Oliver Foote

Statistics Canada Thinks It Is

I have been hearing from many people recently that they are having a hard time finding work. This is not just anecdotal, Stats Canada came out with their most recent labour force survey and the unemployment rate is sitting at 6.4% as of June 2024 and has increased 1.3% in total since April 2023 which was a recent low (low = good). Among these groups, returning students (those who are going back to school in the fall) are at their lowest June employment numbers since June 1998. You may be saying not a big deal, students still have time to figure things out. While this is true, they are also the future of the labour market, and one of the most common ways for students to find their full time employment is through their summer internships or other jobs. If there are fewer students interning and less work for students overall I think this is a concerning development.

I think this lower student employment rate, and the overall high unemployment rate are leading indicators that we are heading for stagnation or even some form of a quiet depression. After having conversations with people from many different industries and hearing by word of mouth from friends of friends, a lot of companies are holding off on hiring right now, because there may be some level of uncertainty about whether their clients will continue to be in business in the coming year or two. This is leading to hesitation across the board regarding hiring people, and especially for new grads. This is making it even more challenging since companies that are shrinking their workforce or looking to hire would rather hire one senior person who can do the work of two people rather than hiring two junior people who need training.

Signs of a Drawn Out Downturn?

Of the types of economic downturns, in this case specifically a job market downturn. It is almost better to have a COVID-like situation where people get hit very hard but can bounce back relatively quickly. A long, slow, protracted downturn, meanwhile, may be felt by fewer people as a whole, but for those who do feel it they will not get a lot of relief in the coming years. It has become apparent that although the Bank of Canada has cut rates, the effect of the rate cuts will be fairly muted, as borrowing power only improves marginally for those looking to take out loans such as a mortgage and businesses are still hesitant to borrow money in order to invest. Because leverage is expensive as a whole right now, we will likely see less economic growth. In order for a business to get a good return on their investment they will need a rather high ROI to justify their cost of borrowing and justify a higher risk investment when a relatively risk free investment is still hovering around 3-4%. With inflation coming down below the risk free rate, there is almost no reason for businesses or investors to look towards higher risk investments which means that less money overall will circulate through the economy.

Canada is also in a special situation because we are always welcoming new highly skilled workers into the country, this could be a good thing for businesses because if there is more demand for their jobs they can theoretically pay a lower rate and get the same output. From the workers side this puts them in an unfortunate situation, they will have to find a way to stand out from the crowd or accept a much lower wage at a time when the cost of living is not improving much.

Real Estate Indicators of Slowing Growth

From the real estate side we are seeing some relief in the rental market, as a recent rentals.ca report showed the year over year rental prices in June 2024 were similar or lower in some of the larger metro areas compared to this time last year. We can also look to the resale market and the pile of inventory that is building up, especially in some segments such as condos. This has yet to manifest in much lower prices, but there are some individual great deals for those who are looking. The market is a whole isn’t seeing much price pressure likely due to the fact that owners are finding a way to hold on until they get the price they are looking for and aren’t in a rush to sell. The number of truly “distressed” sales has only increased marginally anecdotally speaking and banks have been instructed to help those who are in distressed situations to manage their real estate. We likely won’t see a significant decline in prices in the coming years, but prices may slide slowly downward until borrowing becomes a bit more affordable.

I do foresee a time in the next 3-5 years as things improve with respect to borrowing costs that prices will jump up due to the lack of new construction sales. New condo projects have been taking longer to sell and fewer people have been purchasing them. This also corroborates my previous point about lower investment as we’ve reached a point in Toronto where about 50% of condos are owned by investors which means that they are soon to be the majority of the potential buyers, if not already are, and if investors are not investing their money, condos are not going to be built. If condos are not built, there will be less housing while more people continue to come to the Toronto area which simply supply and demand says higher prices.

Potential Improvements in Student Economics

Another interesting development has been the cap on student visas. On balance I view this as a positive development as I believe the intention of capping them was to prevent predatory “career” schools from taking advantage of students and not providing them a proper education. I quite frankly see nothing wrong with this, although it may inconvenience people who were all but too happy to take advantage of these students whether for cheap labour or for absurdly high tuition fees. The only potential downside to this is that some reputable institutions may lose some of the funding they were anticipating from international students and have to make cuts. But again, I see nothing wrong with a little competition, and competition breeds innovation, so maybe in the end this will turn out to be a positive development across the board. I also see positives when looking at student adjacent market such as the student rental market around campuses.

They will likely become somewhat less competitive with this change. I recall from my time at university that it was truly a crapshoot trying to find a half decent student house. The number of questionable landlords who didn’t take care of their properties was high, the inability of students to clean up after themselves was bad, the SERIOUS lack of supply was horrendous. Overall, there were frequently poor outcomes and often just plain unsafe living conditions. So some relief in that regard is well overdue in those markets. Although, I’m not certain that this will affect the larger universities who may not be as highly affected by the student visa quota. Interestingly, Graduate level visas have not been affected at all which is in line with the concept that Canada is interested in highly skilled workers. (although arguably our problem is with trades workers not highly skilled workers).

Signals from The United States

Interestingly though, if you look to our friends in the south (the US) their stock markets are continuing to do well, which is arguably signaling that things are improving over there and there is confidence that they will continue to improve. The US employment rate is still hovering around an all time high (a positive development) and since they have a more diverse economy they are more resilient overall. You can’t predict the market, but generally when I look at my portfolio and get very happy that is usually a sign that it’s time to sell some of it and cut down on the risk. However, I’m more of a buy and hold type of investor rather than a time the market investor, so I’ll probably just ride whatever wave comes and try to build up some cash in order to purchase any opportunities that may come along in the next little while.

It will be interesting to see how all of these different aspects of the economy develop in the next couple of years, I will be following them closely and doing my best to keep you up to date on them. Hopefully you found this discussion interesting. Feel free to let me know your thoughts any time, I’m always interested to talk economics.

Keep investing,

Oliver

Sources:

Stats Canada Labour Force Survey June 2024: Click Here

Student Visa Cap News: Click Here

My last post: https://oliverfoote.ca/dont-invest-in-stocks-or-real-estate/

If you have read some economic history on the Soviet Union, you’ll know that once the Iron Curtain fell and the market became open, it created a lot of prosperity for those who were in the right positions and had the right connections. Since almost all means of production in Russia were state owned at the time, when the Soviet Union fell there was no clear ownership over the state assets anymore, and the people we now know as Oligarchs were able to make deals with state officials and get some once in a lifetime deals on state assets, obviously laden with corruption of all sorts. The Russian story gets quite detailed with people falling in and out of favour with the government, suspicious deaths of Oligarchs and eventually with Vladimir Putin seizing power. I would recommend reading the Wikipedia page on Russian oligarchs if you’re curious.

While the Russia story is fascinating, I wanted to use this post to talk about some smaller scale success stories that occurred as a result of the transition to a free market in some of the Soviet Union satellite countries. Since I have family in Poland and an uncle who runs a small furniture factory out of an old barn, I thought his story and the story of a few entrepreneurs in this small village of 2000 people would make a great example. After the fall of communism in Poland in 1989 and the privatization of the market, it opened opportunities for many people, even small business owners to ride the wave of economic growth that would come. As an example let’s take the story of one family in the village where my mother grew up. The business owner has a very well known story in the village and it is a story of right place right time in his case.

Around the time when the market was opening up and becoming more privatized Greg took out some business loans from multiple banks to purchase land and equipment for his furniture business. Since they were only beginning to regulate open market banking you could shop around at various banks and get each one to lend you a chunk of money for your business. During communism inflation was consistently hitting double digits every month to the point where it hit 1200% in 1990. These two factors set him up for great success with respect to timing. If you have a means of production to make current income at sell goods at current market prices, but your loans were taken out while hyperinflation is happening, you can pay down those loans for pennies on the dollar in a few short months (or groszy on the złoty for my Poles). I’m not entirely sure who would be lending money in an economy with hyperinflation, but I would imagine the lenders tried to protect themselves with very high interest rates or maybe only lend money pegged to a more stable currency. But even interest rates might not be a great defence depending on the severity of the inflation. When there is hyperinflation it’s a very bad time to be a lender and a very good time to be a borrower. So Greg and a few others in the village became significant land owners and business owners and paid next to nothing for it. Now he owns a small shopping mall in the town of Krosno nearby and a vacation home in Spain, so he’s done well for himself. Timing isn’t everything, building a business is not an easy endeavour, but it can help speed things up a bit.

As another example from the same village let’s take my uncle. He was just getting out of school when communism fell. So him and a friend decided to try and start up their own furniture businesses and they worked together to learn all the tricks of the trade required to set up shop. I don’t think he ever expected his business to do as well as it has. At the time he was just trying to find a way to work and make some money. While he didn’t get the very lucky timing of taking out loans while hyperinflation was hitting, he was able to ride a different wave of prosperity. Poland joined the European Union in 2004. This meant free trade and the goal to bring up countries like Poland to higher standards of living. With the free market, the free trade of the EU and the direct financial assistance given to Poland, their economy began to grow. All the while my uncle was selling his furniture to dealers in larger cities and building a network of connections and people who wanted to buy his product. He expanded and bought new equipment and now runs a very sustainable small business.

Poland is now quite “westernized” in it’s standard of living, there is opportunity if you want it, and the big cities are doing quite well and you can find some very well paying jobs in Warsawa. This more advanced stage also introduces multinational corporations who now see a business case to open up stores in the country, for example IKEA. When I had this realization that IKEA might come in and steal all the business from the small furniture manufacturers, I was somewhat concerned for my uncle. But funny enough I actually think something even more interesting has happened. IKEA isn’t exactly known for having top quality materials or amazing variety. What I think has happened is by introducing this new player in the market is it actually elevates my uncles product to a more premium level.

The people who may buy from IKEA to outfit their small apartment in the big city, aren’t necessarily the same people who are staying long term in Poland and are looking for something that is better quality and can be built to order. They serve two completely different markets, and there is space for both of them. Also reflecting back on one of my later blogs about how zoning bylaws in North America don’t encourage small business, the design of a European country is simply more friendly to a wider variety of commerce and smaller businesses in my opinion. Overall, I think there is a more local attitude that still prevails in Europe while in North America we tend to prioritize huge multinational corporations and big box stores.

It is possible that over time things will change, and my uncle will have to find a different way to sell his products. But for now I think his business will continue to grow and serve his market. From a purely economic perspective I find it fascinating how many similar stories there are to his in the soviet satellite countries and Russia itself. Even just within my family’s small village in Poland there are numerous well known entrepreneurs who set up shop around the fall of communism and have expanded their reach to supply stores across the country.

Every once in a while the economy presents a great opportunity to start up a business and in the moment you might not even realize it’s happening. As a recent example, investing in the stock market during COVID. The only thing I wish I did differently was borrow more money to invest with. Hindsight is 20-20 in these situations at there is always risk to borrowing money and you can never really predict what will happen in the future. Our present economy has becoming challenging for a lot of people and if you read the news, there has been news of thousands of tech layoffs in the US. However, many of these employees turn around and start their own companies once they get let go and are finding great success doing so. There is a lot of opportunity available even now, and great sustainable businesses are often built during challenging times. Understanding the past can give you insights into what economic forces were in effect during that moment in time and help improve your radar for understanding when and where the next opportunity might present itself. Communism and COVID are just two of many different examples around the world of global economic shifts that can present great opportunities for people who are ready and able to capitalize on them.

All the best,