VANCOUVER, Canada – When we woke up in the morning, the TransCanada 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 – 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. 

Gagging on Oil

Rather than making or inventing things… or providing useful services… a resource-rich economy tends to sell itself – by the ton. 

When commodities boom, the miners, farmers, and lumberjacks live high on the hog. But when they fall – the economy falls with them. 

Canada’s economic growth was negative in the first quarter. The country is the world’s tenth largest exporter of crude oil. And oil is in its worst downturn in 30 years, according to Morgan Stanley. 

The U.S. oil price has dipped below $50 a barrel. Along with it, the entire commodity complex – upon which much of the economy of Canada depends – could be dragged further down too. 

Why? 

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 six years. And now Janet Yellen is steering the same course. 

The cheap credit gave resource producers the means to overproduce 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 Fed’s rate fixing falsifying the cost of capital, they didn’t know if they were really making money or not. 

So, they produced so much oil the world gagged on it.

Commodities Give Way

But now the bottom has given way under the resource market. (Scroll down to Market Insight for more…) 

BHP Billiton, the world’s largest mining company by reserves, has slashed production… 

…Caterpillar – which pushes lifts and carries resources all over the world – has seen sales falling for 31 months in a row… 

…Chesapeake Energy – the tenth largest oil producer and second largest natural gas producer in the U.S. – has cut its dividend to preserve cash, as shares fell to a 12-year low… 

…and Kumba Iron Ore, Africa’s largest iron ore producer, has eliminated its dividend after announcing that profits had crashed 66% in the first half of the year. 

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

But there’s something else going on here… 

Life in Canada’s cities is 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 the large metropolises of the U.S. For the most part, property prices are higher in Canada, 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, our only reference, houses are modest – even shabby. 

Neither agriculture nor forestry appears to have ever produced much profit for Canada’s heartland. 

Particularly disappointing is the domestic architecture. A dear reader sent a photo (see today’s Mailbag below) 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.

Pricey Property

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. Crowded restaurants. 

A few years ago, a bust in the mining sector would have emptied the restaurants. Today, the waiters keep serving drinks despite the smashup 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, Vancouver has the second most expensive houses in the world. Only Hong Kong has less affordable real estate.

Advice to Canadian readers: Sell. 

Postscript: After 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… Scroll to the end and have a look. 

Regards, 

Bill 

THE OTHER MARKETS

Canadian home prices are about to fall by nearly 50 per cent, leading to the biggest housing crash the country has ever seen – but this could present an opportunity for well-financed investors.

“Investors who own properties with substantial equity can hang on without any trouble and they will see a new supply of renters who will be looking to rent after being burned as owners,” MacBeth, a portfolio manager at Richardson GMP in Edmonton told CREW.

…..read more HERE

CANADIAN AND AUSTRALIAN HOUSING SALES SET NEW MONTHLY RECORDS IN JUNE

Every transitioning economy has its growing pains. This turns out to be especially true when that economy is….continue reading HERE

I reported we sold my mother’s house in one week. I too follow our model. The bounce in real estate into 2015.75 seems to be unfolding on time. What will make the peak is a rise in taxes. You have Chicago looking to raise taxes by 30%. Even in Texas there are protests starting over tax increases everywhere from Dallas, Austin, to San Antonio.

In France protests call it just theft. The London market has been propelled higher than ever because of the problems in Continental Europe with the Euro and France. To the locals, anything that brings the prices down and makes housing more accessible in London is perceived as a good thing since the influx of foreign capital has been to get off the grid. This type of influx of foreign “investment” into the London property market has been seen as actually a destructive force with entire neighborhoods transformed into ghost towns since they are just owned with no one living there. This has had a ripple effect forcing local stores to close down for lack of business when nobody is actually there to service. Prices of this type of property will decline for the property is not actually being utilized.

The bounce in real estate into 2015 that our model projected was the higher end, not the low-end as was the case in 2007. So far everything seems to be on target. The overall long-term decline will be impacted by the reduction in long-term mortgages combined with insane increases in property taxes as governments try to stay afloat. The 30 year mortgage was the product of the New Deal. With Fannie declining and volatility in debt rising, the value of property should decline lacking the “leverage” of long-term mortgages. We will see a decline more in line with the decline in prices meeting the availability of cash for deals.

also…

China – The Bounce