Short 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
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.