Daily round-up: Thursday, September 9, 2010

Hello all

The big news of the day was the unexpected slip in new home prices in August, which fell 0.1% from July.  This represents the first such decline in 13 months.  This article is quite comical. Here’s my favourite quote:

“The home price declines were led by Vancouver (down 0.8%) and the Ontario centres of Greater Sudbury and Thunder Bay (together down 1.9%), and London (down 1.8%).

“In these cities, as well as in Hamilton and St. Catharines–Niagara, prices decreased partly as a result of the introduction of the harmonized sales tax,” the agency said.

The biggest prices increases were in the Kitchener–Cambridge–Waterloo region in Ontario, which saw gains of around 0.6%.”

In logic that can only be found at Stats Canada, the agency points to the introduction of the HST in Ontario and BC as the root cause of the price decrease in three cities, then notes that the biggest price increases were in the KW region.  Last time I checked that was also in Ontario.

In other news, Canada’s trade deficit ‘unexpectedly’ rose in July to reach the highest since at least 1971.  Exports to the US sank…as expected.

Key quote:

“Today’s report is suggesting that trade could continue to be a drag in growth in the current quarter,” said Paul Ferley, assistant chief economist at RBC.  “How much will depend on whether greater strength emerges on the export front which in turn is based on the U.S. recovery.”

I have always maintained that absent massive stimulus spending, there is no recovery and we are still in a recession (more technically a depression as I view a recession as a business cycle event where a depression is a debt bubble event, but I digress).  Those who know me have all heard me say before that there is no recovery until we stop artificially stimulating the economy and begin paying off debts at the government and personal levels and STILL see growth.  Otherwise it is simply a mirage.  Now that stimulus is starting to wear off in the US, what is happening?

One of the interesting gauges of coming economic activity is the ECRI (Economic Cycle Research Institute) Weekly Leading Index.  It is made up of a number of ‘secret’ components such as corporate yield spreads, initial jobless claims, home purchase index, etc, though their exact weighting and composition is a secret.  I have attached a chart of the ECRI WLI going back to the 1960s with US GDP overlayed on top of it.  At last reading on August 27, the index stood at -10.1.

Why is that significant?  Well, a drop of that magnitude was present prior to all 7 of the previous recessions.  A reading of -10 has preceded a recession 100% of the time over the 42 year history of the ECRI.  Now this may be a false signal, but it would be the first such false signal in 4o years.  Bottom line:  I believe the recession will be back in the US by Q4 2010 (though that may not be confirmed until well into 2011).  Back to the quote in bold.  Suffice to say that I’m not overly optimistic about the prospects of export to the US driving down our trade deficit any time soon.  Given our reliance on the US consumer and the inevitable bursting housing bubble, you can see why I’m convinced we’ll be back in recession here in Canada by Q3 2011.

On to another gem today from the Post.  This one is titled, “Rough patch ahead for housing market“.  The title is self-explanatory.  I would like to highlight one bone-headed comment from RBC economist David Onyett-Jeffries: “The risk of a 1990’s-style housing market correction are minimal.”  Based on what, exactly?  It certainly isn’t fundamentals!  We’re seeing more of this cheerleading by bank-employed economists like Dave’s buddy Martin Nel at BMO, who last week was touting the virtues of buying now.

Could they possibly say anything different?  They’re muzzled for fear of kindling the very animal spirits we discussed in our last primer on mass psychology.  You can’t spook the unthinking masses into retrenching or even selling all together or the impact on the unsecured debt at the big banks would not be so good.

Last article I’d like to highlight today is actually from Rob Carrick over at the Globe and Mail.  Rob’s a columnist who I generally agree with and someone I have a lot of respect for.  But this piece sucked!  It basically (weakly) explains why our housing market has not been crushed by the upwards movement in the Bank of Canada’s overnight interest rate, which affects variable rate mortgages.  It essentially explains that it has not had an effect since fixed rates have come down at the same time as variable has gone up.   I’ll let a graph showing home prices and interest rates in the US be my rebuttal to this piece.  Note the direction of both interest rates and home prices after 2005.

Get it?

Cheers,

Ben

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5 Responses to Daily round-up: Thursday, September 9, 2010

  1. Gromit12 says:

    Great blog, thanks for all your work on this, and good luck for the future.

  2. Bobmatou says:

    Man, you’re on fire these days! 😉

    Really enjoy your blog and sharp analysis / writing.

    Keep up the really good work!

    Thanks!

  3. Pingback: Weekend Round-up: Sunday, September 12, 2010 | Financial Insights

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