Juggling Dynamite

I’ve continuously pointed out the danger of asset bubbles because they commonly lead to a slippery slope of destructive behaviours, threatening the health and stability of individuals, businesses, and the economy.

After a dramatic wipeout in March 2020, stock prices rebounded into December 2021 before plunging into October 2022. Rebounding again, some sectors finally reclaimed their December 2021 high by January 2024; a few made a fresh high in early 2025, but that, too, was short-lived.

As of this morning, the widely held S&P 500 is -4% year over year and just 6.4% above its December 2021 peak. The tech-rich Nasdaq, which inspired so much mania, is -4.9% over the past year and -3.2% since November 2021.

Canada’s TSX, flat over the past year, is +5% since November 2021.

The economically sensitive small-cap S&P 600 index has fallen 27% since Trump’s election and is down 21% since November 2021.

In short, irrationally overvalued stock markets have performed as history promised, with a wild ride of volatility and miserably insufficient compensation.

Making returns even worse, participants have paid higher management and brokerage fees for the ‘risk-on’ experience, often while taking ill-advised withdrawal rates.

The bad news is that still-elevated valuations suggest further mean reversion is to come.

Continuing to take sober measurements and manage capital responsibly through full market cycles is mentally demanding, and can be unappreciated and mocked during bubbles. In a world full of bad financial advice and get-rich-quick schemes, it’s hard for the masses to steer clear.

Looking for fast-moving vehicles, many jump in with confident drunk drivers who have no brakes. It’s only after inevitable crashes that they see the harm.

I reviewed the setup for the current loss cycle in a Thoughtful Money video with Adam Taggart last November; see, Stocks are the most overvalued in 100 years.

It is never too late to learn from mistakes, but recovery requires enlightenment and resolve to make wiser choices. Yes, we can.

In March, the year-over-year change in new listings (yellow bars below) outpaced sales volumes (blue bars) in all major Canadian urban areas.
See Canada’s homebuyers wait out trade war fallout:

March saw more homebuyers retreating to the sidelines amid growing tariff threats—waiting to see what will happen to our economy next. This drove home resales down materially for a second straight time in many markets—reaching cyclically lows in southern Ontario, which is especially vulnerable to trade turbulence.

Several local real estate boards also reported weaker home prices in March including the Toronto region, Hamilton, Kitchener-Waterloo, Cambridge, Vancouver and Fraser Valley. Even in Calgary, prices flattened.

Prices are getting marked down, but relatively slowly, overall. Many properties are stuck in limbo while sellers hope for a return to the salad days of easy credit and bidding wars.

Property values are coming under pressure as inventories get more plentiful—stoking competition between sellers—while demand is skittish. Bargaining power has clearly shifted in the buyer’s favour in Vancouver, Fraser Valley, Toronto and other southern Ontario markets like Hamilton, Kitchener-Waterloo, St. Catharines, Niagara Falls and Windsor.

Data from Information Technology Systems Ontario (ITSO) and the Toronto Regional Real Estate Board (TRREB) shows that bidding activity on homes in the GTA largely seized up in March:

According to the report, approximately 20 per cent of GTA neighbourhoods with at least five sales were in overbidding territory in March, which is unchanged from February but down from 43 per cent just a year ago. On the other hand, the majority (73 per cent) remained in underbidding territory, with an additional seven percent at asking.

The 2024 Joe Debtor Canadian Consumer Solvency Study is available here; some takeaways:

Mortgage Renewals Financial stress among homeowners is expected to escalate due to higher mortgage renewal rates, potentially doubling the proportion of homeowner insolvencies to 8-10%.

Pre-Construction Market Stress: Struggles in the pre-construction condo market may contribute to rising real estate insolvencies as appraisals fall below original purchase prices. Investors can include any shortfall as an unsecured debt in a consumer or Division I proposal.

Regulatory Changes: New interest rate caps on high-interest lending may accelerate insolvencies by limiting access to emergency credit, a traditional stopgap for distressed individuals. The lack of short-term lending may pull many insolvencies forward.

This outlook highlights the many economic pressures burdening indebted Canadians, which we expect will continue to drive a substantial rise in insolvency filings in 2025.

Escalating financial stress among owners and lenders suggests downward pressure on property prices should continue.

Understanding that “defensive” equities offer little protection in bear markets is critical to meaningful capital protection. The table below (courtesy of Gary Shilling) shows what happened to different sectors and the S&P 500 index overall during past recessions.

Trying to hold through deep declines is hard; most people understandably panic after they have sustained big losses.  The final capitulation selling of all those who bought and held ‘high’ brings cycle bottoms, but that ‘deleveraging’ process typically takes 12 to 24 months to complete. We are currently just a few months into this downturn.

Proactive loss-avoidance requires steering clear or stepping away from bubbles before your capital implodes. We must be mature and sober enough to avoid/minimize our exposure to bubbles to miss out on the losses too.

As lovely as your investment adviser may be, the finance sector exists to sell products at every price and keep people holding the bag regardless of the risk-reward prospects for the individual client. Minimizing/avoiding losses takes counter-culture thinking and discipline, but it can be done with independence and a lot of focus.

As noted last week by insolvency counsellor Scott Terrio: “In matters of personal finance, avoidance is a huge protection, but it takes proactive decision-making and good advice. And there seems to be less and less good advice either on the internet or in terms of peer pressure. Avoidability.”

The cycle-savvy insights below are worthwhile.

DoubleLine CEO-CIO and Founder Jeffrey Gundlach joins CNBC’s Closing Bell with Scott Wapner on April 7, 2025, to discuss the recent reciprocal tariffs announced by President Donald Trump, emphasizing the significant widening of credit market spreads. He also expresses concern about the potential for leveraged investors to go bankrupt, stating, “This type of thing usually ends with forced liquidations.” Mr. Gundlach suggests maintaining a defensive position and holding cash due to expected continued volatility. In addition, he highlights rising recession probabilities, the Federal Reserve’s challenges in balancing inflation and recession risks, and the potential impact of tariffs on foreign investment in the U.S. Here is a direct video link.