Message to Canadians: Sell!

Jul 24, 2015

- By Bill Bonner

Bill Bonner
Vancouver, Canada

Dear Diary,

When we woke up in the morning, the train 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 - the 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. Rather than make things or invent things or provide useful services, a resource rich economy tends to sell itself - by the ton. Then, when commodities boom, the miners, farmers, and lumberjacks live high on the hog. But when they fall - the whole economy falls with them.

Canada's growth was negative in the first quarter. The country is a large oil exporter. And oil is in the worst downturn in 30 years, according to Morgan Stanley analysts.

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The price of oil has come back from its most recent low, but only a bit. It could still drop perhaps as low as $50 a barrel. Along with it, the whole commodity complex - upon which most of the economy of Canada depends - could be going down further too.

Why? An 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 5 years. The cheap money gave resource producers the means to over-produce 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 cost of money falsified by the Fed's rate fixing, they didn't know if they were really making money or not.

So, they produced so much the world gagged on it. Oil production since February has actually gone up in the face of falling prices.

But now the bottom has given way under the resource market. China is struggling to contain a crisis that has already wiped out nearly $4 trillion in stock market wealth. At one point, so many companies had halted trading in their stocks that investors were only able to buy or sell 3% of them.

BHP has slashed resource production. Caterpillar - which pushes lifts and carries resources - has seen sales falling for 31 months in a row. Chesapeake - the giant shale oil and gas driller - cut its dividend to preserve cash as shares fell to a 12-year low. Kumba Iron Ore, Africa's largest ore producer also eliminated its dividend on Tuesday after announcing that profits had crashed 61% in the first half of the year.

None of this is good news for Canada's traditional commodity-based economy.

But there's something else going on here. Life in Canada's cities is very 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 America's large metropolises. Property prices are higher 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 TransCanada, which is our only reference, houses are modest - even shabby. Neither agriculture nor forestry appears to have ever produced much profit for the heartland.

Particularly disappointing is the domestic architecture. A dear reader sent a photo 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. In Ontario, stone and wood are so abundant they must be almost free. Yet, people still put up charmless houses with 2x4s and vinyl siding - just like they do in West Virginia. No attempt has been made to create a vernacular style appropriate to either the climate or the setting. The countryside is poor - in wealth as well as in architecture.

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. Loud restaurants. A few years ago a bust in the mining sector would have emptied the restaurants. Today, the waiters keep serving drinks despite the smash-up 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, Canada in general and Vancouver in particular has the second most expensive houses in the world. Only Australia, another resource-sensitive economy, has pricier real estate. And compared to average rents, Canada's properties are the most expensive in the world.

Advice to Canadian readers: sell.

Postscript:

After three four days on the rails, the TransCanada eased into Vancouver station. Luggage was off-loaded. Cabin stewards were thanked. We had become friendly with our travel companions and embraced them warmly as we headed in our separate directions.

We don't know if we'd do it again, but it was a pleasure doing it once. Canada is a magnificent country. We were glad we got a chance to see it.

We took photos. Have a look...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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1 Responses to "Message to Canadians: Sell!"

Ramesh

Jul 24, 2015

Bill,

I am reading your articles for the past few years. Only persons who loves nature can write articles like this. I really enjoy your style of writing. This includes articles related to zombies, finance as well. Keep up your good work.

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