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.
 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

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.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

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.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Trade War Game On!
      Interesting Times Arrive “Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.   Ancient Chinese curse alert... [PT]   “One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come...
  • The Dollar Cancer and the Gold Cure
      The Long Run is Here The dollar is failing. Millions of people can see at least some of the major signs, such as the collapse of interest rates, record high number of people not counted in the workforce, and debt rising from already-unpayable levels at an accelerating rate.   Total US credit market debt has hit a new high of $68.6 trillion at the end of 2017. That's up from $22.3 trillion a mere 20 years ago. It's a fairly good bet this isn't sustainable....
  • US Stock Market: Happy Days Are Here Again? Not so Fast...
      A “Typical” Correction? A Narrative Fail May Be in Store Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will...
  • Rise of the Japanese Androids
      Good Intentions One of the unspoken delights in life is the rich satisfaction that comes with bearing witness to the spectacular failure of an offensive and unjust system. This week served up a lavish plate of delicious appetizers with both a style and refinement that’s ordinarily reserved for a competitive speed eating contest. What a remarkable time to be alive.   It seemed a good idea at first... [PT]   Many thrilling stories of doom and gloom were published...
  • Claudio Grass on Cryptocurrencies and Gold – An X22 Report Interview
       The Global Community is Unhappy With the Monetary System, Change is Coming Our friend Claudio Grass of Precious Metal Advisory Switzerland was recently interviewed by the X22 Report on cryptocurrencies and gold. He offers interesting perspectives on cryptocurrencies, bringing them into context with Hayek's idea of the denationalization of money. The connection is that they have originated in the market and exist in a framework of free competition, with users determining which of them...
  • No Revolution Just Yet - Precious Metals Supply and Demand Report
      Irredeemably Yours... Yuan Stops Rallying at the Wrong Moment The so-called petro-yuan was to revolutionize the world of irredeemable fiat paper currencies. Well, since its launch on March 26 — it has gone down. It was to be an enabler for oil companies who were desperate to sell oil for gold, but could not do so until the yuan oil contract.   After becoming progressively stronger over the past year, it looks as thought the 6.25 level in USDCNY is providing support for the...
  • The “Turn of the Month Effect” Exists in 11 of 11 Countries
      A Well Known Seasonal Phenomenon in the US Market – Is There More to It? I already discussed the “turn-of-the-month effect” in a previous issues of Seasonal Insights, see e.g. this report from earlier this year. The term describes the fact that price gains in the stock market tend to cluster around the turn of the month. By contrast, the rest of the time around the middle of the month is typically less profitable for investors.   Due to continual monetary inflation in the...
  • Flight of the Bricks - Precious Metals Supply and Demand
      The Lighthouse Moves Picture, if you will, a brick slowly falling off a cliff. The brick is printed with green ink, and engraved on it are the words “Federal Reserve Note” (FRN). A camera is mounted to the brick. The camera shows lots of things moving up. The cliff face is whizzing upwards at a blur. A black painted brick labeled “oil” is going up pretty fast, but not so fast as the cliff face. It is up 26% in a year. A special brick, a government data brick of sorts, labeled...
  • Getting High on Bubbles
      Turn on, Tune in, Drop out Back in the drug-soaked, if not halcyon, days known at the sexual and drug revolution—the 1960’s—many people were on a quest for the “perfect trip”, and the “perfect hit of acid” (the drug lysergic acid diethylamide, LSD).   Dr. Albert Hoffman and his famous bicycle ride through Basel after he ingested a few drops of LSD-25 by mistake. The photograph in the middle was taken at the Woodstock festival and inter alia serves as a...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist