our balance sheet. We are forced to reduce our inhouse activities.
I have a job contract to fulfill and you don't. You no longer have employable skills here.
Software is eating the world.
"This is the basic insight: Software is eating the world. The Internet has now spread to the size and scope where it has become economically viable to build huge companies in single domains, where their basic, world-changing innovation is entirely in the code. We’ve especially seen it in retail — with companies like Groupon, Zappos, Fab." Marc Andreessen Wired interview April 24, 2013
How Technology Is Destroying Jobs
By David Rotman on June 12, 2013, MIT Technology Review
A less dramatic change, but one with a potentially far larger impact on employment, is taking place in clerical work and professional services. Technologies like the Web, artificial intelligence, big data, and improved analytics—all made possible by the ever increasing availability of cheap computing power and storage capacity—are automating many routine tasks.
Countless traditional white-collar jobs, such as many in the post office and in customer service, have disappeared. W. Brian Arthur, a visiting researcher at the Xerox Palo Alto Research Center’s intelligence systems lab and a former economics professor at Stanford University, calls it the “autonomous economy.” It’s far more subtle than the idea of robots and automation doing human jobs, he says: it involves “digital processes talking to other digital processes and creating new processes,” enabling us to do many things with fewer people and making yet other human jobs obsolete. Full Article Here
"Job Switching" from I Love Lucy
Aired September 15, 1952 on CBS TV
Lawrence Dale (opponent of anti-competitive MLS practice)
When I saw this chart of Canadian Realtor Population growth which in the last 40 years has spiked by 336% or six times our civilian population growth of 55%, I am reminded of Marc Andreessen's 2011 quip that "software is eating the world" which lit up the Twitter-sphere and led to a Wall Street Journal article sounding the warning bell to workers who are incorrectly trained and educated.
More and more major businesses and industries are being run on software and delivered as online services—from movies to agriculture to national defense. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures. Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not.
Many people in the U.S. and around the world lack the education and skills required to participate in the great new companies coming out of the software revolution. This is a tragedy since every company I work with is absolutely starved for talent. Qualified software engineers, managers, marketers and salespeople in Silicon Valley can rack up dozens of high-paying, high-upside job offers any time they want, while national unemployment and underemployment is sky high. This problem is even worse than it looks because many workers in existing industries will be stranded on the wrong side of software-based disruption and may never be able to work in their fields again. There's no way through this problem other than education, and we have a long way to go.
Nearly half of American jobs today could be automated in "a decade or two" according to new research. The Atlantic Jan, 2014
Meanwhile in Canada, if we have not already had our brain's drained into a Silicon Valley somewhere, we leave our homes and go toil in the muck of the Athabasca. (Alberta Earnings are 22% above Canada's average - April 2014 data).
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.
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