China Shop Bull

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While we wait for the Brexit vote, here is Patrick Ceresna's hour long video explaining in detail his argument for what will trigger the Canadian real estate market selloff. My bullet points from the video are below and the chart (left) shows credit is tightening.

Are You Ready For a Canadian Real Estate Crash?
Patrick Ceresna Chief Derivative Market Strategist
​LearnToTradeGlobal.com (1 hr. 4:35 min)

Bullet Points from the Video Above

MACRO EVIDENCE OF PENDING CRASH

• Currency affects commodities, the bond markets and real estate.
• Price discovery is a function of liquidity not fundamentals which are a long term attribute.
• Prices are created by positive or negative feedback loops.
• Bubbles deflate to their fundamental base.
  Tech 1995-2003 (up 100%, down 90%)
  Silver 2001-2012 (up 100%, down 40%)
  U.S. Homes 2001-2012 (up 100%, down 40%)

COMPONENTS OF A BUBBLE

• A believable idea (potash 2007-08 "everyone has to eat")
• There is a surplus of funds and shortage of opportunity (low interest rate prompts a search for yield).
• The idea cannot be disproved.
• The idea shifts from the minority to the majority view.
• The overvaluation is justified as the new paradigm (it's different this time).
• A widespread fear of missing out ensues.
• Rampant financing schemes occur.
• A cult obsession (everyone has an interest).
• The bubble becomes unbelievably long.
• Objective people begin to believe the story.

THE BUBBLE BURSTS

• ​Prices drop and supply grows.
• Investors see risk.
• Credit dries up.
• Frauds are exposed.
• Governments intervene.

THE MINSKY MOMENT

• ​An exponential rise in price occurs as the cycle ends.
• A trigger is needed to reverse the positive feedback loop (China).
• Prices drop, rates rise and commodities are weak.

CHINA WILL BE THE TRIGGER

• The U.S. housing crash was triggered by the ARM (adjustable rate mortgage) reset.
• This time the events will be international triggered by China and its USD$4 trillion in foreign currency reserves.
• Chinese commercial banks increased credit from USD$4T to USD$34T in 10 years increasing the bank debt to 3 times GDP with an estimated USD$1T in non performing loans. (In the U.S. housing crash, their banks had created USD$16T in bank debt which was only 1 times GDP with non performing loans at less than 1/2 trillion USD$.
• China's 4 big banks are bigger than the 6 largest global banks.
• A massive credit orgy has been created and easy credit misallocated into unproductive end results (ghost cities etc).
• The IMF warns that China's credit risk is systemic.

WHY SHOULD CANADIANS CARE?

• The commodity sector is in a bear market.
• There is a currency war going on.
• Slow growth is deflationary (see my debt chart).
• China will not have a new credit cycle (The PBOC warns of an "L" shaped landing).
• China's Yuan is pegged to the USD forcing them to buy and sell USD and the PBOC wants to un-peg.
• The USD rally has the Yuan up 45% against the CAD and there has been a USD$1 trillon of capital outflow from China chasing Canadian and other weak FX country's real estate.
• Un-anchored buyers from China etal have bid the real estate market up and out of equilibrium.
• The China window is closing, they are stopping their capital outflow with restrictions against funding loopholes (Hong Kong, Macau, Bitcoin etal)

BASE CASE SCENARIO

• The Chinese Government will implement their Yuan devaluation.
• it will be a huge macro event as the Chinese bubble deteriorates.
• The PBOC will bail out their banks.
• The Yuan/CAD will plummet.
• The positive feedback loop in Canadian real estate will turn to a negative feedback loop.
• More sellers will emerge as credit tightens.
• Real estate prices will drop to fundamentals regressing to 2010-11 levels.

DELAY SCENARIO

• USD rallies but Yuan does not devalue igniting a second wave of capital outflow.
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June 9, 2016: Bank of Canada Governor Stephen Poloz cautioned that climbing real estate prices have outpaced local economic fundamentals like job creation, immigration and income growth.

June 13, 2016: Financial markets are worried about China because its debt has surged to a record 237% of gross domestic product.

Here's Why China's Economy Will Be So Hard to Fix

"The real problem has been... that in a Bubble,
everyone gets in trouble
at the same time"
Bob Hoye, June 16, 2016