BEWARE OF CANADIAN DEBT & RATE SENSITIVE STOCKS

There’s a warning bell coming out of the USA that echo’s a potential similar problem facing Canadians. Canadians are the highest debt per capita in the developed world. Our debt/GDP is skyrocketing. This easily makes Canada just as vulnerable, if not more so, to the problems seen in consumer debt in the USA.

USA’s consumer credit availability challenge

The rejection rate for auto loans increased to 14.2 percent from 9.1 percent in February, a new series high. It increased for credit cards, credit card limit increase requests, mortgages, and mortgage refinance applications to 21.5 percent, 30.7 percent, 13.2 percent, and 20.8 percent, respectively. The proportion of respondents reporting that they are likely to apply for one or more types of credit over the next twelve months rose to 26.4 percent from 26.1 percent in February. The average reported probability that a loan application will be rejected increased sharply for all loan types. It rose to 30.7 percent for auto loans, 32.8 percent for credit cards, 42.4 percent for credit limit increase requests, 46.1 percent for mortgages, and 29.6 percent for mortgage refinance applications. The readings for auto loans, mortgages, and credit card limit increase requests are all new series highs.” — Center for Microeconomic Data, Federal Reserve Bank of New York

Question: When will Canadians be similarly cut off as our US counterparts? What will that do to our economy? More on that potential below…

Canada’s household debt highest in developed nations – BBC report

“Household debt in Canada is now the highest of any G7 country, according to data by the country’s housing agency. The amount owed by Canadian households is also higher than the country’s entire GDP. The Canada Mortgage and Housing Corporation said high home prices are to blame for the ballooning debt.” BBC News, Toronto

 

Canada vs. USA

My concerns with real estate sensitive stocks are that Canada may end up facing a much, much worse problem than the USA – because of real estate problems as noted in the BBC report above. Note how CDN real estate prices began to rise during the 2008 real estate rush, then began getting parabolic after 2016, when the new government came in. Note the contrast during the same period in the USA, below. COVID was not the reason for this parabolic spike in Canada, as the comparable illustrates.

Yes, it was avoidable

Not to get too deep into Canadian politics (although regular readers do know I dab in the subject on occasion)….

About three years ago, when the Liberal government and the Bank of Canada were claiming that ‘deflation’ was the real threat, Pierre Poilievre was delivering speeches in the House of Commons where he went into great detail on the impending consequences from massive federal spending, massive deficits, and massive money printing by the Bank of Canada. Poilievre repeatedly explained that without a substantial increase in the supply of goods, an increase in the supply of money would lead to inflation – particularly of fixed assets like housing!!!!!!

At the time, the Liberals accused Poilievre of ‘fearmongering’ and ‘talking down Canada’s economy.’ Their words. Turns out, he was exactly right about what was going to happen. They (PM’s office) obviously can’t admit this, nor can they take responsibility for what has happened to the housing market during their time in power. So, all they have left is to try and somehow blame Poilievre for it. Um, OK. Hence some nonsensical tweets by Housing Minister Ahmed Hussen. Like saying they are doing something productive to fight inflation while the opposition fights these wonderful spendy ideas. Like printing and spreading more around to help fight inflation. Um, yeah….Precisely what they did to get us IN this situation.  Putting out the fire by adding more wood. Tiff Mcklem (BOC Governor) has been battling this reality as he raises rates against an ever growing money printing agenda. I feel sorry for the guy. 

I bring this political stuff up because, at the same time that the PM’s office was being warned about the potential for inflation by the opposition (which of course, was an accurate warning that was ignored), I was writing numerous blogs on the exact same potential. At the time, I was doing my own historical research on CPI patterns and causation (you may recall my recounting of the Fed’s Keynesian economic policy/ aka print and spend, of the 1970’s – amongst other lessons learned in that era). I reached the same conclusions as Poilievre and blogged on the subject. Such as here, here, and here. Unfortunately, Canada has a Finance Minister and Prime Minster with Liberal Arts backgrounds (strange as it may be), and appear unfamiliar with basic economics.

Avoiding stocks negatively impacted

Some people get bent out of shape when I point out the consequences of these government policies, but clearly I don’t care about hurt feelings surrounding facts. Trudeaus remain fans are free to unsubscribe to the blog if so bothered by these realities. If you are still with me at this point, I’d like to examine a few sectors that might be best avoided as Canada struggles with its government and consumer debt, along with inflated housing prices.

Banks

Banks are notoriously tied to Canadian real estate sales / mortgages – along with credit debt and auto loans. Craig and I have been trading one bank for a quick oversold bounce. We expect to sell it soon. I noted that bank play on BNN recently (TD, for those interested). But note that I am net-net uninterested in buying Canadian banks for anything more than a near termed flip. Note the sideways pattern below. Tradable, not investable at this point.

It may be interesting to note a contrast in business models. It is clear that some of the more “sub prime” mortgage lenders like MCAN look much better than the prime lenders (banks). This, given that distressed Canadian consumers are turning more towards these lenders – MCAN focuses on family homes rather than commercial, etc.

 

REIT’s

The TSX REIT ETF shows us a similar pattern to that of Canadian banks, albeit more volatility within that sideways containment. Big enough swings for a trade, but nowhere near a long termed investors dream at this point. Given the above discussion, what could inspire a breakout through $18 resistance on this chart?

Real estate

Colliers isn’t a Canadian real estate pure play, given their Int’l exposure. Still, the trend shows us that its not a place for investors to be looking.

Construction

Canadian construction is under pressure via both an overbought, overpriced real estate market caused by government inflationary policies…AND red tape. My son, who is in the home construction business, notes that Poilievre is correct in comments since 2020 regarding ” government gatekeepers”. Canada is ranked as the second worst county in the world regarding how hard it is for developers to build right now.  This pushes prices higher as mass immigration continues to add to demand.

For example, MRD is involved in Canadian housing developments (subdivisions, large projects). Note the go-nowhere performance, despite strong need and demand for housing in the past two years. If you let them build it, they will come (paraphrasing Field of Dreams). Unfortunately, they cannot build it, yet they still come….

Conclusion

Canada faces some unique challenges of inflationary pressures and policies. We continue to focus on climate virtue signaling while paying little attention to our consumer and government debt, along with a world-leading housing crises. For example: A knowledgeable client of mine notes that “Whether you know it or not, you and I are on the hook for about $2000 each — that’s $4000 per couple — to finance 2 big Lithium-Ion Battery plants for electric cars: one for Volkswagen in St Thomas, the other for Stellantis (a S. Korean firm) in Windsor.”

If sent an invoice by JT for the $2000, would you be happy to pay it? You are, one way or another…

BTW–In 2020 I proposed we receive a new tax assessment outlining your exact costs of all of these spendy projects. It is my opinion even the financially unaware JT voters would have something to say when they saw how it impacted their personal finances.

So – This $26 billion of new debt created by Ottawa and Ontario adds to inflation, thus aggravates our immediate problems in paying the grocery bill or providing housing for our growing population. And it impacts our stock holdings. So you need to be aware of the situation for many reasons, including as an investor. Unless the Canadian government begin to grasp economic reality, I’d stay away from stock sectors affected by the current pathways we have been forced to follow.

15 Comments

  • I’m guessing that this credit squeeze is all about banks doing their own version of QT.
    I wouldn’t put too much emphasis on credit cards. the low income earners will always be marginalized with cards.
    many people use CC’s for convenience & rewards but pay them off.
    anyway when I read that one of the largest banks in America fraudulently created new CC accounts using unauthorized access to credit scores to generate new & duplicate fees, well enough Said.

    As for real estate the home construction (residential builders) ETF in the US is at all time highs.
    I guess that means the builder’s in the US do have more flexibility in getting their projects to market sooner.

    politically I don’t like using electronic media to rant but I think if Poilievre was in office he would be defending the same criticisms he is spewing.

    unfortunately in Canada real estate is a much larger part of our economy than in the US so their is alot of pressure to comply.

    Reply
  • Excellent analysis…

    The most respected pundits say gold should be present in everyone’s portfolio, from 1% to 5%, not more, most likely. Unless one is a gold big and have a buyout kit in the trunk of your car, for the End Times.

    Gold pays no dividends, however, if you buy the metal or bullion.

    Also, similar to the Titan from OceanGate, even if your portfolio is comprised of 100% gold, what will you do with it if it turns out the structure collapses, implodes from lack of certification and engineering feasibility for the depths explored?

    Reply
    • Many of the AI tech stocks don’t pay dividends either. People buy stocks or commodities based on supply demand AND their future views of that demand. Gold has never been a “must own” for me. Its a tradable asset like anything else. I’m like a lady of the evening. Booking the hotel room by the hour, so to speak, when it comes to many stocks and commodities. Buy and hold is not my game.

      Reply
  • Hi Steve,

    Great post! I am an avid fan and a follower of your blogs.
    What are you thoughts on DIS? Its back at 2015/2016 levels and testing Mar 2020 / Dec 2022 support levels. Curious.

    Fahad

    Reply
    • Got your other post correcting the name. Don’t worry. My mother meant to name me Steve. Would have stopped a lot of rock-star and drug jokes coming my way!
      Anyhow–I don’t usually answer individual stock questions here (that’s for BNN)- but DIS deserves a view. The stock does seem to be basing in a descending triangle. Would wait for breakout though.
      The other challenge: Go woke, go broke! This is a problem from the fundamental side. Lots of bad publicity well deserved going their way, pressuring sales. They need to fire their millennial creatives and go back to their family-first roots. But, I’m a chartist first, and if I saw breakout per note above, I’d be intrigued.

      Reply
  • wondering what was the relation between bill morneau and justin trudeau before morneau left the cabinet. looking at brookfield asset management (bam.a.to) and i have an answer. montreal downtown commercial sector is in the ditch. come and see by yourself!

    j.p.

    Reply
    • Funny- he has no kind words for JT now, having been just another victim of Justin’s crimes – blame taken by his fall-guys. But I say tough s##t to him–he was part of the problem and got everything he deserved.

      Reply
  • Is there hope for oil & gas stock once JT goes (if he goes) and Pierre gets in?

    Reply
    • Absolutely! I recently watched an interview with a Calgary media person who asked him how he would realize net carbon reduction. He replied that he is against harming individuals with carbon tax burdens, and he is against crushing the industry and the jobs that go with it. Instead, he wants to invest in technology to reduce the emissions. I know this for a fact…AEI (American Energy Institute–a government agency!) has stated that fossil fuel need / usage will NOT shrink for the next 20 years!!! So the only solution is to keep it alive AND invest in technology to clean its negative effects. So yes, it is likely that the industry will flourish in a common sense environment.

      Reply
  • In 1908, the Ford model T began production. At some future moment, investors will need to look in the mirror, and decide whether the electric vehicle era has not only begin, taken hold but overtaken what has been the case for 100 years with the combustion engine. In other words, if this was 1908, are you fully majority invested in horses and carriages and all that goes with it, or divesting in the next 100 years. Who will be left holding the bag, with outdated technologies of the past?

    In that sense, battery production domestically makes sense for a copper and nickle rich Canada. JT is not investing in either horses or carriages here.

    Also, as to social program spending, Biden down South is doing no different.

    The housing supply , true, is strangled and insufficient. However, the climate up North makes housing much money more costly to build than in Southern states in USA. Rent controls are not the solution. Air B&B , speculation in housing by foreign non -residents is much of the problem.

    Reply
    • Over the past decade, a wave of left wing socialist governments through much of the developed world were elected – money printing has been prevalent – WEF reset views abundant. All lead to inflation. That inflation has to be reversed through some hard decisions. Unfortunately, not seeing those hard decisions being made today. Just more money printing, adding fuel to the fire. Mind you, there is hope. Note the Alberta election here, and the united front in the prairies. Note also the election in Italy – a move by the original socialist regime towards a more responsible government.

      Reply
  • Given the headline on rate-sensitive, I was surprised to not see the utility sector mentioned. Any thoughts there? Perhaps likely for a down trend, but just not as significant as the sectors that were mentioned?

    Reply
    • Utilities don’t suffer credit defaults — they are rate sensitive (don’t do well in high rates), but not consumer credit sensitive

      Reply
  • In spite of our Federal government, when I drive into Toronto (almost everyday as I do some deliveries to construction sites), I have rarely seen so many cranes sprinkled across the skyline. I realize this is anecdotal data. There are projects/new builds everywhere across and around the city. I don’t know when these projects were approved but there sure is a ton of work going on. I realize Toronto is not Canada, but geez, it is a notable part of it economically. Anyway, it sure doesn’t look like economic armageddon & it sure looks like gatekeepers have opened the gates for several years. If this is slow, I don’t want to see what busy looks like. For now, Toronto is more than fine economically. It’s nuts!

    Reply

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