Early Warning Report: Welcome to the Great Canadian Depression

Early Warning Report: August 21, 2015

....Welcome to the Great Canadian Depression 
 

OMFG!  I SPEAK!!!  WELL… ERRRR….. I mean write.

NO I AM NOT DEAD!  Not yet anyway.   Although, I am sure after the last year and the family ordeal I have been through, some would wish I would die and are still making their best efforts to put me in my grave earlier than expected.  It just will not happen, no matter how many twists and turns my story takes.  Death is a hard activity for this individual spirit and I will not go that easy.

Kind of like these markets, paralleling my own battle… they have been on a bullish run ever since I can remember.

But just like that last spoonful of chocolate ice cream in your bowl, it seems that all good things must come to an end.  There is no more ice cream left.  The bowl is empty.  The tub the ice cream was in only has a few streaks of freezer burnt ice cream left which only increase your chocolate craving.  Until the grocery store opens in the morning..  the chocolate ice cream party  is over.



When I say the party is over… it is certainly over for many.  It’s over for the mining industry which was supported solely by the parabolic growth of Chinese cities which has now subsided.  Alberta is well on its way to a depression with the price of oil sliding to 10 year record lows.  The single focus of conservatives ramming through energy initiative after energy initiative has left the Canada perilously unbalanced and over-weight on energy which is putting a frosty chill on Canada and its economy.  To make matters worse, our import dependent economy has gone into sticker shock with the loonie further losing its shine as a petro dollar.  The Chinese stock market bubble has heard a resounding pop turning billionaire’s into millionaires overnight.  Around the world there is continued debt woes along with sluggish growth across developed economies.

The only bright spot is the USA economy which may itself be rolling over. The signs are everywhere folks, we are well on our way into a global recession, one much more severe than the 'trip up' we experienced in the financial crisis in 2008.  In places like Canada, without a complete overhaul and reinvention of industry, we could be close to tipping the scales from a recession into a mini depression over the next 3 to 5 years depending on how fast and dynamic our industries can adapt to the changing global landscape.


The Bull Market Never Stops

But it does pause….

Are we at a bull market cycle top?   

No, because we still have yet to see monetary deflation which should come with the enormous debt load built up by western nations.  This monetary deflation in itself will push up nominal stock market prices well into trillion dollar valuations by the shear fact the operating company valued in a given currency does not change value.  If the USD could reduce in value 50% to 75% in a debt crisis… the corresponding companies valued in that currency would increase in value and would most likely benefit in outlook considering a lucrative export market would open up at that time.

In January of 2012 I wrote an article for Wall Street for Mainstreet which indicated that markets would rocket to the moon in an record bull run.   100,000 for the INDU is a possibility.  The most recent run came from a sub 7,000 point index.  Triple the original starting price in 6 years.    The DOW could easily triple from its next base of 12,000 to 13,000 during the next economic cycle and then triple again from that base.  In 15 to 20 years... you could easily see 100,000 INDU.  Maybe more.  If America gets beaten into oblivion by a military alliance.  Germany style  1920's inflation could be in the cards.

The stock market bull never stops.   The fact of the matter is… for the current financial system to work on its current model… growth has to always be there and the easiest way to create growth is to inflate away.  As false as that growth may be.

Certainly this market cycle looks to push well past 3,000 on the S&P 500.  The bottom line is you can never lose money over the long run in equities as long as financial markets use inflation as a primary economic tool.   Just ask Warren Buffet.

That is the number one rule for investing…. you have to always be invested.

That being said.  If you want to avoid short term pain of margin calls, investor psychology selling stocks at bottoms and buying at tops; you can’t buy and hold like Warren Buffet.  None of us have his pocket book thus could never attain his wealth following his great investment strategy.    Not many of us have that ability to take advantage of economies of a portfolio like Buffet and thus cannot invest like Buffet.  Not if we want to catch up to Buffet anyway.

So when is it a good time to sell?  Each company will give you its own signals when to sell which is usually a mix of fundamentals and /or technical but an easy time to pick a time to sell down the portfolio is usually when you find a general market down turn.  I would say when a multi-year trend in the market is broken... that is as good a time to do some general selling as any.

Like the one that is slowly appearing on the financial markets horizons.

What is definitive is that the bull rally is getting old and the markets are definitively turning over and going negative for the fall.   The US market and Chinese markets may rally in early 2016 dependent on economic data, or we could continue into a concerted global recession and in Canada, with an absolute collapse of its major industry oil… a depression.  

Clearly one thing that could make or break the US … interest rates and their free money policy.    If you see rates go up in September through December.  Brace for major pain, everywhere.


The Crash in Oil Prices Could Trigger a Canadian Depression

Like it or not, Canada was great before oil.  Canada balanced its budget without oil.   The current government made a huge error in judgement developing its single focused oil sands energy policy.   This was a huge mistake.  It drove up the loonie and drove out manufacturing.  It made us dependent on a single industry, and after 20 years of development, most Canadians clearly don’t like what they see from space with large parts of Canada’s north destroyed for centuries to come. 

Possibly altered forever.

It’s not just oil for Canada, oil is just the tip of the iceberg.  We are seeing the great commodity deleveraging in every materials sector.  Copper could fall back to $1.  Oil could fall well below $30.  Gold will spike for the traders during uncertainty like it always does, but its a short every single time and will continue its trend under $1000.



It’s over folks.

For energy and materials... when they lose their shine... they lose their shine and nobody wants them.  It's like a hot potato and nobody wants to be holding it when the music stops.

There is no rebound.

Globally we are returning to world where China doesn’t need materials and eventually, China won’t need our oil either.   So you know what Einstein said? About it being insanity hitting your head against a wall over and over and over.  So why bother when remaining in this industry is, like that, hitting your head against the wall. The song "The Gambler" keeps playing in my head.... "and know when to run..."

And if you over extended yourself at the wrong time thinking there might be a way out, here in Canada, some of us have literally chosen to blow our brains out like the stock brokers in 1929 crash, jumping out windows.   Sometimes you just gotta know when to walk away, and not double down and hold em.  Hell, I ran as fast as a could as soon as the checks dried up.  The writing was on the wall in 2012 when 50 exploration companies changed their stripes to graphite miners.

It was that bad then and it is that much worse today.

It is not just Canada.

Believe it or not record low oil prices are killing global spending from some pretty big spenders like the Saudi’s Russians, Qataris, and Canadians.  This could be a good thing.  The Saudi’s have way too much money and with that, came a military program which is creating a humanitarian crisis in Yemen and supports ISIS in Syria and Iraq.

The winds of war are in the air and a lower oil price will certainly impede growing hegemony in the Middle East.   You are going to see a price war between the Iranian and the Saudi’s… and guess who is going to win?  The Iranians of course who have had to sell discounted black market oil for 40 years.   The arrogance of the Saudi’s trying to maintain market share could kill the price well below $30.  The middle east is goign to get worse, much worse.  The Iranians are the only force capable of stopping the Saudi's.  Yemen is the first one.  UAE could be next.  I am sure the new Saudi king would love to move his new palace to Dubai.

Unlike the Middle East, a lower oil price won’t stop the Russian military complex.  Russia has an entire internal economy which supports the nation even if the entire world stops trading with Russia.  You can't beat Russia.  It is impossible so why even bother and with NATO entering the Ukraine you have undeniably awoken the Russian bear and poked it in its eye. They will still build their military might because they have the technology and more importantly, the infrastructure.

Here is the bad news.... unfortunately for Canada, we are affected the most by a crashing oil price.  Hit with a double whammy event with the oil sands producers being the highest cost producers in the entire industry.  Some companies will go under and many projects in Alberta will be the first to be put on care and maintenance.

Projects like the oil sands may never see their potential as alternative energy continues to achieve new efficiency.

Consumers continue to demand alternatives to fossil fuels.   Undoubtedly oil is a 20^th century technology and the world is slowly moving away from its thirst for this dirty form of energy.  How fast will demand move away and how long will it take, are questions none of us know and many are just hoping the time lag is enough to suck more oil out of the tar sands.  Personally I think the best days for the Tar Sands are behind her.  There is a lot of money invested in backward thinking.

A lot of money to be lost up north.  The bottom line is Keystone is dead, Northern Gateway is dead, and Energy East is going nowhere.   Alberta has done it all wrong and sold itself down the river to foreign governments and corporations on promises it could never keep.

It's time to pay the piper.

The way out for Alberta and its energy crisis is easy.   Energy will always be a huge part of Alberta’s economy and abandoning it is not the way out.   Investing into turning bitumen into value added products and using our low dollar to be competitive against other nations exporting those value added energy products is the answer. 

Investing into technology is the answer.

Whether it is creating new regulations for a hemp industry just waiting to flourish, or investing in education to develop entirely new industries, now is the time to plant the seeds that will take us into the future for the next generation.  Whether it’s in Alberta or the rest of Canada, just like the politicians keep chiming for change.  Canada needs a reset button.  This should include an entire overhaul of our industries to take us forward to  help employ our younger generations who continually get shut out of jobs kept by aging baby boomers who refuse to retire.

It is what we should have done in the first place instead of touting Canada as the new Saudi Arabia.   Develop a broad Canadian economy which included more than energy, mining, and banking to financing the energy and mining.  Canada was never meant to replace Saudi Arabia, as investors are starting to realize.  Now is not the time to focus on pipelines and raw resource extraction for a few extra WTI dollars on the spread.  Now is the time to focus on broad change across the country.

Not when consumers are ready for an all-electric alternative.  Not when abundant natural gas resources are much cleaner alternative for industry.  Not when nuclear continues to expand and thorium reactors are being planned and hotly debated.   Not when solar technology and other renewable resources are on the verge of becoming commercial including Tesla’s simple solar powered house battery.

Now is not the time to keep hitting our heads against the wall... not with the oil sands.  Its time to turn to new industries.

One thing is for sure, the over-weight nature of our industries to materials, energy and banking… you are going to see a corresponding effect on the Toronto Stock Exchange with values continuing to plunge.  You will see a huge pullbacks in industry nationwide. 

I say.....  "Welcome to the great Canadian Depression".

The list of stocks to short in the Canadian Markets is a long one. 


US markets look to top out

Not only has Canada taken it on the chin in the last 8 months with it really yet to show in the stock market.  The US recovery from the financial crisis in 2008 and 2009 is complete and is also showing signs of a top in this economic cycle.  The US market looks to correct this fall either way.    During the summer, a flat and directionless market has suddenly become much more bearish.

Even though we are in a perpetual low rate environment, you just can’t go up forever...



 And when you look to leading indicators like the transports breaking down... 



The INDU is struggling.  The Russell 200 just hit 6 month lows and the S & P 500 is starting to break its multiyear uptrend.  The technical signs keep flashing everywhere.   The bull run in US equities is looking like it is at an end.   When you combine the US charts with what is going on in China and the continuing debt woes in Western Europe.  You add in oil prices taking the steam out of some pretty big spenders... we now have conditions which are almost ripe for a concerted global recession.

How severe remains to be seen.  There are always so many variables at work.  One thing is for sure, the markets in the US and in Canada are at a crossroads and if Canada is a leading indicator of what is to come in the US because of huge shale oil expansion which is no longer profitable.  You could see a similar type decline in the Midwest and a similar effect on America's 6 year recovery.

You don’t even need to look at economic stats to tell you which way the market is going.  The market tells you that in advance of the stats.  Cheap money continues to fuel the market and the market will respond to continued quantitative easing, but there is so much negative undertones globally that is looks to me like the cycle is now over.

What could really make the recession into a doozy is when and how hard rates go up.  Normalization will happen and you will see a US market reaction during normalization of interest rates.

How hard and how severe... is everyone's question.  Some think a Greek like situation in the US, others predict a slow and steady raise over the next 10 to 15 years.

At any rate...  now might be the time to buy some calls on the VXX and short the major indices in North America.



Christopher Skidmore

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