Juggling Dynamite

Institutional exposure to equities is at its highest level since November 2007, and American households’ allocation to stocks has surpassed the 2000 tech-bubble highs. Trading volume on U.S. stock exchanges last week reclaimed last April’s record high.

At the same time, as debt prices have soared, the yield reward that investors are receiving from owning corporate bonds is at its lowest since 1998.

The good news is that the majority of risk assets have rebounded from April’s crash and ripped higher year-to-date.

The bad news is that the more they continue, the more brutal the subsequent sell-off is likely to be — that’s the math.

Of course, not everyone is helplessly long risk securities. A few have preserved and increased their fortunes over time by patiently waiting for more durable and rational opportunities to act on. See, Black Swan Manager Sees Huge Rally, Then 1929-Style Crash:

“I’m the crash guy—I remain the crash guy,” says Mark Spitznagel, who earned $1 billion in a single day for his clients during 2015’s “Flash Crash.” A protégé of “Black Swan” author Nassim Nicholas Taleb, his hedge fund, Universa Investments, also scored major gains when Lehman collapsed and when Covid-19 sparked a meltdown.

The alarming part of Spitznagel’s current outlook is that he sees conditions akin to 1929, the year of the Wall Street crash. The silver lining for those hoping the bull-market music will keep playing a while longer: He thinks this is more like the early part of 1929 when stocks added significantly to their Roaring ’20s gains.

In fact, since 1980, the S&P 500 has returned an above-trend 26% annualized in the 12 months preceding the start of each bear market (shown below).

Booming markets tend to attract capital with increasingly wild abandon. The bad news is that subsequent bear markets take back years of capital gains and more. “The markets are perverse,” says Spitznagel. “They exist to screw people.”

Last week, Equifax Canada reported that 286,000 businesses in this country missed a loan payment last quarter.

In the Greater Toronto Area, the number of mortgage lenders repossessing homes and selling them has climbed roughly 60 per cent year over year.

Ninety-day-plus mortgage delinquency rates are climbing in Greater Toronto, Greater Vancouver and Canada generally, according to data from RBC.

Scott Terrio, an insolvency expert, recently told The Globe and Mail that he is talking to homeowners who are “teachers, firefighters, cops. Two years ago, I was doing two to five meetings a day, now I’m doing 10,” said Mr. Terrio.

The debt-fueled housing boom from 2015 to 2022 is costing Canada a fortune. See Debt is Catching Up With Canadians:

It is a personal one for people who dreamed too big and extended themselves too far. They are now reckoning with the consequences of going all in on real estate during the early 2020s boom – crushed credit ratings, legal action, consumer proposals, powers of sale and bankruptcy.

We are seeing the fear of missing out giving way to the fear of losing everything. The Financial Consumer Agency of Canada’s five-year plan to improve financial literacy, which launched in 2021 and cost taxpayers millions over the years, can’t compete with the stickiest financial lessons that hard times will teach.

Canada won top prize at the International Monetary Fund last year for the most household debt as a percentage of GDP in the G7, surpassing with ease the U.S., the United Kingdom and Germany. Italian households carry about a third of the household debt to GDP that Canadians do. In laymen’s terms, Canada is the most vulnerable G7 country to an economic recession and falling housing markets.

The segment below is a worthwhile update on property and mortgage trends in the Greater Toronto Area and beyond.

Toronto home prices have returned to pre-pandemic levels, but financial stress is mounting for homeowners. This video analyzes the surge in power of sale listings, which have risen by 60% year-over-year, and explains the underlying dynamics, from interest rate hikes to rising unemployment. Lenders, particularly individual private lenders, are more frequently initiating power of sales, contributing to a growing inventory of distressed properties. The video also delves into the renewal wall, the impact on the broader market, and the potential for financial contagion. Viewers will learn how to identify these distressed listings and understand the legal process behind power of sale in Canada. With predictions showing the peak of distress occurring around late 2026 or early 2027, this comprehensive analysis offers crucial insights for both buyers and sellers navigating this challenging real estate landscape. Here is a direct video link.

At the end of June 2025, the Global Exchange Traded Fund (ETF) industry had 14,390 products, with 28,447 listings, from 876 providers on 81 exchanges in 63 countries (source: ETFGI). As shown below, since 2007, the $16.99 trillion USD of global market value was 5.7x the $2.948 Tn in 2015 and 20x the $831 billion of 2007.

In the first half of 2025, global ETF assets increased 14.5% on robust monthly inflows totalling $897.65 billion in June alone–the highest on record and the 73rd consecutive month of net inflows. iShares Core S&P 500 ETF (IVV US) gathered $13.81 Bn, the largest individual net inflow.

The top 10 Exchange Traded Products (ETPs) by net new assets collectively gathered $3.13 billion in June–8 of the 10 in the precious metals space (see table below). iShares Physical Gold ETC (SGLN LN) gathered $680.44 Mn, the largest individual net inflow.

A world of heavily promoted investment products holding similar assets in different marketing wrappers offers much less diversity than imagined. Three companies, Vanguard Group, BlackRock Inc. (iShares owner), and State Street Corp., now collectively control more than 75% of US ETF assets.

Nearly 60% of the capital in US markets has been passive (as shown below since 2009), characterized by automated buying, without anyone conducting investment analysis or selection. So much for the timeless adage that we should only invest in things we understand.

Chartered Financial Analyst Michael Green has been a leading voice on the reality and dangers of passive flows. He updates on the latest trends in the segment below, noting that most market participants are utterly unaware of what’s happening with their money.

Michael Green of Simplify Asset Management explains how passive investing distorts markets and will create a bubble. He also discusses how the Pension Protection Act further spurred passive investments, especially since vast majority of people have ‘absolutely no idea’ what is happening with their retirement funds. Here is a direct video link.

As we have seen repeatedly, passive inflows fuel risk-complacency and extreme over-valuations, but they do not hold market prices up permanently. If passive flows were crash protection, we would not have seen recurring market freefalls in recent years, even with employment near-cycle highs.

Market sentiment turns at the margins. Inflows continue until job losses rise enough to curtail and reverse them. Job losses are increasing now. There’s also the 43% of assets that active funds and trend-following managers direct, along with share buyback programs that typically retreat as prices fall.

Concentrated masses with little cash and the same long-duration assets magnify downside risk and the need to sell the same holdings simultaneously. We’ve seen this film before.