22 December 2014
Collapsing energy prices will be the story of the year for Canada, due to our high costs of production in the oil sands sector. In the US, the primary impact of low oil prices will be on the over-leveraged, capital-intensive and high-turnover shale fracking sector. In Canada, the oil sands operations are much better-funded, but they're not economic at these prices, and we have fracking going on here, too.
But the real Canadian story is that we have so far entirely missed the US real estate correction (due to riding the commodity boom), but the turndown in oil prices is going to hit Canada's real estate market very hard.
While our energy sector is much less leveraged than in the US, our housing sector is clearly vulnerable. Our household debt load has doubled as a percentage of income since 1990.
This is thus emerging as Canada's biggest economic setback in decades.
By the way, one statistic really caught my eye. I have been commenting for as long as I can remember that we keep our local construction workers busy full-time without building any new houses. In fact, I have been on the mark. Canada has been involved in a renovation boom for years (see story and chart). Falling energy prices will impact that, too, and it's likely that real estate prices have already peaked, given how fast the rig count is dropping in the oil patch.
Now... will this be the crisis that triggers a resurgence in gold? Well, Mr. al-Naimi just announced that the Saudis don't care if oil falls to $20/barrel. They are obviously wishing to preserve market share, and they are fighting a battle they can win.
Note that the Asians have been playing years ahead of us in stockpiling gold, as a hedge against bad debt and economic volatility. This trend has not reversed since 2011, when the chart below was created.
The gold price will be leveraged if there is a credit crunch, and that appears to be what is shaping up. Once again, the crazy Americans have started another boom/bubble with the only real economic and employment growth of the past 7 years having occurred in only 5 shale fracking states. And of course, everybody will pay for the Federal Reserve's latest experiment in bubble-blowing.
What is the moral of this story? You can't print $4 trillion of funny money and not have consequences. The Fed brought on the so-called Great Recession in 2008 --- arguably a depression, which has so far been masked by moneyprinting and borrowing, but it has not gone away.
The chart below shows that the Federal Reserve has recently accumulated $4 trillion in assets, purchased with printed money, that it cannot sell without creating irreparable market dislocations.
Booms are not the same thing as economic growth. Rather, they are temporary and unsustainable events caused by economic central planners who believe that moneyprinting stimulates the economy. However, moneyprinting always results in malinvestment, which results in transient booms that ALWAYS go bust with real capital loss.
Only saving, combined with capital investment for the long-term, produces growth, whereas stimulating borrowing and debt (the strategy used by economic central planners since 1987) always fails.
In the chart below, we see how decades of Federal Reserve bubble-blowing have decimated US breadwinner jobs.
If you want to know more about how Fed bubble #3 is unfolding (with the usual dire consequences), David Stockman has summarized it here: The Fracturing Energy Bubble Is the New Housing Crash.
Here, we see that Federal reserve intervention has added to jobs only in the least stable and lowest wage sectors.
And for a little more digging into risky energy finance, have a look at John Mauldin's recent review, here (though I disagree with his speculation that we've outgrown our need for jobs --- rather, Fed-induced malinvestment keeps killing them): Oil, Employment, and Growth.
Combined with the above charts, it is evident that the latest boom has led to the creation of only low wage jobs (above) and speculatively-financed carbon energy sector jobs in only 5 states (below).
The article linked at the start of this post is brief, full of charts, easy to read, and sobering. If I'm right, the energy sector will remain weak until the vulnerable players get taken out of the game. It is bad debt that will eventually force interest rates higher, whether our central planners wish for rates to go that way or not.
On the upside for Canada, which has more mining companies than all other countries in the world combined, the fallout in bad debt from the collapse in the carbon energy sector could be counterbalanced to some degree by a resurgence in the gold mining sector, which will certainly benefit the region where I live (Northwest Ontario).
Keep watching, and look out! The oil price collapse seems quickly to be unmasking Fed bubble #3, as far as I can tell from here.
When do the bubbles and booms stop? When the central planners stop intervening by printing money and "stimulating" borrowing and debt in the absence of viable targets for investment.
Where should the investment be coming from?
Savings, not borrowing.
What should we be investing in, instead of booms and bubbles?
Let the market decide --- without intervention by central planners.