Jared Dillian is the editor and publisher of The Daily Dirtnap, investment strategist at Mauldin Economics, and the author of "Street Freak" and "All the Evil of This World." He may have a stake in the areas he writes about. Read more opinion LISTEN TO ARTICLE 4:14 SHARE THIS ARTICLE Share Tweet Post Email

Photographer: Derek Leung/Getty Images Photographer: Derek Leung/Getty Images

Canada has been a primary target for short sellers since 2013. The principal reasons are the country’s very expensive housing, particularly in Toronto and Vancouver, and consumer debt levels that are among the highest in the world. Canada also has an expansive private mortgage market that supplies credit when banks won’t. It is hard to argue with the vulnerabilities. And yet the Canadian housing market hasn’t collapsed.

I have been a very vocal short seller of Canada, and I am not ready to declare the trade officially over even though the stock market has reached new highs and the local currency has strengthened. But I do acknowledge the big reason why the trade hasn’t worked out as planned: immigration.

Canada has a very liberal immigration policy that doesn’t seem to be as controversial as it would be in the U.S. Canada allows 250,000 to 300,000 immigrants to enter the country legally every year, which is about 1% of the population. No matter where you go in the country, society is exceptionally diverse. Complaints like those recently from hockey commentator Don Cherry are pretty rare. Immigration works, and it’s a huge economic engine. In simplest terms, gross domestic product is output, and if you have more people working at a constant level of productivity, you have more output.

Sure, Canada has a few economic issues besides a heated housing market. Its most important industry, energy, is in a sort of perma-recession. The government refuses to allow the construction of pipelines, and Prime Minister Justin Trudeau’s carbon taxes are a drag on growth. Still, population growth—mostly through immigration—is strong and have made up for those negatives.

Various economic studies have shown that countries where the population is declining suffer from low growth and low inflation. Conversely, those with growing populations have faster growth and positive inflation. The economic riddle that is Japan is pretty easy to figure out: deflation won’t reverse until the population decline reverses. Japan’s fertility has declined for cultural and technological reasons. If Japan continues to restrict immigration, it will continue to experience deflation, no matter how much currency they print. Demographics are the primary driver of inflation and interest rates, and nothing else.

Attracting talent from around the world should be a top priority for just about any country. It has pretty much prevented Canada from doing lasting economic harm to itself after some questionable decision-making. Immigration alone is the primary reason that the famed Canada housing short trade hasn’t worked. The number of people in Canada rose 1.4% in July from a year earlier, the biggest increase since 1990 and the fastest growth among the Group of Seven countries, according to Bloomberg News.

Canada’s consumer debt problem is a different issue altogether. Canadians have a comfort level with debt that Americans no longer do, so they never really deleveraged following the global financial crisis. As for real estate, it was an obsession in Canada for a while, and I still hear crazy stories, though most of the madness seemed to have happened in 2017, when Home Capital Group needed a bailout from Warren Buffett, and Pitbull and Tony Robbins were hawking properties at something called the Real Estate Wealth Expo in Toronto. Don’t forget the money from China flowing into West Vancouver houses for various reasons.

For a while, people were of the belief that the Bank of Canada was going to boost interest rates and pop the housing bubble, but now it seems like Governor Stephen Poloz is acknowledging the risks to the Canadian economy, or at least realizes that he can’t have too much an interest rate differential with the U.S. If the central bank cuts rates, it is unlikely housing will go down.

This has been going on for more than six years. It is expensive to finance a losing trade for six years. You either have to declare the idea a failure, or put it in the “too hard” pile. And given that correlations across countries is pretty high, the downturn in Canada will probably be synchronous with the U.S. and the rest of the world, so it’s all the same trade.

There are still risks. Debt is still high, and a second Trudeau term is not going to make things any easier for the Albertans. Secession is being discussed openly. But population growth can cover up a lot of mistakes. I’m still not crazy about Canada, but I think any short seller at this point has to admit that this is going to happen on a timeline that is too long for most people to endure.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.