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The Canada Bubble (?)


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http://www2.macleans.ca/2011/03/16/the-canada-bubble/

 

A topic that interests me a lot as a Canadian who is paid in US dollar and who decided to keep renting rather than buy a house.

 

I try not to make specific macro predictions, but I certainly try to position myself in a way that I can benefit if things go down and that I'll still be okay if things keep going up for a long time. One of the things I potentially see on the horizon is a crisis in China causes by their misallocation of capital (lots of activity, but not always much profit) which could impact Canada a lot. If not that, the eventual rise in interest rates could pop the bubble..

 

Curious to know what people here think about Canada's economic prospects.

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Some choice excerpts:

 

When the Great Recession hit, prices dipped briefly, but quickly rebounded as home­buyers borrowed heavily to get into the market. In fact, relative to incomes, house prices in Canada are now nearly as overvalued as they were in the U.S. at the peak of that country’s housing bubble, notes Madani.

 

As with soaring commodity prices, the strong housing sector has contributed in a big way to the country’s boom-time mentality and sense of invincibility. It’s been a crucial driver for labour markets. According to Madani, construction jobs account for close to 7.5 per cent of total employment, far higher than at any point since the 1970s. Meanwhile, as house prices climbed, households have been more inclined to go shopping.

 

But the housing boom has also gone hand in hand with Canada’s household debt boom. Over the last decade, Canadians have doubled their consumer and mortgage debt loads, to more than $1.5 trillion. For every dollar of disposable income households earn, they now carry $1.50 of debt, a level higher than in the U.S.

 

What’s different is that the U.S. didn’t have the resource sector to fall back on. But how secure should we be in assuming the commodity boom won’t turn into a bust? Not very, says Shawn Hackett, a commodity analyst in Florida who has dug into the sector’s long history of booms and busts. He analyzed the 10-year average annual rates of return for commodity prices dating back to the early 1800s. At no time have prices risen as fast and as high as they have over the last decade without being followed by a sharp decline. “If history is any guide, we’re higher than the 1980 top and much higher than the 1950 top,” he says. “Unless we are going to do something right now that defies 200 years of the way the rules of engagement have been in commodities, we’re due for a nasty spill.”
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“If history is any guide, we’re higher than the 1980 top and much higher than the 1950 top,” he says. “Unless we are going to do something right now that defies 200 years of the way the rules of engagement have been in commodities, we’re due for a nasty spill.”

 

we aren't doing anything differently really, but China and India sure are!  So the rules of engagement are different by a few orders of magnitude on the demand side.

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I think Canadian economic prospects are firmly tied to what happens in China. I think China is still early in its development so the resource sector in Canada will continue do well (with expected ups and downs). China looks to me to have another 10 or 20 years of strong growth ahead of it. As the Canadian dollar continues to climb it is hurting the manufacturing base in Ontario/Quebec (my guess is it is shrinking).

 

I am not saying "this time is different". We have a country with a population of over 1 billion people rapidly industrializing... when was the last time that happened in the last 200 years? All this tells me is the current commodity cycle may get a little more frothy than past cycles. Will it correct at some point? Of course. Bubbles are possible to predict; timing of the bursting is pretty much impossible to predict.

 

Being Canadian, the persistent strength in the Canadian dollar is hurting my US$ investments. As a result I am now looking for a higher margin of safety when purchasing non CAN$ assets to protect against a strong currency. My guess is the current trend will continue and the CAN$ will continue to go higher over the next year or two.

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  • 6 years later...

https://betterdwelling.com/city/toronto/marc-cohodes-short-canadian-real-estate/

 

“It’s international money laundering coming into Canada…regulations are very lax”, he further explained. “China has capital controls on their money, and Canada does not have respect for a nation that has capital controls”.

 

Bloomberg estimates that US$500 billion in capital has been moved out of China by mostly individuals, with a significant portion of it landing in Canada. Much of that has been moved into the Toronto and Vancouver housing markets.

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https://betterdwelling.com/city/toronto/marc-cohodes-short-canadian-real-estate/

 

“It’s international money laundering coming into Canada…regulations are very lax”, he further explained. “China has capital controls on their money, and Canada does not have respect for a nation that has capital controls”.

 

Bloomberg estimates that US$500 billion in capital has been moved out of China by mostly individuals, with a significant portion of it landing in Canada. Much of that has been moved into the Toronto and Vancouver housing markets.

 

As a local resident in one of the hottest areas in all of Canada and a big beneficiary of Chinese/Iranian money, bring it on!

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As a local resident in one of the hottest areas in all of Canada and a big beneficiary of Chinese/Iranian money, bring it on!

 

As a father of a student who will be entering the work force in a couple of years, I am disgusted by what is going on. Good jobs are hard to come by, and housing is out of reach. What a way to run a country.

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As a local resident in one of the hottest areas in all of Canada and a big beneficiary of Chinese/Iranian money, bring it on!

 

As a father of a student who will be entering the work force in a couple of years, I am disgusted by what is going on. Good jobs are hard to come by, and housing is out of reach. What a way to run a country.

 

yah and 100 years ago many europeans were in china buying stuff left and right.  remember hong kong and opium war?  it's just a turn of fortune.  remember we took over stuff from the natives in America?

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I think that Canada's situation will be good long term but there will be medium term weakness as we work through the real estate mess and delever.

 

Effectively when we decided to sell houses to each other at ever increasing prices we levered up and are paying more and more for housing. That means that house expenses are getting a bigger part of the pie. The problem is that there is money to spend on other things, which leads to weak demand and a not so good jobs situation. So the next 5-10 years while we work through the hangover will be a bit rough. Once we come out the other side and return to normal demand levels Canada will do very well.

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I don't think you need anything from China to set off Kanada. 

 

The Kanadian economy is built on real estate, oil, and financial institutions. 

 

Kanada doesn't really create anything. 

 

Kanadians are the patsy's are the poker table. 

 

The foreigners/locals buying real estate are weak hands, I have talked to them, they will flip quickly if things turn the other way. 

They are momentum traders.  They have no conviction, they just look at the price and follow like sheep.

 

PS Anything can set off a decline, including say a stock market decline in kanada that causes a loss of confidence that spreads.

 

Not gonna lie, I wouldn't mind if the nevada turkeys who bear raided valeant, and others, did a full on raid on the TSX.  I think the fundamentals justify going short most of the country. 

 

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Actually Canada is an advanced and diversified economy. We're a bit more heavy on resources than out peer group. But resources are nowhere close to the level that some people are thinking.

 

Housing and related activity (renting, relators, leasing, financing) is running a couple of points of GDP ahead of where it should be but that's nothing that some painful re-balancing won't take care of. The TSX is a different beast since the TSX is not a fair representation of the Canadian economy.

 

While I'm not fond of the corner we've backed ourselves into we'll be just fine in end.

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Never forget the $C is a petro-currency; relative to other currencies there will be repeating periods when the $C is very strong, especially when that other country is also having to import oil. Use it.

 

Never forget that Canada is a highly desirable place, & so is the Canadian passport.

Lots of space, opportunities, more open approach to the world, etc. - & for the most part protected from Europe's mass waves of refugees. Oceans to cross, & the US border, are quite some deterrents; mass immigration is highly desirable, but largely controllable. Hence, hard to see how most assets don't steadily appreciate over time.

 

Trump nation. Canada is full of very smart global standard entrepreneurs, but plagued with small minded & not so smart industrial policy; the more protectionist US and global trade becomes, the more pressure to smarten up that unsustainable industrial policy - & unleash that talent. And all magnified if the best and brightest of the world can't enter the US because they have the wrong sounding name or skin color.

 

Global warming. Like it or the not the North West Passage is opening, growing zones are moving northwards, northern hydro/mineral resources are increasingly becoming more accessable, and tar sands layers are increasingly becoming open to carbon sequesture - similar to Shell's North Sea 'Goldeneye' facility. The North West passage alone is akin to having both the Panama and the Suez Canals working for you - as there is little restriction on the size of the transiting ship.

 

From the multi-generational viewpoint, the place is looking pretty damn good.

All you have to do is transplant your new generation here; if they subsequently start a family - so much the better.

 

SD

 

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What do you mean we create nothing????  We make tar sand oil, maple syrup, to name a few things

:P

 

I'm Canadian and I have worked in financial services. My cousin is a IT consultant at Deloitte. My friend does User Experience Design. I recently met a couple that worked as chemists in the pharmaceutical industry in Brampton where they told me there are a tonne of companies.

 

I think most people's economic ideas are based on 19th century Mercantilism. Essentially the idea is that an economy is only a REAL ECONOMY if its trading actual physical things for Gold (in our case its now dollars) and whoever amasses the most Gold is the strongest best economy. Its a very zero sum competitive form of thinking. But its the folk economics that a lot of people actually believe in.

 

Thus China is a real economy because they make stuff and amass dollars. I once argued with an extremely intelligent person about this point. I asked, the question, about the whole world. The whole world effectively trades with no one and amasses zero IOUs with anyone else. This will continue to be the case until we encounter extraterrestrial life. Yet if your measure of economic strength is amassing IOUs through trade by selling stuff you make with other people...then on this measure the World as a Whole has no economic strength whatsoever.

 

He basically refused to accept the point. I guess I understand to some extent. In the past the most powerful countries typically made stuff: Germany, Britain and US all rose to prominence as manufacturing powerhouses with big trade surpluses. However, I think that the economic powerhouses of the future will not be making stuff and trading it. In fact I think the poorest and weakest economies will be doing this. Countries like China have already realized this.

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Never forget the $C is a petro-currency; relative to other currencies there will be repeating periods when the $C is very strong, especially when that other country is also having to import oil. Use it.

 

Never forget that Canada is a highly desirable place, & so is the Canadian passport.

Lots of space, opportunities, more open approach to the world, etc. - & for the most part protected from Europe's mass waves of refugees. Oceans to cross, & the US border, are quite some deterrents; mass immigration is highly desirable, but largely controllable. Hence, hard to see how most assets don't steadily appreciate over time.

 

Trump nation. Canada is full of very smart global standard entrepreneurs, but plagued with small minded & not so smart industrial policy; the more protectionist US and global trade becomes, the more pressure to smarten up that unsustainable industrial policy - & unleash that talent. And all magnified if the best and brightest of the world can't enter the US because they have the wrong sounding name or skin color.

 

Global warming. Like it or the not the North West Passage is opening, growing zones are moving northwards, northern hydro/mineral resources are increasingly becoming more accessable, and tar sands layers are increasingly becoming open to carbon sequesture - similar to Shell's North Sea 'Goldeneye' facility. The North West passage alone is akin to having both the Panama and the Suez Canals working for you - as there is little restriction on the size of the transiting ship.

 

From the multi-generational viewpoint, the place is looking pretty damn good.

All you have to do is transplant your new generation here; if they subsequently start a family - so much the better.

 

SD

 

 

In addition to these factors I would add some very obscure additional reasons I have come across.

 

Montreal is supposedly the North American capital to be so I don't think the boom has finished, especially in Montreal.

 

Curiously, only Montreal (of the major Canadian cities) aligns with the Great Lakes Pentacle likely surveyed by the so called Gods (as opposed to the giants in the mythical war between gods and giants at the end of the last age). All I can say is that whomever settled Canada in one of the previous ages were good at math, geometry and mapping and they likely left these mounds and alignments to stake their claim to the territory. As to whom the descendants of these Gods are we will have to wait for the release of the records left from previous ages. Anyone who does not have exceptional math skills and the ability to detect the earth grid subtle energies and who do not choose to live closer to the north pole probably is not a descendant. These subtle energies increase as you move north and are greater in the winter during spiritual summer (the real reason Christmas is on December 25th). Now that the subtle energies are strong enough again to create visible plasma in the aurora those who are so attuned may want to move north again onto one of these locations and learn why their ancestors cared about such things.

 

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