The Daily Shot - 12/21/14
- From: "The Daily Shot" <thedailyshotletter@xxxxxxxxx>
- To: <thedailyshot@xxxxxxxxxxxxx>
- Date: Mon, 22 Dec 2014 01:50:53 -0500
The Daily Shot™
Greetings,
Tonight I’d like to focus a bit on the Canadian economy. On Friday I touched on
the latest decline in oil & gas rigs, as the most unprofitable ones are
mothballed. The closures have been particularly acute in Canada, where some 40
oil & gas rigs have been taken out of operation recently. In fact it's not
clear if economists fully appreciate what's about to transpire with the
nation’s economy. This decline in rig count is just the beginning.
Consider for example the situation with the Canadian oil sands - one of the
more expensive sources of crude production. Even if prices recover somewhat,
oil sands production will be winding down - nobody wants to operate
money-losing businesses for a prolonged period. And those who believe crude
will be back above $80/bl any time soon is deluding themselves.
Source: FT
Up until now, production from oil sands has fueled growth in other sectors,
including for example transportation and housing in Alberta. This is about come
to a screeching halt.
Alberta housing situation (source: Alberta Treasury Board and Finance)
The national situation is not significantly better. Housing markets across the
country have continued to rally, even as homes south of the border had
undergone an unprecedented price adjustment. While many point out that the
reason for avoiding a US-style housing crash has been a stronger mortgage
market, that's only part of it. The global commodity boom in which Canada
successfully participated is the main reason.
Source: Multiple Listing Service
Now as the commodity super-cycle has ended and energy prices collapsed,
Canadian households are caught with near-record levels of leverage.
Source: National Post
Some have been pointing out that Canadian mortgage debt service ratio has
continued to improve. However that measure is misleading, as it excludes
principal payments. In reality the situation is much worse.
Source: @FCFYield, @ac_eco
There is also the argument that Canada's economy is "diversified". Perhaps. But
just to put the situation in perspective, take a look at the breakdown of the
nation's trade balances.
Source: @Earthed , Maclean's
While economists will attempt to analyze the impact of energy prices on various
sectors separately, when it comes to Canada, a number of economic components
are quite difficult to decouple from one another. What's clear is that this
exposure to energy is going to damage the labor markets, squeezing the nation’s
overextended households. And the knock-on effect won't be limited to a severe
slowdown in residential construction growth. Consider for example the
expenditures on renovations - something that's been supporting parts of
manufacturing and other sectors. This is not going to end well.
Source: Scotiabank
The markets are already sensing the contagion effect from energy on the housing
market, as Canadian property REITs take a hit (chart below). If oil prices
remain anywhere near the current levels for a prolonged period - something the
Saudis are aiming for - Canada's economy is in serious trouble.
_____
Emerging markets continue to be under pressure, as both debt and equity funds
see significant outflows.
Source: @Eurofaultlines
And credit spreads have blown out again.
If the dollar resumes its rally and/or the Fed becomes more hawkish, we are
going to see further market pain across many emerging economies.
_____
Speaking of emerging markets, let’s put China’s regional debt problem into
perspective. Here is the nation's fiscal deficit with and without local
government financing vehicles (LGFV).
Source: Deutsche Bank
_____
The high yield selloff in the US has recently put the credit component of the
CS Risk Appetite Index into the “panic” mode.
Source: Credit Suisse
Once again, this makes my contrarian bones hurt and it may be time to be more
constructive on US credit – even as a short-term trade.
_____
I was somewhat taken aback to see speculative futures accounts extremely short
treasuries on a net basis. Yes, the treasury rally since September has been
quite strong, but with inflation expectations at multi-year lows such strong
repositioning was a bit surprising.
Source: Deutsche Bank
_____
Now some food for thought. I usually like Stratfor for providing a thorough
analysis of key geopolitical risks. But in their drive to sell more
subscriptions, the organization has been going for scare tactics. And while
Stratfor is technically correct on these issues, such analysis is simply not
helpful.
Source: @Stratfor
_____
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