This post includes Canadian GDP charts, Stephen Poloz's farewell remarks and Paul Schmelzing's introduction to his 110 page thesis that "By the late 2020s, global short term real rates will have reached permanently negative territory and by the second half of this century, global long-term real rates will have followed."
CR: So pandemics are not new. But the policy response to pandemics that we’re seeing is definitely new. If you look at the year 1918, when deaths in the US during the Spanish influenza pandemic peaked at 675,000, real GDP that year grew 9%. So the dominant economic model at the time was war production. You really can’t use that experience as any template for this. That’s one difference.
Canada GDP % Growth Annualized
The Canadian economy advanced an annualized 0.3 percent on quarter in the three months to December 2019, below a downwardly revised 1.1 percent expansion in the previous period and matching market forecasts. It was the weakest growth rate since the second quarter of 2016, when the economy shrank 2 percent. (BEFORE THE FIRST COVID 19 CASE HIT)
In his final official speech May 25, 2020, the Governor of the Bank of Canada Stephen Poloz said:
Market rates rose in Canada to follow suit with U.S. Fed Chairman Volker's policy of raising rates to shut down price and wage inflation of the mid 1970's, the fuse of which was sparked by the 1973 OPEC embargo oil price increase shock. In 1981 Canada, a 5 year fixed rate mortgage was being offered at 18+%.
"Eight centuries of global real interest rates, R-G [real wealth returns (R) and broader real growth (G)], and the ‘suprasecular’ decline, 1311–2018" Source Material
The Suprasecular Rate Decline
"By the late 2020s, global short term real rates will have reached permanently negative territory. By the second half of this century, global long-term real rates will have followed."
said Paul Schmelzing, JAN 2020, Bank of England Staff Working Paper No. 845
The Conclusion, in full:
Schmelzing on Bonds, Why Investors Face Years of Losses
While we wait for the July Canadian housing data to trickle out, let's return to Japan and their housing price experience after nearly 20 years of ZIRP and NIRP.
I have posted charts about Japan since 2012 to illustrate the folly of global central banks and their monetary policies of instituting ZIRP & NIRP to stimulate inflation > consumption > production, the by-product of which, has been the manic search for yields as the underlying asset class values became stretched to perfection under pressure from the FOMO crowd.
Instead of using fiscal policy which requires long term planning and socially cohesive agreements directed towards production and well being, the quarterly knob twiddling monetary policy has in part, along with the rise of a digitized global financial network, unleashed "megabyte" money laundering which the UNODC estimates at 2-5% of global GDP per year.
It has also crushed the incentive to save for a future funding of investment into productive assets.
The Household Saving Rate in Canada has decreased to 1.1% in the first quarter of 2019.
Commodity Super Cycle - 10 Years into the Bear
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.
On march 11th 2019, David Larock an independent full-time mortgage broker laid out his "Case for Lower Canadian Mortgage Rates", below edited, but read the whole feature report at MoveSmartly.com
The Bank of Canada acknowledged that our current economic slowdown is now “more pronounced and widespread” than it had previously forecast.
Global economic momentum is slowing.
Our economic slowdown has been sharper than expected.
Housing and consumption have slowed, and business investment and exports haven’t picked up the slack as the BoC had hoped.
Inflation expectations have been lowered.
Uncertainty is increasing.
Our output gap is widening because debt is choking off growth, and that is a powerful, long-term headwind, which will continue to exert itself long after global trade networks have been re-established.
On this last item, my Household Debt chart is in agreement.
Tuomas Malinen @mtmalinen for the charts above.
Today, March 13th 2019, the live
Canadian Productivity Chart exhibits a slowdown.
While we wait for the November Real estate data to come in, the World Trade Organization has released their November 26, 2018 World Trade Outlook Indicator.
Their Trade Indicator has dropped to the lowest level since October 2016.
NOTE that the Canadian National MLS Real Estate sales peaked three months later in January of 2017.
World Trade Component Indices Key Findings Full Text
This report covers new trade and trade-related measures implemented by G20 economies between 16 May and 15 October 2018. It shows a number of important trends in global trade policy-making. While G20 economies continued to implement trade-facilitating measures, the figures show a significant increase in the number and coverage of trade-restrictive measures. This provides a first factual insight into the trade‑restrictive measures imposed in the context of current trade tensions.
G20 economies applied 40 new trade-restrictive measures during the review period, including tariff increases, import bans and export duties. This equates to an average of eight restrictive measures per month.
During the review period, the estimated trade coverage of the import-restrictive measures (US$ 481 billion) was more than six times larger than that recorded in the previous period and is the largest since it was first calculated in 2012.
G20 economies also implemented 33 measures aimed at facilitating trade during the review period, including eliminating or reducing import tariffs and export duties. At close to seven trade‑facilitating measures per month, this is in line with the 2012-17 trend.
The trade coverage of import-facilitating measures (US$ 216 billion) has also risen significantly during this period but is just half that of trade-restrictive measures.
On trade remedy measures, the review period saw a decrease in initiations of investigations by G20 economies and a stagnation of terminations compared to the previous period. Initiations of anti-dumping investigations remain the most frequent trade remedy action, accounting for almost three-quarters of all initiations. The trade coverage of trade remedy initiations (US$ 25 billion) has fallen significantly compared to the previous period. The trade coverage of trade remedy terminations remained equivalent to the previous review period at US$ 6 billion.
The proliferation of trade‑restrictive actions and the uncertainty created by such actions could place economic recovery in jeopardy. Further escalation would carry potentially large risks for global trade, with knock-on effects for economic growth, jobs and consumer prices around the world.
G20 economies must use all means at their disposal to de-escalate the situation. The WTO will do all it can to support its members to this end and leadership from the G20 will be essential. PDF Chart Source
3 of My Charts Echo the WTO Warning
Canadian National MLS sales peaked in January 2017. Two of the six WTO metrics were already in recession.
The 10yr less 2yr yield metric was at its last major wide in January 2017 and now is only 16 bps from inversion.
Since January 2017, there have been 21 unbroken consecutive negative Net Trade prints.
While we wait for the October data to come in, the reminder of this chart is about cash flow yield and as Henry McVey, KKR's head of Global Macro & Asset Allocation says as we switch from monetary to fiscal policy...
...own more assets that have cash flowing yields...
Hat Tip to @carlquintanilla
It pays for hosting and domain blog costs; thanks.
...more than half of fund managers have never experienced a prolonged bear market... @Hipster_Trader
Millennials who did not 'catch' FOMO might be very relieved at this point in the business cycle.
Canada Has a Broken Housing System and It Has Fucked Over Millennials - Vice, Oct 2018
SNIPPET: In the 2017 edition of the Angus Reid-CIBC housing poll, many millennial homeowners expressed regret about buying a house because of the financial difficulties, and about half of them said they never expect housing prices to go down.) According to an April 2018 Angus Reid-CIBC poll, significantly fewer millennials own homes compared to the same age cohort in 1981.
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
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!
Or get a FREE TRIAL discount to Chris Kimble's peerless financial market research
The OECD released their May 2018 Canadian Economic Forecast Summary. Their charts to the left conflates our usual obsession with "flation" which in Latin means to "blow". We worry about whether our investments in production and consumption are going to blow or suck.
Chris Kimble released a June 21st chart triptych "3 Key Economic Indicators May Be Flashing Caution Here"
The monthly charts of Commodities, Crude Oil and U.S. 10 Year Treasuries are at "Long-Term” Fibonacci retracement levels at the same time and could be creating reversal patterns."
"I have a simple goal for my investment research - help people to enlarge portfolios regardless of market direction by looking for patterns at extreme points of "exhaustion" with a high probability of reversing." Chris Kimble
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
The table above is from Green Street Advisors. What it shows is that if all real world expenses including contingencies are not incurred when calculating NOI (net operating income) then assumptions cannot be made confidently about relative market value especially in a flat or declining market. In a rising market, buyers are generally forgiving or asleep because rising market values tend to reach their limits well before the NOI math catches up.
Sellers tend to be bullish in a rising market which is ironic since one would think they would be buying not selling. In a falling or flat market everyone sharpens their pencils.
The CBRE Ltd Brokerage group have released their 3Q 2017 Canadian Cap Rate Survey and they have average cap rates for apartments in the 4-5% range depending if it's an "A" or "B" class unit in a high or low rise building. The higher the cap rate is on a unit, the lower the market value will be relative to its peers.
But the CBRE warns the reader in their glossary of terms that the Cap Rate:
estimates are provided by NIT members in respective markets based on market transactions and/or feedback from investors on their current yield expectations.
We can see from the Green Street Advisors table above that capital reserve expenditures are prominent line items if one wants a realistic answer to the question "What is the Cap Rate".
In my 2013 Vancouver Condo Study, I refer to Cap Ex Reserve as "Contingency" which is the term Green Street uses for future expenditure to maintain income at the highest levels. That's the contingency account. Strata Corps are obliged to maintain 30 year depreciation reports, but some strata corporations don't apply all the rules; Caveat Emptor!
See "10 Myths Delaying Depreciation Reports" VISOA.bc.ca
In my model calculations, I also use a percentage of gross income, 5% each for vacancy and management as well as Cap-Ex.
The Green Street model warns its reader that:
Different property sectors have different “standard” cap-ex deductions. All of these standard deductions are far lower than what an owner actually spends, and they are simply helpful to normalize quoted cap rates.
So when you ask the question, "What is the Cap Rate?" make sure your respondent tells you what expenses have been used in calculating the NOI. If Cap-Ex (contingency), vacancy and management fees are not included in the line item expenses, then put them in regardless of whether you are planning to do your own management, whether the vacancy rate is very low or whether the unit is very new.
If you do the management chores, that's a job and time spent and if the vacancy rate is low, it's not a guarantee that you won't miss a month's rent in a calendar year and if a contingency fund is not accounted for, you might as well be asleep to the fact that real estate is a depreciating item on your balance sheet in physical terms, accounting terms and if the market trend goes from rising to falling then it's depreciating in market value terms as well. That's called risk and the first line of defense is to ask the question, "What if?".
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