Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web
Canadian author and financial professional Hilliard MacBeth was literally talking his book When the Bubble Bursts on Bloomberg Television Monday, arguing that a domestic financial crisis is imminent.
The thesis is that Canadian housing prices have tripled in the past 15 years and global history warns that rallies like this almost never end without serious financial upheaval.
I don't want to attribute beliefs to Mr. MacBeth that he doesn't hold, and there's the semantic issue of "what do you mean by crisis?" that I have no interest in getting into, but let me explain why I'm confident that a 2008-style financial crisis is not in the cards for Canada.
Like the pre-crisis U.S., the Canadian housing rally was caused by huge credit growth that created unsustainable real estate price appreciation. That, however, is where the similarity ends. The true excesses of the 2008 crisis were caused by derivatives designed to avoid liability for defaulted mortgages, and these derivatives are not widely apparent in Canada.
In the lead-up to 2008, U.S. mortgage underwriters issued mortgages they likely knew were sketchy but dodged default risk by selling these mortgages to major banks. The major banks packaged these mortgages into Collateralized Debt Obligations (CDOs) they sold to money market funds, avoiding default risk themselves. To the extent they held CDOs on their balance sheets and remained liable for defaults, the banks bought default insurance from the financial arm of AIG and monoline insurers.
The financial crisis occurred when it became apparent that the providers of default insurance couldn't make good on these policies. The major banks, now on the hook for mortgage defaults they thought they were financially safe from and fearing insolvency of their competitors because of this, stopped lending to them – no one could figure out who owed what - and the system froze completely.
In Canada, there is very little confusion as to where the responsibility for defaults lie and the odds of a freeze-up are very, very low.
Will some private mortgage issuers go bankrupt in a major housing price correction? Probably.
Will CMHC need financial support from the feds? Maybe.
Will the major banks have trouble generating profit growth? Sure.
But a Canadian version of 2008 is a low probability event.
" Is Canada's Economy on the Verge of a Financial Crisis?" – Bloomberg video
Related: "Four major changes to Canada's housing rules" – Report on Business
"Canada's banks brace for mortgage overhaul' – Report on Business
"How Canada Has Tried to Cool Down Its Housing Market: Chronology" – Bloomberg
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U.K.-based Longview Economics notes that global traders are net shorting the Canadian dollar after being long for the past 25 weeks. Report on Business' Mike Babad recounts CIBC research predicting a downdraft for the loonie, and I wrote a column explaining why Canaccord Genuity strategists feel the same.
"@Lvieweconomics CAD positioning is now firmly net SHORT, having been net LONG for 25 weeks. ' – (includes chart) Twitter
"The Trump 'premium': Investors suddenly scared of the Canadian dollar ' – Babad, Report on Business
"This chart shows us why we should prepare for a 70-cent loonie" – Barlow, Inside the Market
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Tweet of the Day: "@bclund The 5 Greatest Trading Blowups You've Never Heard About http://www.sparkfin.com/the-5-greatest-trading-blowups-youve-never-heard-about/ " – Twitter
Diversion: "Hurricane Matthew Looks Frighteningly Huge from Space" – Sploid
Scott Barlow