A look into our future

Not too much by way of real estate data points for today, but lots of interesting happenings in the world of finance and economics.  As the big real estate boards figure out how to spin this month’s numbers, which should be out tomorrow and I expect will show a 20% year over year sales decline in most boards, let’s turn our eyes to events that may well foreshadow what is to come here in Canada.

For one day I look like a genius

In my 2011 predictions I suggested that the broad commodity market would likely finish the year lower but natural gas would be the one bright spot.  If the first day of the Canadian trading year is any indication, this may be a good year for me.

Commodities dive after heady year-end gains

“Commodities crumbled Tuesday, falling by their most in eight weeks, as energy, metals and agricultural investors took profit on the heady gains made on thin holiday volume over the past two weeks.

The Reuters-Jefferies CRB index dropped nearly 2 per cent in its sharpest one-day fall since mid-November”

However, due to a nice jump in nat gas prices which carried over from Monday, several natural gas stocks and ETFs jumped on the day, with GAS (Claymore Nat Gas ETF) up 5%.  A couple weeks certainly does not make a trend, but it is worth noting that natural gas prices have quietly put in a 12% rally in a couple weeks and have now bounced 22% since mid November.

While it’s a nice bonus for investors, it does put additional pressure on the millions of North American households who depend on it for their primary hearing source.

Also on the topic of commodities, the Baltic Dry Index plunged to its lowest level since 2009.  Remember that this index tracks the price charged by dry bulk carriers to transport goods and tends to decline when demand for commodities (ex gasoline) dwindles.

It has made me nervous with the overwhelming consensus predicting another strong year for commodities.  It’s hard to find many analysts predicting headwinds for commodity prices.  The net spec long positions in most commodities, coupled with widespread bullish sentiment and a Chinese government that has inflation in its crosshairs all seem to support the notion that commodities may be the sleeper laggard of 2011.

“Painful” California budget

California’s new ‘Governator’ Jerry Brown is set to propose a “painful” budget that has been brought on by massive debt obligations that have now caused a “day of reckoning”.

Brown Says Calif. Budget He Proposes Next Week Will Be ‘Painful’

“The budget I present next week will be painful”

“Brown has pledged an austerity budget, due Jan. 10, that will be free from gimmicks and that will skirt the gridlock that forced the state to pay bills with IOUs two years ago.  His budget reductions may include eliminating local redevelopment agencies, shrinking social-service benefits, slashing aid to state universities and closing parks”

“What he’s doing is setting up expectations of a very dire situation and choice for Californians,”….“But it’s going to be the voters’ choice of what services they want to keep — and for those that they keep, are they willing to be taxed for them.”

The nerve of some politicians….asking people to actually PAY for the services they want to keep rather than racking up a debt burden for future generations!

In all seriousness, we do face similar tough choices to balance our Canadian budget.  And that’s with rising tax revenues and commodity prices at their current high levels.  Let me remind my readers that this is even before we factor in continued muted demand from a US consumer who’s watching their primary asset double dip.  Ergo, little by way of export growth at least to the US.  And of course the big fly in the ointment is our overvalued real estate market, the driver of consumer spending and credit creation via HELOC and mortgage growth, with the byproduct being lower unemployment than would otherwise manifest itself.  When that whole mess unwinds, expect decreasing tax revenue at all levels of government and an austerity drive that is either embraced or forced on us by a temperamental bond market.

States taking the boot to public sector unions

While we’re somehow willing to tolerate unions standing behind members who take taxpayer money while wanking out on porn for 5 hours a day, the axe is falling on such union nonsense in many states.  We’re not there yet, but let the coming economic reality sink in and all of a sudden the public support materialized for moves like this:

Strapped states seek to curb union power

“Faced with growing budget deficits and restive taxpayers, elected officials from Maine to Alabama, Ohio to Arizona, are pushing new legislation to limit the power of labour unions, particularly those representing government workers”

“We can no longer live in a society where the public employees are the haves and taxpayers who foot the bills are the have-nots,” Mr. Walker, a Republican, said in a speech. “The bottom line is that we are going to look at every legal means we have to try to put that balance more on the side of taxpayers.”

If you doubt that similar sentiment is coming here, just wait.  If you are a member of a public sector union as I am, it’s time to push union leaders to take a more moderate tone to salary and benefit negotiations.  The public sector is well compensated and for the most part do an excellent job.  Numbered are the days of the unions backing idiots like the guy in the article above.  Private sector accountability needs to come to the public sector. Not to mention defined contribution pension plans for all new members and for all existing members starting NOW.

“Serious reason to worry” about the American economy

Yale professor and bubble guru Robert Shiller discussed his concerns about the US economy with the Wall Street Journal last week.  Shiller is most concerned with the double dipping in house prices, which experienced their third consecutive monthly decline.

“If home prices continue on this pace down, I think the economy has serious reasons to worry”

Bad news in the housing market could ripple through to consumer spending, which has recently shown heartening gains this holiday season. Consumer spending makes up about 70 percent of the economy.

“Our concern on the double-dip is the consumer and the fate of the consumer,”… “I think the lack of stable prices is a negative consumer fundamental for spending.”

The great connection between home prices, consumer spending, and broad economic growth is exactly why I see significant headwinds for the Canadian economy, given that our real estate woes are still ahead of us.


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2 Responses to A look into our future

  1. Alex says:

    From “Priced Out in Toronto” on Garth Turners blog comment on Housing Prices.

    “I used to wonder how people could afford these house prices.
    So I started asking around – for the past few months actually. Sort of like an informal survey of all the people I could talk to.
    Here is my conclusion: Debt.
    I cannot believe some of the stuff I’ve heard. Credit cards with 10′s of thousands, new leased/financed cars with upside down loans (to pay off the loan on their previous car), mortgages that take more than half the net income, consolidation loans as a lifestyle choice after binging for so long, etc…
    This is the new normal. These young professionals (most of the people I spoke to) are living hand to mouth – barely. There was no shame, regret, or fear from them. I’m still stunned.
    I don’t have many of the flashy stuff these people have but I’m actually on better financial footing than about 75% of them. It still amazes me.
    One little wobble, and trust me, this house of cards is coming down hard.
    I still fear when it does how many people are going to get hurt, but I’m still stunned. Until you talk to people, you just never realize how close it is to you. We’re surrounded by these people.
    This is actually happening – these people you see with the fancy homes and cars aren’t really richer than you, they’ve just signed their names on the dotted line and borrowed the veneer of wealth.
    God help us all if or when this turns ugly and comes down. ”

    This is the reality for a lot of people.

  2. Sam says:

    Ben, fantastic job data today, markets continue to drfit higher, lets not ignore the revenue side of the balance sheet. We should see higher home prices print in a more constructive economy.

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