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  • Why Canada's Housing Market Is The Biggest Threat To The Canadian Economy

    Unlike the United States where property values have plummeted since the economic crisis which started in 2006, the Canadian housing market has been and remains hot. As prices continue to rise, and supply continues to grow, the question on everyone's mind is when will housing prices start to come down. The answer could be sooner than we would like.

    The problem is twofold. Issue number one, is the large supply of housing and new construction, while issue number two is the high debt level of Canadians.

    A truly troubling statistic that Canadians do not like to talk about is debt. Canadians are heavily in debt. In the early 1980's if the average Canadian had $100 he/she owed $66 of that money in debt. In the fourth quarter 2012, that same Canadian who had $100 would be -$50 in debt on that same $100. "In 1980, the ratio of household debt to personal disposable income was 66%; that ratio recently passed the 150% figure (Statistics Canada 2011)." Not only is the average Canadian in debt to a level greater than their annual (net) income after taxes but it is approaching a level that is questionably unsustainable.

    Statistics Canada defines disposable income as "Pre-tax income less federal and provincial income tax less premiums/contributions paid on components pertaining to security." So the average Canadian goes to work pays their taxes and the money that they have left over would need to appreciate by 50% in order to satisfy their debts. One might think that this relationship of debt as a percentage of disposable income is unsustainable, however housing prices are questionably high enough to cover, as long as those asset prices remain high enough.

    In the third quarter 2011, the percentage of debt to assets according to Statistics Canada was 20.37% so if need be there would be sufficient assets to cover any debts if necessary. In Canada, most people's largest asset is their home, and according to Statistics Canada real estate as a percentage of personal disposable income in the third quarter 2011 was 300%. The value of real-estate could cover ones debt three times over on average.

    With high levels of debt that are 150% more than what the average Canadian makes after taxes, having equity ownership of a home means that as long as the value of the home stays high enough, it could be sold to cover the debts. Interest rates have been at record lows over the last 4-5 years. The low return on interest bearing investments compared to mortgage debt (which is normally renewed on a five year term,) means that the level of debt is only going to get higher as the interest payments are low, and debt payments are high. What is worse is that when rates eventually increase mortgage rates will rise and reduce demand in the housing market. Either to combat inflation or due to high commodity prices, the dollar, or other central bank actions, the Bank of Canada will eventually raise interest rates.

    With the housing market on the verge of oversupply and with higher rates eliminating new home buyers, the excess supply and low demand for homes will cause housing prices to fall. When this happens the ratio of debt to disposable income may not change much, but the safety net of our assets covering our debts, may no longer apply to the extent it does at present.

    Lower home prices will cause people to sell in order to raise necessary cash while higher mortgage rates will choke out demand. This problem is the single greatest threat to the Canadian economy. The level of debt for the average Canadian especially those strapped for cash is too high to support rising interest payments on a depreciating asset. If there were low levels of debt then falling housing prices would be absorbed by the ability to go into debt to cover increasing costs of a mortgage. What is going to happen is that the costs of a mortgage are going to go up, while the value of the real-estate is going to go down.

    As housing prices start to decline, there will not be a rush of new home buyers to save the market. In a domino effect, lower housing prices will only lead to even lower prices.

    We are an indebted nation who is relying on high commodity prices to carry us forward. If rates increase, or the supply of housing continues to increase it is only a matter of time before a collapse in housing prices lead us into a recession.

    Appendix: Statistics Canada:

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: real-estate
    Aug 29 11:36 AM | Link | Comment!
  • $3.5 Billion Dollars To Send Gold Higher

    It seems that a ticking time bomb has finally been set to go off. According to Reuters for years South African miners "inhaled silica dust form gold-bearing rocks and later contracted silicosis." As such, after many years the inevitable is occuring. The largest class action law suit in South Africa is being brought forward against some of the worlds largest gold mining companies. This is years after these companies exposed hundreds of thousands of miners to the working conditions to which these companies now have to be accountable for. After further investigation into this issue, it seems likely that this class action lawsuit will be successful. The price of gold should appreciate due to a decrease in total future worldwide gold production, as there will be fewer resources for operations and investing in new projects by the companies who get hit with this class action lawsuit.

    The class action lawsuit is being brought forth by Richard Spoor, who was successful in a case last year which set the precedent for claims for compensation in South Africa. Although the details are unclear he has some form of working relationship with the law firm of Motely Rice, which is one of the largest litigation law firms in the US.

    This law suit will be huge in the amount of dollars awarded. According to Spoor, "we're signing up 500 people a week at the moment." Whats more is that family members can still join the claim even if the person in question is deceased. This will provide for a large growing total number of members in the class, especially as this case gains momentum and publicity.

    According to Reuters "It's hard to estimate the potential size of a silicosis class action. South Africa is the source of 40 percent of all the gold ever mined. At its height in the 1980s the industry employed 500,000 men - two-thirds of them from Lesotho, Mozambique and the Eastern Cape - although production has fallen behind China and Australia and employment since halved. But silicosis can take years to show up and check-ups are at best haphazard. A 2005 study by the National Institute of Occupational Health in Johannesburg, based on autopsies of miners, suggested 52 in every 100 had the disease."

    The big gold mining companies AngloGold Ashanti AU , Gold Fields GFI, Harmony HMY, and AngloAmerican AAL.L could face losses of hundreds of millions of dollars in litigation. In my opinioin this class action lawsuit isn't a question of if they are going to have to pay, the question is how much?

    In 2003, Sporr was successful in suing a mining company whose operations where in asbestos. The judgment was for $100 million in 2003 and is the largest mining award to date in South Africa.

    The mining companies know about this issue and have probably enacted various forms of liability insurance as a result. However, the extent to which these companies have mitigated their risks are unknown. According to Reuters Graham Briggs CEO of Harmony said "the issue of silicosis was a big topic but he did not think it class action material." I would say that he is either lying to himself or lying to everyone. But as the CEO of Harmony I understand his position being damage control.

    The fact is that this issue (unknown to myself,) was a ticking time bomb that these companies have known about for years as the facts will show. Now investors around the world are going to be following this story.

    The leading case is that of Thembekile Mankayi against AngloGold, (Africa's biggest gold producer.) Although he died days before the judgement and the judges never got the chance to rule they were still able to issue a statement. What the judges said according to Reuters was that "African mineworkers in particular, have contributed enormously to this country's economic wealth and prospperity, at a great cost to themselves and to their health."

    Furthermore, according to Reuters "under South African common law, widows and children also have a claim for the loss of a breadwinner's earnings, meaning liability does not end with a sick miner's life. A 2009 paper by researchers from Witswatersrand University and University College, London, which was published in the American Journal of Industrial Medicine, estimated there were 288,000 cases of compensable silicosis, and 10 billion rand in unpaid compensation liability at 1998 values. Today, that would be 27 billion rand - more than $3.5 billion."

    There are examples of individual cases against various South Afircan based gold mining companies. For the first time, this class action law suit will have world-wide implications on these companies and as a result on the price of gold.

    Once the litigation is successful, these companies will have less money to deploy into current operations, and future development projects. This will cause the world supply of gold to go down over time. Punishing these gold miners will mean fewer resources. That will mean less gold in the vaults as a result of the litigation. This will cause the price of gold to appreciate (all else being equal.)

    The question is how much of an impact will these claims will have on the balance sheet of the mining companies? The amount of liability is for the courts to decide. The extent to which the gold mining companies have mitigated their risk through use of insurance contracts is yet to be public information. This could either turn into the gold miners issue, or become the insurance or the reinsurance industry's biggest nightmare.

    What does all of this mean for investors? This is another macro-economic indicator along with weak currencies, low interest rates, sovereign debt issues, and monetary supply increases, which should cause gold to appreciate.

    I believe that the real winners of this news are the other gold miners. Goldcorp GG, Barrick Gold ABX, Kinross Gold KGC, should all fair well from this news. Recently I have turned bullish on Yamana Gold AUY, as they are completely focused on South America, and are paying a dividend later this month.

    I picked the above names because Goldcorp is the lowest cost major, Barrick is the largest, Kinross is the most undervalued, and Yamana is paying a dividend at the end of the month and has growing production.

    See the Reuters article or click here to see the picture slideshow for more information about this issue in South Africa.

    Disclosure: I am long KGC.

    Aug 24 5:49 PM | Link | Comment!
  • USA: In Need Of Currency Depreciation
    The United States of America has only 1 option: Currency Depreciation. It is the only tool left in the arsenal that I believe will revive the American economy. The United States must depreciate their currency. Only then will the deficit, employment, and the economy revive.

    The United States is on the edge... There are simply too many current adverse economic issues which are affecting the country. With a deficit in the trillions of dollars, high un-employment, interest rates at historic lows, and post real-estate crisis, there is little that can be done through fiscal policy. Almost everything has been tried. We have seen stimulus packages, bail-outs, and government intervention that have done little to revive the American economy and country, now years later.

    Beyond the obvious that if you devalue the value of a deficit that deficit becomes smaller, the depreciation of the USD will do the following...

    1. For every 10% the USD depreciates ALL American goods will be 10% cheaper for foreigners. Thus, America will be having a sale in a certain way of thought on everything that it produces.

    2. This would lead to employment in the United States to make all of the goods that are now on sale.

    3. If the USD depreciates (lets say in half) and I am a Canadian living in Toronto, (it is cold) I could purchase property in Florida, California, or any other warm state. That same property which cost $250,000 will now only cost me $125,000. It is only a matter of time before property, houses, and investment comes into the United States!!!

    The reason why this hasn't happened yet probably is because of the following.

    1. For every 10% the USD depreciates EVERY other countries goods will be 10% more expensive for Americans to buy. Thus Americans will buy American goods and export themselves as opposed to foreigners doing the selling.

    2. For every 10% the USD depreciates ALL commodity prices denominated in USD will be 10% more expensive in USD. Imagine that the CDN and USD are equal. Also 1 barrel of oil costs $50 USD. Now if the USD losses half of its value relative to the CDN dollar, than in CDN dollars I could purchase a barrel of oil for $25. However the real value a day before was $50. Therefore to offset this, the prices of ALL commodities denominated in USD oil, gold, (everything) will have to go up relative to the USD currency depreciation. The rising prices of commodities will only push up the value of commodity based countries, and this will cause inflation as rising base prices will lead to a rise in prices of all value added or manufactured goods.

    Inevitable inflation will be able to be tamed with interest rate adjustments, and the fact that every other country will be at an economic disadvantage is a short term necessity for the long term interests of the global economy. The United States devaluing their currency is the only thing that can save their economy.

    What could and shouldn't happen is that countries will fight back and devalue their own currency in relation to the USD, therefore offsetting any foreign exchange effects. This is dangerous because countries which hold trillions of USD and treasury notes will only want to see those reserves go so low without dumping them.

    The United States has been the consumer of the world and the main purchaser of goods no matter what Country you come from. The fact that now all of those countries which gained their prosperity by exporting to the United States must take a turn being their consumer for once and deal with the adverse effects of the world's biggest consumer becoming the world's biggest seller. If not imagine what will happen if these countries let the world's biggest consumer go bankrupt?

    It is in every nation's best interest to allow the United States economy to revive and deal with whatever short term economic impacts this course of action has.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: forex
    Feb 24 8:33 AM | Link | Comment!
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