Reading time: 2,758 words, 8 pages, 7 to 11 minutes & only 2 ugly charts.
Synopsis – covered in this final post – Part 4 of 4
Synopsis – covered in Part 1
Baltic Dry Index
Debt, Debt and More Debt
Synopsis – covered in Part 2
Governments and Voter Stupidity
Synopsis – covered in Part 3
Oil Price Plunge
Real Estate Bubble
The sinking Canadian dollar (called the “loonie” for its picture of a loon) was supposed to be a boon to Canada’s tourist industry as tourists took advantage of the stronger U.S. dollar. Although Toronto’s share of tourism increased, the same is not happening elsewhere in Canada. Once again, we overlook the impact of demographics.
Global News reports that “Canada’s reputation as a land of natural beauty and spectacular scenery tends to resonate more among older visitors and less among millennials…” To put this into perspective, U.S. visitors in Canada in 2016 are expected to spend $9.6 billion compared to Canadian snowbirds that are expected to spend $20 billion, more than twice as much, in the U.S.
Alberta is presently suffering the greatest Canadian job losses, but the pain spreads to the rest of Canada as many oil patch workers either moved there and sent money home or commuted from other points in Canada. The Globe and Mail headlines “Alberta endures most annual job losses since early 1980s recession.”
The Calgary Herald expects “oilsands construction workforce to plunge 84% by 2020 … and has [already] wiped out 100,000 direct and indirect jobs according to one industry estimate … Meanwhile, the number of people receiving jobless benefits in Alberta jumped more than 100% in December.”
It’s not just lost jobs that impact the economy. Many people are having work hours reduced so the loss of income extends beyond the unemployment numbers.
Zero Hedge reports, “Suicide rates jumped by 30% and in Calgary commercial break-ins almost doubled from a year earlier, while bank robberies were up 65% and home invasions increased 52%.”
Crony capitalism is not limited to the U.S. After receiving a $1 billion bailout from Canadian taxpayers last October, Bombardier recently announced the firing of 7,000 employees. Bombardier is based in the corrupt 3rd world country province of Quebec. Considering the Liberal’s propensity for scandals, do you think it’s coincidence that Bombardier didn’t ask for a bail-out until Trudeau’s Liberals were elected?
Anyone looking to explain the rising U.S. dollar as a conspiracy had best keep looking. I covered the basis of conspiracy theories in a longer article. As Robert Heinlein said, “You have attributed conditions to villainy that simply result from stupidity.” In other words, the correct explanation is incompetence. In this case it’s the incompetence of our leaders and central banksters to manage free market economies. The strengthening U.S. dollar is simply a matter of supply and demand.
On the demand side is the need to raise Amerikan cash for defaults, hedge fund redemptions, margin calls, etc. On the supply side, U.S. dollars are created by debt and then vanish when debts are paid off resulting in a shortage of U.S. dollars which may seem counter-intuitive until you realize global debt is north of $600 trillion U.S. dollars.
Nobody wins with a strong U.S. dollar. A reduction in the supply of dollars is deflationary and central banks are horrified by deflation because there’s even less money to pay debts, As well, they fear that consumers will delay consumption in anticipation of lower prices in the future and this is contractionary to the economy.
The Globe and Mail reports that “Since the Great Recession, Canada has relied on two key elements to keep its economy humming: oil and real estate.” As Canada’s economy sputters, can other industries pick up the slack?
Spoiler alert: the short answer is NO.
a) Consumers – The same Globe and Mail article cites household debt greater than experienced by Amerikan consumers before the last Great Recession so, “the years of high spending and rising debt have drained the capacity for growth from the consumer side.”
The article goes on to say that “Canadians are now spending 14 per cent of their disposable income on debt payments, a near record. Last month, the Bank of Canada warned that the number of Canadians whose debts make them vulnerable to an economic shock had doubled from 4 per cent to 8 per cent, since before the global financial crisis.”
In other words, don’t expect Canadian consumers to come to the rescue. Retail sales fell in December in all Canadian provinces and territories except tiny Prince Edward Island. An Ipsos Reid poll “suggests nearly half of Canadians surveyed last month are within $200 per month of being unable to pay for their bills and make their debt payments …[and] that 31 per cent of respondents said any increase in interest rates could move them towards bankruptcy.”
b) Lower gas prices – by spending less on gas, it was thought Canadian consumers would have more disposable income. However, the falling Canadian dollar increases the price of imported goods much of which is not discretionary. Canada imports as much as 80% of its fresh fruit and vegetables and the CBC reported that produce prices rose about 10% in 2015 and “and may double inflation in 2016.” The Globe and Mail estimates that “Consumers will pay as much as $5-billion extra this year in food costs … That will more than eat up the savings from lower gas prices and the federal government’s new middle-class tax cut.” In other words, neither lower gas prices nor the Liberal government’s proposed tax cuts are large enough to offset the increase in import prices.
c) Exports – with the Canadian dollar having lost 25% of its value against the U.S. dollar, it was thought that this would decrease prices and increase Canadian exports. Alas, such optimism depends on a real U.S. recovery. As I recently wrote in the global article article Hitting the Wall in 2016, the American so-called recovery is a myth. Canadian exports rely primarily on U.S. and secondarily on global demand and, in case you haven’t noticed, both the American and global economy are slowing once again. As well, the Globe and Mail reports that “the evolution of Canadian exports, which have increasingly become intermediate supply-chain goods, providing parts and materials for U.S. manufactured products that face their own export dynamics, rather than consumer goods that feel a more immediate impact from currency moves.” And so, neither the consumer nor Canada’s supply-chain partners are coming to the rescue.
d) Infrastructure Spending – the newly elected Liberal government announced they will save the day with increased infrastructure spending. Done properly, this stimulus might be beneficial, but we’ll have to see how this plays out. After all, Canada’s new dynastic Boy Bungler, Justin Trudeau’s (aka ‘T2’) lightweight chops have already been on display with such air-head pronouncements as “budgets balance themselves.” As well, this Federal stimulus will be largely offset by reduced spending by provincial governments. In addition, the Globe reports that, “Business investment is expected to actually subtract from GDP for the second successive year as the income-starved resource sectors cut spending again.” In other words, infrastructure spending is ‘pushing on a rope’.
e) Mergers & Acquisitions – Equity investors will need to be nimble. Mining Weekly reports “With the downturn in the commodity cycle, advisory firm EY expected merger and acquisition (M&A) activity to pick up in 2016 … It’s likely there will be material ownership changes across the sector in 2016, with new players taking on positions, larger players downsizing portfolios and some businesses not surviving.” As well, according to Global News the “low loonie means Canadian companies are ripe for the pickings.” International companies paying in U.S. dollars are buying Canadian companies at a discount because of the currency exchange rate difference. For instance, Lowe’s announced they are acquiring Rona. In fairness, Canadian companies acquired American targets when the loonie sold at a premium such as TD Bank and Royal Bank buying South Financial Group and City National.
g) Canadian Dollar Crash – the ‘safe haven’ status of the U.S. dollar makes the greenback the least ugly horse at the glue factory and, by comparison, the Canadian dollar has been dropping in value accordingly. David Doyle of Macquarie Capital Markets Canada Ltd. in February of LAST year predicted “the loonie would hit 69 cents US at some point in the next 12 months.”
It did just that on January 12, 2016. NOW, he’s predicting a 59 cent dollar. Converting the other way, one U.S. dollar would be $1.71 Canadian (and I thought my forecast of 1.55 to 1.60 was nuts!) The price of the imported 80% of Canada’s fruit and vegetables is about to skyrocket and lots of other bad shit we haven’t even contemplated.
“In the past, a cheap dollar was a mixed blessing for the Canadian economy: a boon for exporters, but bad news for importers and Canadians who need to travel or spend money outside the country.
“But the gains to be had from a cheap dollar often take a while to show up. The pain, on the other hand, is almost immediate.”
“Consumers benefit, a tad, from the drop in energy prices, but are no doubt hurt by the dollar’s slide. And, the blaring headlines about a sub-70 cent dollar are likely to [hit] confidence further.”
f) NHL Woes – seven of the thirty National Hockey League teams are in Canada. Sports Illustrated wrote that “They take in Canadian dollars but pay out their biggest expenses—salary and travel—in American currency. They have protected themselves to some degree by stockpiling U.S. funds purchased at more favorable rates, but those reserves can only last so long. The next time they load up on American dollars, they’ll feel it.”
If Macquarie’s loonie prediction (no pun intended) turns out to be correct, expect NHL salary caps and other constraints. Some players packed up and left during previous lockouts so we shouldn’t be surprised if some will seek greener pastures. With the Canadian dollar getting hammered, teams might be happy to see some of them go. However, Canadians love their hockey, so the game will go on.
g) Skills Shortage – It’s difficult to believe, but the Calgary Herald predicts a continuing skills shortage resulting from job losses oil-patch job losses.“… the mass job cuts could haunt the industry in the long-term, as the industry continues to face a shortage in many skillsets and a sizeable chunk of the workforce is expected to retire over the next decade.
“We are expecting a large skills shortage, because we won’t have the right people at our disposal,” said Emma Monaghan, project manager at PetroLMI. “And the longer term the downturn, the less attractive it will be for people to come back.”
h) Western Separatism – during the depths of recession in the late 80’s and early 90’s there was much talk of western Canadian separation. Given the obvious neglect from Trudeau’s new Liberal government and numerous obstructionist provinces, don’t be surprised if we hear this again.
i) Cheaper Gas; More Driving – Good news: gas prices will continue to decline with the price of oil. As mentioned above, the extra cash in motorists’ pockets does not translate into increased spending, but we are taking advantage of lower gas prices by driving more. I don’t have the numbers for Canada, but the U.S. Department of Transportation confirms it for the U.S.
The bad news is more driving translates into more wear and tear on the roads and, without a commensurate increase in infrastructure spending by cash-strapped governments, our streets, highways and bridges will continue to deteriorate.
Also, this will be exacerbated by volatile weather where wilder temperature swings cause increased freezing and thawing resulting in more potholes. With the wild winter temperature extremes we’ve had, we can expect a bumper crop of potholes this spring.
j) More Electric Cars – the increase in the number of electric cars in the future will put a cap on higher oil prices (sorry Alberta!) Bloomberg reports that “Even amid low gasoline prices last year, electric car sales jumped 60 percent worldwide.”
k) 2016 Economic Downturn – the OECD slashed its Canadian and global outlook. “The downgrade in the global outlook since the previous economic outlook in November 2015 is broadly based, spread across both advanced and major emerging economies, with the largest impacts expected in the United States, the euro area and economies reliant on commodity exports, like Brazil and Canada.”
In other words, we are overdue for another recession. The next one will be much worse, longer and deeper than the last one. No one knows what’s on the other side, but judging by trajectory alone, it won’t be pretty.
Central banks are out of ammunition.
Credit: the Economist
The fact they’re pondering negative interest rates shows that they’ve lost control.
Both governments and households are over-indebted and in no shape to weather a severe downturn. Here’s how Gary North describes it and what he recommends.
“Joseph told Pharaoh to use income during seven fat years to prepare for seven
lean years. That was good advice.
‘The last recession officially ended seven years ago.
‘Is there going to be a recession soon? Count on it.
‘Will it squeeze your budget? Count on it.
“Before you panic when it hits, cut five items. You would be wise to cut them
now. They are here: http://www.thesimpledollar.com/monthly-bills-you-could-live-without/
Anyone who can’t see the world of trouble we’re facing isn’t paying attention. The whole world is in financial and economic difficulty and it’s going to get a lot worse. That so many people continue to ignore what’s right in front of them is a testament to the power of our dangerous Normalcy Bias.
Standards of living will decline so now is the time to start living beneath our means while we can still do so voluntarily before circumstances force it on us. Start cutting non-essential expenses now as outlined by Gary North above. The sooner you start, the sooner you get used to it and the more progress you make.
As mentioned before, it’s time to stop spending money you don’t have to buy shit you don’t need to impress people you don’t like. Economists will say this is bad advice. If everyone stopped spending, economies would grind to a halt. My reply is that economies will grind to a halt regardless and neither you nor I can save them so get yourself out of disaster’s path. My motto is, “if something is about to fall anyway, give it a good push and be done with it.”
Every major global economic zone is hurting. China and Japan, the second and third largest economies in the world have debt-to-GDP ratio close to 300%. Unfunded liabilities push the world’s largest economy, the U.S.A. into uncharted territory. It’s a race to see whether the Euro or the Eurozone falls apart first. The Middle East becomes increasingly unstable. China is not only raising hell in the South China Sea, but they’ve created $1 trillion in new debt in just the first two months of 2016.
Furthermore, central banks are out of ammunition and pushing on a rope. Major countries now have bail-in legislation and banks are preparing for negative interest rates. Other than Russia’s Vladimir Putin, we have no effective leadership. The U.S Congress is worse than useless. President Obama is a lame duck. Canada’s new Prime Minister has the sterling leadership qualities of an elementary school teacher and a snowboard instructor **. No sooner did Canada’s new Finance Minister revise the promised $10 billion budget deficit to $18.4 billion then the Marc Pinsonneault, the National Bank’s chief economist claimed that “Taking into account the weakening economy and a promised stimulus, the report predicts a cumulative deficit of $90 billion over the four-year life of the government.” I know you’re as surprised as I am that a thieving bankster would advocate more debt-slavery lending borrowing.
With all the conditions outlined above, what could possibly go wrong?
I’m sorry I don’t have better news. The only bright spot; we know the license plate of the truck that’s about to run over us. A fat lot of good that’ll do although, it might make a nice epitaph.
Mixing metaphors; sometimes, those that live in the forest are the last to see the fire until it is about to engulf them. At the very least, you now know there’s a fire. How are you preparing for it?
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.
February 24, 2016
** Not that I have anything against snowboarders (being one myself), but it’s hardly qualification for national leadership.
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