Monday, August 11, 2008

Double Bubble: Housing and Commodities

In Canada, there was a double bubble: A housing bubble and a commodity bubble.

The commodity bubble was worldwide, started by supply concerns and growing demand, especially in the BRIC countries. The more commodities went higher, the stronger the Canadian economy, particularly out West.

The housing bubble was driven by pent up demand from a relatively weak period (1990s), record low interest rates post 9/11, investor preference for hard assets (after the stock market bubble of 2000).

As with all trends that continue for a long time, these fundamental drivers inevitably drive up prices and then speculation takes over, driving prices even higher.

The mania can last for years and convince even skeptics that they were wrong. The final blowoff usually involves even the bears throwing in the towel. Then the mania finally exhausts itself, and prices come down. At first, it is just a healthy correction and prices can even rebound briefly, but at some point, it becomes clear that the mania is over. The bubble is popped.

Both bubbles drove up asset prices which allowed Canadians to feel richer, spend more and take on more debt than they would have otherwise. Expect the mainstream media to talk about this after the fact (ie in 2009).

I believe that we are now at the point where the double bubble is letting air out. June housing was down year over year (-0.4%). We could get an upward bounce for a month or two, but the trend is now down for the first time in many years.

Oil and most commodities were trashed in July and August (along with the TSX). Many of their long term trends still appear to be upward at this point, but their parabolic charts look broken. I expect a sharp "snapper" rally over the next few days and weeks, but few if any commodities will hit new highs. And then this fall, look for most commodities to break down again, once it is clear to even the bulls that this was more than a healthy correction.

The bursting of the Double Bubble in Canada will trash the Canadian economy in late 2008 into 2009. If we are in recession already, I expect it to get much worse. We had a nice 15 year boom (1992-2007). It is crazy to think that we can just get through this in a few months or a year.

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