The other morning I awoke to a Maclean’s cover that was to say the least, a little bearish on oil and the Canadian dollar. For my non-Canadian readers, Maclean’s is our Newsweek equivalent. It is not a business magazine, so a cover story means we are hitting the point of maximum exposure. When Maclean’s has figured out a business story, you better think about going the other way.
I know all the problems with Canada. I am continually hit over the head with research highlighting the unsustainability of our housing market rise. I understand our reliance on commodities that are refusing to rally. I know about our consumer’s increasing debt level. And I am especially aware at how bearish everyone is on oil.
There are little reasons to be bullish on Canada. Yet, I can’t help but worry that maybe the shorts are pushing their luck.
I have spoken in the past about one newsletter writer I enjoy reading, but who I consider to be a perfect indicator for US hedge fund consensus. He is short Canada up the whazoo. It has been a big winner for him, but he is not even thinking about taking profits. He describes it as a “lifestyle” changing opportunity. When Poloz cut rates last month, he wrote this piece about how it was only a matter of time before he cut all the way down to zero and instituted QE.
My hat is off to him for having called Canada’s decline so far. And maybe he is right that Canada is destined to get a lot worse. Maybe oil never will go back up. Maybe our housing market will crash. Maybe the loonie is destined to trade at 1.50 or 2.00. Maybe this newsletter writer will cover his shorts in Canadian bank stocks at single digits like he forecasts.
But I am worried that he might be getting a little ahead of himself.
Although I am bearish on Canadian housing, I find Americans assume that everyone is going experience the same sort of housing bust they lived through in 2007/8. A couple of years ago, there was an article in the Globe and Mail about a San Francisco hedge fund manager who had staked 95 percent of his investors’ assets on a wager that Canada’s housing market and banking sector are about to come apart at the seams.
This hedge fund manager was convinced that the Canadian housing market would crash the same way the American housing market imploded. But the American decline was unique. There was a spectacular amount of fraud that created a perfect storm. Canadian housing will go down, there is no doubt about it. But I have said it before, and I will repeat it again: we are going to bore them with our Canadian-ness. Our decline will be a long drawn out affair. We are just not the same sort of people as the Americans. We don’t run from one side of the boat to the other as quickly. Too many American hedge funds assume that the Canadian housing bust will be the same as the US – it won’t be. It will be boring and frustrating slow.
It reminds me of this great joke:
An Englishman, a Canadian and an American are captured by terrorists.
The terrorist leader said, “Before we shoot you, you will be allowed last words. Please let me know what you wish to talk about.”
The Englishman replied, “I wish to speak of loyalty and service to the crown.”
The Canadian replied, “Since you are involved in a question of national purpose, national identity, and secession, I wish to talk about the history of the constitutional process in Canada, special status, distinct society and uniqueness within diversity.”
The American replied, “Just shoot me before the Canadian starts talking.”
My suspicion is that before it is all through, my American hedge fund friends will be bored to tears from our Canadian market, and they too, will wish to be shot.
Back to my newsletter writer. I think his attitude about Canada is quite helpful in understanding market sentiment. Whenever I hear someone talk about a “lifestyle changing trade,” my antennae immediately get raised. The Market Gods are an unmerciful bunch. The last time I heard someone as confident about a trade was when one of the hedge fund managers I know said he was going to buy a G5 when his favourite stock got taken out. (Now don’t get mistaken and think I am in the same league as this guy – I am happy just to spring for business class once every ten years on the way to Disney with the family).
I don’t need to tell you how that one ended. The Market Gods do not like that sort of talk, and it worries me that the Canadian bears are tempting them again. The fact that a hedge fund manager is confident enough to have 95 percent of his fund in a short Canada bet demonstrates the one sided nature of this trade.
I know if these Canada bears read this, they would immediately throw their recent positive P&L back in my face. And I can’t dispute that they have been right. At the end of the day, money on the sheets is all that matters.
But have they made money for the correct reasons? Has Canada imploded as they forecasted?
Let’s start with our housing prices. Have they collapsed? Are we struggling with new lows from the ravaged Canadian economy?
Not a chance. In fact it is just the opposite. Canadian house prices have stubbornly refused to go down and are still bouncing along at the highs.
My newsletter friend says that his bearishness has cost him all sorts of Canadian subscribers. I don’t know who he gets as customers as almost everyone I know in the Canadian finance business shakes their heads at the stupid price of our real estate. We all know that it will eventually be a big problem. We don’t get upset when people point out that this is not a healthy market.
Yet so far it hasn’t been a problem, and all those Canada bears are still waiting for the US style collapse.
Let’s move on to the banking sector. The article about the hedge fund manager who was 95 per cent short Canadian financial assets with a particular emphasis on the banking sector was from April 2013. Let’s look and see how his Canada bank short is working for him.
Nope, that hasn’t worked either.
So what has worked? Why are the Canada bears happy lately?
The only part of their trade that has worked is the short Canadian dollar. But that trade has worked in spades. The USDCAD has gone from 1.05 to 1.25 over the past six months. The bears are licking their chops at the sudden decline.
The CAD has definitely been under more pressure than some of the other currencies due to the collapse in oil. Over the last six months being short CAD was a much better trade than almost all the other cross rates.
But the vast majority of the decline in CAD was actually US dollar strength. Here is a chart of the USDCAD rates alongside the DXY US Dollar Index.
Although the Canada bears will point to the P&L on their sheets from this trade, they haven’t been right for the reasons they forecasted. They might as well have just bought US dollars. That has been the main driver in their profits.
And as for crude, shorting the commodity was way better than shorting Canada financial assets.
On the whole, Canada is still hanging in there. Now maybe this is the final gasp before we collapse. Maybe these hedge funds and newsletter writers are correct in that we are still in the early innings of Canada’s long term demise.
But when I see the bearishness on the cover of Maclean’s and in the research reports, I think at the very least you should avoid this crowded trade.
In twenty minutes, we are going to get the latest Bank of Canada meeting. I am sure the hedge funds are all licking their lips at the thought of all the easing Poloz has to do to get to zero. Yet, I think once again, they will be disappointed by the boring Canadian.