Canada Mauled by Oil Bust, Job Losses Pile Up – Housing Bubble, Banks at Risk

Wolf Richter's picture

Ratings agency Fitch had already warned about Canada’s magnificent housing bubble that is even more magnificent than the housing bubble in the US that blew up so spectacularly. “High household debt relative to disposable income” – at the time hovering near a record 164% – “has made the market more susceptible to market stresses like unemployment or interest rate increases,” it wrote back in July.

On September 30, the Bank of Canada warned about the housing bubble and what an implosion would do to the banks: It’s so enormous and encumbered with so much debt that a “sharp correction in house prices” would pose a risk to the “stability of the financial system” [Is Canada Next? Housing Bubble Threatens “Financial Stability”].

Then in early January, oil-and-gas data provider CanOils found that “less than 20%” of the leading 50 Canadian oil and gas companies would be able to sustain their operations long-term with oil at US$50 per barrel (WTI last traded at $47.85). “A significant number of companies with high-debt ratios were particularly vulnerable right now,” it said. “The inevitable write-downs of assets that will accompany the falling oil price could harm companies’ ability to borrow,” and “low share prices” may prevent them from raising more money by issuing equity.

In other words, these companies, if the price of oil stays low for a while, are going to lose a lot of money, and the capital markets are going to turn off the spigot just when these companies need that new money the most. Fewer than 20% of them would make it through the bust.

To hang on a little longer without running out of money, these companies are going on an all-out campaign to slash operating costs and capital expenditures.The Canadian Association of Petroleum Producers estimated that oil companies in Western Canada would cut capital expenditures by C$23 billion in 2015, with C$8 billion getting cut from oil-sands projects and C$15 billion from conventional oil and gas projects.

However, despite these cuts, CAPP expected oil production to rise, thus prolonging the very glut that has weighed so heavily on prices (a somewhat ironic, but ultimately logical phenomenon also taking place in the US).

Then on January 21 – plot twist. The Bank of Canada surprised the dickens out of everyone by cutting the overnight interest rate by 25 basis points. So what did it see that freaked it out? A crashing oil-and-gas sector, deteriorating employment, and weakness in housing. A triple shock rippling through the economy – and creating the very risks that it had fretted about in September.

“After four years of scolding Canadians about taking on too much debt, the Bank has pretty much said, ‘Oh, never mind, we’ve got your back’, despite the fact that the debt/income ratio is at an all-time high of 163 per cent,” wrote Bank of Montreal Chief Economist Doug Porter in a research note after the rate-cut announcement. Clearly the Bank of Canada, which is helplessly observing the oil bust and the job losses, wants to re-fuel the housing bubble and encourage consumers to drive their debt-to-income ratio to new heights by spending money they don’t have.

And what Fitch worried about concerning the housing market in July – that “high household debt relative to disposable income has made the market more susceptible to market stresses like unemployment…” – is now coming to pass.

On Wednesday, Statistics Canada rejiggered its job creation and unemployment numbers by slashing the number of jobs created in 2014 to a mere 121,000. December proved to be even drearier than previously reported: a total of 11,300 jobs were lost.

Now layoffs have begun to cascade through the Canadian oil patch, with 20,000 to 25,000 job cuts already announced so far. They will trigger additional job cuts in other industries. Plus Target’s 17,500 cuts to hit when it leaves Canada. Alberta’s Labor Minister, Ric McIver, told AM 770 on Saturday that the number of unemployed workers would jump by 22%. And he exhorted the government and employers to think long-term about retaining skilled workers for whenever the good times might return.

John Garth Turner, former Member of the House of Commons and now best-selling author in Canada, explained it this way:

The fewest number of people are currently working in Canada since back in 2000, which is a big black eye for a government that slashed interest rates, crushed the dollar, and added $170 billion in national debt over the last six years. Now it doesn’t even have the stones to bring forth a budget, or warn people from scarfing down more debt when the party’s clearly over. Sad.

The oil industry in the US too is dead-serious when it talks about slashing operating costs and capital expenditures. Preserving cash is suddenly a priority, after years when money was growing on trees. And cost cutting has reached frenetic levels. Read… Oil Price Soars, Rig Count Plunges Worst Ever, But Bloodletting Just Beginning  

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
pine_marten's picture

Jobless on the frozen Prarie. How bleak.

WhackoWarner's picture

Meanwhile back at the ranch this gets absolutely zero press coverage.  Constitutional challenge to the 1974 BIS takeover of monetary policy.  The fact that until 1974 Canada was in fact a democracy kind of.....

 

Zero press attention.

 

Pardon if this link appears to be a bit extremist.  Does not negate the underlying story.

http://www.maxresistance.com/total-news-blackout-in-canada-people-vs-central-bank/

One of the numero uno Constitutional lawyers in Canada is in court bringing suit against the Bank of Canada.....

 

edited for spelling....

 

 

MEAN BUSINESS's picture

whocouldaKNOWd WhackoWarner. Disheartening when Rocco says that the case is solid but the outcome depends on which way the wind is blowing. Any talk about it from JT or Muc? I wonder what Rad thinks, given that he has done the court thing too.

Thanks for posting!

TrulyStupid's picture

“After four years of scolding Canadians about taking on too much debt, the Bank has pretty much said, ‘Oh, never mind, we’ve got your back’,

The BOC is bailing out the bank balance sheets with this rate cut...not the consumer...There is no rate cut in mortgages or consumer loans.

Coopster's picture

I could be wrong, but I think the main purpose of the cut in interest rates was to drop the dollar, which it did. The loonie has dropped almost 5% since rate cut was announced. 

The government sees the writing on wall as far as job losses go (oil patch, Target, Mexx, Jacob, Smart Set, Tim Horton's etc., etc.,).  There could possibly be 50,000 job losses this quarter alone.  (for US, think 500K, as Canada is about 1/10th size).  The only way to possibly get these jobs back is to have a lower dollar, and hopefully restart industries that were lost as a result in a higher dollar.  You hear all the talk on business TV that manufacturing will pick up again, Ontario will be a powerhouse, yada yada yada.  However, those manufacturing industries have long been shipped off to low wage countries, and it's debatable whether anyone will invest in the plants and machinery to bring them back.

JRobby's picture

The Canadian banks, largely avoiding the excesses of the MBS market are some of the most sound in the world.....................................

Mike Honcho's picture

As a form of posturing, Canada promptly forwarded Fitch an article outlining the S&P $1.5 billion dollar fine.

Vylahkinnen's picture

Yeah, but what about the job creation in the VFX industry, Wolf? Nah, don't say it is probably right now the industry in Canada that relies the most on government subsidies. At least they killed a lot of jobs in the United States. Until the next gullible government idiot appears and offers a higher subsidy. Heard Great Britain is offering better tax breaks. Not that I am an industry insider. Just a guy who is always looking for the next government fool.

Peter "The Master Hobbit" Jackson was asked recently in an interview if Germany was interesting country to make a movie. He replied: "I heard that they have great government subsidies..."

Never One Roach's picture

I don't recognize Calgary or Edmonton anymore. They are two of the giantest Bubble cities in North America who also were the result of Globalism.

wonderatitall's picture

...and bush did  it. i didnt like the guy but its fun to say bush over and over like msnbshit

Herdee's picture

Canadian morals means Harper meeting with a Ukrainian leader backed by neo-nazis and installed by the U.S. State Dept. and the CIA.Harper also was used as a sucker and puppet in Afghan-Land by the U.S.,he blew billions fighting a war against a plant and the Taliban.How much was spent?It's a secret and it's all coming home in a big deflationary spiral run by a bunch of Keynesian morons.I get sick to my stomach and puke when I see Harper( a fat pig-beer drinking drunk)playing the piano.It reminds me of Brian Mulroney singing his Irish tune with Ronald Reagan.I've never seen such a useless , pathetic example called conservatives try to run a country.They've sold off all of Canada's gold reserves and run the butch into the ground.

squid's picture

John Cretien, pronounced Kreetin, sold off Canada's gold reserves in the nineties.

They were gone already when Harper showed up.

 

John Cretien also approved the back of Canada doing away with that troublesome thing called "Reserve Ratio" for Canadaian banks back in 1996. Yes, that's right folks, the official reserve ratio for Canada's banks is....

10%, nope,

7%, nope, 

6%, nope,

4%, nope, 

3% (you gotta be shittin me), nope,

1%, nope,

0%.....A WINNER!!!!

 

That's right ladies and gents, banks in Canada are required by law to hold NO deposits in cash.

 

Now, one could go all blue team-red team on this and say it was those darn Liberals under Kreetin that did it but....

Harper has had a majority for some time now, if he wanted to fix the Bank of Canada, he could have....but he didn't.

No leader wants to take away the punch bowl, Clinton didn't want to in 98/99, bush didn't want to in 2006/2007 and Harper hasn't wanted to. Yah, yah, the central bank is independant, lah-lah-lah-lah, sure it is.

 

Now he is going to wear the crash. And with a reserve ratio of 0%, it doesn't take much to start a bank run.

 

As they say, "Buckle up!".

 

Squid

Bopper09's picture

Very true, Kreetin destroyed our country.  And you're right, nobody wants to admit what is happening and straighten things out.  But a bank run isn't going to happen.  People here are too stupid to see what's going on.  They don't even carry cash, it pisses me off, it's all debit cards.  I go to a gas station to buy something, and I wait for some asshole to fiddle with his card and punch in a code for the $2.50 coke and chips.  I'm pretty sure our country is trying to get rid of cash all together, and 99% here would be all for it.  I mean, money has germs on it, or it could be stole.  Fucking idiots.  Not that I think paper with the word canada on it is money, but we currently have to play the game.

TrulyStupid's picture

Fact: Chretien//Martin inherited a world class debt and deficit from the criminal Mulroney, possibly the most corrupt PM in history. They turned it into a budgetary surplus for the last few years of their reign. Harper managed to reverse that into an even bigger ongoing deficit, turned Canadian foreign policy from peacekeepers to neo-nazi stromtroopers and introduced the most wasteful cronyism porkbarelling in the "defense" department (f-35, new ships). He has surrounded himself with nonentities, corrupted the CBC and oh yes.. enriched his friends. Only 38% of Canadians voted for him, yet he has consolidated power in the PMO, thanks to an incompetent opposition afraid of being labelled "soft on terrorism".

redd_green's picture

THat would be true (... inherited ... from criminal Mulroney...) if politicians ran the banks.  Unfortunately, in most western countries anyway, its the other way around.   Arguably: banks run the governments.   We all have corrupt politicians all over our governments, but the underlying issue is who is pulling these politicians strings.   its the banks, mostly.  

WhackoWarner's picture

Canadians can accuse whatever PM was in charge.  Fact is we have not had an honest government in decades.  Mulroney hides in senility.  Harper is a bum boy psycho,,,NDP have no balls and reincarnated Trudeau is just a poster boy.

Heaven help this nation if the next election gives Harper more giddy-up.  Guy belongs in a rubber room reserved for those with Napoleon complexes.  WE are in deep trouble.

logicalman's picture

It's not like anyone could get hold of the numbers for all those cards and run up a big bill or anything.

Most people seem to find the act of thinking to be too much like hard work.

 

tradingdaze's picture

But, other than that he's ok. Right?

logicalman's picture

He was talking about Harper's good points!

Free_Spirit's picture

Harper is Canada's Blair, what he meant when he met Putin was "Get out of Ukraine so we can sell Canadian oil to Europe, cos without that market Canada's going down". Markets should be created by innovation and competition, but Harper and Obama decided that creating a civil war in Ukraine was cheaper and quicker. Well, look where are we - total destruction in the East, thousands dead, and Harper's promises of riches from his black-gold turning to dust in his own electoral heartland . Canada used to be one great nation.  

squid's picture

"Markets should be created by innovation and competition, but Harper and Obama decided that creating a civil war in Ukraine was cheaper and quicker. "

 

I harly think Harper was consulted....

he just went along with it. And why not, all the Canadians of Polish, Ukrainian, Romanian etc...decent all sing the same tune, "Those EVIL Russians!". Like the only Commies 30 years ago were ethenic Russians, there were no Uky, Polack or Georgian Commies, right?

 

Harper is playing the "evil russian' card to the masses and it sells. Reality isn't quite so interesting.

 

He is, after all, a politician.

 

Squid

thegr8whorebabylon's picture

http://www.economic-undertow.com/2015/01/29/voting-with-empty-wallets/

I suggest you read the blog and comments.
There is no demand for oil, and there will not be barring WWIII.

Jack Daniels Esq's picture

US/CA banks dont care - hose taxpayers

nowhereman's picture

What is truly interesting is the loss of revenue for the government.  In Canada approximately 50% of the price of fuel at the pump is taxes.  The price of fuel today is half of what it was 6 months ago.  When you consider how much revenue the government makes from fuel sales in the Great White North, you begin to see the death spiral this has created.  Government expenditures for the social safety net increase with the rise in unemployment, just when revenues decrease due to fall in fuel taxes.  In a relatively small economy like Canada, this could be devestating.

funkybro's picture

Just as with people, there are good banks, and there are the stereotypical bank that you seem to be describing. To lump them into one pot as you have is no different than saying that "all persons of one particular race are freeloaders" which is incredibly simpleminded.

bluskyes's picture

CAD$ has lost a lot of value compared to USD since Sept 30. How does that figure into the $50usd/barell calculation? Does that mean Canada can now withstand $40/USD barell oil now?

Soul Glow's picture

Shale is game over.

OpenThePodBayDoorHAL's picture

F*cking idiots, everybody running around asking what's causing the bust, nobody stops to wonder what caused the boom in the first place

jonjon831983's picture

Googled the CanOils "free" report: http://cdn2.hubspot.net/hub/312313/file-2316059151-pdf/Canadian_Oil_Gas_...

If revenues are in USD what currency are their debts, costs, and currency hedges denominated?

I couldn't find any mention about currency's effect as USDCAD is now at the lows of new 52wk Range: 1.0621 - 1.2740, a 19.95% boost in CAD denominated revenues.

What about the WCS + WTI discount if that narrows closer to WTI or wider?

 

But yea, skeletons spilling outta the closet.

Abbie Normal's picture

That 20% boost in revenue due to FX concerns is usually offset by the 20% boost in equipment expenses; because Canada doesn't make its own oil and gas machinery.

"Hey honey, let's go visit Canada because everythings on sale for 20% off."

After coming home: "Let's never visit there again, because everything costs 30% more"

ceilidh_trail's picture

gotta love those GSTs, PSTs, HSTs......

bluskyes's picture

I should have read your post before opening my mouth.

Don't worry about the Kanadians - The government of Alberta is SLASHING their MP's pay by a whopping 5% - everything is under control!

FIAT CON's picture

Gov's talk about balanced bugets, most people are conned and think this is great, but hom many go's talk about paying off any of the debt? NONE. It has become the norm for gov's to increase the debt, print and devalue the currency.

A 1993 Auditor General report said that of the accumulated net debt of $423 billion, only $37 billion was principal - the rest was due to the ‘magic’ of compound interest.

Ya, let us all borrow and not pay down any debt.

oudinot's picture

FIAT:  You are incorrect.

If a soveriegn nation has a balanced budget for 29 years (the longest bond maturity being 30 years) it will be debt free.

A balanced budget includes bond interest and principal payments .

gimme-gimme-gimme's picture

The prices will pop in the shitholes up North in the *TAR* Sands that laid everyone off.

The property isn't really worth anything without high paying employment and the place is so polutted from the *TAR* sands operations that no one in their right mind would consider buying up there as a "summer" cottage. (if people can even afford those anymore)

Places like Vancouver (or Hongcouver/Chincouver) won't have property prices go down due to the drop in oil since those locations get the Hong Kong/China overflow of the rich people.

Maybe if credit markets freeze up in China/Hong Kong -- Vancouver will see panick selling of Chinese/Hong Kong nationals who need to raise capital and don't live in those places. (VERY unlikely)

But the reality is that most of those people bought property in Canada as an investment to get Permanent Residency/Citizenship since those parts of the world can change in a blink and they want to bug out at a moments notice to a good country. (can't put a price on that)

There are plenty of crappy places in Canada you can buy cheap realestate and the few big cities in Canada are not and probably will not unless interest rates shoot up. (even then the rich that bought at the top are foreign and probably paid cash and have no need to sell in those situations...)

Canadian Dirtlump's picture

The tar sands arent angels by any means but continue to reduce theor footprint. As an industry guy i have always said developing energy is fine only if done responsibly.

They will take it sooner or later. I more take umbrage selling it to the usa at a discount and buying it back at a premium.

A study i just saw said the avg oilsands development now has one quarter of the previous footprint.

As to the hongcouver effect. Dont forget that their pay to play deal is a ticket out of a worse situation so unless they sell here to buy in spain that wont be our death knell. The fact that they have no leverage bodes well versus the cdn family leveraged to the touque.

The canadian game ends when the economy stalls and or there is a disorderly rise in rates.

That being said, again, what we are looking at collectively is chapters in the book 'the end of the line.'

ebear's picture

"The fact that they have no leverage bodes well versus the cdn family leveraged to the touque."

That may be true for the primary residence, but what about the 4 or 5 rental units or commercial properties they "own?"  I'll bet they're leveraged to the boards.  

bluskyes's picture

For the most part, tar sands land doesn't serve any useful purpose until the tar is removed.

FIAT CON's picture

I lived in Alberts for 21 years. If there was no oil there, the only one's that would live there is farmers.

So I agree the Ft McMurray area home is worth nothing with no job there to pay for it. Especially with it being very overpriced.

Canadian Dirtlump's picture

Ive been here in whole or in part for 40 and worked across the country.

No one would live in bc if it wasnt for weed, trees, asians, resources, or an aversion to cold.

No one would live in manitoba barring an unusual allegiance to club beer, wild rice or mining.

No one would live in ontario barring mines, being awesome, manufacturing or satisfying a waypoint for the international multicultural sewer.

No one would be in quebec barring a predeliction for syrup, superiority or duty free smokes.

No one would live in the maritimes outside of those with the last name irving, Those who like to generationally just get by, those that build the boat and sail it, and those with an affinity for the ei system.

Sask? If you hate skiing and love a coop account then that is for you.

ebear's picture

"Sask? If you hate skiing and love a coop account then that is for you."

What?  You can ski in Sask.  Just need a snowmobile to tow you.

logicalman's picture

Never heard of cross-country skiing?

zuuma's picture

"No one would live in [insert CA region here ]"

 

Ok, Lump,  what is THE place to live in the Great White North? 

(Not even Cumberland County, NS?)

 

I assume Tuktuyaktuk is off the list.

ceilidh_trail's picture

Cumberland county has nice views with the new toll road, bu give me anywhere in Cape Breton or along St Margrets bay.

Canadian Dirtlump's picture

I was merely pointing out you can shit on any province. I would be Ok living anywhere in Canada myself.

Charming Anarchist's picture

Driving an RV anywhere you please! whenever you please!

dogbreath's picture

my best friend is a COOP grocery manager. haha

litemine's picture

Radical Marijuana.

There is no way in HELL your Canadian. You obviously  do not hold our Morals.

squid's picture

"There is no way in HELL you're Canadian. You obviously do not hold our Morals."

 

There, fixed it for yah.

 

Squid