A question put to Martin Armstrong
Source: ArmstrongEconomics.com February 10, 2016
Vancouver is the Poster Child
First In ~ First Out
According to StatsCan, in 2001 after the dot.com blowout and the markets then turned to commodities, there were +/- 329,129 employees working in the Oil, Gas & Mining industries per year in Canada and in full year 2014 that number had increased by 60.8% to 529,248.
This includes "support activities" but not the peripheral jobs in the general economy that depend on the spending by those oil, gas and mining employees.
According to the New York Times December 8, 2015 "If It Owns a Well or a Mine, It’s Probably in Trouble".
“The world of commodities has been turned upside down,” said Daniel Yergin, the energy historian and vice chairman of IHS, a consultant firm. “Instead of tight supply and strong demand, we have tepid demand and oversupply and overcapacity for commodity production. It’s the end of an era that is not going to come back soon.”
Some energy experts are even beginning to express concerns that sovereign wealth funds of Saudi Arabia and other wealthy Persian Gulf and oil-producing countries will redeem their money from investment firms in the coming year to shore up their balance sheets. If they do, the moves could initiate more instability in global equity and debt markets.
Credit lines drying up for oil companies?
Distress (bonds trading over 1,000bps) has been spreading across the HY space. From its starting point in energy a year ago, it has now reached other commodity-sensitive areas such as transportation, materials, capital goods, and commercial services. But it did not stop here and is also visible in places like retail, gaming, media, consumer staples, and technology – all areas that were widely expected to be insulated from low oil prices, if not even benefitting form them.
In other words, what was until a year ago a purely "energy" phenomenon is now an "everything" phenomenon, despite promises by every prominent economist that plunging energy prices are great news for the economy.
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.
Residential Mortgage Debt as a % of GDP (Sep 2014 Source)
If it looks like Vancouver, it's probably San Francisco
Trapped in Silicon Valley
As the chart illustrates, U.S. home ownership is back to the 1980's levels and unreported debt is growing (table below chart).
This is what happens when debt levels outpace earning capabilities. The stress of watching one's equity evaporate leads many consumers to lose track of obligations when reporting.
If debt levels are under reported in the U.S. it's probably similar in Canada as well. James Fitz-Morris examines debt-to-income levels for the average Canadian family in the video below.
The bubbly asset levels in Canada represent a huge risk because without price appreciation, debt repayment becomes an occupation.
- Economists' understanding of the finances of U.S. consumers is based heavily on survey data, and on the Survey of Consumer Finances (SCF) in particular. However, recent research calls into question survey respondents' willingness and ability to report their debts accurately.
- This study compares U.S. household debt as reported by borrowers to the SCF with debt reported by lenders to Equifax using the FRBNY Consumer Credit Panel (CCP). Debt levels, distributions, and trends are compared by loan type, both in aggregate form and for age, region, and household-size subsamples.
- Our most striking finding is that, overall and in most disaggregated debt categories, debt levels reported in the SCF and CCP are quite similar. Even bankruptcy measures correspond well.
- The exceptions lie in the unsecured debts. Under our most inclusive assumptions, SCF-implied aggregate credit card debt is 37 percent lower than that implied by the CCP, and SCF-implied aggregate student debt is 25 percent lower.
Canada's Sky-Rocketing Household Debt 1990 vs 2015
for the average Canadian family; September 13, 2015
Debt to Income
Equity to Debt
"The drop in oil prices looks as if it may be quite persistent. This will have a permanent effect on the spending decisions of the average Canadian, translating into a drop in real domestic demand. Total aggregate demand could only remain on its previous trend to the extent that net exports increase permanently. While they will recover from their disappointing recent performance, a permanent increase is unfeasible. Total demand is on a lower trend than before the oil price shock." Read the whole article by Steve Ambler.
Alberta's Boom Time Hangover
VICE NEWS June 1, 2015
In a word; valuation.
In the chart above I have highlighted the Government 10 year yields for Canada, the U.S. and the Euro area as well as an overlay of the USD/CAD ratio.
Rates have bottomed in North America and Europe since April 2015, and the first leg up in repricing risk has put rates up to a potential new floor as noted by the coiling action in May.
The USD/CAD ratio has turned up this past week. A strong U.S. Dollar will mute U.S. inflation since domiciled U.S. producers will have a more difficult time setting export prices, and that leads to headlines like "HP plans to eliminate 55,000 jobs by the end of 2015".
In Canada, we can expect our main activity of consumption to be dampened by rising import prices. We may have to switch from Ikea to Craigslist to stuff our condos with.
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
Are you worried about being PRICED OUT of real estate because interest rates are going to zoom?
Or are you anxious about being PRICED IN because the commodity bust is widening?
A solution to these stressful thoughts is to move more to cash.
If rates do zoom you will be able to move cash into higher rates of return or if the asset value bust continues, you will be able to buy more value.
The charts above show the ongoing DEFLATION in consumption prices and wage earnings. The top panel is the MIT Billion Prices Project which tracks online in real time the high-frequency price data, as well as the US inflation index (CPI). The lower panel is the U.S. FRED chart of Y/Y total private average hourly earnings of all employees with the data plotted year over year to gauge the momentum. Both series are clearly down since the 2009 Pit of Gloom.
Without wage inflation, price inflation evaporates with every actor's change in sentiment from bull to bear.
45% (U.S.) say it's a good time to find a quality job (the highest since 2007 prior to the bust and the Pit of Gloom)
The Low point on this measure was 8% in 2009 (after the pit of Gloom) and in 2011 (after the top in Commodities)
Ukulele Orchestra - Should I Stay Or Should I Go
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
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