Via Kevin Muir of “The Macro Tourist” fame
Today is a tough day to be Canadian.
Coming just a few days after the Ontario government made the atrociously timed decision to impose a foreign buyer tax on Toronto real estate (The world’s worst market timer), this morning, alternative home lender, Home Capital Group, announced they were forced to borrow $2 billion at a 10% interest rate to fund their short term needs.
The stock market clubbed HCG’s stock price like a baby seal (I know, I know – terrible metaphor and another of Canada’s great shames).
I have no brilliant insight into this debacle. I am unsure if Home Capital Group’s shenanigans were confined to their company, or if they were prevalent throughout the entire industry. But it doesn’t really matter. For a while, investors will assume the rot spreads deeper than just one company. The entire Canadian real estate sector will now be guilty until proven innocent.
Many are comparing today’s development to the infamous Bear Stearns moment that proved to be the start of the entire 2008 credit collapse.
Regardless of the outcome, investors will now shun Canada until the entire picture becomes more clear. And it wouldn’t surprise me at all if the Ontario Leader Wynne’s terrible policies end up being the top tick in the Toronto real estate bubble. Maybe even to the day…
Today’s Canadian real estate news was bad enough, but then it got worse. A lot worse.
It was reported that the Trump administration was preparing to leave NAFTA. From Reuters:
WASHINGTON (Reuters) – A draft executive order that would withdraw the United States from the North American Free Trade Agreement is under consideration, a senior administration official said on Wednesday, confirming an earlier report from Politico.
It is unclear whether the order will be enacted by President Donald Trump, who has accused NAFTA – a trade pact between the United States, Mexico and Canada – of undermining U.S. jobs.
This is probably just President Trump leaking an extreme negotiating stance, only to compromise later, but again, it adds uncertainty to Canada’s situation.
With all this bad news overhanging the Canadian economy, investors will steer clear. Who would want to go overweight Canada with these latest developments?
And this already evident with the recent poor performance of the Canadian dollar. Even though lately the US dollar has been weakening, the Loonie is weakening even more.
USDCAD has been pushing up against resistance, and looks like it wants to explode higher (lower Loonie). I know you are supposed to wait for the clean breakout before committing to the trade, but I am jumping ahead. Now maybe this will prove extraordinarily dumb. I am willing to accept that possibility.
But I think the breakout will happen in a sickening swoosh and it will be extremely difficult to climb on board at that time. I would rather find my seat on the train ahead of time.
And the trade I like even better than long USDCAD is to be long GBPCAD.
That chart has already broken out, and looks like it has a lot further to run.
I wish I had a more insightful original idea to take advantage of these new developments, but sometimes, there is nothing to do but go with it.
This may actually work out (or “work oat”, as you say in Ontario) well for Canada. Knucklehead half-wit Stephen Poloz can’t figure out how to pop the real estate bubble and keep the Loonie weak at the same time. This could be the solution. If the Loonie tanks against the USD, then Poloz can raise interest rates to get the Loonie back up to its current 75-ish cents USD. The higher CAD interest rates will tap the brakes on the real estate bubble without resorting to the foreign buyer tax.
Could be a win-win. If this falls into idiot Poloz’s lap, he might not be too dumb to take “yes” for an answer.