Reading time: 3,262 words, 10 pages, 8 to 13 minutes & lotsa ugly charts.

Synopsis – covered in this post
Inflation
Oil Price Plunge
Real Estate Bubble

Synopsis – covered in Part 1 

Baltic Dry Index
China’s Slowdown
Commodities
Debt, Debt and More Debt

Synopsis – covered in Part 2
Economy
Governments and Voter Stupidity

Synopsis – covered in a future post
Tourism
Unemployment
US Dollar
Forecast Canada

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Inflation

Don’t look now, but this might be another nail in the coffin of the 3000-mile Caesar salad in winter. At the end of January, Zero Hedge reported, “we got confirmation that all Canadians, not just those in the deep north, are indeed suffering under double-digit inflation at the supermarket when Statistics Canada said the price of fresh fruit has skyrocketed by 12.4% since the end of 2014 while fresh vegetables are up a staggering 14.4%.”   Global News reports that “For the fourth year in a row, the increase in food prices is expected to outpace inflation …” 

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Oil Price Plunge

“Oilmegaddon”, the world-wide plunge in petroleum prices has hurt oil exporters such as Russia, Venezuela, Mexico, Nigeria, Norway, Canada and others while Saudi Arabia wages economic Jihad on the rest of the world. . It’s working. Nigeria cannot pay it’s teachers and Venezuela is on the verge of starvation although that may be a fringe benefit of their rampant Socialism rather than entirely caused by low oil prices. And, the global pain is not over yet.

Macleans reports that “Even if prices do recover somewhat, there are factors working against oil returning to those levels any time soon. Saudi Arabia appears committed to pumping out crude as a way to recover market share lost to non-OPEC countries…” 

Regarding the latest production freeze agreement between Saudi Arabia and Russia, Casey Research writes that “Even a global production freeze at January’s levels would leave the world with about 300 million barrels of oil produced above demand. That doesn’t include oil stored in tanks, which stands at more than 3 billion barrels just in the industrialized world, according to the International Energy Agency…. The Wall Street Journal went on to explain that freezing production isn’t enough. The world needs production cuts.”  Casey Research’s chart below indicates the over-supply (blue bars) could last well into 2017.

In Canada, the pain is particularly sharp in the province of Alberta where oil & gas production forms a large part of the province’s economy.

Macleans magazine reports that “Bank of Canada governor Stephen Poloz reminded the country of the hit we’re collectively taking: the drop in oil has delivered a $50-billion cut to Canada’s national income…

“When you look at the levels of these surveys of investment and hiring intentions, they’re historically consistent with negative growth,” says David Madani, the chief economist at Capital Economics, who says it’s a sign that “perhaps the economy is on the verge of a full-blown recession.” 

Gonzalo Rafo writes that “Canada is the world’s fifth-largest oil-producing country. Crude oil makes up 18% of Canada’s exports, making it by far the country’s biggest export. While energy makes up 25% of Alberta’s GDP, the spin-off industries such as construction, finance, real estate and services will soon feel the pain from the end of the 15 year oil boom. “The boom times are clearly over…but Canada’s economic problems are just starting.”

“In October, The Conference Board of Canada said it expects revenues for Canada’s energy sector to fall 22% this year. It also expects the industry to record a net loss of about C$2.1 billion ($1.6 billion) in 2015. Last year, Canada’s energy industry made a C$6 billion profit.”  North American oil producers have hedged with forward contracts only 11% of their 2016 production thus giving them far less financial protection from collapsing oil prices. That’s going to hurt as these remaining hedges expire and oil producers face current low prices.

Shutting down production is not easy. OilPrice.com reports that “some companies might stay online and lose money because shutting down carries its own trouble and costs. Shutting down can actually damage a reservoir, leaving a site with permanently lower output. As a result, production shut ins could actually be ‘extremely limited’…”  In fact, globally just 0.1% of oil production has been curtailed.

According to Global News, “The International Energy Agency says oil supply is set to outpace demand this year, keeping a lid on any expected price increases.”

The chart below shows the impact of $50 oil.

We’ll be lucky if we see $50 oil soon. Some analysts are forecasting crude oil prices to plunge to $20 and even as low as $10 a barrel. In an increasingly volatile world, we can expect prices to ‘overshoot’ to the downside.

Suncor, Canada’s most powerful oil and gas recorded a net loss of $2 billion in the final quarter of 2015. This resulted not only from depressed commodity prices, but, contrary to ass media propaganda that the low Canadian dollar would boost Canadian export revenue, Suncor suffered from foreign exchange loss due to their U.S. dollar denominated debt. It’s easy to forget how globalized and interconnected we are now.

The chart below belies the advantage of the low Canadian dollar on exports. As you can see manufacturers have increased domestic sales, but they reduced exports so the low dollar does more damage than good.

Canadian banks are in danger because of their exposure to oil and gas companies that are teetering on the brink. Also, contrary to the ass media propaganda about the strength of Canadian banks withstanding the last Great Recession, Canadian banks were bailed-out by the Canadian taxpayers, most of whom knew nothing about it. Furthermore, the Canadian bail-out was proportionately larger than the U.S. bank bail-out. Thanks, suckers! Do you still think your vote counts or are you beginning to see who actually owns us?

However, U.S. banks now have a far larger loan loss reserve for faltering oil & gas companies than do Canadian banks as you can see in the chart below.

[Canadian bank reserves are on the left side of the chart above and U.S. on the right.]

Governments are once again displaying their stupidity and the limits of their power. The newly elected Alberta socialist NDP provincial government announced they are freezing the salaries for about 7,000 senior officials, managers and other non-unionized government employees at current levels until 2018. Let’s put this stunning announcement into perspective.

a) this freeze covers only 8% of 87,0000 government employees  which resembles a fart in a windstorm. This is known as ‘spin’.

b) senior employees will still continue making between $110,000 and $286,000 a year; a much larger fart in a windstorm.

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The private sector wasn’t so lucky. According to the Calgary Herald, “The number of people receiving regular Employment Insurance benefits has more than doubled in the past year in the Calgary region and across Alberta … Across the country, year-over-year regular EI beneficiaries were up 8.2 per cent.”

The chart below shows Alberta’s unemployment rate already approaching that of the ’09 Great Recession.

Bloomberg reported that “Crime is rising, home prices are falling and food banks are overwhelmed in Calgary as job losses spread. And the worst isn’t yet over in the heart of Canada’s oil patch … Some of the city’s largest employers are poised to cut more jobs in 2016 as they reduce spending for a second straight year … In the first 10 months of 2015, commercial break-ins almost doubled from a year earlier, bank robberies were up 65 percent and home invasions increased 52 percent.”

The chart below shows the decline of economic indicators for jobs, shopping, cars and houses in energy producing areas (in orange).

The plunging petroleum price is not just Alberta’s problem or even just Canada’s. It’s a global problem according to Bloomberg “because a growing share of the world’s consumers and investors are in the very places getting hammered by the rout in commodities prices. Apple Inc., for example, blamed weaker sales last quarter on lower economic growth in some oil-rich countries.”

“The problem is that the world’s economy relies far more today on emerging countries than 15 or 25 years ago — the last periods of ultra-low oil prices.”

Remarkable as it sounds, one of the largest transfers of human wealth does little for global economies. Trillions of dollars are being ‘pushed-back’ from oil producers to consumers but consumers are not spending the energy windfall because cash-strapped consumers are paying down their massive debts. Economists in their arcane world call this ‘saving’ and that’s bad because we consumers are supposed to spend, spend, spend money we don’t have to buy shit we don’t need to impress people we don’t like. However, as you can see in the chart below, we’re just not getting with that program.

As you can see in the above chart, all age groups have increased their cash ‘hoarding’ especially the under-35 Millennials compared to 2007. It should be no surprise that the ass media puppets are propagandizing that ‘cash is bad’.

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Real Estate Bubble

One of the frothiest Canadian real estate bubbles is Vancouver, or, as some call it, ‘Hongcouver’ for the hot Asian money that supposedly bids up house prices. I’m always leery of such conspiratorial ‘conventional wisdom’ and, in fact, Garth Turner, who knows a lot more about real estate than I do, writes “And while people are quick to say it’s all the fault of offshore buyers, the fact remains that 95% of all trades are local-to-local. The blame here lies squarely on the shoulders of those who joined a speculative fever at odds not only with the rest of the country, but the national economy.”

The graph above shows real estate’s increasing percentage of GDP .

Hilliard MacBeth, Richardson writes “Most Canadians are unaware of the degree of over-investment in residential housing. Total investment is $120 billion annually, split equally between renovation and new housing. This pace is unsustainable and the adjustment will be painful.” 

In December, Global News reported that “benchmark prices in Vancouver surged 17.8 per cent as sales soared 40.1 per cent … In slightly tamer Toronto, benchmark prices increased a relatively meagre 10.3 per cent as sales climbed 14 per cent compared to November a year ago, making 2015 the most active year on record for the country’s biggest housing market (eclipsing red-hot 2007).”  In fact, “The Vancouver and Toronto markets have firmly decoupled from the rest of the country, where home prices are moving at a far more slower rate of about 2.5 per cent…”  In fact, January saw home prices in Toronto and Vancouver actually accelerating. “Benchmark home prices, which capture price growth for all home types including condos and townhouses, were up 11.2 per cent in Toronto and 22.9 per cent in Vancouver.”

In a more recent report by Global News: “New data released by the country’s real estate association on Tuesday shows average property values on resold homes in the Greater Vancouver area rising by 30.9 per cent in January compared to the same month a year ago.”

Global News also reported “New numbers from researcher Andy Yan of Bing Thom Architects found 91 per cent of homes in Vancouver are now valued over $1 million and around one-third are worth more than $2 million.”  According to Zero Hedge  “The benchmark price for a detached home in Vancouver: $1,293,700. The benchmark price for an apartment: $456,600.”

 To put this into perspective, consider that in the last decade, Vancouver house prices have increased 175% whereas average income increased only 20%. That which cannot last, won’t.

The pain in the oil patch hurts Alberta real estate. The Globe and Mail headlines “Alberta housing market braces for most painful year since crisis.”  As well, Calgary’s rental vacancy rate which at 5.3%, tripled last year’s.

The Calgary Herald reports “New data by CREA indicates Fort McMurray, in the heart of the oil patch in the province, saw a 27.7 per cent year-over-year decline in MLS sales in November with the average sale price plunging by 19.1 per cent”  and warns that there’s more pain to come. According to Global News,  “Fort McMurray’s food bank sees record use in 2015, as real estate market cools” with food bank use surging between 72% and 125% last year. With such fodder, Michael Snyder (admittedly a doom-pornster) headlines Suicide, Crime, Unemployment And Poverty All Soar As The Economic Crisis In Alberta Accelerates.

“Alberta is the only Canadian province to broadly offer non-recourse residential mortgages.” And now, ‘jingle mail’ makes another comeback in Alberta. The CBC reports “Jingle mail — the act of walking away from an underwater mortgage by mailing your keys back to the bank — is a peculiarity of the Alberta residential market and an act of desperation. However, a combination of high debt and lost jobs make it an option in a province going through a significant economic reckoning.” 

However, the CBC warns “The one main difference between now and the 1980s is that now credit bureaus have access to mortgage information. If you make a strategic default, it will follow you.”

On the other hand, good on Alberta for screwing the Canadian banking oligopoly! That doesn’t happen often enough.

Zero Hedge writes “We are building a lot more houses than we really need. From 2006 to 2011, Canada’s population grew by 3 per cent while housing stock grew by 7.1 per cent (Canada Mortgage and Housing Corp. housing stock surveys are compiled every five years, so we should have updated numbers this year).”  Normally, surplus housing would lower house prices, but Fard writes that, “As many have argued, evidence suggests that additional production was and is being bought by foreign investors. Indeed, CMHC reports that the share of foreign ownership of condos in Toronto and Vancouver grew by 22 per cent and 51 per cent respectively – in 2015 alone.”  [Note: these are increase percentages not overall.] Historically, housing overproduction has never been sustainable in any country. Furthermore, foreigners can leave quickly as they aren’t as attached to the domestic market the way locals are.

Whistling past the graveyard last summer by predicting, not a melt-down, but a ‘normal cooling’, the Bank of Canada estimates that Canadian housing is over-valued  by 10 to 30 percent. A year ago, Deutsche Bank estimated that Canadian housing was over-valued by 60%. And, prices have continued climbing.

Unlike the U.S. where banks were at the center of the sub-prime mortgage melt-down, most Canadian mortgages are guaranteed by Canada Mortgage and Housing Corporation (CMHC) a Government of Canada Crown corporation. The CMHC is also adept at whistling past the graveyard as seen in its so-called ‘stress test’ where it developed so-called worst-case scenarios such as:

a) 5 years of global economic deflation

b) 5 years of crude at US$35 a barrel, and

c) A magnitude 9 earthquake in Vancouver

I’m surprised they didn’t throw in a Martian invasion! Omitted from this onerous test is very mobile foreign ownership of Canadian real estate subject to capital flight. Hot foreign cash would bail out of Canadian real estate if things got grim. CMHC CEO Evan Siddall noted “This would increase volatility in domestic housing markets.”

Real estate prices have already begun ‘correcting’ in some areas. Global News reports that “Benchmark home prices in December fell in both Calgary and Regina.”  How long Toronto and Vancouver can continue their blistering rise in prices remains to be seen.

Canadians are assured that the government has their backs. Don’t believe it. Governments look after themselves. Yes, the Government of Canada, through the CMHC guarantees the most at-risk mortgages. But, who underwrites the government and CMHC? Ah, the public, of course.  The gains from mortgage finance were privatized by Canada’s banksters as profits, but the losses, as usual, will be socialized.  Do-nothing banksters that add no value get filthy rich while many of Canada’s major industries, including aerospace, energy and the mining sector are on the brink of financial collapse.

The real estate bubble, like all bubbles, leads to many unintended consequences. For example, B.C. property taxes are increasing at double digits with some property assessments in Greater Vancouver jumping up to 30%.

Another unintended consequence is the under-funding of many condominium reserve funds, especially in hot markets like Toronto and Vancouver where high prices have left owners with little disposable income. The Vancouver Sun quotes

Bramwell & Associates Realty Advisors, “We are going to have a lot of special assessments being levied (on condo unit owners) in coming years … Special assessments are the dreaded lump-sum levies imposed on owners by strata corporations when they need extra cash to cover supposedly unexpected expenses.”

Rentals are also being affected. House rental rates are dropping and vacancy rates are  rising as owners, unable to sell, try to rent their homes to fewer and fewer renters as more people move away. This makes it more difficult for home-owners to service their mortgages which will further drive down house prices. In the chart below, you can see vacancy rates are rising in energy producing provinces.

Will over-priced Canadian real estate crash? History may not repeat, but it does rhyme so looking at the past may be instructive. Garth Turner writes “The real estate and housing boom of the late 1980s in most Canadian cities was replaced not with a crash, nor a bust nor a cataclysmic economic event, but rather with a relentless melt.

“Rising interest rates didn’t trigger the bust, since the cost of a mortgage fell steadily – from 14% down to 7% – during the period that houses were unloved. And still real estate lost almost a third of its value from the speculative, house-horny peak of the late Eighties. The reason was simple: recession. 

“Today Canada is in the grip of an oil collapse, as you know. Job loss seems epidemic. What started in Fort Mac spread to Calgary, the Martitimes, southern Ontario suppliers and now Bay Street financials. Our economy will be lucky to expand by 1% this year.” 

As I’ve been ranting for years, based on the REAL Canadian rate of inflation (about 7%), official 1% growth means the economy slowly declines year after year. There is no recovery.

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Stay tuned in a couple days for the final post Canada Hits the Wall in 2016 – Part 4: Tourism, Unemployment, US Dollar & Forecast

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.

Gerold

February 22, 2016

Click here to read Part 1

Click here to read Part 2

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