Less than a week after declaring that China’s economy is headed for an economic “day of reckoning” thanks to its twin asset bubbles (real estate and equity), short-seller Carson Block said he’s starting to believe there are “real problems with Canada”, particularly the country’s dangerously overvalued housing market. Block discussed Canada's housing market with a Bloomberg reporter who called him for comment after shares of Element Fleet Management, a Toronto-based leasing company, plunged 38% on unfounded speculation that the famed short-seller had chosen the company as his next target. Shares of troubled home lender Home Capital Group also dipped in early trade. Block told Bloomberg that the action in those two stocks suggests Canadians are (rightfully) nervous about soaring real estate prices and household debt. “I’m starting to believe that there could be some real problems with Canada,”
Though Block said he hadn’t heard of Element before Wednesday, the run on Home Capital Group’s deposits in recent weeks suggests that “investors denial is just starting to crack.” HCG is being drained of assets at an unprecedented pace, already 94% of retail deposits have fled the troubled lender - and the company has erased more than half of its market capitalization since a Canadian regulator accused it five weeks ago of misleading investors over an internal probe of fraudulent mortgage loan applications, a practice that bears some resemblance to US mortgage lenders’ reliance on “liar loans,” which helped inflate the subprime bubble...
“Particularly given what happened to Home Capital in recent weeks I kind of wonder if Canadian investors are really nervous about the stuff that they’re holding and that’s why there was so much sensitivity around Element this morning," Block said.
“When I see a reaction like we saw to a stock that I had never heard of because people were evidently concerned that we were about to short it, that tells me that maybe we’re at a point in Canada where investor denial is just starting to crack,” he said.
Block told Bloomberg that Canada’s real estate market has “been pushed by foreign money” to the kind of “buying frenzy” the U.S. experienced a decade ago.
A frenzy of buying by wealthy Chinese nationals seeking to store their wealth outside of China has helped push Canadian home prices in certain markets to levels that are obviously unsustainable and well beyond the means of most Canadian citizens.
Even Bank of Canada Governor Stephen Poloz acknowledged as much earlier this month when he remarked that Toronto home prices “were not sustainable” while answering questions following a speech in Mexico City...
Block told Bloomberg about a visit to Toronto in 2011, when he said he was stunned to see posters throughout Toronto’s financial district encouraging people to borrow aggressively for consumption.
“I was thinking, my God, didn’t we just go through this in the U.S.?”
Meanwhile, there is a prevailing sense in Canada that the situation is different, and the collapse experienced by the U.S. in 2008 couldn’t happen here, he told Bloomberg.
“Every time you hear that, you know that it can happen, and it’s going to.”
Block concluded ominously.
"The conditions seem to exist for there to be some pain inflicted on the markets. That suggests that Canada is the hottest market in the world for short sellers; if not, it could be."
After a more than five-year break from shorting Canadian companies, Block announced Monday that he is shorting Asanko Mining Inc, saying that production problems at the company's largest mine will likely force the company into bankruptcy in 2018...
True to form, Block explained his reasoning for shorting the stock in a 43-page research report published Wednesday, then summarized its contents during an appearance on Canada’s Business News Network. The notorious short seller believes the Vancouver-based mining company will run out of money in 2018 as it struggles to make urgent repairs at its main asset, the Ghana-based Nkran gold mine, while also serving its $165 million debt load.
“We think Asanko is on its way to zero,” Block said during the interview....