Juggling Dynamite

Canada is a global leader in auto and parts production yet one of the few auto-producing nations with no homegrown auto companies.  Twenty years ago, Canada was assembling about three million internal combustion engine (ICE) vehicles a year for foreign giants (Fiat-Chrysler, Ford, General Motors, Honda and Toyota), today this has dropped to about 2 million and falling as other countries lead on electric vehicle (EV) production.

We are falling behind not for a lack of skilled labour or opportunity but because of a backward-looking focus on sunk costs in fossil fuels and ICE. We can evolve or die.  Initiatives to think and invest forward are imperative and many Canadians get it.  Smart incentives in this direction are critical.  See:  Avenging the Avro Arrow:  Canada’s audacious play to build an all-Canadian electric car:

On Tuesday, the Automotive Parts Manufacturers’ Association, which represents Canadian companies that ordinarily supply parts to international automakers, announced the design for what it has branded Project Arrow – an effort to prove that a zero-emissions vehicle can be completely designed, engineered and built here. It’s now to proceed to the engineering stage, with the rollout of a full concept car targeted for 2022.

In its latest annual World Energy Outlook report, the International Energy Association (IEA) reiterates its forecast that global oil demand will plateau over the next decade and at lower levels than they forecast last year.  Here is their chart courtesy of Bloomberg.

Each week pensions, banks and other institutions announce that they will no longer make new investments or loans in the oil and gas sector (see last week’s JP Morgan promises to shift portfolio away from fossil fuels) and oil majors like BP and Royal Dutch Shell have acknowledged that drastic changes required to reduce climate crisis will have profound consequences for their assets and business models.   See IEA sees oil demand suffering long-lasting blow:

Long-term growth in oil demand will be tamed by the switch to more efficient or electric vehicles, the IEA forecast. Consumption will increase by about 750,000 barrels a day each year to reach 103.2 million a day in 2030. That’s about 2 million a day less than predicted in last year’s report.

The increase will be entirely concentrated in developing nations — most notably India — and dominated by feedstocks for plastics and other petrochemicals, rather than fuel for road transportation. After 2030, annual growth will dwindle to just 100,000 barrels a day.

This is a raging heads up for oil producers globally (including Canada):

OPEC members also face a difficult period as depleted revenues strain national budgets, and a chunk of growth that had been anticipated from Nigeria, Iraq and Angola is now expected to be lost.

Canada must transition oil investment and employment to the critical components needed for batteries and renewable electricity and infrastructure without further delay. The segment below discusses a new study out of the University of Toronto on the accelerating shift to electric vehicles.  “Once you go electric, you’ll never go back.”  True that.

Alexandre Milovanoff, a University of Toronto researcher says full electrification of vehicles is needed to meet aggressive climate targets set in the Paris agreement. Here is a direct video link.

A new study from the Business Development Bank of Canada finds that 76% of the small and medium-sized Canadian businesses surveyed saw a decline in revenue and profits in 2020.  Nearly half laid off staff, while about 39% of entrepreneurs have taken on more debt to survive.  See Indebted Canadian businesses more “fragile” than during the first wave:  BDC.

The good news is that recent experience has shocked many households and businesses to focus on greater efficiency, reduce costs, and build up cash savings–critical behaviours needed to restore financial strength.

The bad news is that as the recession and under-employment continue (see: Deloitte’s estimates that 70% of jobs lost in Pandemic may not return before 2022), many lack the income needed to rebuild. Many are more indebted now than they were six months ago.

Two-thirds of small business owners say they’re in a worse situation now than before the pandemic. And insolvency trustees are warning of similar trends in Canadian households.  See: What to do if you can’t pay deferred mortgage payments.

New Bank of Canada chief Tiff Macklem acknowledged Canada’s debt-linked fragility today in a speech:  “The bottom line is that the private and public sectors together need to be acutely aware of financial system risks and vulnerabilities as the economy recovers.”

Falling commercial and residential rents are much needed for reducing overhead costs, but property prices must also follow, and the income and balance sheet losses will hurt present owners and lenders. See, Manhatten apartments haven’t been this cheap to rent since 2013, and In an echo of Toronto, condos flooding the market in Montreal.

As shown in the chart below (source: not indicated), since 1990, central banks don’t admit it, but the policy obsession with lower and lower interest rates is the cornerstone of our present fragility.  As the interest component of mortgage payments flatlined from 2008 to 2017, prices paid soared along with the debt’s principal portion.  This inflated debt is now a heavyweight on consumption and saving ability for years into the future.

Simultaneously, the low rates that have enabled record debt, unaffordable shelter and other asset bubbles have worsened retirement prospects worldwide as prices are too high today to produce yields anywhere near what most financial plans are banking on. From 6% in 2000, secure deposits are now yielding less than 1% and dramatically undershoot the presumption of 4% as a sustainable withdrawal rate from retirement savings.  As noted in the 2020 Natixis Global Retirement Index released this week:

One of the biggest threats to retiree wellbeing is low-to-negative interest rates, which can make earning a decent income from safe investments nearly impossible. The report found that for 16 of the 44 countries studied, the five-year average for real (inflation-adjusted) interest rates had gone negative. In the 2016 version of the report, just one country, the U.K., fit that bill.

To gain financial viability, social stability, and yield–critical cash flows for compound growth and income withdrawals–asset prices must first give back years of bubble gains.  In the process, a growing number of people will seek to liquidate assets to reduce overhead and raise cash.  A buyer’s market is coming for most things, but only those who have patiently prepared in advance will be ready to buy.