Five years undone

Readers of Bill Booner’s daily missive will recognize a term that he widely used during last five years or so. He used to call the boom as a ‘crack boom.’ A boom in which nothing useful was created but everything was merely an illusion. Just like an eastern scripture says, ‘all that is visible is illusory.’ There was illusion of wealth and prosperity.Of achievement and triumph. Of mastering the business cycle by artificial setting of interest rates by a committee.

And now with oil falling below $35, we have undone almost 4.5 years of speculative and artificial demand of a product that would have made Alberta and Canada the Energy superpower of the world. Demand that was fostered by free credit, rampant speculation and excessive greed. Demand that disappeared as soon as the Hummers were repossessed, the McMansions foreclosed and factories closed down in China.

Too bad, that in one stroke OPEC agreed to reduce the oil production by the entire projected supply of the Oil Sands (by 2020).

This morning sitting in my office with a windchill of -35 outside, I am just wondering how could so many people around the world have been so naïve. The naiveté varied across cultures, continents and locales, based on some sort of fundamental underlying belief that ‘we are different.’ The 'weather in California', 'oil sands in Alberta', ‘Olympics in Vancouver’, ‘Microsoft/Boeing Economy of Seattle’, ‘BRIC magic of Mumbai’, ‘Manufacturing prowess of China’, ‘Financial juggernaut of London’….the list is endless. Every city had its own way of overpowering reason and common sense.

And now, we have to confront reality.

The consequences won’t be pretty. As most of Canada and several parts of the US go through a major cold weather streak, I can’t help but think what would have happened to natural gas prices if this were year 2005 or 2007. But then, until the ‘master thieves of universe’ started placing massive bets in the commodity markets on 50 to 1 leveraged funds, periods of massive spikes and volatility in prices were few and far between. Peak oil was merely an interesting theory and not a call to action for the doomsday crowd. Yet, a good majority of people who believed in a housing bubble did not believe there was a commodity bubble. Or bubble in oil and gas.

The entire Alberta Government and the oil and gas chieftains of Calgary or Houston did not believe that oil prices will fall again. But time and again, the unbridled optimism of investors and market participants is undone by Mr Market. This time is no different. Many on this blog ridiculed me for being a pessimist and believer in gloom and doom. Reflecting on this, I think I had been too optimistic for I did not know the extent of corruption, fraud and deceit in the underlying financial economy.

The reality of Alberta’s economy is that it is entirely dependent on the Energy sector. Once the energy sector slows down, as it is now, everything else will follow. Foreclosures, lay offs, bankruptcies will all rise leading to the prairie land version of rust belt. At least until the next wave of liquidity lifts the sunken boats of commodities. And the coming months and years will illustrate how inane the claims of diversified Alberta economy were.And perhaps for next few decades people will think numerous times before spending half a million dollars on a tiny shoe box.

Happy holidays to everyone.

Weekend Open Thread

I woke up this morning to hear not so positive news on so many fronts. The chicken are coming home to roost now and the years of credit excesses, leverage, denial, 'Greenspan Put' and speculation are clearly hurting the mainstream economies both in Canada and the US.

• US unemployment rose by over a whopping half a million. Worst since 1982. Bye Bye Goldilocks economy. Bye Bye quick recovery.
  
• Canadian unemployment rose by 77,000, a much worse number than the US if we account for population.
  
• The West is fairing better at this time, but it's only a matter of time. Layoffs are occurring at GE, Jacobs etc and the full effect of the ensuing commodity bust is only starting to getting felt.
• Oil is at $43 and more importantly natural gas is below $6. A fall to $25 and $4 will kill the economy of West in a replay of 1982. But 1982 will look like a picnic as compared to what's unfolding right now. Just for perspective, the 1982 recession was 18 months long. This recession is already 12 months old and until recently leading economists did not even admit that there was a recession. And Canada is only in a 'technical recession' as per our esteemed leaders. Expect things to get much worse on the employment front with a double digit unemployment rate a very real possibility.
  
• With manufacturing tanking and the commodities bust about to show its ramifications, what's going to happen to the real estate? Not a very pretty picture.
  
• The bust is here. It can't be wished away and most readers of this blog knew what was coming. Yet a few delusional ones bought and even had the chutzpah to lure others into buying by making specious arguments. With a grim employment picture, it won't take much convincing to anyone to put off buying homes. Or will it? When people have sleepless nights before signing on the mortgage papers and committing themselves to a debt for 25 years, we'll know the market has become normal.
  
• Finally, the loonie is down to 77 cents and change. The true companion of $25 oil would be a 65 cents loonie. So much for the collapse of USD.
• And here's a little bit of humour on this otherwise gloomy news day(from Calculated Risk blog comment post):
  

Lawrence Livermore Laboratories has discovered the heaviest element yet known to science. The new element, Governmentium (symbol=Gv), has one neutron, 25 assistant neutrons, 88 deputy neutrons, and 198 assistant deputy neutrons, giving it an atomic mass of 312. These 312 particles are held together by forces called morons, which are surrounded by vast quantities of lepton-like particles called peons. Since Governmentium has no electrons, it is inert. However, it can be detected, because it impedes every reaction with which it comes into contact. A tiny amount of Governmentium can cause a reaction that would normally take less than a second, to take from 4 days to 4 years to complete. Governmentium has a normal half-life of 2 to 6 years. It does not decay, but instead undergoes a reorganization in which a portion of the assistant neutrons and deputy neutrons exchange places.

Have a great weekend everyone.

What will Oil and Gas Bust do to Alberta real estate?

Several months ago, there was a poll on this blog that talked about the ramifications of lower oil prices on Alberta. The consensus then was that anything below $50 would be bad. If $50 were bad, what would $25 oil do to Alberta? And what will be the impact of $3 or $4 natural gas?
Many educated commentators on this blog have long made the case that the Alberta real estate boom had less to do with the commodity prices but more with the rampant construction activity and easy credit/speculation.
But we can't deny that at least there was some component of the increased demand from people who moved to Alberta in search of work. Now that it looks an oil and gas bust is a fairly probable if not likely event, what will happen to all the new Albertans who moved here just for jobs? They will likely move to places (in east or west) that have somewhat more diversified economies.
I've a few friends who moved to Calgary in EPC companies from all over Canada during the last few years. The EPC companies (Colt, Jacobs etc) recruited massively in the last few years in anticipation of the hundreds of billions of oil sands spending that everyone was counting on. With almost all the upgraders now canceled or indefinitely delayed and the spectre of $25 oil seriously threatening mining projects in Fort Mcmurray, I expect massive layoffs in EPC sector soon.
And that is just the start. Even though there are still lots of jobs in Calgary, almost everything in province is built around oil and gas. We have discussed in the past how our half trick pony energy industry manages to kill everything in the boom years that is developed during the bust years.

If the commodity bust really unfolds as I am afraid it will, expect the following:

• Sharp fall in provincial government resource revenue (this will be impacted more by natural gas prices) leading to fall in government spending, hiring freezes and potential layoffs in government. Let's hope it won't be 1992 all over again for government employees.
  
• Very few oil sands projects will continue to produce leading to sharp fall in profitability of oil and gas sector and consequent retrenchment of workforce.
  
• Since everything in Alberta is built around the energy industry, everyone ranging from accounting firms to staffing agencies will be impacted.
  
• A sharp slowdown in construction employment sending the transitory labour force home.
  
• Rental vacancies climbing and reaching 10 per cent or more.
  
• Flippers, speculators and others in the same genre who have been saved so far by a strong rental market will start hemorrhaging cash and will run to exits.
  
• Start of noticeable foreclosure activity in Alberta at this stage.
  
• Combination of layoffs, falling employment, tighter credit, foreclosure will pull the prices further down.
  
• And the vicious cycle will continue.

Of course, this is not a chronological forecast of things that are about to unfold but a likely scenario that can play out in several different ways but will most likely feature most of above mentioned items.

In most of the posts in the past, I avoided making a case for collapsing values in Alberta real estate based on the fundamental economic factors. But the dreadful bust scenario is now knocking on the doors of Alberta and the last few years of greed, speculation, excesses, lack of public policy will only exacerbate the problems.
It looks like the fat lady has sung on Alberta's most recent boom.

Anyone who is thinking of buying at this time is either too rich or too stupid.

Is the beginning of the second leg down in prices?

Residential Sales plummeted across the board in Edmonton and Calgary last month. The first drop in prices last summer was preceded by a sharp contraction in sales volumes from the bubble level sales.

While condos in both Edmonton and Calgary saw a sharp drop in prices, an across the board massive drop in value hasn’t occurred yet. Like a ten per cent fall in SFH values in Calgary or Edmonton in a month.

With the psychologically important oil prices below $50 and environmental pressures mounting in the face of an ultra liberal government, oil sands might not be the saviour of Alberta Real Estate after all.

If sales fall further in December from the levels seen last year, it’s possible that we are now going to see the second leg down for the real estate prices. And if the macro economic picture and commodity bust unfolds as I’m afraid it might, the spring bounce that so many sellers and realtors are counting on (yet again) will be more ephemeral than a mayfly.