Late Daily round-up for Monday, September 13, 2010

The content of this blog continues to go mainstream.  We had a couple of survey results released yesterday, the content of which supports what has been said on this wretched blog.  My brother used to post some of my email commentary on his blog.  You can look back through the archive to see for yourself that so much of what is now playing out in the media has been warned about for some time now.

With that, let’s start with this beauty and this beauty and this beauty.  They all incorporated data from a new Stats Canada report detailing how household balance sheets had deteriorated in Q2.

From the first article:

“The balance sheet of the average Canadian household worsened in the second quarter, pointing to weaker spending ahead as consumers work off rising debts, economists said Monday.

Statistics Canada reported Monday that household net worth — a measure of wealth minus liabilities — fell 0.6%, or $34-million, as the value of equity holdings fell, and liabilities, particularly mortgages, rose.”

And a snippet from the second:

“Canada’s consumer-led economic recovery is quickly fading, as workers living paycheque to paycheque struggle with stubbornly high debt levels.

Reports Monday offered a sombre glimpse into how diminished consumer spending could dent housing prices and overall growth into 2011.

Largely, it boils down to the real estate market and the debt Canadians acquired in a flurry of home buying that helped the country weather the economic downturn.”

Well that doesn’t bode well for an economy that is 70% dependent on consumer spending to generate ‘growth’.  And that’s just the start.  Wait until the housing market really starts to cool, then it should get really interesting.  I’ve been saying for many months now that we should start seeing the first year-over-year declines in the next month or two.  The psychological effect of seeing those headlines will cause these consumers to retrench even more as they realize that their precious home equity is melting like a snowball in July.  It’s why I’ve been saying that Canada will see a recession by Q3 2011 and why I believe the real estate market will fall over 30% nationally within the next few years, with certain areas seeing falls of 50% or greater.

Interestingly, a new report by the OECD supports my position.  To wit:

The price of an average home in Canada is about five times average after tax income, which is 35 per cent higher than long term averages, says the influential economic think tank that includes 33 wealthy member nations, including Canada.”

That’s not a shocker to those who have been following the primers on this blog.

Another report shed further light on the state of the average Canadian’s finances.

The article notes that,  “Fifty-nine per cent of Canadian workers say they would be in financial trouble if their paycheque was delayed by just a week – the same proportion as last year when the economy was still mired in a downturn.”

Alas, this is what a debt-based economy looks like at the tail end of a secular credit bubble.  The ‘growth’ that has buoyed a number of asset classes, particularly real estate, is nothing but a mirage based upon ever-increasing levels of debt.  This can’t last forever.  Debt cannot outpace income growth.  Real estate cannot outpace income growth.  Period.  Now if you’re still in doubt about the existence of a debt bubble, chew on the following graphs, the first four courtesy of Jonathan Tonge and the last two courtesy of the OECD report discussed above:

We’ve discussed the end result of this credit boom:  A period of pronounced deflation, where asset values, and particularly leveraged assets like real estate, are crushed.  There’s no way out of this short of organic wage growth…..but that’s not happening given the recent jobs report that highlights how our economy is still bleeding private sector jobs.
David Rosenberg noted in his daily musings the following related to trade data and GDP projections:

“While the international trade data was positive in the U.S., net trade looks like it will sorely hurt Canadian Q3 GDP, evidence that the weakness south of the border is creeping north. The trade deficit in July deteriorated to a record gap of $2.7 billion. This is not good for the GDP bean count — in real terms, exports were flat while imports fell 1.2%, suggesting that net trade will be a drag on GDP growth.
We have downgraded our Q3 GDP forecast to 2.3% from 2.5%, which is now 50bps below the Bank’s forecast. Only an ultra-hawkish central bank would continue to raise rates into an environment where the pace of economic activity is slipping further and further away from official forecasts.”  …and more and more in line with mine!

It’s my firm belief that we will once again see those rock bottom interest rates before a serious round of rate hikes.  I can’t help but wonder if perhaps Mark Carney is hoping to re-orchestrate another Great Reflation a la 2008-2009 by crashing interest rates once the headline stats get too ugly to ignore.  It’s also why I’m a believer that interest rate-sensitive investments, such as long government bonds and strip bonds, high quality corporates, and non-financial preferred shares will perform nicely over the next year.

Avoid the madness of the crowds!  Keep your head about you.  Deal with debt, embrace a lifestyle that is in line with your income, save your cash.  Tremendous opportunities are around the corner!


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7 Responses to Late Daily round-up for Monday, September 13, 2010

  1. hmm... says:

    Would you elaborate on why financial’s preffereds should be avoided. Do you think that the feds will let fall?

  2. Hello

    I’m not predicting any bank failures as the bulk of the riskier loans are backed by CMHC, limiting losses on their mortgage portfolios. However, they will certainly be feeling the pain when the default rates on their unsecured debt starts to move higher. I also believe we will see default rates on mortgages move substantially higher than most people realize here in Canada. Check out the posting about Canada not being immune from a default wave for more info.

    I think the dividend payments on bank common shares will likely be cut or suspended at some point over the next few years. This will call into question the safety of the preferred dividends, driving prices lower. I’d be inclined to pass on all financial stocks, preferred or common.


  3. BuySide says:

    Just a tip for your blog in general here: post your biography and experience.

    As egalitarian as the internet is, without a credible history most readers will not even bother to read a poster’s articles in the future. Those of us with little spare time rely on filters to minimize the noise and maximize quality of information, curriculum vitae is a simple method.

    Free advice, so take it for what it is worth, but with a Google subscriber level of 20 I’d be taking all the tips I could if I were you.

    • I appreciate the tip. Take my advice for what you think it’s worth. I’ve posted enough information in my ‘About’ section for people to make an informed decision regarding my credibility. I also don’t post under a pseudonym. I’ve got nothing to hide. This blog is exactly 9 days old. I’m fairly happy with 2000 daily readers after a week and a half.

      • BuySide says:

        Do you have an academic background in your subject matter? Advanced degree in economics, econometrics, mathematics would obviously apply. Have you produced any relevant peer-review papers? In your part-time role at the Georgian College technical school, do you lead any lectures that may be relevant to your subject material?

        All these would be helpful contextual answers to provide your 2,000 link-through ZH readers.

        Best of luck

  4. ATP says:

    Hi BuySide,

    How many of those with a PhD in economics totally failed to see the financial meltdown coming? I rest my case.

  5. Bruce says:

    @Buyside – Respectfully many of the experts with high credentials have been ineffective at providing advice due to the interest of the organizations of whom they work for. If you believe someone based only on their credentials and experience you can be caught with your pants down. This content is gold and this writers credibility is in the sound logic of his articles. Warren Buffet once said beware geeks bearing formulas. In the dot com bubble every expert with and MBA thought the hay day would never end and small handful of skeptics were seen as lunatics. Contrarians with logic outperform the market hands down. In short I judge the author of this blog based only on his content which to me seem authentic, sincere and most of all rational. Further many who argue logic are simply looking to justify their irrational financial positions. Cheers.

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