Reading time: 3,582 words, 12 pages, 8 to 14 minutes.
My ability to connect disparate dots forecasts a major Canadian economic downturn is imminent and it will be much worse than the last recession. These aren’t unforeseen ‘black swans’. The events outlined below can be foreseen and some have already begun. Moreover, the cumulative effect of these events will be catastrophic for Canada’s economy.
These events are:
a) China’s economy is slowing
b) The West is overdue for another recession
c) Canada’s economy is already slowing down
d) Canada’s oil patch boosted jobs and disguised the unemployment rate
e) House prices didn’t collapse because oil patch job commuters kept their homes
f) The global shale boom will kill Canada’s oil industry
g) Canada’s real estate market will collapse as unemployment increases
h) Governments are over-indebted and out of ammunition from the last recession
i) Social collapse
j) Black swans
That briefly sums it up. Those of you who have been following my ‘Collapse’ articles on this blog can probably connect the above dots. No single one of these events is earth-shattering. However, these events threaten to cascade into an economic avalanche (pardon the mixed metaphors). What follows are the dirty details.
a) China’s Economy is Slowing
This was covered in great detail in last week’s article. China, the world’s second largest economy, after the U.S., was (past tense) also the fastest growing. As a result of its unwinding of huge levels of debt it will either slow down or crash.
This will have dire consequences for resource producing nations like Canada, Australia, South Africa and Brazil as well as emerging economies (once called ‘third world’). Many people think Australia will be affected worse than Canada because Canada exports less to China than does Australia.
However, we mustn’t overlook the economic term ‘fungible’. Resources are fungible insofar as commodities from one part of the world can be substituted by similar commodities from other parts of the world thus prices are virtually identical for all similar commodities. For instance, light sweet crude oil from Texas is similar to light sweet crude from Saudi Arabia. The same hold true for gold because 99.9% pure gold from Canada is indistinguishable from the same purity of gold from Russia.
A slowdown in Chinese demand for commodities will reduce the price of commodities and that price drop affects ALL similar commodities world-wide. In other words, a drop in oil prices as a result of reduced exports to China will also reduce the price of Canadian oil exports to the U.S. And, oil prices in particular, will have a detrimental effect on Canada’s economy as I’ll demonstrate shortly.
The second scenario: a hard landing (crash) in China will have even more devastating effects world-wide because so many nations trade with China; because of the interconnectedness of our globalized economies and because of financial interdependences of debt, credit, bonds, etc.
Worth Ray, writing in John Mauldin’s China’s Minsky Moment? says, “China doesn’t have to experience a deep recession in order to disrupt global growth. A slowdown to 2-3% real GDP growth and a corresponding decline in China’s import demand could fire demand shocks across emerging Asian economies like India and Indonesia, commodity producers like Australia and South Africa, and even deteriorating economies in the Eurozone like France and Italy.”
In other words, whether China’s economy lands hard or soft, the pain will be felt world-wide.
b) The West is Overdue for Another Recession
Recessions tend to occur every four or five years. Canada’s last recession was in 2009. Do the math. Canada is due for another one.
The U.S. ‘supposedly’ came out of recession in 2009. Again, do the math. And, I say ‘supposedly’ because pretending isn’t the same as recovering.
Fifty million Amerikans are on food stamps. The so-called housing recovery is fuelled by Wall Street buying foreclosed homes in order to rent them to Amerikans who can no longer afford to make mortgage payments. The so-called improvement in the unemployment rate is driven by the jobless who have stopped looking for non-existent jobs and therefore they are dropped from unemployment statistics which gives a false picture of the true rate of unemployment. Furthermore, most of the ‘new’ jobs are low-wage.
Five years of unprecedented near-zero interest rates has failed to revive the Amerikan economy. Incomes are stagnant. The real inflation rate is much higher than the bogus ‘official’ rate and these manipulated statistics mask a myriad of poor economic indicators.
Egon von Greyerz, founder of Matterhorn Asset Management out of Switzerland, says “In the U.S., the latest retail sales point to a 4% decline, and housing starts are seeing a 34% decline. Existing homes sales are down 18% since 2013 — that’s the 19th drop in a row.
“The U.S. consumer is getting squeezed continuously. Real household incomes are down 10% since 2000, and consumer debt is up 20% since 2010. Also, inflation in food prices is getting out of hand…. “Coffee is up 70%, hogs are up 42%, and beef is up 5% this year alone. So the consumer is really getting squeezed.”
The U.S. is still Canada’s largest trade partner. The U.S. is not in recovery although the ‘establishment’ is pretending really hard with their presstitute propaganda. It’s nothing more than a “Potemkin economy”. The U.S. is in the fifth year of a twenty year Depression. Thus, the prospects for Canada’s economy are increasingly dim.
c) Canada’s Economy is Already Slowing Down
Mining is an important part of Canada’s economy accounting for more than 20% of export dollars. The recent Prospectors and Developers Association of Canada (PDAC) conference was noteworthy for its subdued tone compared to past years. Gone was the talk of multi-billion dollar projects; replaced by multi-million dollar prospects. The juniors are in the their third year of financial drought. New mine projects are being delayed or deferred. Existing mines are cutting back on capital expenditures, watching every penny, delaying payments and putting pressure on their suppliers.
In my own field of logistics, I see an economic slowdown in reduced shipments in both the domestic as well as import & export markets. I use the Baltic Dry Index as an excellent leading economic indicator of global shipments. The chart below shows the demand for world-wide shipping is not recovering. In fact, it’s bottom-bouncing.
Being the ‘analytic type’, I generally don’t put much stock in ‘feelings’, but according to Bloomberg, Canada’s ‘Consumer Sentiment’ fell to an eight month low in February. I’ll grudgingly admit that there is much to be said for the Wisdom of Crowds wherein ‘the many are smarter than the few’.
Ontario, once the ‘economic engine’ of Canada is in long-term decline. According to Bloomberg, “Ontario’s job market is shifting away from full-time, permanent work and towards part-time and temporary work, and middle-wage jobs are being squeezed out in the process.”
Not only is Ontario’s employment rate dropping in the chart above, but the gap between low wage and high wage jobs is increasing. The Canadian Centre for Policy Alternatives reports that “The problems can’t be blamed on a recession hangover. It goes deeper than that. Long-term manufacturing job losses, coupled with a dramatic rise in service sector jobs, is creating a seismic shift from secure, middle-income jobs to a more polarized labour market … Ontario’s well-paying manufacturing sector went from the bedrock of the economy at 18% of the labour market in 2000 to 11% by 2013 – a loss of 290,000 jobs.” Heinz and Kellog’s and Novartis have all recently shuttered Ontario plants.
Canadian housing starts fell twice as fast as economists expected in January, led by a drop in multiple-unit projects. The real estate ‘correction’, when it comes, will be particularly painful because as Pater Tenebrarum of ‘Acting Man’ says that, “according to recent data, Canada’s houses are the most overvalued in the world relative to rents – with the overvaluation clocking in at an estimated 80%.”
If the chart below doesn’t scare the crap out of you with Canada on the extreme right, then nothing will.
The Amerikans aren’t the only ones trying to pretend their way out of trouble. Connor McDonald, economist at Toronto-Dominion Bank says, “A slower pace of construction activity to start the year is consistent with the wider theme of domestic fatigue that will inevitably put more pressure on net exports to drive the next stage of Canada’s economic recovery.” I don’t know what he’s smoking, but I wish he’d share so I might understand how ‘domestic fatigue’ is going to drive growth. Oh, that’s right; he’s an economist. I really do wish he shared so I, too, could be unburdened by reality.
d) Canada’s Oil Patch Boosted Jobs and Disguised the Unemployment Rate
Canadian manufacturing continues its downtrend and job losses. The forest industry’s lumber and pulp & paper mills continue to languish. East Coast fisheries haven’t recovered from the decline of Cod stocks and fears of radioactive West Coast salmon are adding to fears of declining salmon stocks. Mining is slowing down with reduced potash output and iron ore prices falling on China fears.
The saving grace for the Canadian economy has been the oil and gas industry. “The western Canadian oil industry is responsible for significant economic benefits in all provinces. This is one of the principal findings of an extensive study conducted by KPMG entitled Economic Benefits of the Western Canadian Oil Industry…”
“Canada’s petroleum industry generated $44 billions in economic benefits and created nearly 420,000 direct or indirect jobs in Canada in 2012.”
It’s notable that, “The study focused exclusively on economic benefits associated with the production phase of the oil industry and did not take into account those involved in the distribution and processing phases.” Nor did it account for many industries that supply materials, logistics, equipment, repair, maintenance, finance, capital investment and numerous other support services. In other words the spin-off effect to Canada’s economy is many times greater than reported.
Canada, it seems, has put all its eggs in one basket. The importance of this cannot be overstated especially considering that Canada’s oil and gas industry is notorious for its ‘boom and bust’ history. Keep reading.
e) House prices didn’t collapse because of the oil patch
I’m no ‘social butterfly’, but I do like to talking with people; even strangers. Everyone has a story to tell. Sometimes, people will provide interesting perspectives. I recently shared a chairlift with a woman from a small town whose largest employer, a pulp and paper mill had shut down.
She said her husband was now commuting to the oil patch along with many others who had lost their jobs. She said the only reason house prices hadn’t declined is that people were commuting to the oil patch and thus continue to make their mortgage payments.
It was like a bolt out of the blue. I already knew that Canadian airlines have long ago set up regular flights to the oil patch from as far away as Newfoundland and Atlantic Canada where low-wage jobs reign. Workers from all over Canada have either moved or regularly commute to Western Canada’s oil and gas fields. The oil patch has, single-handedly, propped up employment, house prices, capital investment, government tax revenue; in fact, the entire Canadian economy.
In other words, all of Canada’s eggs are in one basket. I was thunderstruck when I realized that, as the Globe and Mail’s Eric Regully says, “Beware one-product wonders. Economies that are tilted towards a single industry are accidents waiting to happen, just like single-crop farms.”
f) The Global Shale Boom will Kill Canada’s Oil Industry
The Star.com reports that, “The ‘shale revolution,’ which releases oil and natural gas from buried shale rocks, promises a fivefold increase in the world’s known recoverable oil, according to estimates by the International Energy Agency, and double known gas reserves, according to the U.S. Energy Information Administration. The shale revolution has enormously increased the volume and dramatically slashed the price of natural gas in North America. Shale oil production is increasing almost as dramatically.”
With China slowing down and the U.S. in non-recovery, the demand for oil and gas will also decrease. A decrease in demand will also decrease petroleum prices. The only reason this hasn’t become evident yet is this past winter was long and severely cold. This increased the demand for natural gas and home heating oil.
In fact, the pump price for gasoline has actually gone up because refiners who would normally start switching from home heating oil to gasoline are still producing home heating oil. Once, (if?) spring comes, this will change and the increased supply of shale oil and gas will drop petroleum prices. The only question is how much?
There are other factors to consider as well. Again, according to the Star.com, “Increasing efficiency in energy use will continue to reduce the U.S. need for oil. So will growing alternative fuels, such as ethane and fuels that come as a by-product of natural gas production.
“As for caps on CO2 emission, if they were ‘implemented worldwide, the Canadian bitumen production (from the oilsands) becomes essentially nonviable,’ according to a study by the Massachusetts Institute of Technology.”
Yes, I know; hydraulic fracturing (fracking) of shale is over-rated. Arthur Berman, a geological consultant with thirty-four years of experience in petroleum exploration and production says, “Oil companies have to make a big deal about shale plays because that is all that is left in the world. Let’s face it: these are truly awful reservoir rocks and that is why we waited until all more attractive opportunities were exhausted before developing them.” He admits the depletion rate is far greater than conventional oil and gas; “all shale gas plays except the Marcellus are in decline or flat … Production from shale is not a revolution; it’s a retirement party … Shale plays will last years, not decades.”
However, the end of shale won’t happen overnight. By the time the over-rated shale plays have played out, the damage may already have been done to Western Canada’s oil patch and, by extension, to all of Canada’s “eggs-in-one-basket” economy. It all depends on the oil price.
So, keep your eye on the price of oil. Continued oil sands production is expensive, energy intensive and viable only at a high oil price. Once oil prices dip below $100 a barrel and especially if it falls towards $80, then Canada’s oil patch projects are in jeopardy along with jobs, housing and the economy.
g) Canada’s Real Estate Market will Collapse as Unemployment Increases
Having put all our eggs in the oil patch basket, what happens when the oil patch goes bust again? And, history tells us it’s only a matter of time so keep your eye on the price of oil. Once ‘Saudi Oilberta’ starts winding down projects and laying off workers then mortgage payments will be missed, house prices marked down for quick sale and the over-priced real estate market collapses.
I remember several decades ago, when home owners walked away from their homes, threw the house keys across the bank’s counter (“jingle mail”) and left town. It happened before ; it’ll happen again. It’s only a matter of time.
Pater Tenebrarum of the Acting Man blog writes about Carney’s Legacy: Canada’s Credit and Housing Bubble. and asks “How Long Before it Bursts?” See the chart below comparing Canadian vs U.S. house prices.
Above, Canada is the red line (no pun intended), the U.S. is in blue. The increasing gap between the two makes this a ‘jaws of death’ chart. It also shows how far Canadian real estate will ‘correct’ once the crash starts.
Most Canadian mortgages are insured by the state-owned Canadian Mortgage and Housing Corporation (CMHC) which can provide up to $80 billion for new guarantees of market NHA MBS and up to $40 billion of new guarantees for CMB for a total of $120 billion. The limit on mortgage insurance-in-force is $600 billion.
As indicated above, Canadian real estate is 80% overvalued and ‘corrections’ always overshoot to the downside. In other words, CMHC does NOT have the reserves to cover such a correction. A bust will lead to considerable deterioration in the government’s finances and the taxpayer will end up bailing out CMHC.
For more detail, read Mish’s “Canada Housing Bubble: Far Too Late for Warnings; Rule of Predictions” or the Daily Bell’s Good Timing! Financial Times Affirms the Canadian Real-Estate Bust where Seth Daniels says, “One of the biggest concerns is the duration of Canadian mortgages because Canadians refinance [about] once every five years instead of once every 20. There is little doubt that Canadians who borrowed in the past few years of low rates will pay more at their next refinancing … At some point interest rates are going to have to rise and it’s going to be a shock to a lot of Canadians.”
According to Armstrong Economics “The impact of interest rates and attempts to artificially keep them low to stimulate the economy have routinely failed. These behind-the-scene-machinations have done far more damage to society as civil unrest rises in the wake of such failed manipulations.”
And, don’t forget the spin-offs from real estate; agents, furniture, appliances, fertilizer, granite countertops, Canadian Tire and so on, will all feel the effects of a housing collapsing.
h) Governments are over-indebted and out of ammunition from the last recession
The Canadian government is already deeply in debt and in no condition to weather such a financial storm.
And, forget all the crap about Canada’s Federal government “balancing the budget” in (insert some wishful-thinking year of your choice) because balancing the budget does NOT pay off the huge debt. It simply stops adding to it and we will still have to pay the interest on it.
Remember: ‘deficit’ is the annual shortfall; ‘debts’ are the total accumulation of all previous deficits. Canada’s debt has as much chance of being paid off as Amerika’s or Ukraine’s or any other country. Not gonna happen!
If that’s not bad enough then consider that the interest paid on that debt is at an unprecedented, near-zero rate and governments will soon lose control of the long end of the yield curve. In other words, interest rates will rise and increase the cost of servicing that debt. So, the chances of a “balanced budget” are about the same as paying off the debt or winning the lottery. That’s not gonna happen, either!
i) Social collapse
Young people are the ‘canaries’ in the coal mine. Coal miners evacuated mines when their sensitive canaries died from exposure to toxic gas. By the same token, teens’ sensitivities make them early indicators of present and coming danger.
The Canadian Press recently headlined “Canadian Hospitals Stretched as Self-Harming Teens Seek Help” with the by-line, “Emergency rooms across the country seeing spike in teens with self-inflicted injuries.”
“’We’re seeing twice as many kids as we were 10 years ago,’ said Dr. Hazen Gandy, division chief of community-based psychiatry at the Children’s Hospital of Eastern Ontario in Ottawa.”
“Doctors say they are not only seeing a distressing rise in the number of kids seeking help for self-inflicted wounds, but many specialists report that they don’t have the hallmarks of a psychiatric disorder. That is leaving doctors with no clear answers as to why they’re seeing so many more kids with these kinds of injuries.”
Let’s see. We have high youth unemployment especially in Ontario, increasingly dim job prospects, dumbed-down education systems, increasing student debt and no hope for the future. They’re either delaying moving out or moving back in and watching their middle-class parents descend into poverty while failing to cope with rising costs and stagnant incomes, increasing suicides in the military, concern about GMO frankenfood, Fukushima radiation poisoning and increasing prospects of nuclear war; all of which conflicts with government’s ass media propaganda telling us that everything is wonderful and under control.
Meanwhile, the Kool-Aid drinking medical experts are stretching to explain this as maybe bullying or perhaps social media or sex abuse or lack of coping skills (as if any of these are new). In other words, they don’t know.
What could those bellwether teens be telling us that we are unwilling to admit?
Meanwhile, we’re facing another leg down in our “Stealth Depression” which for the most part is hidden from view. For more detail see last fall’s forecast Collapse Update Fall 2013 – CANADIAN OUTLOOK.
j) Black swans
And then, of course, are the ‘unknown unknowns’; the Black Swans; the inevitable surprises. You can bet they’re just hovering and waiting to blindside us as if the foreseeable events outlined above aren’t dire enough.
Conclusion: the next downturn for Canada will be either:
a) fast and painful if oil prices drop too far, or
b) slow and painful even if they don’t.
The speed remains indeterminate, but the pain, unfortunately, will be inevitable.
Put on your crash helmet and remember the mantra:
We cannot borrow our way out of debt.
We cannot spend our way to prosperity.
We cannot pretend our way out of trouble.
March 23, 2014
Update March 26: no sooner do I publish then more information comes to light. Macleans latest edition has two pertinent articles.
Living beyond our means is by-lined “Extravagant, reckless, debt-ridden—Canadian consumers have maxed themselves out after a decade-long spending spree. When did we start to be like Americans?” Canadians are deeper in personal debt than Americans were before the U.S. crashed in ’07.
And, Premier Wynne’s California debt dreams is by-lined “Deficit spending failed to boost Ontario’s economy—so naturally the Liberals want to spend more.” Everyone thinks California’s government is debt-ridden, but all Canadian provinces except Alberta are worse. See the chart below. I highly recommend both articles.
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