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Freddy Hutter, TrendLines Research
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As a data analyst, Freddy Hutter of Trendlines Research provides guidance in chart format on the specialties of peak oil, realty bubbles, baseline GDP projections and election predictions. Virtually each day an update is published to the website's MemberVenue. All charts are made publicly... More
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  • TRENDLines Recession Indicator Upgrades Canadian Q4 GDP Despite Burst Housing Bubble 0 comments
    Jan 23, 2012 11:44 PM
    click to enlarge ... more macro economic charts @ my SA Instablog & website

    Jan 19 2012 delayed FreeVenue public release of Oct 19th MemberVenue guidance ~ The Trendlines Recession Indicator continues to project an utter collapse of the new business cycle. Economic activity has contracted for three consecutive months with inferred Real GDP of -o.9% in September (Q3), up from a -2.1% pace in August. Data announced by StatCan last month infers July's GDP growth rate was -o.3% (TRI = -o.1%). TRENDLines outlook projects o.7% in October & 1.1% for Q4. Sans fiscal/monetary policy mitigation, near flat growth will continue thru most of 2012/2013. TRI forecasts a mere 2.7% GDP crest in 2014Q4 ... en route to an end-of-cycle soft landing of o.4% in 2017Q4.

    Canada's economic recovery commenced Sept/2009. Expansion of the next business cycle began afresh in Aug/2010 upon Real GDP surpassing the former 2008 peak. At 7.1% in Sept/2011, the Unemployment Rate is not yet half way back to its pre-recession 2007 low of 5.3% after rocketing to an 8.7% peak in Aug/2009. Having commenced a new business cycle, this new contraction cannot be considered a double-dip. Should this event extend another two months, it would indeed be a Technical Recession.

    Headwinds: Factors contributing to perceived weakness in the TRI outlook continue to be: (a) high oil prices; (b) the Canadian Housing Bubble; (c) an Export killing "par-plus" Loonie & (d) waning Fed/Prov fiscal stimulus cheques

    High Crude Oil Prices ~ TRENDLines estimates the cumulative effect of multiple quarters of high petroleum costs reduced September's GDP growth rate by 2.6% ... just a tad below this factor's record economic damping back in Oct/2008.

    Upon breaching $90/barrel in early Feb-2011, Crude Price passed a definitive Petroleum/GDP ratio which induced a collapse of North American Light Vehicle Sales & manufacturing in 1980, 1990 & 2007 (see my Gas Pump & Barrel Meter model analysis). The present episode was responsible for USA Sales retreating (13%) to an 11.5 million units/yr pace in June from 13.2 mu/yr in Feb/2011. It is little known Ontario has been the #1 production jurisdiction since 2005. Canadian auto sales are down 6%. It is unlikely auto mnfg will surpass the 14 mu/yr pace 'til the USA contract Crude Price retreats below $90 (from $97/barrel today).

    $89k Canadian Housing Bubble ~ According to the TRENDLines Realty Bubble Monitor, the USA's median home price was a record 35% above the long-term Price/Family-Income ratio trend when the housing bubble peaked in 2005. So it was of little surprise to TRENDLiners when upon hitting that exact same metric in May 2011, Canada's realty bubble finally burst as well. Avg home prices in Canada plunged $1,500/week over the past 90 days. High mortgage and rent costs resulting from the Bubble are a severe burden on Disposable Income, preventing families from indulging in desired durable goods, holidays, landscaping, renovations, clothing, etc ... in short a recessionary forcing.

    Falling home values are further impeding the economy via deteriorating "wealth effect". The avg priced home of $363,ooo currently faces an $89,ooo (32%) correction. Upon this realization becoming widespread, a probable assault on consumer/business confidence and investment plans will unfold. TRENDLines forecasts 5-yr mortgage rates will rise 2% by 2015 as a normalization of the business cycle, serving to accelerate the ongoing correction.

    In spite of this growing reality, CMHC has not yet heeded TRENDLines long-time recommendation to raise required minimum downpayments for residences to 10% from 5% of purchase price for insured high ratio mortgages. Since the first plea (March 24 2010) targeted at CMHC, average home prices unnecessarily increased $32,ooo. Canadian taxpayers are ultimately at risk for the crown corporation's claim losses.

    Par-plus Loonie vs Exports ~ Added to the assault on manufacturing via the auto sector, Exports have declined as foretold in 2010 as consequence of a "par-plus" Loonie.

    Waning Fiscal Policy stimulus ~ Hayek & Friedman are fairly convincing in their arguments for using Monetary Policy rather the Fiscal Policy during economic contractions. But, when Central Bank rates reach "zero" Fiscal policy is preferred to Quantitative Easing (QE) since the latter spurs imported Inflation via debasement of its currency. Canada is one of a decreasing number of nations able to use fiscal stimulus. Greece & the USA represent a sorry lot of jurisdictions that cannot 'cuz of their failure to run Surpluses at the crests of business cycles left them with Sovereign Debt/GDP ratios exceeding 90%.

    Deficit borrowing for fiscal stimulus harms the economy in long run as debt servicing usually outweighs rising safety net costs in downturns. However, the realities of democracies and republics require governing parties to bow to media and public pressure to combat the social costs of rising unemployment rates.

    Canada paid down its national debt by 15% over the past decade so was in excellent shape to take on the task, but waning Federal & Provincial stimulus cheques have revealed the immature business cycle lacked sufficient critical mass to battle headwinds already in play.

    TRI Canada Targets (2011/10/19)

    2011Q2 o.5 %
    2011Q3 - o.9 %
    2011Q4 1.1 %
    2012Q1 o.0 %
    2012Q2 - o.9 %
    2012Q3 - 1.4 % (low)
    2012Q4 o.4 %
    2013Q1 o.5 %
    2013Q2 o.5 %
    2013Q3 1.0 %
    2013Q4 1.3 %
    2014Q1 1.4 %
    2014Q2 1.5 %
    2014Q3 2.3 %
    2014Q4 2.7 % (high)
    - -
    2017Q4 end of cycle o.4%(soft landing)

    original article

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

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