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The US Economy: A Canadian Leading Indicator
Courtesy of Zero Hedge's latest contributor, Derailed Capitalism, which will focus primarily on the Canadian financial and economic situation.
The US Economy: A Canadian Leading Indicator
Canada’s economic soundness has garnered renewed interest amongst
foreign investors. The country was fortunate to escape the economic
crisis unscathed, unlike the rest of the world. It boasts one of the
strongest financial systems on the globe, ranking best in the world by
the World Economic Forum.
While it appears that the Canadian economy remained unscathed
throughout the financial crisis of 2007-2008, further deterioration of
public finances combined with declining exports while commodity prices
remain high may put further pressure on the Canadian economy. With the
global economic recovery in doubt, Canada’s resilient economy is
beginning to mimic that of the United States in 2006-2007:
- Unemployment is now moving upwards, 170,000 full-time jobs were shed in June
- High reliance on exports to the United States, United Kingdom, and Japan
- Foreigners continue to divest of Canadian securities
- Canada’s trade balance is now negative
- Public finances, including federal and provincial, are in terrible condition
- Unfunded liabilities continue to grow in Medicare, CPP, and OAS
- Home sales have begun to fall off a cliff, down 30% since implementing HST
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It is amazing to me that in spite of the fact that more than 70% of Canadian exports sales and nearly 50% of Canadian GDP depend on US markets, that Canada has been so far able to avoid the economic travails of its southern neighbor. Real estate prices in some of its major cities have even rallied above 2009 lows and now in cities like Vancouver, home prices sit at levels which require more than 70% of the average income to support.
How much longer can the Canadian economy and real estate prices defy the gravity of economic reality?
How much longer can the US bond market defy the gravity of economic reality ?
The only thing that will bring down the Canadian housing market is substantially higher interest rates.
Part of our "success" is due to the fact we underwent a painful debt paydown under the prior Liberal government. The Liberal government refused CDN banks the right to introduce the "innovations" deployed by US banks.
Vancouver real estate is driven by expatriate Chinese. They make a bundle of money, enter Canada as investor immigrants, buy a safe haven property in Vancouver and then return to the Far East to make more money secure in the knowledge that they have an escape route. When China collapses this cash injection will end.
Canada also benefits from its resource base. We are inhibited in our ability to export jobs so domestic demand remains relatively high unlike in the US. Resource exports have benefited from Chinese demand and growing US reliance on oil exports. But this results in the CDN version of the Dutch disease. Studies indicate that every job gained in the oil producing provinces results in a job lost in the mfg provinces.
Tar sands oil is expensive to produce. If the US enters double dip and China flatlines then the price of crude may go to $40 a bbl and this is below production cost in the tar sands. At that point Canada enters a world of hurt: limited foreign capital, declining oil exports, declining mfg exports, large and expensive public sector, declining private sector incomes, no tax revenue to support all the goodies. I may move to Iceland.
sushi in Iceland; probably does not get better than that........nice post.
Another factor in real estate is the enormous amount of Crown land owned by the province, especially on the North Shore. And Vancouver is Canada's "Lotusland", as in California. Even the ocean is warm compared to the coasts of WA, OR and Northern California. People will pay a lot to live in Vancouver, just like NYC.
not long...
http://www.greaterfool.ca/
Get informed, ride the Vancouver BC Real Estate Market Roller Coaster :)
http://www.youtube.com/watch?v=hqOn5XEm86A
I posted this link before but it is worth to highlight it again for this topic.
"How much longer can the Canadian economy and real estate prices defy the gravity of economic reality?"
Good question. As a Canadian I'm astounded that consumer/household debt in this country is well over a trillion dollars, that the national debt is just over 500 billion and the province of Ontario, where I reside is 25 billion in the red. But, people keep buying - on credit.
There is an absurd amount of subdivisions being built around Toronto. Condos are still being built at breakneck speed in downtown Toronto. Commutes are now well over an hour - one way if you're in Stuporbia. But cheap credit and low interest rates are seeing this boom which has to bust. Homes are heavily overvalued - even homes in Toronto that have nothing done to them inflate at insane levels - just becuase.
It has to come crashing down one day - has to. But many that I speak to are still in belief that real estate is an investment and it can only go up. Fools.
Honestly, being Canadian, we are way overrated for economic soundness. Details here http://americacanada.blogspot.com/
I started shorting Canadas banks(non leveraged ETF) when they leaped over the pre lehman prices. I am slightly down on that but I have high expectations for it to pay off in the near future.
Spitzer, what ETF shorts Canadian Financials and doesn't the Canadian Gov't bare the losses of a collapsing RE market through the CHMC guarantees?
Any guidance would be appreciated.
http://stockcharts.com/h-sc/ui?s=HFD.TO
Horizons BetaPro http://www.horizonsetfs.com/en/index.asp The Fin bear is HFD
I don't know a whole lot about the CHMC, search Mishes site, I think he has done a piece on it before.
Wow, I suggest learning a lot more about CMHC if you think real estate here will play a part in our banks declining. More to the point, while you may be completely right and our banks may decline, I can think of 3 or 4 industries that would have to go down first, and go down harder.
The entire Canadian banking cartel was insolvent in the 1980's when oil collapsed. Only the magic of a government mandated accounting change (writing off losses over 5 years instead of 1 year), prevented their net worth from going negative.
The Canadian banking cartel has no competition and is protected by the Canadian government exactly like the New York/Washington TBTF.
They promoted "world class" mergers amongst themselves until the politicians couldn't take the public pressure.
Any accolades they receive are entirely unwarranted. A case of despite their best efforts to fail, they were unsuccessful at failure. In spite of, not because of.
would you short a legal cartel? I wouldn't.
canadian banks have been one of the all time great investments, especially in terms of risk vs reward.
doesn't mean they should have gov't backing, but they do.
tons of better shorts out there...
Canadian banks are in full retardation: two sets of books, wtf is this "strong Canadian economy" bullshit. Not to mention those illiquid structured notes that pension funds and institutions hold on their books.
I think it's the prospect of United States refoogies.
That's whats keeping CAD housing afloat.
5% down with 5% cashback = nothing down , liar loans and .oooooo9% variable rate.
Where in Canada can you get a loan like this? Smoking too much BC Bud?
You absolutely can't. He might have been re-hashing the loans in the US.
Puck off, Bitchez.
Maybe we can trade Obama to the Oilers for a player to be named later. Oh ya, he likes basketball. What is that Toronto team? Raptors?
We'll keep Gretzky and make him a citizen then make him VP under prez Biden.
Never mind. Prez Biden doesn't sound good. I think teleprompters confuse him anyway.
Obama to the Oilers ? Time to dust off that old Antson Carter jersey.
"let's look at the difference between creating the money ourselves and borrowing it from private banks...."
http://www.youtube.com/watch?v=IiBSdBDeucU
Anyone writing about Canada should probably be aware that the HST is ONLY in British Columbia and Ontario.
Notwithstanding this omission, nice addition to ZH.
Not true. They are the newest provinces to tie their provincial sales taxes to the GST. The Atlantic provinces have already done so (Newfoundland, New Brunswick, Nova Scotia.)
My bad. You are correct.
and the Atlantic provinces account for 7% of the country's population , the implementation in the western province of BC is being challenged in the courts.
In any event, it's a non-event. It's not like the provinces weren't charging a PST before the HST arrived; all this does is make the two bases the same. Since some things that were PST exempt will now be subject to the HST, it's true there's a small tax hike, but it's peanuts in the larger scheme of things.
My wife is Director of Finance for a string of auto dealers. When I asked her about the impact, she said in the long run it will save them money and make their accounting simpler. Yes, there's a one-time changeover cost, but she thinks that's nothing in the long run.
Odd, the contractors I hired to fix my house had a very different view of the HST. Yes the tax rate is the same but the accounting is simplier because you can't write nearly as much off. Note that this is second hand information.
My socialist ex is blowing a gasket over the HST. There really is no one to vote for in BC.
Well, I was looking at that a leetole bit. Stats Can shows M1 increased by 11% yoy from 2008 - 2009.
http://www40.statcan.gc.ca/l01/cst01/econ07-eng.htm
No embarassment to expand the money supply relentlessly while propagandizing about growth. Growth is in the bond markets, nowheres else.
"Canada’s resilient economy is beginning to mimic that of the United States in 2006-2007:"
You mean there's a bubble in the government's credit?
The "best" part of globalization is that it ensures equal suffering for all, eventually.
Look at MFC, the giant insurer (owns J Hancock in the US). Stock at 44 in 07, then 7 in 09, then 24, now 12 handle. Ouch. So, I don't believe its the brilliance of the financial industry there but they should be commended for...
a) having a sane immigration policy - you have money, you get in
b) having a sane defense policy - tiny relative to the US so the war machine does not have control
c) awesome pancakes and syrup and canadian bacon breakfasts
d) energy and mineral reserves up the wazoo
e) compared to the US, a relatively intelligent population. Look at a number of social stats - divorce, guns, obesity. US society is unravelling while Canada looks like the US of the 50s.
Yep, I am moving there. Hello Mr. Mountie, sir.
I like that. Interesting observation. Not so much a post-war boom however, and a lot less population, but i get the idea.
Owning firearms is a "social" stat? More like a metric of statism. You can still hunt in Canada, eh?
We welcome you friend!
Madhouse - the reason MFC got killed (amongst other things) was the massive sale of segregated equity mutual funds prior to the financial meltdown of 08/09. While they have a bit of that exposure hedged now.. its not 100%.
Spitzer - I'd be careful shorting the Cdn banks.. while I'm NOT bullish at all on financials (hate them) - our banking system here is pretty concentrated - and they are already down from their year highs.
I'm hoping reality hits the real estate market - I live in Victoria.. and valuations here are mental. Too much building going on (that seeks to take advantage of momentum rather than actual demand) - and I'm starting to see "New Price" signs all over.
the Vancouver real estate board reported in July that sales were down 45% YoY and 24% MoM.. will be interesting to see Augusts numbers.
CRE is apeshit here as well - LOTS of new buildings, but every business that leaves an area has a "for lease" sign in the window - which then begs the question.. why build more CRE when there is a pile already for lease on the market.
Canada is deluded in my opinion.. we haven't prepared for the pinch because we think we missed it all.
Bad idea (jeans)
Without a military you march with those who do and the leash can get short and uncomfortable. Remember 67% of energy produced by Canada must head south and as the country supplying the most energy to the U.S., that certainly represents a good fraction of the prosperity. 'Saudis in sweaters' to an extent most Canadians neither realize or don't care to acknowledge.
BC Hydro rescued California when Enron was manipulating energy supplies. When I came back to The States my first US "hydro" bill in the US was a shocker. However my taxes were cut in half--largely because of BC Medical Plan. In '99 unemployment was 10%, UI ran for 36 weeks (I think), when it ran out you had to go to welfare, who demanded you sell your house if you had one. That was under the socialists.
That Canada is the largest oil exporter to the U.S. is little known to Canadians, but even less known to Americans.
The bank are not "conservative" at all!
Canada’s Housing Bubble- a Look at Canada’s “Conservative” Banking System
We have our version of Fannie and Freddy called CMHC. With less than 20% down you need to insure the mtge with CMHC. Up till a year ago, loan terms were very generous: 40 Yr amortizations, min 5% down.
Problem is that easy money encourages buying more house than you need or can afford. Leverage to the max because the property will only go up and you can always sell to the next sucker. Property prices are priced for perfection and any decline in incomes will see lots of folks in a world of hurt. And not just property holders; all the defaults become the responsiblity of the taxpayer and as stated above, we cannot just print, we have to borrow and are already running a considerable deficit.
I would like to add that if you hunt around for your mortgage, you could find some with 5% cash back. A quick look at TD's site shows a 5 year fixed rate mortgage 5.49% with a 5% cash back. Come get it for a low low price. It will be interesting to see if Canadians can swim when their net equity is underwater.
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Housing data is suspect in above article, I would like to see the source.
Using the author's five year data 2005 - 2009, the annual growth rate in average house prices is 5% against annual average income growth of 2%, but the author fails to comment on the corresponding decline in personal and corporate income tax rates in that period.
The HST |(combo of national GST and provincial PST) will have an impact specifically on housing starts in the provinces where it has been implemented notwithstanding a 1 percentage point decline across the country in the GST (national sales tax). For the larger resale component of the housing market the HST (which does not apply to that sector other than closing costs) could actually be inflationary due to reduced supply.
In the conclusion the author highlights one month of employment numbers along with one month of housing numbers. All I can say is that 4 weeks does not a trend make and it is somewhat disingenuous to present those numbers without the context of prior months.
BB just mentioned ZH... congrats
cmhc (govt agency) guarantees mortgage loans= tax payers will left holding a huge debt burden, when bubble bursts (which is appening no) sound fimiliar -Fanny and Freddy
CMHC has very good reserves - cash - against losses Especially when you consider that re-fi isn't happening. Any risk would likely be from sales of existing and new homes.
This isn't an easy topic. Canadian banks were better managed than US banks because they didn't take on excessive leverage. At the height of the crisis, there were some funding concerns related to the fallout of non-bank asset-backed commercial paper (ABCP), but that seems to have been resolved. Canada's economy is very fragmented. Out west, it's mostly about oil and over in the east it's mostly about manufacturing. Demand from China has boosted commodities, benefiting the economy. In other words, the Canadian economy did not have the run-up of the US economy in the bubble years, and it benefited from the global recovery led by EM. Having said this, there are speculative pockets in some real estate markets (Vancouver, Toronto,...) which are a concern, and the CAD's appreciation is a concern. IMHO, growth will taper off in the coming year, but it's not just about the US recovery. Keep an eye on emerging markets who are leading the global recovery right now.
Nice post. Notice no junks if you keep it clean (aka no solars).
PS - another bubble, the Old Port in mtl. Are they for serious?
cmhc (govt agency) guarantees mortgage loans= tax payers will left holding a huge debt burden, when bubble bursts (which is happening now) sound fimiliar -Fanny and Freddy
Canada is a country of debtors. The average Mr. and Mrs Joe Plumber is Up to their eyeballs in debt,that most will spend a lifetime repaying .
With Taxes increasing, pensions and real estate decreasing in value, most of these brainwashed canuck consumer slaves of the banking cartels, are going to be in for a nasty reality check when the stimulus based recovery finally collapses in the coming weeks and months.
NOTE:It is estimated that 32% of the work force is on some type of depressent mediction.
Canadas banks are strong. Ok, fine. But are they really helping the people of the Great White North, or just using the population of this nation as instruements for profit.
Everytime someone takes out a 25-30 year mortgage the banks have a guarantee on that entity for a lifetime of servitude
Canada is a country of debtors. The average Mr. and Mrs Joe Plumber is Up to their eyeballs in debt,that most will spend a lifetime repaying .
With Taxes increasing, pensions and real estate decreasing in value, most of these brainwashed canuck consumer slaves of the banking cartels, are going to be in for a nasty reality check when the stimulus based recovery finally collapses in the coming weeks and months.
NOTE:It is estimated that 32% of the work force is on some type of depressent mediction.
Canadas banks are strong. Ok, fine. But are they really helping the people of the Great White North, or just using the population of this nation as instruements for profit.
Everytime someone takes out a 25-30 year mortgage the banks have a guarantee on that entity for a lifetime of servitude
As a Canadian, I am amazed how complacent everyone I talk to is about the economy. I guess, as benfactors of the entitlement society, we have nothing to fear.
well i'd sure like to see RE prices come down here, as i'd like to buy some, and it might happen, but i am not at all convinced.
if we get inflation, prices could well go up dramatically.
it all depends on the inflation/deflation debate
cdn dollar getting crushed right now, i am going to buy some...just wait for that bhp $40 billion purchase to finalize...and then the next one..
Canada has been OK because they have kept lending. The same is true of Australia and New Zealand.
The idea that Canadian banks are sound is laughable - they haven't had to deal with declining prices yet. Canadian real estate is absurdly priced and will fall hard.
If you keep lending people money they can keep paying their interest payments. How can this be hard to understand after what we have been through in the US.
As to "Canadian banks wont get into trouble because they are a cartel" all I can say is Citigroup, BOFA or any other large US bank.
THE NEXT LEG DOWN ...
http://stockmarket618.wordpress.com
Canada, Australia, New Zealand...someone please explain to me how anywhere in the world is a good bolthole when the entire planet is using fiat currency.
I'm betting that the entire world is screwed, so you might as well hang around a place with plenty of arable land and gun ownership. In other words, the U.S.A.
There are certainly a lot of details like that to take into consideration.I read and understand the entire article and I really enjoyed it to be honest.
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