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Canada's big banks have avoided the train wreck that has swept through much of the world's financial system. This week provided more examples, as the banks reported their results for the latest quarter.

Fred Lum/The Globe and Mail

Another investor is fessing up to shorting Canada's big and almost universally loved banks.

He's hedge fund manager Albert Friedberg, founder of Toronto's Friedberg Mercantile Group Ltd., who indicated in his latest quarterly report to clients that he has a short position on the banks as a kind of disaster insurance should global financial conditions worsen.

There was considerable buzz this past weekend after reports in The Globe and Mail that a small San Francisco-based hedge fund, Hyphen Partners LP, has staked 95 per cent of its assets on a bet that Canada's housing market is about to go bust and the banking sector is going to tumble.

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Mr. Friedberg, one of Canada's foremost currency and commodities experts, didn't reveal the size of his wager against the banks, nor which institutions he's shorting. He was travelling Tuesday and couldn't immediately be reached for comment.

An investor shorts a stock by selling shares borrowed from a broker, aiming to profit by buying them back later at a lower price. This is the reverse of the normal "long" transaction, in which an investor buys a stock, planning to sell it later at a higher price to book a profit. It's also possible to get similar "short" exposure through put options and other, more exotic, instruments.

The reason for the short sale is that Mr. Friedberg believes Canada, along with Australia, faces "an incipient housing bust of major proportions." He's also of the view that shares of the domestic banks are trading at overvalued levels. Judging by measures such as their market price to book value, Canadian bank stocks appear far dearer than those in the U.S. and Europe.

Still, Canadian banks are viewed as some of the best managed and most conservative in the world, in part because they came through the recent financial panic without needing a government rescue, unlike banks in the U.S., Britain, Ireland and elsewhere.

In addition, Canadian banks have a large part of the risk involved in mortgage lending to homeowners covered by taxpayers through insurance from federally owned Canada Mortgage and Housing Corp.

Mr. Friedberg is nervous about what lies ahead and said to clients that he is of two minds about how the global economy will evolve.

In one scenario, he sees the world muddling through, with a continuation of lacklustre economic growth, low consumer price inflation and rising asset price inflation in housing, along with "large official interventions to keep repeated mini-crises from exploding and exposing us to systemic risk. Such a scenario can last some time but is highly unlikely to go on for two more years."

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He worries more about a "nightmare scenario" in which the business collapse in southern Europe spreads to still-growing regions, throwing the global economy into a tailspin. This could lead to "generalized country defaults and nationalization of the major banks (wiping out shareholders, debtholders and large depositors) or, alternatively, asset inflation that runs out of control," prompting tighter monetary policy and higher interest rates that would threaten "fiscal blowouts" of highly indebted governments.

Given the two scenarios, Mr. Friedberg has taken positions that will prosper in the muddle-through outlook, including U.S. home builders and large-cap U.S. companies with strong balance sheets, among others.

In case things implode, he hopes to make money from gold and his shorts, which, besides the Canadian banks, include some U.S. technology stocks and positions in Brazil, India, Australia, Russia and Britain that he did not elaborate upon.

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