Reading time: 4,380 words, 10 to 17 minutes.
Another massive economic downturn is underway worldwide that will plunge the entire globe into another Greater Depression. Here we’ll focus on the U.S. downturn that has also begun in Canada.
In the industry I’m involved (mining machinery and distribution) I’m receiving emails from U.S. and Canadian distributors offering large quantities of surplus machinery. Major manufacturers are announcing plant shut-downs, line closures and layoffs. Last year, lead-times for large multi-million dollar mining machines were typically two years or more. Now, product availability is measured in months from factories and immediately from surplus stock. Up to now, the mining industry was virtually immune to the recession. Not anymore! The slowdown has begun, even in mining.
The National Bureau of Economic Research (NBER) is the U.S. agency that calls the beginning and end of recessions. However, it takes them a long time to report; sifting through immense reams of revised and seasonally-adjusted data. It was December ’08 that they reported the last recession had begun one year before in December ’07. Judging by what I’ve read and researched, my feeling is the U.S. went into recession this summer and Canada began in August. It may be another six months or more before this latest recession becomes officially official but the pain will be felt long before then.
Resource exports saved Canada from much of the pain last time. This time will be different. India and China are slowing down because their two biggest customers – the U.S. and Europe are fading fast. In fact, China has such a stockpile of resources it may become a net EXPORTER of resources that are now surplus to their needs. This will increase supply and drive down prices of commodities which will hurt resource exporters like Canada, Australia, Brazil and Russia who were largely inured to the last downturn.
Then too, governments world-wide are out of ammunition having shot their wads during the last recession. Every new stimulus has less effect than the last one. Interest rates, once a powerful tool to stimulate economies, are now near zero and can’t go any lower. Government debt is at historical levels, the bond bubble can’t inflate forever, real inflation exceeds so-called economic growth which means there is NO growth. In fact, adjusted for real inflation rather than governments’ fictitious fudged figures, economies are shrinking along with jobs, the middle class and hope for the future. In other words this new recession will be longer, deeper and more painful for a lot more people than the last one that we supposedly recovered from.
AMERICAN STUDENT DEBT
Amerikan student debt has reached gargantuan proportions exceeding $1 trillion dollars and a large number of college and university grads are either unemployed or under-employed and enslaved by life-long debt serfdom unable to pay off their debts let alone capable of saving for a down payment for a mortgage to buy the pressboard McMansions that the Boomers will be trying to unload into the weakened housing market for the next ten years as a last hope for their retirement in a vain attempt to compensate Boomers’ shrinking pensions, increased taxes and rising cost of living while they delay retirement by holding onto jobs and deny the younger generation decent paying jobs, job skills and tax payments necessary to fund the Boomers’ social security and Medicare while financial commentators like me, short on punctuation marks like periods, will be crafting paragraph-long sentences as the only source of amusement we can still afford. Bet you’re gonna read this again.
CANADIAN STUDENT DEBT
Garth Turner reports that Canadian student debt exceeds $14 billion. That’s much less than Amerikan student debt but considering the U.S. has ten times Canada’s population that means that proportionately Canadian student debt would be equivalent to $1.4 trillion or 40% higher than Amerikan student debt. And, don’t forget that Canadian household debt (recently revised to 163% of income) now exceeds American household debt (159%) before the bottom fell out of the Amerikan economy. Anyone who thinks it will be different in Canada needs to extract their head from where the ‘sun don’t shine’.
CANADIAN HOUSEHOLD DEBT
Mike Whitney in Counterpunch reports that, “According to the latest estimate by Statistics Canada, which just revised its methodology for calculating the ratio of debt to disposable income to adjust to standards set by the IMF and the UN, Canadians are even deeper in the red than previously thought, owing $1.63 in debt for every dollar they make.” Compare this to the $1.59 Amerikans owed before they plunged into the last recession from which they are supposedly recovering and you can see how much trouble Canada is facing.
And according to Globe and Mail’s Is Canada sitting on a household debt land mine? “Household debt growth over the past decade has risen nearly three times as fast as income growth, a trend that is clearly unsustainable.” … The average Canadian now has a record-high debt load …
To avoid catastrophe, we must make some assumptions. “Interest rates must remain low and any rise in rates must be gradual; there must be no shocks to the economy that result in a significant rise in unemployment; most importantly, households must be able to slow their pace of unsustainable borrowing and begin to pay off their debt burdens without adversely affecting the economy.” In other words, don’t hold your breath thinking Canadians will be able to manage these Herculean feats.
Does the debt chart below look like it’s sustainable? The red portion is mortgage debt, the blue is consumer debt. This is starting to look like Ponzi scheme and they never end well.
Ben Rabidoux, analyst and strategist at M Hanson Advisors says, “It’s not the fall that kills you. It’s the sudden stop at the end.”.
HURRICANE SANDY’S AFTERMATH
They’ll be adding up Hurricane Sandy’s damage for a long time yet. Original damage figures were in the $5 to $10 billion range but that was a lot of pre-election propaganda. Just as with Hurricane Katrina that hit new orleans, damage assessment increases as time goes on. Sandy’s damage has increased to a range between $25 to $45 billion. Some analysts now say don’t be surprised if the total bill is anywhere from $150 to $250 billion. This is the last thing the U.S. needs as its economy is already dangerously weakened.
In Apocalyptoween James Howard Kunstler describes travelling in Vermont before Sandy hit. Uncompleted repair efforts from last year’s Hurricane Irene are jeopardized by Sandy and a testament to Amerika sliding into a third world nation.
If you liked the last four years that eviscerated the U.S. middle class, enshrined permanent joblessness, misallocated capital, fomented divisive class warfare, increased the Federal bureaucracy, enabled the TSA to grope your children and destroyed liberty in the name of national security then you’re gonna love the next four years of tax hikes, spending cuts, choking regulation and the destruction of the small to medium-sized businesses that provide most of the nation’s jobs
As I told you, the Republicans were determined to lose the Presidency. They do not want to be at the helm when the U.S. hits the next painful recession. Instead, they want the Democrats to take the blame so the Republicans can waltz into power in 2016.
Machiavellian as it sounds, it’s actually a good thing. Consider the alternative. Had Romney won, the Republicans would take the blame for the next recession and Obama would usher in and support Hillary Clinton as the next President. Why do you think Bill Clinton campaigned so hard for Obama if there’s wasn’t a quid pro quo involved? A shyster like Bill wouldn’t have done it for nothing.
In any case, Obama may be a clueless Marxist who believes Amerika can spend itself rich but the Dragon Lady would gladly loot the country back into the stone-age given half a chance. When the Republicans win the next Presidency, Hillary will lose the Democratic leadership and be effectively shut out of politics. Good-by and good riddance! See? There is some good news. However, if you’re a Democrat it must burn your butt to hear the Republicans just saved your bacon from the Bilderberg poster girl.
BLEEDING CANADIAN JOBS
The National Post’s Financial Post headline reads Employment numbers hide the fact Canada is bleeding private sector jobs “Canada may have added 1,800 jobs in October, but that number hides the fact that almost all the gains came from government and that the private sector lost more than 20,000 jobs.”
Canadian companies have been reporting poor earnings in the third quarter. The article continues with, “Details of the report were much worse than the headline number with the private sector showing a loss of 21,000 in October, the fourth decline in six months,” said Matthieu Arseneau, senior economist with the National Bank of Canada. “Over the period, the private sector is actually showing a loss of 12,000 jobs, compared to a surge of 76,000 jobs in the public sector.
“That’s a worrying trend, because government spending cuts are on the horizon, said David Madani, Canada economist at Capital Economics.”
With the U.S. and Europe mired in recession and both India and China slowing down, the outlook is bleak for a commodity exporter like Canada.
“The worsening economic outlook … suggests that private sector employment gains in the coming months are likely to remain modest, with the unemployment rate likely resuming its upward trend.” .
U.S. TAX INCREASES
Warning: now is the time for Amerikans to get their financial affairs in order. After December 31st increased taxes will bite and bite hard.
Below is commentary by Charles Payne of WStreetMarket from November 12.
“Higher taxes on top earners mean higher taxes on small businesses, too. In fact, there is no doubt the headlock placed on small businesses will eventually become a dope fiend yoke for the entire country. It’s going to be economically disastrous.
“When President Obama calls for a compromise that includes tax hikes and defense spending cuts, it is laughable. Compromise means giving up some of the stuff you like, too. From the list of taxes and spending cuts to take effect where is the White House going to yield ground?
* Income Tax hike
* Payroll Tax hike
* AMT tax expansion
* Marriage Penalty Tax
* Unemployment benefits extension expires
* Medicare Payment rates to doctors decline
* Spending: mostly defense cut
“This promises to be a fun show for the macabre, a scary show for patriots and those that still believe in the American Dream, and a thrilling hayride for those consumed with envy over the success of their fellow man.”
Obama plans to increase taxes on anyone making $250,000 or more per year. However, many of those are small businesses. Contrary to popular opinion (usually wrong) most jobs are not created by huge corporations but by small businesses. A day later, Payne wrote that small businesses that employ 50 or less generated 713,000 jobs this past year according to ADP.
You can see the economic impact via job hiring over the past year in the graph above. Tax increases along with a greater regulatory burden will drive many of these job creators out of business. The same happened during the last Great Depression when the business-unfriendly Federal government also increased taxes and regulations. Capital, which is the lifeblood of an economy, simply disappeared as businesses cashed out waiting for friendlier times. History doesn’t always repeat but it often rhymes.
U.S. FISCAL CLIFF AND THE DEBT CEILING
Ignore the ass media and their distracting nonsense about the impending ‘Fiscal Cliff’ and the looming ‘Debt Ceiling’ It’s just senseless sensationalism that can safely be ignored. Let’s briefly discuss these one at a time. The Fiscal Cliff is a law that imposes tax increases and government spending cuts at the end of the year. There will be much political wrangling and ass media sensationalism about this so-called looming disaster. Bottom line: we know taxes WILL increase (see above) and spending WILL be cut because the government is broke and can’t afford to do otherwise. Both will harm the economy which is slowly going down the toilet anyway.
Both the Democrats and the Republicans will politicize, remonstrate and put on a show of fighting tooth and nail but whichever way they slice and dice tax increases and spending cuts, the U.S. economy is slowly going down the toilet regardless what gets done. Why? Because they and so much of the global economy is past the point-of-no-return as I’ve mentioned numerous times. What could have been done should have been done long ago but now it’s much too late.
The other issue, the Debt Ceiling is just a fictitious number signifying nothing. It’s been raised before; it will be raised again. The U.S. Congress imposes a maximum number of dollars for the U.S. Federal government to spend. The annual shortfall is called the Deficit and the total accumulation is called the Debt. The U.S. government has been spending more than it receives in tax revenue since before most of us were born. It will continue doing so because they’re beyond the point-of-no-return. Tax revenues keep decreasing and spending keeps increasing so the annual deficit and the total debt keep climbing.
They will continue to climb until it all goes BOOM and falls down. This will happen when there’s no one left to buy government debt (bonds) except the government itself. Much of the bond market is already being bought (monetized) by the government itself. The U.S. Treasury and the U.S. Federal Reserve are scribbling IOU’s and trading them with one another. Sooner or later the rest of the world holding U.S. dollars will realize the jig is up and dump (sell) dollars as fast as they can. This will drive other currencies higher and the U.S. dollar even lower in relation to each other. That’ll be the end of cheap Chinese crap at Wal-Mart.
Many financial pundits once expected the U.S. dollar to hit the wall about 2016 to 2020. Many have since reduced the time frame year by year and presently they estimate the SHTF about 2015 to 2016 and some are now talking 2014. However, an economy like the Amerikan is large and momentum will keep it going longer than many think possible. This means Amerikans still have at least two years, maybe more, to get their affairs in order after which their currency will be ass-wipe.
In the meantime, Congress is controlled by the Republicans while the Democrats control the Senate. This political grid-lock will provide the ass media with much sensationalist material as the inept politicians push everything to the brink and then, just as in the past, they’ll increase the Debt Ceiling at the last minute. They will no doubt do it again. Improve your digestion and your sleep by ignoring the whole thing.
There is much ‘Chicken Little’ the “sky is falling” along with the never-ending Euro crisis that will also drag on far longer than anyone thinks. Macleans reports that German Chancellor Angela Merkel says, “We have to hold our breath for five years or more” before the European Union overcomes its debt crisis.
Hint: there WON’T be an end to the EU debt crisis. They, like everyone else are beyond the point-of-no-return but they’ll drag it out as long as possible. That politicians keep spouting such soothing nostrums says much about the ass media’s stupidity (apologies to Macleans which is usually a first rate publication.)
The impending end-of-the-world Mid-East USraeli bombing-the-crap-out-of-everybody won’t affect anyone unless you happen to live in the Mid-East and are being bombed. However, this has been going on for five thousand years and will continue to be a vale of tears until the whole place is finally turned into a parking lot paved with radioactive glass.
So, isn’t it good to know there are things you don’t have to worry about?
CANADA’ HOUSING BUBBLE SPRINGS A LEAK
Macleans’ November 19 issue reports that, “Condo sales fell 30% in Toronto in the last quarter”. Remember the steps Garth Turner outlined. First, sales fall and then listings increase, then prices fall and after a “price reduction of about 15% nationally which takes roughly a year to roll out, followed by a languishing period of rolling decline – a melt. How long that lasts cannot yet be known, as it depends on economic growth, jobs, rates and the pace of US recovery.” I can almost guarantee we won’t see three out of four of those improve in the short term: growth, jobs and a US recovery. And, it’s only a matter of time before interest rates rise to entice investors into buying worthless government debt (bonds).
In a ‘Special’ to the Globe and Mail, Tom Bradley writes the following.
“Most experts, including Canada Mortgage and Housing Corp., are now acknowledging that residential real estate has stopped going up, but more importantly, they’re predicting that prices won’t go down far, or stay there for long. Interest rates remain low and there is a reasonable balance between supply and demand.
“The pronouncements of limited downside remind me of Ben Bernanke’s now famous words about the U.S. housing market. In June of 2006 he said, “… it looks to be a very orderly and moderate kind of cooling at this point.”
“If Canadian prices do pull back, moderation would be a spectacular result. I can’t think of any cycles as long and powerful as this one that weren’t followed by a significant downturn. Extreme cycles breed excesses that need to be corrected – stretched budgets, heavy leverage, speculation, and a mentality that can’t conceive of things being any other way.
“Perhaps my best dose of real estate reality came from a conversation I had with a Toronto lawyer, who told me the story of when he and his wife bought their first home.
“As it so happened, they bought exactly at the bottom of the market (spring of 1995), but not until they had spent 18 months going through empty open houses (“We had all the time in the world to look around”) and watching prices fall (“We had no fear of prices going up”).
“His sobering tale is a reminder that real estate markets don’t always moderate; sometimes they turn ice cold.”
The Dollar Vigilante in Canada’s Real Estate Market – Boom Or Bust? has the graph below that demonstrates Canada’s real estate prices cannot continue forever to climb faster than GDP. The red line is house prices while the blue is mortgage debt. Both are calculated as a percentage of GDP.
There is a maxim: That which cannot go up forever, stops.
Gerold’s corollary: That which has gone too high over-corrects to the downside before eventually finding its proper value.
Some Florida homes that rose in price to $300,000 plunged to a ridiculous $60,000 before eventually reaching $120,000; its proper valuation. Now imagine if that homeowner had to renew the mortgage when it was priced at $60,000. Few homeowners have the equity to make up such a large difference.
Mish (Michael Shedlock) of of Global Economic Analysis reports that Vancouver Home Sales Plunge 16.7 Percent; Crash Awaits
In Vancouver, Garth Turner says, “realtor Sam Wyatt tells his clients that prices are down as much as 23% on the once-unflappable Westside.”
In other words, the third step has already begun in Canada’s hottest real estate sector. It won’t be long before falling prices hit other hot spots like Toronto and Calgary and then spreads to the rest of Canada.
A frightening 20% of Canada’s GDP is tied up in real estate (among the highest in the world) and real-estate related industries like construction, finance, furniture retail, household goods, etc. The inevitable housing crash will have a devastating impact on the economy and, as the economy slows, jobs are lost in all sectors. Without jobs, homeowners cannot afford mortgage payments so defaulting homeowners put their homes up for sale. This adds to the supply, driving real estate prices even lower so more homeowners are ‘underwater’ as mortgages exceed the value of homes. This makes it difficult to renew mortgages without putting up additional equity.
This is all reminiscent of the crash of the U.S. housing bubble that began circa 2006. This will be particularly devastating because a record numbers of Boomers are unable to pay off their mortgages before retirement. History doesn’t always repeat but it often rhymes.
As Garth Turner says, “When 70% of people own the same thing, and it declines, we all have a problem.”
In Getting Ugly Turner writes, “parts of Vancouver and the Lower Mainland will lose 40% of their value (some are already edging 30%) while sleepy cities like Moncton will be barely affected. Montreal will suffer the extra burden of being in a province run by idiot idealists, while 416 will fare far better than 905. The GTA will end up being a housing microcosm, with some of its in-demand mini-markets barely affected other than longer DOM, while Brampton and Milton wither. Cottage markets everywhere will be smoked.”
He continues, “There won’t be a crash, as the media defines it. But if you own a property you can’t sell, which has lost a fifth of its value, and is mortgaged for more than it’s now worth, what’s the difference? To you, that’s a crash. If you’re one of the three million Boomers who must sell to afford retirement, and the only buyers are vultures, then it’s a crash. If your desperate neighbour accepts an offer for 20% less than you thought your identical suburban house was worth, and you have only 15% equity, it’s a crash.”
In Canada Household Debt Approaches US Bubble Levels Mish Shedlock writes, “In a recession (and one is on the way if not started), layoffs will increase and income will drop. Housing prices and the stock market will both take a hit as well. Thus, debt-to-income ratios will rise and net worth will plunge. Canadians should expect a double whammy.”
Both Garth and Mish have been warning us about this for a long time. Are you listening?
SHRINKING U.S. MIDDLE CLASS
John Williams’ Shadow Government Statistics exposes dubious government statistics by measuring real economic conditions such as inflation (currently about 9%) and unemployment (23%). There’s no doubt the U.S. middle class is shrinking when real statistics are used instead of the government’s numbers because, as Paul Craig Roberts says the government’s “measure of inflation keeps inflation down by reflecting a lowered standard of living.”
The Shadowstat’s chart above shows why there is no U.S. economic recovery. Real median household income is back where it was in 1967-68. Moreover, in Virtual Recovery Roberts writes, “when both husband and wife have to work in order to maintain the same purchasing power, household income from the wife’s in-kind household services is eliminated. Therefore, the monetary measure of the dual household income overstates income because it is not adjusted for the lost benefits formerly provided by the wife who at home managed the household.” Simply put, government statistics are bullshit and the ass media dutifully disseminates this propaganda.
When I began my ‘doom & gloom’ missives in 2007, about
27 million Amerikans were on ‘food stamps’. Today the number is almost 47 million.
The chart above is from Business Insider
For an excellent infographic on Food Stamps see Mac Slavo’s Food Stamp Nation: What a Modern Day Bread Line Looks Like.
REAL U.S. UNEMPLOYMENT
Another item from Shadowstats illustrates that Amerika is in a Depression.
AND ON THE LIGHTER SIDE: you can’t make this stuff up – Part 1
US set to become biggest oil producer
The Financial Times as well as Huffington Post and Bloomberg and others. reported, “The US will overtake Saudi Arabia and Russia to become the world’s largest global oil producer by 2017, according to the International Energy Agency, in one of the clearest signs yet of how the shale revolution is redrawing the global energy landscape.”
I still haven’t stopped laughing. Fracking (hydraulic fracturing) enables increased production from previously inaccessible deposits. However, shale is a dense rock unlike normal petroleum reservoirs. Recently tapped shale reserves are already running out as their limited supply dwindles.
The comparison to Saudi Arabia is ridiculous. Even if the U.S. produced more than Saudi Arabia, it’s a temporary blip as global supplies dwindle and are not replaced with major new finds. Saudi Arabia has a sway over world petroleum prices because it could increase production at a moment’s notice while the U.S. cannot. Conversely, if prices dropped, the Arabs can easily withhold production and increase prices. As well, the ‘sweeter’ quality of Iraqi and Kuwaiti crude is more suitable for existing U.S. refineries than ‘sour’ U.S. oil.
You can read more details in Kurt Cobb’s Why the U.S. is NOT the new Saudi Arabia
The U.S. may rely slightly less on imports but it won’t eliminate its dependence on oil imports from the Middle East. A temporary oil boom will not be an Amerikan geopolitical or economic salvation despite what the ass media says. Remember, we’re coming off a Presidential election media-induced sugar high so expect a crash from a dose of reality.
You can’t make this stuff up – Part 2
Twinkie Junkies Raid Stores as Hostess Brands to Close
Twinkie junkies have spoken.
Since Hostess Brands Inc. announced yesterday it plans to liquidate and sell its products until supplies are exhausted, Americans have been scooping up Twinkies to get a fix of their beloved snacks. Supermarkets are running out and fans are pushing up prices on EBay.
Personally I don’t eat any Hostess crap (I read labels) and Wonder bread always made me wonder how anyone could be stupid enough to eat such devoid-of-nutrition junk. As Joel Bowman of the Daily Reckoning says, “When a company peddling sugar-infused cream rolls to the most obese population on the planet goes broke, you know market conditions have broken down.”.
There’s much more to report but this has already gotten longer than I had hoped for what was to have been a brief update. Curses, failed again!
Stay tuned. 2013 is going to get real ugly. I hope you’re prepared because we’re running out of time.
November 17, 2012
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I read your blog to supplement my studies for my “Finance in a Post-Crisis World” exams at school. Thanks, you are great!
@Anna – thanks for taking the time to leave a comment. Glad I could help.
Thanks for article.
Tells people exactly what is going on with the world that the clowndish and harlot and corrupted press refuse to tell.
Thanks, Jerry. I couldn’t have said it better.