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Debt ratio nearing level that got Americans into trouble

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Income burden climbs, net worth sinks There are fears today that, if left unchecked, the debt burden of Canadian consumers will reach the level that got the United States into such a mess.

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The burden among households rose in the third quarter as they took on more debt with little change in what they were bringing in, and household net worth fell markedly, clearly not a good sign amid rising unemployment and forecasts that suggest economic growth will slow.

"The household balance sheet has been significantly strained by soft personal income and home price growth, falling equity prices and rising debt loads," warned Toronto-Dominion Bank economist Diana Petramala.

The ratio of debt to personal disposable income, a key measure of where a consumer stands, climbed in the quarter to a record 152.98 per cent from 150.57 in the second quarter, The Globe and Mail's Tavia Grant reports. That measure by Statistics Canada today includes not just debt but takes in outstanding liabilities, such as phone bills and taxes owed, as well.

A separate measure that looks at just credit market debt rose to 150.8 per cent. Mortgage credit rose to $1-trillion and other consumer debt to $448-billion, the federal agency said.

This second reading is important because it can compare directly to a similar measure in the United States, which, Ms. Petramala noted, was at 160 per cent just before the housing market crashed. That's not to suggest Canada's housing sector is headed for a crash - the two markets are different - but it is an interesting reference point.

"We are of the view that household debt has become excessive," Ms. Petramala said.

"If indebtedness continues to grow at this speed, the debt-to-income ratio will hit 160 per cent – the level at which both U.S. and U.K. households got into trouble – within the next few years. To stop indebtedness from rising, households are going to have to cool borrowing further and increase savings, both of which will imply a modest pace of consumer spending over the next few years."

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Household net worth in the quarter fell by 2.1 per cent, marking the second consecutive decline, as stock values more than offset the gains in house prices.

"Per capita household net worth declined to $180,100 in the third quarter from $184,700 in the second quarter," Statistics Canada said. "This marked the sharpest quarterly reduction in stock prices and per capita household net worth since the fourth quarter of 2008."

Only yesterday, Bank of Canada Governor Mark Carney warned that too much of the capital coming into Canada is being used to fund household spending instead of building productive capacity, he said.

In an interview with CBC today, Mr. Carney said that while consumer debt levels are still the biggest threat to the broader economy, they're not a "clear and present danger" like the euro debt crisis.

Fed holds the line The Federal Reserve today painted a slightly brighter picture of the economy, though it continued to point to the threats ahead and made no change in its widely watched policy.

For the U.S. central bank, of course, 'brighter' is relative. Unemployment is still expected to ease only slowly and the housing markets is still deeply troubled.

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"Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth," the Fed's policy-setting panel said in a statement.

"While indicators point to some improvement in overall labour market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable."

UBS takes dimmer potash view UBS Securities Canada is taking a dimmer view of shares of Canada's Potash Corp. of Saskatchewan and Agrium Inc. .

"Fertilizer bulk buyers have become increasingly more cautious of pre-buying and holding large inventories over fears of a 'credit crunch,'" said analyst Brian MacArthur.

"Potash prices stalled in recent weeks and Potash Corp. temporarily closed two mines last week on demand weakness. UBS expects 'last minute' purchasing to be the norm but only in [the first quarter of 2012]"

Mr. MacArthur cut his 12-month target on Potash Corp. shares to $65 (U.S.) from $75, and maintained his "buy" rating. For Agrium, he cut his target to $107 from $115, and also maintained a "buy" recommendation.

UBS cut its price forecast for potash for the 2011-2013 period, and its longer-term projection.

Gartman out of gold Dennis Gartman is out of gold, seeing "the beginnings of a real bear market, and the death of a bull."

In his Gartman Letter published today, Mr. Gartman warns that the incredible run-up in gold over more than a decade appears to be at an end. He noted that China has been buying gold aggressively over the past several weeks, which should have sent the price surging.

"Instead they plunged," the publisher of the letter wrote today. "One of the oldest rules of trading is simply this: A market that cannot or does not respond to bullish news is a bearish market not a bullish one."

Mr. Gartman, who, as Bloomberg News noted, correctly called the 2008 commodities slump, said that "we are out of gold" as of yesterday.

"Where then can gold go?," he said in his note as prices were little changed today after yesterday's tumble.

"Lower, we fear and perhaps decidedly so. So much damage has been done to the psychology of the market in the past week and so many late longs have been caught off guard that we think wholesale liquidation … and perhaps forced liquidation … shall be the outcome. We can imagine gold trading back toward €1075-1125/oz and/or toward US$1475-1525. It really won't take much to push it there. Panic liquidation would do so rather swiftly. We'll simply stand aside from the gold market then, preferring to be long of gold and not wishing really to be short of it. The sidelines seem the cozier of the two."

Not everyone feels that way, of course.

"People will come back to gold since eventually it will be clear that there has been no improvement in the European situation," Lance Roberts, the chief executive officer of Streettalk Advisors of Houston, told Bloomberg.

How the 1 per cent fared A study by The New York Times today showed the top 1 per cent of Americans, who have become such a target for the Occupy movement, took a big hit during the financial crisis and recession.

But it's all relative, of course.

Millions of the 99 per cent were thrown out of work, and foreclosures became a flash point in the housing bust. For the wealthy, average income fell in 2009 to $957,000 (U.S.) from $1.4-million two years earlier, the newspaper said, using federal tax data for its findings.

That group's share of national incomes slipped to 17 per cent from 23 per cent, and, of course, most of the losses are believed tied to the plunge in stocks. That means incomes in that group have probably recovered somewhat since the depths of the crisis.

"It's very interesting that this has become such a big topic now when the numbers are back to where they were in the 1990s," economist Steven Kaplan of the University of Chicago's business school told the Times. "People didn't seem to be complaining about it then."

Retail sales disappoint The holiday shopping season in the United States got off to a weaker-than-expected start.

U.S. retail sales climbed 0.2 per cent in November, the kickoff to the season and the month of Black Friday. It was the sixth straight month of gains, but not enough to take the sting out of today's report.

"I wouldn't go as far as to say the U.S. retail sales report was Grinch-like, but the 0.2 per cent gain was disappointing," said senior economist Jennifer Lee of BMO Nesbitt Burns.

Business ticker

In Economy Lab Many Canadians would agree that the Harper government has done the right thing to take us out of the Kyoto game, but what comes next? Warren Mabee examines the issue.

In International Business Fears of battery fires are probably overblown, but of greater concern are the expense and inconvenience of purely electric vehicles and efficiency gains in traditional internal combustion engines, The Financial Times writes.

In Globe Careers Canadian employers anticipate a cautious hiring climate in the months ahead, with optimism the highest in the resource-rich western provinces, Tavia Grant reports.

In Personal Finance The IRS may have eased tax rules for U.S. residents in Canada, but American citizens still have to file a return.

From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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