Juggling Dynamite

America’s largest retailer Walmart reported today that it ended its latest quarter July 31st with revenues 5.6% higher than a year earlier as consumers spent government support funds:  “Stimulus was definitely impactful to the consumer in the second quarter, and we’re watching what’s going on in Washington, and how we’re going to progress with a new stimulus package,” Walmart CFO Brett Biggs said.  The share price turned down as the company noted sales growth slowed later in the quarter as stimulus checks tapered off.  Consumers drive just under 70% of America’s GDP growth, and in Canada just over 50%.

On top of government-sanctioned deferral programs for mortgages, other debts and rents, the Canada Emergency Response Benefit (CERB) doled out $2,000 per month to keep Canadians spending since the end of March.  After falling 31% between February and April, Canadian retail sales jumped 18% in May, and an estimated 25% more in June (Statistics Canada data) as provinces moved to re-open. But these measures were always meant to be temporary.  Already extended by two months, the CERB is to end October 3rd and other payment deferral programs at the end of September. 

The Canadian Centre for Policy Alternatives estimates that 2.9 million Canadians will have their income lost or cut in the transition from CERB to Employment Insurance come October.  At the beginning of August, 4.7 million Canadians were receiving CERB. Of that number, just 1.4 million are eligible for EI under the current rules, and many would receive less than CERB’s $500 per week.

Canadian consumer solvency trustee Doug Hoyes noted last month, that payment deferral programs have added to high household debt levels, reducing future spending ability while delaying and increasing the coming wave of insolvency filings.

As GMO’s James Montier writes this month, a study from the University of Chicago estimates that up to 40% of COVID-19-related layoffs in the past 6 months could be permanent.  Personal finance guru Suze Ormon implored her viewers to think of longer-term implication on July 20 as follows:

“The first thing people must do is to stop spending money.  Any money that you are receiving, whether it is a paycheck, stimulus check or unemployment, put it into an emergency fund, after you pay the bills.  Take a look at new income opportunities out there for you.  Stop thinking that your job is going to come back.  It may, but many of them may not.”

The first phase of the pandemic shock was the abrupt shutdown and asset price collapse between February and March. The next was a relative improvement purchased by payment deferrals and government transfers as the economy moved to re-open, and financial markets bounced on central bank injections and idle speculation.

We now approach the next wave of this saga as recession continues, layoffs rise, bad debts mount, and the quest for cash intensifies.

With market sentiment back near historical highs and reliant on the continued exuberance of a few tech leaders, one is reminded of the summer of 2000 when the NASDAQ index bounced sharply into July after losing 41% between March and May 24.  Bulls were convinced the worst was over.  As shown in Cory Venable’s chart below, the NASDAQ went on to lose 60% over the next seven months (for a total decline of 78%) even as the US experienced just a short, mild recession. It would be 15 years, three months and 23 days before this basket of stocks recovered its March 2000 highs again in June 2015.  Food for thought.

Canadian real estate prices have increased by 88% since 2005–nearly triple the pace of any G7 country (red line below since 1975). The next closest is Germany (in yellow), with an increase of 32.3% over the same period.  Historical precedents are daunting for Canada.
After bubbling into a 2005 peak, US real estate prices (in blue) collapsed over 30% and were still -15% a decade later in 2015.  Rising since then, in 2020, US prices are now just 3.0% above their peak 15 years ago.  Japanese real estate prices (above in green) also collapsed from a bubble peak in 1990 to be -44% by 2008 and have flatlined since.

Canada has paid for unaffordable housing with unsustainable debt levels, diminished household savings and a loss of economic productivity.  All are likely to exact a negative financial toll for years to come.  See more from Better Dwelling here:  Canada doubles down on real estate since 2005. Now it’s the biggest bubble the G7 has ever seen, and its getting bigger:

“Since the Global Financial Crisis, Canada has leaned on non-productive investment, and it shows. The rate of residential investment to GDP more than doubled from 2000 to 2020. Last year, real estate transactions were generating almost half of all GDP growth. This isn’t just a Toronto and Vancouver thing either. The national index outpaces growth for every other G7 country, and is more than double the next one. With the government currently dedicating an unusual amount of resources to driving home prices during this recession, they’re shooting to go all-in or for failure.”

The slowdown in global economic activity has been accelerated by COVID-19 but was ongoing well before it as debt weight and aged populations continue to curb consumption.  This has implications for all countries but particularly those with less household wealth who have built their economies on the presumption of ever-expanding consumer debt and leaping demand abroad.  China–the world’s second-largest economy–is a key example.  See China’s debt collectors flourish as consumers flounder in COVID-hit economy.

China has been the largest commodity consumer over the last couple of decades in order to build domestic infrastructure and export goods for other countries.  Now, intensifying trade wars and the deepest recession since the 1930s are hurting demand for both finished goods and most raw materials globally.  Chinese economic expert Leland R. Miller understands the numbers and impacts in more detail than most and his recent discussion with Danielle DiMartino Booth is worthwhile.

Economist Danielle DiMartino Booth sits down with Chinese Economy expert Leland Miller. About the guest: Leland R. Miller is the Chief Executive Officer of China Beige Book International. Here is a direct video link.

According to the United Nations COMTRADE database on international trade, Canada exported US $17.49 Billion in goods to China during 2019, 93.5% of it was commodities.  Diversifying our economy to increase finished goods and services as well as household savings (rather than debt) is critical to our future prospects. Miller speaks specifically about the challenge to commodity exporters starting around the 25-minute mark in this interview.  He opines on the US dollar benchmark currency status starting around the 1:12 mark.