Juggling Dynamite

Margin debt (people borrowing against their security portfolios) has now topped $1 trillion for the first time in history, +25% over the past year alone. Other, lesser, margin-abuse peaks occurred before major bear markets/recessions (grey bars below) since 1995, courtesy of Rosenberg Research.

Among professionals, dry powder is also in short supply. Trend-chasing portfolio manglers managers are all in with portfolio cash ratios at a record low of just 1.4%.

The tech-heavy NASDAQ 100 index is today priced at 105% of the US economy (GDP) for the first time ever (shown below since 1990).It is not just the Nasdaq index that’s grossly inflated.

Shopify is back to being the largest weight in Canada’s TSX composite. Three tech stocks–Nvidia, Microsoft and Apple–make up a record 20% of the S&P 500 market capitalization, and the top ten most expensive account for 40%, versus the prior mania record of 27% at the 2000 cycle top.

The historically informative Shiller price-to-earnings ratio for the S&P 500 at 38.8x is a range only seen briefly in the stock market euphoria of 2000 and late 2021 (below since 1975 courtesy of www.multpl.com).

Within the S&P 500, the technology sector’s price-to-sales ratio hit an all-time high of 10x (black line below since 1990), compared with 7.8x at the 2000 tech bubble top and a median ex-tech ratio of 3x (gold line below).  Paying 10x sales for a singular company has long been recognized as crazy, for a whole index? Financially suicidal.

The Wilshire 5000 Total Market Index (Wilshire 5000) is a broad U.S. stock market index designed to measure the performance of nearly the entire investable U.S. equity market. It is currently trading at an all-time high of 212% of US GDP, compared with 172% in February 2021, 137% in March 2000 and a long-term average of 155%. Warren Buffett has famously said that a market-to-GDP valuation over 140% is dangerous.

At the same time, junk debt (with a credit quality less than investment grade) is priced so high as to have the lowest yield spread over similar dated Treasuries since 2021 and 2007.

Market cycles are a full circle, and current valuation levels suggest return-free risk from here. It’s a fantasy to think that the valuation-insensitive capital that’s in today will get out intact.

All’s well that ends well. We can either look foolish by shielding capital and minimizing exposure to irrational exuberance or holding on as prices mean-revert lower once more.  The former can feel hard for a while, the latter tends to leave lasting financial, emotional and psychological harm. Consciously or not, we each pick our poison.

As policymakers focus on tariffs, bursting real estate bubbles pose a significantly larger threat in terms of relative economic impact, and that’s now happening in several major economies simultaneously. Homes are the foundation of the household balance sheet and assets in the banking system.

A 2025 Bank of Montreal report, “A Long Way Home”, concurs with our analysis that Canada’s current real estate downturn—often a bellwether for broader North American housing trends—is the most significant since the 1980s correction that lasted six years from peak to trough. Given the still-persistent lack of affordability, the current housing downturn, which began in February 2022, could last longer than most expect.

Canada lost 40,800 jobs in July—the most significant decline since January 2022—and just over half of those lost were in construction (–22,000).

The ongoing housing downturn is the biggest story, and it’s getting little coverage. No doubt, there is financial pain unfolding, but longer-term, much lower home prices are a massive part of the economic rebalancing and revitalization needed.

Vancouver developers are sitting on roughly 13,000 unsold condos, a record high. This is up from roughly 5000 units during the pandemic era. No wise developer is going to start new projects until this backlog clears, hence the cries for removing the foreign buyer ban. There were just 1300 condos sold in the Toronto Real Estate market in Q2, Urbanation calls it a collapse. Rental construction surging in Calgary which will push rents lower. Here is a direct video link.

Similar trends are unfolding in major American centers, too.

Condo prices are dropping across the U.S. as HOA fees skyrocket and condo owners look to sell before the drop gets worse. Condo prices are now down over 20% in markets such as Oakland, Austin, and St. Petersburg, and now they’re even dropping in Nashville. Access condo and rental market data at www.reventure.app. Could this condo correction be a signal of an impending housing market downturn? And when will it be a good time to buy a condo? In a market like Nashville, the rents for apartments are well below the cost of buying a condo, suggesting that the downturn will continue. The last time we saw condo inventory this high on the U.S. Condo Market was 2011, the end of the last housing market downturn.  Here is a direct video link.

Last night at midnight, goods from more than 60 countries and the European Union became subject to tariff rates of 10% or higher. Products from the EU, Japan and South Korea are taxed at 15%, while imports from Taiwan, Vietnam and Bangladesh are taxed at 20%. See the full list of U.S tariffs in place around the world.

The White House says that the onset of tariffs provides economic clarity as companies understand the direction the U.S. is headed, allowing them to ramp up new investments and jump-start hiring in ways that can rebalance America as a manufacturing power. That is the hope.

But tariffs are taxes that the private sector pays, lowering profit margins and demand. The risk is that these sharply higher trade taxes will erode an already waning global economy.

Backward revisions show that hiring has been stalling for months, inflationary pressures rising for some goods, while key housing markets are swamped with new listings, few buyers and falling prices. No asset matters more to household balance sheets than home values; that’s why housing downturns have traditionally led the harshest economic contractions.

Risk markets have been trading on eternal optimism and record-high valuations for so long that believers have declared them independent of economic activity. Indefinitely? That would be a first.

I am old enough to remember the period from February to April 9, 2025, when Trump’s original 10% baseline tariff and mostly paused reciprocal tariffs were enough to spark a heart attack in financial markets. Today, the baseline tariff remains active, and reciprocal tariffs have resumed, with significant increases, especially a 35% tariff on many Canadian goods.

Risk-bulls have had a truly fantastic run, but no one gets market cycles all their way, or it wouldn’t be called a cycle.

At some point, some of this is going to matter, not just to struggling households and small businesses but also to the most expensive companies who have been funnelling precious cash into buying back their own grotesquely over-priced shares.

Perhaps some can afford to waste money, blow up equity and still keep going. For individuals later in life who have already amassed the bulk of their net savings, the math of loss tends to be devastating.