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.
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:
“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.