Canada Bear

Published on
July 24th, 2018
10 minutes

Canada Bear

Trade Ideas ·
Featuring Larry McDonald

Published on: July 24th, 2018 • Duration: 10 minutes

Larry McDonald, creator of The Bear Traps Report, discusses his bearish trade on the Canadian dollar. He highlights why excessive leverage and exposure to China are key factors that could spark a downturn in Canada’s economy, in this interview with Justine Underhill. Filmed on July 19, 2018.


  • IC
    Ibrahim C.
    24 July 2018 @ 09:49
    Very reasonable one, however the target could be higher if the housing bubble busts. One more point is the Canadian Central Bank’s interest rate policy to keep the rates increasing, which has not been helping either!
    • JH
      James H.
      24 July 2018 @ 12:27
      agree, have been watching CAN and AUS for a while. Both nations banks and housing markets are flies waiting for windshields. If anyone has a suggestion on simple way to trade this or AUS currency or banks via ETF or otherwise please post here.
    • DR
      David R.
      24 July 2018 @ 21:20
      You can use the CurrencyShares etf's to short those currencies, but they're not the greatest liquidity. Cdn bank shares have higher liquidity, and even trade in NY, so the best thing is to short those - which is a bet both against the Cdn banks (heading toward zero in the coming collapse per BIS) and a short against the currency. Just do NOT hold positions with a Cdn broker, because the Cdn financial system is expected to totally collapse & fail in a few years (per the BIS) so anyone with any money or investments held in a Cdn financial will lose everything! (never mind their bogus bank & brokerage insurance scheme which is woefully inadequate and underfunded by about 99.9%)
    • ZJ
      Zhaozhe J.
      25 July 2018 @ 00:04
      Please elaborate on why it's not good to hold assets with a canadian broker? As a canadian I did some digging and if you read OSFI's notes on the banks the big 6 are considered systemically important institutions and would be back stopped by the government at all costs and the bail in regime is there to protect them. I expect to see some turmoil but I see some of them ending up like citigroup in what happened in the financial crisis in the USA; and that they would be bailed out and forced into mergers. The non big 6 banks on the other hand would technically be unwound, according to OSFI. But if bail in measures are done, there will be way more pressure on the CAD and real funky stuff could happen. I think there would be huge amount of imported inflation with CAD weakness and the BoC would be in a place where they'll be damned if you do damned if you don't situation with interest rates.
    • DR
      David R.
      25 July 2018 @ 17:57
      Your "holdings" at the Cdn broker or bank actually do NOT belong to you; they belong to the FI and you're ONLY an *unsecured* creditor against the FI, ranking behind all secured creditors, the gov't and even all the employees. So in a crisis, you'll get zero, except from "insurance" from industry & gov't which will also be either defaulted on (overwhelmed by claims) or paid in severely devalued paper Cdn dollars, likely to be worthless as Canada is a small economy with zero reserve status whatsoever (an important distinction vs the international reserve status of the US which is what saved US during its housing/banking meltdown - which is proportionately less than half the size as the bubble-to-burst in Canada currently is). As if that's not bad enough, those bail-ins which are the law of the land in Canada, legally assure that what you have in a Cdn FI will be turned over to the FI to help it continue. At best, you'll get nearly-worthless special bank shares in exchange for your money/investments/holdings, which will also severely water-down the equity of the already bankrupt bank failing under the weight of collapsing asset/mortgage collateral. The size of the problem in Canada mathematically overwhelms the ability of the Cdn gov't, which is already technically insolvent, to come to any rescue whatsoever. Except perhaps by printing currency, contrary to Cdn bail-in laws, thereby rendering the Cdn currency virtually worthless, as Canada is not a reserve currency whatsoever and its economy is meaningless to the world, again in stark contrast to the far-less-severe US situation a decade ago. Some extremely smart hedge money is now betting on the collapse of Canadian banking. It's been a widow-maker of a trade lately, but will likely collapse fast as these things do, and the sharks will attack mercilessly and the Cdn gov't will be totally impotent. Like in Cyprus not so long ago but a bit bigger. It's going to happen, just a question of "when" not "if".
    • ZJ
      Zhaozhe J.
      25 July 2018 @ 22:24
      Well realistically, there is little opportunity for canadians to avoid this mess unless they are significantly rich because there's almost no retail institutions that offer services for banking and brokerages that are legitimately foreign. The only major banking services offered by foreign institutions are canadian subsidaries of a few european and asian banks. If I want US denominated accounts or brokerages services they often will have to go through the US subsidaries of the big 6 banks like BMO Harris bank. It seems like the average canadian is screwed because they cannot escape the Big 6 banks. However the bail ins specifically state deposits are not convertible into bank shares, however how long it will take to get money out of the CDIC is another matter.
    • DR
      David R.
      26 July 2018 @ 10:12
      Zhaozhe you can do two things to protect yourself without having to be rich. One, you can arrange to have your investment shares (for larger companies) issued to you in share certificate form or kept by the company in direct registration form. This bypasses all custodianship of the banks, financial system and brokers in which they "hold" your investments in "street name" basis, but legally "your" investments belong to them and all you have is an unsecured debt claim against your FI or broker, which will likely be worthless in a systemic event. Two, you can open a brokerage account overseas without being rich such as at Saxo in Europe or Phillip Capital Singapore. In singapore, your holdings are kept at CDP a central depository, not with the bank/broker and not in "street name" form as described above, like in North America. Ask the former customers at Lehmann a decade ago or more recently MF Global etc plus a small one in Canada (I forget its name) how the latter arrangement worked out for them (they lost almost everything). The brokerage industry will push back hard when you try to go direct and protect yourself, but you're entitled and it's definitely doable and it's infinitely safer.
    • ZJ
      Zhaozhe J.
      29 July 2018 @ 02:43
      David, your over complicating things. There's nothing stopping me from going to a bullion dealer in any major city in canada and buying some hard assets.
  • TN
    Thomas N.
    26 July 2018 @ 02:09
    As a Canadian, I feel I need to toss my two cents (or two loonies) in here. Firstly in regards to the trade idea itself, long USD/CAD right now makes some sense. I can agree with that on a momentum basis, I can agree based on NAFTA risk or global growth (Chinese growth) slowdown. I cannot agree for the reasons given in the trade idea and I feel his statements were painting Canada with a very broad brush in terms of two major metropolitan centres (Vancouver & Toronto). Trust me, there's lots of great deals for real estate in Canada. Also, the legislation put in place to disincentivize foreign buyers also included measures for stricter mortgage qualifications, therefore creating a more stable, higher quality loan environment that will have a very subdued "housing crisis" outside of a potential price correction in those two centres. Trust me, this isn't 2008 sub-prime on repeat. Secondly, I need to reply to some of the comments which I find to be alarmist and hyperbolic, especially in regards to David R's comments. I'm sorry David, but I find your comments to be misleading. The BIS report (March 2018 quarterly, which can be found here is not claiming that our system is on fire. Of course we have elevated debt levels right now, but our indicators according to the report are just barely triggering "early warning indicators" that are designed to signal 3 years ahead, and we also still have household debt service ratios that are very much under control. This report also does not say anywhere that the "Canadian financial system as the second-weakest & riskiest in the world in 2018, with "high probability" of failure & collapse of its banking system. One of the worst countries in the world today, economically speaking." It does not rate a probability at all! Don't lie, David, it just makes you look bad. Tell me the page number this is on. If you dislike our "basket-case" of an economy so much, please just leave it alone. I'm sorry we offend you. But I'm not sorry that I'm Canadian. Hope you have a wonderful day
    • JM
      John M.
      26 July 2018 @ 05:23
      Its not just Toronto and Vancouver. Its BC lower mainland & Vancouver Island (average home price in Victoria, the capital of British Columbia is circa $850-900k - that's not as bad as Vancouver but that's not cheap either). Also its not just Toronto either but more like ~ 100 miles out of Toronto in any direction E,W,N, right? I don't think Canada's housing market will implode until we are in a bona fide recession (definitely not by December). But its quite a bubble and it will burst. Looking at BoC Banking and financial statistics Canadian mortgage market grew from $973B (April 2010) to $1,526B (March 2018). That a lot of growth and I think much of that is housing inflation!
    • DR
      David R.
      26 July 2018 @ 09:45
      Well I could reciprocate your personal attacks of "alarmist" by calling you "complacent", and therefore likely to go down with the sinking ship. But complacency is common in the lead to a collapse and reinforces its likelihood. And speaking of "lies", Canada's household debt levels in fact proportionately ranks among the highest/worst in the world, not fine nor "under control". Also the main Cdn province of Ontario (half the Cdn economy) in fact proportionately suffers the very worst sub-federal debt levels in the entire world. And now Toronto has regular terrorist attacks like 18 killed or severely injured including children yesterday by ISIS immigrants in "danforth" area, apparently admitted enmasse in 2015-16 without proper vetting over the strong objections of US Homeland Security, on top of another big attack recently in "etobicoke" part of toronto, a good area even. So nobody is safe in Toronto - and the headlines here in Asia are now accurately reporting this and fanning the flames of Asians' increasing aversion to Cdn real estate and falling Cdn real estate sales/prices particularly on a currency-adjusted basis. Subscribe to the pay-premium materials for Cdn banking details, not in the free press releases you describe, or see free issues of the Institutional Risk Analyst from NY professionally dedicated to banking including Canada but only on rare occasion as Canada is only 1% of the world and a steadily shrinking piece of the global economic pie. SHORT Canada and Cdn banks per McDonald (but needs longer I think like I stated below a couple days ago)... Easy peasy :)
    • DR
      David R.
      26 July 2018 @ 09:52
      ^ Clarification: Short Cdn banks in USD listed on NYSE (as I explained previously)
  • PB
    Pieter B.
    26 July 2018 @ 04:36
    Thanks a lot Larry & Justine!
  • JM
    John M.
    25 July 2018 @ 22:02
    Maybe by year end the Federal Reserve will abort it's rate hike cycle in which case the BoC can also stop raising rates without causing the CAD USD exchange rate to deteriorate, right?
  • DR
    David R.
    24 July 2018 @ 21:15
    Canada is indeed an economic basket case, circling the drain about to be flushed. The BIS (the central banks for central banks) just identified the Canadian financial system as the second-weakest & riskiest in the world in 2018, with "high probability" of failure & collapse of its banking system. One of the worst countries in the world today, economically speaking.
    • DW
      Daniel W.
      25 July 2018 @ 03:43
      how reliable is this info and what happens to credit card and other types of debt? is that going to be wiped out too? so the debt holder comes out flat?
    • DR
      David R.
      25 July 2018 @ 19:50
      Daniel, good questions, but who knows. Wanna bet the little guy (c/card holder and mortgage payer) still pays whilst the big guys (government and banks) renege on their liabilities (that includes your bank deposits and gov't benefits for the public, which of course aren't at all funded but rather are a pay-as-you-go ponzi scheme).
  • AE
    Alex E.
    25 July 2018 @ 02:52
    Just curious, what would compel all those Chinese housing buyers to sell their Canadian holdings and return them to a confiscatory regime like the Chinese Government? Granted, the Canadian Home Owner is leveraged but with interest rates going higher, most mortgage owners are holding their own given that NO borrower of mortgage money is able to have a mortgage which would cost more than 40% of their incomes. As well, ALL Canadian Banks are insured for their mortgages meaning that the CMHC (Insurance Company) takes the brunt of any housing whoopsie...But, maybe Mr. McDonald has a crystal ball that I don't have??? Maybe he sees something that I'm not seeing...
    • DR
      David R.
      25 July 2018 @ 18:38
      Alex, in fact Asian investors now view Canada as the "confiscatory regime" with its extremely high taxes, huge foreign buyer fees & surtaxes, 50% capital gains tax on foreigners, extremely weak & failing Cdn dollar (down 40-45% against many Asian currencies in recent years). Plus the 50% capital gains tax which was never collected, enforced or tracked until 2017 when the Cdn housing collapse began, no coincidence I'd guess. Being Asian based, I see that Asian investors most certainly wish to AVOID Canada, and most Asians invested in Canada want to sell OUT, as is clearly confirmed by international capital flows analysis showing net foreign investment fleeing Canada. A good setup for a crash that rapidly unwinds the foreigner-induced boom. As far as Chinese homebuyers, a stat shows they bought 1.8 million homes in booming southeast Asia this year, but virtually none in Canada. It smells like a collapse in the making, and Mr McDonald is by no means the only hedgie that is smelling it out. Probably a matter of timing so McDonald might be too early.
  • DV
    Dimitri V.
    25 July 2018 @ 05:46
    China just announced fiscal stimulus no?
  • BG
    Brandon G.
    25 July 2018 @ 02:11
    Would an unwinding of NAFTA or imposing of tariffs by the US have a material affect on the Canadian dollar compared to the forces of Chinese investment volatility and oil prices discussed in the video? I was surprised neither were addressed.
  • SM
    Sergio M.
    24 July 2018 @ 12:45
    USD?CAD has a hit if 1.46 so that would be a resistance level? I wonder if that's what he meant by his Profit Target?