Gagging on Oil

VANCOUVER, Canada – When we woke up in the morning, the Trans-Canada had already heaved itself over the highest point in the Rockies. Gone were the dense forests of the East. Gone were the wide-open spaces of Saskatchewan and Alberta. We were in British Columbia – rolling downhill, following the gray-green river downstream, through boiling canyons and lazy flats…

Does any country have more bountiful natural resources than Canada? Timber, food, cattle, minerals, water – Canadians have it all. Too bad: When it comes to prosperity, there are few things as dangerous as inheriting money or having abundant natural resources.

 

vancouver-3Vancouver at night time – something different is going on there…but trouble is probably looming anyway.

Photo creidt: silveryhawk

 

Rather than making or inventing things… or providing useful services… a resource-rich economy tends to sell itself – by the ton. When commodities boom, the miners, farmers, and lumberjacks live high on the hog. But when they fall – the economy falls with them.

 

WTICNot good for Canada- the price of oil has been in free-fall for some time, the end result of massive, central bank policy-induced malinvestment in the sector – click to enlarge.

 

Canada’s economic growth was negative in the first quarter. The country is the world’s tenth largest exporter of crude oil. And oil is in its worst downturn in 30 years, according to Morgan Stanley.

The U.S. oil price has dipped below $50 a barrel. Along with it, the entire commodity complex – upon which much of the economy of Canada depends – could be dragged further down too. Why?

Even more dangerous than resource abundance is economic “guidance” from the feds. First, Alan Greenspan kept rates too low after the mini-recession of 2001. Then the Bernanke Fed pushed them down to near zero and kept them there for the last six years. And now Janet Yellen is steering the same course.

The cheap credit gave resource producers the means to overproduce and consumers the wherewithal to over consume. At such a low cost of borrowing, producers could earn positive cash flow without regard to real economic results.

And with the Fed’s rate fixing falsifying the cost of capital, they didn’t know if they were really making money or not. So, they produced so much oil the world gagged on it.

 

FF rateSince 2008, the Federal Reserve is helping the world to pretend that the cost of capital should be zero, or near zero. The fallout from the resulting price distortions has now begun, and it isn’t pretty – click to enlarge.

 

Commodities Give Way

But now the bottom has given way under the resource market. BHP Billiton, the world’s largest mining company by reserves, has slashed production…

… Caterpillar – which pushes lifts and carries resources all over the world – has seen sales falling for 31 months in a row…

… Chesapeake Energy – the tenth largest oil producer and second largest natural gas producer in the U.S. – has cut its dividend to preserve cash, as shares fell to a 12-year low…

…a nd Kumba Iron Ore, Africa’s largest iron ore producer, has eliminated its dividend after announcing that profits had crashed 66% in the first half of the year.

None of this is good news for Canada’s commodity-based economy. But there’s something else going on here…

Life in Canada’s cities is different from the countryside. An influx of immigrants, mostly from Asia, has boosted the energy and wealth of Toronto, Vancouver, and other large urban areas.

They seem more prosperous and dynamic than the large metropolises of the U.S. For the most part, property prices are higher in Canada, too – especially in Vancouver – where they may be more a product of foreign buying than of local industry.

Outside the cities, though, you might just as well be in West Virginia, Oklahoma, or Alabama. There is little evidence of wealth or style. Along the tracks of the Trans-Canada, our only reference, houses are modest – even shabby. Neither agriculture nor forestry appears to have ever produced much profit for Canada’s heartland.

Particularly disappointing is the domestic architecture. A dear reader sent a photo (see today’s Mailbag below) of a house he had built with his own hands – of stone and logs. It is a gem. But it is unusual. Whether you are in the outer suburbs of Toronto… or out on the plains of Alberta… the style is the same: boxy, boring, and cheap.

 

Pricey Property

But when we rolled into Vancouver, all of a sudden, things changed. We saw money. There are high-rise condos everywhere. Chic people. Expensive shops. Crowded restaurants. A few years ago, a bust in the mining sector would have emptied the restaurants. Today, the waiters keep serving drinks despite the smashup in the resource sector.

Back in the old days, a collapse in mining meant that brokers, promoters, and mining entrepreneurs – not to mention the stockholders – had to move fast to raise cash. Their fancy cars went back to the dealers, and real estate agents put up “For Sale” signs in front of their handsome houses! No evidence of that now.

Compared to incomes, Vancouver has the second most expensive houses in the world. Only Hong Kong has less affordable real estate. Advice to Canadian readers: Sell.

 

metro-vancouver-real-estate-2014Vancouver’s house price bubble until year-end 2014 (it has since then continued to grow at a double-digit annualized rate). This is one for the history books – click to enlarge.

 

Image captions by PT

 

Charts by StockCharts, St. Louis Federal Reserve Research, Rennie & Associates
The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.
 

 

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You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

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One Response to “If You Own This Expensive Asset, It’s Time to Sell”

  • Kafka:

    Canada is cronies and quotas. Vancouver developers want the hot money from Chinese criminals- many of them card carrying members of the Communist party. Only the top fringe of Canada’s wealthy can afford Vancouver property.
    Most of the money funding the current ruling party in B.C. is from real estate developers and resource companies-writing cheques from $100,000 to $400,000. Shameless. Best return on investment ? Buy a politician.
    Oh, and now we are trying to pay foreign companies to take our natural gas, mimicking Australia’s folly, only 10 years too late.

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