Sunday, June 6, 2010

De-leveraging ourselves....part 1 of 4 or maybe 5

The above chart is in response to a certain reader who said:

Fish do you really think a 0.5% rate environment really changes how much debt people are going to take on?

I don't think so it is a fact, and there is lots of data out there to back it up.

The above chart is one of these, which is particularly useful because it compares us to the USA and UK.

All the Central Banks started cutting rates aggressively in the last three years, the Fed went first, then the Bank of England and then in 2008, early 2009 the Bank of Canada slashed rates in a complete panic. What do you see?

The UK and USA which were in deep doo-doo, and even with lower rates their consumers pulled their horns in. Despite the Central Bankers begging them to borrow and spend, they could see the terrible state of the economy and started getting their debt house in order. Borrowing dropped as a % of household income.

Meanwhile what happened in Canada??

We were in pretty good shape. But our consumers could see the carnage that was going on in the US and UK, and so they were just starting to follow the consumers in those countries in trimming debt.

BANG! The Bank of Canada starts cutting and they start piling on more debt, at the fastest rate ever in fact.

So what is the net result of the Bank of Canada's rate cuts. Well one result is that the Canadian consumer which started off with a much lower debt/income ratio than the UK and US, has caught up- just in time for...

1) A housing slow-down
2) Higher rates
3) A double dip recession

If any of the above three happen, we will be in same mess as the US.

Thanks Mark!


  1. Don't worry the other 3 or 4 parts won't be for a while.

  2. wave c now under way .. highly possible


  3. Just a side note. I've seen from several sources that the decline in US consumer indebtedness is mostly due to default, not people prudently cutting spending and paying down debt. Lots of cutting spending, but that is due to lack of money and additional credit being declined rather than choice. Those who could handle more debt don't want to, those who want to can't get it because they can't handle what they have now.

    This doesn't take away from the import of those charts as another sign the credit bubble has peaked.

  4. As per usual you bears get ahead of yourselves with the "major de-leveraging in the Asian markets tonight". The Chinese markets are up +0.47% and the Japanse markets are down marginally ......

  5. At the time of my post that's what they were at. EWJ (Japan) currently down 1.07% and FXI (Hang Seng) down 0.26% - hardly major de-leveraging, my point being bears get too giddy, too quickly, I'm only mentioning this because of how excited bears got after a 1 month marginal decline in RE.

  6. Nikkei 9,521 -3.84%
    Shanghai Comp 2,512 -1.64%
    Hang Seng 19,378 -2.03%

    These markets fluctuate this much on a regular basis. I don't think it's anything significant.

  7. The Asian markets were playing "catch up" with us after our local Friday declines so I don't think those declines say too much.

  8. Exactly Panda.. and Jesse, refer to what Panada said, those #'s are #'s of the overseas mkts playing catchup from Friday, if you actually looked at real time futures or ETF's instead of basically yesterdays price you would see that the Chinese markets (FXI) are now up +0.18% and the Nikkei is down -0.64%, so yes, it's not anything significant.

  9. Chad, the asian markets may play some more catch up tonight :)

    Hey Gold is flying, I think somehow Vancouver RE will show a bit of divergence there.

  10. Hey Fish, you scooped the Globe :-)

    Their plot has an extra quarter on it I think. The drop in the US ratio and rise in the Canadian continues.

  11. Sorry Chad, I neither follow nor invest in futures or ETFs so I'll take your word for it. But I think we agree a single day's (or for housing a month's) move does not in and of itself indicate any meaningful trend.

  12. Well Panda we on the blogosphere were saying all this years ago. Now the bank economists have picked up on it , and finally the MSM.

    When the words 'dire consequences' and 'high debt levels' are used by a bank report, you know things are not good.

  13. Fish10, hehe, yup they will.. I wasn't debating what the stock market was going to do, was just pointing out that bears get ahead of themselves very quickly.