Canada Collapse – Update Feb 19, 2012

Reading time: 2650 words, 6 to 10 minutes

Well that didn’t take very long! No sooner do I post a grim forecast CANADA COLLAPSING on Canada’s economic future Sunday, Feb. 12 when the news catches up and passes me a couple days later. Damn, I hate being right!

New Inflation Calculation

The Globe and Mail’s headline sounds positive enough, “CPI retooling could result in big savings for Ottawa, business”.

I mean, what could be wrong with saving money, right?

It all depends where the so-called “savings” come from. Stats Canada is revising the formula they use to calculate the Consumer Price Index (CPI) otherwise known as the inflation rate. They monitor a “consumer basket of goods” of about 600 items. Stats Canada says the formula they’ve been using until now overstates inflation. So, they’re going to revise the formula to reduce the official inflation rate.

Ok, so what does it mean? It means Canadian citizens had better bend over because they’re going to get it good and hard. The CPI is used to calculate:

a) Cost-of-living increases for company employees’ salaries
b) Cost-of-living increases for government employees’ salaries
c) Cost-of-living increases for pension plans
d) Cost-of-living increases for government benefits such as Old Age Security
e) Basic exemption calculation for income tax, and
f) The basis for union wage negotiations, to name a few.

In other words, it’s going to have an enormous impact on Canadian’s lives. The government of Canada like almost all governments world-wide is broke and desperately looking for ways to save money. And, the savings will come out of Canadian’s pockets:

a) Lower wage and salary increases
b) Lower pension increases
c) Lower Old age Security increases
d) More taxes
e) Lower standard of living

How much money are we talking about? The federal government will save $72 million a year. The report didn’t mention how much the provinces, cities, municipalities and business will save but you can bet it’ll be substantial and it’s all coming out of the taxpayers’ pockets or more specifically; it’s money that WON’T be going INTO the tapayers’ pockets.

I’ve been ranting for years that inflation calculations are rigged using a number of devious metrics. For example, the “hedonics” formula says if this year’s laptop computer power doubles from last year, even if laptop prices stay the same then that’s a 50% reduction in inflation. Or, the substitution formula says if the price of steak increases, then they calculate hamburger on the assumption that consumers will buy less steak and more hamburger. I read a short “filler” in the Winnipeg Free Press a few years ago where bottle washers were removed from the “consumer basket of goods” because the price doubled. This was “distorting” the “basket” so they substituted another item. Hey, if I have to pay double for a bottle washer then the inflation rate for bottle washers is 100% regardless how some government flunkey manipulates the numbers.

So is there any good news? Yeah, instead of adjusting the “basket of goods” every four years they’re going to adjust it every two years and eventually annually so governments and businesses will save even more. Oh, right, I forgot; it’s coming out of our pockets. Better have some petroleum jelly handy when you bend over …

Canada’s Housing Bubble

Before launching into more grimness, let’s have a chuckle at the expense of Canada Mortgage & Housing Corp. (CMHC) which is a government-owned, housing mortgage guarantor. Now we all know what a bunch of dim-bulbs governments are; having been incapable of forecasting the last recession and totally inept at predicting both its severity and its duration nor capable of solving any of the real problems that led to the down-turn in the first place. So, now that I’ve lowered your expectations here’s is a Feb.14 Globe and Mail headline: CMHC sees stability in housing market

“According to the CMHC, In Eastern Canada, all provinces are expected to see a contraction in housing starts for 2012 … Canada’s hot housing market is due for a soft landing that stabilizes prices, sales and new construction over the next two years, the Canada Mortgage and Housing Corp. said Monday.”

And, for some more wishful thinking, they go on to say, “with ‘modest growth’ returning to Quebec and Ontario in 2013”

Ok, folks, nothing to see here. Move along (to reality). The reality is the American real estate bubble burst in 2006. That’s more than 5 years ago and it hasn’t found a bottom yet. Casey Research’s Ed Steer knows a thing or two about real estate. He used to think the American housing market would find a floor in 2013. He now says it’ll likely be 2017 to 2018.

Canada’s housing bubble is greater than the American at its peak. Do the math and it looks grim! Canada has farther to fall. Furthermore, it’s much harder for Canadians than Americans to do “jingle mail” i.e. mailing their house keys to the bank or tossing them over the bank counter. This means U.S. real estate crashed faster and therefore will recover sooner. On the other hand, Canadian real estate will not only fall further but for a much longer period of time before it begins to recover. In the meantime, a lot of Canadians will be “underwater” with their mortgages for a much longer period of time than their American cousins.

There’s two ways to remove a bandage: fast or slow. Fast is a little more painful but recovery begins immediately. That’s the American way. Slow means a little less pain but for a much longer period of time. That’ll be the Canadian way.

But, wait, here’s more: the article quotes, “What we need is this housing market to soften. We have a window of opportunity to allow this market to take a break . . . (because) interest rates are not rising any time soon.”

Of course interest rates aren’t rising anytime soon because even the idiots in government realize that rising rates will decimate a weakening economy so they will continue to control the price money (interest rates are the “price” of money). Now, if anyone can give me just one example where government price controls worked in the long run (somewhere, anywhere), please leave a comment below.

And so this artificially low price of money (interest rates) will continue to distort the housing market long after the idiots in government should have let interest rates rise BEFORE the economy got into trouble but, no; governments have to pretend they’re in control (they out of control) and pretend they know what they’re doing (they haven’t a clue) and that their ham-fisted efforts will have the desired result (it never does) and so this insanity just gets more insane and it’s all really unnecessary because all they had to do was get the hell out of the way and let the market do what the markets do best and that’s called “price-discovery” which means prices find their proper levels instead of being distorted by government intervention and manipulation by a bunch of idiots who couldn’t find their butt-holes if they used both hands.

You know I’m ranting when you see sentences a paragraph long!

On the same day, a Bloomberg headline reads, “Toronto Bubble Risk Tops New York in Condos: Mortgages”

“Toronto has more skyscrapers and high-rises under construction than any North American city — almost three times as many as New York”

“Toronto has 148 high-rises and skyscrapers being built, compared with 59 tall buildings for No. 2-ranked New York City, and 22 in Chicago, according to Emporis, a Hamburg-based building data company.”

““If builders stopped building today, there’s five years worth of supply that is about to be delivered, relative to what normal population growth is,” Bank of America’s King said.”

Gerold sarcasm: Gee, that wouldn’t be a bubble would it?

“In absence of another recession, we’re not expecting demand to fall,” Canadian Mortgage’s Hildebrand said. “We’re expecting it to hold steady so long as the economy holds steady.”

Gerold comment: Watchit folks! There’s a big, unstated “IF” in that remark – IF the economy holds steady. It won’t. We’re going into another recession. Ergo, demand will fall. Falling demand results in falling prices which will increase supply which further decreases prices. This is known as a downward spiral.

“Toronto isn’t facing a bubble because price increases have been steady, said Ben Myers, executive vice president of Urbanation, a Toronto-based real-estate research firm.”

More Gerold sarcasm: translation: it’s different this time. Hmm, where have we heard that before.

According to George Athanassakos, professor of finance at the Richard Ivey School of Business, so much of our GDP is now housing-related, it is simply unsustainable. In other words, a bubble. He says, “Eventually, everything boils down to demand and supply. Whenever this ratio goes over 7%, it signifies overinvestment in housing and two or three years later, we have a severe correction.”

He adds, “Canada’s housing market is booming as historically-low interest rates fuel purchases, driving up home prices and adding to record household debt. Canada’s ratio of housing investment to GDP has averaged 5.8% over the last 50 years and is currently at about 7%, based on Statistics Canada figures as of the third quarter of 2011. We have experienced bubbles and busts before in Canada, it’s nothing new,” Athanassakos said. “I don’t know why this time would be different.”

Then there’s this story from Business Insider, “The Most Overpriced Housing Markets In The Developed World”

“Most OECD countries have experienced an inflating home price bubble from the first quarter of 2001 through the fourth quarter of 2006. But many have yet to see their bubbles burst.

“Torsten Slok, chief international economist at Deutsche Bank Securities, has a new report examining global home prices.

“Specifically, he looks at the relative valuation of housing markets as measured by price/rent and price/income and compares those ratios to historical long-run averages.

“Slok argues that home prices in many countries in the developed world are still overvalued. Across the Euro area, home prices are still overvalued by 14 percent.

“We ranked the countries by the average over- / under-valuation of home prices relative to rent and income.”

Japan’s home prices are undervalued by 37%
Germany’s home prices are undervalued by 26%
Korea’s home prices are undervalued by 14
USA home prices are undervalued by 9%
Switzerland’s home prices are undervalued by 8%
Ireland’s home prices are undervalued by 2%
Greece’s home prices are fairly valued
Italy’s home prices are overvalued by 10%
Denmark’s home prices are overvalued by 17%
Finland’s home prices are overvalued by 22%
Sweden’s home prices are overvalued by 25%
Spanish home prices are overvalued by 33%
UK home prices are overvalued by 34%
Netherlands’ home prices are overvalued by 36%
Australia’s home prices are overvalued by 39%
France’s home prices are overvalued by 42%
New Zealand’s home prices are overvalued by 44%
Norway’s home prices are overvalued by 48%
Canada’s home prices are overvalued by 54%
Belgium’s home prices are overvalued by 56%

Notice that Canada is second from the bottom in terms of over-valued housing i.e. real estate bubble. Now who are you going to believe, a business publication with no axe to grind or the government spinning stories of a “soft landing”? I’ll let you decide.

China Real Estate Bublble Crashing

Today, Garth Turner reports, “Tough numbers. The price of houses fell in 70% of the cities surveyed. In the four largest, sales crashed by two-thirds last month. America? Nah, try China.” Now, do you still think it can’t happen here?

The Drummond Report

So, is there any good news? In fact, yes. Somebody figured out how to solve Ontario’s debt problem. Now, the question is, ‘will anyone listen?’ and more important, ‘will anyone do anything about it?’ The government of Ontario commissioned the Drummond Report which was released last week. For more details, see Rex Murphy National Post and The Star.

You’ll remember the province of Ontario once was the engine that drove the Canadian economy. The engine is in trouble because Ontario went from a “have” province to a “have-not” province, in part because Bob Ray’s NDP social programs were kept off the government books by saddling Ontario Hydro with the tab. Ontario Hydro is still having trouble with the more than $35 billion in debt resulting in Ontarians having some of the highest electricity rates in Canada. Coupled with globalizations’ loss of high-paying manufacturing jobs, successive Ontario governments have been unable to turn the province around.

By the way, Bob Rae wants to become Canada’s Prime Minister. If you like what he did to Ontario, wait’ll you see what he’s gonna do to Canada. Bend over Canadians!

In any case, the governing Ontario Liberal Party, unable to get its own house in order and incapable of making tough decisions has asked economist Don Drummond for a report on Ontario’s financial health. The report was issued last week. Of course, this report was jinxed from the start.

In fairness, Don Drummond explained that growth in Ontario is no longer enough to reduce the provincial debt; only reforming the delivery of government services can accomplish that. He says, “The commission is recommending a degree of spending restraint that is almost certainly unprecedented in Canadian postwar history.” A total of 362 recommendations were made. Almost immediately, Ontario Premier Dalton McGuinty proclaimed that funding of nursery schools was a sacred cow and would not be cut. This, in spite of Drummond warning that cherry-picking the recommendations would increase provincial debt is only the beginning of the political circus.

Unfortunately there are several reasons why the report, even if fully implemented, is too little, too late.

First, the commission was prevented from looking at taxes; either increasing or decreasing them.

Second, the commission failed to address the insanity of four public education systems in Ontario:
– English
– French
– English Catholic
– French Catholic

Many days I see an army of practically empty school buses driving past one another. The duplication, actually quadruplication of all education services in Ontario is insane but it too is a sacred cow. Let’s hope we never see a time when we can’t afford even a single education system.

Third, Drummond is correct that cherry-picking the recommendations will not reduce the debt. Yet, no sooner is the report issued than the Ontario Premier starts cherry-picking.

Last, and most important, even if the report’s recommendations were fully implemented, it would be too little, too late. The time is long past for such reform as recommended by Don Drummond. During good times, when the economy was health and growing, we could afford and absorb the pain of the recommended reforms. Now, when we’re faced with another recession – Ontario hasn’t even crawled out of the last one yet – cutting spending will be painful and counterproductive.

I’ve said this many times before. We are past the point of no return. No matter what is done now, whether in Ontario, or Canada or globally; the only thing governments can do is try to soften the hard landing and all that does is give us the bandage choice; rip it off fast or slow but the bandage is coming off.

There’s nothing you can do at this point to help the economic situation of a province, state, country or the globe. You can only look after yourself and your loved ones. Follow the recommendations made on this blog and you’ll be better equipped to survive than those who think the government is going to help them. Governments can’t even help themselves now.

February 19, 2012

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About gerold

I have a bit of financial experience having invested in stocks in the 1960s & 70s, commodities in the 80s & commercial real estate in the 90s (I sold in 2005.) I'm back in stocks. I am appalled at our rapidly deteriorating global condition so I've written articles for family, friends & colleagues since 2007; warning them and doing my best to explain what's happening, what we can expect in the future and what you can do to prepare and mitigate the worst of the economic, social, political and nuclear fallout. As a public service in 2010 I decided to create a blog accessible to a larger number of people because I believe that knowledge not shared is wasted.
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