Juggling Dynamite

Danielle was guest today with Jim Goddard on Talk Digital Network talking about recent developments in the world economy and markets. You can listen to an audio clip of the segment here.

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.”

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.