I’m alive….the canary is not!

Well I’ve managed to survive the nastiest illness of my life.  I can’t remember ever feeling as wretched as I did earlier this week.  I’m quite certain it was a real nasty case of food poisoning.  For those of you fortunate enough to not have ever experienced it, count your blessings.  It’s awful.

Enough about me.  Let’s talk about that canary in the coal mine.  You know….the one that just croaked?!    If you’ve been reading this blog, you’ll know that I’ve been calling for a renewed recession here in Canada by Q3 2011.  I say renewed as I’ve been saying all along that this ‘recovery’ has been smoke and mirrors, driven exclusively by the largest peace-time deficit spending in history, the spin-off effect of irrational real estate appreciation, and inventory restocking by businesses who correctly anticipated much weaker demand until the great stimulus reflation of 2009-2010 got consumers to unwisely reach for their credit cards again.  Strip out these three things, and we’re still in the throes of that nasty recession of 2008-2009.

My conviction has long been that we’re nearing an inflection point in the real estate market.  Fundamentals no longer support the price levels across virtually the entire nation, with pockets that have reached levels of irrational exuberance found nowhere else on earth.  That’s not hyperbole!  When we pass this inflection point and prices begin their inevitable march back towards their long-term mean, the spin-off effect will be two-fold:

1)  It will choke off consumer spending, particularly on big-ticket items.  In a twisted economy that relies on ever-greater levels of consumer indebtedness to generate pseudo-growth, this is bad news.

2)  As consumer spending fizzles, employment will follow.

The net result will be a very unpleasant and very long recession that will begin by Q3 2011.  So about that canary:

GDP shrinks for the first time in 11 months

“Many measures of the economy have stalled in recent months, from job growth and housing starts to consumer spending and manufacturing”

Note that link between housing (starts and general price appreciation), job growth, and consumer spending.  That’s a big theme on this blog.

“Construction fell 0.5 per cent as activity on single dwellings slowed. The home resale market, meantime, fell for a third straight month.  The output of in the real estate agents and brokers is about two-thirds of its level recorded at the beginning of this year, Statscan said.”

“Canada can expect little more than 3.5-per-cent nominal GDP growth next year—well below the 5-per-cent gain envisaged in 2010 budgets”

3.5% growth in 2011 is a pipe dream! In the face of a falling real estate market, deflation via reduction in credit demand and reduced velocity of money, diminished consumer spending, and rising unemployment, we’ll be lucky to see any growth whatsoever.

The Globe ran a great piece today making a similar, though much more muted argument.

Housing slowdown threatens recovery

First of all, ask yourself what sort of a recovery it was if it was dependent upon increasing house prices (read: increased debt loads as house prices have outstripped income growth during the ‘recovery’ by a ratio of 20:1).  Seriously!  We now generate ‘growth’ by having people borrow their brains out in a time of stagnant wage growth?

To the article:

The housing sector that helped pull Canada out of the recession now threatens to derail the recovery, as a slowdown in sales and construction acts as a drag on economic growth.”

“The economy contracted for the first time in almost two years in July, and the formerly red-hot housing sector was a key contributor. And with Canadian consumer debt at all-time highs, even a modest slip in prices could have large consequences for the broader economy as cash-strapped consumers rein in their spending.”

Construction jobs, which have accounted for about 33 per cent of the job market’s recovery post-recession, are largely dependent on a booming housing market. And with housing starts expected to tail off in the next year, the jobless rate will likely rise as construction companies lay off workers.”

Wow these guys get it!  Do you?  There is a great feedback loop between rising home prices, people’s willingness to tap their rising home equity and spend money they don’t have since they feel richer, and the associated employment bounce that this produces.  It’s a fantastic self-feeding cycle on the way up, but cuts equally deeply on the way back down.

Even Jay Bryan, the resident knuckle-dragger over at the Montreal Gazette gets it.  Bryan is the one who has weakly attempted to dismiss any notion of a housing bubble, even as it deflates before his eyes.

In his latest article, ‘Confidence level reflects reality’, Bryan notes the falling consumer confidence readings consistent with the predictions of this humble blog.  Over to you, Jay!

“In Canada, banks were healthy and the job situation wasn’t nearly as bad. As a result, people went on a homebuying spree when interest rates plunged, causing a housing boomlet that made sales and prices soar.  This and other consumer spending helped boost job creation, creating something of a virtuous circle

I find it mind-boggling that a person who can so accurately describe the fundamentals that have driven our screwed-up economic ‘growth’ over the past few years can also miss how this same dynamic works in reverse.  It’s amazing!

I’ll ask you again:  Do you get it?  A great deal of our growth over the past decade has been on the back of rising real estate prices.  People feel richer and have therefore been happy to tap home equity or take on debt in general.  It’s led to a culture of debt-tolerance here in Canada.  It’s also caused job growth in areas of the economy that would not otherwise flourish were people not willing to be so frivolous.  The party is now ending.  Real estate prices will normalize.  The associated economic effects of this will be nasty.

Couple this with the fact that these debts must now be repaid in a time of falling employment and falling wages, and also that consumers must begin finally saving again, and you’ve got a made in Canada deflationary real estate bust.

So what do you do?  If you’re thinking of selling your home, do it now and price it aggressively.  If you’re thinking of buying, lay off the crack.  If you’re living off debt, stop it.  Now!  If you’re not saving, start.  Now!  Amazing how common sense this would have been 25 years ago.  Boy how things have changed.

Cheers, blessings, and good health!

Ben

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6 Responses to I’m alive….the canary is not!

  1. Village Whisperer says:

    Glad you’re feeling better, Ben. Welcome back.

  2. backwardsevolution says:

    Perfectly describes what happened here and in the States – credit gone wild! Good article. We need to abolish the Bank of Canada and CMHC, along with CDIC. People believe these institutions are there for them, but they are really there to help their friends, the banks.

    The banks wouldn’t have lent to “anybody who could breathe” if they weren’t guaranteed to be bailed out by CMHC. People wouldn’t have put their money in an over-levered bank that made bad bets on people with no money down if they didn’t feel the safety of CDIC.

    And the Bank of Canada, holding the rates down as it did, caused one hell of a party in over-priced boxes. This will be a bad hangover.

  3. breezer1 says:

    savers are punished. huge # of boomers will want their benefits soon and all of their retirement money is in an asset that will be worth 50 to 75% less real soon.
    carney should be jailed as well as the idiots who let goldman saks run our central ‘ policy ‘ bank.

  4. processdude says:

    This sounds almost exactly like here in Australia – there is SO MUCH in common with Canada and Australia at the moment – even the timing…

  5. Been reading your site for a while, and just wanted to finlly add a comment. Thanks for posting this info and putting thr time into this site.

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