Juggling Dynamite

What soars up tends to crash down. Welcome to ‘free’ money driven asset moves.

What about all those supply shortages the realtors were talking about? Nothing like insanely high prices to bring supply on stream. In July Toronto new listings rose 5.1% and active listings were up 65% from a year earlier.  See Toronto home prices suffer worst monthly decline in 17 years:

Home prices in Canada’s largest city posted their biggest monthly drop in at least 17 years in July and sales plunged as government efforts to cool the market and the near-collapse of a mortgage lender made buyers leery.

Transactions tumbled 40 percent to 5,921, the biggest year-over-year decline since 2009, led by detached homes.

This is only a start in the long overdue and much needed mean reversion journey back to affordable Canadian shelter once more.  The average sale price in July, for all property types in Toronto, was still up 5% (C$746,218) from July 2016, compared with a 17% increase from July 2015 to July 2016.

Nationally we watch for the home ownership rate to retrace from recent all-time-highs near 70% in Canada, to the long term norm around 64%.  In the process, the marginal 6% of buyers who could not actually afford the homes they stretched to buy the past few years will default and/or liquidate in order go back to renting.  In the US cycle from 2007-2012 this same home ownership ratio correction translated into an average 40% price correction nationally.  Ten years later even with trillions of QE into the banking system, many areas have still not recovered their 2006 peaks.

Necessary lessons on the downside of excessive borrowing/lending/monetary stimulants. Canada has some re-learning due.

A simple fix to refocus energy on business building that grows prosperity and solves global problems rather than on short term accounting gimmicks that drive up share prices temporarily:  change the law back to pre-1982 ban on share buybacks as illegal market manipulation.  Because it is manipulation and it is costing us all greatly in deflecting attention, talent and resources away from everything else that matters.

A conversation on the global economy and the future of capitalism with Jeremy Grantham, chief investment strategist at GMO. Here is a direct video link.

Market commentators were ebullient last week on the outdated news that Canada’s May GDP estimate was .6% versus the .2% projected by the consensus. Here is a chart of the last 6 months.
The driver?  Oil and gas extraction increased 7.6% on a snapback following the oil sands fire of last May and another that knocked a major Syncrude upgrader offline earlier this year. Of course, the world has high inventories of oil and lots of capacity today, so pumping out more from the oil sands is likely to help keep prices lower for longer…not great for joyful revenue targets.

Manufacturing by comparison grew 1.1% in May, while construction declined 0.6% and real estate, rental and leasing shrank by 0.2%.

Most importantly, with the Bank of Canada hiking into the consumer debt storm in July, and the US Fed not, the Loonie bounced 10% against the Greenback since April. With Canadian households buried in debt and the red hot realty sector bleeding at the moment, export hopes to our largest trading partner are up for revision.   All the while, the long-always, sell-side army is pumping up its earnings targets for Canadian companies.  Spoiler alert:  they did the exact same thing in 2007-08 as captured in this article from 2008.
What happened next should be seared in the memory of everyone with some savings to lose.  This chart shows the Canadian stock index (TSX) since 2007, today back below the cyclical peak reached 9 years ago in July 2008.

A run-of-the-mill bear market decline of 25% from here would take the Canadian market all the way back to where it was at its secular top in 2000—17 years ago!  That’s what happens when we ignore valuations:  lots of risk and wild capital swings, with no rewards to show for it.  Irrational valuations create secular bears that persist until mean reversion takes prices back to attractive investment prospects once more.  Facts must be faced.

We cannot compound returns when capital looses big chunks and takes years to grow back again.  This is not investing, its Russian roulette.   Blind faith in the financial sales force will get you pain and suffering every time.  The price we pay is the most defining feature of investment returns over time.  History promises us that better prices are coming for those who can wait.