Entries from May 2015 ↓

Six chilling charts

epa02552212 Motorcycle stunt champion Chris Pfeffier (L) and model Mai-Lin perform a 'Stoppie-Kiss' trick at the Hamburg Motorcycle Days trade show in Hamburg, Germany, 27 January 2011. The 17th Hamburg Motorcycle Days takes place from 28 to 30 January 2011 with many exhibitions and shows.  EPA/MAURIZIO GAMBARINI

epa02552212 Motorcycle stunt champion Chris Pfeffier (L) and model Mai-Lin perform a ‘Stoppie-Kiss’ trick at the Hamburg Motorcycle Days trade show in Hamburg, Germany, 27 January 2011. The 17th Hamburg Motorcycle Days takes place from 28 to 30 January 2011 with many exhibitions and shows. EPA/MAURIZIO GAMBARINI

Days ago the federal government, out of the blue and doing a 180, said they’ll sweeten the CPP. Sort of. If it happens, people could increase the money they pay into the system in order to get more out in retirement.

There are major hurdles with pulling this off, but never mind. We have bigger stuff to discuss today.

As you know, the Ontario left-wing Liberal government has gone down a similar road. The province is now building a pension plan taking another 2% from everybody’s income (to $90,000) which might pay about $10,000 a year in benefits in three decades. And then there’s Alberta. That province embraced a socialist NDP government promising to make the rich pay more (including higher taxes on corporations and people making over $125,000), while boosting the minimum wage in a pro-people, anti-business agenda.

In BC, twenty-five thousand people signed a petition to thump foreign investors in residential real estate. The mayor of Vancouver called on the province for a broad-based speculation tax and hundreds of thousands of #DontHave1Million tweets decreed the ‘unfairness’ of wealth inequality between the haves (Boomers) and the haven’ts (Millennials).

Spot a trend here?

These are the political reactions you can expect in a country where the economy reflects what the public wants and does. In reality, most people have been over-borrowing, over-consuming, under-saving and now increasingly realize they could be screwed. The bulk of middle-class wealth has been shoveled into a single commodity, houses, which could easily be imperiled by a faltering job market, global economic forces (like the price of oil) and, inevitably, higher interest rates. Most people are woefully unprepared for the rest of their lives, or desperately envious of those with wealth. This is the soil from whence the shoots of socialist thought sprout.

So, tax the rich. Clip corporations. Nail the speculators. Plus the Chinese. Governments have a responsibility to support the people. Even if citizens are the architects of their own situation. And so the plot goes.

As you plan your financial future, you might wish to reflect on the following six chilling charts, some of which were published by the federal government for the first time in the past few days.

1) The economy has been seriously losing altitude for an entire year. It‘s now in negative growth – shrinking, in other words. So why have real estate sales been torrid with average prices in Toronto, for example, up 10.7% since last May. Does this represent an increase in household debt and a greater concentration of wealth in one, over-valued asset?

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2) Here’s how the economy is changing. And not in a good way. While overall investment is down and exports have been whacked, households have increased their spending, largely fueled by debt. Business inventories, however, are increasing showing that sales have weakened, while imports have jumped. This is not sustainable.

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3) Here’s what the economy looks like when you strip out a bunch of the housing component. When businesses stop investing in equipment and expansion, where do we expect the new jobs to come from? This could help explain why we lost 19,700 paycheques in the latest monthly period.


4) House prices in Canada (red) compared to those in the US (blue). Increasingly the Canadian economy is becoming dependent on the real estate sector and industries associated with it. People in this country have convinced themselves the red line will go up forever. Guess what?


5) This explains the last chart. House values in Canada have far exceeded those in the States because we’re willing to swallow epic levels of debt to buy beyond our means. Blame it on cheap rates, greedy bankers or CMHC – but at the end of the day, this is what people have done to their own personal balance sheets. Risk, in extremis.


6) Finally, here are property prices expressed as a ratio of family incomes. This is what cheap debt and house porn does. Chasing real estate, speculating in its continued ascent, Canadians have gambled they can increase spending even as incomes fall behind.


With an aging population, scant savings and a weak economy, it’s hard to see how this ends well. Instead of diversifying or using cheap rates to trash debt, we’ve done the opposite. Never before have your neighbours owed so much nor owned so narrowly. Now they want to elect politicians promising public policy to wipe away their mistakes by taxing others and providing lifelong security.

Govern yourself accordingly.

The accident

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He’s been out of the country on work assignment for the past four years. Now he’s back. Shocked. “I can’t believe the euphoria in the real estate market,” says Jordan. “Keeping in touch with the headlines while away doesn’t do this story justice.”

So, he rents now. Big social mistake. “Most consider me a peasant of sorts for renting because “the monthly carry to buy is no more than rent”. For starters that statement is not true for most, and even if it were you are looking at rate renewal risk, ownership of an asset at highly inflated prices driven by ultra low rates and for most a single asset strategy for building wealth,” he explains.

“The scariest part is the people with these views are not stupid or uneducated, however I would suggest financially illiterate. As a society we need to do a better job of educating our people to make better financial decisions, the system has failed many and there will be much pain ahead. I’ll be happy to watch this car accident from a distance.”

Well, I heard from Jordan on the same day that some lights went out in Alberta. Across the nation, in fact. Logic tells us that a collision with destiny may be closer than it was a few months ago. Here’s why…

The economy’s blowing smoke. GDP (gross domestic product, a measure of economic growth) shrank 0.6% on an annualized basis in the first three months of 2015. That’s a lot. But it gets worse. Business investment dropped almost 10%, thanks largely to misery in the resource sector. The guys who support these industries are also getting creamed – activity down about 18% in both February and March. Then, as you know, we lost 19,700 jobs in April as retailers punted an army of workers amid lousy sales

And while the economy overall was in Preparation H mode with shrivelling job prospects, guess what people were doing? You bet. Buying houses with borrowed money. Residential investment expanded by 4% – a big number – thanks in part of unfettered condo construction. As I’ve also told you, household debt bloated considerably – by about 8% – during the same period GDP was shrinking .6%.

Do these people have any idea what they’re doing? Of course not. Jordan sees that. They’re probably hooped.

Now, what about America? News also arrived that the US economy shrank an equal amount in the first three months of the year. So are things are messed up there, too? Does this mean the Fed will never raise interest rates and a recession is coming?

Nah, it doesn’t. Incomes actually grew in Q1, payrolls rebounded by a strong 223,000 new jobs in April and corporate profits advanced 3.7% from the same time a year earlier. Car sales took off, selling at an annualized rate of about 17 million. Orders for capital goods increased in both March and April showing corporate investment in increasing, while going in the opposite direction here. Did you hear GM is spending half a billion to build a new Corvette factory, just for Boomer guys with hormone problems who like to wear ball caps and gold chains? And the US housing market is doing just fine – prices up 5% nationally – despite a jump in mortgage rates. New home sales are ahead 6.8% and the number of pending deals in the resale market is at the highest point in nine years.

The unemployment rate is down to 5.4%, or about half of the level after the GFC and the best number since the spring of 2008. Applications for jobless benefits – which have spiked in Alberta – are at 15-year lows south of the border.

So the consensus of economists is that the US economy will rebound, and grow at the rate of 2.7% for the current quarter, which means a few things. First, I sure hope you took the advice offered here two years ago to position more of your portfolio in American and international assets than Canadian ones. Second, the interest rate hike signalled by the Fed for later this year is still on. Third, never, ever, ever believe what you read in the comment section of this pathetic blog.

Unless it agrees with me.

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