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no_free_lunch
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Okay, first off, please don't take too seriously, speculating on currencies is foolish right?  That being said I hold both CAD and USD investments and I do have to determine how to allocate new funds.  I feel I should at least consider where the currencies are at when making that decision.

 

The canadian dollar has had a decent rally this year, pushing up to 1.25 per USD from 1.34 a year ago.  This just seems at odds with reality.  Just a few things I can think of.

 

- With the change to US corporate tax rate canada is now much less competitive than it used to be for multi nationals.

- Canada's housing stock is severely over-priced.  I fear that this will ripple through and ultimately affect the currency if the government is forced to lower/sustain rates.

- In fact the bank of canada has been much slower in raising rates than the US fed.

- Trump / NAFTA...

- It seems much of the recent appreciation has been a result of higher oil prices, but how sustainable is that?  Crude output is still very high, OPEC is completely disfunctional, the US is opening up drilling, alternative energy appears unstoppable.  I have a hard time getting bullish on oil.

 

Just some food for thought.  I am probably going to put all new funds to non Canadian markets.  Just not sure what to do with cash, which is currently all in CAD.

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Nofreelunch, being a Canadian investor I have similar questions to you.

 

I feel that we are in a housing bubble; I live in greater Vancouver and most houses here are now valued at CAN +$1,000,000. Should the housing bubble pop there is a good chance our economy will struggle.

 

All of my financial assets are held in US$ accounts or hold US securities. The main reason for this is I prefer to invest in the US markets for a number of reasons (size being the main one). A secondary reason why I like my financial assets in US$ is as a hedge should the housing bubble pop and the Canadian economy tank (which would likely drop the Can$).

 

 

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Okay, first off, please don't take too seriously, speculating on currencies is foolish right?  That being said I hold both CAD and USD investments and I do have to determine how to allocate new funds.  I feel I should at least consider where the currencies are at when making that decision.

 

The canadian dollar has had a decent rally this year, pushing up to 1.25 per USD from 1.34 a year ago.  This just seems at odds with reality.  Just a few things I can think of.

 

- With the change to US corporate tax rate canada is now much less competitive than it used to be for multi nationals.

- Canada's housing stock is severely over-priced.  I fear that this will ripple through and ultimately affect the currency if the government is forced to lower/sustain rates.

- In fact the bank of canada has been much slower in raising rates than the US fed.

- Trump / NAFTA...

- It seems much of the recent appreciation has been a result of higher oil prices, but how sustainable is that?  Crude output is still very high, OPEC is completely disfunctional, the US is opening up drilling, alternative energy appears unstoppable.  I have a hard time getting bullish on oil.

 

Just some food for thought.  I am probably going to put all new funds to non Canadian markets.  Just not sure what to do with cash, which is currently all in CAD.

 

Not taking it too seriously: 

- The dems will control the House and possibly the senate in 10 months.  The tax cuts will get quietly rolled back (maybe)

- Is Canadian housing really in a bubble or have our prices just normalized to intenational levels?  Dont know the answer, but I am not convinced there is a bubble, any more than London, Paris, Tokyo, or Manhattan are in a bubble. 

- CDN. interest rates are higher than the US. last I looked. 

- Trump/Nafta:  We have professional negotiators as well in Canada.  We can tax the living daylights out of Facebook. Google, Amazon, Apple, and Netflix, and cause far more damage than softwood lumber tarrifs.  The US needs to bargain in good faith or they may find the whole world throwing tarrifs on all those lucrative tech companies.  You can be sure that the above crew has lobbyists working fulltime in DC to block the loss of Nafta and other trade agreements. 

- Oil prices could go very high.  Shale could turn out to be a disappointment.  At a certain oil price there is a US recession - the US net imports 15 M bpd.  Now of course, if the US has a recession we get one as well but highh oil prices mitigate ours a little. 

 

5 years ago the CDN dollar was greater than par with the US.  Playing this game could very well lose you 25%. 

 

There are more moving parts than we can possibly account for in these scenarios.  Right now, I see no deals on US stocks (outside the energy sector), to even be bothered with.  For the first time in my investing career of 20 plus years I hold no US companies.  When there is a major correction I have a list but right now I am sitting out the US rally. 

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Weighing in on the debate - I'm currently at about 50-50% split CDN/US.

 

After not having been in a position to take advantage of the prior currency parity, I have converted CDN to USD at current exchange rates whenever I felt there was a compelling US denominated equity I wished to have.  Aside from US stocks, which I agree are overvalued for the most part, there are ADRs and foreign equities denominated in USD which seem to present more value.  I have also initiated 'small' positions in an array of US equities which I wish to add to over time based on improved valuations.  My USD equities have performed much more impressively than my CDN ones over 2017, and the selection offered in USD is the main reason why I converted so much currency.

 

I believe the CDN economy to be on precarious ground.  Personal debt loads for Canadians are at extreme levels (the highest of any developed nation at 168% of disposable income)  and the majority of this is due to mortgage and credit card debt.  Stock markets are also showing irrational bubbles in marijuana and crypto without regard to valuation.  The 'glue' holding this house of cards together is low interest rates (esp for mortgages).  To keep this party going, either you need to believe that the government will stop and possibly reverse course in raising interest rates (out of fear of causing a collapse), people will change behavior and spend less (doubtful) or wages will increase to keep pace (wage inflation).

 

I don't know what will act as a catalyst for this house of cards to fall nor when it will happen.  But I do know that people earning $100,000K /yr or less owning homes well in excess of 1 million dollars is not normal and highly risky.  It isn't so risky for the individuals (who can declare bankruptcy when underwater), but more so for the banks, debt holders and savers who may have to 'bail-in' the banks deemed too important to fail.  At some point, this debt cycle needs to unravel - and nobody has convincingly articulated how that is going to happen.

 

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Weighing in on the debate - I'm currently at about 50-50% split CDN/US.

 

I don't know what will act as a catalyst for this house of cards to fall nor when it will happen.  But I do know that people earning $100,000K /yr or less owning homes well in excess of 1 million dollars is not normal and highly risky.  It isn't so risky for the individuals (who can declare bankruptcy when underwater), but more so for the banks, debt holders and savers who may have to 'bail-in' the banks deemed too important to fail.  At some point, this debt cycle needs to unravel - and nobody has convincingly articulated how that is going to happen.

 

How does this even happen?  I am going to presume that a person making $95k a year who owns a million+ home did it in one of two ways:

 

A). They bought the house some time ago (10+ years) and it has appreciated since then

 

B). They inherited the house

 

Of course, for a house to be worth a million+, there must have been some marginal buyers.  When I was growing up in the world, it was always pounded into my head that one bought a house for a MAXIMUM of three times your household income.  Of course, that was also with a substantial down payment.  So for somebody to buy a million dollar+ home, they need household income of $350K+ OR some massive liquidity OR most likely both.

 

I get that some people make good money, but I really have to question how many households are making $350k+ a year.  Clearly if the average house price in Toronto or Vancouver, or ANYWHERE is $1mm+, you most assuredly are in a bubble.  The average household income is nowhere near $350k.  Nor do most households have $200K+ for a down payment.

 

Finally, maybe things are different in Canada...but how does one even begin to LIVE in a 1mm+ house?  You are going to need furniture & such.  You probably aren't going to be outfitting a house like that at Ikea.  You are also probably going to have some $$$ for maintenance & repair.  Finally, what in the world would property taxes be on that?  1% on $1mm is $10k per year...just in property taxes!  You also have electric & heat & water & sewer & such.  A household pulling in ONLY $100k a year might wind up eating ramen noodles just to be able to stay in such a place.

 

At some point, I think interest rates are going to have to rise.  When that happens, look out below at housing valuations!

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Dtejdd1997, crazy low interest rates are, from my perspective, the primary culprit of the jump in house prices. Until just recently, it was possible to get a 5 year fixed mortgage rate under 2.75%; people are focussed on payments and not total amount of debt they are taking on. Interest rates are starting to rise. If they continue higher it is hard to see house prices staying this high. The Bank of Canada is in a very tough spot; if they follow the Fed and continue to raise interest rates they will risk a housing correction that could spread to the broader economy (given housings outsized importance).

 

The Can$ is currently trading at US$0.80. My guess is the Bank of Canada will be getting very nervous if the Can$ continues to strengthen in the coming year to US$0.85 or higher.

 

Higher interest rates and a higher Can$ in 2018? Might work if we get another commodities boom :-)

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I read a lot about currencies this past year and from what i now know the CAD is still a good statistical long position against the USD. Based on relative purchasing power it is undervalued by 22%, carry and term spread are pretty equal and momentum is in favor of the CAD (1m and 6m favor CAD, 3m equal). But of course all this can change tomorrow or next month and besides of the statistics i have no idea what the housing market, oil prices, the central bank or inflation does in canada in 2018.

 

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Weighing in on the debate - I'm currently at about 50-50% split CDN/US.

 

I don't know what will act as a catalyst for this house of cards to fall nor when it will happen.  But I do know that people earning $100,000K /yr or less owning homes well in excess of 1 million dollars is not normal and highly risky.  It isn't so risky for the individuals (who can declare bankruptcy when underwater), but more so for the banks, debt holders and savers who may have to 'bail-in' the banks deemed too important to fail.  At some point, this debt cycle needs to unravel - and nobody has convincingly articulated how that is going to happen.

 

How does this even happen?  I am going to presume that a person making $95k a year who owns a million+ home did it in one of two ways:

 

A). They bought the house some time ago (10+ years) and it has appreciated since then

 

B). They inherited the house

 

Of course, for a house to be worth a million+, there must have been some marginal buyers.  When I was growing up in the world, it was always pounded into my head that one bought a house for a MAXIMUM of three times your household income.  Of course, that was also with a substantial down payment.  So for somebody to buy a million dollar+ home, they need household income of $350K+ OR some massive liquidity OR most likely both.

 

I get that some people make good money, but I really have to question how many households are making $350k+ a year.  Clearly if the average house price in Toronto or Vancouver, or ANYWHERE is $1mm+, you most assuredly are in a bubble.  The average household income is nowhere near $350k.  Nor do most households have $200K+ for a down payment.

 

Finally, maybe things are different in Canada...but how does one even begin to LIVE in a 1mm+ house?  You are going to need furniture & such.  You probably aren't going to be outfitting a house like that at Ikea.  You are also probably going to have some $$$ for maintenance & repair.  Finally, what in the world would property taxes be on that?  1% on $1mm is $10k per year...just in property taxes!  You also have electric & heat & water & sewer & such.  A household pulling in ONLY $100k a year might wind up eating ramen noodles just to be able to stay in such a place.

 

At some point, I think interest rates are going to have to rise.  When that happens, look out below at housing valuations!

 

a lot likely had help from parents who have been in real estate in 30+ years and mortgage paid off...so there's a lot of equity  -- if they can send $ 250K to help the down payment, then all the sudden the kids can afford a $1M house with a couple / family earning roughly $ 150K ~ $ 200K.

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I had a bit of an eye opening conversation with a friend - a teacher earning ~ 75K/yr.

 

On the topic of investments, he told me how he had purchased multiple properties - one for rent and had recently flipped another one.  Both close to the Toronto area.

 

Me: So how did you manage to finance the down payments?

Reply:  Well, you can purchase with 0$ down.

Me: Really?  What lender?

Reply: Any lender?

Me:  What????

 

It turns out, you can 'purchase' your down payment through private lenders who will lend you $50K - $150K at 7 - 10% Interest rates. 

You lie on the mortgage application.  There are no real verifications.

 

Its actually genius:  if you have some (any) cash flow, you purchase multiple houses for no money down in this fashion, flip them (declare them your primary residence) and book the profits.  You can't loose - house prices go up as there is a greater fool/genius doing the same thing.  Banks appraise the homes at the higher valuation and issue larger mortgages.  And hey, if the housing market crashes - return the keys to the bank and declare bankruptcy- oops...  you still earn your $75K/yr and can afford rent/food like before.  The kicker, is the banks are doing this with the money of the savers who have deposits at the bank backed with insurance by the taxpayer.  It isn't people who purchased houses though loans from their parents or who bought 20 years ago driving up home prices, its the speculators who are flipping.  I think its the same story as the 2008 US housing bubble, except Canadians are laden with more debt than even Americans back then.

 

One way I see the CDN dollar possibly going up - is if there is a large burst of the credit bubble with asset price deflation, there may be a flight to currency.  All of a sudden, currency/money becomes more valuable as people sell everything - stocks, real estate, collector assets.  However, they may also fly to the USD, gold, crypto etc.  I'm just speculating...

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Not taking it too seriously: 

- The dems will control the House and possibly the senate in 10 months.  The tax cuts will get quietly rolled back (maybe)

- Is Canadian housing really in a bubble or have our prices just normalized to intenational levels?  Dont know the answer, but I am not convinced there is a bubble, any more than London, Paris, Tokyo, or Manhattan are in a bubble. 

- CDN. interest rates are higher than the US. last I looked. 

- Trump/Nafta:  We have professional negotiators as well in Canada.  We can tax the living daylights out of Facebook. Google, Amazon, Apple, and Netflix, and cause far more damage than softwood lumber tarrifs.  The US needs to bargain in good faith or they may find the whole world throwing tarrifs on all those lucrative tech companies.  You can be sure that the above crew has lobbyists working fulltime in DC to block the loss of Nafta and other trade agreements. 

- Oil prices could go very high.  Shale could turn out to be a disappointment.  At a certain oil price there is a US recession - the US net imports 15 M bpd.  Now of course, if the US has a recession we get one as well but highh oil prices mitigate ours a little. 

 

5 years ago the CDN dollar was greater than par with the US.  Playing this game could very well lose you 25%. 

 

There are more moving parts than we can possibly account for in these scenarios.  Right now, I see no deals on US stocks (outside the energy sector), to even be bothered with.  For the first time in my investing career of 20 plus years I hold no US companies.  When there is a major correction I have a list but right now I am sitting out the US rally. 

 

Interest rates are about .5% higher in the US right now across most comparable government bonds.

 

I appreciate the feedback of NAFTA.  I hope you are right here.

 

I guess we won't know if Canada housing is a bubble unless it crashes but it sure isn't a bet I want to make, any more than I have to.

 

I am sticking with my gloomy perspective on oil.  Maybe in the short-term, the next 2-3 years I am wrong but I just can't get optimistic on it.  The US only imports 2.5m bpd so they are not as reliant.

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Actually I was wrong about US oil and so were you. 

 

Last week they imported 8 m bpd.  I think ( but am not sure) that 2.5 m is from Canada.  The 8 m bpd is down somewhat from the past but isn't likely to suddenly stop anytime soon. 

 

Its good to be gloomy.  I certaintly wouldn't be a buyer of Cdn. residential real estate in this environment which is too bad because I would like to buy a fixer upper and fixer up. 

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My amateurish view is that CAD is a petrocurrency to a very large extent. Long-term positive correlation between CAD and oil is 0.75 - 0.8 (very robust). I am not aware of any other factor that comes close to explaining the changes in CAD/USD rate.

 

 

 

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Ok, that figures that you guys are looking up is for crude and petroleum products. The 2.5 is low because the US exports a lot of gas and gas products.

 

If we're talking crude oil. The US imported net 5.9 million bbls per day. Out of those net 3 million bbls are from Canada.

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In Vancouver, property taxes are subsidized for houses valued at $1.65 mil or under because the median household earns $70,000 (the lowest amongst major Canadian cities) and cannot afford to pay taxes having made interest only payments on their home equity line of credit. The average house in this city peaked at $1.8 mil and condos are around $650k.

 

When prime was at 2.7%, it only cost $2,700 a month ($32,000 annually) in interest only payments on a $1 million mortgage to own. Which was around the same as rent.

 

Even long time holders have large mortgages now as the bubble made them believe and they now own fancy cars, furniture, bought a revenue property or 10, helped their kids with down payments because they could not afford to buy.

 

Looking around at the activity in the market this week - Vancouver is toast if it does not change soon. Hasn't been like this in years. R.I.P.

 

PS. If the housing bubble goes, Canada will be in a recession.

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I had a bit of an eye opening conversation with a friend - a teacher earning ~ 75K/yr.

 

On the topic of investments, he told me how he had purchased multiple properties - one for rent and had recently flipped another one.  Both close to the Toronto area.

 

Me: So how did you manage to finance the down payments?

Reply:  Well, you can purchase with 0$ down.

Me: Really?  What lender?

Reply: Any lender?

Me:  What????

 

It turns out, you can 'purchase' your down payment through private lenders who will lend you $50K - $150K at 7 - 10% Interest rates. 

You lie on the mortgage application.  There are no real verifications.

 

Its actually genius:  if you have some (any) cash flow, you purchase multiple houses for no money down in this fashion, flip them (declare them your primary residence) and book the profits.  You can't loose - house prices go up as there is a greater fool/genius doing the same thing.  Banks appraise the homes at the higher valuation and issue larger mortgages.  And hey, if the housing market crashes - return the keys to the bank and declare bankruptcy- oops...  you still earn your $75K/yr and can afford rent/food like before.  The kicker, is the banks are doing this with the money of the savers who have deposits at the bank backed with insurance by the taxpayer.  It isn't people who purchased houses though loans from their parents or who bought 20 years ago driving up home prices, its the speculators who are flipping.  I think its the same story as the 2008 US housing bubble, except Canadians are laden with more debt than even Americans back then.

 

One way I see the CDN dollar possibly going up - is if there is a large burst of the credit bubble with asset price deflation, there may be a flight to currency.  All of a sudden, currency/money becomes more valuable as people sell everything - stocks, real estate, collector assets.  However, they may also fly to the USD, gold, crypto etc.  I'm just speculating...

 

I think I've seen this movie

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Doesn't Canadian crude trade at a steep discount compared to other oil benchmarks because of it's lack of export markets? And aren't they already near their export limit because of lack of pipeline capacity?

 

My understanding was USA purchases the Canadian oil at a discount because the Canadian sellers have no other export markets?

 

What about the prices of other natural resources (gold, nickel, uranium, potash, rare earth metals) Isn't Canada in a position to start exporting some of the rare earth metals used in batteries?

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Doesn't Canadian crude trade at a steep discount compared to other oil benchmarks because of it's lack of export markets? And aren't they already near their export limit because of lack of pipeline capacity?

 

My understanding was USA purchases the Canadian oil at a discount because the Canadian sellers have no other export markets?

 

What about the prices of other natural resources (gold, nickel, uranium, potash, rare earth metals) Isn't Canada in a position to start exporting some of the rare earth metals used in batteries?

Well it's actually a lot more complicated than that. The fact that it's landlocked does play a part in the price. But a huge part of the discount is the fact that Canadian crude is a heavy grade. Heavy crude is cheaper than light crude. So generally you expect WCS to be at a discount to WTI.

 

Keystone XL also got approved so there's new pipeline capacity coming online. But even without that you can still put it on a train and then on a ship. On top of everything oil isn't really traded but is actually sold to customers. Say that you have XYZ refinery in the Midwest that buys crude from a certain oilfield in Alberta. That refinery is optimized to process that particular crude. Say there's even a pipeline for ABC field to XYZ refinery. The refinery doesn't have many options. It will buy that crude from ABC field. It's not easy for refiners to change suppliers. We call that black stuff oil and think it's all the same but it's really not.

 

Anyway that's a sort of explanation from a simpleton like me. I'm sure someone from the oil business can explain it better because this stuff is surprisingly complex.

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The oil price is no longer gonna move CAD (the 2 yr differential will) because GDP from oil production in Canada is now a rounding error.

 

A sustained move to even $75 per barrel for multiple years would be required to get serious new CAPEX too boost its percentage of GDP enough to be relevant to move the CAD.

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My philosophy is to be short all currencies in Western nations and long business, commodities, and a select few currencies farther east.

I would be short, in proportion, everything. Right now, interest rate at IB on loans in CAD are slightly below USD. I'm also thinking to be somewhat short Euro because loans there are even less and IB just put out a note that in some currencies, due to volatility over the new year you must PAY to hold a long position in them of a pretty substantial amount!

 

 

 

 

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Doesn't Canadian crude trade at a steep discount compared to other oil benchmarks because of it's lack of export markets? And aren't they already near their export limit because of lack of pipeline capacity?

 

My understanding was USA purchases the Canadian oil at a discount because the Canadian sellers have no other export markets?

 

What about the prices of other natural resources (gold, nickel, uranium, potash, rare earth metals) Isn't Canada in a position to start exporting some of the rare earth metals used in batteries?

Well it's actually a lot more complicated than that. The fact that it's landlocked does play a part in the price. But a huge part of the discount is the fact that Canadian crude is a heavy grade. Heavy crude is cheaper than light crude. So generally you expect WCS to be at a discount to WTI.

 

Keystone XL also got approved so there's new pipeline capacity coming online. But even without that you can still put it on a train and then on a ship. On top of everything oil isn't really traded but is actually sold to customers. Say that you have XYZ refinery in the Midwest that buys crude from a certain oilfield in Alberta. That refinery is optimized to process that particular crude. Say there's even a pipeline for ABC field to XYZ refinery. The refinery doesn't have many options. It will buy that crude from ABC field. It's not easy for refiners to change suppliers. We call that black stuff oil and think it's all the same but it's really not.

 

Anyway that's a sort of explanation from a simpleton like me. I'm sure someone from the oil business can explain it better because this stuff is surprisingly complex.

 

I think you did a good job outlining the nuances.  Add to that, many of the minor E&Ps sell light crude, and price to the edmonton hub.  At any rate most of the smaller E&Ps have presentations that show their cash flow relative to levels in the cdn dollar versus US, and WTI as a reference price.  They include the discounts within their cash flow projections. 

 

And the oil moves back and forth across the border depending on what type is processed where, and where the end markets are.  The oil is moved via pipelines which are toll booths run by Enbridge, Kinder Morgan, and smaller players. 

 

It is entirely feasible that Cdn oil is going to Texas and then onto Europe. 

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  • 2 months later...
  • 1 month later...

The oil price is no longer gonna move CAD (the 2 yr differential will) because GDP from oil production in Canada is now a rounding error.

 

A sustained move to even $75 per barrel for multiple years would be required to get serious new CAPEX too boost its percentage of GDP enough to be relevant to move the CAD.

 

Told you 👆

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