Entries from January 2015 ↓

At least we know more now about Poodlenomics.

Why did the Bank of Canada abruptly cut its key rate, risking what BMO economist Doug Porter says could be a miserable outcome?

“After four years of scolding Canadians about taking on too much debt,” he moans, “the Bank (of Canada) 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.”

Exactly. We’re just weeks away from a new spring-time Mortgage War with virgins descending on For Sale signs like crazed bugs. Sadly thinking lower rates mean higher prices, the moist ones are setting themselves up for a huge surprise. Because Canada’s sinking. The poodles knew that a week ago. Didn’t let on.

On Wednesday, as oil tanked and the dollar slipped below 80 cents, StatsCan dropped a bomb, restating employment numbers to reflect reality. Job losses were far worse – 11,300 last month rather than the 4,300 originally reported. In all of 2014, while the US created just shy of 3,000,000 new jobs, we added 121,000. And just wait until Target (17,600 layoffs) and the oil patch (perhaps 20,000 thus far) click in, starting in numbers to be released a week from Friday.

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 clearly warn people from scarfing down more debt when the party’s clearly over. Sad.

Then, there’s oil, now at $44 and at a 52-week low. Looks like it’s on its way to forty, and likely to stay there for a while. The industry revealed this week expenditures will drop by at least $23 billion in 2015.

Jonathan is a high-end caterer in Calgary. “I have contacts in Suncor, BP, Athabasca, Tourmaline, TransCanada, Spectra, North West Redwater – you name it, and I know someone from there. To be honest, the best info comes from the administrative assistants, though I do know a few higher-ups,” he says.

“Things are bad. Suncor has shut down catering completely and they are re-budgeting for $45 oil (‘Thank God those windows don’t open!’ quipped one of my middle management clients), and I haven’t heard from a few others since the start of the year – and it’s not from lack of trying,” he continues. “Thank God I diversified and got into lawyers and accountants offices, and weddings! I’m sure the oil will come back, but I’m not holding me breath (or putting anyone on account.) One client went so far to tell me that he was ‘terrified.’”

Perhaps you saw this comment posted here earlier today:

“The husband of one of my wife’s good friends is a fly-in/out (Vancouver Island) contractor in the oil patch and has made well over $200k/annum the last few years. This week he was told once his current project is done (a couple of more weeks to go) he won’t have any work until at least June. And that depends on oil prices. He claims 10, 000 people have lost their jobs in Fort Crack over the last week. I have no idea how reliable that number is though.

“This couple are just like all the others, living high on the hog with a big property, toys out the ying-yang and hardly any savings. Now the wife has started looking for work to help pay the bills. Sheesh.”

Or this, from yesterday:

“Neighbours’ son just back from Ft Mac today, fairly high up crane operator, told me that 1000 guys got laid off yesterday, no warning at all, said lots of layoffs happening but no one reports it in the media. Its not just the big names letting people go everyone is battening down the hatches.”

Yes, these are just anonymous words on a blog. They’re anecdotal. None of this is finding its way into the mainstream media, or getting to downtown Vancouver or Toronto, where the big lenders are quickly trying to Hoover up all of the virginal business possible, before it does. But it’s a fair bet the poodles at the Bank of Canada knew this well when they decided to pull the rate lever, once again distributing opiate to the addicted masses.

Meanwhile, CanOils has issued a report nobody in Alberta will want to read:

Less than 20% of leading Canadian oil and gas companies with oil-weighted production will be able to sustain their business long-term at US$50 a barrel. The longer that benchmark prices stay this low, the quicker and deeper the decline in expenditures on exploration and new development – and consequently on Canadian oil production – will be. Externally-sourced finance for development could also be limited; the inevitable writedowns of assets that will accompany the falling oil price could harm companies’ ability to borrow based on their reserves going forward and low share prices may discourage companies from securing finance by issuing equity.

Well, on Wednesday listings in Calgary were up 84% and sales lower by 34%. It’s a train wreck. As I told you yesterday, TD Bank says housing will decline this year in eight of 10 provinces. And are we now seeing cracks in Toronto?

As I told you days ago, sales in the GTA have turned negative on a year/year basis. The price of the average detached house in 416 is lower than it was one year ago. Factor in land transfer tax to buy plus commission to sell, and it’s an asset that’s lost 12% of its value in a year. Are condos next?

In the last few weeks two high-profile condo projects have been abruptly turned into rentals. About 300 buyers are out of luck and will have their deposits returned – with up to three years of interest at the Bank of Canada rate (0.75% per annum). It certainly indicates developers are getting cold  feet about a saturated and volatile market, and see more security in catering to renters.

By the way, Singapore has joined Canada – the 9th country this month to diddle with monetary policy in the face of deflation, oil collapse and stuttering global growth. Like ours, its currency was toppled. Singapore has reduced its expected inflation rate to negative .5%, as real estate values there fall.

Remember all I’ve told you about the transfer of wealth from real assets to financial ones? Looks like it’s here.

In a funk over lousy oil-induced earnings at Caterpillar, irritating Greek people and a blizzard, American stocks shed a few hundred points on Tuesday. In fact, so far this year (all 27 days of it), the S&P is down about 1%. In Toronto, despite the oil mess and the dingdongs at the Bank of Canada, the TSX is ahead 1.5%.

This volatility worries some people, especially those who waste their youth and kill brain cells reading sites like the Zero guy. (Suicide is far more efficient, plus you can cancel your Internet provider.) Well, days like these – when you have no idea what’s coming next – show exactly why a balanced and diversified portfolio works.

It’s simple. Take an account that has 60% growth assets (such as large-cap equity ETFs and real estate trusts) and 40% secure stuff (like bonds and preferred shares). When worried money comes out of dipsy stocks, it looks for a safe haven. So while equities get squeezed, bonds get plumped – and the price rises. Or when central banker poodles drop the interest rate, money looks for the best yields, jacking REITs, for example. Or when an unproven leftie who lives in a tenement with his unemployed spouse wins the Greek election, money moves into stable companies in safer lands. The TSX gains.

Since the middle of December, the ETF holding a basket of real estate trusts, XRE, has added about 13%. Bond funds (like XSB or XBB) are ahead 2-4%. Preferreds are up 2%. It all means a balanced and diversified portfolio is positive by several points in the last four weeks despite all the financial mayhem we’re reading about daily.

In contrast, if you like despair, moaning and endless nihilism as much as the wackos who post here daily, there’s always Calgary.

The situation just keeps getting worse, now with monthly sales plunged 36% and active listings swollen by 81.4%. There are 4,500 properties for sale, of which almost 2,700 materialized in the last few weeks. And while there have been Januaries when more houses were up for grabs, this sets a record for the greatest tidal wave of panicked sellers.

No wonder. It seems a safe bet now that oil prices aren’t going anywhere, except maybe down. Goldman Sachs says thirty bucks is possible. Other smarties are projecting a cheap-oil era lasting more than 10 years, with a semi-permanent imbalance between supply and demand. It’s the worst kind of news for the Albertan oil sands, where it costs a relative fortune to dig, heat and suck a barrel of the gooey stuff out of the earth. Of course, this is just what the carnivores in OPEC were hoping for. And are getting.

Suddenly the huge run-up in house prices in Calgary, and to a lesser extent Edmonton and across the line in Saskatoon, looks speculative and rash. When job security and incomes are at stake in a deflationary environment, it matters not how cheap interest rates get or if the banks drop their primes to 2.85% and mortgages to 2%. People used to six-figure salaries now contemplating EI realize quickly how easy it was to buy a house, and what a bitch it is to sell it.

This is the worst part of deflation. Real estate gets illiquid, and the debt grows more difficult to pay. Until you have been in a situation like this – and most people have not, especially the moist Millennials now clamoring for mortgages – you cannot imagine. It’s the deepest of wealth traps.

And expect it to grow deeper, says the brain trust at TD Bank. In fact these guys believe housing prices will fall in eight of 10 provinces this year, with only parts of Ontario and BC being supported by rate-induced hormonal house lust. Even there price gains will be in the 2-3% range

As for Alberta, says TD, expect a 20% sales plunge and prices lower by an average of 3.5% amid “extreme signs of weakness in the housing market.” Of course, it could be a lot worse. And I suspect it will be, given what’s happened in the last thirty days. The layoff avalanche, it seems, has not really started rolling yet. From the hottest province a year ago, Alberta is destined to be the most frigid in terms of growth, possibly slipping into recession.

Now, you may not be able to sell a house in Calgary this month, you also can’t live inside an ETF. So the message here is simple – buy real estate you can afford, as shelter, and never pretend it’s an investment strategy. Follow my Rule of 90 (ninety less your age = % of net worth in your home). Forget mortgage rates. They don’t matter. Ten-year home loans are 1.1% in Japan, and there’s no real estate boom. People in that land have learned in a weak economy nothing beats liquidity.

So, we now have a dangerous, two-city housing bubble, with every other market about to be spanked. Meanwhile, in a world of freaking bankers, morose cowboys, crashing loonies and swooning, house-horny virgins, the dude with the balanced portfolio swaggers serenely through the financial detritus. Make my day, he says.