A Quick Look At Saskatchewan Commodity Prices, Commodity Crash Would Pop Housing Bubble

If you don't know it already, there was a commodity bubble in 2008.  And while prices in 2011 are not at the highs of 2008, some commodity prices are quite a bit higher than the historic average.

Here is a list of Rapeseed Oil, Wheat, Barley, Potash,Uranium Oil and Natural Gas Prices since 1995.  Some of Saskatchewan's main commodities.

These 3 agricultural commodities experienced their peaks all at the same time in 2008.  They moved up since bottoming in 2009, but have lost some sparkle in the last few months.

Every peak in natural gas occurred in the winter due to demand except for the June 2008 peak which was because of speculation. It has not recovered.

Oil experienced the ultimate asset bubble in 2008, subsequently crashed at the end of 2008, rose from 2009 until July 2011 and has lost about $20 bucks a barrel since July and sits at about 80 bucks a barrel.

Uranium was also in a classic bubble in 2008.  Then it crashed, found bottom at the end of 2009 and rose a bit until the Japan meltdown.

Potash, Saskatchewan's pink gold.  In the commodity bubble of 1981, Potash hit $110.00 a Ton.  The price then crashed and did not hit $110.00 for another ten years.  In the year 2003, the price was $112.50.  But then it started to slowly climb and by July 2007 it hit $203 a ton.  It then only took 8 months to hit $445 a ton and then 10 months later it hit $872.00.  Certain spot prices hit over $1000!  A classic bubble.  It, along with all commodities crashed in mid 2008.  Potash found a bottom and has rose since to just under $500 a ton.

Most people say resources are a huge part of Saskatoon's economy and they are right as our resources fill the provincial coffers which then trickles down.  Just for an idea how much resources impact Saskatchewan Government revenues take a look here.  At the peak of the commodity bubble in 2008, resource revenue was $4,612,408,000 , in 2009 resource revenues dropped to $1,910,624,000 after the market crash.  For 2010, resource revenues rebounded rather nicely to 2,527,799,000. Off the peak of 2008, but the second strongest on record.

 

Whatever way you cut it, the world is slowing and the possibility of a global recession is quite high.  In that scenario, commodities will fall even further. Throw in a Greece default and commodities take an even bigger hit. The other wild card is China.  China is slowing and the question is whether it is a soft landing or hard landing.  A hard landing in China has been estimated to lop 30% to 40% off of commodity prices.  Another commodity crash would have a synergy affect on Saskatchewan that would negative impact Government spending all the way down to consumer spending and confidence.  

And the housing bubble?  Yeah it would definitely pop. One just has to remember the fall of 2008 and when commodities crashed so did confidence and so did housing.  It was then propped up with low interest rates by the Feds and the home reno tax credit which helped put confidence back into housing, then credit followed and housing rebounded to where we are today.  But we also have to remember that the housing bubble in Saskatchewan started at the end of 2006 while the Potash ( our main commodity) bubble really did not start until Dec 2007.  Potash went from $240 in Dec 2007 to $870 by Feb 2009.  The launch in house prices has always been the result of more mortgage debt.

* The value in mortgage debt taken out in the year 2005 was 2.7 Billion.

   The value in mortgage debt taken out in the year 2010 was 6.7 Billion.

For anybody that says that more mortgage debt is justified because the Province is growing in population GDP,and wages, then can they explain this graph?

Mortgage loan values doubled at the same time that house prices doubled.  Is there any reason why Steven Keen says " people do not buy houses, people with mortgages buy houses".

The Widening US and Canada House Price Gap

From the Globe and Mail "The Widening US and Canada House Price Gap"

The gap between Canadian and American house prices - they're well above pre-recession levels in Canada and still depressed in the United States - continues to grow. 
Research by deputy chief economist Douglas Porter of BMO Nesbitt Burns shows a "staggering turnabout" from the 1990s and the first half of the last decade, when American prices were higher.
His research compares U.S. prices measured in Canadian dollar terms, and he notes that the two aren't perfectly comparable because median prices, used for the U.S. are typically lower than average prices, which were used for the Canadian reading. 
"The average home price in Canada is now gliding along at $360,000, more than twice the median existing home price in the U.S. (converted into C$ terms) ... Nothing says prices need equalize, but a gap of more than 2:1 is not sustainable. Three ways it can narrow: a) the C$ falls, b) U.S. prices recover, or c) Canadian prices drop. Or, some of the above, or all of the above." 

More reading on this
Comparing US and Canadian Housing Markets Using Some Economic Housing Measurements

More Saskatchewan Potash Mines?; But Has The Potash Money Train Passed Us By?

More Saskatchewan Potash Mines?
The Star Phoenix is reporting that BHP Billington is eyeing up to 5 more Potash mines in Saskatchewan.

BHP Billiton Ltd.'s ambition is to build five new potash mines in Saskatchewan, all potentially as large as the huge Jansen project proposed near Lanigan, a top executive said Tuesday.

 "We just think there's the potential for three, four, five or more mines in Saskatchewan, and we think the demand is growing at the appropriate rate to be able to support that," Ryder said.

I think that it is great that more investment is pouring into this province.  But I seriously doubt worldwide demand will continue to grow like it has to justify 5 new Potash mines in the next decade or so. Prices of commodities have been juiced by cheap credit, the appetite for more debt and speculation over the past half decade. To expect the same thing for the next decade is foolish.  History teaches us that growth for any one asset does not grow in a straight line.  With a global recession all but certain, the questions are how deep and for how long.  And we can not forgot the possibility of a hard landing in China.  All this would drive the price of Potash down.  If that happens, maybe a couple of the projects will go forward but not all.   We also have to remember that Potash is not labor intensive like the oilsands.  For example, Potash Corp employs 5,000 people in the province.  To believe that Potash will save Saskatoon's housing bubble from popping is foolish.

Potash bubble anyone?

But Has The Potash Money Train Passed Us By?
While I will not get into the private vs public debate, here is an article that makes you say "what if"
From the Rabble.ca "Privatizing Potash Was a Mistake"

The greatest tragedy in BHP Billiton's $38.6-billion (U.S.) bid for the Potash Corporation of Saskatchewan (PCS) is that the Government of Saskatchewan previously sold PCS for just $630 million. This privatization was the worst fiscal decision in the province's history and has been aggravated by subsequent royalty giveaways to private potash companies.
PCS was created in 1975 as a provincial Crown corporation. The Saskatchewan government privatized it in 1989, selling all of its shares by 1994.
Presumably, the proceeds were deducted from the provincial deficit. Borrowing $630 million at 10 per cent interest, compounded over two decades, would have added $4.2-billion of provincial debt by now.
In fact, provincial bond rates have fallen far below 10 per cent since the early 1990s. Also, had PCS shares not been sold, dividend payments to the government would have partly offset interest charges on its additional borrowing. Therefore, $4.2-billion is a very optimistic estimate of privatization's fiscal benefit.
The fiscal cost of privatization is the amount that PCS would be worth had it remained a Crown corporation. Since privatization, PCS has acquired additional potash mines in Saskatchewan and New Brunswick, phosphate and nitrogen facilities in the U.S. and Trinidad, and shares in other fertilizer companies.
During the 1990s, Crown corporations were encouraged to invest outside the province. Therefore, PCS could have made the same acquisitions and developed along the same lines had it remained a Crown corporation. If so, the fiscal cost of privatization is at least $40-billion (the Canadian-dollar value of BHP's offer), which is about 10 times the maximum fiscal benefit.
Of course, privatization supporters would claim that PCS has been better managed as a private company. Had it remained a Crown corporation, PCS might have lacked the initiative or financial ability to expand.
Depending upon which assumptions one accepts, the costs of privatization exceeded the benefits by between $18-billion and $36-billion. In other words, the Saskatchewan government gave up between $17,000 and $35,000 for every man, woman and child in the province.
Saskatchewan's potash reserves still belong to the public. Unfortunately, the provincial government has been slashing the royalties charged to PCS and other companies that mine these reserves. Saskatchewan's misguided royalty holidays on increased potash production in 2003 and 2005 simply prompted the U.S. and New Brunswick to cut their potash royalties.
This race to the bottom has robbed Saskatchewan residents of an appropriate return on their resource. The potash industry extracted the same tonnage from Saskatchewan in 2005 and 2008. Entirely due to price increases, this output was worth $4.7-billion more in 2008 than in 2005.
Most of this gain should have accrued to the people of Saskatchewan, who own the resource. Yet provincial potash royalties rose by only $1.1-billion between the 2005 and 2008 fiscal years.
The provincial government then refunded much of this money to PCS and other potash companies following the economic crisis. As a result, royalty revenues actually turned negative in the 2009 fiscal year, even though the dollar value of potash sold from Saskatchewan remained higher than it had been in any year before 2007.
Of course, profits in excess of royalties are subject to corporate income tax. However, the Canadian government is slashing its corporate tax rate from 29 per cent in 2000 to just 15 per cent by 2012.
Between 2006 and 2008, Saskatchewan cut its rate from 17 to 12 per cent. Wholly or partially reversing these corporate tax breaks would give the public a more significant fraction of future potash profits.
The prospect of a PCS takeover underscores the folly of having privatized Saskatchewan's crown jewel. Whether or not a takeover occurs, governments should strengthen their royalty and tax regimes to collect a fairer share of potash revenue for the public.
Erin Weir is a Saskatchewan expatriate working at the Canadian National Office of the United Steelworkers union, which represents most of Saskatchewan's potash miners. This story was first published in the Regina Leader-Post. Weir's blog can be found on the Progressive Economics Forum website.

However, the mines that PCS owned in 1989 still account for 80 per cent of its potash production and capacity. Since 70 per cent of the company's current gross margin is from potash (rather than phosphate and nitrogen), these mines still provide at least 55 per cent of overall profits today.If PCS had simply held onto those historic assets, it would now be worth more than half of today's value. Even assuming that PCS would have completely stagnated as a Crown corporation after 1989, the fiscal cost of privatization was still more than five times the maximum fiscal benefit.

Macleans: What's The Use Of Saving Money?

From Macleans.ca : What's the use of saving money?: How years of ultra-low interest rates have punished savers, rewarded spenders, and now might be smothering any hopes of recovery

Steven Patterson and his family moved to Vancouver from Cambridge, Ont., in mid-2008, just as the financial crisis hit. After years of scrimping and saving to pay off their first mortgage, they had earned a tidy profit when they sold the Cambridge house and put the proceeds into GICs, where the money would be safe and easily accessible should they decide to buy another home in B.C. Three years later, Patterson, a 42-year-old IT manager, is still sitting on the sidelines, renting, while real estate prices march ever upward in a city where a three-bedroom bungalow covered in warped siding can fetch $1 million.
That might seem like a prudent move in an uncertain economy, but Patterson says his cautious approach has come at a steep price: all his money is steadily being eaten away by inflation, which the meagre interest income from his GICs can’t cover—particularly after the taxman takes a cut. Meanwhile, several of Patterson’s friends have taken advantage of those same low interest rates, loaded up on debt, and bought into Vancouver’s frothy housing market in recent years. And they have enjoyed a windfall—at least on paper—as the value of their homes continues to climb. As for Patterson, “I’m only a few thousand dollars ahead—minus inflation,” he says, clearly frustrated. “So actually, I’m way behind, and I don’t have a house.”
Welcome to the world of ultra-low interest rates, where profligacy is richly rewarded and saving is, well, for suckers. Those who’ve opted to be austere with their personal finances have found themselves on the losing end as governments and central bankers have worked to get people to borrow and spend in the wake of the global recession. While emergency interest rate cuts were to be expected after the financial crisis seized up lending markets, it’s been nearly four years since central banks started slashing rates to the lowest levels in history. For that matter, over the last 10-year period, following the 9/11 terrorist attacks, the Bank of Canada’s benchmark interest rate stayed above four per cent for just six quarters (in 2006 and 2007), while the average headline rate of inflation over that time was 2.1 per cent.

As a result, those saving money have seen almost nothing in the way of returns for a painfully long time. In fact, after accounting for inflation, anyone who dares to be prudent risks seeing the value of their money decline. If one were to put $10,000 into a five-year GIC at two per cent this year, and assume headline inflation goes no higher than the current rate of 2.7 per cent, the future value of that investment in 2016 will have shrunk to around $9,670. (The consumer price index the Bank of Canada uses when setting interest rates is lower than the headline rate because it excludes volatile items like fuel and food, which is fine, if you don’t drive, or eat.)
For seniors and others living on fixed incomes in particular, low rates threaten to wipe out their savings. Yet it’s also depressing for those in the second half of their careers who don’t have an appetite for risk but feel they now have no other choice. “People in their 50s are worried about what they’re going to retire on,” says Susan Eng, vice-president of advocacy at CARP, which works on behalf of aging Canadians. Between the carnage in stock markets and the collapse of interest rates, “there’s a huge amount of anxiety. You’re asking for a lot of trouble with this situation.”
Some will argue people like Patterson are simply bitter because they didn’t buy into Vancouver’s soaring housing market. And yes, those who take risks should enjoy the potential for greater rewards. That principle is at the heart of capitalism. Only, in the current environment where central banks have pushed down interest rates to abnormally low levels, and government policies encourage consumption over thrift, the dynamics of risk and reward have been severely distorted.
This isn’t how it’s supposed to work. From the moment children are given their first penny, it’s driven into us that saving is a virtue and the path to financial security starts with that ceramic piggy bank on the dresser. Only now, with policy-makers in a desperate race to reignite economic growth, all that has been turned on its head. Yes, Bank of Canada governor Mark Carney and Finance Minister Jim Flaherty have repeatedly warned Canadians not to take on too much debt, but their policies, and those of their colleagues in countries like the United States and Great Britain, have had the opposite effect, encouraging people to buy homes, cars, flat-screen TVs or take a plunge into volatile stock markets—anything, that is, but save.
“We’ve got ourselves into a position where debt and spending seem to be highly valued, but saving, which is prudent and helps people plan for their futures, seems to be almost looked down upon,” says Simon Rose, who works with Save Our Savers, a British organization that’s taken up the fight for downtrodden penny counters. “It’s unfair that the problems of the economy should be disproportionately shouldered by savers rather than those with a tendency to borrow too much and get into trouble.” No one is saying Canadians should abandon thrift and go on a wild spree of gluttonous consumption. Indeed, Ottawa has set up tax-free savings accounts to encourage people to save. But the competing priority of spurring economic activity means the interests of savers have taken a back seat and made it that much harder to act responsibly. What’s more, while central bankers have undone basic thinking about saving in the name of juicing the economy, a growing chorus of critics claim that strategy has not only failed to turn things around, but the dogged pursuit of low rates might be weakening the recovery
Sometimes Lee Tunstall wonders why she bothers saving at all. A child of parents who grew up during the Second World War and instilled in her the importance of living within her means, Tunstall, a consultant in Calgary, has rented the same apartment for 17 years and dutifully contributes to her conservatively managed RSP account. Yet all around her, friends have piled on huge mortgages and run up towering lines of credit debts in the past few years to buy homes and new Bimmers for the driveway. “If you are a saver you’re absolutely losing money to inflation, and if you go into the markets you’re losing money there too, so why bother?” she says. “Sometimes I think, ‘Why don’t I just join the herd and do what everybody else is doing, buy the toys and live it up like everybody else?’ ”
Tunstall would have plenty of company were she to give up her frugal ways. Gone are the days when Canada was a nation of savers. In 1980, the personal saving rate peaked at above 20 per cent and was still around 13 per cent in 1995. Today it stands at just 4.1 per cent. At the same time, over the last decade Canadians have increasingly relied on debt to maintain their lifestyles. The average household now owes $151 for every $100 of disposable income, a higher level than even American households reached in 2007 as the air rushed out of the U.S. housing bubble. This week, Moody’s, the credit-rating agency, said it is increasingly uneasy with the consumer debt mountain rising in Canada. “We are concerned that Canadians are relying on low interest rates to support high debt levels,” the agency said in a statement.
Much of that growth in debt has taken place since 2007, when the Bank of Canada cut its overnight rate from 4.5 per cent to a low of 0.25 per cent in 2009. The dramatic cuts, along with stimulus programs targeted at the real estate sector, revived house prices, which had begun to tumble. As of June, the Teranet-National Bank House Price index has nearly doubled over the last decade, while in markets like Vancouver, prices have soared a whopping 140 per cent. That shouldn’t have been a surprise; reckless behaviour gets a boost when government and central bank policies punish individuals for not taking part. But while the cuts were a boon to mortgage borrowers, they’ve sideswiped the saving crowd.
One way to measure the impact is to look at how much interest income is being lost as a result of low rates. Stephen Johnston, a Calgary money manager, estimates that with roughly $1.2 trillion on deposit at the banks and rates roughly three percentage points below their historical average, savers are losing out on $30 billion to $40 billion every year in interest income. He argues this amounts to a massive subsidy for the country’s banks, since the rate depositors are paid to part with their money is far less than what the banks can earn lending that money out to other people as mortgages. “Deposit rates now cost the banks nothing, but that’s not free,” he says. “Someone else is paying the price, and it’s little old ladies and people on fixed incomes who can least afford it.”
As bad as the situation is here, it’s even worse in the U.K. Last month, figures from the Bank of England showed that since 2008, when the central bank slashed the interest rate to 0.5 per cent, savers there have lost out on $66 billion of interest income. What’s more, the bank estimates mortgage borrowers have benefited to the tune of $79 billion. Meanwhile in the U.S., where rates are virtually zero and the Federal Reserve recently vowed to hold them there until 2013, the suffering inflicted on the saving crowd is especially severe. In a recent analysis for the American Institute for Economic Research, William Ford, a former president of the Federal Reserve Bank of Atlanta, estimated American savers have seen anywhere from US$256 billion to US$587 billion in potential income vanish. “None of the supposedly favourable effects [of low interest rates] are actually happening, and instead it’s having a very strong negative impact on savers,” Ford told Maclean’s. “It’s killing savers. Retirees are getting negative returns on their life savings.”
With Canada’s overnight rate at an almost-princely one per cent compared to the U.S., savers have at least had that going for them. Unfortunately, Canada’s economy shrank by 0.4 per cent in the second quarter, reviving calls for more rate cuts. At the very least, Carney now says the need for a rate hike has been “diminished.”
But as policy-makers consider a fresh round of monetary easing, some in the U.S. are warning that low rates, and their punishing effect on savers, could be doing the economy more harm than good.
While the Bank of Canada’s interest rate policies have been credited with helping Canada quickly recover from the recession, in America unemployment is still stubbornly high while house prices have continued to fall. Raghuram Rajan, a finance professor at the University of Chicago and the former chief economist at the International Monetary Fund, sees this as evidence that perpetually low rates—a long-established tool for repairing broken economies—are simply failing this time around. Instead, he believes an overlooked cause of the recovery’s sluggishness lies with America’s devastated savers.
Consider the example of China for why that is, says Rajan. For years, China has kept interest rates artificially low—well below the rate of inflation—partly to drive down its currency but also to make it easier for manufacturers and builders to access capital. That’s had the unforeseen consequence of sapping consumer spending, too, which has shrunk as a share of the economy from 50 per cent in the 1990s to just 35 per cent today. When Chinese families who are saving for their children’s education, or to take care of an elderly parent, see their savings eroded by low rates and inflation, they have responded by spending less and saving even more.
Rajan believes the same phenomena could be at work in America today. “Your traditional spenders are hesitant about splurging again, while low rates mean your savers are cutting back because their incomes are falling,” he says. “Giving savers a better deal by raising rates from abnormally low levels may help rather than hurt the economy.”
For its part, the Bank of Canada is in a difficult spot. If it leaves rates low indefinitely, there’s the very real risk more Canadians will decide saving is a suckers’ game and start to pile on debt. Yet when the bank eventually does raise rates, which it must, someday, over-indebted households could spark a fresh crisis. “Previous generations used to buy a house that was twice their household income, but now families are spending 10 to 12 times what they earn,” says David Trahair, a financial author whose new book, Crushing Debt: Why Canadians Should Drop Everything and Pay Off Debt, is due out in November. “The central banks are in a bind because they can’t increase interest rates or it will be extremely punitive to these people with mountains of variable rate debt.”
Whatever happens, Ritchie Hok, an actuary living in Ottawa, is convinced savers will ultimately wind up paying the price for others’ imprudence. At the peak of the U.S. housing bubble, Hok lived in Minneapolis and saw the excesses first-hand. While there he resisted those who urged him to get into the market; a wise move given prices are down 40 per cent there. Now that he’s in Ottawa, though, he’s hearing all the same arguments for why he should take advantage of low rates and buy a house before prices rise even further. He’s convinced Canada’s housing market is a bubble that will eventually burst, and when it does, policy-makers will rush to people’s rescue. “My fear is that most people in Canada are now debtors and not savers, and so governments will enact policies to help them because they make up most of the population,” he says. “Savers may get screwed on the way down, too.”
If Hok is right, the frugal few could be in for even more pain ahead. Why is it again that it pays to save?

Scotiabank: Canadian Housing Market Slows While International Markets Stumble

Scotiabank is out with a new research paper here

Some key points:

The renewed slowdown in global economic activity is putting further downward pressure on already-weak residential property markets across much of the developed world. In the majority of the major markets we track in North America, Europe and Australasia, inflation-adjusted home prices declined on a year-over-year basis in the second quarter of 2011 (chart). While Canada’s hot housing market also has begun to cool, it remains a
notable outperformer.

We expect global housing demand to remain moribund until the global economic recovery gets back on a firmer footing and some financial market stability returns. An oversupply of owner-occupied housing, due to overbuilding and rising foreclosures, remains problematic in many markets, adding to the downward pressure on prices. A generally more cautious lending environment also will hold back the pace of recovery.

Canada’s housing market stands out in its resilience and longevity. Average inflation-adjusted existing home prices were up 5% y/y in the April-June period, on par with the first-quarter’s pace of appreciation. Data for July and August point to continued firm but stable sales through the late summer, alongside a levelling out in prices.Ultra-low interest rates will continue to support affordability in the face of record high prices. Nonetheless, heightened economic uncertainty combined with recent signs of a loss of momentum in Canada’s jobs market could keep some potential buyers on the sidelines for the time being. On balance, we anticipate a modest slowdown in the volume of sales transactions heading into year end, alongside relatively flat prices.

Is Negative Gearing More Prevalent in Saskatoon Now

Your first question is likely, "what the hell is negative gearing?"
From Investopedia 

What Does Negative Gearing Mean?
Borrowing money to buy an investment asset without receiving enough income from the investment to cover the interest expenses and other costs involved in maintaining it.  Depending on the investor's home country, the shortfall between income earned and interest due can be deducted from current income taxes. Countries that allow this tax deduction include Canada, Australia and New Zealand.

Investopedia explains Negative Gearing
Negative gearing most often occurs in rental properties, where the rental income received isn't enough to cover the interest costs on borrowings plus expenditures toward property maintenance and upkeep.

Negative gearing only becomes a profitable venture when the property is eventually sold, and a prerequisite is that property values are rising, not falling or holding steady.

Many investors who speculate this way will purposely seek out negative gearing for the tax deductions in the hope that they will make a profit when the property is sold for a capital gain.

Investors considering this type of arrangement need to have the financial stability to fund the shortfall out of pocket until the property is sold and the full profit can be reached. Also of utmost importance is that the interest rate is locked in from the beginning or, if the borrower's interest is calculated on a floating index, that prevailing rates remain low. 

Let's take a look at an example
Here we have a house in Westview.  Rent is 1400 a month.  1000 sq feet. 3 bedrooms.  A comparable house on MLS is listed for $300,000.  Would someone who bought this be a negative gearer?

In order to buy a investment property, a buyer needs 20% down, so they would need $60,000 for a down payment.  So a 3.75% 5 year term mortgage over 25 years would produce a mortgage payment of $1230.  Plus add in monthly taxes of $166, homeowners insurance of $80, plus maintenance costs of $200 equals $1676.  One should also add the economic cost of a loss of 1 months rent in a year which pushes the monthly cost to $1792.

Negative gearing WITH a rent bubble! Wow! We all know that incomes have not kept pace with rents and rents have not kept with house prices.  That is how big the housing bubble is in this town!  And I do not need to do an example with an investment property bought in 2008 with 0 down and a higher 5 year interest rate which would show even more negative gearing.

Some recent investors, speculators in Saskatoon's housing market might be breaking even, while many would be losing money each month, hoping house prices will rise so they can receive a gain when they sell.  Add in selling costs and very few will break even.  But with negative gearing laws in Canada, at least these guys can deduct the loss.

Just how prevalent is negative gearing in Saskatoon?  We can only guess. I do not think it is that big.  But it is out there and those people are suffering.

Some interesting charts on European bank exposure with Italy and Greece

Europe bank debt in lurid detail
by GolemXIV

For anyone who thinks that crushing the Greeks with even more dent and even more austerity will somehow ‘save’ Europe’s insolvent banks here from Reuters is why it won’t.
First here’s Europe’s bank exposure to Greece:

Remember this isn’t the fabled public debt wracked up by countless lazy, feckless lay-abouts and their ugly children all determinedly doing nothing and expecting to be given flat screen televisions and hospital care they don’t deserve. This is debt created by, agreed to, marketed by and because of which huge bonuses were awarded to,  private bankers throughout Europe.
I think that shows quite clearly why French banks have been pulverized and the size of the crater on whose edge they teeter. But let’s imagine Germany ignores the rising tempest of public anger and throws its money into the hole. Now let’s look at what comes next, Italy.

Oops! France still collapses. Italy is ruled by a cretin who gives visas to men who pimp for him so he can ‘Carry on Fornicating” while Italy, never mind Rome, burns.
And why will Italy collapse?  This is why.


Over 400 billion dollars worth of Italy’s debt has a maturity of ONE year. Another 250 billion in TWO years.
And just in case you were thinking it was all France and Italy,

“‘Germany’s 10 biggest banks need 127 billion euros ($175 billion) of additional capital’, German newspaper Frankfurt Allgemeine Sonntagszeitung reported, citing a study by economic research institute DIW.”

In case you want to see more of the images,they come from a very good Reuters graphic of the total European debt debacle which you can see in its horrid entirety here, here and here. The first two are part of the same group but I’m giving you different entry points. Then third is a larger package. And this is a ZeroHedge article in case you want to see what people are saying over there.

The Biggest Bubble of All Time: Commodities Market Speculation

The world is not crashing.  But the markets are.  And the housing bubble in Canada will pop.  For those that think that Saskatoon is immune because of our resources, you may want to rethink that.  Europe, US and Canada are most likely headed for a recession and China is slowing down.  With that scenario, commodities will fall.  How much?  Well, it depends on how big the commodity bubble is.  Here is a great article on the commodities bubble that is a definite read.
From the EconoMonitor 
The Biggest Bubble of  All Time: Commodities Market Speculation

Sorry, this is a day late (but hopefully not a dollar short).
Back in fall of 2008 I wrote a piece examining what was then the biggest bubble in human history: http://www.levyinstitute.org/pubs/ppb_96.pdf.
Say what? You thought that was tulip bulb mania? Or, maybe the NASDAQ hi-tech hysteria?
No, folks, those were child’s play. From 2004 to 2008 we experienced the biggest commodities bubble the world had ever seen. If you looked to the top 25 traded commodities, you found prices had doubled over the period. For the top 8, the price inflation was much more spectacular. As I wrote:
“According to an analysis by market strategist Frank Veneroso, over the course of the 20th century, there were only 13 instances in which the price of a single commodity rose by 500 percent or more. For example, the price of sugar rose 641 percent in 1920, and in the same year, the price of cotton rose 538 percent. In 1947, there was a commodities boom across three commodities: pork bellies (1,053 percent), soybean oil (797 percent), and soybeans (558 percent). During theHunt brothers episode, in 1980, silver prices were driven up by 3,813 percent. Now, if we look at the current commodities boom, there are already eight commodities whose price rise had reached 500 percent or more by the end of June: heating oil (1,313 percent), nickel (1,273 percent), crude oil (1,205 percent), lead (870 percent), copper (606 percent), zinc (616 percent), tin (510 percent), and wheat (500 percent). Many other agricultural, energy, and metals commodities have also had large price hikes, albeit below that threshold (for the 25 commodities typically included in the indexes, the average price rise since 2003 has been 203 percent). There is no evidence of any other commodities price boom to match the current one in terms of scope.”
Now here’s the amazing thing about that bubble. The staff of Senator Joe Lieberman and Representative Bart Stupak wanted to know whether the bubble was just due to “supply and demand”. Relying on the expertise of Frank Veneroso and Mike Masters (two experts on the commodities market), I was able to conclude beyond any doubt that it was a speculative bubble driven by a “buy and hold” strategy adopted by managers of pension funds. Hearings were held in Congress, with guys like Mike Masters testifying as well as representatives from the airlines and other industries.
The pension funds panicked, realizing that their members would hold them responsible for exploding prices of gasoline at the pump. Pension funds withdrew one-third of their funds and oil prices fell from about $150 per barrel to $50. If you want to read the detailed analysis, go to my paper cited above—it has to do with commodities indexes, strategies pushed by your favorite blood sucking vampire squid (Goldman Sachs), and futures contracts. It gets wonky. To make a long story short, the bubble ended in fall of 2008.
But then the crisis wiped out real estate markets and the economy. Managed money needed another bubble. They whipped up irrational fears of hyperinflation that supposedly would be caused by Helicopter Ben’s QE1, QE2, and the newly announced QE3. Better run to good “inflation hedges” like gold and other commodities. That did the trick. The commodities speculative bubble resumed.
And boy, oh boy, what a boom. An April report by expert Jeremy Grantham looks at the last decade’s bubble in commodities; Frank Veneroso expands upon that in a more recent report. Here’s the elevator speech summary. Take the top 33 commodities that are globally traded—everything from gold and oil to to rubber, flaxseed, jute, plywood, and something called diammonium phosphate. Over the past 110 years, an index price of these 33 commodities has declined at an annual rate of 1.2% per year. (Sure there are variations across the commodities—this is the average. And so much for inflation hedges. Commodities prices fell—they did not keep up with inflation. If you liked negative returns, commodities were a good bet.) Although demand for these 33 commodities has increased a lot over the century, new production techniques plus successful exploration has resulted in a declining price trend.
Further—and this is a bit surprising—deviations from the trend follow a normal distribution (you learned about this in high school; it is a bell curve with nice properties; chief among these is the finding that about 68% of outcomes fall within one standard deviation; about 95% fall within two standard deviations (once a generation); and you’ve got just about a snowball’s chance in hell of finding outcomes that are three or four standard deviations from the mean).
But what is more surprising is that over the past decade, the price rises you find for these 33 commodities are just about beyond the realm of possibility—2, 3, and 4 standard deviations away from trend. It is a boom without any precedent. Quite simply, nothing even close has ever happened before, in any market, including hi tech bubbles and real estate bubbles.
By now you’ve all read about black swans with fat tails—a reference to supposedly “unexpected” and highly improbable default rates on subprime mortgages and other toxic waste assets. (Way out the normal distribution’s “tail”.) As an insider quipped, you had once in 100,000 year events happening every day. But that is misleading. These were junk assets that from the get-go had nearly 100% probabilities of default—NINJA loans and so on. The models were flawed, indeed, fraudulent. That was all a scam. Those weren’t black swans with fat tails—they were Hindenburg blimps filled with explosive hydrogen just waiting for someone to light a cigarette.
By contrast, in the case of commodities, this is real stuff (not IOUs of deadbeats with no prospects). Barrels of oil that someone really wants. Corn to turn into pig and steer fat, or fuel for Midwest automobiles. Or gold to be hoarded by the University of Texas. There really is a demand for it; and someone produces it.
 Yes, commodity bubbles happen, but eventually reality sets in and brings the price back down to reality. You don’t get 3, 4, and 5 standard deviation events. A four standard deviation price rise falls outside 99.994% of all outcomes—one in 100,000 years; a five standard deviation price rise is about one in 2 million years. That pretty much covers the time since our ancestors beat things with big sticks.
But wait a minute. The standard deviation of price rises for iron (5), coal, copper, corn and silver (4), sorghum, palladium, and rubber (3.5), flaxseed, palm oil, soybeans, coconut oil, and nickel (3), and so on down through jute, cotton, uranium, tin, zinc, potosh and wool (2) are so unlikely that they quite simply could not have happened. Individually. Together, the likelihood that we’ve got an unlikely boom in almost all of the 33 commodities? All at the same time? Impossible. Cannot happen. Not in the lifetime of our sun, let alone our planet.
But it did.
Why? China. Peak oil. Supply disruptions. Some markets cornered by speculators. Market manipulation by oligopolistic suppliers.
Yes, OK, those have played some small role. But remember, we are in the worst global slowdown since the 1930s. I will not go through all the data, but demand for most commodities is actually slumping. For many there is substantial excess supply. And China wants to slow. China is still largely a socialist society. China basically does what it wants to do. China will slow.
And yet the prices rise far beyond anything that has ever happened before. Beyond anything that can happen.
Why? Financialization. Just as homes became financialized (in many ways, including serving as the collateral for “ATM” cash-out home equity loans), commodities became thoroughly financialized. (So did healthcare and death, with peasant insurance and death settlements—topics for another day.)
Here’s the reason. Believe it or not, commodities markets are tiny; except for soy, oil, and corn they are smaller than tiny. Managed money is huge—tens of trillions of dollars floating around the world looking for high returns. US pension funds alone are three-fourths of US GDP–$10 trillion give or take. If you put even a fraction of managed money into commodities index funds, you blow up the prices.
The weapon of choice is the futures contracts—essentially you buy commodities for future delivery (a couple of months from now). When they mature, you do not take delivery but instead sell the contract to someone who actually wants the commodity, and roll into another futures contract. This is what pension funds, and so on, have been doing. If prices rise, you always win on the roll (sell for more than you paid).
The typical argument is that this cannot affect prices since for every buyer (long position in the contract) there must be a seller (short position). The balance between these two keeps prices in line with “fundamentals”.
In normal times, yes, more or less. But here’s the deal. What if I supply diammonium phosphate (whatever the heck that is) and you are speculating that the price will rise. You and every other pension fund and client of Goldman Sachs. I want to lock in the expected price rise, so I am a happy seller of future commodities. If prices go down, I do not get hurt—I locked in the price rise and have the right to sell the commodity at the higher price. And so even as prices leave all fundamentals, the producers continue to sell futures contracts to lock in higher prices.
 I win, you win, we all win with price appreciation.
Now, to be sure, the whole thing is going to blow up, in what Frank Veneroso calls a commodities nuclear winter. As prices rise, consumption of the commodities falls (as we are already observing) both through substitution and through conservation. At the same time, additional supplies come on line. Real world suppliers feel the imperative to slash prices to have some actual real world sales. They cannot forever live in never-never land with rising prices and collapsing sales.
There are many shoes that will drop, bringing back the Global Financial Crisis with a vengeance. Commodities crash, default by a Euro periphery nation, failure of a Euro bank, or the closure of Bank of America or Citi. All of these are likely events, less than one standard deviation from the mean; probably all of them will happen within the next year.
No matter what the triggering event is, that commodities nuclear winter will happen.
Soon.
Sooner than later.

Saskatchewan Yearly Wage Growth Not Covering Inflation Rate; Tax Burden By Provinces

From the Globe and Mail

Canada's national inflation rate was 3.1 per cent in August, Statistics Canada says.

Saskatchewan 2.8 (2.8)
Saskatoon, 2.4 (2.4)

But we know that year over year wage increases in Saskatchewan from July 2010 to July 2011 was 1%.  While this could just be a blip, many unions are settling for 5.5% over 3 years, which, if inflation is at 2.8%, shows us that wages are not keeping up to the inflation rate. 

Tax burden by province from Canada Business Magazine

To see who bears the burden of individual federal income taxes, a simple formula was devised. We took each province’s percentage of Canada’s population, then the percentage each province contributed to net federal income tax payable in 2008. Generally, provinces contributed fairly close to their share of population, with the variance between population and tax being less than 1%. For example, Saskatchewan has 3.07% of Canadians and contributed 2.75% of federal income tax. There were three exceptions. Alberta and Ontario were the only two provinces with positive variances, with Alberta coming in at 6.1%. The largest negative variance was Quebec, where a 23.3% share of the population contributed 19% of the tax for a negative variance of 4.3%.

Comparing previous housing bubbles with todays housing bubble with charts

Comparing today's housing bubble with housing bubbles that popped in the 80s and the 90's.  No commentary, the charts say it all.

 

The Holy Grail of Why House Prices Doubled in Saskatchwan ( Hint: it's not wages)

House prices in Saskatchewan have pretty well doubled since 2005.  How?
Here are numbers of mortgage debt borrowed each year for mortgages, the average weekly wage for each year, the average house price for year.  ( 2005 to 2010), I do not have 2005 average weekly wage yet)

From CMHC
NHA and Conventional Residential Mortgage Loans Approved by Lending Institutions, New and Existing,  
For Saskatchewan:

*Note this is not growth in mortgage debt.  This is the amount of debt borrowed each year for mortgages.
$2,749,000,000 in 2005
$3,191,500,000 in 2006
$4,840,900,000 in 2007
$5,156,000,000 in 2008
$5,759,000,000 in 2009
$6,665,500,000 in 2010
This is an increase of 142%.

Here is the average Saskatchewan weekly wage
$710 in 2006
$749 in 2007
$784 in 2008
$804 in 2009
$846 in 2010
This is an increase of 19%

While the average house price in Saskatchewan has increased:
122k in 2005
132k in 2006
174k in 2007
224k in 2008
233k in 2009
234k in 2010
This is an increase of 92%

The Law of Diminishing Returns is firmly in play as accumulation of mortgage debt each year has continued to increase substantially but house prices have basically stalled. 

The next graph shows how house prices have doubled in just a few short years.  The value of mortgage loans as a percentage of Provincial GDP have DOUBLED at the same time house prices have DOUBLED!

 

For the Alberta Realtor:  This blog will continue until the bust is firmly in place.  But I will admit that Saskatchewan's bust will not be as big as Alberta's.  Man, you guys went completely goofy. 

Will the US have "lost decades" like Japan: 9 graphs showing troubling similiarities

Back to this side of the pond.  A very excellent but long article comparing the US and Japan economies from DR Housing Bubble

"The Heisei boom, financial trickery, and central bank voodoo – Can the U.S. support two lost decades? Japan asset bubble collapse solutions exported to the United States. 9 graphs showing troubling similarities."

The comparisons between the current real estate and debt debacles in Japan and the United States are hard to ignore.  Not all horror stories of economic collapse follow the same script but it is hard to deny that we have incredible similarities and more mainstream articles are picking up on this trend.  Take for example the current debt ceiling charade.  It is amazing that we raised the debt ceiling with no subsequent changes to revenues and yet interest rates fell.  Think about this on a more individual level.  This is like a household who is spending beyond its means and suddenly raises its spending without any subsequent growth to income.  Yet the fear spreading around the financial world still finds safety in the United States.  At this point, it is better to store your money in the U.S. instead of Greece, England, Ireland, or Spain for example and the markets reflect this reality.  Yet The U.S. is following a remarkably similar path to Japan’s lost two decades.  As we approach our first lost decade it is important to examine what is happening on multiple fronts.
Japan and U.S. experience bubbles in home lending

Source:  Gluskin Sheff
The U.S. and Japan both experienced unparalleled growth in bank lending to households to purchase real estate.  In Japan this started in 1984 and collapsed in the early 1990s.  In the U.S. the trend started in 1995 and collapsed in 2007.  The collapse in the U.S. was actually more vicious once it hit. The only reason home prices have not contracted as severely in many areas is the emergence of shadow inventory on bank balance sheets.  Japan had zombie banks and we have banks with shadow inventory but the comparison to the walking dead is very apt here.  Both countries have insolvent banking systems and only through financial trickery and central bank voodoo can both systems pretend to be working.  Yet both extract a toll on the productive sectors of the economy.
Real estate prices collapse in both countries

The collapse in housing prices has been similar in both countries and the path of each bubble seems extremely similar.  For example, the above chart looks at Japan real estate starting in 1984 and aligns U.S. home prices starting in 1997.  So a decade sets both bubbles apart but the path is unmistakable.  Japan gave up all gains in their housing bubble bust and the U.S. housing market has yet to reach that trough.  Does this mean a baseline of 1997 is where a true bottom will be reached?  Hard to say yet there is little evidence to show for a rise in home prices.  There is still over 6,000,000 homes in the shadow inventory that need to be liquidated at some point and will add pressure to home prices on the downside.  In terms of bank housing lending collapsing and real estate values imploding we are two for two between Japan and the United States.
Japan and U.S. fiscal policy looks similar

Source:  Gluskin Sheff
When bubbles burst a wide gap is left in the economy.  Both the Bank of Japan and Federal Reserve stepped in and aided the banking systems of both countries but how well did this translate to helping the productive side of the economy?  If the ultimate goal is to save the too big to fail banks then both central banks succeeded yet at what costs?  Japan has now witnessed two lost decades while the U.S. is entering its first.  Take a look at the above data.  During the good years Japan was running a deficit of 1 to 3 percent.  All of a sudden it was running deficits of 10 percent.  The U.S. is running similar deficits and there is little evidence of a reversal here:

With GDP at roughly $14 trillion we are running a deficit of over 10 percent.  So far the similarities between Japan’s lost decades and the United States seem to be following a very similar path.
Pushing inflation lower at least as measured by government


This is an interesting pattern that is playing out here in the U.S.  The crushing blow to housing has kept a lid on inflation as the economy contracts.  The size of the bubble has kept inflation muted at least by how it is measured by the CPI.  We’ve argued that the BLS does a very poor job at measuring the cost of housing by using an owner’s equivalent of rent but that is the system that is in place.  As measured by both charts above, the bursting of the real estate market allowed each country’s central bank to save the banking system without causing dramatic inflation in the economy.  Sure food, education, fuel, and healthcare went up in costs but who uses those things anyway?  As measured by each government department, inflation has been contained in each country:

Part of this also has to do with the fear running through the global markets.  People want to park their money in stable countries.  You don’t see a rush of people buying up Greece or Spanish debt yet people are comfortable in Japanese and American debt.  This is why as the debt ceiling “solution” was largely a kick the can down the road response money rushed into the U.S. markets and pushed mortgage rates even lower.  Rates are so absurdly low yet this is doing very little to save the market.  Why?  Well we have 46,000,000 Americans on food stamps which doesn’t exactly seem like a good sign.  Many Americans are first trying to deal with the employment market before trying to purchase a home.
The rise of part-time employment is also a very common theme in both countries.  In Japan nearly one-third of the work force now works part-time or on a contractual basis yet is counted as fully employed.  We have that similar issue here in the U.S. as our “part-time” category has shot through the roof.  Headline unemployment is 9 percent but throw in the part-time looking for full work or those who have dropped out of the labor force and we have a figure above 16 percent.
Two decades of collapse

Japan is heading to a third lost decade which is hard to believe.  The U.S without a doubt will have a lost decade.  Even comparing stock markets we see problems ahead:

Source:  Dshort.com
Japan’s Nikkei 225 index is down 78 percent from the peak reached 21 years ago!  Our S&P 500 index is down 41 percent from where it was in 2000.  I know many people discount the similarities between the two countries but you have many comparisons and the path each country is following is very similar:

-Central banks protect banks and turn them into zombies hiding assets in balance sheets
-Incredibly low rates for decades
-Stock market bubble followed by real estate bubble
-Rise of part-time employment workforce
-Drag on GDP
-Massive fiscal deficits
-Artificially low interest rates
-Inflation controlled in government measures
-Large aging populations
-Poorer younger generation

A big difference is the demographic argument and population growth.  Yet I would argue that we have a mini-Japan like issue at hand with baby boomers entering into retirement.  You have a wealthier previous generation trying to sell stocks and real estate to a poorer younger generation.  No doubt, there will be demand for real estate but what we are seeing is demand for affordable housing, not massive debt built mansions.  This is being played out here in the U.S. as there is little sign that we have a massive growing middle class emerging that will supplant the baby boomers.  And one thing that we even have worse than Japan is our massive burden of student loans on Americans.  The student debt market is now larger than the credit card market here in the U.S.  Japan does not have a similar massive student loan market.  So that is actually a larger negative that we have that Japan doesn’t.  Just because you have a growing population means nothing if you can’t bring them into the middle class.  Food stamp participation has shot up 70 percent in the last four years and now one out of every six Americans is on this program.  Yet what isn’t brought up is that these were folks once not on food stamps.  So we are pulling people from the middle class or the working poor deeper into the inequality and this is causing our system to stall and enforces government policy that simply protects the too big to fail banking sector.
So far we’ve been in this crisis for four solid years and the path seems extremely similar with differences here and there.  Japan’s multiple lost decades have hurt its overall economy:

Japan’s GDP growth has stalled since 1995.  For the first time since the 1950s has the U.S. had a stall in GPD growth dragging out for four years.  How much longer can this go?  What similarities or differences do you see between the paths we are following?

Europe Is A Basket Case

This one year bond says it all about a default happening in Greece. 143% yield! Wow!

Most commentators are saying that Greece should and will default

Moody's cuts French Banks' Rating

PARIS/DALIAN — Moody’s cut the credit ratings of two French banks on Wednesday because of their exposure to Greece’s debt, highlighting growing risks to Europe’s financial sector from the deepening eurozone sovereign debt crisis.
The one-notch downgrade of Societe Generale and Credit Agricole came hours before the leaders of Greece, France and Germany were due to hold a video conference on measures to head off a possible Greek default, which has prompted rising global alarm over the potential fallout.

Will the BRICS bailout Europe?
Maybe, but Euro zone countries need to stop the spread of contagion  FIRST, before any help comes there way.

“The governments of all countries must truly shoulder their responsibilities and deal properly with their own affairs,” Wen said in a speech at the World Economic Forum in Dalian, China, although he made no direct mention of a BRICS plan.

Central bank adviser Li Dakui suggested China should refrain from buying large amounts of European bonds to focus on its own economy.
“We have more than our share of trouble to deal with,” Li said, referring to concerns in China about inflation and asset bubbles.

The Eurozone is on life support.  Make no mistake, politicians will fight a default with everything they have for many reasons.  From what I have read, they will not succeed.

What does this all mean?
Pretty much this

"The bottom line is that it looks like a Lehman like event is about to be unleashed on Europe WITHOUT an effective TARP like structure fully in place.

But hey, it's all good time to buy a house, it is not like Canadians are going further into debt.  Oops!  Somehow with our conservative Banks and prudent borrowers, Canadian households have managed to put themselves into more debt than their American counterparts and we all know what kind of silliness went on down there.  But maybe we have magic debt and our debt is different here!

Business Insider: Real Estate Bubble And Pricey Commodities Mean Trouble Ahead For Canada's Economy

Think house prices will continue to defy gravity in Canada forever? Some do not think so. From the Business Insider: Real Estate Bubble And Pricey Commodities Mean Trouble Ahead For Canada's Economy

If adulation comes before a fall, the Canadian economy is in serious trouble.
Both at home and abroad, people are in love with Canada as an investment destination.
Yet largely ignored amidst the hoopla are clear and growing threats to the country’s economic well-being.
The common theme of these dangers is overvaluation: pricey real estate, inflated commodities and a currency too strong for the nation’s manufacturing exporters.
The most obvious issue facing the Canadian economy is its housing bubble.
Using data from the Canadian Real Estate Association, Alexandre Pestov of Three Bears Research estimated in September 2010 that average nominal national house prices increased 121% in the prior decade.
By his calculations, this equated to 76% in inflation-adjusted terms. And of course Canadian house prices have continued to rise since Pestov’s research was published.
Granted, talk about a Canadian housing bubble is everywhere. But what should be on everyone’s mind are the consequences of its inevitable bursting. The real danger exists because the bubble has been financed with credit, leaving Canadian households in record levels of debt. According to data from Statistics Canada, personal mortgage debt at the end of 2010 totaled $956 billion, more than double the level of 2000.
Financial bubbles without debt are bad (think internet stocks), but they are minor compared to those financed with credit. This was a key implication of economist Irving Fisher’s work, whose famous 1933 paper explained the toxic combination of debt and deflation.  Indeed, the major economic downturns of the last hundred years, the Great Depression, the Japanese malaise, and the recent Great Recession, were all rooted in excessive private sector debt.
Because asset bubbles ultimately crash but debts don’t magically disappear, a collapsing bubble makes the debt more onerous. Bank of Canada Governor Mark Carney alluded to this predicament in recent testimony to the Senate when he reminded Canadians that, “while asset prices can rise and fall, debt endures.”
In the housing context, people can end up owning homes worth less than their mortgage. Selling the asset to raise funds simply causes everyone else’s property to decline further in value.
The risks to the Canadian economy are not confined to real estate. Many of the investors bullish on the country and its currency justify their optimism on the grounds that commodity prices will continue to increase due to growth in developing economies. This is wishful thinking.
The real impetus behind the raw material spikes of recent years is not developing world demand, but rather a previously unimaginable degree of speculation in commodity markets. This was plain to see when oil plummeted from $147 a barrel in July 2008 to just over $30 in early 2009 as speculators unloaded their futures positions.
Like housing, the commodity bubble has received attention. Once again, though, the depth of the problem isn’t often recognized.
Pre-financial crisis, speculation in commodities overwhelmingly occurred via derivatives. What may not be widely understood, though, is that in addition to a few exchange traded commodity funds, some speculators also took physical delivery of raw materials. This activity has increased post-financial crisis, perhaps due to pending U.S. regulations to limit bets in futures markets.
To use one striking example, according to a report from the Federal Reserve, JP Morgan Chase owned physical commodities as of June 31, 2011 worth just over $21 billion. To this we can add the holdings of other investment banks, commodity merchants, ETFs and hedge funds. It is not difficult to see how financial players have distorted what are primarily intended to be markets for consumption, not investment.
The final major issue facing Canada is its currency’s strength. With oil until recently above $100 and metal and grain prices very high as well, you would think that a major commodity exporter like Canada would be running significant trade surpluses. You would be mistaken. Despite historically high commodity prices, trade surpluses have morphed into deficits.
Forget its French and English heritage; Canada would seem to suffer from a serious case of “Dutch Disease”, an economic affliction whereby an appreciating currency prices a commodity country out of other export markets. The gains of Bay Street and the oil sands thus parallel the decline of export-oriented manufacturers across the country.
Nothing could have made this more evident than a Bloomberg article from December 2010, which reported that factories now employ only 10% of the Canadian workforce, the lowest level since 1976. In addition, the story noted that Canada’s exports to the U.S. as a percentage of total exports account for their smallest share since 1982. Canada’s trade surplus with its southern neighbour has plunged from $11.7 billion in October 2005 to $3.6 billion this June. This can’t be blamed solely on China, because as TD Economics pointed out in April, “Canada has fared worse than most other countries from the changing composition of the U.S. trade deficit”. This suggests our dollar also bears responsibility.
In the aftermath of the financial crisis a peculiar Canadian hubris has emerged. Its neighbour chastened, once humble Canada is seen as a rock in a turbulent economic world. The Conservatives boasted during the election campaign of the nation’s economic prowess in television commercials, and foreigners take good notes about steady, fiscally responsible (allegedly) Canada.  To top it off, Toronto Councillor Doug Ford recently presented Jim Flaherty with a mock “World Finance Minister Championship” belt. If there ever was bad economic karma, this was it.
It may be tempting to believe that Canada is, in the words of more than one economist, “a bastion of stability”. But a realistic look at the Canadian economy suggests a castle at least partly built on sand, and of course financed with debt. Unless house and commodity prices continue to defy gravity, Canada’s current good fortunes will likely come to a very painful end.
Unfortunately, there is little stock market diversification to save the day: as of September 1, the energy, materials and financial sectors accounted for a staggering 78.83% of the S&P TSX Composite Index.

I have talked extensively about Canadian real estate but not much about commodities.   And if anybody has been paying attention the problems in Europe are very bearish for commodities.  Greece has a 98% probability that it will default within 5 years. Many of the other PIIGS are in rough shape as well.  I can not say what that really means if there is a default, if it will be a "Lehman episode" or worse.  But I do know that European Bank exposure to this mess is huge.  And many of them have not had a good year, with many French Banks possibly being downgraded.  Take a look at this chart and tell me that European Banks are in good shape. You can't. 

The world wide recovery is done.  Now I just wonder how much of hit commodities will take. 

The Delusional Canadian Housing Market vs the US Housing Market

Throughout Canada, extreme house prices for the past half decade has become "normal".  But we need to take a step back and take a look at how delusional house prices are in this country compared to house prices in the US.

From Vancouver Condo Info.

Here’s a couple of million dollar houses.
This first one is in West Palm Beach. It’s a modest 6,898 sq. foot 5 bedroom home on 2.5 acres with a guest house and five car garage:

But for just $50k more you can get this beauty in South East Vancouver, conveniently close to Burnaby. It’s a 1958 sq. foot old timer with a basement and all windows are double glazed:



Click on the links and take a look at the pictures for both properties. 

Saskatoon Job Market Stuck in Reverse, Housing Starts Down 25%

Stats Canada is out with their monthly labour force survey

Employment was little changed for the second consecutive month in August and the unemployment rate edged up 0.1 percentage points to 7.3%.
Employment increased in Nova Scotia in August, while it declined in Newfoundland and Labrador and Saskatchewan.
In Saskatchewan, employment declined by 3,000 in August. The unemployment rate fell 0.4 percentage points to 4.5%, as fewer people participated in the labour market. Employment levels in the province were down 0.5% compared with 12 months earlier.

As for Saskatoon, the unemployment rate dropped from 5.4% to 5.1%, but not because there were more people working.  On the contrary, there were 1000 less people working in August 2011 compared to a month earlier and 1400 less people working compared to August 2010. ( Labour Force Survey, page 44)

I find it hard to drink the koolaid that "Saskatchewan is booming", when the average wage in Saskatchewan increased by 1% year over year and the biggest city in the province has less people working year over year.


If construction and real estate job growth rose at the same pace as other employment since 2005, we would be staring at a unemployment rate of near 7% in this province.
Graphs from Ben

A booming economy is one that sees growth in a majority of industries at near the same pace, not just a few, especially when the growth is fueled by credit.

Housing Starts Down 25% from August 2010
CMHC is out with their monthly housing start report
Saskatoon CMA housing starts are down 26% with 365 starts last August compared to 275 this August.  We have to remember that last August was one of the busiest months for housing starts, ever.  A month with 275 is still very robust.  From Jan to August, 1974 housing units were started, up 26% compared to the same time period from last year when 1564 housing units were started.  Just for reference, 2010 was one of the strongest years for housing starts, so with 2011 numbers even stronger, there is much inventory down the pipeline.