Yesterday I made the following statement:
“We will see austerity either willingly by our elected officials or in a roundabout manner through higher bond yields on our debt, consuming more of our tax base. The accompanying attempt to curb public sector salaries or benefits will set the stage for nasty protests a la Greece, France, UK, Spain, and now in the US.”
Today we hear that self proclaimed fiscal conservative Rob Ford has taken the liberal stronghold of Toronto.
“Smitherman was considered an early favourite to win, but couldn’t compete against Ford who tapped into a potent well of voter fury with his tax-cutting, “stop the gravy train” message.”
Austerity is coming. Deflation is its riding partner. The message for public sector unions is simple: A hard-nosed approach to negotiations right now is like running a razor across your own throat. You’ll only create the very political climate that will see a Rob Ford type take Ontario, then Canada. If you’re a member of a public sector union, as I am, convey the message to your leaders. Acknowledge that we are well compensated in the public sector, particularly once benefits are considered, and that perhaps now might be a time to approach the bargaining table with the mindset that now is not the time to seek a major pay raise, if a raise at all. Now is the time to be thankful in light of what the private sector is experiencing and will experience even more acutely once the broader economy slows. Just a thought. Don’t label me anti-union, as one emailer did. I’m not. I’m pro-common sense and pro-equity.
We also found out today that The Economist puts our real estate overvaluation at close to 24% based on price to rentals. Not the biggest bubble in the world (Australia is calculated to be over 60% overvalued), but not too far off my own crude estimates of 30% overvalued. Of course, bubbles never unwind in a perfectly symmetrical manner; They overshoot to the downside.
CIBC recently calculated that every 5% drop in house prices from current levels erases $10 billion in consumer spending from the broader economy. So, for home prices to return to fundamentals, according to this piece, $40 billion in consumer spending from the wealth effect will be removed from the economy. Do you get now why I keep stressing the connection between real estate and the broader economy?
CIBC continues to get it. In a report released a few days ago (though dated September 30 on the PDF file), they once again discussed several topics near and dear to my own heart. With reference to the coming austerity drive, they had this to say:
“In general, an emphasis on cost containment will mean wage freezes and outright reductions in public sector headcount…Public sector wage restraint helps colour the lackluster nominal GDP outlook.”
“The relatively sturdy economic backdrop provincial governments have hoped for won’t emerge, stalling progress on deficit reduction, adding to debt levels and eroding fiscal flexibility. This is of particular concern in Ontario, where real GDP growth risks running more 1.5%-pts below this Spring’s budget forecast….barring corrective action, next year’s subdued growth prospects risks putting negative pressure on provincial credit ratings, and for fixed income investors, looks to leave the sector once more on the defensive.”
Translation to the provinces: Get your house in order or the bond market will spank you like a crying kid in Walmart.
Translation to you: Austerity will either be embraced or forced upon us. It looks like it will be embraced.
CIBC also nicely highlighted the drag that real estate will be on the broader economy.
“No part of Canada looks to be immune to further housing market weakness, with significant momentum having been more recently lost”
They also weighed in with their own estimate of fair value for residential real estate, concluding that Canada is 12% overvalued, a fairly shocking admission from an entity that survives on generating new credit, which will fall precipitously in the aftermath of even a modest real estate correction. It begs the question of how bad it actually is.
Winds of change are blowing. Are you prepared? Do you live off credit? Stop it now. Are you saving for your own financial security? If not, start! And don’t say you can’t. It’s a lifestyle choice. Make it! Are you counting on your home equity to fund your retirement? You’re playing a dangerous game. I’d be thinking long and hard about getting that equity NOW. As they say, better a year early than a day late. When the herd turns, it will be too late.
“Come gather ’round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You’ll be drenched to the bone.
If your time to you
Is worth savin’
Then you better start swimmin’
Or you’ll sink like a stone
For the times they are a-changin’.”