The Globe and Mail reports in its Thursday, April 11, edition that fund manager Steve Eisman is predicting trouble for Canada's largest lenders. The Globe's Tim Kiladze and James Bradshaw write that Mr. Eisman worries that Canada's housing market is cooling quickly. He also fears the fallout from a sluggish economy. Because the Big Six banks dominate domestic lending, he expects they will suffer. It is a compelling story, but there are a number of holes in the thesis.
From afar, the statistics about Canadian debt are jarring. Household debt has risen to 179 per cent of disposable income. The bulk of that debt is from mortgages, and the majority of these loans are financed by the Big Six. So the banks look particularly vulnerable in any downturn.
However, the specifics about the market structure matter, and Hamilton Capital Partners manager Rob Wessel is pushing back against the short trade. The same is true for Australia, he argued, a country where the banking system closely resembles ours. He wrote, "While the housing story has not yet been fully written, we believe the ongoing corrections will remain orderly and that a 'big short' position in the Canadian and Australian banks will continue to be challenging."
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