Tuesday, March 31, 2009

GDP back to 2007 level

It just took 4 months to completely wipe out the 'growth' of last 2 years. January's GDP fell by an annualized 8.4%, taking the total GDP back to the levels last seen in 2006.

Is it possible that we'll undo the growth of the last 7 or 8 years of the debt fueled bubble before this is all over? I wouldn't rule that out?

In other news from closer home, the drilling industry is talking about utilization at levels last seen in the 1980s.
"It's similar to the downturn that we saw in the '80s," said Joe Bruce, chief operating officer at Nabors Canada, one of the biggest drillers in the country. Because of its position in the industry, Nabors expects to run 15 per cent of its fleet during breakup. It is currently at 21 per cent."

"Another conundrum concerns manpower: Faced with the traditional slack spring season, companies must decide how many workers will receive the traditional $140-a-day subsistence pay during annual training. It's a calculation that requires looking into the gloomy future and paring down staff levels to the bare minimum needed."

Wage deflation anyone? High unemployment?
If we are unwinding the excesses of last 8 to 10 years in virtually every domain, how will Alberta's residential and commercial real estate be any different? The bulls will get a chance to make their case in the comments, as usual.

Saturday, March 28, 2009

Calgary Deflationary Scenario

I've been really busy with work and haven't had opportunity to post. This post from RJT deserves more attention as it presents a hypothetical scenario which is now becoming more realistic to a lot of people in Alberta. Before this is all over, expectations of a lot of people will change- annual raises, retention bonuses, competing offers, wage inflation will have become a distant memory. Keep an eye on the natural gas price, if it goes below $3, it will get ugly here.


For fun, I would like to give a hypothetical example of deflation in action:

Let's take your typical youngish, Calgary engineer. He's been out of school about 4 or 5 years, and so has only ever seen good times, and doesn't have a concept of what "normal" or "recession" is. Let's call him "Radley", just for fun.

Radley, has done very well for a young man. Graduating during good times, he made 65K right out of school. Within 5 years, he got some good raises and perhaps a promotion or two, and is soon earning 120K. Radley thinks this progression is "normal" in a city like Calgary, which is basically immune to the booms and busts of the rest of the world.

Problem is, the bust comes unexpectedly, and everyone around Radley, including his engineering bosses, comfort him by assuring him it is simply a 6 or 12 month lull, before the perma-boom resumes. His boss even gives him a nice big "retention bonus" around Christmas.

But then something happens. The company that Radley works for starts losing contracts, and those that continue to hire the company, are asking for a reduction in price. Company starts with a "hiring freeze". After a few months, the company realizes that the next few years, probably won't look like the past few, and they need to reduce costs to stay in business. The best way to reduce costs is to either lay off engineers. If they need to hire again in a year or two, it is much cheaper to hire a young one for 60K, than one for 120K.

Some engineers get laid off, and look for other work. They can get it, but the problem is it pays them only 80K, instead of the 120K they were used to.

This is deflation in action. It is happening all around.

This actual wage deflation, memory of wage deflation, and fear of wage deflation is what takes all of the heat out of the local RE market. People don't want to over-leverage anymore, even with interest rates at rock bottom. Better to be safe. Better to have savings (not tied up in illiquid assets). Better to live in a smaller house.

It is a fundamental change in the way people act, spend, and behave.

Friday, March 13, 2009

Highest Unemployment in 6 years in Alberta

A while ago, I wrote a post, titled 5 years undone.
Some people did not appreciate it fully at that time. Perhaps they will now, as the decline in economic activity brought Alberta in tandem with the rest of the country. Unemployment in Feb was up to 5.4 %, the highest level in 6 years. That takes us back to 2003. This is officially 6 years of jobs gone, and we have not even started the real carnage. Double digit unemployment is very likely before the year is out.
While some people can continue to please (or amuse) themselves by looking at slight upticks in the daily or even monthly real estate prices, these numbers still do not reflect the underlying realities such as:
  1. More stringent Lending standards.
  2. Changed Employment picture -Normalcy is being restored in the market, from an 'employees' market to employers market.
  3. Real Estate prices are still very high. If we have unwound to the unemployment levels of 2003, energy prices of 2003, why won't we unwind to real estate prices of 2003?
  4. End of of euphoria. While the central banks are trying hard to inflate another bubble, it may not happen. Japan couldn't re inflate even when they had the good fortune of exporting to countries experiencing two booms (tech and housing) during the last ten years.
Have a good weekend everyone.

Monday, March 9, 2009

Predictions Made on this Blog

While the markets are doing what many on this blog have been saying for the last two years, it’s a good time to do a quick recap of how we have fared in the last two years on some of the predictions made on this blog:

  1. Don’t buy Alberta Real Estate. The prices have fallen by around $100k for the average property since hitting the peak. That’s a good $800 per month for the next 25 years amortized over 25 years.Expect further weakness here and at least another $1000 per month hit over the next 25 years.
  2. Commodities bust –There was a commodities bubble and it popped. It’s possible that we have not seen the bottom here, despite the steep declines in prices. Copper, Zinc, Uranium and almost every industrial commodity could be further impacted causing problems for Saskatchewan.
  3. Higher Unemployment- This is the unfolding story. With current unemployment levels still too close to ‘full employment’ and service standards in Alberta still reminiscent of $150 oil and $10 natural gas days, a lot of pain has to begin in this area.
  4. Falling Natural Gas- Back in January, I talked about the significance of natural gas to this province. The prices are still falling and we are sub $4 with natural gas. This will impact the profitability of big oil and gas in Calgary and provincial royalties. Back in 2002, natural gas was trading at around $2 or so. If we go there again, it’ll be a big problem.
  5. Falling Loonie-Back in August 2008, when loonie was still trading at mid 90s, I asked, if long USD and short Alberta real estate will be a good trade? So far loonie has fallen by more than 25 per cent from the days of parity and Alberta real estate has lost around 20 per cent or so from the peak. It’s likely that we haven’t seen the end of these trends.Today the loonie closed at 4 year lows of sub 77 cent levels.
  6. Decoupling is a myth- We are more tightly integrated than before, but decoupling has been the core argument of all commodities bulls and inflationists. So far it has been nothing more than a 'theory' like derivatives reduce risk in the financial system.

It’s entirely possible that these trends could change suddenly, but it doesn’t look very likely. This is not an investment advice either. You have to develop your own conviction about your economic worldview. Don’t rely on this blog. Don’t rely on Garth Turner (who incidentally does quite a bit of flip flop on the severity of recession, the $300 oil as soon as the recession ends, and that ‘depression won’t happen), Mish or anybody else. When you try to form your own worldview, don’t rely on the mainstream media and its poster boys. If everybody believes in what Mr Buffett says, it’s possible that his advice is now mainstream and may not reflect the underlying realities.

Your thoughts?

Monday, March 2, 2009

Recession, Oil Prices and Incogurence

Let's start with the headline of today-the Canadian recession. It's here and is gathering steam. The annualized quarterly number isn't so bad as compared to numbers of other countries, but let's not forget the lag effect. And if you recall, right until the end of October, most people were talking about recession as a 'US problem and not Canadian one.'
But if we were to annualize the December numbers, then our GDP shrank by a whopping 12 per cent. The GDP for November declined by 0.7 per cent. So for the last two months of 2008, the GDP declined by an astounding 10.2 per cent, a pretty bad showing indeed.
But this is a headline you are unlikely to find anywhere in the mainstream media as most people want to believe in the 'We are different', 'we are decoupled', 'our banks are solid' stuff.

M0ving on to oil...
There's something about oil that probably used to be the case with gold. I think several gold bugs are oil bugs now. Garth Turner for example. I like what he writes, at least most of the time, but I'm surprised how he can hold two incongruous viewpoints at the same time. He subscribes to the Peter Schiff hyperinflationary school perhaps.
On one hand he talks about falling economy, a potential depression, falling demand, job losses, massive unemployment and yet in face of that he also talks of $100 oil and a rising stock market. How is that possible? Unless he expects the recession to be short and mild, profits are not rising. And unless job recovery quickly takes hold, there will be a severe demand destruction for oil. The Chindia story is pretty much on hold, if not entirely dead, with Indian economy growing at barely 5 per cent or so in the last quarter. So what will cause a sudden spike in the oil prices? And if oil does indeed rise to $100, then at least one part of Canadian economy will continue to function nicely and that is Alberta. The oilsands investments will resume, the Canadian government and Alberta government's revenue projections won't be so bad and maritimers will flock to Alberta again. Happy days will return to Alberta and the speculators will rejoice once again. But in the face of grimmest economic news in the generation, is it likely to happen? I don't think so.

In similar vein, the oracle of Omaha who seems to be losing his way, says in his annual report that oil prices in $40 or $50 range are too low. Is he just trying to rationalize his purchae of ConocoPhilips? Or is there anything deeper in that statement.
If you recall Mr Buffett visited Albertan Oil Sands in August/September last year. At that time he had remarked (paraphrasing)"You could be the best mining engineer in the world but if you are not sure that oil prices will stay high, then oil sands investments may not be worthwhile."
Again, if thinks $40-$50 oil is not a good price, then why didn't he invest in oil sands? I find that Mr Buffett is now singing the same songs as the mainstream media about inflation, 'cash is trash', 'buy and hold forever', 'stocks are for long run' and so forth. Which is quite a departure from his old days of value investing that was clearly visible during the dot com days.

In other news, the Feburary Calgary Real Estate numbers don't stink too much. Sales, prices, days on market and pretty much all metrics are down with respect to last year.
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