Juggling Dynamite

As the US and Canadian central banks declined to offer monetary easing yesterday, consumer confidence measures are already below the levels recorded in the past nine recessions, including the periods surrounding 9/11, the 2008 financial crisis, and the 2020 pandemic.

A raft of recent data shows households under increasing financial stress across all income levels.

Year-to-date consumer spending data, combined with rising debt delinquencies, suggest the post-pandemic model of economic growth fueled by upper-income purchases of big-ticket items like cars, houses and vacations is coming under strain. See: Even top income earners are falling behind on credit card and car payments.

Spending in the first quarter was the weakest since the onset of the pandemic, and more recent monthly numbers indicated ongoing caution in discretionary categories like recreation services, air transportation and accommodations — all of which have registered outright declines this year.

Gucci owner Kering reported yesterday that Gucci sales were 25% lower year on year.

Procter & Gamble, a long-recognized bellwether for the health of the U.S. consumer economy, says consumers are delaying purchases and shopping less frequently. See, American shoppers are slowing down.

Delinquencies on credit card and auto loan debts from those making at least $150,000 annually have jumped almost 20% over the last two years, and faster than for middle- and lower-income borrowers (VantageScore data).

A recent Federal Reserve Bank of St. Louis study found the share of people making late card payments in the highest-income zip codes has risen twice as much over the last year as in the lowest-income ones.

Fifty-eight percent of Americans surveyed expect higher unemployment in the next twelve months, the highest since 2008, and a level only seen during past recessions. Those looking for incomes over 100k annually are reporting the least optimism on new job prospects since the pandemic (chart below since 2013).

Last year, a record of nearly 5.0% of workers in 401(k) plans took a hardship distribution for financial emergencies, up from a pre-pandemic average of about 2.0% (Vanguard Group data).

About 40% of the working population isn’t saving enough to maintain their lifestyle in retirement. The current personal savings rate of 4.5% in America 5.7% in Canada needs to rise significantly, and that means less per capita consumption spending in developed economies that have become dependent on it for the bulk of economic growth.

Speculative trading indicators measure froth in financial markets and indicate when speculators—rather than fundamental investors—are dominating market behavior.

As shown below, since 1995, the rebound in speculative measures over the past three months has been one of the sharpest on record, and in rare company with now infamous bubble tops in 1999-2000 and 2021.
The composite indicator includes:

1. Options volume skew: A high call option volume relative to puts suggests speculative fervour. Additionally, trading in single-stock options, especially those that expire the same day, provides another input.

Both have skyrocketed of late, with retail trading—especially in zero-day-to-expiration (0DTE) index options — now accounting for over 61% of total S&P 500 options volume, averaging around 2.1 million contracts daily (chart below since 2020). See: Meme stock surge underlines market froth, mostly centred on retail investors.2. Margin debt: Rapid increases in borrowed money to buy stocks often coincide with speculative peaks. As shown below, since 1997, margin use has spiked year-to-date, similar to past tops in 2000, 2007 and 2021.

3. Retail trading volume/penny stock activity: surging activity and high turnover in low-quality or meme stocks, e.g. rewatch the 2023 movie “Dumb Money” for a refresher on how this goes.

Speculative penny stocks have exploded higher. Of the 33 stocks in the Russell 3000 that have tripled in price since April 6, only six have generated profits over the past year.

Investment banks are making off like bandits with trading revenues up 17% in the second quarter compared to the same period last year.

4. SPAC issuance and performance: explosive Special Purpose Acquisition Company (SPAC) IPO activity and extreme valuations often mark speculative excess (e.g., in 2020–2021).

Year-to-date, approximately 74 SPAC IPOs have priced, accounting for 69% of all U.S. IPOs by count and 48% by total proceeds (SPAC and US IPO activity).

5. Crypto prices and Altcoin frenzy: Parabolic moves in crypto and other ‘alternative’ assets coincide with risk-on speculative surges in broader markets.

Crypto prices are back to all-time highs, and crypto funds took in a record $12.2 billion over the past month.

6. Short squeeze and “most shorted” stock rallies: When the most shorted stocks rise the most, it’s often due to speculators coordinating squeezes, not fundamentals.

The Goldman Sachs Most Shorted Rolling Index, an equal-weighted basket of the 50 highest short-interest names in the Russell 3000 Index, is up 13% this month, compared to a nearly 2% gain for the Russell 3000 in that time, and is up over 60% since the low for the year in April.

7. Valuation Multiples (e.g., 10x+ EV/Sales)

Today, the share of global stocks trading above a 10x enterprise value/sales is the highest ever recorded (shown below, since 1999).8. Social media and Google trends: Spikes in searches for “how to buy stocks,” “options trading,” or specific meme stocks indicate heightened speculative interest.

According to Chat GPT, search activity for “how to buy stocks” and “options trading” is currently higher than typical historical levels, though not yet at prior extremes.

9. Citi Panic/Euphoria Index: The Citi model, incorporating AAII and II with other investor surveys, is a sentiment indicator that historically signals speculative euphoria above a certain threshold.

Recent sentiment readings are back in ‘euphoria’ territory (as shown below via Yahoo Finance and ISABELNET.com in early July).Corporate credit is also bubbling along for the ride with high yield spreads just 284 basis points above similar dated Treasuries–about half of their 525 basis point long run average spread. Investment-grade corporate yields (BB-rated and above) are just 167 basis points over similar dated Treasuries versus a long-term average spread of 346 basis points.

It’s not just retail gone wild; career risk around missing out has driven global fund managers to chase the crowd. Professionals are now holding a meagre 3.9% in cash on hand (shown below since 1999). This leaves little to fund cash redemption requests or buying opportunities when asset prices next crash.

History suggests that doing the opposite of the masses is a financial superpower over time.

Being risk-light and cash-heavy today positions us to be among the few able to capitalize on exceptional buying opportunities when the current euphoria inevitably crashes again. In the immortal words of Charlie Munger:

 “When everybody goes insane, staying sane is your competitive advantage.”

Hoisington Management’s 2025 Second Quarter Review and Outlook is available here.

At his June 18 press conference, Federal Reserve Chairman Jerome Powell referred to tariffs as inflationary. Hoisington points out that this is only the first-round effect:

Second, third, and later-round effects also come into play, causing the quantity demanded and price to decrease for the goods subjected to tariffs. When retaliators respond by swiftly raising tariffs, as has been the case historically as well as this year, the micro-demand curves in the country that initiated the tariff increase, referred to as the “instigator country,” shift inward, and the benefit of hiking tariffs is lost. A substantial fall in the quantity demanded for the goods of export industries at home and abroad leads to a contraction in their total revenues. Soon, firms must make the difficult decision of whether to raise prices and lose market share or cut profit margins to maintain their market share. In addition, they will need to reduce their demand for the factors of production (labor, natural resources, and capital). These micro effects quickly domino into the macro-economy.

Less global trade means fewer US dollars being sent into the hands of foreigners who owe trillions in US dollars.

Neither Treasury yields nor risk assets, near cycle highs, are priced for a persistent downturn in economic activity and retreating dollar liquidity.

Hoisington concludes that the Fed will need to ease monetary policy to try to offset the deleterious effects of tariffs and a worsening debt overhang:

While inflation will likely rise over the near term it will be temporary. The far more critical consideration is the coming contraction in global economic activity. This environment is very attractive for long horizon investors in long-term Treasury bonds.