REIT retreat cycle likely to continue

On an ex-dividend basis, the Canadian Real Estate Investment Trust Index (XRE) is today some 9% lower than its prior cycle peaks in both March 2007 and April 2013, and has fallen 3% since the Home Capital meltdown intensified last month.

But if past cycles are prologue, the price-indiscriminate capital that flooded into this sector, desperate for yield the past 4 years, faces much further downside ahead.  The problems here go way beyond Home Capital, to a sector that has been grossly over-built, over-bought and over-valued.

The REIT index lost 62% of its value between March 2007 and 2009.  Eight years of excessively rising debt and property prices since, have set the sector up for another cycle of deep disappointment.  After mean reversion, buyers will find yields about double current levels with a fraction of the current capital risk.  In the meantime though, downside risks are due.  See: Hit bottom on Home Capital?:

Problems at Canada’s REITs go beyond Home Capital’s woes. A slump in oil prices has hurt demand for property in Alberta, the country’s big cities are seeing rents fall far behind price gains, which dents revenue, and online shopping has shrunk traffic at malls. Finally, in times of broad market stress, REITS behave more like stocks rather than safer bonds, according to Pavilion Global Markets Ltd.

“We find the risk-reward in Canadian REITs to be quite poor in the current environment,” Alex Bellefleur, an analyst at Montreal-based Pavilion, wrote in a strategy note Wednesday. “In the context of Canada’s property bubble, we would stay away from this asset class.”

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The future of transportation and the death of big oil and big auto

The future is so much more efficient than current systems, and for a world population moving to 8 billion and beyond, this evolution is coming just-in-time.

A new, must read, report from energy entrepreneur and teacher Tony Seba lays out the future of transportation and how it will drastically reduce the need for not just fossil fuels and their producers, but automobiles, along with all the associated financing costs and expenses.  The Telegraph’s Ambrose Evans-Pritchard summarizes key findings from the report here in:  All fossil-fuel vehicles will vanish in 8 years in twin ‘death spiral’ for big oil and big autos.

This is all creative distruction to existing models and thinking.  Pouring finite capital into old technologies and systems like pipelines, massive automobile showrooms and parking garages, is good money wasted.  Many high-cost oil producing countries, companies, and fields will see their production entirely wiped out. Exxon-Mobil, Shell and BP could see 40 to 50% of their assets become stranded.

The upside is a huge reduction in friction costs and waste, leading to an exponential s-cruve of adoption and productivity gains in the economy where today’s debt encumbered, cash-strapped consumers waste less, while benefiting from fewer expenses and an improved standard of living.  Also see:  Is Tesla’s lead bigger than we think? So-long planned obsolescence, hello million-mile, shared, autonomous vehicles:

“We already know that the operating cost of an EV platform is far lower than a gasoline vehicle. Fuel costs are way lower because electric motors are more efficient than combustion engines and electricity is cheaper than gasoline. Maintenance costs are way down – just 20 moving parts versus 2,000 means there’s much less to go wrong– and an operating environment that has little heat, friction or vibration – the scourges of gasoline vehicles. But the biggest cost is the depreciation cost – the way vehicle owners recover the upfront cost of the vehicle – and this is where A-EVs have a huge advantage.”

The full, 77 page report, with great graphics is available here: Rethinking Transportation 2020-2030: The disruption of transportation and the death of the internal combustion vehicle and oil industries. Here is the executive summary:

We are on the cusp of one of the fastest, deepest, most consequential disruptions of transportation in history. By 2030, within 10 years of regulatory approval of autonomous vehicles (AVs), 95% of U.S. passenger miles traveled will be served by on-demand autonomous electric vehicles owned by fleets, not individuals, in a new business model we call “transport-as-a-service” (TaaS). The TaaS disruption will have enormous implications across the transportation and oil industries, decimating entire portions of their value chains, causing oil demand and prices to plummet, and destroying trillions of dollars in investor value — but also creating trillions of dollars in new business opportunities, consumer surplus and GDP growth.

The disruption will be driven by economics. Using TaaS, the average American family will save more than $5,600 per year in transportation costs, equivalent to a wage raise of 10%. This will keep an additional $1 trillion per year in Americans’ pockets by 2030, potentially generating the largest infusion of consumer spending in history.

We have reached this conclusion through exhaustive analysis of data, market, consumer and regulatory dynamics, using well-established cost curves and assuming only existing technology. This report presents overwhelming evidence that mainstream analysis is missing, yet again, the speed, scope and impact of technology disruption…These systems dynamics, unleashed as adoption of TaaS begins, will create a virtuous cycle of decreasing costs and increasing quality of service and convenience, which will in turn drive further adoption along an exponential S-curve. Conversely, individual vehicle ownership, especially of internal combustion engine (ICE) vehicles, will enter a vicious cycle of increasing costs, decreasing convenience and diminishing quality of service.

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Time to reboot the economy into the virtuous cycle

Good little primer on why we need to get back to saving and investment rather than borrowing to consume and throwing capital at reckless bets in financial markets.

A short animated piece on the benefits of savings and investments. Here is a direct video link.

Also see: US household debt hits record in first quarter.
And OECD: Continued slowdown in productivity growth weighs down on living standards.

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The other side of today’s record debts are asset bubbles

This important article Canada’s Middle Class is on the brink of ruin, should be read with empathy, but also with recognition of the practices and behaviors that have strip-mined families for short-term spending at the expense of the country’s longer term health and stability.  Easy access to credit, risk-sellers handing out financial ‘advice’ (No Scotiabank, Canadians are not ‘richer than they think’) relentless lifestyle marketing, poor wage gains, and a lack of personal discipline, are all part of this toxic mix:

“Canadian households are now carrying more debt than those of any other G7 nation. By the end of 2016, Canadians owed a total of $2 trillion in mortgages, consumer credit, and loans. Millions of us now report living paycheque to paycheque, spending almost everything we make.

The reason our debt level is so troubling to economists is that we appear to be nearing a breaking point when it comes to our ability to manage it. In a recent survey by Canadian Payroll Association, ­almost 48 percent of respondents admitted they wouldn’t be able to make ends meet if their paycheque were late even by a week. Canadians, in other words, don’t have much of a cushion to handle an economic shock—such as a jump in interest rates or a loss of income. Yet thanks to all the cheap credit being doled out by banks, many of us can bridge our financial shortfalls for years before realizing we are on the brink of ruin.”

This particular story is about the financially fragile majority who have debt and little net equity.  Yet few people appreciate how vulnerable 17 years of debt pumping has made even the wealthiest 10% of households today.  This fortunate group–mostly boomers ages 51-71–are now at or nearing the end of their working life, while holding the bulk of their net worth in low, zero and negative-yielding real estate and financial assets at obscene valuations with massive downside risks.

While the highly indebted no doubt feel vulnerable, in the end we don’t have debtor’s prisons, those who can’t repay what they’ve borrowed, stand to ‘lose’ debt, through default and bankruptcy.  It is the minority holding assets today, that stand to lose net worth in the deflation cycle ahead.  It would behoove them to appreciate the connection here.

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Words to the wise: don’t wait until the recession happens to make changes

Automakers have widespread shutdowns planned for the summer to adjust to the U.S. car market’s recent slowdown.  As shown below, in April auto sales contracted in the three largest global markets, for the first time since the 2008-09 recession.  The sales downturn is consistent with the negative trend in global debt impulse seen year to date.

It also conflicts directly with upbeat projections on consumer spending and the state of the world economy, now 8 years since the last recession.  See:  Motown slowdown runs counter to Trump touting automotive growth:

“We are continuing our intense focus on cost and the reason for that is not only mindful of the current environment that we’re in, but also I think preparing us even more for a downturn scenario,” Fields said on April 27.

In the U.S., Ford has about 30,000 salaried workers. The company employed a total of about 201,000 workers as of the end of last year, including about 101,000 in North America, according to a regulatory filing.

“It’s sad to see jobs disappear when the company is still doing well. But you should do it when you identify the need,” Whiston said. “If you wait until the recession happens, you’re just delaying the inevitable.”

This last sentence offers wise words for consumers, business owners and investors alike.  Recessions and bear markets are a normal part of every business cycle, the time to take defensive action–liking lowering debt and risk, while building up cash–is during the expansion, not after the recession has already hit and revenues and asset prices have imploded.

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Next bright idea: floating solar fields

When you’re trying to generate a lot more solar power, you’re limited by the size and heft of those big solar panels.

Where can you put them? The answer so far has been the desert, or on rooftops. There have even been efforts to put panels on top of landfill sites.

Solar entrepreneur Troy Helming of the San Francisco-based solar company Pristine Sun has a new idea: floating on water.Here is a direct audio link.

“A big source of water loss over reservoirs is evaporation. When you put solar photovoltaics over a reservoir, you reduce evaporation.”–Mark Jacobson, Stanford University

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