Juggling Dynamite

A decade of ultra-low rates punished risk-conscious savers and encouraged profligate financial decisions among the masses. Rather than use record-low interest rates to get out of debt faster, most levered up to imprudent levels. Insufficient cash and falling prices are common themes as pandemic excesses unwind. This will take some time, but for the few prepared to take advantage of the bust cycle, it’s well worth being patient. The discussion below illuminates trends unfolding in the auto market.

Car prices went bananas after COVID hit — propelled by inventory shortages from disrupted supply chains & the unprecedented stimulus sent to businesses & households. Now here in 2022, the boom may be ending. Used car prices which nearly doubled post-COVID, have fallen for much of this year — though still remain much higher than their pre-pandemic lows. Also, lax lending standards in extending auto loans during the recent boom are coming back to bite lenders — the percentage of loans that are at least 60 days delinquent hit 1.65% in the third quarter, the highest rate for 60-day delinquencies in more than a decade. Where is the auto market headed from here? Will patient buyers be rewarded with better values in 2023? Here is a direct video link.

Something not mentioned in this discussion is that the vast majority of vehicle inventories are internal combustion engines (ICE) while demand growth is focused on cheaper-to-run electric vehicles and shared transportation as a service. #ICEglut

At the same time, the unprecedented global liquidity contraction unfolding (dark blue below since 1995, courtesy of Mikael Sarwe) has historically led corporate earnings (light blue below) by 12 months. Whistling past the graveyard, equity markets are priced for earnings growth over the next year.  More downside to come.

Truly other world…

Sandy Munro was blown away by Tesla’s profit margin, which is eight times more than Toyota’s.  Here is a direct video link.

Bank economist Robert Kavcic offers useful macro housing context in the Better Dwelling segment below. One caveat worth noting, though: from a price peak in February 2022, a housing bottom by mid-2023 would be an unusually quick downcycle.

Meanwhile, the Bank of Canada’s late but great tightening from March 2022 through early 2023 will contract financial conditions through the economy until at least March 2024, even if the BOC pauses and then returns to easing later in 2023.

How much will Canadian real estate correct? Is it a bubble? BMO senior economist Robert Kavcic drops some knowledge with our team. Here is a direct video link.

In other realty news: some 17% of office space nationally is empty in Canada, see Canada’s office vacancies hit record as space floods market.

The 13.6% vacancy rate in downtown Toronto is now the highest since 2003. An additional 62% of new space under construction nationally is expected to complete in 2023.

Also, overbuilding during the credit bubble has left excess square footage and inventory amid aging populations in many countries. See, China’s Housing Market will Revive but might not thrive. There are global consequences here:

China’s long-suffering property market will finally get some relief in 2023. But it seems unlikely to ever again become the enormous structural growth driver it was for most of the past two decades—a fact that will reshape future commodity markets and how China’s growth affects the world.