While we wait for the June housing data to come out, the twitter-verse has been signalling more recession metrics. Hat tips for the charts to @TaviCosta @crescatkevin and @long_vol
Image slide show below of the 3 charts above.
The New York Fed’s recession probability model is currently warning that there is a 30% probability of a recession in the next 12 months. The last time that recession odds were the same as they are now was in July 2007, which was just five months before the Great Recession officially started in December 2007. July 2007 was also when Bear Stearns’ two subprime hedge funds lost nearly all of their value, which ultimately contributed to the investment bank’s demise and the sharp escalation of the U.S. financial crisis.
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While we wait for the June real estate stats to come out, let's look at the relationship between WTI Oil prices and real estate in Canada.
The top chart shows the WTI oil prices dropping into month end lows and as the inset seasonal chart shows, the drop is happening when the price variability is at one of the four low points in the year which suggests this year may not be much different.
Now look at the Canadian scene via the TSX cash markets in the chart below. As the chart plots since 2015 demonstrate, when the energy sector price drops so does the real estate sector.
These cash markets react quickly to changes "on the ground" and are not restricted by the handicap of finding a buyer.
The relationship between oil prices and real estate are clearly seen in the Calgary housing chart with its total sales plot and the TSX Energy plot overlays, both of which have been descending since 2013 while the energy plot itself has been dropping since the July 2008 peak. It also shows up on my chart of TSX indexes for Energy, Real Estate, Financial Services and Gold... and gold is maybe leading the way for another leg down.
Gold heading down makes sense since the U.S. Dollar (my chart of Canadian real estate in USD) has been rising since 3Q 2017 and a high USD/CAD ratio can quickly unwind marketplace sentiment when it comes to a speculative commodity which real estate has been transformed into with the global suppression of leverage costs.
Oil Breaks Down: Should Stock Market Bulls Be Worried?
From CHRIS KIMBLE, technical market analyst:
A couple of weeks ago, I wrote an article about crude oil’s recent correlation to the S&P 500 (stock market) and that its initial move lower may be sending a bearish signal to stocks. Since then, crude oil has fallen sharply through its up-trend line, sending a bearish message to Oil bulls.
Is the S&P 500 the next to fall?
Below is an updated chart of Crude Oil showing the multi-month downtrend (1), and the ultimate break down through its near term up-trend line (2).
More importantly, from a pattern perspective, Crude Oil is putting in a large weekly reversal bar (bearish). This warrants watching as Crude Oil and the stock market remain highly correlated since their peak in October. Stay tuned!
Thanks to Chris Kimble for the chart above; get a FREE TRIAL to his work.
Why The Stock Market Is Heading For Disaster
In this presentation, Clarity Financial's economic analyst Jesse Colombo explains why the U.S. stock market is experiencing a dangerous bubble that is going to burst violently and cause serious damage to the underlying economy. Published on Oct 11, 2018
- S&P 500 since 1997
- Percent equity gains since 2009
- Interest rates since 1997
- Real Fed Funds rate since 1990
- U.S. corp debt since 1980
- U.S. corp debt as a percent of GDP since 1980
- Buybacks and dividends paid vs S&P 500 value since 2000
- S&P 500 vs NYSE margin debt as percent of GDP since 1997
- Retail investor allocation to stocks vs cash since 1997
- CBOE volatility index (VIX) since 1997
- St Louis financial stress index since 1997
- BAML U.S. high yield spread since 1997
- Cyclically adjusted P/E ratio since 1980
- U.S. stock market capitalization to GDP ratio since 1971
- Tobins Q ratio since 1902
- U.S. net corp profits as a percent of GNP since 1947
- FAANG stocks vs S&P 500 since 2009
- Fed Funds rate and recessions since 1997
- Financial banking crises and recessions since 1977
- 10-2 year treasuries spread since 1976
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
Market Bear Hussman Says Stocks Could Lose $20 Trillion
To state the obvious, bull markets do not last forever, and inevitably are followed by bear markets. Likewise, economic expansions also must end at some point, followed by recessions, and recessions typically are accompanied by bear markets. John Hussman, Oct 15, 2018
There's trouble ahead in the global housing market
Source: Business Insider July 2018
Toronto: Prices clearly peaked in early 2017. Prices are now down 3% vs last year. (Toronto SF Detached are down 17% from the peak. See the Sept 30, 2018 Plunge-O-Meter)
Syndey: Compared to last year, prices are now down 5% and supply has ballooned 22%.
Stockholm & Vancouver: Over a recent 6-month period, prices in the luxury property market fell 9% and 7.6%, respectively.
New York City: In Q1 2018, prices were down 8% YoY and sales were down 25%. NYC's luxury properties fared even worse.
San Francisco: After hitting a record price high in January, the city has seen a rare spring decline in prices, while rents across the SF Bay Area are starting to "cool off"
Bond King Gundlach predicts yields
much higher before this move ends
"If you look at the charts and you look at the way the market's behaving and you think about the trends that are underneath the bond market, it wouldn't be surprising at all to see the 30-year [yield] go to 4 percent before this move of the breakout above 3.25 percent is over," he said on "Halftime Report" Thursday. CNBC, Oct 11, 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
I have to get this off my chest before I return my attention back to the turmoil brewing that is real estate in Canada because the Trump Presidency will be headed by a psychologically defined Psychopath and his vice president who will be one step away from the oval office also "believes it his 'calling' to legislate his religious views into public policy."
Bye bye secular humanist civil government; hello to religious and political ideologues.
Here is the Hare Psychopathy Checklist. "Each of the twenty items is given a score of 0, 1, or 2 based on how well it applies to the subject being tested. A prototypical psychopath would receive a maximum score of 40, while someone with absolutely no psychopathic traits or tendencies would receive a score of zero. A score of 30 or above qualifies a person for a diagnosis of psychopathy. People with no criminal backgrounds normally score around 5. Many non-psychopathic criminal offenders score around 22."
01. glib and superficial charm
02. grandiose (exaggeratedly high) estimation of self
03. need for stimulation
04. pathological lying
05. cunning and manipulativeness
06. lack of remorse or guilt
07. shallow affect (superficial emotional responsiveness)
08. callousness and lack of empathy
09. parasitic lifestyle
10. poor behavioral controls
11. sexual promiscuity
12. early behavior problems
13. lack of realistic long-term goals
16. failure to accept responsibility for own actions
17. many short-term marital relationships
18. juvenile delinquency
19. revocation of conditional release
20. criminal versatility
Does anything sound familiar?
And here is Umberto Eco's definition of Facism from Wikipedia:
In his 1995 essay "Eternal Fascism", Umberto Eco lists fourteen general properties of fascist ideology. [UR-Fascism] He argues that it is not possible to organise these into a coherent system, but that "it is enough that one of them be present to allow fascism to coagulate around it". He uses the term "Ur-fascism" as a generic description of different historical forms of fascism. Eleven of the fourteen properties are as follows:
"The Cult of Tradition", characterized by cultural syncretism, even at the risk of internal contradiction. When all truth has already been revealed by Tradition, no new learning can occur, only further interpretation and refinement.
"The Rejection of modernism", which views the rationalistic development of Western culture since the Enlightenment as a descent into depravity. Eco distinguishes this from a rejection of superficial technological advancement, as many fascist regimes cite their industrial potency as proof of the vitality of their system.
"The Cult of Action for Action's Sake", which dictates that action is of value in itself, and should be taken without intellectual reflection. This, says Eco, is connected with anti-intellectualism and irrationalism, and often manifests in attacks on modern culture and science.
"Disagreement Is Treason" – Fascism devalues intellectual discourse and critical reasoning as barriers to action, as well as out of fear that such analysis will expose the contradictions embodied in a syncretistic faith.
"Fear of Difference", which fascism seeks to exploit and exacerbate, often in the form of racism or an appeal against foreigners and immigrants.
"Appeal to a Frustrated Middle Class", fearing economic pressure from the demands and aspirations of lower social groups.
"Obsession with a Plot" and the hyping-up of an enemy threat. This often combines an appeal to xenophobia with a fear of disloyalty and sabotage from marginalized groups living within the society (such as the German elite's 'fear' of the 1930s Jewish populace's businesses and well-doings; see also anti-Semitism). Eco also cites Pat Robertson's book The New World Order as a prominent example of a plot obsession.
Fascist societies rhetorically cast their enemies as "at the same time too strong and too weak." On the one hand, fascists play up the power of certain disfavored elites to encourage in their followers a sense of grievance and humiliation. On the other hand, fascist leaders point to the decadence of those elites as proof of their ultimate feebleness in the face of an overwhelming popular will.
"Pacifism is Trafficking with the Enemy" because "Life is Permanent Warfare" – there must always be an enemy to fight. Both fascist Germany under Hitler and Italy under Mussolini worked first to organize and clean up their respective countries and then build the war machines that they later intended to and did use, despite Germany being under restrictions of the Versailles treaty to NOT build a military force. This principle leads to a fundamental contradiction within fascism: the incompatibility of ultimate triumph with perpetual war.
"Contempt for the Weak", which is uncomfortably married to a chauvinistic popular elitism, in which every member of society is superior to outsiders by virtue of belonging to the in-group. Eco sees in these attitudes the root of a deep tension in the fundamentally hierarchical structure of fascist polities, as they encourage leaders to despise their underlings, up to the ultimate Leader who holds the whole country in contempt for having allowed him to overtake it by force.
"Everybody is Educated to Become a Hero", which leads to the embrace of a cult of death. As Eco observes, "the Ur-Fascist hero is impatient to die. In his impatience, he more frequently sends other people to death."
"Machismo", which sublimates the difficult work of permanent war and heroism into the sexual sphere. Fascists thus hold "both disdain for women and intolerance and condemnation of nonstandard sexual habits, from chastity to homosexuality."
"Selective Populism" – The People, conceived monolithically, have a Common Will, distinct from and superior to the viewpoint of any individual. As no mass of people can ever be truly unanimous, the Leader holds himself out as the interpreter of the popular will (though truly he dictates it). Fascists use this concept to delegitimize democratic institutions they accuse of "no longer represent[ing] the Voice of the People."
"Newspeak" – Fascism employs and promotes an impoverished vocabulary in order to limit critical reasoning.
Does anything sound familiar?
Stephen K. Bannon
"Bannon and Breitbart Media were Trump before Trump"
QUOTES from the interview of Stephen K. Bannon
by Ken Stern, Vanity Fair, August 17, 2016:
Bannon and Breitbart Media were Trump before Trump, creating the political philosophy and the political army in waiting that has been the engine for the candidate’s astonishing rise in American politics.
A former employee of Breitbart described him (Bannon) to me as “Donald Trump but more intelligent.” He didn’t mean it as a compliment, and was instead referring to the opportunism, the personal vindictiveness, and the lack of a moral center that have become defining characteristics of Trump.
Breitbart, under his (Bannon's) leadership, after all, has become “Trump Pravda,” as one former staffer described it to me (Ken Stern, Vanity Fair).
Trump is a “blunt instrument for us,” he (Bannon) told me (Stern) earlier this summer. “I don’t know whether he really gets it or not.”
QUOTES from Trump's New Chief Strategist, Stephen K. Bannon
via Gizmodo, NOV 13, 2016:
“I’ve got a cure for mental health issue. Spank your children more.”
“I, Donald Trump and the rest of the alpha males will continue to dominate the internet without feminist whining.”
“Women should just log off. Given that men built the internet, along with the rest of modern civilization, I think it’s only fair that they get to keep it.”
“As insane as my suggestion sounds, it’s genuinely the best recipe for harmony between the sexes until women can stop lying about “abuse” and “harassment” or at least learn to take it as well as dish it out.”
“Breitbart beat other news organisations such as CNN, The Hill, and The Guardian with a total combined 9,098,013 Twitter and Facebook interactions, of which 89% came from Facebook and 11% from Twitter.” “This October, Breitbart News broke company traffic records, generating over 240 million pageviews and 37 million unique visitors.”
The Left is Responsible
"Stop Apologizing Liberals"
Bill Maher, January 27, 2017
As does Dave Chappelle and others, I wish Donald Trump the chance to do well. The U.S. is going to need all its patriots both left and right.
The Dave Chappelle SNL monologue video link here or here for Canadian viewers.
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.
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.
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.
"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."
Flood levels are different from city to city, but the trends are similar.
See the complete New York Times September 3, 2016 Info Graphic in my Attention Snow Birds post.
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).
The Cost of Being Canadian
even when the CAD/USD is near par
Source: ArmstrongEconomics.com February 10, 2016
Dear Marty, When talking about negative interest rates and a shift of cash from banks to the stock market from 2017, would that not mean that cash may also shift to property and other assets? Yet I thought that we have seen the high in the property market already? Thanks for your useful insights as ever. SP
Real estate has peaked in REAL TERMS. The sub-prime market that made the high in 2007 was not exceeded. The secondary rally into 2015 was the high-end, so we now have the IRS targeting NYC and Miami in their hunt for money.
The high-end will now decline. The average home will make the transition, but will not be making new highs. In real terms, the high is in. Real estate varies tremendously based upon location. This is due to capital inflows that drive certain markets like Vancouver and Toronto in Canada or New York and Miami in the States. Washington, D.C., held up in 2007-2009 because politicians did not want to lose their jobs. Taxes will also prevent real estate from reaching new highs in “real terms.”
In nominal terms, some areas will make the transition to new currencies; the movable assets will appreciate the most. Those are the assets that you do not have to make annual payments on to hold them annually.
We also have a collapse in long-term interest rates to the point that banks do not want to write 30-year mortgages anymore. As that long-term view collapses, so does the leverage. That will cause housing to decline in “real terms.”
Vancouver is the Poster Child
for a Real Estate Bubble
Interview with Hilliard MacBeth - February 9, 2016
The Foundation of Wealth
is the ownership of income generating enterprises.
The wealthiest households' primary wealth is businesses and shares in businesses. The bottom 90% depend on the family residence as a store of wealth, and on debt as a means of funding asset purchases and consumption.
But now that housing has been financialized and globalized, it is prone to boom and bust cycles like every other risk-on financialized asset.
The key take-away: focus on owning income-producing assets, not a primary residence. The second key take-away: Don't finance your assets with debt; finance your income-producing assets with savings and sweat equity, not borrowed money.
This is why real estate should be looked at through the lens of fundamental appraisal, not simply price comparison.
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