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Shorting Canada? Rosenberg warns investors may get burned

Shorting Canada? Rosenberg warns investors may get burned

Forget Canada-U.S. hockey rivalries and debates over whose beer is stronger (Canada’s, no contest). The latest battle brewing between the two countries these days appears to be over the shorting of key Canadian investments.

Ever since it was revealed that some U.S. investors were shorting Canadian banks and the loonie based on fears of a housing bubble and a weak economic growth outlook, Canadian economists have been quick to defend the homeland.

The latest came this week from Canadian economist David Rosenberg of Gluskin Sheff + Associates, who used the latest GDP figures as his ammunition.

“Well, well. For all the talk of how the Canadian dollar, the Canadian banks, and the Canadian economy are all such great shorting opportunities, real GDP growth exceeded consensus views, said Rosenberg in a note to clients. “In fact, Canada has now quietly outpaced the U.S.A. in three of the past four quarters!”

Rosenberg went further to point out that Canada’s personal savings rate is double that of the U.S., at 5 per cent, and that its economy is growing “without nearly as much government support for the housing sector or expansion of the central bank balance sheet.”

Take that, short sellers. (Short sellers make money by borrowing an investment they expect to drop in price, at which time they buy it back at a lower price and return it to the lender).

Rosenberg’s argument follows others made recently from experts within Canada, including from BMO Capital Markets senior economist Robert Kavcic, who suggested the Canadian bears (those from the economic wilderness), were picking on Canada after it became “unfashionable” to go negative on U.S. equities.

“Barring some major exogenous shock, those bears waiting for a cataclysmic collapse in Canadian housing, and therefore Canadian equities and bank stocks, could be waiting for a while,” Kavcic said.

But for some of those U.S. short sellers, a little patience is the point.

Vijai Mohan, founder of San Francisco-based hedge fund Hyphen Partners LP, and one of the Canadian economy short sellers behind the controversy, said he’s taking a long-term view. For Mohan, it’s not just about his pessimistic view of banks and housing, but the Canadian economy’s overall reliance on its resources sector.

"It's not a matter of if, it's a matter of when are Canadian house prices going to start falling,” said Mohan in an interview this week. “The question is: Does that happen coincident with, or not, with a commodity price decline … That would be a very impactful force for the Canadian economy."

While many analysts point to the near-record profits reported recently by the Canadian banks as a reason why the shorts have it wrong, Mohan points to the same longer-term investment case.

"I'm not saying banks are suffering. I am saying they are going to suffer,” he said. "If you look at the U.S. experience, everything looked hunky dory right until it wasn't. The question is, what can you do now and how do you think about the way things can change.”

Mohan said there’s a “fundamental problem” with how a lot of observers of the Canadian economy are thinking about the big picture.

“You can't just take a linear extrapolation of the last three quarters and assume that is going to be the case forever because life is inherently cyclical. There is strong reason to believe that many of the things that have been important tailwinds for the Canadian economy could in fact become headwinds,” he said.

So who’s right? Time will tell. Luckily, Canadians have good, strong beer to drink while they watch it play out.

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