The Day of reckoning is coming

Here’s something to ponder on the Christmas eve: Alberta finally has seen negative inter provincial immigration (something we did mention several quarters ago as a distinct possibility). We have also seen the mortgages in Alberta that are in arrears (pdf) rising to the highest levels in years. We also have a fairly high level of unemployment, both official and the invisible ones (those who are off the EI rolls).
The economy grew in October but only because utilities were slightly costlier and the realtors and mortgage brokers found some bigger fools who seem to learn nothing from other peoples' miseries(US bubble, Albertans who bought at peak who are still under water etc). Despite that we are still meandering somewhere in late 2005 GDP level territory. And given the population increases since then, we are certainly doing a lot worse than a lot of special interest groups would like you to believe.

So all in all, the "solid fundamentals" that drove the Alberta's real estate market during 2005-2007, have all but vanished. Just to recollect, remember all the arguments from that era:

• People are moving in droves to Alberta.
• There are plenty of jobs.
  
• There's Alberta Advantage.

Yet, the prices keep on rising in late 2009. Which means, there must be some other factors at work. Like the factors we discussed way back in 2007 - speculation fueled by cheap credit and abetted by CMHC. And nothing else. Nothing is more important to the health of real estate market than the availability of cheap and accessible credit. And accessibility sure means NINJA loans, government underwriting, lax conformance to solid rules of lending.
Jobs don't matter. We have seen that. Negative inter provincial immigration doesn't matter. We just saw that in this quarter. Overall shrinking economy doesn't matter. We saw that this quarter.
But credit matters only until it stops mattering. Sooner or later something will give in.

The Honourable finance minister, having woken up woken up to the reality of a real estate bubble and the devastating aftermath it might unleash when it bursts, is contemplating changes to the CMHC's requirements.

That this bubble will collapse is a mathematical and financial certainty. Will it collapse under its own weight, like it had started doing last summer, or will it be done by exogenous forces?
Will 2010 be the year when bond vigilantes finally wake up? Will the bond market really live up to its reputation as the scariest thing?

For all the renters who have managed to save goblets of cash, don't forget to share your good fortune with those in need around you. Happy Holidays to all of you.

China Bust Scenario

• Is China overheating? An interesting post from Mish. Of great interest should be the video below where in a brand new huge city has been built with the obvious motivation of boosting the GDP numbers. Mal-investments? Who knows?
• What happens when the China boom turns to a bust or eventually runs out. For Canada, and even more for Australia, the only growth story has been commodities. Take away Commodities and Canada's financial situation overall becomes a lot more perilous.
  
• Obviously for most Canadians, such a scenario is nearly impossible to imagine. But remember until a few years ago nobody believed that housing prices could fall across the whole country, a la USA. So we are big fans of possible events that could become probable. Whenever the China bubble pops, the ramifications will be felt in the down under and the Great white north.
• Leaving aside all other cases such as higher interest rates, CMHC, real estate speculation, this is the real wild card that not too many people want to talk about. Why? Because they don't see it happening.
  
• And pray tell, what's our plan B, should commodities fall?
  
• A couple of more interesting perspectives on Chinese bubbles and GDP calculations.
  
• But such unsalubrious thoughts should not consume us during the Festivus season. Happy holidays to everyone.
  

Yet another voice on Bubble

It seems all the contrarians who successfully called the US housing bubble and global credit bubble are somehow feeling remiss in their obligations to their readers by holding back in their perspective on the Canadian real estate.
The latest one to call the Canadian bubble is yet another contrarian-Karl Denninger. He rarely minces words and boldly proclaims what a majority of Canadians will be loathe to admit:

Canada is in for a housing bust WORSE THAN OURS.

And what is his rationale?
Canadian family income as a whole ("families of 2 persons or more") is allegedly $70,000 (approximately.) The average house price? $325,000.
That's a multiple of 4.64, or dramatically into bubble territory (the maximum for affordable housing is roughly 3x, so this is 154% of the maximum!)
It's worse in places like Vancouver - there the ratio is over 10 (!) for single-family homes and about 8x for all residences.
And he concludes by warning:
Beware Canadians..... you can argue over the timing of the outcome here, but if you think the "bad event" won't happen and act on that belief, don't cry when a year or three down the road I start piping up with "I told you so!"


That's too much truth in there to be handled by the mainstream readers. So enjoy the double top formation in Canadian and Alberta real estate prices.

Canadian Housing is a Bubble, says Rosenburg

One of the better known analysts who is bullish on Canada, the loonie and overall Canadian economy has a somewhat surprising take on the Canadian housing market. Dave asks, if the Canadian market is in a bubble? And the answer is yes, even though he is somewhat more conservative in his estimates of the over valuation.

This adds to the list of commentators (Shilling, Mish, numerous bloggers) whose voices have not yet produced cacophony unpleasant enough for the BOC or the Feds to do anything about it. But if they don't do anything now, they'll have to do something in the next few years.
It's a funny and tragic commentary on the human emotions-most of us will continue to merrily believe "it can't happen to us, until it happens." The bubble has burst in the US, Spain, Ireland, UK and several other parts of the world. But where it hasn't, the unflinching confidence in real estate and 'we are different' thrives.

From today's Breakfast with Dave:

IS THE CANADIAN HOUSING MARKET IN A BUBBLE?

It sure looks that way. At a time when personal income is down around 1% in the last year, we have seen nationwide average home prices soar 21% and last month hit a record high, as did sales. In real terms, home price appreciation is back to where it was in 1989. Of course, back then, interest rates were far higher but then again, the economy was in the late stages of a phenomenal multi-year economic expansion, not making a transition from deep recession to nascent recovery.
While the Canadian economy is recovering, overall growth is still barely above zero as manufacturers grappled with excess inventories, a strong currency and a soft domestic demand picture south of the border. Employment conditions have improved, but are hardly that healthy, as we saw in the November jobs report where wages and the workweek were both down despite a constructive headline number (half of which were in the education sector, an inherently difficult area for statisticians to adequately seasonally adjust).
In answer to the question as to whether prices are in a bubble, all we will say is that when we ran some models showing Canadian home prices normalized by personal income or by residential rent, what we found is that housing values are anywhere between 15-35% above levels we would label as being consistent with the fundamentals. If being 15% to 35% overvalued isn’t a bubble, then it’s the next closest thing. We are talking about 2-3 standard deviation events here in terms of the parabolic move in Canadian home prices from their lows. So if it walks like a duck …

Real estate surge no ‘blip,' TD says

How do you categorize the definat housing market in face of rising unemployment, continual contraction of the economy, global recession, massive problems in the economy of our largest partner, surging trade deficit and {add your list of other problems with the economy here}? Here are the choices:

a) It's a bubble.

b) It's a bubble on steroids fueled by the greatest fools who have learnt nothing from the real estate debacle in the US, UK, Dubai and several other parts of the world.

c)It's based on strong fundamentals.

If you answered c, you can get a job as an economist with the TD Bank. But seriously, why would you answer it any other way? If you make a good chunk of your money by lending obscene amounts of money riskfree to the greatest fools in many generations, this would seem an appropriate response.

Let's talk a little bit about the fundamentals here, since we haven't dealt with those in a long time. I'll focus on my favorite ones-the ones that use the cost of production model:

-How expensive should land be in a country like Canada where there's no dearth of land? Especially in Alberta where there's usable land. Why are lots in Calgary sub division three to four times as expensive in Texas? New Mexico? Colorado?

I won't even mention the lot sizes here. The newer lots are a fraction of the size of older lots in the same city. I won't dare do a comparison with the US suburbs here. Everything is so much smaller. Because the developers can get away with it, just as retailers, auto makers, cell phone providers and everyone else in our country can get away by milking the sheep-would be Canadian homeowners.

-Why should there be so much difference in cost of construction across different parts of Canada? Yes, excluding the cost of a lot, why does it cost so much more to build a house in Calgary or Vancouver than in say Guelph or Barrie? I won't even venture to do a comparison between the US construction costs and the Canadian ones. We no longer have the problems of 'surging labour costs' as evidenced by the nearly 8% unemployment in Alberta.

What are the real fundamentals behind the house price increases? If you have been reading this blog for a while, you know the answer. And it's a four letter word.

Weekend Open Thread

• Short term rates in the US are negative again. There's certainly the fear of inflation that is about to be unleashed imminently, but for now, TBTB know that there's nothing to be afraid of by getting fully into short term UST.
• Here's an interesting perspective on the reflation trade- what if the commodity boom fueled since early spring is not based on solid sustainable demand? The answers won't be pretty for many, but particularly ugly for Canada and Australia.
• If CMHC keeps on expanding its balance sheet, will the bubble ever burst in Canadian real estate? Remember, the music went on in the US until mortgage reset based defaults started to hit the collateral quality in a direct way. Assuming the interest rates stay low for at least the short to medium term, what will cause the bubble to be popped in face of all the free money that is being thrown?
• Debt is the real enemy. It takes quite a lot of debt to produce any income stream. Be it professional education (medicine, dentistry, law school), small businesses (think of franchises and mom/pop shops) or a vanilla real estate(strip malls, apartment buildings, commercial condos). A friend of mine who was laid off from an oil and gas company late last year has been unsuccessful at finding any work in his engineering profession. He's looking at buying a small fast food type of business. For a small food business(think Subway Sandwich restaurant) that produces barely $100k of free cash per year, the prices are close to $500k. Why? Because there is plenty of debt available. Think of Canadian government's pledge to help small businesses via number of its programs and the BDC. These loans all inflate the prices of underlying assets, just as CMHC based loans make real estate more expensive. Same with student loans. Cost of education keeps on climbing because the government wants to make education affordable. In the process, they are making education more expensive by throwing more debt at everyone. 'Affordable' in the government parlance means- we'll lend you money so that you can afford something done by being debt slaves for the rest of your lives. Not unlike the targets of CMHC. In the US, this has reached a breaking point now with the recent riots in the Universities of California system. The government's solution is simple- keep on increasing prices for homes, education, small businesses and keep on providing more debt. All the government entities do the same task. Instead of making things 'affordable', they make all these things accessible to joe public. At enormous price. And in a nation full of financial illiterates and 'per month payment' champions, accessibility means affordability.

Have a good weekend everyone.

Weekend Open Thread

• Officially double digit unemployment in the USA. Too bad, the unofficial or the other official metrics of unemployment are much higher.
• Canada is not doing so badly at a mere 8.6%. But what's this, someone is actually questioning the discrepancy between what StatsCan reports based on household surveys and the official payroll reports. There's a huge gap between the two. The unemployment numbers based on household survey are very volatile for Canada showing huge gains and losses in a short period. Potentially, the higher the layoffs in a month, the more the vigor with which the ex-employees will claim that they are self employed. I'd say that the payroll report is more objective, unless we want to believe that employers are firing employees and then hiring them again pretty soon as consultants.
• But I guess none of this should really make any difference to the overall economy. After all, an economy built on speculation in stocks and commodities and selling homes to each other does not require such puritan thoughts as solid employment, savings, fiscal and monetary restraint. I guess everyone will now have more time to attend open houses, visit show homes and become day traders . {Sarcasm}
• Have a good weekend everyone.

Growing economy, more jobs and other lies

Why is it that every contraction in GDP called 'unexpected'? Or every decline in jobs seen through the eyes of economist who never saw it coming?Why do all these economics have to constantly bullish projections? I think I know the answer-they are the cheerleaders for their respective sell side institutions, including the central banks. Here's the headline from Globe and Mail:

Economy contracted slightly in August as gross domestic product fell 0.1 per cent, following flat reading in July, but economists still believe recession over.

Why should anyone listen to these moronic 'economists' when they didn't even see it coming. Some time in future they will all claim that they never saw the housing bust coming.

Two very sobering releases from Stats Can- the Payroll report and the GDP report.

The GDP number takes us back all the way to the fall of 2005 with a total output of around $1170 billion or so. So much for 4 years of growth and the new era of prosperity brought in by the dirty oil and natural gas speculators. The growth is occurring in the same sectors-construction and public sector. One paid by tax payers now and for the other the bill will be coming pretty soon in the form of tax payer supported bailouts.

Too bad, Canada didn't spend anything on stimulus plan. Oops...they did spend around $50 billion, but that wasn't enough to still get us out of recession. Next on agenda-more spending backed by the strength of the Canadian tax payers.

The payroll report is even more sobering -guess why nobody in mainstream media talked about it. More than 110,000 non farm payroll jobs lost in August. If you look at the payroll graphs you'll see that the employment numbers are back to 2007 levels only. But the GDP is back to 2005 levels. So the economy will most likely shed more jobs to produce the same extent of output and maintain similar level of productivity. Or may be most of the employment was generated by the public sector requiring no productivity.

This is all happening when the commodities have not been routed at all-they have merely come down a bit from their all time high prices. What will Canada and Alberta be like, when the commodities do enter their secular bear market? Is there a plan B here, other than continually expanding the balance sheet of CMHC?

Have a good weekend everyone.

And the secret recipe for continued housing strength is...

CMHC. Or secruitization and mortgages backed by us, the poor Canadian tax payers. CMHC has been given the go ahead to increase its mortgage cap limit to $600 billion by the Federal government. The government has full commitment to just one thing-ensuring that assets bubble don't deflate, no matter what the cost. For stupid $2 to $5 million items and expense items much smaller than that, there's a lot of debate, discussion, media attention and bickering. Yet hundreds of billions are implicitly guaranteed without anyone asking a single question anywhere. Such is the power bankers yield in this day and age.

Just for perspective, this limit is roughly half of our GDP. And when things go south, as they most likely will, what would it do to the Canadian sovereign rating? And deficits? the Loonie? Most of the people would ignore this, as they generally do until it's too late. We are following the footsteps of US just too closely.

The question is-will be lucky and see the bubble pop when the guarantees are mere $600 billion or will we have to wait till we hit a sweet trillion dollars or more?

At least the illusions of the strength of the Canadian banking system and the robustness of our lending practices are intact.

More on Natural Gas

Our province's economy depends significantly on natural gas prices. More specifically, a strong Alberta economy depends on strong natural gas prices. In the past, many have speculated the ramifications for Alberta if the prices were to enter a sustained downturn.
The recent shale natural gas discoveries are getting noticeable coverage in the mainstream media and many are even speculating that this will solve the perennial US dependence on foreign energy resources.
What do you think?

Deja Vu all over again

It's getting harder and harder to be a bear. It is as if the laws of common sense have all been rewritten. Less is more, debt is good, you buy houses when you don't have a job and prices rise in recession. The real demand is down, price cuts are rampant and yet inflationary fears are exacerbated by attempts to ward off almost certain deflation. It's harder to actually think rationally about finance, economics and market any more. Natural gas prices go up and down by more than 25 per cent in a single session. US Dollar keeps on falling on account of increasing deficits and loose monetary policy, yet most of the currencies it's declining against (CAD, Euro, INR, JPY etc) are just as fiscally profligate. Decoupling which had barely been buried solidly six feet in the ground just a few months ago is back with a vengeance.
We are closer to an 'economic black hole' perhaps, now that none of the 'old laws' of economics have stopped working any more.
Real estate wars are heating up all over the world. From Delhi to San Diego, it seems a solid resurgence in real estate has taken place. It seems the world is buccaneering again on the dosage of easy availability of money. No lessons from past mistakes have been learned nor any punishments served on those who brought about the pain to the masses. And here we are ready to repeat the show.
Real demand for finished products is down worldwide, yet China is building more capacity to export. China is stockpiling more of commodities, boosting Australia's economy. And this brings back decoupling back into vogue.
Multiple bids were common in 2005, 2005 and 2007. And they are back in the summer and fall of 2009.
What's the end game from this? The central bankers and pretty much all governments have only one faith and ambition- to somehow in someway refuel one global bubble. So far they are having some success.
What do you all think?

Alberta sans Natural Gas

Those who have spent any time in Alberta know that the province might get all the hype for its conventional oil and oil sands assets, but it is really a natural gas driven province. What would happen if Alberta's natural gas was simply 'priced out' of the market? What would happen to the provincial royalties and the provincial budget that has gotten used to the cushy $7 to $8 prices?
This article in the Globe discusses just that:

Combine that with a technological revolution that has allowed firms to profitably extract shale gas at $4 to $5 per thousand cubic feet, compared with $7 or $8 for new Canadian conventional supplies, and Alberta gas may find itself simply priced out of the market.

...“Canadian plays in general have some challenges because of the higher cost structure and greater distance to market,” EnCana chief executive officer Randy Eresman said this month.

Could Encana's forthcoming splitting might have anything to do with this changed game?

In the article there are a few other critical insights:

“There may well be a ceiling on North American gas prices,” Gary Leach said. “We may be range-bound – at the top end, around $6, $6.50 – and a lot of Alberta natural gas needs prices higher than that.”

“Either they bring down the costs and there will be a larger industry, or the costs remain the same and it will be a much smaller industry,” he said.

But wage deflation in the oil and gas sector is simply impossible? After all, don't Albertans have to pay well over $300k just to get a little shoe box in the middle of prairies?
Too bad, those signing up for 35 year mortgages based on the very recent prosperity of the province might wake up to numerous economic surprises during the different stages of their mortgaged lives.

Bad Karma- Consequences catch up with you, eventually

India is now the new diabetes capital of the world. Cases of hyper tension, diabetes and its subsequent consequences are common place here. But the street vendors and high end shops that sell low quality sweet junk and other similar Trans fat full crap are doing bustling business, even in these recessionary times. A local friend of mine has a cousin, who has been diagnosed with end stage renal failure and is expected to undergo a transplant in the next few months.
Yet, few people are concerned. I’m told that 20 years ago end stage renal failure was less common and people used to get worried over such prognosis. But not anymore. There are millions of people who have bee diagnosed with end stage renal failure and other complications that arise from hypertension and diabetes. Yet, both these chronic diseases are taken lightly. Why? If you are wondering what all this has to do with Alberta or Canadian real estate, please bear with me. At the current rate, roughly 1 in 10 people in Delhi have been estimated to be affected with Diabetes. A combination of bad genes, bad diet and lack of exercise has made this disease an epidemic here.

This is as much a social phenomenon as much as it is a public health problem. People are no longer worried about diabetes, hypertension or kidney disease because it’s normal to do so. The consequences- a drastically shortened life span and poor quality of remainder of life are not given much thought.

What does this have to do with Alberta real estate? A lot, in terms of the underlying psychology.
The Western economies have been afflicted with similar diseases. The severe addiction to debt- zero down housing, cars, massive funding for student loans, consumer credit, multiple credit cards-is similar disease. The consequences, which could especially be ‘at some point in future’ are not given a lot of thought. Especially because everybody else around you is doing it. The underlying human psychology is built primarily around ‘fight or flight’-things get our attention only when we see an imminent danger. Deleterious consequences especially that might happen at a time in the not so visible future are generally disregarded as ‘pessimist thinking.’
The sharp rise in housing sales this year in Canada is equivalent to the behavior of a diabetic patient who has been advised by the sane doctors to curtail the carb consumption, yet he increases his insulin dose and goes on a carb eating spree. Because at this very moment he doesn’t see any ill effects other than a few higher than normal medical test numbers. And this is considered ‘normal’ because he sees a lot of people around him doing the same thing. But in the slightly long term (anytime after immediate today), there will be repercussions. More debt today will result in greater pain tomorrow. Slower growth, higher taxes, higher unemployment and more bailouts. All leading up to end stage renal failure which might require a very painful transplant. Unfortunately, we do not know the treatment from this end stage debt bubble collapse.
Too bad, it is very hard to dissociate yourself from the less responsible in the society. We’ll be paying a price for the zero down mortgages, 35 to 40 year amortizations, and continued rise in prices. Even though we were responsible and did think of ramifications of our actions.

On a different note, I’m back in Alberta after spending a few months in India. Blog entries will become more frequent now.

The Pitch From Toronto...

It seems all of a sudden, hope has been replaced by ardent confidence. In fact, the same old scare tactic is back with a vengeance with a not so subtle mention of 'buy now...or..."
It might be the final hurrah before the ultimate demise, but going by the fervor in the following pitch, it seems a lot of people will get sucked in. A friend of mine who has some interest in condos in the Toronto area sent this mail:

Prices are rising fast. JUNE MLS SALES HIT ANSTONISHING HEIGHTS!

We have been pounding the table since January that all the signs were clearly pointing to a fast real estate recovery in Toronto.

At that time, we were starting to see growth month-over-month in sales, but the “chicken littles” in the media and financial community were still promoting the doomsday scenario with an apocalyptic fervor. My advice had been for buyers to enter the market as soon as possible.

With some leftover motivated fall ’08 sellers and crazy interest rates - it was a great time to buy, a fleeting setback in a rising,long-term, bull real estate marketplace. My prediction was for the real estate market to settle down and start rising again, represented by a strong

seller’s market by fall ‘09. I also indicated that Toronto’s development sites, which buyers have avoided like the plague for the past year, were going to get very busy by the fall. Well, I was 100% correct about all of it, except that the real estate recovery happened a little faster than I predicted back in January. June ’09 MLS sales were nothing short of spectacular. Almost 11,000 (10,955) homes were sold. This represents an all-time high. Keep in mind that June is

typically the 4th or 5th strongest month of the year. We are smack dab in the middle of a seller’s market. Most properties sell in a few days, many with multiple offers. Prices are rising fast. I expect that for the balance of 2009, we are going to see strong numbers. Currently, the time to sell, or number of days on the market, has fallen to an average of 33 days. Chronic inventory shortage exists in most areas.

What is now going to happen is a surge in new development sales. July and August will set the tone for a busy fall when I predict that over 1000 units per month will sell for the next several months. Buyers still have a great opportunity to purchase at rock bottom prices at most of the city’s new sites.

The inventory of ‘leftover’ suites is shrinking. Pricing at all of the city’s developments are going to start to rise. New development prices are currently 10-15% lower than

resale prices. This margin will close to nothing in 3-4 months with the strengthening new development marketplace. I predict that some new developments will be launched

in the fall and several will come to market next spring. It appears to me that our economy in mending quite nicely and by late fall we will be back to business as usual.

Despite what some doomsdayers still predict, the U.S. and the world is in a better place economically. We are now in a recovery mode. By 2010, the negative prognosticators will be

safely trotted back to their dark little holes where they spend the majority of their lives, having enjoyed their fleeting 9 months in the sun. “June ’09 MLS sales were

nothing short of spectacular... Most properties sell in a few days, many with multiple offers.

View from Bangalore

As I had alluded in the past, the severe cost escalation in pretty much everything in Alberta strongly dissuaded us from expanding our business in Alberta. Even after 20 to 25 per cent fall in housing and real estate prices and significant jump in unemployment, the Alberta advantage has not yet been restored. That is, Alberta advantage for companies that are not dependent on their physical presence in this province. Just 5 years ago, Dell had chosen Edmonton as one of its favored low cost locations. And just 3 years hence, it closed its operations.

So I’ve been visiting India for the last several weeks trying to establish our back office here. Despite all the bullish talk of the Indian economy’s miracles and the sustained 7 to 8% growth for decades to come, the mood here is somber. There is massive overcapacity in pretty much everything. The commercial real estate is massively over built, all in the anticipation of thousands of companies that would want to setup their back office operations here. Not that many companies have not done so or won’t do in the future- it’s just that the actual demand has been way less than the projections. Not unlike the real estate in the US, Spain, UK, China or dare I say, Alberta. The loose credit policies of central banks worldwide have transformed normal economic booms into massive manias. First the technology boom, which was a genuine economic phenomenon was masqueraded as the beginning of a new golden age. It was indeed golden age, but for those who were early to cash out their stock options and for the investment bankers who fooled the public by underwriting crap IPOs. Similarly, the genuine investments in Alberta’ oil sands and energy industry should have resulted in some uptick in the real estate. Instead, the massive credit bubble worldwide created party times for somewhat different constituency this time- home owners, flippers, mortgage brokers and of course the investment bankers.

Back to Bangalore. This place seems over populated, with roughly a quarter of the Canadian population in an area less than a fifth of the GTA. Everything should be in demand here, especially housing. Except for the fact that the current inventory of housing stock is unaffordable to majority of residents, even with generous financing. Software engineers, who were once princes and princesses of the ‘silicon valley of India’ are no longer the most desirable matches in the ‘marriage market.’ Not that the firms here don’t employ hundreds of thousands of such professionals, it’s just that the way too many of these professionals have been trained than there is real work. Once again, over capacity.

We found space in a world class business center at 40% of the rate that was given to customers last year. The reason- a major financial institutions fired its 150 employees who used to work in that office space. The business center is now desperate for any customers, and little fish like us have finally found the ‘value’ we had been seeking all this time.

On the employment front, a few ads on the popular job posting sites have yielded hundreds of resumes. Initial interviews have been fairly positive. If we are successful in hiring good candidates, we’ll be able to get 5 good people at the cost of 1 good equivalent Canadian resource.

We’d have loved to do this in our home province but alas, the Alberta economy has been severely disadvantaged to anything that is non-Energy based. Our competitors have all moved to lower cost locations and if we want to survive, we have no option but to do something similar. We figure that rather than closing down our operations entirely, it's better to remain incorporated in Canada and at least contribute something to the economy here in the form of taxes.

Before the reckless oil sands developments severely impacted all other non-dependent industries in Alberta, the province had a good shot at competing in so many industries. Housing was cheap, labour was skilled, high quality and affordable. A single wage earner making $50k could live a decent life since everything was so cheap. But all that is long gone. Once the inevitable end to resource driven boom occurs (just look at the UK), what will our economy be like? But who has the time to think about 10 or 20 years down the road when the priority for everyone is to milk the current setup for their own benefit? The recent rerun of the housing mania in Alberta and rest of Canada proves that unless it hits people directly, they won't learn anything from it. And that too, if they are really intelligent and observant.

We tried our best to not relocate our business out of the province. But the choice was simple-relocate or perish. Thousands of more businesses in this country will face similar choices in the coming months and years. The answers won’t be very healthy for the long term prosperity of our country. But who has time to think about all this when you can get rich just by buying and selling homes to each other?

Weekend Open Thread

Happy days are here again....

• Loonie up to 91 cents and change. Will we see parity again soon? Who knows. Ontario and Quebec are going to be in more trouble and manufacturing hit again.
  
• Oil up to $66. Are we going to see $100 oil again? Who knows. In any case, we sure seem to be running out of space for holding the excessive oil produced during the last several months.
  
• Up is down, good is bad, bad is great....fundamentals don't matter. Once again. We do know how this ended the last time, but everyone (Banks, Hedgies et.al) is back in the game with a vengeance, supercharged with the massive guarantees given by the governments of the world and inspired by their dedication to do 'good' to the world.
  
• And it's not misplaced. If they can all succeed in restarting the commodities bubble, so many problems will be solved. Like all those unemployed engineers and tradespeople in Alberta can start working on the oil sands again which will help energy companies produce more and generate more tax for the governments at all levels. Never mind the drag higher oil prices will have on the rest of the world and wilt the 'green shoots.' And we seem to have forgotten how the oil bubble ended the last time. But that was all so last year.
  
• The local real estate seems to be doing just fine again. For all those bullish on real estate, the only thing that matters is- but prices are going up and the sales are strong. This is all bolstered by the arguments specific to a locale- oil, weather, diversified economy etc. We all know how this has ended at other places but given we never completely fell down the cliff and miraculously got a lift on our journey downwards has revived many a faltering spirit. May be we are really different here. As many people would say- this is the last chance to get into the Alberta's faltered real estate market. Sigh.

Nortel Building Bought by City of Calgary

Some of you who are looking at commercial investments in future might have caught this one. The city of Calgary bought the Nortel's calgary campus for around $97 million.
Is it a good value? The city of Calgary assessed the property at around $125 million....so the city is saying that for commercial properties the actual value should be discounted by at least 20 per cent?

And you might notice that I've implemented a new comment system. It will make it much easier to get rid of the trolls and hopefully have a few moderators.

Guest Post: ARE THE CALGARY HERALD & CANWEST CORP ARE PAWNS OF THE "REIC" ?

This post was submitted by our regular commentator ...."Carioca Canuck". Guest articles are welcome and can be submitted to albertabubble@gmail.com

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This article reflects "my personal views and opinions" and expressed under the charter and its posting here is not a defacto endorsement by the blog owner nor GOOGLE.



Just what is news anyways ?

The collapse of a government, the egregious murder of a citizen by a criminal, the theft of money from a restaurant, the opening of a new neighbourhood business or a school, a proposed increase in civic taxes, transit parking being converted from free for the day to $3.00 a day....etc.....this is what is commonly referred to as news. Hard news. The Calgary Herald, and the other "newspaper" minions of Canwest Corp, in addition to the Canwest GLOBAL TV stations call themselves a news organization, but today, as they have many times in the past, they have crossed the line once again. Using the term "news organization" when describing this company should be taken with a grain of salt, no wait, you're probably going to need a dump truck full when you are done reading.

All over this continent the print media is losing revenue dramatically, companies are collapsing outright, employees are being laid off in record numbers, assets are being sold to fund operations, and that staple core of the print media's revenue, the advertiser, has run for the hills with their wallets firmly in hand, wherein they have found that the greater consumer reach and lower cost of the internet to be to their greater benefit.

So where does this leave The Calgary Herald, other newspapers, it's TV stations and their owners Canwest Corp ? With a .30 cent share price, you guessed it........like many other "news organizations" they are on their death bed in the opinion of some analysts, potentially facing bankruptcy and struggling for revenues. So what is a "news organization" with the power to spread whatever message they wish, as no one controls what they say or print, to do in these tough times whilst trying to stay afloat ? Grow revenues of course !! When I was young, I tried to make a deal with the devil. I said "Satan give me $1MM and a Lamborghini and you can have my soul when I die"........well, I never got the money or the car, so IMHO on that day, the devil did not exist. But today I am of the opinion that there is a devil....and it is the "Real Estate Industrial Complex" or REIC. The REIC is comprised of the media, home builders, real estate sales organizations, lending institutions and the government. So, is Canwest making a deal with this devil, or have they already done so ? Let's see shall we........

In the weekend edition of the Calgary Herald, you will see an abnormally high page count of advertisers from the REIC. The Herald's usual Saturday and Sunday editions which on some days are comprised of 120 + pages have had between 40-50 full pages of RE specific advertising over the last two years. In fact I have commented on this point some 5 + times here on this blog over the same period. Now what is wrong with that you say ? Well, nothing quite frankly, newspapers have to sell advertising to stay in business in order to print the "news". But the wheels at the Calgary Herald have fallen off the wagon some time ago.

Kathy McCormick is one of the real estate writers for the newspaper. I am not going to criticize her personally for the content of her articles, for if she didn't do what she was told to do, she'd probably be pouring coffee for Timmies. Here is her latest scribe, entitled "Dream Within Reach" in which she waxes eloquently about how record low rates, dropping housing prices, etc, etc, you know the story, make it a perfect time for first time buyers to pull the pin and figuratively blow themselves up financially down the road. Read the article closely, and you'll note that the Calgary Herald is going to do a 6 WEEK series on this phenomena !!!! Geesh......I wonder how much that cost the REIC ? Did any of you who read it see the disclaimer "ADVERTISING FEATURE" posted prominently anywhere in the text or heading of this "news" article as well ? Didn't think so. They won't even let us leave comments as that feature has been disabled for this article......ROTFLMAO !!!!

And then you have the eternal "permabull" Calgary Herald writer Marty Hope. He also can't be faulted for what his pen, or keyboard puts forth now can he ? After all, delivering the Herald as an unemployed writer would be most humbling. In the same edition, he gets his turn to glibly inform us of the power of that mysterious naive and clueless milquetoast......the first time home buyer. http://www.calgaryherald.com/business/real-estate/Dream+Within+Reach/1464293/story.html He appeals to them mercilessly, as they are the only group that can save the REIC from total and utter collapse. Again though, you see no "ADVERTISING FEATURE", nor comments section, indicating that this hyperbole must be the gospel truth and is not to be decried by those pesky basement dwelling renters.

Now Derek Sanker from the corporate parent CANWEST "news" service has his turn at bat in the same edition as well. "Paul Anderson and his wife Sue felt like they could only dream of home ownership. Much to their surprise, and after some negotiating, the couple was approved. "I looked at my wife with a tear in my eye and realized I might get a house," says Paul, 42." Please excuse me while I get a towel.......not for the tears, for the puke on my keyboard. Absolutely positively none of these articles are "news" or even "news worthy" in the clearcut journalistic sense of the word......none of them have "ADVERTISING FEATURE" posted cleary, nor a comments section. And here's why........

Mario Toneguzzi ("toneguzzi" is Italian for pile of gibberish) recently posted another "news" article for the Herald about how buyers are coming back into the market and raving about how sales have gone up over last month. Doouuh !! Look at the historical patterns and you'll see that happens every year at this time. Yet in this "news" article they left the comment feature on, and that is where you'll find the most accurate and digestible information about the state of Calgary's real estate decline. But it pisses off the REIC when they do that.......bloody basement dwelling renters again with their opinions.....heh.

So what do you, Bubble Bloggers, have to say about the Calgary Herald and the Canwest GLOBAL news organization ? Are they in bed with the REIC ? At $10,000 + per full page of Calgary Herald advertising is the REIC the only thing keeping them afloat ? While you are formulating your comments which I eagerly await, I will remind you of one thing beforehand. RE/MAX is the sole sponsor of the Canwest/GLOBAL TV evening "news"............

Analysis of New Home Price Index

While some people are celebrating the spring with the signs of the shoots, bottoming of the real estate market, rebound in oil prices, it could just be another case of triumph of hope over reality. Patience is the name of the game and those who are sitting without any interest in the markets can afford to wait out. There's no urgency. There's no rush.
The fluctuations in median/mean prices of new homes in Edmonton and Calgary could just be noise though the incontrovertible fact is that prices have been falling for almost 2 years now. That is if you bought anytime in 2007 or 2008, you are in the red.
The new home price index in Alberta gives an interesting perspective as it represents a more controlled set of sample space. In the index, they get information from the same representative builders/contractors who sell largely same/similar homes.

"The New Housing Price Index (NHPI) is a monthly series that measures changes over time in the contractors' selling prices of new residential houses, where detailed specifications pertaining to each house remain the same between two consecutive periods."

The new house price Index is down to 230.8 in Calgary from a peak of 248.2 in 2008. The Edmonton index has fallen more rapidly to 213.1 from a peak of 236.2 in 2008. Please not that the monthly peaks could be higher than the values I have as I did not want to give $6 to StatsCan for getting the montly data that should really be freely availalbe. And if that is the case, then the over pricing will be even more spectacular.

Given the humble readings of 137 and 147 for Edmonton and Calgary in 2005, one can easily see the 'bubble' there. From 100 in 1997 to around 150 took over 8 years, yet the index gained another 100 points in less than 3 years. And for all the arguments about increasing population etc, Alberta's population grew just as fast in 1996-2001 than it did between 2001-2006.

Why did the prices rise so much and so fast? For the same reasons it rose in just about all parts of the world. Easy credit. Speculation. 'Real Estate always goes up' mantra.

That game is over now, except in the minds of a few who are invested heavingly in real estate, either via vocation or investments. For us, we are losing our affinity to this province as we don't work in the Energy sector and our small business is taking off in a big way. As and when we decide to expand, we don't want to be based in Alberta for reasons we witnessed in the last few years. So we really have no interst in the market, except as an observer.

On a broader scale, what we are seeing now is a desperate attempt to revive the 'decoupling myth'. That's why the rush to commodities currencies, oil and everything else. OPEC has so far cut about 3 mbpd production and yet we keep on talking about supply constraints. Everyone (banks, hedge funds etc) is trying to play the same old game(lower dollar, higher commodities, rising stocks) because this is the only game they know. But alas! the numbers tell something else. Chinese exports are still falling hard (down 23% YOY) and it seems most of the stimulus China is providing is going into building more new factories even when the power consumption and utilization is all going down in the existing factories. But that's the only thing the Chinese government can do since it doesn't have any banksters to bail out.

Returning to the index of new home prices, if the prices were to keep pace only with inflation of 3% per annum, then we would see price index of roughly 143 or so in both Edmonton and Calgary, last seen in 2005. I recall that several long time investors who bought during mid 90s bust in Alberta sold in 2005 because the market was getting frothy at that time.

For a new home that is now selling at around $400k in Calgary, it's inflation adjusted price based on 1997 base of 100 should be $400*143/236 or around $242k. Remember, 143 is the inflation adjusted index based on an anuual inflation of 3% since 1997.
A similar home in Edmonton should sell for $400*143/213 or around 268k.

Which means, we are not even half way through the declines yet, assuming there's no over swinging of the pendulum to ther other side.

Entitlement and Delusions

The welfare queens and kings of Wall Street have already decided to start partying like it were 2007, never mind the trillions of dollars that have been forced upon taxpayers to keep these toxic dumps afloat. But, the underlying chutzpah at these places is enormous, along with the natural sense of entitlement that accompanies it. So what if we screwed up, so what if our products were garbage, so what if our products add negative value; we are entitled to the compensation, because we need to have the 'best and the brightest.' If this is the cesspool you get by hiring the best and the brightest, I wonder what would mere mediocres have done?

The OPEC ministers sing the same tune saying that a fairly high price of $50 is not good enough and is 'undermining economy.'
The wizards of the government economy in Alberta are not too different either as they are borrowing in the hope that the recession will go away if they wait for long enough. It's the same sense of entitlement- higher commodity prices- irrespective of the the macro economic situation. Well, here's a question. If $50 oil and $3.5 natural gas ain't going to cut it in Alberta, what happens if the prices again halve from here on? Can someone say the definite collapse in the mid east asset markets and Klein style cuts in not too distant future. Natural gas btw, is now down to around $3.2 and likely to fall further. We have been tracking natural gas since January and its slow but steady decline from $5 or more to the present levels. What this is doing to the drilling levels in the province and corporate profits will be discussed in another post.

At a more local level, thousands of 'landlords' are wishing that the recession goes away. They can't/won't/don't reduce the prices that reflect the current market conditions and hope that the prices will bounce back to a level higher than the current values. Again, it's a strong hope and delusion, built on the underlying entitlement of 'higher prices' for 'my real estate holding'.
The economy has changed since 2007. Many companies are talking about a permanent and new 'baseline' for sales, production and consequent growth.
The economy of last few years was a mirage. It ain't coming back, neither are the prices of assets that were used to foment this mirage.
A lot of people, currently on EI and the governments willing to take on more debt will recognize that despite the loads of apparent green shoots that appeared in last few weeks, nothing fundamentally has changed. The economy still stinks, no matter how much perfume is applied to it to make the stench go away. It simply can't be fixed by a culture of entitlement, and believing in the ideas of unfounded hope.
Debt deflation is here and it can't be wished away.

Season of Hope, again

The warm weather of last few weeks along with the ferocious rallies in equities markets worldwide has germinated what had almost disappeared by the middle of March. Optimism is back, and not lest due to the President who got elected on the message of hope. Optimism and hope are very powerful emotions, especially when there isn't much else available. And they were on vivid display and action during the last month and a half. The calls of 'the bottom' have been getting more vociferous, even if more cantankerous for us. 

So what if the world buccaneered in an orgy of debt for 25 years, the  magic potion of more debt by the Fed and the treasury cured all the problems in less than 18 months. The credit bubble will unwind in just as short a time and everything will begin their ascent to the end of the universe again. Oil will rise again, and so will other commodity prices. Alberta will blossom again, and this time Fort Mcmurray trailers will sell for $1 million. 

And how can we forget the major upswing in home sales across Canada? After all, sales in March have been higher than in Feb and those in April will probably be higher than in March. Notwithstanding the fact that this is as much of certainty as the average temperature going up in these months as compared to previous ones. But since this is the season of hope, no one is supposed to question such basics. 

But hope, like greed is a very powerful emotion. It clouds judgement. It diminishes the capabilities of mind to contemplate simple 'what if' scenarios. Not the ones that reinforce your perspective using selective data from the last few years.  Scenarios such as- what would happen to Alberta if oil goes back again to sub $30 level for a long time. Or if natural gas goes below  $3. Yeah, but we were told that oil  will never go below $80. 

I was looking at the new MLS site the  other day. For some reason, I did not hate it as much as I hated it the first time I used it. I almost liked it a little bit. If we forget the average and median prices for a moment, I think we are back to the levels last seen in April  2006 for many of the property types I used to track. A starter shoe box in Edmonton North is down to around $275k, and unlike in April 2006, there won't be multiple bids raising the price but some aggressive buyers who will ask for 5 to 10 % discount. It's the same story in Calgary. In Calgary, the homes that were selling for(at least  listed for $430k) are now going for around $340k, plus the  possible discount. 

These are not pretty numbers and have got to hurt those who have bought in  the last three years.  For most of these people, they haven't paid more than 5% of their mortgage and  are clearly in the red after accounting for the closing costs etc.

But these are all inconvenient facts. Facts that have the potential to dash hope and cause despair. And anger, frustration and grief. And that is to be avoided at all costs, no matter what the reality. So, the alternate reality world in which only good news happens, and is reported must be created and cherished. 

Credit bubble unwind, global deflation, falling employment, falling commodity prices, falling aggregate demand, falling real estate prices, exorbitant prices for shoe boxes, tapped out consumers, massive over capacity, end of 40 year mortgages, heavy over consumption and subsequent lower corporate profits are mere distractions. The world has changed with hope. We can wish the recession away if have strong will power. If we want to it strongly enough. Like the Russian comrades who could wish the fall of the Soviet Union just by believing in the alternate reality.  

But we know how that ended.  

Employment numbers tell the real story

...and it's being told in a not so straight forward manner. I find it interesting that the custodians of all the stats of our country have to resort to dubious math such as following:

20 full time jobs lost + 5 part time jobs gained = net loss of 15 jobs.

May be it has always been their way of reporting, but it does not paint the real picture. Part time jobs can't pay for mortgage in PEI, let alone in Calgary.

But of course, this is an attempt to make the headline number all the better and lure the masses into complacency.

Given the above equation, it's very interesting that the first line of the stats can report is this:

"Employment declined by 61,000 in March, all in full-time work."

whereas it should really be: Full time employment declined by 79,000 while part time employment increased by 28000.

Now where in the Statscan report do they mention the 79,000 figure because it represents the real picture. This is not unlike the local real estate boards registering the seasonal uptick in sales volume as new evidence of a booming or balanced market.

Closer home to Alberta, we registered another 20,000 loss in real, full time jobs, about 5000 more than that reported by Stats Can in their commentary. Once again, they add the part time jobs gain to the full time loss and arrive at a reduced figure. Our unemployment is up to 5.8%.

Going forward, expect at least 10 to 12 per cent unemployment nation wide. The repercussions for the real estate industry won't be pretty, as we have said many times in the past.

Have a good long weekened everyone!

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.

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.

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.

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?

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.

Thriving in the Recession(Depression)

The downturn many of us here had predicted, but no one particularly wished for, at least in the schnadenfreude way, is here. The deniers are still in huge numbers, but with every day of falling markets, fall in prices, canceled sales orders, interviews that do not convert and bills that do not get paid, their numbers will dwindle.
One of the good things that came out of this blog was that it prevented at least a handful of people from jumping on the Alberta real estate bandwagon during the last two years.

Having saved yourself of making a stupid blunder then (and assuming you didn’t change course, like a blogger who is mentioned here frequently), what are you doing now?

Here’s what I’m doing?

• Saving lots of money. As usual. Our expenses are fixed at around $3500 a month or so and we make a lot more than that. After taxes, rest is all savings. We plan to continue to do so.
• Continue to diversify the sources of income. We don’t rely only on regular employment income. We have significant business income (two different side businesses) along with interest income. We are always looking to add more streams and make existing ones grow so that our reliance is not great on a single source.
• Keep on tithing. That’s what we will keep on doing, especially in bad times when a lot of people will be in need of help. Of course, it doesn't mean giving money only to your church, but to any non profit that you think is going great work. Or to food banks. Of course, this is a purely selfish thing to do as it saves goblets of cash, come the tax time. If our income increases even in this market, we’ll proportionately increase our contributions to this end.
• Staying fit. The doom and gloom should never be internalized. This is a personal lesson from the dot cum bust era. It should be studied and examined and decisions made accordingly. One of the best ways of remaining positive is by working out regularly. I try to run 5 to 6 miles every day or do some other aerobic exercise for at least one hour. It will hopefully keep me away from the grips of Big Pharma in the latter years. In the short term of course, my energy levels are high, attitude positive and productivity improved.
• Volunteering. And that means doing things beyond writing good blog posts and posting useful links to help people. It means, trying to help other people with your valuable skills and time. And trying to make some difference.
• Not wasting time on TV-I haven't watched TV in a long time. Everytime I travel and see TV programming for a while in a hotel room, I feel so good about the decision of not having cable TV in our home. Not only does it save us several hours in a day, but it also helps us save $50 to $100 in cable TV bill. Plus, it keeps your materialistic desires in check and helps you keep all the propaganda at bay.
• Not Depending on Government Bailouts or Help- Believe in the old fashioned capitalistic way. Watch out for your interests and protect your interests. Do things that make sense to you. Don't get influenced by the mass media.
• Start looking for investment opportunities. This may not be the right time, but the right time will soon arrive. Keeping the cash handy for investments is a good thing, but zeroing in on the asset classes you would like to buy will be helpful too. Whether it’s commercial real estate, apartment buildings, dividend paying ‘boring stocks’, strip malls or anything else, clearly define the criteria by which you will define the investments and establish valuation levels that will make you comfortable, irrespective of the short term market fluctuations. And that will certainly mean looking beyond the valuations in play in the last two decades or so. I’ll post more on this once I have more time.

What are you doing?

Painful Lessons

In the feel good world of Canadian news, employers have taken a big clue from the politicians. Instead of laying off hundreds or thousands of employers in one go, most employers, at least in Alberta, are laying off people in smaller batches of 30 to 50 every day. Engineering firms are the primary culprit. Others are likely to join them in this 'non sensational', 'feel not too bad' way of laying off people.
I ran into three friends during the last week who work for engineering companies. The story is the same everywhere. EPC companies have vacated 'floors and floor's of engineers who used to work on the energy industry projects. His own concern was, "How would they pay their mortgage?"
Good question. But asked a bit too late.
During the last three years, the overwhelming attitude in Alberta (or indeed worldwide) was that bad times had been defeated forever. Much like those talking about the 'End of History', the idea of conquest of the business cycle proved a bit premature.
In several parts of Alberta, new immigrants or those who recently moved to Alberta, got themselves into huge mortgages, driven by the propaganda of the usual suspects (realtors, realtor associations, banks, mortgage brokers, newspapers etc). Most of these people have not seen even one real business cycle. That is, they have never tasted the pain that usually follows any huge boom. The bigger the boom, usually the bigger the bust is, especially if there were speculative elements built into the boom.
I had first hand experience of this while working in the IT industry during the dot com bust. But that bust was confined to a specific sector of the economy and was 'cured' by the magic potion of cheap credit, which at that time, had already been in good circulation. The central bankers merely increased it dosage to extreme levels and ended up creating a cure far worse than the disease.
Thousands of engineers are in the process of getting laid off in Alberta and lot of these engineers have huge mortgages to pay. These are all well paying jobs, with a good multiplier effect. The pittance of EI will not even cover the basic mortgage for most of these people, increasing the chances of bankruptcy and foreclosure.
Not to mention the case of all speculators who have multiple properties and were so far insulated by the relatively good rental market. The rental market is becoming softer everyday (the layoffs have something to do with it) and will pressure a lot of these speculators.

Until a few decades ago, people's hands would tremble before they committed themselves to a 20 or 25 year long mortgage. Now, it's just become a no brainer activity and an absolute essential thing to do as most people try to keep up with Joneses.
The real meaning of paying $2000 to $3000 to your banking masters, no matter what-rain or shine, health or sickness,good times or bad, strong economy or weak, fruitful employment or despairs of unemployment- over a really long period of time has been lost. For people have forgotten that the borrower is a slave to the lender. When times are good, not too many borrowers recognize this (Even though more than half of their pay cheque goes on to pay the interest over their deprecating assets such as cars and houses), but when the pay cheque stops, the reality begins to sink in. Too bad, in this day and age, you have to be a heretic to not have a mortgage when you can easily afford to.
The real estate complex has been incredibly successful at luring people by all means- fear, deceit, greed and specious economic reasoning. Buy now or be priced out. Smart people buy houses. Renting is throwing money away. Houses have appreciated at over 7 per cent per annum since the dawn of civilization.
As job losses mount and foreclosures increase and new employment opportunities continue to dwindle, a whole generation of people is about to get painful lesson on the basics of economics. That those in the media lie. Realtors lie. Bankers lie, cheat and swindle. They lie because they are in the business of selling their services and lying comes as a part of their training.
If you- the individual or the family-does not take care of affairs on your own by being economically literate and proactive, you will keep on getting painful lessons.
Once this fresh generation of 'suckers' get their lessons, speculation in real estate will freeze for a decade or more. Until the next generation of freshly minted (by immigration, emigration or from our glorious education system) 'suckers' is ready to take their place and the story begins again.

Weekend Open Thread

• As almost every realist knows, unemployment situation is getting grimmer by the day worldwide. Specifically in Canada, we shed over 129,000 jobs last month. That's a huge number. More than the specific economic damage these numbers do to the economy of the region, the bigger damage is done to the psychology of the consumer who will put off purchasing big ticket items, heck even small items. The regions west of Thunder Bay seem to be holding on the best so far. But for how long? Once the gravity of global slowdown is fully priced in to the commodity markets, the bust here will rival that of the manfucating towns of the Central Canada or even worse.
  
• The US fared far better than us on Per capita basis, losing 'only' 598,000 jobs. This way we have lost more than twice the number of jobs than the US last month.
  
• The Official Unemployment rates in both Canada and the US are at 7.6%. How quickly have we caught up with our southern neighbour. I can't help but reminiscence the conversation I had with Honda Car Dealership Manager a few months ago when she said, "But this is an American problem. Our economy is strong here." Hopefully by now she has waken up to the reality that few are insulated from this global slowdown and by every characteristic this looks like a totally different beast. Much different than any other recession most people have seen in their lives.
  
• What is the way out? People are waking up to the reality that almost everyone whose opinion they thought they could trust, has been lying to them. The elected demagogues, real estate agents, central bankers, economists, company CEOs, mainstream media and almost anyone with any shred of authority. Before this is all over, people will trust themselves more than they trusted 'Suzzanne' or their friendly neighborhood mortgage broker.
  
• We need to watch out for ourselves. It's a very simple thought, but too many people have forgotten what it means to take care of their own affairs. A little paranoia is not bad, as Andy Grove used to say 'Only the Paranoid Survive.'
• We need to excel at our own jobs so that in a globalized workforce environment, we can offer more value while in Canada than those in other parts of the world. This is most relevant for the 'information workers', that is all those whose jobs can be taken offshore with a click of mouse. We need to have huge savings so that we can ride out the downturns in a better way, without expecting too much from the government. To give you some perspective, some of my friends save over 75% of their net income. They do make comfortable six figure incomes, but I think it's got more to do with the attitude towards savings than with the specific dollar amounts that people make.
  
• Almost every idiot urging you to go out and spend is doing so to promote their agenda. Real value and real economic activity is created by real savings and not by debt. We have had almost no savings in this part of the world for the last decade or so. Wtihout real savings, there cannot be meaningful investments and no real job growth. Speculation driven investments in commodities and real estate disappear sooner or later leaving very few real jobs. But I doubt if too many people in the right places will suddenly develop an urge to do anything about this. Instead, they will push people to take on more debt, annihilate more of their savings on bad home upgrade projects and push them further into perpetual wage slavery, albeit at wage rates with an equilibrium point determined by third world level wages.
• Talking about the specifics of Alberta real estates seems almost a detail in the midst of the global turmoil. The prices of almost everything are way too high across the province. They will fall. Unemployment will rise and so will the foreclousres. Those buying at this time either 'must buy' (not sure who they are) or they are incredibly naive. Or they still have faith in what the Bank of Canada governor who believes in magical second quarter turaround. May be in next life, due to accumlated bad karma, Mark will be born as a realtor association economist that believes in a perpetual second half rebound.
• And while, the economy is going to hell, bankers are fleecing billions and potentially trillions in dollars from the tax payers, Canadian are expressing outrage at a 60 year old woman giving birth to twins. No wonder fleecing the masses is trivial-it's too easy to distract people from the real issues! In 21st century, it's more than bread and circus- it's bread, circus and drama!
  
• Have a good weekend everyone.
  

Thoughts on the Budget

The budget is out and there is nothing meaningful there. Opportunity to cut taxes substantially or even send some stimulus checks that are commonplace in the US and heck even in Alberta, at least in circa 2005 has been squandered. Keynes would have been delighted had he been alive today at the tremendous following his works are getting worldwide. Canada will issue over 85 billion in debt to finance this increased spending. So much for the 'better fiscal shape' of Canada. And the consequent prospects for rise in the loonie. I think deficits will be even worse than the current projections as the full magnitude of commodities collapse trickles down to the various sectors of the Canadian economy and the government tax and royalty revenues.

In addition to the above, at tax payers expense, the government will buy more of toxic garbage, this time not confined to only homes but securities backed by used Hummers and Dodge Durangos.

It’s clear that the only trick known to the government worldwide is the one taught to them by the bankers and that is-credit is everything.

There’s no point of putting money directly into people’s pockets even as hundreds of billions are given to bail out inefficient and corrupt bankers.

And by the looks of it, I doubt very many people are going to be impressed by the little tax cuts that are offered.

Looking at the budget, all I see is future tax increases for our progeny while we get little if any benefits out of it.

Your thoughts?

Weekend Canadian Delusion Edition

• This morning while perusing some Canadian news, I come across a headline "Home Depot buys its way out of project." Sure, bad times mean such decision are likely. But this is what I find instead as an explanation:
  

"Home Depot's decision is further proof some Canadian retailers are paying a high price for the economic woes south of the border, some observers said.

"They're (Home Depot Canada) definitely getting pressure from their U.S. parent just because things are so bad in the U.S.," said Michael McLarney, editor and publisher of the Canadian online home improvement retail magazine, Hardlines.

Are these guys for real? Don't they still see any problems with Canadian economy? When will they admit Canada is for twice the pain as the US.

• Continuing on the topic of bigger pain, I think Canada experienced two bubbles while most other first world economies (Except say Australia and New Zealand) experienced just one. Our first bubble was the housing bubble and our second bubble was the commodity bubble. Which is why we are likely to be hit twice as hard in terms of falling employment exacerbated by falling commodity prices leading to further problems with the housing market.
  
• The symptoms of deflation are here in Canada: "Canadian consumer prices fell a third consecutive month for only the second time since 1931 as energy prices plunged, giving policy makers room to lower interest rates to revive the world’s eighth-largest economy." They still believe in the infallibility of the central bankers and their ability to cut rates and force the economy out of the mess. The falling loonie will give some encouragement to Canadian 'inflationists' but purely Canadian items such as housing and wages will continue to fall further. A friend of mine in IT recruitment said that she has change a sea change in the attitude of lot of job seekers since November.
• Your thoughts?
  

Who could have thought this? Suncor making loss

It's probably an aberration as the prices plunged a lot faster than they had time to adjust their cost base. But it doesn't' bode well for Capital spending that a lot of Edmonton and Fort McMurray bulls had their expectations tied to.

The board this month approved a revised 2009 capital spending program of C$3 billion, with about one-third of that for “growth projects” and the remainder for the “base business,” Suncor said in the statement. An October plan had targeted spending of C$6 billion this year, 21 percent less than in 2008.

And as we have said numerous times in the past, clinging to historical highs is stupid. Suncor CEO admits,

“I think there’re some people hanging on to the history of it rather than the go-forward basis,” George said during the call.

What's the plan B for Alberta's future prosperity?

Weekend Open Thread

• Based on the amount of spam left on previous thread by someone not too happy with the existence of this blog, it seems the blog is still serving a purpose. I've been incredibly busy with a few project deadlines and will resume posting more frequently soon.
• I'm working on getting a better comments system in place so that the spammers' IP Addresses will be banned and publicly posted on this blog.
  
• Just as I've mentioned a number of times in the past, as soon as resource revenues fall, there's going to be a big trouble with provincial government employment levels. The big guys are finally admitting it and we know it won't end happily. The funny thing is that nobody questions how the governemnt was able to generate massive surpluses a few years ago with oil prices at $35 and now the same governemnt is going to be solidly in red at the same prices of oil. Perhaps the natural gas prices are the factor but they haven't admitted it yet.
  
• Have a good weekend.
  

Few will escape this unscathed

Residents of Alberta island, especially those with strong vested interests in high commodity and real estate prices are about to wake up to a harsh reality. The falling prices of oil were affecting the future prosperity and project based construction and engineering employment. But now there’s another potentially dangerous animal circling on top of Alberta economy-falling natural gas prices.

A lot of people don’t pay much attention to natural gas prices, but they are the bread and butter of the province, especially of big corporate in Calgary and the provincial government royalties. Oil royalties are merely a drop in bucket as compared to what the Alberta government collects from natural gas (by a factor of 6).

Today natural gas prices fell to 2 year lows of around $5. Should the natural gas prices fall further, as they just might in face of severe demand contraction, there will be massive further fallout from this in provincial government and corporate employment levels in the province.

Natural gas business is the cash cow for most businesses in the province while oil sands was the future growth business.

The growth business is now in dumpster and the cash cow will likely come under severe duress. There’s no way this will have a happy ending for the provincial economy.

Right now it’s hard to find a sector of economy that is booming or even going steady, bankruptcy specialists excepted.

If worldwide demand continues to fall across the board as it has, there’s no one that will escape unscathed.

Despite a significant fall in the oil prices, there was a noticeable decline in consumption of gasoline in the first week of this year. Unemployed people don't take skiing trips , take extended vacations or go for frequent shopping trips to the mall. Those who are fearful of losing their jobs show similar behavior.

Everything ranging from dental hygienists to entertainers will feel the pinch of this slowdown. A lot of demand of everything in last several years was just as fictitious as the NINJA loans and demand for virtually everything is falling apart worldwide. In face of this, Canada’s (and Australia, Brazil, New Zealand’s ) economy cannot remain insulated.

It wouldn’t take a genius to figure out what a further collapse in commodity prices will do to Canadian economy and Alberta real estate.

Those who are contemplating buying in this environment at ridiculously inflated prices will have severe cases of post purchase dissonance for many years.