By Justin Spittler, editor, Casey Daily Dispatch
Investors beware: the U.S. economy is in for a huge shock.
This shock won’t start with auto loans…student loans…or even U.S. corporate debt.
It will begin north of the 49th parallel.
That’s right. Canada will soon put the U.S. economy to the test.
Regular readers know where I’m headed with this.
In short, Canada has a gigantic housing bubble on its hands. And it looks like that bubble is finally about to burst.
When it does, Canada will have serious problems. It could even have a recession or a full-fledged banking crisis.
• And yet, you’re probably not too worried about this…
That’s because, if you’re like most Dispatch readers, you live in the United States…not Canada.
This makes it easy to assume that Canada’s housing crisis isn’t your problem. But that’s a very dangerous assumption.
You see, financial crises almost never stay in one place. Instead, they move from country to country like a plague of locusts.
Investors learned this the hard way in 2007 when a U.S. housing crisis turned into a global financial crisis almost overnight. By the time the dust settled, investors from Tokyo to London were sitting on huge losses.
I’m reminding you of this because Canada's housing crisis could trigger the next global economic meltdown.
I'll show you why in a minute. But let’s start by looking at why Canada’s economy could unravel soon.
• Housing is the heart of Canada’s economy…
Real estate and related financial services industries account for almost a quarter of Canada’s economic output. That’s the highest level since at least the 1960s.
In British Columbia, real estate, construction, and related industries make up 40% of the economy.
But housing isn’t just a key pillar of Canada’s economy. It’s also about the only thing holding up Canada’s economy right now.
According to Bloomberg Markets, Canada’s economy would have actually shrunk in February were it not for the country’s red-hot housing market.
• Canada’s housing boom has also lifted other parts of the economy…
According to the Toronto-Dominion Bank, the housing “wealth effect” has driven one-fifth of Canada’s consumer spending since 2001.
In other words, rising housing prices have made Canadians feel richer. And that’s led them to spend more money on other things.
That may seem like a good thing. But you have to understand something about the wealth effect. It slices both ways.
This means Canadians are going to feel less rich when housing prices inevitably crash. They’re going to eat out less…visit the mall less often…and take fewer vacations.
• In short, a housing crisis would drag down Canada’s entire economy…
But don’t take my word for it. Mark Chandler, who runs the fixed-income desk at RBC Capital Markets in Toronto, recently had this to say:
You don’t need a collapse in house prices, you don’t need housing starts to be cut in half for weaker real estate sector to have a significant effect on GDP [Gross Domestic Product] and incomes.
According to RBC, it would only take a 10% drop in housing prices to shave a full percentage point off of Canada’s economic growth rate.
Unfortunately, Canada’s housing market isn’t on the verge of a 10% correction. It’s headed for a major crash.
David Rosenberg, one of Canada’s leading economists, thinks Toronto housing prices could fall 40% or more.
• That kind of crash would send Canada’s economy into a tailspin…
It could even trigger a full-fledged banking crisis.
Most Canadians haven’t considered this possibility. That’s because Canadian banks are supposedly safer than U.S. banks. Because of this, Canadians can’t imagine having the kind of financial crisis that the States had a decade ago.
Now, there’s some truth to this. For instance, Canadian banks have issued fewer subprime mortgages than U.S. banks did a decade ago. They’ve also bundled fewer mortgages into “toxic” securities.
But let’s be clear about something…
• Canadian banks wouldn’t be immune to a nationwide housing crisis…
That’s because real estate holds Canada’s entire banking system together.
In fact, residential mortgages now make up about 52% of Canada’s chartered bank loans.
Real estate companies also account for 14% of all private business loans. That’s the most since 1981.
At this point, Canadian banks also now lend more money to real estate companies than they do to manufacturing and oil companies combined.
In other words, Canadian banks are far more exposed to real estate than most investors think.
• So, avoid Canadian bank stocks if you can…
You might also want to consider shorting (betting against) Canadian bank stocks.
Just understand that shorting is highly speculative. So, only bet with money you can afford to lose.
I also encourage U.S. investors to take a good look at their portfolios.
That’s because Canada is America’s most important trading partner. Every year, we send them $267 billion worth of goods and services. That’s more than we export to China, Japan, and the United Kingdom combined.
In other words, the fate of the U.S. and Canada are highly intertwined.
More importantly, the U.S. economy sits on a mountain of cheap money, just like Canada.
We have more auto loan, student loan, credit card, and corporate debt than we’ve ever had. Plus, the federal debt is at $20 trillion and counting. And that “official” figure doesn’t include Social Security, Medicare, or Medicaid.
In short, the U.S. economy is sitting on a tinderbox of debt. And a Canadian housing crisis could very well be the spark that sets the U.S. economy on fire.
The good news is that you can protect yourself with a few simple moves. Here are three ways to get started:
➢ Close out your weakest positions. Start by selling your most expensive stocks. You should also get out of companies that need a booming economy to make money.
➢ Hold more cash than usual. Setting aside cash now will help you avoid big losses should the market pull back. A cash reserve will also give you “dry powder” to buy stocks when they get cheaper.
➢ Own physical gold. Gold is the ultimate chaos hedge. Its value should soar when the next financial crisis takes hold.
These moves will shield you from huge losses should Canada’s financial crisis spill over into the United States.
Delray Beach, Florida
May 31, 2017
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