Canada Is in Extreme Bubble Territory—Here’s How to Profit

BY MAULDIN ECONOMICS

There’s trouble brewing in the Great White North.

Jared Dillian, former Lehman Brothers trader and noted financial writer, says that low oil prices have hurt the Canadian economy and the real estate market is near the peak of a massive bubble.

In a video interview with Mauldin Economics, Dillian notes he shorted the Canadian dollar almost three years ago, and has profited a great deal since then. He also says the structure of the Canadian mortgage market means that when the bubble bursts, it will look quite different than the sharp and sudden 2008 crisis in the US.

Canadian dollar will continue to drop

The Canadian dollar is facing major headwinds. Dillian notes it’s likely that the US Fed will raise interest rates while the Bank of Canada will cut rates (if they move at all). This dynamic will put more pressure on the already weak Canadian dollar.

High and rapidly growing consumer debt in Canada is also a concern. And, if economic news continues to be poor—like the employment numbers that came out the first week of August—look out below.

Dillian thinks the Canadian dollar could move to 1.60 to 1.70 to the US dollar (currently trading around 1.30). He believes that shorting the Canadian dollar is “one of the best macro opportunities over the next couple of years.”

Canada housing crisis will be a long, drawn-out bottoming process

Unlike the US market, the mortgage market in Canada is not securitized. This means that the housing crisis in Canada won’t be quick like it was in the US (6/2007 to 3/2009).

Dillian says that a long, drawn-out “death by a thousand cuts” scenario is in the cards for the Canadian housing market. And, this economic pain will probably last for years.

He also notes that nearly all mortgages in Canada are “recourse mortgages” (except in Alberta). This means in-the-hole homeowners are not as likely to walk away as they were in the US housing crisis.

Canada interest rates could go negative

Dillian states that more interest rate cuts by the Bank of Canada could be in the cards. With the prime rate in Canada at 0.5% right now, it’s not far to zero. In fact, he wouldn’t be surprised to see negative rates by the second half of 2017.

How to protect yourself

Dillian had a few investment tips on how to prepare your portfolio for the coming crisis.

First, he suggests selling any real estate assets in Canada you have, including your home. You should be able to buy that same property back cheaper in three to five years.

Second, Dillian says that Canadians (or those invested in Canada) can mitigate risk with FX or interest rate trades, short stocks, or the like.

He stressed that a short against the Canadian dollar, although it’s an obvious and increasingly “crowded” trade, is as close as you can get to a sure thing.

Watch the full Mauldin Economics’ video interview (9:13) below where Jared Dillian breaks down the problems with the Canadian economy and shows how you can profit from the slow-rolling meltdown in Canada.

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