The “R” Word
Benjamin Tal
Senior Economist
May 2008
Economics & Strategy
An Unprecedented US Housing Downturn Is
Unfolding
110
Housing Starts
100
Home Sales
110
100
90
80
90
70
80
60
70
50
60
40
30
50
1
5
9
13 17 21 25
months
Index
Index
Index
Index
Apr
Jan
Jan
Jan
78=100
81=100
90=100
06=100
1
4
7
10 13 16 19
months
Index
Index
Index
Index
Nov 78=100
Oct 80=100
Jan 90=100
Feb 07=100
Level of Housing Starts
Still Much Too High
2500
Thousand units
2000
Excess unsold
houses now equals
a full year of
housing starts
1500
1000
500
0
05
06
Excess Unsold Houses (L)
07
Housing Starts (R)
House Prices Overshot Income Growth by a
Wide Margin
700
Index 1975=100
25.2%
600
500
400
300
200
100
0
75 78 81 84 87 90 93 96 99 02 05
Household Income
House Prices
Consumer To Play Big Roll in
2008 Recession
NA
0
-2
-4
-6
-8
- 10
- 12
- 14
- 16
- 18
Personal C onsumption
Non-Residential Fixed
Investment
% chg from peak to trough
2008 Recession
2001 Recession
Subprime Exposure is Asymmetrical
Distribution of
Subprime O rigination
(2006)
Drop in House Prices
(Nov 06-07)
0
Los Angeles
18.2
%
Rest of
the
country
55.1
%
-4
-6
San
Francisco
6.2%
NY
8.8%
3.5%
Miami
-2
3.3%
C hicago
4.9%
Washington
Source: Loan Performance, S&P/CSI, CIBCWM
-8
- 10
- 12
%
- 14
High
Tie r
Low Subprim e
Tie r we ighte d
Falling House Prices…
Rising Negative Equity
130
120
Index Jan 2005=100
Fcst
%
60
40
110
100
20
90
80
0
05
06
07
08
09
S&P/C ase-Shiller Home Price Index (L)
Share of households with exotic mortgages in
negative equity position (2006 vintage) (R)
Source: First American CoreLogic, CIBCWM
2006 & 2007 –
The Worst Vintages on Record
60+ day Delinquency
Rate by Vintage
%
2005
2006
2006
2007
50
45
40
vintage
vintage
vintage
vintage
Actual
Actual
Fcst
Actual
35
Subprime Issuance
600
$ Bn
500
400
30
25
300
20
200
15
10
100
5
0
0
4
8 12 16 20 24 28 32 36
Loan Age
Source: Loan Performance, CIBCWM
0
2005
2006
2007
Reset Is No Longer The Issue
Unprecedented Fed
Easing...
Real fed funds
rate (%)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
... W ill Eliminate Reset
Pain in 2008
12
Avg. 7
recessions
Mortgage
rate (%)
10
8
6
1
4
7
10
months
13
16
2008F
Reset
2007
Reset
2006
Teaser
Last
6 months
2005
Teaser
2004
Teaser
4
Emergency Lending Jumps Off the Chart
70,000
60,000
Term auction & discount
window lending ($mil)
50,000
40,000
30,000
20,000
Septem ber, 11, 2001
10,000
0
Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan98 99 00 01 02 03 04 05 06 07 08
ABX Index Rallies on Hopes of Bailout
100
ABX AAA Index - 2006 vintage
96
92
88
84
80
/2
0
25
3/
3/
11
/2
0
08
08
08
/2
0
26
2/
12
2/
29
1/
15
1/
/2
0
08
/2
0
08
/2
0
08
20
1/
1/
08
76
US Stocks Rose on Days
with Big Writedowns
D aily return, S&P 500
6%
$0
- $4
4%
- $8
- $12
2%
- $16
A
pr
i
l1
8
6
l1
pr
i
A
pr
il
1
A
20
ch
M
ar
ch
M
ar
pr
il
1
8
6
A
pr
il
1
A
pr
il
1
A
ch
20
18
M
ar
ch
18
- $20
0%
M
ar
$bn, announced
financial sector
writedowns
Domestic Demand Growth:
Canada vs US
6
forecast
y/y % chg
5
4
3
2
1
0
-1
Q1- 04
Q1- 05
Q1- 06
US
Q1- 07
Q1- 08
C anada
Q1- 09
REITs – The Correction
150
% Cha nge Since June
2007
Index Jan 2006= 100
140
130
0
120
110
-5
100
- 10
90
- 15
1/3/2008
9/3/2007
5/3/2007
1/3/2007
9/3/2006
5/3/2006
1/3/2006
80
S&P/TSX Capped REIT
Index
MSCI US REIT Index
- 20
- 25
- 30
REIT Financial S&P/
TSX
Factory Share of GDP
Hitting Past Recession Lows
21
Mfg Share of Real GD P, %
20
19
18
17
16
Shading denotes
severe N.A.
recessions
15
14
1962
67
72
77
82
87
92
97
02
07
Over 50% of Investable Reserves in Canada
"Investable" oil
reserves=those not off limits
due to restrictive foreign
investment policies.
Also excludes Iraq.
Norway 2%
Other Open
20%
Kazakhstan 9%
US
6%
Source: Oil & Gas
Journal (2007), CIBC
Nigeria
11%
C anada
52%
Canadian Oil Sands Production to be Single
Largest Source of New Supply
1.5
Yearly capacity growth, mn bbl/day
1.0
0.5
0.0
-0.5
2006-08
C onventional
2009-2012
Deepwater
Alberta Oil Sands
Who is Driving the Bus?
40
% of global GDP growth, 2004-7
35
30
25
20
Key Emerging Markets
(Brazil, Russia, India, C hina)
+ Mideast Oil Producers
15
10
5
0
"BRIC A" Other
Asia
US
Eurozone C entral
&
Eastern
Europe
Japan
US Contribution to Resource Demand Growth
35
Average annual demand growth, 2005-2007 (%)
30
25
20
15
10
5
0
-5
-10
Aluminum
Nicke l
C hina
Coppe r
Zinc
US
Oil
Record Low Grain Stocks &
Rising Consumption
Global Grain Stocks
140
Global Grain
Consumption
days of consumption
130
1,760
120
1,740
110
1,720
100
1,700
90
Million metric
tons
1,680
80
1,660
70
1,640
60
50
1,620
40
1,600
80 84 88 92 96 00 04
Source: USDA
03 04 05 06 07
Corn for Ethanol
Rising Fast...
900
C orn production
index 1990=100
800
700
… And Crowding O ut
O ther Crops
25
% chg in acres planted
(06-07)
20
600
15
500
10
400
300
5
200
0
100
-5
0
909294969800020406
Other grains
For Ethanol
Source: USDA
- 10
Corn
Othe r
gra ins
90% of Emission Growth
Came From Outside of the OECD
Emissions Growth (2000-2007)
6000
5000
Million metric tonnes
carbon dioxide
Developing
countries
7000
D eveloped
countries
4000
3000
2000
1000
0
C hina
Source: EIA, CIBCWM
Other
NonOEC D
US
Other
OEC D
China’s Growing GHG Emissions
CO 2 Emissions
230
China's CO 2
Emissions
Index 2000=100
7,000
210
190
6,000
170
5,000
150
4,000
130
110
MMT
Japan
2000-07
G rowth
India
C anada
3,000
90
Spain
2,000
70
1,000
50
00 01 02 03 04 05 06e07e
United Sates
Source: EIA, CIBCWM
C hina
0
2000
2007
Total Cost of Shipping a 40’ Container
From Shanghai to US East Coast
14,000
12,000
10,000
Inland Transport
Freight
8,000
6,000
4,000
2,000
0
00
05
Curre nt
WTI
@ $150
Savings on Transport Costs by Switching
From China to Mexico (Textile)
9,000
$
%
7,500
14
12
10
6,000
8
4,500
6
3,000
4
1,500
2
0
0
00
04
Per 40' container (L)
07
WTI
@ $150
Tariff equivalent (R)
Surging Canadian Infrastructure Shortfall
140
$ Bn
Per Capita ($2007)
5,000
4,500
120
$
2007
Total
4,000
100
3,500
3,000
80
2,500
60
2,000
1,500
40
1,000
20
500
0
0
85 88 92 96 03 07
Source: Federation of Cdn Municipalities (FCM), CIBCWM
85 88 9296 0307
US
Canadian Infrastructure Aging Fast
18
more than 1/2 of C dn
infrastructure
is older than 50 yrs
%
Infrastructure Condition
as Determined by
Maintenance
16
Infrastructure Condition
14
12
10
8
6
4
2
10
20
30
40
50
60
70
80
90
100
100+
0
Age of Infrastructure (Years)
Source: FCM, CIBCWM
No maintenance
1% maintenance
2% maintenance
30 45 60
Service Life (Years)
Government Net Spending
on Infrastructure *
1997 dollars
6.0
$ Bn
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
62 66 70 74 78 82 86 90 94 98 02
* Net of depreciation.
Source: Statistics Canada
Pension Fund Infrastructure Investment Will
Grow Rapidly
Investment in Infrastructure
250
$ Bn
%
200
14
12
10
150
8
100
6
4
50
2
0
0
95
00
Total Investment (L)
Source: Statistics Canada, CIBCWM
07f
10f
15f
Share of Total Assets (R)
Canadian Infrastructure Stocks Outperform
Rate of Growth
(Feb 08)
Index July 2004=100
260
240
220
200
180
160
140
120
100
80
60
12
10
8
6
4
2
Macquarie
Global 100
($US)
UBS US
Infrastructure
($US)
7
l0
Ju
Ju
l0
6
5
l0
Ju
C anadian Infrastructure
Index
S&P/TSX
Canadian
Infrastructure
Index ($Can)
0
4
l0
Ju
y/y % chg
Net Mutual Fund Sales
O ut of Equities ...
4
Equity Funds
$ Bn, 3 m o m oving avg
3
2
1
0
-1
-2
Ja n- Ma y - Se p- Ja n07
07
07
08
Source: IFIC, CIBCWM
… Into Cash
4.0
3.5
Money Market Funds
$ Bn, 3 mo m oving avg
3.0
2.5
2.0
1.5
1.0
0.5
0.0
- 0.5
Ja n-Ma y -Se p- Ja n07 07 07 08
Excess Liquidity
C umulative % increase in nonregistered liquid assets chequing &
demand deposits, money market mutual
funds and cash positions in brokerage
accounts)
24
21
18
15
12
9
6
3
0
-3
05
06
Source: Bank of Canada, IFIC, Statistics Canada and CIBCWM
07
08
$45 bn
excess
liquidity
Sitting on Cash for Too Long –
The 2001 Example
170
Index Jan 2000=100
150
130
110
90
70
50
00
01
02
03
04
C ash & cash equiv. position
TSX total return index
Source: Bank of Canada, IFIC and CIBCWM
05