Juggling Dynamite

Understanding the link between ultra-loose financial conditions over the past few years and the tech sector boom, jobs, housing, the stock market, and economic growth is key to anticipating the bust contagion. This video segment connects the dots well.

Companies like Tesla, JP Morgan, and Zillow have announced layoffs in the last 30 Days. In particular – the CEOs of the companies think the Recession and Market Crash are going to get worse. Elon Musk predicts that: “the US is already in Recession. And that it could last 18 Months”. He also thinks a lot of companies will go bankrupt. That would be why Tesla just announced layoffs for 10% of its salaried workforce.

Despite this surge in layoffs, the US Unemployment Rate is still at a near record low 3.6%, while Initial Jobless Claims are also low. That means, unfortunately, that the Stock/Housing Market bottom has not yet occurred. And that more job losses/layoffs will be coming in 2022. Here is a direct video link.

The Bank of Canada hiked base rates a whole percentage point yesterday–its most significant one-time increase since 1998–now at 2.5% from .25% four months ago in March. Futures are pricing in a 84% chance that the US Fed will follow suit with its own 1% increase at its next policy meeting on July 27.

These are huge increases in a short time frame. The Canadian prime lending rate now jumps to 4.7%, and most home equity lines of credit (HELOCs) to 5.2%, while conventional variable rate mortgages are in the 3.85 to 4.2% range. Federal rules require borrowers to prove they can make their mortgage payments at an interest rate at least two percentage points above their offered mortgage rate. With a five-year fixed rate mortgage near 5%, borrowers would have to prove they can make mortgage payments with a notional interest rate near 7%–a rate level not seen since the year 2000. Meanwhile, the average Canadian home price was $164,000 in 2000 compared with $816,720 in February 2022.

As the pool of able buyers shrinks, home prices have already declined by double-digit percentages in some areas. While impossible for most to fathom, a 40% drop would only bring home prices back to where they were in 2020. And given the extreme magnitude of Canada’s late great housing bubble, a 40% decline would be a reasonably modest outcome.

Suffice to say, this mean-reversion cycle, while necessary, is set to be painful for many.

Chinese imports are not rising to the rescue of global demand this downturn as they did in 2008-2020. #tappedout.  China Beige Book does on-the-ground analysis, which is updated in this segment.

Shehzad Qazi, managing director of China Beige Book (CBB) International explains how CBB has been able to gauge China’s economic performance without relying on official figures. Shehzad gives an overview of key metrics of China’s Q2 economic data and provides his assessment of the health of the Chinese housing market and the tech sector. Here is a direct video link.

Meanwhile, the Chinese property bubble continues to deflate with increasingly volatile contagion impacts on lenders, commodities, debt and property prices internationally. Heads up Canada, see Chinese property buyers across 22 cities refuse to pay mortgages:

Buyers of 35 projects across 22 cities have decided to stop paying mortgages as of July 12 due to project delays and a drop in real estate prices, Citigroup Inc. analysts led by Griffin Chan wrote in a research report distributed on Wednesday.

The payment refusals underscore how the storm engulfing China’s property sector is now affecting the country’s middle class, posing a threat to social stability. Chinese banks already grappling with challenges from liquidity stress among developers now also have to brace for homebuyer defaults.

Now is “a critical time for social stability,” said Chan, adding that “the forgoing of down payments may bring social instability.”

A drop in home values hasn’t helped. Average selling prices of properties in nearby projects in 2022 were on average 15% lower than purchase costs in the past three years, according to Citigroup’s research.  The contagion is spreading to banks.