All posts by Parallax Equity

About Parallax Equity

Over 25 years in the energy industry managing global chemical and energy divisions.

Canada may ultimately take one of the biggest hits from the slowdown in China and the fall in commodities.

I spend a fair amount of my time watching global macro trends and looking for outliers in markets that ultimately bring about opportunities. A lot has been made about the Saudis and OPEC targeting US Shale producers in their battle for market shale but it is probably Canada that may end up being hurt the worst as the Saudi move for market share is timed with the China hard landing and the bursting of the commodity bubble. Canada made it through the 2008 financial crisis relatively unscathed. It was thought that and boasted by many (mostly Canadians) that Canada was “a bastion of stability”. It looks as though Canada’s stability is going to run out.

I spent a week in Vancouver and Whistler a couple of years ago with some customers. What a fabulous place. This was after the financial collapse in the US but Canada had somehow received only a minor nick in comparison. The area has great weather and tremendous natural beauty, however, the real estate prices drew the most gasps. They have continued to go up for the last several years with a big push coming from Chinese immigrants under the Immigrant Investor Program (IIP). About 55,000 wealthy migrants (primarily Chinese) were estimated to have moved to the Vancouver area between 2005 and 2012. Partly as a result of this massive migration of new wealth, the commodities boom and quantitative easing programs the real estate bubble has been inflated. Bloomberg’s analysis has Canada as a whole as the most overvalued real estate in the world at 63% overvalued. Vancouver is widely recognized as having some of the most expensive homes in the world and articles about the building bubble appeared in the WSJ back in 2011. But air kept being pumped in. Immigrants kept pouring in through 2014 when the IIP was finally canceled for Ottawa at the end of 2014 and replaced by the Immigrant Investor Venture Capital (IIVC) which is much less favorable to the immigrant and has resulted in only 6 applications. However, Quebec still has their own IIP which has seen a bumper crop of takers with many ultimately headed for Quebec.

Take a look at this great article from Andrew Hepburn from 2011 and look at it in light of today’s events. Written in 2011 he notes:

“The real danger exists because the bubble has been financed with credit, leaving Canadian households in record levels of debt. According to data from Statistics Canada, personal mortgage debt at the end of 2010 totaled $956 billion, more than double the level of 2000.”

If only the magic of the great commodity cycle would never end the fairytale could keep going. But alas it has not. The commodity super cycle is over and Canada is getting hammered by the slowing Chinese economy on top of the collapsing oil and commodity prices. Canada is now technically in a recession as described in this excellent article and chart by Wolfstreet who has some excellent articles on the subject.

Wolf Richter of Wolf Street notes that Calgary could possibly hit 17.5% office vacancy rates over the next couple of years. Look what Wolf has to show about Toronto’s condo bubble and the following chart.

The real pinch comes as Canada also has extremely high personal debt exposure as our friends to the north did not deleverage after 2008 because for the most part they were still enjoying the commodity party.

Add to this the new left government in Alberta that is loading on new taxes on the oil industry and you are really kicking the dog while he is down. The Canadian $ has weakened earlier this year but look for more and bigger moves to come. It looks to be a rough landing for those north of the border.