Commodities

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In Canada, stuff matters. Oil. Copper. Trees. Fertilizer. Uranium. Commodities. When they surge, so does the dollar, jobs, the economy and real estate. For the past two years we’ve been in a commodity boom, taking oil, gold and base metals substantially higher, as the world recovered from its near-death experience. Places with lots of stuff – Canada, Australia – have done okay. Places that consume it – America, Europe – haven’t.

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It’s why ages ago I suggested you buy oil, since it was on the way to $100 (we got there, tripling its value). But it’s also why I’ve been telling the metalheads to take their profits on precious metals. Cuz the party’s probably over.

From time to time I’ve tried to connect the dots for people horny about houses. Obviously without success. Real estate’s an end product of confidence. Without an ample supply of jobs, economic growth, rising incomes and sunshine, housing does not flourish. It’s why the US has been in a housing recession for the past 57 months, and daily it grows worse. Meanwhile the patina of prosperity – a high loonie and bustling resource companies, for example – have lulled too many Canadians into record debt and a lust for homes at nasty prices.

Yeah, I’ve bored you with lots of reasons why real estate has a troubled future. Like the normalization of interest rates. Battalions of busted Boomers staggering into senility. Tighter credit. Or debt fatigue.

But still the little hornies keep buying, storming sales trailers, using 95% leverage, pushing average values higher. Some people (most people, actually) take higher prices as proof real estate is hot. But all around us seems irrefutable evidence none of this might last, as we stall and shudder into a lower economic gear. It’s there, if you care to look. Sadly most people won’t. That’s why they’re not reading this miserable blog.

In case you missed it, oil, copper, silver, even gold have been intensely volatile, swinging wildly in valuation and mostly dropping from earlier highs. A new Bloomberg survey of people who invest zillions for others found that 30% are bailing out of commodities and another third are boosting cash-type investments. So much for the end of paper money.

Anyway, draw your own conclusions. Here are a few reasons the tide’s going out:

Demand for oil is actually dropping – the first time since the recession and defying common wisdom. As gas prices cross the key $4-per-gallon mark, Americans are hanging up their keys or buying econoboxes.

The implications for Canada are profound and for Alberta, monumental. We sell $200 million a day worth of the stuff to the Yanks, so lower demand means high anxiety.

Making matters more acute are disasters. The Japanese earthquake and tsunami crippled the world’s third-biggest economy and slashed its oil consumption. The nuclear meltdown at Fukushima pretty much fukushima’d the uranium market. And now the massive floods in the southern US have rendered roads impassable and sidelined gasoline-producing refineries.

Then there’s the American housing crisis, steadily reducing the size and purchasing power of the world’s greatest middle class. Over 13% of all houses in the country are now vacant, almost a third of all homeowners are under water, and over $5 trillion in home equity has vaporized. Lousy consumer spending means a slower economy, less gas, fewer barrels, reduced imports and cheaper houses in Edmonton.

China’s official inflation rate is 5.3%, enough to freak out the central bank which is tightening credit and trying to slow economic growth. Bank reserve requirements were raised again yesterday. Interest rates are going up in India for the same reason. Meanwhile Portugal’s a basket case and Greece is smelling again, raising new concerns about European prospects. Given all this, why not expect global growth to stall and the appetite for stuff to wane?

And kiss stimulus goodbye. In the US the Fed will stop throwing endless billions into buying bonds (leading to higher interest rates) while Tea Partiers force Obama into pre-election austerity. As for F and the Majority Cons, well, just wait for next month’s budget. Let’s hope you voted for less.

Ask yourself: is this the kinda news which makes you want to borrow big to buy granite? Have the fundamentals been manipulated by desperate governments to mask a darker reality? Was it just dumb to think we could all go back to normal so, so painlessly? How did we get to believe it’s okay for a routine SFH to cost $1 million? Or for young couples without money to get better first homes than their parents ever had?

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Could this whole 2009-11 real estate orgy, following the housing crash of 2008, have been one giant sucker’s rally?

Beats me. I just know this. The fool who follows is the greater fool.

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avatarGarth Turner - The Greater Fool posted Thursday, May 12th, 2011.

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