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Why Canada May Be Going in to a Recession

The idea of a recession is hard for most Canadians to fathom. With a large part of the population living in major cities like Toronto and Vancouver, housing prices have been a leading sign of wealth and prosperity. Due to the increases in equity, many homeowners are now feeling much wealthier; it’s almost like sitting on a goldmine!

The situation from coast to coast is not all that even though. In places like Alberta, which was a very strong driver of economic growth for the country for many years, it is still treading water and could potentially stay that way for a long while yet.

The oil industry is the main economic driver of Alberta. Low oil prices have persisted for many years, which has led to a large number of layoffs and many severance packages. As many Canadians are aware, after the severance package runs out, those still unemployed can apply for employment insurance and receive money from the government. Altogether, the process of receiving money while not being employed can be a very lengthy one.

After close to two years of lower than expected oil prices, things have not substantially picked up in Alberta. This is now leading to the worry of a recession (at least locally). Many households in Alberta are cutting the non-essentials, so it may only take a slowdown in housing prices in Calgary to ruin the party for everyone else.

Let’s take shares of Canadian Western Bank (TSX:CWB) as an example. The company is currently trading at a share price very close to tangible book value. Closing this past Friday at $26.18 per share, the tangible book value per share as of April 30 is approximately $26.30. Although the company made profits of $2.20 per share for fiscal 2016 and $1.18 through the first half of fiscal 2017, investors don’t seem to want to value the company at any more than the run-off value. To make it even more interesting, the price-to-earnings multiple is no more than 12 times trailing earnings in spite of a 3.5% dividend yield.

For investors looking for a bargain, shares of Canadian Western Bank may just fit the mould. For those anticipating a recession, however, this bank may be one of the most vulnerable.

Although things have been moving forward very nicely for the majority of Canadians, the major warning sign may just be the large increase in housing prices over the past few months. Sometimes things end with a bang!

The last recession is approximately eight years behind us, so it may be a good idea to consider things very carefully.

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Fool contributor Ryan Goldsman has no position in any stocks mentioned.

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