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Canada’s Real Estate Sector Faces Difficult Transition

The great Canadian real estate bull market has pushed home prices to dizzying heights over the past two decades. And with ever-rising prices it has sucked in more capital and resources creating an almost self enforcing feedback loop, where an entire economy has become dependent on rising house prices. This misallocation of capital and resources is particularly well documented in the labour force where every year the number of realtors, mortgage brokers, and homebuilders seems to grow exponentially. Per Stats Canada, the share of employment tied to construction as well as finance, insurance and real estate is nearly two standard deviations above its long-term average.

I’m no economist but somehow it seems building an economy dependant on selling each other more expensive homes is probably not the greatest long term growth strategy. To illustrate this point we can see here that residential investment as a percentage of GDP now outpaces investment in machinery equipment research and development.

Source: Ben Rabidoux, North Cove Advisors

Currently there are over 55,000 new homes under construction across BC, with a record high number of housing starts also underway. This has created a massive shortage in the trades sector, while sending construction costs and house prices higher. However, with the real estate market across BC now beginning to slow, particularly in greater Vancouver, which saw housing sales across all property types drop to a 17 year low, early indications suggest a potential difficult transition may be underway.  With the help of Ben Rabidoux of North Cove advisors, we can see that job growth in British Columbia is been in a funk in recent months.

BC job growth
Source: Ben Rabidoux, North Cove Advisors

For simplicity sake, we can estimate how this would affect the real estate broker space, where real estate commissions now command 2% of Canadian GDP. Through the first four months of 2018, British Columbians have spent nearly $2 billion less on residential real estate.

…click on the above link to read the rest of the article…

Areas Of The World More Vulnerable To Collapse

Areas Of The World More Vulnerable To Collapse

Certain areas of the world are more vulnerable to economic and societal collapse.  While most analysts gauge the strength or weakness of an economy based on its outstanding debt or debt to GDP ratio, there is another factor that is a much better indicator.  To understand which areas and regions in the world that will suffer a larger degree of collapse than others, we need to look at their energy dynamics.

For example, while the United States is still the largest oil consumer on the planet, it is no longer the number one oil importer.  China surpassed the United States by importing a record 8.9 million barrels per day (mbd) in 2017.  This data came from the recently released BP 2018 Statistical Review.  Each year, BP publishes a report that lists each countries’ energy production and consumption figures.

BP also lists the total oil production and consumption for each area (regions and continents).  I took BP’s figures and calculated the Net Oil Exports for each area.  As we can see, the Middle East has the highest amount of net oil exports with 22.3 million barrels per day in 2017:

The figures in the chart above are shown in “thousand barrels per day.”  Russia and CIS (Commonwealth Independent States) came in second with 10 mbd of net oil exports followed by Africa with 4 mbd and Central and South America with 388,000 barrels per day.  The areas with the negative figures are net oil importers.

The area in the world with the largest net oil imports was the Asia-Pacific region at 26.6 mbd followed by Europe with 11.4 mbd and North America (Canada, USA & Mexico) at 4.1 mbd.

Now, that we understand the energy dynamics shown in the chart above, the basic rule of thumb is that the areas in the world that are more vulnerable to collapse are those with the highest amount of net oil imports.

…click on the above link to read the rest of the article…

Do We Really Borrow From Only Ourselves? Does the Debt/GDP Ratio Means Anything?

QUESTION: Mr. Armstrong, the famous economist Paul Krugman says that debt is ok when we owe it to ourselves. He calls it “deficit scolding” as he wrote in the New York Times. Would you like to comment on this statement?

GH

ANSWER: Paul Krugman seems to lack any historical understanding of how nations rise and fall. Anyone who claims debt is OK and can be infinite because “we” owe it to ourselves is clueless. He wrote in the article you referred to that “we have a more or less stable ratio of debt to GDP, and no hint of a financing problem.” The debt to GDP ratio is interesting but totally irrelevant. China’s debt to GDP stands at 250%, the USA at 103%, and Greece buckled at 186%. Obviously, this ratio is rather meaningless as a forecasting tool. I have published this chart on call money rates previously. In my studies, I quickly discovered that you cannot reduce the cause of any effect to a single issue. We can see that the peak in call money rates took place during 1899 and it was the lowest in 1929 when the Great Depression hit. You can’t even claim that if interest rates hit some magical level the stock market would crash. The world is far more complicated than just this one-dimensional approach to everything.

Capital flows were fleeing the USA in 1899 so interest rates went higher with a shortage of money. In 1929, the capital was in the USA for it rushed here because of World War I. The inflow of capital created an excess so the peak in call money rates was lower than 1899 when capital was fleeing. We even have the world of President Grover Cleveland from the Panic of 1893 commenting on the net capital outflow because of the “unsound” financial policy of the Silver Democrats.

…click on the above link to read the rest of the article…

The Dangers of Investing Based on Phony Government Statistics

The Dangers of Investing Based on Phony Government Statistics

President Donald Trump recently took to Twitter to boast, “The U.S. has an increased economic value of more than 7 Trillion Dollars since the Election. May be the best economy in the history of our country. Record Jobs numbers. Nice!”

“We ran out of words to describe how good the jobs numbers are,” reported Neil Irwin of the New York Times, amplified in a Trump retweet.

Increase

If you believe the headline numbers, joblessness is at a generational low with the economy booming.

Trillions in nominal value added to the stock market since Trump’s election. GDP up over 3% in the second quarter. 223,000 jobs added in May. Unemployment at an 18-year low of 3.8%.

On the surface, this all paints a beautiful picture for the economy and stock market. But dig a little deeper, and the numbers aren’t quite as bright they appear. All that glitters is not gold.

Headline Unemployment Number Is Fake News

Donald Trump himself put his finger on one of the main flaws with the unemployment number back when he was a private citizen.

“Unemployment rate only dropped because more people are out of labor force & have stopped looking for work. Not a real recovery, phony numbers,” he posted on September 7th, 2012.

The headline unemployment number isn’t any less phony in 2018. Though it has improved under Trump’s presidency – in large part because of his pro-growth tax cuts and deregulation – the statistic is still derived from a dubious formula.

Back in 2012, Trump rightly pointed to the large numbers of workers who had dropped out of the labor force but weren’t counted among the ranks of the unemployed.

The labor force participation rate currently comes in at just 62.7%. That means 33.7% of the population is currently not employed in the labor force. The vast majority of these jobless Americans aren’t among the 3.8% officially “unemployed.”

…click on the above link to read the rest of the article…

The Eurozone’s Coming Debt Crisis

The Eurozone’s Coming Debt Crisis

The European Central bank has signaled the end of its asset purchase program and a possible rate hike before 2019. After more than 2 trillion euro of purchases and zero interest rate policy, it is overdue.

The massive quantitative easing program has generated very significant imbalances and the risks outweigh the questionable benefits.

The balance sheet of the ECB is now more than 40% of the Eurozone GDP.

The governments of the Eurozone, however, have not prepared themselves at all for the end of stimuli.

Rather the contrary.

The Eurozone states often claim that deficits have been reduced and risks contained. However, closer scrutiny shows that the bulk of deficit reductions came from lower cost of debt. Eurozone government spending has barely fallen, despite lower unemployment and rising tax revenues. Structural deficits remain stubborn, and in some cases, unchanged from 2013 levels.

The 19 eurozone countries have collectively saved 1.15 trillion euros in interest payments since 2008 due to ECB rate cuts and monetary policy interventions, according to Handelsblatt. A reduction in costs against the losses of pensioners and savers.

However, that illusion of savings and budget stability can rapidly disappear as most Eurozone countries face massive maturities in the 2018-2020 period and wasted precious years of quantitative easing without implementing strong structural reforms. Tax wedge rose for families and SMEs, while current spending by governments barely fell, competitiveness remained poor and a massive one trillion euro in non-performing loans raised doubts about the health of the European financial system.

 

The main eurozone economies face more than 2.1 trillion euro in maturities between 2018 and 2021. This, added to lower tax revenues due to the slowdown and rising spending from populist demands creates an enormous risk of a large debt crisis that no central bank will be able to contain. Absent of structural reforms, the eurozone faces a Japan-style stagnation or a debt crisis.

 

…click on the above link to read the rest of the article…

Is the U.S. in a depression? (How John Williams became America’s most important statistician)

Is the U.S. in a depression? (How John Williams became America’s most important statistician)

America’s economy has been progressing steadily. First quarter real GDP growth came in 2.2%. The official unemployment rate is 3.8%. Inflation, according to the Fed’s preferred measure is 2%.

But how accurate are those numbers?

“Nonsensical,” says John Williams, founder of Shadow Government Statistics, who has been tracking U.S. government data for more than three decades.

Williams reckons that, using traditional calculation methodologies, true inflation is likely running above 6% and the unemployment rate over 20%.

Most importantly, Williams’ calculations suggest that the US economy has been in a two decade-long depression. His line of reasoning is worth a look.

Underestimating inflation

Williams argues that U.S. statistical agencies overestimate GDP data by underestimating the inflation deflator they use in the calculation.

Manipulating the inflation rate, Williams argues in Public Comment on Inflation Measurement , also enables the US government to pay out pensioners less than they were promised, by fudging cost of living adjustments.

This manipulation has ironically taken place quite openly over decades, as successive Republican and Democratic administrations made “improvements” in the way they calculated the data.

These adjustments (such as hedonic adjustments to inflation calculations, or not counting people who have stopped looking for work as part of the labor force) inevitably cast the government’s numbers in a more favorable light.

However, mainstream media journalists tend to have a poor grasp of mathematics. They were thus unable to grasp the depth of the problem, let alone explain the issues to the public.

Politicians have thus been able to fudge economic data openly. For example, the chart below shows U.S. GDP growth as measured by official sources.

The following chart (produced by Williams) shows GDP growth as calculated using a GDP deflator, corrected for an approximately two percentage point understatement.

…click on the above link to read the rest of the article…

Seven Ways to Think Like a Twenty-First-Century Economist

This excerpt has been adapted from Kate Raworth’s book Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist (Chelsea Green, 2017) and is printed with permission from the publisher. Now available in paperback and audio.

Seven Ways to Think Like a Twenty-First-Century Economist

Whether you consider yourself an economic veteran or novice, now is the time to uncover the economic graffiti that lingers in all of our minds and, if you don’t like what you find, scrub it out; or, better still, paint it over with new images that far better serve our needs and times. The rest of this book proposes seven ways to think like a twenty-first-century economist, revealing for each of those seven ways the spurious image that has occupied our minds, how it came to be so powerful and the damaging influence it has had. But the time for mere critique is past, which is why the focus here is on creating new images that capture the essential principles to guide us now. The diagrams in this book aim to summarise that leap from old to new economic thinking. Taken together, they set out—quite literally—a new big picture for the twenty-first-century economist. So here is a whirlwind tour of the ideas and images at the heart of Doughnut Economics.

First, change the goal. For over 70 years, economics has been fixated on GDP, or national output, as its primary measure of progress. That fixation has been used to justify extreme inequalities of income and wealth coupled with unprecedented destruction of the living world. For the twenty-first century, a far bigger goal is needed: meeting the human rights of every person within the means of our life-giving planet. And that goal is encapsulated in the concept of the Doughnut.

…click on the above link to read the rest of the article…

Work in a World Without Growth

WORK IN A WORLD WITHOUT GROWTH

A fixation with growth in economics has seen GDP increase in proportion to environmental damage. As planetary limits draw ever closer and are even being surpassed, such a model cannot be sustained. Riccardo Mastini explains how a job guarantee could open up the way to a sustainable economic model.

Since the dawn of capitalism, market economies have placed a high emphasis on labour productivity. Continuous improvements in technology geared towards productivity increases lead to more output being produced for a given amount of labour. But crucially these advances also mean that fewer people are needed to produce the same amount of goods and services each year. As long as the economy expands fast enough to offset increases in labour productivity there is no problem. But if the economy does not grow, people lose their jobs.

Economic growth has been necessary within this system just to prevent mass unemployment. Communities and the politicians that represent them celebrate the construction of a new factory not so much for the increase in supply of some needed product, but because of the jobs it creates. In advanced economies, the shortage of employment has become more pressing than the shortage of products. Basically, we produce goods and services mostly to keep people employed rather than to cater for their needs.

But what if economic growth were to slow down and, eventually, come to a halt in the near future? More than half a century of ‘growth propaganda’ supporting the dogma that pursuing never-ending growth is plausible and desirable may make this new prospect shocking for some. However, there is now overwhelming evidence that  decoupling GDP growth from increases in natural resource and energy use is impossible. And our plundering of Earth’s bounty has already reached unsustainable levels with the overshot of several planetary boundaries.

…click on the above link to read the rest of the article…

How the Economy Works as It Reaches Energy Limits — An Introduction for Actuaries and Others

How the Economy Works as It Reaches Energy Limits — An Introduction for Actuaries and Others

Why have long-term interest rates generally fallen since 1981? Why have asset prices risen? Can these trends be expected to continue? The standard evaluation approach by actuaries and economists seems to be to look at past patterns and assume that they will be repeated.

The catch is that energy consumption growth plays a hugely important role in GDP growth. It also plays an important role in interest rates that businesses and governments can afford to pay. Energy consumption growth has been slowing; it is hard to see how growth in energy consumption can ramp back up materially in the future.

Slowing growth in energy consumption puts the world on track for a future like the 1930s, or even worse. It is hard to see how GDP growth, interest rates, and inflation rates can ramp up in the future. More likely, asset price bubbles will pop, leading to significant financial distress. Derivatives may be affected by rapid changes in prices and currency relativities, as asset bubbles pop.

The article that follows is a partial write-up of a long talk I gave to a group of life and annuity actuaries. (I am a casualty actuary myself, which is a slightly different specialty.) A PDF of my presentation can be found at this link: Reaching Limits of a Finite World

Slide 1

..

Slide 4

After the audience had a chance to answer this question (mostly with yes), I gave my answer: “Yes, indeed, it is possible to build a model that gives misleading results, and not understand the situation.” For example, a flat map works as a perfectly adequate model in some situations. But when longer distances are involved, a globe is needed. A two-dimensional model works for some purposes, but not for others.

…click on the above link to read the rest of the article…

The ninety percent and the tithe

The ninety percent and the tithe

I think it likely that 90% of our working time creates what we don’t need and also damages work to preserve what we do need. That is: most of our time is not only wasted but destructive. Of course, I’m speaking of the so-called First World and of the mass of what it does. First World economies could be renamed Last World economies. If First World people want to be constructive – to become Possible World people, then we must shrink our GDP to just that 10%. No government can or will even attempt to achieve that. I cannot think of a single powerful politician (even in the Green Party) who would consider it. Only the household can do it. Politicians may then follow the fashion.

Money-flow through wages and profits follows (or should follow) the same trajectory as energy-flow. Let’s consider that 90% of energy-flow – of what people do – is powered by fossil fuels. So, then we can say that wasted time, destructive time and soul-sapping futility are also directly related to fossil fuels.

Remove fossil fuels and we can easily produce what we need, while also dramatically reducing ecological and economical harm. 90% of our time will be freed to devote to new, regenerative and more appropriate cultural activity. Removing fossil fuels will prove beneficial, not only to climate change, but to the conviviality and durability of culture.

Yes, cultures were often destructive before the use of fossil fuels. Even so, reliance on natural cycles will mean engaging with natural cycles, whereas those millions of years of sequestered photosynthesis lay supine for the plundering by the worst of our opportunistic human nature. Now we may find our better selves. That’s the moral – we may or may not do so. We need moral conversation.

…click on the above link to read the rest of the article…

The Economy Is Cooked

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The Economy Is Cooked

The growth cycle has peaked

Hours ago, European Central Bank chief Mario Dragho conceded: “The growth cycle may have peaked”

Of course, those paying attention to the data already knew this. Our politicians and central planers have been peddling to us the fantasy that the global economy is strengthening, finally ready to fire on all cylinders after nearly ten years of dependence on monetary stimulus.

That just ain’t so.

The Federal Reserve of Atlanta’s GDPNow measure, which gives a forecast of Q1 2018’s expected GDP, is currently coming in at 2.0%, down from the much more vigorous 5.4% growth predicted as recently as early February:

Generating this growth, meager as it is, has required a tremendous amount of new debt. So much more so that the US will soon have a worse debt-to-GDP ratio than perennial fiscal basket-case Italy:

U.S. Debt Load Seen Worse Than Italy’s by 2023, IMF Predicts (Bloomberg)

In five years, the U.S. government is forecast to have a bleaker debt profile than Italy, the perennial poor man of the Group of Seven industrial nations.

The U.S. debt-to-GDP ratio is projected widen to 116.9 percent by 2023 while Italy’s is seen narrowing to 116.6 percent, according to the latest data from the International Monetary Fund. The U.S. will also place ahead of both Mozambique and Burundi in terms of the weight of its fiscal burden.

The numbers put renewed focus on the U.S. deteriorating budget after the enactment in December of $1.5 trillion in tax cuts, and the passage more recently of $300 billion in new spending. President Donald Trump’s administration argues that the tax overhaul combined with deregulation will help the economy accelerate, which in turn will generate enough extra revenue to avoid any fiscal fallout.

…click on the above link to read the rest of the article…

Doug Duncan: Even US Government Economists Predict Trouble Ahead

Doug Duncan: Even US Government Economists Predict Trouble Ahead

Fannie Mae forecasts an economic slowdown by 2019

Doug Duncan is not your average beltway economist.

The chief economist for Fannie Mae is surprisingly outspoken about the troublesome outlook for the US economy. He’s worried about the rising cost of debt service as outstanding credit continues to mount at the same time interest rates are starting to ratchet higher, too.

He predicts the US will enter recession within a year, concurrent with a topping out of America’s real estate market. It wouldn’t surprise him to see the stock market falter, too, as central banks around the world begin a coordinated tightening of monetary policy and — similar to the thoughts recently expressed within our podcast with Axel Merk — Doug expects Jerome Powell to be much more reluctant to intervene in attempt to support asset prices. Having met personally with Powell, Doug thinks the Fed is now happy to see some of the air come out of the Everything Bubble (just not too much and not too fast) — a market change from past Fed administrations:

Our forecast definitely sees slowing economic activity, particularly in the second half of ’19. Part of it has to do with the length of the expansion. Just because an expansion is long doesn’t mean it’s going to end; but they all have eventually ended, and this one is getting pretty old. I think if it’s not the second longest, it’s getting to be the second longest that we’ve ever had shortly.

The tax bill was viewed differently by different parties, but the capital markets initially took that — plus the $300 billion agreement to get past the expiration of government funding plus the budget agreement — they took all those things as inflationary.

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Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold

Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold

– Global debt bubble hits new all time high – over $237 trillion
– Global debt increased 10% or $21 tn in 2017 to nearly a quarter quadrillion USD
– Increase in debt equivalent to United States’ ballooning national debt
– Global debt up $50 trillion in decade & over 327% of global GDP
– $750 trillion of bank derivatives means global debt over $1 quadrillion
– Gold will be ‘store of value’ in coming economic contraction
– Global debt is the mother of all bubbles

Source: Bloomberg

Global debt has now reached over 327% of global GDP, $237 trillion. Prior to the financial crisis it was less that $150 trillion. The amount by which it has surged in just one year is the same amount as the ballooning national debt of the United States.

The response of our leaders, central bankers and financial thinkers to this latest data?

It was good news as it showed that thanks to global growth the ratio of debt-to-gross domestic product fell for the fifth consecutive quarter. No irony in the fact that the economic growth is entirely funded by debt itself – adding another shaky layer to the house of cards.

Christine Lagarde said earlier this week:

The bottom line is that high debt burdens have left governments, companies, and households more vulnerable to a sudden tightening of financial conditions. This potential shift could prompt market corrections, debt sustainability concerns, and capital flow reversals in emerging markets.

A sudden tightening of financial conditions is inevitable. The latest FOMC minutes released yesterday showed that members plan to increase interest rates at a faster rate than previously expected. This was inevitable given the loose monetary policy that central banks have been enjoying for the last decade.

As Jim Rickards summarises:

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Jerome Is The New Janet: Tie, Trousers And Same Old Keynesian Jabberwocky

Jerome Is The New Janet: Tie, Trousers And Same Old Keynesian Jabberwocky

The election of 2016 was supposed to be the most disruptive break with the status quo in modern history, if ever. On the single most important decision of his tenure, however, the Donald has lined-up check-by-jowl with Barry and Dubya, too.

That is to say, Trump’s new Fed chairman, Jerome Powell, amounts to Janet Yellen in trousers and tie. In fact, you can make it a three-part composite by adding Bernanke with a full head of hair and Greenspan sans the mumble.

The overarching point here is that the great problems plaguing American society—scarcity of good jobs, punk GDP growth, faltering productivity, raging wealth mal-distribution, massive indebtedness, egregious speculative bubbles, fiscally incontinent government—-are overwhelmingly caused by our rogue central bank. They are the fetid fruits of massive and sustained financial repression and falsification of the most import prices in all of capitalism—–the prices of money, debt, equities and other financial assets.

Moreover, the worst of it is that the Fed is overwhelmingly the province of an unelected politburo that rules by the lights of its own Keynesian groupthink and by the hypnotic power of its Big Lie. So powerful is the latter that American democracy has meekly seconded vast, open-ended power to dominate the financial markets, and therefore the warp and woof of the nation’s $19 trillioneconomy, to a tiny priesthood possessing neither of the usual instruments of rule.

That is to say, never before in history has a people so completely and abjectly surrendered to an occupying power—even though its ostensibly democratic government already possessed all the votes and all the guns.

…click on the above link to read the rest of the article…

What a Hoot: Fed Chairman Powell Says “Growth Has Picked Up”

In his first non-FOMC speech, Jerome Powell stresses growth and jobs.

Inquiring minds are investigating Jerome Powell’s speech on his Outlook for the U.S. Economy presented today at the Economic Club of Chicago, Chicago, Illinois. Here are a few key quotes.

  • After what at times has been a slow recovery from the financial crisis and the Great Recession, growth has picked up. The labor market has been strong, and my colleagues and I on the Federal Open Market Committee (FOMC) expect it to remain strong.
  • Trends in participation have been more pronounced in the United States than in other advanced economies.
  • There is no consensus about the reasons for the long-term decline in prime-age participation rates, and a variety of factors could have played a role. Research suggests that structurally-oriented measures–for example, improving education or fighting the opioid crisis–also will help raise labor force participation in this age group.
  • The balance sheet reduction process is going smoothly and is expected to contribute over time to a gradual tightening of financial conditions. Over the next few years, the size of our balance sheet is expected to shrink significantly.
  • The FOMC’s patient approach has paid dividends and contributed to the strong economy we have today.
  • My FOMC colleagues and I believe that, as long as the economy continues broadly on its current path, further gradual increases in the federal funds rate will best promote these goals
  • It remains the case that raising rates too slowly would make it necessary for monetary policy to tighten abruptly down the road, which could jeopardize the economic expansion. But raising rates too quickly would increase the risk that inflation would remain persistently below our 2 percent objective. Our path of gradual rate increases is intended to balance these two risks.

…click on the above link to read the rest of the article…

Olduvai II: Exodus
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Olduvai
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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