A random smattering of Christmas data points

With the holidays now upon us, this will be the last post likely until December 27th.  Let’s take a quick tour through some of the interesting data points from the past couple days:

So much for the conservative Conservatives

Just a few weeks after big Jim and warned of tough budgets to come, it now looks like he’s having second thoughts.

Flaherty rethinks Canada’s budget

“The Canadian economy, which appeared to be roaring back to life a year ago, has been dragged down by a persistently poor economic performance in the United States, Canada’s most important trading partner. Canada’s economic growth slowed to one per cent in the July-through-September period.”

We didn’t anticipate around the table that we would have so much difficulty this year…”

Evidently they also don’t see what likely comes next.  I would argue we now face the significantly underappreciated headwinds of consumer deleveraging, increased savings (amounting to lower consumer spending….65% of GDP), government austerity either willingly or imposed by an increasingly jittery bond market, and an overextended real estate market all coming to a head at some point in the near future.

“People do want us to move toward a balanced budget, but they do not want us to do that at the expense of jobs and growth and the economy.”

I’ll admit that this puts poor old Jim in an awfully difficult spot.  He’s expected to be a magician….pick up the slack in demand while at the same time cut back on spending.  It would be great if he could do it, but it’s a bit unrealistic at this point.

“Ottawa must continue with hefty spending “in order to continue to foster some economic growth,” Flaherty explained.”

I’m not sure about the rationale behind this line of thinking.  I understand that under normal circumstances the government could sustain economic growth via public spending until the consumer and private sector picked up the slack.  But how is that going to work with consumer debt levels at all-time highs and bond markets beginning to price in sovereign debt risk?  If consumers were sitting on stronger balance sheets, it would be the prudent thing to do.  But as it stands, what’s the end game here?  Consumers deleverage while the government borrows to sustain the growth illusion, then the government does the same via rising taxes and lower services while struggling with higher borrowing costs?  See the problem?  At this point I don’t see how we’ll have significant economic growth over the next few years.  I think 3% is a pipe dream, but we’ll see.

 

CMHC under the media magnifying glass

Consumer debt levels have been in the news quite a bit lately.  I think it took everyone by surprise when our household debt to disposable income passed that of those crazy Yanks who we used to think were the irresponsible ones.  It’s no wonder then that people are starting to connect some dots:

CMHC is answer to ballooning consumer debt

It’s a good article.  By ‘answer to’, the article really means ‘culprit for’.

“The reason consumers are borrowing so much is that the government has been encouraging them, just as it’s also been encouraging the banks to lend. It’s called CMHC insurance and the way it works is that Ottawa guarantees virtually all of the risky home loans made by the banks.”

“That’s a good thing but it also provides a key benefit to the lenders since it removes risk of default.”

Can I once again remind my readers that our banks are private, profit-seeking businesses.  Why does the government (taxpayers) guarantee them profits while eliminating certain risks?  The whole concept of CMHC is ridiculous.  We have no need for it in Canada.  Those who would say that CMHC helps homebuyers afford a home don’t understand their role in massively inflating the housing market as it is.  I would argue that first time home buyers and low income families would have a much easier time entering the housing market despite higher interest rates by the big banks as home prices would sit at a much lower level.

“Thanks to the government guarantee, Canadian lenders were able to securitize billions of dollars of mortgages and swap them for cash.  In connection with the crisis, Ottawa vastly expanded the program, allowing the banks to insure and sell more than $100-billion of home loans.

But as financial markets returned to normal the level, government support declined only slightly.  For the first time the amount of outstanding mortgage-backed securities passed the $300-billion mark earlier this year, more than double the amount at the start of 2007.  2010 issuance is expected to reach $100-billion, the third highest level in history.

The banks love it because it’s risk free business, and investors love it for the same reason.  The problem is that it’s encouraging banks to lend at a time when they need to put their foot on the brake.”

“There’s no motivation for the banks to tighten up on lending – since they know that by the time the stuff hits the fan, much of their risk will be off the table”

…and squarely on the shoulder of the Canadian tax payer.  A situation that must be corrected!

 

China’s economy will blow your mind

An interesting piece by the Business Insider (linked through the Financial Post):

17 facts about China’s economy that will blow your mind.

I’ll just highlight a couple.  Remember that the China growth story revolves around the massive Chinese ‘middle class’ and their future role as global consumers.  Once again I’ll state that I think the Chinese growth story is THE story of the coming several decades, but I do think there are serious structural issues that need to be corrected in the interim.  To wit:

 

And on a perhaps related note, the Baltic Dry Index continues its plunge towards its 2010 lows.  It may well end the year at new lows.

While most economists are calling for sustained commodity prices through 2011, I take a more cautious tone.  Falling BDI signalling declining commodity demand coupled with ongoing attempts by the PBoC to quell Chinese inflation, and ongoing debt issues in Europe which could result in a capital flight to the USD are all provide possible headwinds against the commodity complex in 2011.

 

Flawed economics

Though I don’t have the time to dismantle the economic theory contained in this final article, I’ll post it anyways and see if one of my astute readers wants to have a go at poking holes through the main premise:

Dump your roommate, help kick-start the economy

So, is increasing home ownership rates actually the way to a stronger, more robust economy?  Is the answer to the US economic woes simply to get people back into housing again?  I know…..big questions.  If someone has the time or inclination to tackle this over the holidays, feel free to post in the comment section.

 

Enjoy the holidays!  See you on the 27th!

 

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16 Responses to A random smattering of Christmas data points

  1. The Masked Avenger says:

    Love the China article. Have always said there needs to be caution when looking at opportunities in China. I believe there will be serious soicial upheaval as more of there population demands a share of the economic pie!

    Can’t understand why you slagg CMHC. It’s the greatest financial success story here in Canada if not North America. Millions of Canadians enjoy the benefit of home ownership (and the increased wealth through property appreciation) thanks to CMHC.
    Don’t knock a good thing!!

    • People would have enjoyed the benfits of home ownership regardless. The massive debt burden associated with home ownership is CMHC’s true legacy.

    • Lumpen says:

      Depends how you measure wealth. If nominal, yes. If real, unclear. Money is simply a means of facilitating resource allocation.

      Add a zero to every asset & liability, every income and expense. Are you wealthier now? Nominally, yes (assuming positive net worth). In real terms, no. But people think in nominal terms, not real – even when they try to think in real terms.

      If they wanted to promote home ownership for lower-income Canadians, they might have at least capped the “conforming mortgage” size like FRE/FNM did. But if you’re already wealthy, it’s great to have the middle class subsidize mortgage rates for the $5mm+ properties.

    • rp1 says:

      Your “increased wealth” through property appreciation is just a transfer, generally from the young and poor to the rich and old. If you think this is healthy then you’re going to love what comes next: young people won’t start families or find gainful employment, and society will rot. Not my idea of a good country.

  2. Sam says:

    BDI is a result of massive supply of ships I would argue. If CMHC was a publicly traded company sitting with 750B plus in balances (obligations) with 1% equity, i can imagine it would trading close to zero. only a sovr backing is alwaying this – they have no margin calls and infinite duration.

    By almost fluke, Canada has closed the mortgage market to free market trading and valuations. We will never know its true benefit

  3. jesse says:

    “The reason consumers are borrowing so much is that the government has been encouraging them”

    No the reason consumers have been borrowing is because they want something for nothing. Look south of the line for how governments are trying to get people to borrow but having little success: the de-leveraging continues.

    So Canadian: blaming the government for what the citizenry should really accept as full onus.

  4. T3 says:

    I cannot believe anyone still defends the CMHC after the catastrophe in the US with Freddie and Fannie!

    The CMHC has the potential to bank-rupt the Canadian Government. It is an anathema, and has only helped drive home prices higher so penalizing buyers and shisfting risky mortgages from the banks to the tax-payer (only after the banks and mortgage brokers have taken their profits)

  5. John in Ottawa says:

    Just to shed a little ray of sunshine on the issue, CMHC backs 5 year mortgages whereas FNM and FRM back 30 year mortgages. There is a huge difference in risk.

  6. Gordan says:

    CMHC has created a monster. This wont end well.

  7. John in Ottawa says:

    I complained a few weeks ago that it is difficult to get demographic data in Canada. The data exists, but it can be very expensive to access and little of it has been digested and presented in easily accessible forms.

    This paucity of information means that the public is feed averages and aggregates which can be very misleading in a heterogeneous environment.

    Thankfully the University of Toronto has done some of the work for us. Their work gives us a glimpse into the demographic breakdown in Toronto and provides us with a clue as to how mortgages my be distributed and their relative size and, possibly, default risk. It also gives us some insight into the issue of so-called bubbles.

    Have a quick look through the media release.

    It shows that Toronto has subdivided itself into three economic tiers with upper income earners in the core, middle income earners forming a buffer zone around the core, and lower income earners in the periphery.

    A commenter a few weeks ago suggested a similar situation was occurring in Vancouver.

    The take away point from this is: A wealthy enclave can significantly distort average prices.

    The “fact” that still seems to be in dispute is whether or not there is a “bubble” in housing prices in Canada. In the past ten years, most regional housing indexes have doubled. That’s a 7% annual increase and significantly above the inflation trend. However, in the past 30 years, the index has only doubled, and that is a very poor return on investment indeed.

    In the same ten year period, housing indexes in Australia have gone up five times. The bigger the bubble, the bigger the crash. Also, it should be noted, in the US, the biggest bubbles were in lower valued homes. Higher valued homes did not rise as much in percentage terms and have not fallen as much.

    Now, we still have the CAAMP report to deal with. However, the CAAMP report is proposing that Canadians are too indebted and are unable to weather an interest rate shock. This is a significant worry.

    Nothing I have written is intended to suggest that house prices are going to merrily continue rising. It is provided to suggest that we may very well not see a US style collapse, or even an Australian style collapse when it occurs.

    Our “bubble” is much more muted than either the US bubble or the Australian bubble. Additionally, the US mortgage situation leading up to the crash was criminally fraudulent on a huge scale, leading to the financial crisis and the bailing out of the TBTF banks. There has not been any suggestion that a similar fraudulent mortgage origination situation exists in Canada, and thus far our “sub-prime” mortgages are performing within normal risk bounds.

    The meme in the US was that house prices always go up. In general that was true until last decade’s crash. We never had that reality in Canada, even though we may have inadvertently adopted the meme. House prices in Canada have had significant corrections in the recent past.

    My prediction remains that, in general, aggregate house prices will soon begin to trend down. Certain classes of housing will trend down at a greater rate than others. Some neighborhoods may experience a “crash” just as some unemployed are experiencing a depression long after the official recession ended. This general trend will last a very long time as the boomer overhang is absorbed.

    The risks to Canada’s financial health remain, as always, more from exogenous factors over which our government has no control, than from internal factors. The key internal risks I see are consumer debt in general (although I would like to see a demographic breakdown), pensions, municipal and provincial debt.

    My long term outlook, this far, remains deflationary.

    • Sam says:

      Great breakdown john. It comes down to premium that people are paying to access an area. You pay it on the way in and hope to capture it on the way out. That spread has always existed in areas of toronto and Vancouver

      I see this everyday between new jersey, queens, etc spread from manhattan. During the boom those spreads widened and during the crises they overshoot on the downside and now are back to really fair levels representing schools, transportation, etc.

      And your point of long long term returns on real estate returns is very thoughtful. Not been great, but you have to subtract the cost of trends etc, as people have to live. It seems a wash to me.

      Bens point of heloc and people turning homes into ATM getting bigger is a point of concern. But for now, most people are still standing in line to buy real estate. It has years of room to grow put of control

  8. Pingback: Chamber of Commerce’s Economic Outlook | Financial Insights

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