Understanding Tin Foil Hats

Never judge a man by the fact that he may be wearing a tin-foil hat. Rather seek to understand the reasons why. We found one such item that, either downplayed or completely absent from the mainstream, may drive some to question true reality from the reality that the masses are fed.

Impaired Mortgages Soar at Canadian Banks

A new accounting framework adopted by Canadian banks is sending impaired loan numbers soaring. The International Accounting Standards Board (IASB) released a new standard, improving accounting transparency in a few key areas. The standard, known as IFRS-9, became mandatory for members starting January 2018. Despite only being around for a short time, it’s having a big impact on impaired mortgage numbers at the Big Six banks.

IFRS 9 Standardizes Reporting

The International Financial Reporting Standard 9 (IFRS-9) makes it easier to compare numbers around the world. This round of improvements focuses on the measurement of financial instruments, hedge accounting, and impairment of loans. All really exciting improvements, if you get your rocks off to accounting standards. Sadly, today we’ll just be looking at the impairment of loans portion. Specifically, around the impairment of residential mortgages.

Canada’s “Special” Accounting System

You’ve probably heard Canadian banks have some of the lowest impaired mortgage rates in the world? That’s because we used our own special method to account for them. In Canada, loans securitized by a private insurance company, aren’t considered impaired until 180 days of non-payment. Loans securitized by the government backed Canada Housing and Mortgage Corporation (CMHC), aren’t considered impaired until 365 days of non-payment. That’s a lot of time to screw up on payments, list your home, and even make a profit during a bull market. A large part of why impaired mortgage dollar volumes appear lower than they are.

Under IFRS-9, that changes. All loans, except for credit cards, are automatically considered impaired after 90 days of non-payment. That includes CMHC’s obscenely long 365 day window, for accounting purposes at least. This is already making dramatic changes to the numbers banks are reporting.

Canadian Banks See Impaired Loans Rise Up To 136%

Dollar volumes of impaired residential mortgages spiked in the first quarter of 2018, at the Big Six Canadian banks. National Bank of Canada (NBC), the smallest of the Six, has seen impaired dollar volume jump 111.84% compared to the same quarter last year. CIBC came in second, with an increase of 29.89% to the same quarter last year. TD was the only Big Six that saw the dollar volume of impairment fall.

It could be that borrowers started defaulting at a faster clip, but that’s a big spike. More likely, IFRS-9 adoption is at work. Including more insured loans in the impairment numbers, puts a new class of losses on the books. The jump in the last quarter makes a lot more sense, when you understand this.

Not a lot changes for the borrowers that defaulted, now included in the numbers. They’ll still be treated mostly the same way, with a few exceptions on renewals. Don’t expect a sudden flood of foreclosures due to this specific change.

We do get a little more insight going forward though. Exuberance for Canadian real estate has been built on opaque data. As transparency improves, we’ll get a more data points on how markets are actually performing. It’s much harder to add spin to numbers that are publicly available.


Contributed by: Daniel Wong http://www.betterdwelling.com/

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Debt Trap!

The day of reckoning for over indebted Canadians does not appear to be coming soon, but a new survey indicates a rising proportion of Canadians fear the fallout from higher interest rates. Thirty-three per cent of respondents to a survey conducted on behalf of MNP said they could be pushed toward bankruptcy due to rising rates.   That’s up five percentage points over the last six months. The Bank of Canada has raised interest rates three times since last summer, taking its benchmark policy rate to 1.25 percent. Although the Bank of Canada announced on April 18, 2018 that Canada’s key lending rate will remain steady for now at 1.25 percent the survey results paint a worrying picture of how consumers will bear the burden as the cost of borrowing rises.

More than half of respondents to the MNP survey (51 per cent) said they fear higher rates will affect their ability to repay debts, 43 per cent of respondents admit to feeling the effects of already-higher rates, and 29 per cent said they have no financial breathing room after paying monthly bills. “Nearly half of outstanding mortgages have interest rate renewals within a year so monthly mortgage payments are set to rise for a huge proportion of people. But a staggering percentage of Canadians say they already don’t have any wiggle room at all,” said MNP President Grant Bazian in a press release. “Households currently showing signs of financial difficulty and living on credit are about to fall into a debt-trap if interest rates continue to rise or, if they face an unexpected expense.”

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Our Head-In-Ass Phenomenon & Interest Rates

Like many central bankers nowadays Stephen Poloz, Governor of the Bank of Canada, finds himself in a bit of a pickle these days. Like central bankers elsewhere, Poloz is trying to figure out how to bring historically low interest rates to more normal levels without inadvertently triggering another downturn. To walk that line, he must answer two questions: where is normal; and how quickly should policy makers raise borrowing costs to get there?

In his comments in late April at a media roundtable in Washington where he was attending the spring meetings of the International Monetary Fund (IMF) Poloz gave few signs that he was in a hurry to raise rates.

He dismissed, for example, the recent inflation spike, which he said will be temporary. He also said plenty of uncertainty remains over where the neutral level for interest rates actually is. While the central bank’s base case estimate is somewhere between 2.5 percent and 3.5 percent, it’s possible it could be as low as the current policy rate of 1.25 percent. “It could very well be the rate it is today,” Poloz said. “I don’t really think that, but anyway, the point is, it could be.” That’s consistent with his cautious narrative, and his reluctance to provide much forward guidance about the future path for rates.

Stephen Poloz is unapologetic about his cautious approach to raising interest rates. He faces constant criticism for stoking debt accumulation with cheap credit. His reluctance to match higher U.S. rates has fueled a drop in the currency. And now there’s a new challenge: Canada’s inflation is rising at the fastest pace in seven years with the CPI climbing 2.3 percent from a year earlier, while at the same time, the jobless rate is at the lowest in four decades and, overall economic expansion is running up against capacity. Even so, Poloz is willing to err on the side of nurturing an economy that’s still feeling the effects of the last global crisis.

Two phenomenon we see as being supportive of Poloz’s cautionary stance, leading to plenty dry powder to tease further growth in the ecomony:

  1. While the jobless rate is at its lowest point in four decades, real numbers indicate that if the non-participation rate is folded back into employment numbers (as they really should be, accounting for those who have simply given up looking for work) we would be looking at an unemployment rate of closer to 9% versus the headline 5.8 percent number touted by the mainstream.
  2. In spite of many of those far wiser than us losing their minds over escalating interest rates over the past year, real interest rates ( Bank of Canada Rate 1.25% – Inflation 2.3%) remain well in the negative.

However, should Canada manage to get its self-flagellating collective heads out of its collective asses when it comes to market access; most notably pipeline expansion and the unshackling of rail traffic in order to move our products to international markets, we may very well begin to concern ourselves with the unintended negative consequences that come along with an economy running at capacity.

 We see very little chance of Canada performing anywhere near its natural economic potential over the next couple of years so tend to support Poloz in his current cautionary approach.  We should begin to consider our low interest rate environment simply as an off-set for our growing tax burden and burgeoning anti-growth regulatory environment, in order to keep the lights on a little longer.

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Global Gluttony Continues

Taking on debt in basic terms simply means stealing from our future income in order to purchase or consume something today. If we do enough of it what will be left of our future income in order to purchase or consume in the future?  Is there not an inevitable wall that will be hit?  Will the bowl of popcorn not eventually register empty if we gorge and stuff our faces in two fisted fashion?

Speaking of two fisted gluttony global debt jumped to a record $237 Trillion last year. Norway, Canada, Sweden and China all exceeded 2008 pre-crisis debt levels in the fourth quarter of 2017 by adding more than $70 trillion to the debt pile in comparison to a decade earlier.  According to the analysis done by the Institute of International Finance (IIF) among mature markets, household debt as a percentage of GDP hit all-time highs in Belgium, Canada, France, Luxembourg, Norway, Sweden and Switzerland.

This is a worrying signal with interest rates beginning to rise globally. Ireland and Italy are the only major countries where household debt as a percentage of GDP is below 50 percent.   Notwithstanding the ratio of global debt-to-gross domestic product fell for the fifth consecutive quarter as the world’s economic growth accelerated.  The ratio is currently 317.8 percent of global GDP, or 4 percentage points below the record high of Q3-2016, according to the IFF.



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Sustainability; just a fancy new word for “common sense”

A few years ago, BC Comfort Air Conditioning, a B.C.-based company with over 45 years experience in mechanical HVAC services, noted employees were leaving the doors wide open in the chilly season for convenience.

One simple change—asking workers to keep that bay door closed—helped cut natural gas use by 65%, saving the company $7,000 a year and reducing carbon emissions by the same amount as planting 500 trees.

The company appears as one of 12 case studies in a new report, 200 Million Tonnes of Opportunity: How small and medium-sized businesses are driving Canadian clean growth, a report from Climate Smart Businesses. 200 Million Tonnes features stories from 800 SMEs in 13 sectors Climate Smart has worked with, offering real-world examples on how to cut costs by reducing emissions through actions like route optimization, paperless operations, heat recovery, employee engagement and more.

In another example, a company saved $65,000 in hauling costs by diverting 35% of its waste from the local landfill, reducing emissions by an amount equivalent to three tanker trucks of gasoline. A hotel chain in the Yukon was able to save $180,000 a year by upgrading its incandescent light bulbs to LEDs. Sometimes the company’s return on investment was not in savings but in happier employees or improved reputation.

Many small businesses, however, are short on resources but long on to-dos. When it comes to considering the sustainability of business operations, it can be intimidating to figure out that first step.

Luckily, there are tools to help. The World Wildlife Fund’s Living Planet @Work program provides a list of activities and programs people can use to start the conversation in their workplaces. The WWF’s Smart Office Challenge focuses on IT, which as a part of almost every business and a significant energy consumer, is a natural starting point for sustainability newbies. The tool offers a check list of simple actions that can have a big impact. For example, cutting energy consumption from PCs by half can be as simple as getting employees to turn them off at night. More information is available in this interview with the Canadian Chamber.

The Canadian Chamber is also partnering with Climate Smart to help share its training program across the chamber network. The Victoria Chamber of Commerce and the Mississauga and St. John’s boards of trade will pilot the outreach program, offering their members a $1,000 discount. SMEs that belong to other member chamber of commerce are also able to access the discount on a first come-first served basis. Contact Christine VanDerwill at christine@climatesmartbusiness.com to learn more.

Flashy new innovations or clean technology start ups are exciting stories that make headlines and it can sometimes seem that is what sustainability is all about, but much of the time, going green can simply mean finding ways to use resources more efficiently.

When a business reduces its environmental impact by making better choices about how it uses energy and materials, some call it sustainability, but the practice has an older name: common sense.


For more information, please contact: policy@chamber.ca.

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Uuuum…Alberta We Have a Problem….

According to a recent by RBC report focusing on Canada’s Household Debt Albertans would be hardest hit by further interest rate hikes.   Mortgage debt in Alberta rose almost 30 per cent on average from 2010 to 2016. Households in Alberta will feel the most pressure from rising interest rates because residents in the province carry the highest debt loads in the country. “Alberta residents would see the biggest increase in debt-service payments in Canada of more than $1,200 a year on average if interest rates rose by one percentage point”, Robert Hogue, a senior economist at RBC Economic Research, said in the report released April 3, 2018. “That’s the amount of money needed to make payments on the principal and interest on outstanding loans.” The Bank of Canada has already hiked interest rates three times since the middle of last year, raising the key lending rate by a total of 75 basis points to 1.25 per cent.

“Households in B.C. and Ontario are also more indebted than the national average, but Albertans carry the heaviest debt loads,” Hogue said. “A booming provincial economy and strong income gains between 2011 and 2014 emboldened households in Alberta to buy homes (sales growth averaged over 10 per cent per year in that period) and accumulate significant debt, leaving them with high debt loads when incomes dropped following the plunge in global oil prices.” Hogue added that Alberta residents are also holding more shorter-term mortgage debt than other Canadian households, but higher-than-average incomes offer them “some breathing room.” Higher incomes in the province are a “mitigating” factor, Hogue said as debt service payments accounted for over 15 per cent of disposable income in 2016, which is just a bit more than in B.C.

But on average, household debt in the province rose from $164,000 in 2010 to $192,000 in 2016, according to the report. “These numbers include households who are debt-free, so actual outstanding balances for those carrying debt are even higher,” Hogue said. Mortgages accounted for the majority of debt that Alberta households carried, with the average going up to $124,000 in 2016 from $96,000 six years earlier. That’s a nearly 30 per cent jump. Meanwhile, debt-service payments in the province are already the highest among all Canadians at an average of $15,300 per household in 2016. That compares to $13,700 paid by B.C. residents, and $12,600 paid by Ontario households on average. The overall average for Canadians in 2016 was $11,600. “These amounts aren’t pocket change.

“In Alberta, for example, the $1,200 no longer available for spending on everyday goods and services or saved for future consumption. It would exceed what households spend on entertainment ($1,000) or furniture ($800) each year,” said Hogue. “Their debt-service bills will get bigger, and possibly sooner than elsewhere in the country, when interest rates rise. It’s bound to cause many households to spend more cautiously on other goods and services.” This could potentially hold back economic growth more in Alberta, B.C. and Ontario than in other provinces, Hogue said. Meanwhile, markets are pricing in a nearly 70 per cent chance that the Bank of Canada will raise interest rates again in July.

Read the full report from RBC Economic Research by clicking here: householddebt_apr2018.pdf (31 downloads)

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Canadian Debt Dogpile

Our Federal government recently admitted that they will never eliminate the deficit. In fact, Finance Canada now projects deficits for another 25 years, totaling almost a half-a-trillion-dollars!

The fiscal victory being claimed by the federal government however is that the debt will grow ‘slower’ than the economy’ – lowering the debt-to-GDP ratio with program spending growing at only 1.6% for the next 5 years. Keep in mind however that program spending growth over the last 2 years has been 5.6%; during a time that the Canadian economy was performing reasonably well!  So much for keeping some powder dry for tougher days ahead.  Furthermore, that would mean GDP growth in excess of 1.6% per year.  In our regulatory environment?   Anyone try building a pipeline or try getting grain shipped to market lately?…and that’s before any new gender and identity provisions for environmental impact assessments come into play (whatever those are).   But it sure as hell sounds expensive and will be guaranteed to be a further drain on productivity, that’s for sure!

Who’s going to pay for all this?

Provincially Alberta ran a $9 billion deficit in 2017/18, almost 1/5th of the total budget, while the Wynne Liberals in Ontario have more than doubled their debt in just over 10 years.  Furthermore the Atlantic provinces have their own liability concerns along with an aging population that will pay less taxes overall while requiring more costly heath care services post retirement.

Who’s going to pay for all this?

We’ll tell you who’s going to pay for that…the same Canadian taxpayer whose households are carrying a record $1.74 of debt for every dollar of income. As interest rates rise over the next three years, debt payments will consume a larger share of household income than at any time in the last 30 years, costing a family with $100,000 in net income approximately $2000.00 more than they were paying last year to service their debt.  While households deal with higher interest rates on credit cards and mortgages, their taxes will naturally also need to rise to pay a one-third or $8 billion increase in federal debt interest payments.  It’s either that or cut program spending.  Cut program spending? Never…that’s sacrosanct!

Canada’s combined personal, business and government debt is now three times the size of the entire Canadian economy. This is a higher total debt-to-GDP ratio than even European fiscal basket cases like Italy, Spain and Greece…and our weather generally sucks in comparison to theirs!

We are truly doomed.

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Pending Credit Market Dumpster Fire?

Moody’s Investors Services joined the Bank of International Settlements (BIS) and S&P Global Ratings this month warning that Canada’s banking system, dominated by the Big 5, is facing a growing threat of souring consumer loans amid rising interest rates.  Canada’s ratio of household debt to disposable income reached a record 171 percent in Q3 of 2017. The proportion of uninsured mortgages has also increased 60 percent from 50 percent five years ago.  The credit quality of Canada’s biggest lenders is under a triple threat of unsecured credit card portfolios, longer tem car loans and the fact that more than half of Canadian mortgages will see their interest rates increase this year.

Canadian Mortgage and Housing Corp (CMHC), a government agency (or in other words something the taxpayers are on the hook for), insures the bulk of mortgages in Canada. Almost half of these outstanding mortgages, many of them on fixed-rate terms, will be subject to an interest-rate reset within the next year, increasing the strain on households’ debt-servicing capacity.

After a series of new rules over the last couple of years aimed at tightening the housing market, the majority of Canadian mortgages are now uninsured, which means lenders alone are on the hook for them if they turn bad and borrowers default.

While delinquency rates on mortgages are still at record lows (less than three out of every 1,000 borrowers are currently more than three months past due) the possibility of that number increasing in the current rate environment means the banks need to be aware of the risk. Higher interest rates could be a trigger for that admittedly unlikely event. The Bank of Canada has hiked its benchmark interest rate three times since the start of 2017 with expectations for at least two more this year.

Further aggravating the current risk faced by Canadian banks are auto loans which are being offered at terms as long as 68 months! With these longer terms, the car’s market value will most often drop below the amount owed on the loan before it’s paid off.  If it’s ever paid off!

We see first-hand the egregious number of sub-prime borrowers already over indebted and unable to meet previous obligations and in collections qualifying for high interest, long term auto loans that we know, they stand no chance of honouring the terms and completion except in the event of a major lottery win.

Add on top of the above unsecured credit-card portfolios, which will be the first to feel the pinch as their repayment tends to have lower priority for financially strapped borrowers, and we have the perfect recipe for a major dumpster fire in Canadian credit markets.




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The 1.8 Trillion Dollar Millstone

Canadians’ collective household debt has climbed to $1.8 trillion as the Bank of International Settlements (BIS) sounded an early warning that the country’s banking system is at risk from rising debt levels.

China, Canada and Hong Kong are among the economies deemed most at risk of a banking crisis.  Yes, you read that right.  Not Greece, Italy or Spain but Canada!  It was less than 10 years ago, during the 2008-2009 global credit crisis, that Canada was lauded as the global ‘poster-person’ of sound banking.

Earlier this week Equifax Canada reported that consumers now owe $1.821 trillion including mortgages as of the fourth-quarter of 2017, marking a six per cent increase from a year earlier.

Although nearly half of Canadians reduced their personal liabilities, roughly 37 per cent added to their debt to push the average amount up 3.3 per cent to $22,837 per person, not including mortgages.

The fresh numbers come as the BIS indicated Canada’s credit-to-gross-domestic-product and debt-service ratios show early warning signs of potential risk to the banking system in the coming years.

The latest report by the Bank for International Settlements says Canada’s credit-to-GDP gap and debt-service ratios have surpassed critical thresholds and are signalling red, pointing to vulnerabilities.

The BIS however, with their typical politically correct mannerisms, cautioned that these indicators should not be treated as a formal stress test, but as a first step in a broader analysis. Broader analysis?  Wait, what?  Here’s an idea: instead of feeling we are entitled to whatever our heart desires how about simply spending less than we make?

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Alberta Economic Outlook 2018

All signs point to growth for Alberta’s economy in 2018 with non-energy sectors poised to perform well, particularly agriculture, agri-foods, tourism and technology. Still, challenges continue, with the unemployment rate stubbornly high and some businesses in the province struggling.

Late last month ATB Financial released its first  Alberta Economic Outlook of 2018, providing insight into what has happened so far this year and what may happen in the months ahead. The key findings are:

  • US oil prices have been stronger this year.
  • The price for Alberta’s heavy crude has not enjoyed the same increase, which has widened the differential.
  • Alberta will continue to see job creation in 2018, but the unemployment rate will come down only gradually.
  • Housing prices will improve modestly over last year; housing starts will be unchanged or slightly lower.
  • Net inter-provincial migration should return to positive in 2018.

When it comes to oil, North American benchmark oil prices have increased, yet Western Canadian prices have barely budged, and our heavy oil producers have not enjoyed the same lift in price. This is due mostly to pipeline bottlenecks and constraints. In the current price environment, Alberta’s energy sector is positioned for only modest expansion in capital spending.

There are threats beyond our control that add uncertainty to our economy including NAFTA negotiations and the opposition to pipeline expansion. Household debt levels are also at record levels, and borrowing costs are rising. As well, the global economy may be shifting into another period of financial and market volatility.”

ATB Financial’s Economics and Research team is forecasting real GDP growth of 2.8 per cent this year, followed by 2.2 per cent in 2019.

Read the complete ATB Financial Alberta Economic Outlook (February 2018) and watch ATB’s Chief Economist Todd Hirsch summarize the report.

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