Canada's Economy- Teetering on an Abyss?

[MortgageQueen]

It's not often I come across such a well written and concise article. If you follow economics you'll love it. If you don't. . .than maybe just read the parts I highlighted. We are in a serious position whether we want to acknowledge it or not.. .. . .

I'm not an economist, but even I have seen this coming and I do believe it's quite serious.
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Canada faces huge risks with oil, gas and general commodity price implosion....real estate may fuel the problems

Canada has been viewed as one of the safe havens worldwide. A significant of foreign monies have been invested in the Country and many wealthy families worldwide have purchased secondary homes in major cities like Vancouver, Toronto and Montreal. This has pushed up real estate prices in these cities to probable unsustainable levels. Alberta and Saskatchewan residential real estate has seen the greatest increases but for different reasons. In this case, it has been the rise in energy and commodity prices, at least until 2014. Now we are seeing that shift change dramatically. We think this will be the trigger than Canada will unfortunately move towards a negative transitional period. This will negatively impact both stocks and real estate prices.


There is a significant postive correlation between oil and commodity prices and the Toronto Stock Exchange. Here are three charts with similar formations until the recent year:



The first chart is the Toronto Stock Exchange. The second the price of crude oil and the last the commodity index. As you can see the second two have traded in nearly identical patterns. Clearly oil and commodities overall have a very positive correlation. Also in fairness, oil & gas are about half of the commodity index, so a tight correlation makes sense.
The very interesting comparison is the TSX to both the oil and commodity indexes. Let’s look at it from year to year:
2010 – traded in a near identical pattern
2011 – very similar patter but TSX corrected 20% whereas oil was down 12%, commodities 15%
2012 & 1st half of 2013 – traded in a near identical pattern
2013 & 2014 – TSX had a huge run with choppiness in recent months; oil and commodities went sideways from mid-2013 to mid-2014, then crashed
Bottom line is that the TSX traded in a very similar pattern to oil and commodities as it usually does until July 2013. At that point the positive correlation or similar trading pattern ended. They went in opposite directions. This does not make sense and will correct itself over time. That either means that commodities/oil will move up once again or the TSX will move down. Given our lack of belief that commodities, oil or gas will see any major sustained rally, we are less comfortable with holding the TSX or most of its components. In other words, we believe the TSX is at risk of a significant fall. It is moving up after commodity prices have stabilized and bounced up as they were oversold. This we expected but do not expect it to be a new trend. If you play this bounce as an investor, you better only do it as a trade, not a long term buy and hold.
The other trend that we expect to continue is a falling Canadian dollar. It is also attached to the price of oil and is considered a petro currency. Well a look at the chart on the Canadian dollar should make any holder of the Lonnie concerned:

As of last Friday we hit a key technical area of resistance around 1.27 to 1.28. If the Canadian dollar breaks down further through this level, watch out, things can get really ugly. There is minor support around the 1.40 level but not major support until its former lows, 1.55 to 1.60. We are looking for a minor rally in the Canadian dollar currently as we believe that it will trade up with oil and commodity prices that will have an oversold bounce. Following this 'dead cat bounce' I would look for a further selloff in the Canadian dollar.
Reversing the numbers shows the Cdn dollar is trading below .79c today versus the US dollar. At the next resistance at 1.4, the level is about .71c and at 1.6 it equals .63c. That will help exporters but significantly hurt the standard of living for Canadians as prices of imported goods will go up significantly. The Bank of Canada recently dropped its target for overnight interest rates from 1% to 0.75% in response to the concern of oil price collapse. Clearly the dollar and any return by savers will be sacrificed to try to save the economy. There is a clear message behind the drop in interest rates: there are much bigger problems in the economy than is being reported.
Remember, the Bank of Canada’s greatest stance has been that the greatest risk to our economy is the high debt level of individuals. Well, by lowering interest rates they are doing nothing but encouraging further borrowing. This makes no sense, unless there are bigger issues that have now taken over from huge consumer debt levels concern. Sometimes we have to read between the lines as we can never expect forthright thoughts from politicians or key leaders until it is too late. That is how the system has to work or panic would be created and ensure the problem they are trying to avoid would occur.
The economy’s health really is the most important issue. If it grows at a healthy pace, you will tend to have solid employment growth, consumer spending, reasonable inflation and strong businesses and stock markets. Well lets see what growth has been for Canada as reflected by its GDP – it has been down in 2 of the last 4 months, showing lower results than expected. Growth is stalling. GDP was down 0.2% in 2015 and 0.1% in October 2014. The months between were modest growth.
Employment has been steadily weakening for months. Yes, last week employment data came out strong with growth of 35,000 jobs. The media gave the perception that it was an excellent accomplishment. The reality is that 47,000 part time jobs, most low paying were created in . Therefore, 12,000 full time jobs were lost. The trend is down and concerning.
An important gauge of business health is the Ivey Purchasing Managers Index. The Ivey Purchasing Managers Index (PMI) is an economic index which measures the month to month variation in economic activity as indicated by a panel of purchasing managers from across Canada, and is prepared by the Ivey Business School at Western University. The results just came out for and the result was an unexpected collapse to 45.4 from 55.4 from December. This is the worst result since February 2011 and prior to that, the great recession of 2009. Any result below 50 shows a contraction, with employment, inventories and deliveries all showing contraction last month. This is the seasonally adjusted number. The result if you do not adjust came out at 42.6, an abysmal result.

The biggest challenge all investors face is their own brain. Our brains are trained to look at the positive and assume past results will continue. That is why most investors buy into stocks and growth investments at the latter stages of the cycle, not early in the cycle when most of the gains are made. At the early stages, fear is still the motivator as the economy is coming out of a contraction, possibly a major one like we went through in 2008-09. The herding effect kills investor’s returns as they tend to follow the crowd which is led by the banks and investment firms as this is the time when they will make most money. Unfortunately when things roll over, most of their customers will lose a great deal of money. Most will lose the gains they achieved and more, especially in secular bear markets as we at Fortrus strongly believe we are in.

Our research believes that one more major correction which will force debt de-leveraging and write downs is on the horizon. It will be painful but a necessary process to enter the next secular bull/growth phase.
Lets have a look at the massive concern that real estate has to be for Canada. First, we have to be realistic and realize that nothing goes up forever. A simple rule in real estate is that if the next generation cannot afford to get into the market, as most cannot today, the market is irrational in its pricing and it will have to correct. In today’s world, the resumption of the secular market will force prices down, potentially significantly. Here is a look at real estate pricing in Canada in general:

As you can see, real estate has gone up with only a minor blip (in 2008-09) since 1997. That is too long for a real estate market to expand, especially when we are seeing average wages stay relatively stagnant since 2000. Here is a chart reflecting how average wages have only gone up 0.8% per year from 1997 to 2012 (more recent data shows little change in this):

So given real estate prices have gone up 5.8% per year over the same period, how have Canadians done it….debt, debt and more debt. Canada is one of the most personally indebted countries in the world. In a healthy, growing economy with low interest rates, that can work…and it has. But what happens if the economy rolls over into a recession or even worse, a depression. Is it possible…you bet it is. Canada does not operate in isolation. It is attached to the hip with the US, so how goes the US goes Canada. The US economy is performing decently today but overinflated stock markets, high government debt levels, overleveraged Central Bank balance sheet and slow economic growth may change that. Lets not forget that the world is more interconnected than ever. Europe is a political and fiscal mess. Outside of Germany, growth is non-existent in Europe; unemployment is dangerously high; government debt and deficits continue to soar; and banks are extremely overleveraged with very weak balance sheets.
Japan is a monetary and fiscal basket case that will inevitably implode and China is built on a foundation of debt. That is changing and we are seeing negative numbers consistently coming out of China. They also have a major shadow banking problem linked to real estate. The reporting number of ghost towns and vacant homes and commercial properties is staggering. The world is teetering on a perfect storm where fiscal, monetary, geo-political and economic storms all hit at once. It will not be pretty if they do. I only wish it does not happen but smart money management means you must be aware of the risks and have a plan. Here is a look at how indebted Canadians are:

Currently the debt to income ratio for Canadians is at a record 165%. The danger is the number of individuals that literally live paycheck to paycheck and cannot afford any negative surprises like a loss of a job or rising interest rates. The dangers are great for both them and the financial institutions that lend to them.
Looking at personal debt versus personal disposable income slightly different is the growth in each segment. Here is a chart that reflects this:

As you can clearly see, debt growth has been dramatic relative to personal disposable income growth. Of course this pushes up the ratio from 0 in 1990 (base year) to 90%+ today. This is massive debt growth in a short period of time. Leverage works in your favour on the way up but can destroy with its unwinding.
Debt has become accepted by Canadians more than most countries worldwide. It has become much easier to obtain and there no longer is a stigma attached to being over indebted. Instead there is now a bigger stigma to not living the lifestyle of others, so the way most are keeping up is through dramatic increase in debt levels. The today versus future mentality has taken hold of society. Look at the chart of total mortgage debt of over $1.2 trillion. That went up from about $400 billion in 1999. That works out to be an annualized compounded increase of 8%. That is a massive increase in debt given the low average increase in wages. Debt just keeps expanding as many individuals have no choice. It is a ponzi scheme where debt is used to fund one area of one’s lifestyle and more debt is used for other areas etc. The problem is these scenarios never end well. In this case it will not when real estate prices fall…and they will.

Speaking of the banks, lets have a look to see how leveraged they are to their real estate lending portfolio and therefore real estate prices indirectly.

That is major leverage to one asset class. In the 60’s mortgages were less than 5% of bank portfolios. The 1970’s from 5-15%; 1980’s 15-30%; and 1990 to 2011 30-35%. Just the last few years is where the percentage has bone beyond 40%...dangerous leverage. We also have to recognize that of the remaining 60% a good chunk is other lending including commercial lending. This includes oil and gas companies as well as other resource companies. In severe deflation, they will see many of these loans potentially go bad. The good times may be over for Canadian banks.
So how does this create risk to Canadian investors? First, most money managers including mutual funds have to have a disproportional amount of bank equities in their portfolios as banks are around 35% of the TSX. Also, there has been a significant increase in mortgage backed securities issued. If low quality mortgages implode, these mortgages will have to be covered by Canadian taxpayers. The growth of this market has been dramatic over the last number of years, especially since the great financial recession:

Does this not remind you of a story we lived through a number of years back…Canadians did it through the media but our neighbors to the south so their real estate implode by too much leverage and backing of mortgages by their equivalent Fannie May and Freddie Mac. This is not a scenario any Canadians should want to see.
The next chart should put it in perspective. Canadian real estate has been driven not by organic growth (through Canadian income growth) but instead through the guarantees of Government Backed Securities – yes that is you and me as we are on the hook…we are the government. Just look at how these Government guaranteed investments have more than doubled since 2006 from 16.5% to 34.1%...yes in 8 years. What is just as scary is the amount of mortgages funded by deposits. It has gone down from 71% to 51%. Debt has expanded but debt via government guarantees. This is quite a gift to banks and a potential huge liability to the average Canadian if this ever blows up. The banks will be off the hook and taxpayers have the liability. If this is not a bubble in the making, I don’t know what is.

So what in the end could trigger the next economic freefall? It could be a number of things including Greece walking away from their European debt…this could trigger bank failures that cold ripple worldwide; it could be a derivative liability caused by something like oil price collapse…derivatives are around $700 trillion notional value which is 10 times the size of the global economy; it could be geo-political such as Ukraine or ISIS escalation; or it could simply be a collapse in growth and therefore earnings.
The key is having an exit plan as when this does occur, it will potentially be much more painful than what we went through in 2008-09. Be an investor that is prepared and invests with their head, not their heart….
To empowered and wise investors,
Matthew Sammut
Founder & Chief Investment Strategist

http://www.fortrusfinancial.com/blog...8uekM.linkedin

[tjthemanto]

People living on borrowed money for too long , too much household debt ..credit card debt , student debt , car financing , mortgage debt , LOC , HELOC ..you name it they have it...easy credit / easy money is the issue ..buying things they can't even afford on borrowed money.

The worst is they are using their house as a big ATM card , by borrowing money against the equity in their house. Too many HELOC 's I see out there & Reverse mortgages ..so even that one safe solid asset they have is being gambled & borrowed against by them

Add job loses to that & also RRSP , TFSA , Investments etc down due to stock markets down..and people are in a bad state.

[Tommycoupons]

Canada is about to hit the crapper! The Housing bubble everyone has been talking about is going to explode and cause a huge mess. A house is only worth what the next sucker is willing to pay. The Cons are just trying to prolong it by lowering interest rates. They are now running on "Protecting Canadians" because they screwed the economy. Everything is priced in US Dollars globally so the 20 cent drop the past 18 months is going to cause huge inflation. etc. etc. etc. Glad i don't own a home and I know many people who are rushing to sell now. The only debt I have is Student loans which is not too bad as the interest is tax deductible and have been trying to make larger payments while rates are low. However the recent .25% reduction was only passed on as .15% for me

[tjthemanto]

Canada is about to hit the crapper! The Housing bubble everyone has been talking about is going to explode and cause a huge mess. A house is only worth what the next sucker is willing to pay. The Cons are just trying to prolong it by lowering interest rates. They are now running on "Protecting Canadians" because they screwed the economy. Everything is priced in US Dollars globally so the 20 cent drop the past 18 months is going to cause huge inflation. etc. etc. etc. Glad i don't own a home and I know many people who are rushing to sell now. The only debt I have is Student loans which is not too bad as the interest is tax deductible and have been trying to make larger payments while rates are low. However the recent .25% reduction was only passed on as .15% for me

Yup especially GTA & GVR . In Vancouver you get a crap hole for $ 1 million , when you would think you should get a mansion for that kind of money ..lol.

Low Interest rates & Immigration is the only reason the house prices are holding up..& rental vacancies are low.

Every year close to 300,000 immigrants are brought into Canada & most of them arrive in GTA , GVR or Montreal , they need some place to live , so rentals & housing is still going strong...without them coming in there would be large rental vacancies, & empty houses too.

[Tommycoupons]

Yup especially GTA & GVR . In Vancouver you get a crap hole for $ 1 million , when you would think you should get a mansion for that kind of money ..lol.

Low Interest rates & Immigration is the only reason the house prices are holding up..& rental vacancies are low.

Every year close to 300,000 immigrants are brought into Canada & most of them arrive in GTA , GVR or Montreal , they need some place to live , so rentals & housing is still going strong...without them coming in there would be large rental vacancies, & empty houses too.

Yes that is true to an extent. We have always had immigration and that did not prevent previous housing corrections.

[Shwa Girl]

People living on borrowed money for too long , too much household debt ..credit card debt , student debt , car financing , mortgage debt , LOC , HELOC ..you name it they have it...easy credit / easy money is the issue ..buying things they can't even afford on borrowed money.

The worst is they are using their house as a big ATM card , by borrowing money against the equity in their house. Too many HELOC 's I see out there & Reverse mortgages ..so even that one safe solid asset they have is being gambled & borrowed against by them

Add job loses to that & also RRSP , TFSA , Investments etc down due to stock markets down..and people are in a bad state.

Solutions to surviving any ecconomic condition:

People living on borrowed money for too long: take an extra job to pay down debt
too much household debt :
credit card debt:
student debt: if a student can't afford tuition + housing, live with family; have a part time job; take a semester off to work and save for the next semester; work full time and go to school part time, online
car financing: buying used, if buying new is not in the budget; using public transit if possible
mortgage debt: pay off as soon as possible, and making this a family priority
LOC: for emergencies only
HELOC: only for an emergency, like furnace failing in Feb. Even then, should set aside money for such emergencies
buying things they can't even afford on borrowed money:


The worst is they are using their house as a big ATM card , by borrowing money against the equity in their house:
Reverse mortgages: instead, downsize and bank the gain on the sale
Add job loses: have an emergency fund

[Tommycoupons]

Gail vaz oxlade is an amazing person and resource for financial advice! http://gailvazoxlade.com/

Here's a recent article of her's:

Ready to Move from Renting to Buying?

Posted by Gail | Filed under Home Buying
One of the things I hear most often is that people what to buy their own homes because they want to put down roots in a community. Hey, if you have the “will” to move from renter to home-owner, that’s the first step. The second step: having the “means.”Wanting to own isn’t just about the money; perhaps you want to know you can stay where you are with no fear you’ll be told to move just when you’ve got the place perfect. Or perhaps you’re looking for a neighbourhood with good schools and a strong community and there aren’t a lot of rental options. But buying a home is a big decision, and without some careful planning, it can end in disaster. Here are some things you must be sure you have in place before you make the leap from renter to owner.Enough income: Seems obvious right? Yet loads of people move into their first home and then discover that their latest acquisition is eating so much of their money they have to use credit to cover the gap. Lenders will want to see a solid work history – minimum time at your latest job: 1 year – so if you’ve been quilting together an income, you may have difficulty being approved for a mortgage.A downpayment: Again, obvious? Except that there are still people offering new buyers ways to get into homes without any money down. Whether it’s through a cash-back program, or through alternative lenders, it’s a bad idea. Don’t think that the bare minimum of 5% down means you’re ready. Having less than 20% down means that on a $375,000 home you’ll have to fork over nearly $10,000 in mortgage insurance premium, and pay more than $55,000 in interest in the first five years, assuming a mortgage of just 3.25%. Let’s see now…that means you’ll be paying about $917 a month in interest. Hmmm…. Kinda like rent, don’t you think?No consumer debt: Having no consumer debt means you’re in a better place to qualify for a mortgage. Having no consumer debt also means you’ve got your spending in line with your income so you’re less likely to hit the wall once you close and start paying all those new bills. If you carry consumer debt into the home-purchase phase of your life, it’s because you think you can have it all at the same time. You can’t. You’ll see.[COLOR=#201F1F !important]

Gail Vaz-Oxlade
Gail Vaz-Oxlade wants YOU! Join MyMoneyMyChoices.com to get smarter about your money and help others get smarter about theirs. Isn’t it time we eliminated financial illiteracy? Come find me on Google+ and on Twitter.

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[christinehenry]

Housing prices can't go up forever can they? I guess if interest rates go down forever they can. But wait, interest rates can't go down forever. Woops - end of the ponzi scheme.

[AlexM1359]

The Canadian economy is so depressing right now, and the prices of everything is going up because of our weak dollar. I found this article really interesting. We get ripped off so badly as Canadian consumers compared to our American counterparts !
http://www.knightsbridgefx.com/the-m...ase-in-canada/

[brunt]

To start off, I would like to say from an economics standpoint, I count myself firmly in the gloom and doom pack. I have been for quite a while now.

Having said that, people tend to overestimate the "specialness" of the situations and events of their particular lifetime. They also tend to greatly underestimate the amount of time required for changes to happen.

For instance, when people now talk about the Great Depression, they think about how Wall Street fell, and how in a very short time, there were bread lines. That is not how things happened, as it was all stretched out over a ten year period.

Things were also not the same for all people. To return to the Great Depression example, unemployment was at 25%. To be a member of that 25% was a pretty bad situation in which to find oneself. However, remember that 75% of the people were employed, having regular pay cheques with falling prices.

Not that it was all wine and roses, but the pain was very unequally distributed.

Bringing it to today's time frame, my thoughts are that debt is going to bring a whole lot of pain to a whole lot of people in Canada.

Artificially low interest rates should be a blessing to debtors. This is a once-in-a-multi-generation gift that allows debtors to pay off debt far quicker than previously possible for many, many people. My first mortgage was 12.625%, and that was about five years after the peak in interest rates, so others had it worse than we did.

But rather than reducing their debts, Canadians have collectively been gorging as the "low monthly payments" allow for larger and larger loans as interest rates have been dropping.

This concerns me greatly. Increasing interest rates by a single percentage point would sink a lot of Canadians. And if rates were to increase to the long-term average of about 6%, I would think that legions of Canadians would find themselves in very hot water.

But again, the pain will not be distributed equally. Those who did not take out loans for trips in the winter, or increased their mortgage to purchase furniture, or whose first house was more luxurious than their parents final house will find themselves once again in a position of having money in the bank when the price of "things" decreases. Especially prices of used things like houses and cars.

And those who say that "the government won't let rates go up" don't understand that the bond market sets the rates, not the government. In a relatively stable time (like now), all the governments can do is offer low cost loans to banks in hopes that they will loan the money out to kick the economy into high gear.

But once fear takes hold in the bond market, rates can and will increase, and there is not a thing that the government can do to stop it.

One should be wary of this, and certainly position oneself so that one is not unduly hurt if/when rates increase. But don't let it ruin your life - sunsets will still be beautiful, flowers will bloom, and children will play. Just try to position yourself so that the banker doesn't come and take your house.

[MortgageQueen]

Well said Brunt. As far as a home is concerned, it should be everyones goal to have a home "beneath" their means. One day, when it's paid off, (and if you still feel the need) you can afford to get what you want. My goal is to be completely debt free, but other's may use their equity to invest. Nothing wrong with that either.

Just be sure to be cautious about total debt load at all times. Things can change fast and everyone needs a cushion for those times.

[Frugalbigmama]

Thumbs up to debt free!

[tjthemanto]

I think lot of good high paying jobs aka careers are going away thesedays, and low level low paying jobs are remaining. The race to the bottom has begun. Lot of corporate slaves out there just working to barely pay their bills & taxes ..& in huge credit card & household debt like Mortgage et al.

Most things are being automated thesedays or being sent abroad aka outsourced for slave wages.

Lot of 12 dollar - 15 dollar jobs out there, you can barely survive on that ..plus not much benefits & security with these jobs either..you can be fired & laid off anytime they want.

[MortgageQueen]

I think lot of good high paying jobs aka careers are going away thesedays, and low level low paying jobs are remaining. The race to the bottom has begun. Lot of corporate slaves out there just working to barely pay their bills & taxes ..& in huge credit card & household debt like Mortgage et al.

Most things are being automated thesedays or being sent abroad aka outsourced for slave wages.

Lot of 12 dollar - 15 dollar jobs out there, you can barely survive on that ..plus not much benefits & security with these jobs either..you can be fired & laid off anytime they want.

Sad but true.

[Frugalbigmama]

No job is secure and people are foolish to think the money will keep rolling in.