Americans

Wow. Those Americans are sure worried about us. Isn’t it touching?

As I told you some weeks ago, the first hard-landing, you-guys-are-so-screwed hedge fund is set to be launched shortly by Spartan Fund Management. It’s called the Libertas Real Asset Opportunities Fund, and it’s making a bet F and his social engineers will fail miserably in pulling off a soft landing, with house prices drifting casually back to a more sane level.

“I think it’s a tough slog going forward,” says portfolio manager Michael Brown. “I don’t know what rabbits the government is going to be able to pull out of their hat. It may not be a fall of 50%, but it’s got to be a fall of 30%.”

Yikes. That would mean almost everyone who bought real estate in Canada since 2009 with a small downpayment would lose 100% of their equity or end up with an air tank and flippers. By the way, the new fund is open only to accredited investors – rich people with a million in (non-real estate) assets who can afford to bet wrong.

Meanwhile Time magazine has joined the growing list of Yanks looking north, amazed to see we’ve essentially repeated all of the mistakes that led Oakies to buy McMansions and greedy bankers to fund them. And the story’s no longer just that the Canadian housing market will be pooched, but the scope of the economic damage when it occurs.

There are three things everyone points to as they wait for Canada to blow up.

First, our condo economy. Close to 8% of the entire workforce is now in the construction business. In contrast, that’s four times the number working in the oil and gas business, and about equal to the entire manufacturing sector. Actually 7% of the whole economy is related to drywall and plumbing fixtures, and about a quarter when you add in all the realtors, bankers and brokers. These kinds of numbers have never existed before.

Second, jobs. I’ve been beating on this since the latest employment numbers were published because they’re so profound in implication. In all of 2013 only 8,500 jobs per month were added. Compare that to 25,900 a month in 2012 – which was still lacklustre. So when businesses lose the confidence to hire people, how can people be so moronic as to keep on buying houses and snorffling debt?

Third, speaking of debt, as more people lose their jobs (10,000 layoffs a week in December) the escalation of borrowing is now epic. As the debt-to-income ratio edges past 164% (for the first time), we easily eclipse the American borrowing binge which preceded a real estate crash bringing prices down by 32% and hitting some neighbourhoods up to 70%.

So, with debt like that what happens if the economy continues to slow and unemployment rises? Or if long-term mortgage rates increase as Fed tapering rattles the bond market? Time quotes economist Aman Asaf: “Even a modest uptick in mortgage rates will translate into much higher homeownership costs, easily outpacing any expected increase in household incomes. This will price out some prospective home buyers, reinforcing the drop back in existing home sales that is already under way.”

And under way it is. As mentioned here last week, sales have been slipping now for four months nationally, and six months in some markets. It may all be corrected by the spring rush. But maybe not. As the hard-landing advocates point out, we Canadians are building the perfect storm – those same conditions which led to shock and awe among the American middle class.

So here’s the bottom line for the Canada-bashers: housing mayhem here won’t be the same as real estate slaughter there. After all, a fat majority of our mortgages are government-insured. But with CMHC devoid of the funds to make good on any wave of defaults, and a property bust coming along with increased unemployment, the peckerettes will be severely tested. Will the deficit have to bloat again? Will we have to stop spending on necessities, like sending 200 people to Israel along the PM?

American stock-picker and newsletter-writer Moe Zulfiqar is telling his clients Canada is “facing a possibly severe economic slowdown,” and it’s time to short the loonie.

“If the Canadian economy does go through an economic slowdown, the value of the Canadian dollar could decline. American investors can profit from this by shorting such exchange-traded funds (ETFs) as CurrencyShares Canadian Dollar Trust (NYSEArca/FXC). This ETF tracks the performance of the Canadian dollar. By shorting it, investors will be able to profit when the Canadian dollar goes down in value.”

Good logic. But the loonie’s already tanked 10% in the last year and dramatically since 2014 began. How much more is there?

Nobody knows. Shorting anything is a risky strategy. Unproven hedge funds are a gamble. And government actions (like the Bank of Canada deciding to hover up dollars) can cream an investor in short order.

As you know, a hard landing is not expected, but seriously possible. More likely is a slow and relentless unwinding of markets, with sales tapering off, prices in a long-term slide, and the most recent buyers being the greatest fools. The single best strategy for most families is diversification – ensuring all of your net worth is not in one asset at one address (hence my Rule of 90). It’s assured that things like bank preferred shares, for example, will be paying you a lot more over the next five years than residential real estate. If there is a housing crash, then REITs holding big blocks of rental accommodation will be hotly in demand, giving not only a nice income stream but the potential of a capital gain. And a piddly loonie is actually good for Canadian manufacturers and exporters, and most of the TSX.

Then again, the Yanks could be idiots. It’s different here. The Albertan unicorn herds alone prove it.