Juggling Dynamite

Canadians living at the financial edge may be pushed to the brink when the taxman comes calling, according to a new study from licensed insolvency trustee Hoyes, Michalos & Associates Inc (report available here).

According to the firm’s annual Joe Debtor study, tax obligations returned as the primary driver of consumer insolvencies in 2021 as the pandemic strained household balance sheets, and the insolvency experts believe there’s more pain ahead as the world returns to a more normal state.

“We believe that this increase in tax insolvencies is the tip of the iceberg,” the firm said in a release, forecasting that stronger action from the Canada Revenue Agency (CRA), an end to interest relief on COVID tax obligations, and the upcoming tax filing deadline will lead to an increase in insolvencies.  Here is a direct video link.

This morning, the spread between the ten and two-year U.S Treasury yields has narrowed to just .405%, and oil (WTI) has moved above $92.

As shown below in my partner Cory Venable’s chart since 1990, when the ratio of these two financial indicators fell to zero (yields compressing faster than oil price is rising) in 1990, 2000, 2007 and 2020, a bear market and recession were in process.

So far, the Dow is off 5.6% from the highs (transports are -12.0%), the S&P 500 is -7.8%. Ex-energy and financials, the S&P 500 is near -10%.

The TSX is flat thanks to its 45% concentration in late-cycle holdouts financials and petrochemicals. Word to the wise, this late-cycle outperformance is not long for this world:  petrochemicals, commodities, materials, tech, and financials are all the worst-performing sectors in the slowing growth and inflation phase now unfolding. The Nasdaq is -14%, and the economically sensitive Russell 2000 is -16.9%–the same level it was at the start of 2021.

Meanwhile, retail investors plowed a record $34.1 billion into U.S. equity funds last week, further reducing their already historically minuscule allocations to bonds and cash. Global fund flows show similar trends.

At the onset of the next cyclical bear market of historic proportions, retail is once more long on debt and overvalued assets but short on dry powder.

Doing the opposite of the crowd is a critical component of longer-term financial success and investment optionality.

With more than 70% of its 3600 c0nstituent companies down more than 20% from their highs, the sentiment-leading NASDAQ index is now trading below its 50-, 100–, and 200-day moving averages for the first time since March 2020.

The 2020 market plunge was abrupt but too short and shallow to correct for cyclical extremes in valuations and animal spirits.  A retest was always coming.  The Federal Reserve-inspired market excesses of the last two years have been breathtaking.  If the recent weakness is the lasting trend change, the downside prospects are also spectacular.

Lance Roberts lays out the reality from present levels in A 50% Decline Will Only be a Correction:

Every bear market in history has an initial decline, a reflexive rally, then a protracted decline which reverts market excesses. Investors never know where they are in the process until the rally’s completion from the initial fall.

…When you realize that a 50-percent decline in prices would still maintain the “bullish trend” of the market, it just shows how exacerbated markets are due to a decade of monetary interventions.

Lance offers the 40,000-foot view in this chart of the S&P exponential growth trend (green line) versus price (black) since 1900 and notes that other lesser periods of overshoot above-trend have always been followed by very long periods of no returns.  Just the facts, folks.