Global Economies in Perspective - Recessions, Housing Bubbles & the real unemployment rate

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Back on January 19th, our Canadian Recession Meter alerted Q4 GDP activity was in the 6% vicinity. Non-TrendLiners had to wait a long six weeks to hear this surprisingly excellent news from StatCan, bank economists & the media! Similarly, it won't be possible to compare today's (2010/7/16) Index inferred Q2 estimate to StatCan for almost seven weeks. Stay tuned to TrendLines for the best in forward outlooks...

Click here for the 2009-2010 blog archive of these charts...

Backgrounder ~ July 30 2010 ~ As illustrated in our long term chart, the 2009 Recession was the fourth severest Canadian economic event since WWII in terms of TrendLines Research Recession Meter Index data. Revised GDP stats indicate Canada entered a Technical Recession in October 2008 ... almost a full year later than the USA. This sheds light on the discussions surrounding the 2008 Election campaign, when Harper and Flaherty were adamant that there was no Recession in play and thus no chance of a 2008/2009 Deficit, whilst the Opposition used anecdotal evidence to "talk down the economy". Then in November, Canada suffered a swift and deep plunge right into Severe Recession. The apparent good economic data (via GDP & Leading Indicators) of that Fourth Quarter was not downgraded by StatCan 'til January 30th 2009.

With clarity absent, reporting inaccuracies sent mixed signals and resulted in the failure of the Harper Gov't to address fiscal policy stimulus in their infamous November 2008 Fiscal Update. This misread was compounded by actions (or inaction) of the Bank of Canada, which made no effort to use its monetary policy privilege to reduce interest rates after March 2008. The Bank Canada finally reduced rates by 0.5% on Oct 8th 2008, but even then it was only as part of a concerted effort by six Central Banks to address the international liquidity crisis. At the time, it was not aimed at any perceived critical Canadian softness. Viewing our Recession Meter archive, it can be seen that it was not until mid-September 2009 that StatCan was reporting the extent of the contraction somewhat properly. But even then, browsing thru the archived subsequent charts reveals major revisions of 2008Q2/Q3 right up to February 2010.

Canada's contraction finally found its bottom (-7.9%) in February 2009, in tandem with the USA (-6.8% in January). An American slowdown in the sales of new home construction & autos had devastated imports from Canada of softwood lumber, auto parts/vehicles, and the general manufacturing sector. It is little known that more cars & trucks have been assembled in Ontario than Michigan since 2005. As we predicted in Autumn 2008, a Spring recovery for both (new) homes & cars came as scheduled ... and before any of the stimulus cheques. Already by July 2009, American New Home sales were up 27% from the January 2008 low.

Back on August 19th we declared that the Canadian Recession had ended in July. StatCan GDP figures have confirmed the essence of that prediction. Using NBER definitions, our Recession was over in March 2009, and the economic contraction completed its cycle in August. Down south, we expect NBER to pronounce on Aug 2nd that the USA Severe Recession was over in July 2009, and the contraction in December. The announcement should also amend the start date of the USA Recession to Jan/2008 (from Dec/2007).

May GDP: 4% or 7.5%?

July 30th ~ Economic data released by StatCan today reveals Canada enjoyed a 4.0% Real GDP annualized growth rate in the 90-days ending May, down from 6.2% in January, 5.9% in March (Q1) & 4.8% in April. The May figure is far below the comparable 7.5% figure inferred by the TrendLines Recession Meter and its analysis of leading indicator data. Our forward looking Index projects an even higher growth rate of 7.8% in June (Q2).

StatCan's pessimism continues a divergence between the two metrics that commenced in March. TrendLines has been projecting a downturn since December, but the StatCan version seem to us slightly premature. We expect some upward revisions to bring GDP more in line with our interpretation of recent economic activity.

By measure of our economic activity Index, it would appear on first glance Canada's $62 billion Economic Action Plan, proposed in January 2009, should have been pared by half. On the other hand, with the Unemployment Rate stubbornly at 7.9% (after a high of 8.7%), the excess stimulus is a welcome aid in getting the Rate back to the pre-Recession low of 5.3% in 2007. In the absence of Inflation, Bank of Canada has been tolerant of this quest for full employment. Pleasantly surprising tax revenues and royalties resulted in the annual Federal Gov't Deficit being $47 billion ... $7 billion less than forecast.

The projected drop in growth rate to 2.3% GDP, as early as September, is mostly attributable to consequences of a probable American double-dip. Resumption of 2.7% rate norms could take 'til 2012Q2. Contributing factors taking a toll on vulnerable sectors will include higher petroleum costs, a near-par Canadian Dollar, waning Keynesian spending & an imminent $80,000 correction to residential real estate prices.

If long-term American business cycle trends hold to form, both economies should trough again in 2017Q3. Whether this shall be a soft or hard landing will depend on Bank of Canada's monetary policy maneuvers in tandem with fiscal policy actions at the federal & provincial level.

Most credit for the projected softness in the current business cycle is attributable to American influence. For eight years, I have warned of the consequences of growing structural deficits and the impending Federal Debt Bubble in the USA. Because both Congress & consecutive Presidents have failed to address this issue, the USDollar has been in secular decline since January 2002. Failing intervention by bond vigilantes, America will probably face the beginnings of a Greek style Debt Crisis in 2019 ... marked by Treasury downgrades, major bumps in yield and ultimately ... investor withdrawal.

As most crude oil is denominated in USDollars, its price reacts inversely to movements in the Dollar. As illustrated in our Barrel Meter chart, the current price run will continue 'til oil hits $140/barrel in 2011Q4 if the US Gov't continue its fiscal mismanagement. Resultant rising crude costs are increasing gasoline prices to the extent pump price is approaching the same Gasoline/GDP ratio that decimated USA New Car Sales in 1980, 1990 & 2007. Breach of this threshold will be signaled by $92/barrel crude. Vulnerable sectors will shortly be exposing the havoc of rising energy costs. Rising pump prices will cause Real Estate to be an early victim and on two fronts: (a) by making New Housing out in the suburbs less attractive & (b) via an obvious shrinking of the existing homes' commuter zone. Another critical juncture occurs as oil passes thru the $107/barrel threshold a few weeks later ... another round of G-20 Recessions.

Over the past year the Loonie has climbed 20% on the doubling of crude prices. Both the Canadian & Australian currencies are unfortunately cursed with the infliction of still being considered commodity sensitive. A rising Dollar impedes exports and thus the manufacturing sector. Despite near-record low interest rates, Canada's superb macro economic fundamentals have encouraged foreign investment, as well as somewhat of a safe haven status; and even limited reserve currency status on the international scene. These factors have not gone unnoticed at the Chicago Mercantile Exchange, where high speculation activity was reflected by record long futures volume (120,000 long non-commercial contracts) in mid-April. This exuberance has expired and volume drifted to a mere 24k last week.

Based on current commodity prices and other macro-economic fundamentals, the Canadian Dollar has a fair value of $0.88 today agin the USDollar. Based on the recent past, one would expect that should oil rise to the $125/barrel vicinity in 2011Q4 as our Barrel Meter projects, the Canadian Dollar should revisit the $1.00 area. That the Canadian Dollar in April already visited par with only $82/barrel contract crude implies the 2010 bump was built upon far too much anticipation. Our projected moderation of the Canadian economy in part reflects export challenges in a protracted par-valued CdnDollar environment. It appears that a substantial rise in oil could put us in uncharted territory. Aside from this, there are even more storm clouds ahead...

Canada's average home prices have been double their American counterparts since March. The 2010 Canadian price exceeds the long term Price / Family Income ratio trend by 31%. Canada is today suffering an $80,000 Housing Bubble. With the experience of our early 90's event, consumers are more likely to see a sideways realty price correction than the deep-plunging episode witnessed by the USA in dealing with its own $77k (35%) bubble. Home owners' growing realization of imminent falling prices and deteriorating wealth effect will not bode well for Confidence. This factor will stymie robust GDP right through to the end of the current business cycle in 2017.

Bank of Canada & the Fed must be very careful in raising interest rates in 2010 and early 2011. Low rate regimes will be necessary to weather a potential auto-related downturn and the collateral damage associated with a 7-yr soft housing market in Canada. America is on the verge of double-dip. Overly ambitious raising of rates in the next four quarters to address inflation concerns will need to be reversed ahead of the coming diesel & gasoline spikes.

In a final look back at the downturn event, revised StatCan GDP data confirms the full economic contraction was 11 months (~ 4 quarters) in length, with an avg GDP decline of -4.2%. Its cycle was over in August 2009. By NBER definitions, the Technical Recession started in October 2008, quickly escalated to a Severe Recession in November, and plunged to its eventual -7.9% trough in February before coming to an end in March 2009.

Click here for the 2010/2009/2008 blog archive of these charts

Backgrounder ~ (rev 2010/7/30) By measure of the Recession Meter's monthly Index (blue line), this was the worst downturn of economic activity in at least half a century. Alternatively, a view of BEA's quarterly GDP data reveals this was the severest downturn since 1980. But based on BEA's annual data, it was the worst episode since 1946. The USA's recent contraction began March 2008, bottomed in January 2009, and ended in December 2009. As an NBER defined event commencing in Dec/2007, it escalated from a Technical Recession to a Severe Recession in May 2008, and ended July 2009. With revelations within updated data, NBER will probably change the start date to January 2008. The 2008Q4 Real GDP decline of -6.8% compares with recent Quarterly lows of -6.4% in 1982, -7.9% in 1980 & -10.4% in 1958. In turn, the recent record highs were 16.7% in 1978 & 17.4% in 1950.

Recent Annual Real GDP growth rates: -2.6% (2009), 0.0% (2008) & 1.9% (2001). Last year's annual contraction compares with post-WWII declines of -0.2% in 1991, -1.9% in 1982 & -0.3% in 1980, -0.2 in 1975, -0.6% in 1974, -1.0% in 1958, -0.7% in 1954, -0.5% in 1949 & -11.0% in 1946. The Great Depression saw contractions of -8.6%, --6.4%, -13.0% & -1.3% in 1930 to 1933 respectively, followed by a -3.4% contraction in 1938 in a failed attempt by policy makers to balance the Budget. By some strange coincidence, the 1929 to 1933 era saw both GDP & CPI collapse 25% & Unemployment rise to 25%. The Great Depression's GDP averaged -7.3% over 43 months (14 quarters).

This event was the longest since the Great Depression. Over its 6 GDP quarters, the Severe Recession averaged -2.8%. Measured by the Index, the contraction lasted 22 months (March 2008 to December 2009) and averaged -3.9%. It would have become a full fledged Depression if Real GDP had averaged -4% for 8 Quarters. It was very close! That scenario was narrowly averted by prudent fiscal/monetary policy interventions. As in the 2001 Recession, many in the mainstream media have been visibly confused as to the Recession's end date. Because 2001 was a "jobless recovery", the MSM pundits kept waiting (and hoping) for a "double dip". Their talking down of the Economy broke both consumer & business Confidence long after the Recession was over. The Media was instrumental in the Unemployment Rate continuing to get worse thru 2002 & 2003, albeit GDP was rising after the Nov 2001 end date of that Technical Recession. With a financially struggling Media desperate for ratings, this phenom is in play again and will likely continue long into 2010 even though the Recession has been over since July 2009, and the contraction since December.

The 2008-2009 USA Recession had its roots in the inevitable Realty Bubble correction. The irrational exuberance in the Housing sector stems from irresponsible Legislators that fuelled the subprime mortgage availability; hiding those toxic mortgages within conventional Securities; and negligence by the Rating Agencies in granting these instruments favourable risk status. Using annualized figures, the Realty Bubble maxed out at 35% (or $77,000) above the long term Price/Income trend in Year 2005. See our Realty Correction backgrounder below to see how diminishing Disposable Income related to the Housing Bubble led to the general GDP growth rate downtrend that commenced in early 2006.

It is noteworthy that the trough of the Recession coincided with our determination of the Housing bottom, as we forecast it would in late 2008. Both New & Existing Home Prices returned to their secular Price/Family Income ratio trend level in January 2009. The halt in equity loss did much for the substantial and predicted upticks in Confidence levels. Also quite helpful was the simultaneous bottoming of crude & gasoline prices a month earlier.

July 30th ~ Economic data released by BEA today reveals the USA enjoyed a 2.4% Real GDP growth rate in Q2, down from 3.7% in Q1 & 5.0% in 2009Q4. The 2010Q2 figure is slightly below the 3.2% figure for the TrendLines Recession Meter which monitors 139 indicators related to the Fed's Coincident & National Activity indices. Looking forward, the Index projects short-term deterioration on journey to an ultimate -2.4% double-dip trough in September. The prospect of a secondary downturn, related to rapidly increasing petroleum costs, is consistent with our early alerts way back in Dec/2009.

Today's release also includes BEA's annual revisions affecting GDP going back to 2007Q1. The mostly downward revisions (as much as 1.5%) have noticeably merged the chart's GDP to be more in line with our Index reflection of economic activity.

Should long-term trends prevail, the current business cycle should peak @ 4% in 2013Q2 and wind down in 2017Q3. The path to getting there is rather murky at this time. Animal Spirits suggest GDP will be positive for the next twelve months. Conversely, our Barrel Meter & Gas Pump projections infer the economy is on the verge of a double-dip that will trough in September. This is an uncharacteristic dire outlook for us, and relates to the economy being at risk of an imminent collapse of New car & Light Truck Sales.

Ironically, it was the rebound of the auto & housing sectors that helped end the recent Severe Recession in July 2009. The year-to-date median price for Existing Homes is within $6k of our 2010 Target. New Home Sales bottomed in Jan/2009 and the subsequent 27% rise in unit sales contributed to the economic recovery. New Car & Light Truck Sales saw bottom in Feb/2009 when consumers gained faith that the collapse in Crude & Gasoline Prices was genuine and long term. Unfortunately, that premise may be misguided.

We have predicted for some time that a rebound would stem from Inventories being at business cycle lows, The correction will prompt an increase in average weekly hours, followed by more overtime, and finally new hiring. In the jobless recovery of the 2001 Recession, the U-6 Unemployment Rate peaked 23 months past the trough. It is little reported that this time the 17.4% U-6 top occurred only 9 months post-trough. The end of the economic contraction in Dec/2009 bodes well, but we see storm clouds on the horizon...

It all stems from the inability of Congress & the President to address runaway structural Deficits and the resultant mounting Federal Debt. This has not gone unnoticed by foreign investors, and debasement of the USDollar commenced in January 2002. Feeling the pinch, petroleum exporters began to factor this component into their crude pricing starting in 2004. As illustrated in our Barrel Meter chart, crude costs rise as the Dollar devalues, and this is a trend that will continue 'til oil hits $123/barrel in 2011Q4 should the US Gov't continue its fiscal mismanagement.

With rising crude comes increases in the gasoline and diesel prices, to the extent where pump price is on a trajectory approaching the same Gasoline/GDP ratio that decimated New Car Sales in 1980, 1990 & 2007. The threshold, rising with nominal GDP. was $3.19/gallon gasoline ($86/barrel) in the last breach event. The ratio could again be signaled in January upon $3.42/gal gasoline ($92 oil). Other vulnerable sectors will shortly be exposing the havoc of rising energy costs.

Rising gas pump prices will cause Real Estate to be an early victim on two fronts. New Housing out in the suburbs will be less attractive & there will be an obvious shrinking of the commuter zone. Another critical event occurs as oil passes thru the $109/barrel threshold - another round of G-20 Recessions. Perhaps fortunately, these two potential episodes occur just when critical mass of the business cycle recovery should provide good momentum. Unfortunately, rather than an annoying "pause", I fear the growth rate of the USA economy is more likely to see a double-dip plunge to approx -2.4% GDP in September.

The Fed must navigate its monetary policy delicately to prevent this potential pause in the Recovery from blossoming into a full fledged secondary Recession ... as in 1982. Sensitive Fiscal & Monetary Policy mitigation will be crucial over the coming seasons. Stymied stimulus action and/or the excessive raising of Fed rates could further dampen Recovery momentum.

In that respect, Mr Bernanke should note that our canary in the mine, Real Unemployment, is suffering a relapse. Albeit the 16.5% U-6 rate of June is down slightly from last October's post-1982 high of 17.4%, it only matches the rate already seen in January.

Much farther down the road, similar mitigation activity by the Fed & the Treasury Secretary's guidance to Congress with respect to Fiscal Policy will determine whether the cycle's contraction bottom in 2017Q3 will be a hard or soft landing.

In summary and using recent revised BEA & Federal Reserve data, the present downturn escalated to a Severe Recession in May 2008, after entering a Technical Recession in December 2007 (we say January!). The TrendLines Recession Meter Index set a record low of -6.8% in January 2009, obliterating the -4.8% marker of January 1975. It is apparent that the NBER defined Recession was over in July 2009, whilst the stubborn economic contraction did not end until December 2009. Today's BEA numbers confirm the high water mark for nominal GDP in 2008Q3 was finally surpassed in Q2.

By Real GDP terms, the current contraction ended in June (2009Q2). Conversely, the TrendLines' Index of underlying economic activity did not turn positive 'til January 2010 ... after 22 long months. The corrected divergence of the Index from BEA GDP numbers is not unprecedented. On the way down, we were similarly distressed at the original 2008Q3 number of -0.5% while our Index was inferring -3%. We were overcome with relief upon BEA's eventual downward revision -2.7%! Shortly thereafter, 2008Q4 was announced at -3.8% compared to our Meter Index inferred -9.8%. BEA has since downgraded that quarter to -6.8%!

Some downward revisions are improbable. The 40-yr chart is instructive in its revelation that in each post-Recession Recovery, GDP far outpaces our Index for the first three quarters - probably reflecting the artificial nature of Keynesian Fiscal Policy.

the TrendLines Recession Meter compiles Federal Reserve data on 139 indicators via the National Activity & Coincident Indices

Projections via Animal Spirits, the correction of the Housing Bubble, the Barrel Meter & our Gas Pump provide its future guidance

July 28th 2010 monthly update ~ Realty Bubble Monitor

Click here for the 2010-2009-2008 archive of these 2 charts

USA's Housing Bubble rises to $6,000 in May ... New Homes still in overshoot mode by $5k

New Homes: Record low interest rates coming out of the 2001 Recession enabled consumers to buy more expensive New Homes w/o increasing their mortgage payments. Added to pent-up demand, this caused median price to quickly detach from the long term Price/Income ratio of 2.4 in 2001. As slack lending guidelines and outright fraud became entrenched, irrational exuberance took the P/I ratio to an unsustainable high of 3.1 in 2005.

The annual & monthly prices peaked in 2007 @ $247,900 & $262,600 respectively. Despite the rising home values afterwards, 2005 is still considered the Bubble Peak as price in that year was 27% ($52,000) above the trend line. Using annual figures, a classic "return to the mean" correction was virtually complete in 2009 ... with median price a mere $2,056 shy of that year's target.

New Home Prices have resumed the long term trend and based on year-to-date data, this year's target of $222,000 has been overshot by $5k (2.3 P/I ratio). Using monthly data, June's $213,400 median price is down $49,200 (19%) from the all time high of $262,600 in March 2007. It is $8k above the 2009 low. More importantly with regards to the economic recovery, unit sales in June were 24% above the five decade low in May 2010. As shown by trajectory in the chart, it is probable that new highs for New Home Price will not be set 'til 2013. In summary, the New Home price Bubble has transitioned from $2k (1% above trend) in December 2009 to $-5k (2% below trend & 2.3 P/I ratio) in June.

Existing Homes: Record low interest rates coming out of the 2001 Recession enabled consumers to buy more expensive Existing Homes w/o increasing their mortgage payments. Added to pent-up demand, this caused median price to rise above the long term Price/Income ratio of 1.8 starting in Y2k. As slack lending guidelines and outright fraud became entrenched, irrational exuberance took the P/I ratio to an unsustainable bubble high of 2.8 in 2005.

The annual price peaked in 2006 @ $221,900 & the monthly median had its high of $229,000 in 2007. Despite those rising new home values, 2005 is still considered the Bubble Peak as price in that year was 35% ($77,000) above the trend line.

Existing Home Prices have resumed the long term trend and based on year-to-date annual figures to the end of June, classic "return to the mean" is $6k from being completed. Using monthly data, February's $164,600 was down $64,400 (28%) from the all time high of $229,000 in June 2007. June was up $19k from that post bubble low. More importantly with regards to the economic recovery, unit sales have improved 19% from the January 2009 trough. As shown by trajectory in the chart, it is probable that new highs for Existing Home Price will not be set 'til 2018. In summary, the Existing Home price Bubble has transitioned from $12k (7% above trend) in December 2009 to $6k (3% above trend & 1.9 P/I ratio) in June.

USA Backgrounder ~ (rev 2010/7/28) In May 2008, TrendLines Research published guidance that the correction of the USA Housing Bubble would neither be as drastic as forecasts painted by self-appointed pundits, nor would it be as soft as the media voices openly rationalizing the USA housing market was not in a bubble, Our scenarios predicted the collapse would only be as severe as needed to return the USA's median Existing & New Home Prices to their Price/2-earner Family Income ratio trend lines.

Shortly thereafter (2008/11/18), McDoomer Nouriel Roubini was predicting a 40% collapse in housing prices and that 1,400 banks would "go bust in 2009". Well, he was out by 1,260 on the latter call, and to date, existing home prices have declined only 28%. A growingly tabloid-style mainstream media seems obsessed with extreme positions.

Following a long time commitment to Home Price/Family Income ratios to measure real estate bubbles, our first publicly available effort illustrated Existing Homes were inflated by $74k (51%) at the bubble's crest. Based on our experience with the Canadian Real Estate Bubble of the 90's, we speculated prices would decline 'til at least 2017, and there would be no new American highs set 'til 2029. But to our amazement, the classic "return to the mean" did not even come close to mirroring the Canada episode, and the correction for both New & Existing Homes was virtually complete by January 2009. It was no coincidence the economic Recovery commenced the following month ... long before any fiscal stimulus cheques.

While waiting for the realty sector (and general economy) to correct (recover) completely, we had been awaiting four bottoms. The first two were Existing Home transactions/month & Existing Home Median Prices. Done ... January & January (2009) respectively. The remaining pair were New Home monthly sales & Prices. Done ... January & March (2009) respectively. An increase in monthly transactions was important to the Economy 'cuz it brings on increased revenues via purchases of furnishings, appliances, landscaping/gardening, With respect to New Homes, rising sales also mean "jobs".

The passing of the bottom of Prices for both categories is important 'cuz the subsequent apparent increase in "wealth effect" affects consumer demand and durable good sales. As the economic Recovery took hold, New Home Price rebounded 10% within 20 weeks of the March 2009 low. Unit sales rose 27% from the January 2009 bottom by July.

A return to the mean is both natural and necessary for economic stability. In the early 80's & 90's, we twice saw the Fed raise rates to embattle the Inflation cycle. An upward effect on mortgage rates left less Disposable Income for consumers to spend on holidays, clothing, durable goods, etc ... and Recessions ensued. The purpose was to quell overheating Economies. And it worked.

Due to winterization costs, Canadians spend an average 2.7 x's 2-earner Family Income for their residences, compared to a 1.8 factor in the USA. Analysis reveals avg Home Price in both nations detached from the home price/family income ratio trend line after 1999 (see charts) along with avg New Home Price. Lower interest rates made upgrade purchases almost painless. Then irrational exuberance set in...

In 2001 the Fed lowered interest rates to draw the Economy out of its Technical Recession. Many consumers, recently burned by the Dotcom fiasco, began to invest heavily in Real Estate rather than the volatile, collapsing Stock Market. Low interest rates enabled the purchase of more expensive homes for the same monthly servicing cost, even w/o an increase in Family Income ... and housing inflated. At the same time, new sub-prime mortgages flourished, compounded by rampant fraud by buyers, mtg brokers, appraisers, lawyers, lenders, mtg aggregators, investment banks and bond rating agencies. Artificial Demand was greater than Supply, and the Realty Bubble was under way. As Existing Home Prices attained levels of 2.8 x's Median Family Income, it was all to clear that irrational exuberance was fuelling the frenzy.

The USA norm for Median Existing Home Price is only 1.8 x's the median of 2-earner Family Income. With extraordinarily higher prices, many families were drawing from their Disposable Income to pay higher monthly mortgage payments. This left less funds for family budget spending on holidays, clothing, durable goods, vehicles, etc. Coming out of the Recession, mortgage interest rates began to rise. Add to the fray the higher energy costs for transportation and heating fuel that was in play, and we had the recipe for a Severe Recession. The Fed recognized this scenario unfolding and attempted a succession of lower Interest Rates to keep the Economy humming ... but alas, could not avert negative GDP.

The realty correction plunge was unexpectedly swift ... much faster than we originally forecast, and resulted in a return to the trend line in January 2009 using monthly data. It is no accident that the Severe Recession came to an abrupt end in July ... prior to delivery of the first fiscal policy stimulus cheques. Nasty real estate & mortgage practices caused the economic contraction, and the return to norms also helped in getting out of the downturn by restoring Confidence. The financial liquidity crisis & record petroleum costs were just a shove over the edge.

July 28th 2010 monthly update ~ Realty Bubble Monitor

Overpricing of Avg Home in June 2010:

$
Bubble Today Bubble @ Peak

$150,000 Australia 47% $155k & 56% (2007)

£88,000 UK 112% £ 108 & 146% (2007)

$80,000 Canada 31% $78k & 30% (2010)

$ 6,000 USA 3% $77k & 35% (2005)

Australia's Housing Bubble steady at $150,000 in June

Australian median home prices had already detached from the long term Price/Family-Income ratio of 3.1 way back in 1996. The onset of record low interest rates shortly thereafter enabled consumers to buy more expensive Existing Homes w/o increasing their mortgage payments. Subsequent irrational exuberance swept the P/I ratio to an unsustainable bubble high of 4.8 in 2007.

The year-to-date annualized price for 2010 has set a new peak of $468,000. Despite the ongoing rise in home values, 2007 is still considered the Bubble Peak as price in that year was 56% ($155k) above the trend line. In its third year of correction, today's median Price exceeds our 2010 target by $150k (47%). As shown by trajectory in the chart, it is probable that new highs for median Home Price will not be set 'til 2020. In summary, the National Home price Bubble has transitioned from $145k (47% above trend) in December 2009 to $150k (47% above trend & 4.5 P/I ratio) in June.

UK's Housing Bubble rises to £88,000 in June

UK average home prices had already detached from the long term Price/Family-Income ratio of 2.0 way back in 1996. The onset of record low interest rates shortly thereafter enabled consumers to buy more expensive Existing Homes w/o increasing their mortgage payments. Subsequent irrational exuberance swept the P/I ratio to an unsustainable bubble high of 4.9 in 2007.

The annual price peaked in 2007 @ $181,364 and was £108k (146%) above the trend line. In its third year of correction, avg Price exceeds our 2010 target by £88k (112%). As shown by trajectory in the chart, it is probable that new highs for the avg Home Price will not be set 'til 2048. In summary, the National Home price Bubble has transitioned from $80k (104% over trend) in December 2009 to $88k (112% over trend & 4.2 P/I ratio) in June.

Canada's Housing Bubble rises to $80,000 in June ... Canadian Homes 2 x's USA

Canadian average home prices had already detached from the long term Price/Family-Income ratio of 2.7 back in 2001. The onset of record low interest rates shortly thereafter enabled consumers to buy more expensive homes w/o increasing their mortgage payments. Subsequent irrational exuberance has swept the P/I ratio to an unsustainable bubble high of 3.5 in 2010.

The year-to-date annual price of $339,392 is 31% ($80k) above the trend line. As shown by trajectory in the chart, and assuming a 2010 Peak, it is probable that new highs for the avg Home Price will not be set 'til 2017. Unlike Australia, the UK & USA, Canada's real estate sector has not yet commenced its inevitable correction. For comparison sake, the USA Housing Bubble was 35% ($77k) above the P/I ratio trend at its peak in 2005. It appears the end is nigh. Indeed in June, the national average was down $2k from the all time high of $347k in May.

With an annual avg price of $341k vs $172k in the USA, this was the ninth consecutive month where Canadian homes were double the price of a similar home in America. In summary, the National Home price Bubble has transitioned from $67k (27% above trend) in December 2009 to $80k (31% above trend & 3.5 ratio) in June.

Canada Backgrounder ~ (rev 2010/7/28) TrendLines Research first drew attention to the topic of Canadian Housing Bubbles in 1989. Although that particular Bubble was only $53k, it was actually a more severe event as the average price of the time was an unprecedented 55% above the P/I ratio trend ... almost double the current episode. Families were paying an astonishing 4.2 x's their Income.

Rather than the recent rapid 4+ year correction (-22%) witnessed in the USA (annual figures), it took ten long years for the Canadian average price to surpass the 1989 high. Avg Home Price fell a mere 6% over the first five years. Considering the momentum in play within the present economic Recovery, it is not unreasonable to expect a repeat of the long-term sideways correction ... with perhaps an absence of new highs 'til 2017. It would be prudent for CMHC to temporarily increase its down-payment requirements for high-ratio insured mortgages to 10% (from 5%) until the downside risk dissipates.

This recommended action may be difficult in an environment where economists for four of Canada's largest banks have been unequivocal in recent weeks that "there is no real estate bubble in Canada". They join the Gov't of Canada and the Bank of Canada (see our Wall of Shame below). We heard their same chorus of rationalizations in 1989 & from their counterparts south of the 49th in 2005! Both events posed an assault on the Disposable Income of consumers, and wealth effect ramifications resulted in imminent Recessions within twenty-four months. As elaborated in our Canadian Recession Meter, failure by the Bank of Canada & CMHC to address a winding down of the Housing Bubble could easily turn the expected 2012Q1 economic downturn into a full fledged Recession.

"There is No Real Estate Bubble in Canada" ~ Wall of Shame

As mentioned above, there exists in Canada an extraordinary denial of the housing bubble. We have seen these rationalizations of unsustainably high prices in North America before: 1989 Canada with its 55% ($53k) episode & the USA's 30% ($65k) event in 2005.

Here are some of the more current members of our Wall of Shame:

- Bank of Canada (Paul Jenkins, Senior Deputy Governor - 2010/2/22) "I would certainly not say we are looking at a housing bubble" - Global Business Leaders Day panel discussion sponsored by Govt of Canada & Financial Times, via Vancouver Sun

- BMO Capital Markets (Michael Gregory - 2010/2/15) "He also concludes that there's no bubble and, furthermore, that there is very little chance one will appear. His prediction: talk of a housing bubble, which has become bit of a bubble itself, should deflate by summer" - Vancouver Sun

- Bank of Canada (Timothy Lane, Deputy Governor - 2010/1/11) "It is premature to talk about a bubble in Canadian housing markets" - Financial Post

- Gov't of Canada (Jim Flaherty, Federal Finance Minister - 2009/12/21) "We always watch the housing market to make sure that we do not see the development of an asset bubble. Record Canadian home prices partly reflect a stabilizing economy and don't constitute a bubble right now" - Bloomberg

- Gov't of Canada (Jim Flaherty, Federal Finance Minister - 2009/7/16) "There is no bubble in the Canadian housing sector. That has not been our concern" - Calgary Chamber of Commerce speech, via Reuters

Global GDP: Year 2010 4.2% (pending)     Year 2009 -0.6%     Year 2008 3.0%     Year 2007 5.2%

G-20 Nations in Technical or Severe Recession & Global GDP:

2010Q3 2010Q2 2010Q1 2009Q4 2009Q3 2009Q2 2009Q1
2008Q4

2008Q3

2008Q2

2008Q1

2007Q4

3.9% p 3.5% 5.1% 5.4% 5.1% 4.2% -6.0% -6.0% -0.2% 1.9% 3.9% 5.3%

nil

nil

nil

Russia
3% of Global GDP

UK Turkey Russia

8% of Global GDP

    UK     Russia Italy Canada SouthAfrica Turkey
27% of Global GDP

USA    Japan Germany UK     Russia France Brazil   Italy Canada Turkey Mexico SouthAfrica
53% of Global GDP

USA   Japan   Germany UK     Russia France Brazil   Italy Canada Turkey Mexico SouthAfrica

53% of Global GDP

USA Japan Germany UK France   Italy Mexico

43% of Global GDP

USA Japan Germany France Italy

38% of Global GDP

USA

21% of Global GDP

USA

21% of Global GDP

And Not in Recession in 2010Q2: USA, China, Japan, India, Germany, UK, Russia, France, Brazil, Italy, Mexico, Canada, South Korea, Turkey, Indonesia, Australia, Saudi Arabia, Argentina & South Africa (in order of GDP & comprising 77% of worldwide GDP; excludes 20th membership, courtesy to EU)

Remaining 160 nations comprise only 23% of worldwide GDP

July 22nd ~ 2010Q2 global GDP is on 3.5% pace, down slightly from 5.1% in Q1, and a major recovery from the -6.0% of 2009Q1. There are no G-20 nations currently in Technical or Severe Recession. Only Mexico had negative growth in Q1.

The pre-Recession high for global trade occurred in February 2008. After declining 20% by May 2009, it had rebounded 21% by March 2010, but was still below the 2008 record. April 2010 world merchandise trade was down 3% from the previous month.

The duration of the global Recession was 2008Q3 to 2009Q1. Despite the mainstream media hysteria, at its worse only 12 G-20 nations (representing 53% of global GDP) were in Recession. 2009's -0.6% GDP decline was the first contraction in the last four decades.

This economic episode was in part precipitated by rising energy prices that caused a collapse of USA New Car Sales in 2007Q4 when USA contract crude price broke the $86/barrel ($3.19/gallon gasoline) threshold. On its present path, gasoline and diesel will breach that same Fuel Cost/GDP ratio in 2011Q1 @ $3.42/gal ($92/barrel). Another Fuel Cost/GDP ratio is more ominous. At $109/barrel, a new round of G-20 Recessions shall commence. Our Barrel Meter suggests this will occur in 2011Q1 failing central banks' mitigation, or fiscal policy stimulation. The rising crude prices relate mainly to USDollar debasement and failure of successive Congress and Presidential Administrations to address Structural Deficits and mounting National Debt.

A long term effect of this downturn will be an acceleration in China's overtaking the USA as the largest Economy. We determines that this event will occur in 2051 ... a mere 40 years away. In turn, India's demographics create the situation whereby it is poised to take the title of largest economy in 2075.

July 21st ~ Due to exorbitant gasoline and diesel prices at the pump, USA Car & Light Truck sales collapsed in 1980, 1990 & 2007. On its present trajectory, the same fuel cost/GDP ratio that initiated these episodes of dramatic demand destruction will be revisited upon $3.42/gallon gas ($92/barrel crude) ... probably in 2011Q1.

Ignoring the Cash-for-Clunkers anomaly, annualized sales have climbed back to as high as 11.8 million from 9.1 in Feb/2009. See our Gas Pump & Barrel Meter charts for lots more discussion on the real factor thrusting the USA economy into double-dip.

Backgrounder ~ (rev 2010/7/20) The scenario above is defined by legacy legislation and ramifications of the Obama 2010-2020 Budget as interpreted by the CBO. Over the long term, it will never be allowed to happen. As we saw in Canada in the early 90's, program spending will be the eventual victim of these structural Budget Deficits. Ever larger annual Debt Servicing forces the Gov't-of-the-day into a realm of cuts in services and/or the raising of taxes. While populism affords the Obama Administration the ability to tax upper incomes today, eventually realities of the Laffer Curve will force policy makers to spread the taxation among the "other 95%" or pare back program spending. One of the first taxes will be a 2% hike in payroll withholdings to rectify the expected shortfall in Social Security obligations from 2017 to 2057.

A modern economy cannot sustain structural Deficits forever. Eventually, debt servicing becomes so great that it crowds out program spending. This usually occurs when interest consumes 30% of revenues, and is accelerated as interest rates rise coming out of Recessions. New Zealand, Canada, Argentina, Greece & the UK are empirical examples of jurisdictions having faced "the wall". Devaluation allows nations to re-price exports to rejuvenate their trade sectors. Germany, Japan & China have all traveled this road at some time. With a Deficit/GDP ratio of 14%, Greece would be the natural "next" candidate ... but was prevented of that opportunity by its past decision to have joined the EUROzone.

Source: Congressional Budget Office (Note: The extended-baseline scenario adheres closely to current law, following CBO’s 10-year baseline budget projections from 2009 to 2019 and then extending the baseline concept for the rest of the projection period. The alternative fiscal scenario deviates from CBO’s baseline projections, beginning in 2010, by incorporating some changes in policy that are widely expected to occur and that policymakers have regularly made in the past.)

July 20th ~ Since early 2009, TrendLines Research has published alerts warning USA is headed for an inevitable Investor rebellion. With concern over the integrity of sovereign debt, bond vigilantes are increasingly monitoring Deficit/GDP & National Debt/GDP ratios. It appears the current spotlight on European nations will be donned on American Treasury activities within nine short years.

Due to an increasingly corrupt electoral system, members of Congress and successive Presidents appear beholden to donators to their fund raising efforts. Add in immense lobbying activities to the fray, and we see legislation catering to the social engineering agenda of the Progressive left and providing obscene levels of subsidies to corporate sectors. As a result, the Federal Gov't is on a path that would double today's $13-trillion National Debt by 2022, and triple it by 2029. Already a staggering 92% of GDP, the ratio would rise to 129% & 178% respectively. Unimpeded, the Debt will cross the 200% threshold in 2031.

Most buyers of US Treasuries are unaware of these precise numbers, but they have had a sense for a while that America's fiscal mismanagement will lead to demands for increased interest rates on Treasury notes, then ratings' downgrades, and still higher yields ... as the realities of compound interest cause bond vigilantes to eventually withdrawal temporarily from the auctions ... to stage an intervention.

Left unimpeded, the rise in Debt interest, unfunded Social Security liabilities, Entitlements for Medicare/Medicaid and Universal Health Care would drive the National Debt to $92 trillion over the next 30 years. This target was $55-Trillion at the end of the Bush era.

On the very short term, there is definite relief. Albeit the 2010 $1.5 trillion Budget Deficit represents a scary 10% of GDP, our analysis of CBO costing of the current Obama ten-year Budget indicates the ratio will decline to "only" 4% by 2014. This virtually guarantees the stability of Treasury sales to both domestic & international investors over the next 12 - 36 months. The decline mostly marks the extinguishing of fiscal stimulus, TARP & remnants of the Bush era tax cuts.

Not so pretty is the journey from 2015 onwards wherein the Deficit/GDP ratio is scheduled to rocket to a horrendous 20% by 2040. Somewhere along the way, Congress will be forced to acknowledge that the raising of new funds is having diminishing returns due to increased shunning of Treasury sales and ballooning interest costs.

As part of a diversionary tactic that started in February, Wall Street & Cable News have been engaged in faux outrage at the prospect of Greece's 14% Deficit/GDP ratio, accompanied by mucho finger-pointing at the other PIIGS. Well, an unrestrained American Federal Gov't is on a path where it begrudgingly admits it will "again" pass today's 10% threshold in 2025. Congress got away with it this time 'cuz it was a sanctioned spike deemed necessary to avert an economic Depression. But the future episode is clearly a child of structural Deficit budgeting ... an unforgiveable strategy as it lacks the prospect of responsible corrective action options.

With its 10-year horizon, the Pelosi-Reid-Obama Budget process has shone a light on the whole structural deficit issue that TrendLines has been raising awareness about for almost a decade. The foundations cross several administrations. Hopefully, closer Media & think-tank scrutiny will spawn anticipatory action by a more fiscally responsible Congress and/or President. Hey, at least they formed a non-partisan committed in March! If action is not forthcoming, current CBO data indicates that left unchecked, the annual Deficit rockets to $5.8 trillion by 2040, $9 trillion by 2050 & $28 trillion by 2075. Meanwhile, the National Debt surges to $167 trillion & $604 trillion respectively by the latter two dates.

Gratefully, this "would/could/might" scenario is only an academic exercise. If Congress fails to address this issue responsibly, most of the foreign and even some domestic players will simply withdraw and shun the Treasury Auctions that fund "the habit". The dark and ominous path illustrated in the chart will be truncated when these Investors sense the Federal Gov't is approaching tipping points where they deem it prudent to exit the venue.

Weighing the USA's situation, TrendLines Research judges such an Investor Crisis will occur upon the National Debt reaching 115% of GDP ... likely in 2019. That's only nine years away. Even if the USA dodges that bullet by some fortune, a similar fate, via the Deficit Crisis, is also on the distant horizon ... when the annual Deficit again approaches 11% of GDP ... in 2025.

Clues to the proximity of another and almost inevitable American financial crisis can be found via the trend in the USDollar exchange rate. Distrust of Congress & the Administration in addressing their Deficit/Debt responsibilities began in January 2002. In the succeeding six years, the disfavoured currency plunged from its USA:EUR rate of 1.16 to 0.63 (46%). The secular decline was interrupted in 2008 by safe haven seekers during Russia's incursion into Georgia & the Liquidity Crisis; but the trend resumed in March 2009. Mass withdrawal of foreign (and some domestic) buyers of Treasuries will be known to be imminent upon deterioration of the USA:EUR exchange rate to new lows.

The unholy alliance between Wall Street, Cable News (and possibly the White House) has been sly in diverting scrutiny away from itself by highlighting poor financial fundamentals in Argentina, Iceland, Dubai-UAE, Greece, Ireland, Spain, Hungary, Portugal & Italy. As the globe-trotters are running out of new countries to finger-point, TrendLines Research takes the position the spotlight is in fact back on USA, in increased awareness, and there has been a resumption of the secular decline of the USDollar. The recent safe haven moves escalated the USDollar to 0.83, but it has already drifted back to 0.77 vicinity.

Present trajectory suggests new lows for the Dollar will occur prior to the end of the decade. A more aggressive scenario (reflected via our Barrel Meter) predicts an accelerated version of this crisis, with the USDollar plunging to 0.55 by 2012Q4 (Presidential Election). Such a EURO spike would certainly act as a wake-up call for policy makers, bringing about immediate intervention strategies to initiate a prompt retreat.

On the positive side, the string of USA Export records seen in 2006/2007 should resurface in 2011 as importers see nicer prices. Manufacturing could also surprise when domestic consumers start to shun high priced foreign goods and associated ever increasing transportation costs of those products.

Real Unemployment Rate:

24.9% - 1933

19.3% - Nov/Dec 1982 (post Great Depression high)

17.9% ~ 1939

17.4% Oct/2009

17.1% April/2010

16.6% May/2010

16.5% June/2010

July 11th ~ Today's headline USA Unemployment Rate for June may be 9.5% (U-3), but the dire state of the economy is reflected by the REAL Unemployment Rate of 16.5%. The latter includes discouraged/marginally attached workers and economically necessitated part-timers. It's down from 16.6% in June and marks the lowest rate since the Recession-inspired high of 17.4% set October 2009.

The post Great Depression high for this Bureau of Labour metric (U-6) was 19.3% in 1982. The all time record of 24.9% was set in 1933. By 1937 it had corrected to 11%, but in a 1939 premature effort to balance the Budget, suffered a relapse to 17.9%.

This jobless recovery was foretold by TrendLines Research in Autumn 2008. And it seemed the economy was over the hump when it was reported the Inventory/Sales ratio was much improved. As some sectors move to replenish, there is a visible increase in Aggregate Weekly Hours ... then overtime ... and finally re-hiring. The U-6 Unemployment Rate did not peak 'til 22 months after NBER-declared end of the 2001 Recession. It never got back to the pre-contraction level of 6.8%. Assuming this Recession ended July 2009, then U-6 topped three months afterward "this time".

But just as it was thought the fiscal stimulus was ushering in a robust Recovery, December's leading indicators began to hint of relapse ... perhaps one to three years off. By February 2010, the "downturn" was starting to look more like a double-dip. And by March, it became apparent whatever was on the horizon wasn't a year off any longer. The TrendLines Recession Meter gives guidance on the economy's history and path forward.

Upon resumption of the business cycle and folks commence to come back into the labour market, the statistical U-3 universe will expand. Due to the larger denominator, it is common for U-3 to temporarily mask the better times, and the Rate may in fact rise. With that paradox, the Real Unemployment Rate (U-6) may actually start to decline first and hence reveal the first signs of better times.

U-6 definition: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.

April 13 2009 ~ The first chart reveals that Mortgages have maintained steady growth of 4.5% - 8% thru the Recession.

Similarly, the second chart shows that consumer loans have grown at a remarkably steady 9%-11% pace since Dec/2007.

Yet, the MSM & legislators have maintained hysteric rhetoric since the beginning of the "credit crisis" (Oct/2008) that nobody can get a car loan, student loan or mortgage.

Democrat congressmen & President Obama employed misinformation to persuade the public that massive bailouts and loans to certain Investment Banks was crucial to prevent a melt down.

You be the Judge...

recession band starts Dec-2007

real farmers don't live on subsidies ... they live in Brazil ! Real farmers don't live on subsidies... they live in Brazil !

Freddy Hutter, TrendLines Research, Aug 4 2004

Send email to Freddy Hutter with questions or comments about this web site Copyright © 1989-2010 TrendLines Research ~ Last modified: July 27, 2010

Send email to Freddy Hutter with questions or comments about this web site
Copyright © 1989-2010 TrendLines Research ~ Last modified: July 27, 2010