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Canada’s housing bubble won’t end until China’s credit bubble does

A roundup of what The Globe and Mail's market strategist Scott Barlow is reading today on the Web

Things do not look great in energy markets for the short term,

"With the U.S. awash in gasoline, money managers for the first time on record were bearish on the fuel in the month of June, when the driving season is heading for its peak. At the same time, bets on falling West Texas Intermediate crude prices surged by almost a third in the week through June 13, U.S. Commodity Futures Trading Commission data show. That increase in short positions on oil was the biggest in five weeks."

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"Oil's Gloomy Summer Triggers Hedge Fund Doubts on Gasoline" – Bloomberg
"Oil prices pause after sharp falls" – Reuters
"@anasalhajji We have a gasoline problem! probably a big #problem. #Gasoline demand in US in mb/d" – (chart) Twitter

Counterpoint: "@chris1reuters #Oil market "too bearish" says @staunovo @UBS expecting crude to rally towards $60/barrel in next 6 months " – (chart) Twitter

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The Macro Man blog is written by under a pseudonym, so Canadians should take the observations with a grain of salt. I am, however, familiar with the site's content and have found it generally credible so far. That context is important because Macro Man wrote about the Canadian housing market, while quoting a recent study by The Economist, suggesting that domestic housing prices wont fall significantly until China has a hard economic landing,

"It's clear that it will be a reversal of the capital flows from China that finally pops the housing bubble, which will likely be because of a hard landing/financial crisis in China, coinciding with a cratering in commodity prices. As I discussed last week, there are clear signs of a Chinese credit boom. But I don't see the signs that there is a bubble popping there. I recognize front end rates are inverted but I don't see the spark that is going to ignite the tinder--maybe a dead whale beaches itself onshore tomorrow, but given the firepower and incentives of the Chinese government, I suspect that day is well in front of us."

People will argue that foreign investment is only a small percentage of total domestic home buying, but it doesn't take many buyers who don't care about price to distort markets.

"Economist riff of the week: canada" – (includes link to The Economist analysis for those with access) – Macro Man
"Can China Really Rein in Credit?" – Pettis, Carnegie Endowment for International Peace

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Maclean's Kevin Carmichael argues that domestic interest rates will shortly head higher, an event that would pose a threat to real estate and income stock values. For now, I personally don't think rates can climb that far because of excess household debt. From Maclean's,

"The Bank of Canada wants everyone to know that it is getting ready to raise interest rates. Poloz reinforced Wilkins's message in an interview with CBC Radio on June 13, stating that the emergency cuts in 2015 appear to have done their jobs."

"Interest rates: From lower for longer, to low for no longer" – Carmichael, Maclean's
Related: "King: "The Fed's planned balance-sheet reduction..likely to destabilize markets sufficiently that .. they will be unable to complete it." – (Citi research excerpt) Twitter

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Tweet of the Day: "@ReutersJamie Citi calls this "the most important chart in the world" - inflation expectations becoming unanchored ... downward. Bond yields headed lower" – (chart) Twitter

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Diversion: Russian pirates are mining for wooly mammoth tusks. You read that right.

"The mammoth pirates" – Radio Free Europe

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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