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Canadians Just Don’t Get It

The Canadian housing bubble continues frothing despite the authorities’ efforts to cool it off. Mortgage rates have increased, maximum amortization periods have shortened from 30 to 25 years and mortgage insurance rules have tightened, all to no avail. The chart below shows how sales keep rebounding after new restrictions are implemented.

Delusional Canadians are convinced “it can’t happen here”. Canadian homeowners have become the poster children for the Normalcy Bias by underestimating the possibility of disaster.

So far, only the Toronto condo real estate market has shown signs of slowing. The trouble with bubbles is they burst and bursting real estate bubbles start with condos. Macleans’ May 27 issue reports, “In Toronto’s condo market, a crash may already be under way. Sales plummeted 55% in the first quarter compared to the same period last year” and the November 25 issue reports, “Sales in the Toronto condo market, the epicenter of the Canadian housing bubble, keep falling, down eight percent in the third quarter.” Macleans warned about this as far back as last January in “The great Canadian real estate crash of 2013”. Is anyone listening? It seems not.

The chart above shows the plunge in Canadian single-family home sales. Sales fall first, followed by prices. The CBC reported that the Organization for Economic Co-operation and Development (OECD) ranks Canadian real estate the third most overvalued of the 34 developed countries. So how much longer can house prices climb before the bubble bursts?
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The Inevitable Correction

On one hand, the inevitable correction won’t be nearly as devastating to Canadian banks as the Amerikan housing crash. CMHC (i.e. the taxpayer) is on the hook more so than the banks were in the U.S. As well, there’s a lot less leverage in Canadian financial instruments (think U.S. sub-prime derivative melt-down).

On the other hand, the effect of a housing crash on the Canadian economy and unemployment could be WORSE than the U.S. according to Macleans October 21 issue ‘Did Housing Kill Exports?” Between 2002 and 2008, Canada lost 328,000 manufacturing jobs. However, rising construction wages softened the blow by luring manufacturing workers and capital into construction. France’s economy has been sluggish for the past decade for the same reason as Canada’s whereas, “Germany’s declining house prices might have helped boost its manufacturing and exports.” Thus sluggish France is a harbinger of things to come for Canada.
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Construction Industry Unemployment

Gerold’s dire prediction: the next shoe to drop will be increased unemployment in the construction industry which, until now, has been boosted by the housing bubble. And, a real estate downturn affects more than just construction. It affects retail sales like furniture, appliances, renovations, landscaping, etc. as well as primary industries like logging and lumber in addition to support industries like transportation. An April 27 report by Macleans says that, “housing and related industries account for as much as 27% of Canada’s GDP, which is more than the U.S. before the crash. An equally big concern is Canada’s household debt-to-income ratio, which now stands at a record 165 percent – again, higher than in pre-crash America”. In other words, the effect on the Canadian economy in general and unemployment in particular will be more devastating than occurred in the U.S.

Furthermore, the Canadian jobs picture is not as robust as it appears. November 4 Macleans reports, “A new OECD report says the number of people out of work for a year or longer is up dramatically since 2007: 126 per cent in Canada …”

Is anyone listening? It seems not because many Canadian young people I know are rushing into real estate. Since many of them are not in high income brackets, they will be crushed with rising interest rates when renewing their mortgages. Finance Minister Jim Flaherty openly admits that central banks are losing control of the long end of the yield curve. November 25 Macleans reports that, “… Flaherty offered some guidance of his own last week, warning Canadians that the current era of low rates is ‘an anomaly’”. He warns that, “Interest rates will go up, regardless of what central banks do now.” Is anyone listening?
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Delusional Bank of Canada

The November 18 Macleans “Econowatch” says, “A key qualification for landing a job at the Bank of Canada, it seems, is an unfailing sense of optimism.” But then, central banks are notorious propaganda cheerleaders and Canada’s is no exception. They wouldn’t say shit if their mouth was full of it. Below is Bank of Canada’s growth forecasts followed by actual numbers.

2009 forecast 2011 growth 3.3% 2.5%
2011 forecast 2013 growth 2.9% 1.6%
2013 forecast 2014 growth 2.3% (two weeks earlier it was 1.6%).

Maclean’s rhetorical question: “how likely is that?” Unlikely indeed when you look at the trend above. The forecasts keep dropping and the actuals keep disappointing. The overall trend is DOWN.
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REAL Canadian Inflation Spells Recession

Worse still, when you factor in the REAL Canadian inflation rate (about 7%), Canada’s economy is already in recession. This would underscore Macleans, “The Bank of Canada had been forecasting [interest] rate hikes for nearly two years, only to have new governor Stephen Poloz open the door to further cuts.” You can stop drinking the “recovery” Kool-Aid. If Canada were really recovering, further interest rate cuts would NOT be necessary.

The November 11 issue summed up Canada’s predicament, “The hope is that its ultra-low interest rate policy will kick-start the economy. Unfortunately, there’ no evidence that it’s working. What it is doing is continuing to fuel record house-hold debt and a dangerously over-heated housing market.”

That is not some Chicken Little “the sky is falling’ tin-foil hat conspiracy theorist. That’s Macleans magazine, Canada’s national main stream weekly news publication. Is anyone listening?

Five years of ultra-low interest rates failed to kick-start the U.S. economy (other than a ‘technical’ recovery and ass media propaganda) nor has it lifted Japan out of its two decade depression. Don’t hold your breath waiting for it to work in Canada. As I’ve said for many years; we are long past the point of no return. All the authorities are doing is delaying the inevitable collapse so the ultra-rich 0.1% can extract as much loot as possible from the shrinking middle class.
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The Impact of the TSX Venture Melt-Down & Mining Slowdown

The news of the TSX Venture exchange’s collapse and the slowdown in the Canadian mining industry is conspicuous by its absence. As usual the ass media are more interested in sensationalizing the never-ending antics of Toronto mayor Rob Ford than reporting anything useful.

At its peak, the TSX Venture stock exchange was home to about 1,600 junior exploration and mining companies. With the collapse of that stock market caused by the slump of commodity and precious metal prices and various other reasons, about half of those juniors now have less than $200,000 left in working capital. This comes at a time when capital markets have dried up. Juniors are unable to borrow to fund continuing exploration and the collapse of their stock prices prevents them from issuing new stock without massive dilution of shareholder value.

Equedia reports as of this summer the number of junior explorers had fallen to 1,310 and the massacre continues. A junior stock needs a minimum of $1 million a year to cover expenses like salaries, office space, legal fees, regulatory requirements, etc.

Thousands of people are losing their jobs thus depriving Canada of millions of dollars of revenue. The losses increase when you consider the service jobs that support these juniors and the revenue loss of brokers, small financial institutions as well as investors.

The multiplier effect of just one job can be seen in the mining industry. Although only 2% of Canadians are directly employed by a mine, there are numerous other support services such as transportation (half of CN & CP rail freight revenue is mining related), major ports, accounting, administration, finance, equipment suppliers, environmental consulting, legal and technical services, etc.

Equedia reports that, “All industries create spillover effects, known as multipliers, but the mining sector generally creates a higher multiplier effect than other sectors.” Exact Canadian numbers are difficult to quantify, but according to Equedia, “case studies found that for every job directly created by the Yanacocha mine in Peru, 14 jobs were indirectly created. In South Africa … each person employed in the industry may, on average, support eight dependents.”

Then too, “the average weekly wage paid in the mining industry in Ontario is 60% higher than the province’s average industrial wage.” In other words, this is having more of a negative impact on Canada’s GDP than ordinary job losses. This does not bode well for the future.
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How Amerika’s Problems Affect Canada

Canada weathered the last recession fairly well but Canada is now in the calm before the next storm and a lot less prepared for it. Canada economy relies largely on exports. According to Equedia “Most of Q1 growth came from trade with the U.S., and partly due to a one-off rebound in energy exports – also to the U.S. – that are now pretty much recovered after the disruptions to production from last year.” As well, the U.S. has increased its oil and gas production thanks largely to shale hydraulic fracturing (“fracking”) so it needs less Canadian energy supply now.

Ground Zero for the inevitable world-wide economic collapse will be the U.S. which just happens to be Canada’s largest trade partner. How well do you think that bodes for Canada’s economic future? Many Canadians bury their heads in the sand (Normalcy Bias), but as Ayn Rand said, “You can ignore reality, but you can’t ignore the consequences of ignoring reality.” And, reality is gonna bite Canadians. Hard!
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Canadian Government Spending

Another component to consider is government sending. You know Canada is in trouble when government spending is one of the strongest component of domestic demand. The budget for Canada has been in a deficit for the last 5 years.

The Canadian government is trying cut back on spending. Equedia says, “If consumer spending falls, business investments usually fall with it. Combine that with government cutbacks and we could be looking at a much stronger decline in domestic demand moving forward.”

Canada cannot export its way out of trouble. Mineral exports account for more than 20% of Canada’s exports. As noted above, mineral commodity prices have slumped. Mines have scaled back both production and cost inputs and have put projects on hold. Don’t hold your breath waiting for the “Ring of Fire” to be developed.

Much of Canada’s GDP was based on strong and rising minerals exports to emerging markets like Brazil and China, both of which are now showing signs of trouble. Brazil’s economy is now flat-lining and China is experiencing its own problems that will impact world growth and commodity prices.
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How China’s Bubble Affects Canada

China’s growth statistics have long been suspect. The Chinese fudge their numbers worse than the Amerikans. For years, Chinese growth numbers reported EXACTLY as forecast estimates. It gives new meaning to “unreal”. This past summer the bullshit became public.

China’s National Bureau of Statistics publicly ousted government economic development and technology information as massively overstated. The Wall Street Journal asked, “…How widespread the problem is elsewhere in the country is anyone’s guess…” That’s putting it mildly.

China then embarked on Quantitative Easing (QE) proportionately larger than even Amerika’s.

If China’s economy is in such good health, why the need for such massive liquidity injections? According to Equedia, “If China’s bubble bursts, a large part of Canada’s GDP will be wiped out. One of Canada’s biggest GDP drivers, the mining and resource sector, continues its decline as commodity prices continue to drop and investments into the sector continue to fall dramatically… That means GDP will likely shrink, as exports to Brazil and China fall along with commodity prices, leading to a loss of jobs and a further decline in domestic demand.”
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Canadian Household Debt

Canadian Households Plunge Deeper Into Serious Debt : On “Off The Charts,” “chief markets correspondent Scarlet Fu looks at the percentage of Canadian households that have fallen into serious debt of more than 250 percent of gross income during the past ten years.” Most of this is due to real estate debt. See the chart below.

“Based on rents, Canadian real estate is overvalued by as much as 60 per cent, the OECD says. In terms of prices to incomes, Canada fares a little bit better, but the OECD suggests the country’s real estate is still as much as 30 per cent overvalued.”

Analyst, William Kaye says “The only thing keeping things together at the moment is artificially suppressed interest rates … If they (central planners) actually got that result (a recovering economy), interest rates would spike higher and we would go back not only into recessionary times, we would be facing what Gerald Celente has correctly stated would be the ‘Greatest Depression of all-time,’ because the firepower now to bail out (various) people (or entities) simply doesn’t exist.” And Gerald Celente, who has an excellent forecasting track record, predicts a major global economic dislocation during the second quarter of next year.

And, wordsmith James Howard Kunstler speaking of Canada’s largest trading partner, the U.S. says, “The nation gets over everything without resolving anything — fiscal cliffs, debt ceilings, health care implosions, domestic spying outrages, taper talk jukes, banking turpitudes, the Syria bluster, the Iran nuke deal fake-out. It’s dangerous to live as though there was no such thing as consequence. Societies have a way of reaching a consensus about something without ever stating it outright. The American public has silently agreed to sit on its hands through one more Christmas and after that things shake loose.” [my emphasis]

Considering, that the American debt ceiling and fiscal cliff ‘can’ has been kicked into this coming February when the Amerikan leadership tears itself apart again, both those gents may be correct.

Are you prepared?

Gerold
November 24, 2013

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