Juggling Dynamite

Danielle was a guest with Jim Goddard on Talk Digital Network talking about recent developments in the world economy and markets.  You can listen to an audio clip of the segment here.

As mentioned, while the NASDAQ index (top line below since 1999) is off just 6% from its November high, internally, 50% of its constituent companies have already fallen 40% from their recent highs (bottom in blue).  At no other point since the dot-com bubble bursting has so many companies fallen like this while the index itself was so close to a peak.  A leverage train wreck is once more in motion.

Those without the ability or willingness to lose capital and wait years hoping to recover have no business owning stocks and risky debts (including funds and ETFs of them), never mind cryptocurrencies, SPACs, and the myriad of other Ponzi-like instruments. And yet, individuals, asset managers and speculators have never been more fully risk-exposed.

Last month, cash held by portfolio managers was less than 2%, while the percentage of cash in private portfolios touched 10.8%, besting the previous cycle low of 11% cash at the 2007 stock market top (Bank of America data).

As the price of risk has rebounded since March 2020, misplaced confidence among vulnerable, cash-light participants has become deeply entrenched.   Record-high property and stock markets have inflated household net worth to a record 790% of the average household’s disposable income—and far beyond the asset bubble peaks of 2000 and 2008 (Rosenberg Research).

American households alone are now holding $43 trillion of equities, nearly twice the size of the nation’s GDP. The stock market represents 40% of their entire balance sheet (which includes real estate equity) compared with 18% as the long-term norm.

The presently elevated equity exposure (even without leverage) means that just a modest 20% drop in equity markets will hit household balance sheets as hard as a 44% bear market would have in the past.  And a 20% market decline would be an extremely modest giveback following the excesses of the past two years. As shown below in my partner Cory Venable’s chart of the S&P 500 since 1997, a 65% decline would be more consistent with mean reversion norms from present extremes.

The good news is that Canada’s TSX has inflated less than the S&P 500 over the past decade, and so its downside from here is perhaps a more muted -50%.
At the same time, household debt and margin debt borrowed against financial portfolios begin 2022 at cycle highs, and leverage further magnifies the impact of drawdowns. Add in the probability of some mean reversion in home prices, and the net effect will be devastating for many. Balance sheet recessions are the worst kind because they hurt not only incomes/revenues but also the savings/equity their owners will need as a backup.

As octogenarian investor Jeremy Grantham has observed from decades of sheepherding billions through complete market cycles: “sooner or later, you will have made money to have sidestepped the bubble phase.”

Finally, thanks to Tesla’s leadership, all of the world’s major vehicle companies are racing to evolve to cleaner technology that is much more energy-efficient and cheaper to run for owners.  See Ford plans to nearly double production of its new all-electric F-150 Lightning pickup by mid-2023:

The increase is a positive sign of demand for the F-150 Lightning as well as electric vehicles in general but also shows Ford significantly underestimated demand for the truck, causing it to now scramble to boost manufacturing of it. This is the second time Ford has said it plans to double production of the vehicle, which is due out in the spring. Initial output was set for about 40,000 units.

“The reception of this vehicle has been absolutely incredible,” Kumar Galhotra, Ford president of the Americas & international markets, said Tuesday on CNBC’s “Squawk Box.”

Electric vehicles that go as far as a tank of gas on one charge are the final death blow for ICE vehicles, and smarter tech is just getting started here. Plant-based and recycled materials for interiors are the new standard too. See Daimler’s concept car has over 621 miles of range and solar tech on roof:

Daimler has released details of a concept electric vehicle which uses solar technology and bio-based materials, with the German automotive giant saying it has a range of over 1,000 kilometers (around 621 miles) on one charge.  The Vision EQXX has 117 roof-based solar cells — the idea is that they can help to boost the car’s range — while the vehicle’s interior incorporates materials including a leather alternative called Mylo.  Mylo is produced using mycelium, which Daimler described as being “the underground rootlike structure of mushrooms.”