The Great White Short

gi-mohan27rb1Short selling stocks is a decent way to make money if you know what you’re doing. Vijai Mohan, founder of San Francisco-based hedge fund Hyphen Partners LP,  claims to be one of these people. He’s shorting Canadian banks much to the dismay of mainstream opinion. “Economist” David Rosenberg is confident that GDP numbers are describing perpetual economic growth, while the TD Bank is relying on a government-insured guarantee to avoid disaster. But Mohan shorted the US housing bubble and his logic for shorting Canada seems solid. Although the differences between the United States in 2007 and Canada in 2013 are significant – the fundamentals are similar enough to cause the same effects.

In a survey of 322 accountants in senior corporate positions, three quarters said the Bank of Canada should keep interest rates low. They fail to see how the manual lowering of interest rates distorts the price system and eventually leads to its absolute ruin. With no prices there is no market; suppression of markets create chaos and poverty. The ongoing policy of low interest rates is resulting in massive capital consumption and putting a strain on the planet’s resources. “Economist” David Rosenberg of Gluskin Sheff & Associates avoids these facts. Instead he tells his clients,

“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 [Gross Domestic Product] growth exceeded consensus views in Q1 with a +2.5-per-cent annualized growth rate. The market was braced for +2.2 per cent and this also eked out the +2.4-per-cent pace stateside and, in fact, Canada has now quietly outpaced the USA in three of the past four quarters!”

The GDP is fallacious. It is supposed to be a measurement of economic growth but in reality it serves as a propaganda tool for governments. For starters, the GDP includes spending in its projection. So when I get my car stuck outside Moraine Lake and I spend money to tow it out, I am apparently creating economic growth – despite my net loss of $230. Second, the perpetual production of goods and services doesn’t necessarily imply economic growth. Artificially low interest rates distorts the production structure, signalling entrepreneurs to invest based on savings that don’t actually exist.

This is where Rosenberg really goes off the deep end. He says, “the personal savings rate in Canada at 5 per cent is now double the 2.5-per cent level in the United States, so there would seem to be more potential for spending growth north of the border,” [emphasis mine]. As the Keynesian logic goes – spending equals growth. Rosenberg apparently sees savings as nothing but as a means to achieve consumption ends. The idea of capital accumulation and decreasing prices don’t seem to dawn upon Rosenberg’s analysis.

Colleen Johnston, the chief financial “officer” at TD Bank said, “[real estate lending] business is excellent and a largest part of the business is insured – most of it by the Canadian government.” So individual taxpayers are responsible for it, at gun-point. Johnston fails to consider that the federal government can default on its debts. Then we’d owe money to the IMF or World Bank. This insurance scam may prove Vijai Mohan’s short on Canadian banks to be a bad move. Canadian banks may go unscathed by having all responsibilities and obligations cast onto the federal government. At the end of the day, taxpayers could be left footing the bill while the Big Five Banks move overseas.

David Rosenberg and Colleen Johnston are so far off the mark that their recommendations following the crash will likely become government policy.

Meanwhile Mohan says, “it’s not a matter of if, it’s a matter of when are Canadian house prices going to start falling.” Over dependence on the resource sector is troublesome and retail is undeniably linked to credit malinvestments. “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.”

Mohan also criticizes the methods of the “mainstream economists”: “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.”

Colleen and Rosenberg may actually believe in what they say. Or they could be doing what Mohan is doing but telling everyone else to do the opposite. Whatever the case, this “Great White Short” may or may not pan out. Human action is always uncertain. But the kind of nonsense spewing from “mainstream economists” is economic illiteracy.

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One Response to “The Great White Short”

  1. rabbit says:

    This is a projection of the American situation in 2008 onto Canada in 2013, and the analogy just doesn't work. For example, there is no significant subprime mortgage market in Canada. Furthermore, you don't have a lot of Canadians speculating on residential real estate.

    There may well be a fall in real estate prices in Toronto and Vancouver (the two most expensive markets), and that will hurt bank profits, but short of a major global recession I doubt it will be cataclysmic.

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