Juggling Dynamite

Further to the  vulnerability in insanely valued, heavily levered Canadian housing today, real estate investment securities reflect potentially even greater downside risk.  After all, at least you can live in housing as the price goes down (if you can maintain the payments), but for those holding real estate investment trusts (REITs), plunging price has no offsetting consolation or utility–just capital losses and mental torture.

As shown here on the Blackrock website, the Canadian (XRE) REIT reports a mix of realty types but as CMHC has pointed out, a downturn in Canadian home prices should be expected to spike unemployment and lead to an overall recession which will have knock-down effects on other wildly over-built areas like retail and office. (Diversified REIT’s are just those who do not break out their specific weights in each of the sectors).

Here is a chart of the US commercial property index to get a sense of how far prices have lept since 2009.

Below is my partner Cory Venable’s chart of the Canadian real estate investment trust (XRE) since 2002.  Arguably even more than 2008, price risk is u-u-u-g-e at the moment.  On the other hand, a mean reversion of 30 to 50% would go a long way in increasing yield and restoring investment prospects once more.  Unfortunately those who have been buying these securities in search of income the past few years, will be side-swiped.  Wise to wait on the sidelines for now. Much better entry points are likely as this cycle completes.

This is a necessary part of the solution. By demanding higher capital ratios of big banks, reckless bets will be curtailed, taxpayer risk reduced, and the too big to fail financial monsters will be incentivized to reorganize themselves to more responsible, self-insuring structures.

Federal Reserve Bank of Minneapolis President Neel Kashkari doesn’t accept the idea of letting an occasional financial crisis happen. Kashkari offers details on his plan to end the problem of ‘too-big-to-fail” banks on “Bloomberg Daybreak: Americas. Here is a direct video link.

A new report by Canadian environmental groups says annual government subsidies of $3.3 billion to oil and gas companies undermine Canadian Prime Minister Justin Trudeau’s plans to impose a price on carbon dioxide emissions by 2018. Oil Change International said, “This system is like taxing consumers when they buy cigarettes while giving massive tax breaks to tobacco companies that encourage them to produce more cigarettes. It doesn’t make sense.”

Report: Canada’s $3.3B in Oil & Gas Subsidies Undermines Climate Action https://t.co/Q82m8PVz9q pic.twitter.com/EZIEP3zZ7q

— Democracy Now! (@democracynow) November 17, 2016