Juggling Dynamite

The Next Twelve Months Price-to-Earnings ratio (NTM P/E, shown below courtesy of ISABELNET) is one of the historically relevant forward-looking valuation metrics that compares a company’s current share price to its projected earnings over the next 12 months. Today’s sky-high US equity valuations, highlighted in dark blue, are comparable only to the rare, infamous peaks of the 2000 and 1929 stock market bubbles.  The 20-year median NTM P/E is marked in grey for each index.There has never been a time when extreme investor overconfidence was not ultimately punished by equally dramatic loss cycles.

Unlike most professional portfolio managers, individuals do not have to stay invested in asset bubbles. Grantham calls this “the amateur advantage”. Unfortunately, most lack the discipline and insight to resist the madness of crowds, and they tend to buy most near the top of the price cycle. Most wait until the hammer lands on the head and then react by selling and firing their financial advisor after the inevitable loss cycles.

As Grantham notes, with the world dominated by financial salespeople, “the average investor will never hear that the market is dreadfully dangerous and overpriced when it is, in fact, dreadfully dangerous and overpriced.”

Other international market valuations are less inflated than the US today, but they are highly correlated nonetheless. The Canadian stock market has repeatedly declined pretty much in lockstep with American markets, most recently in 2000, 2008, 2020, 2022-23, and February 2025.

The chart below, courtesy of my partner Cory Venable, highlights the close correlation between the S&P 500 (in red) and Canada’s TSX (in black) during drawdowns (red arrows), since 1990.

This week Wilf speaks to the man who has predicted some of the biggest stock market bubbles of the last 5 decades – Jeremy Grantham – who, on the day that NVIDIA hits $4trn market cap predicts that we are nearing the top of another major bubble, likening Nvidia’s success to the “guy selling shovels at the peak of the gold rush”. Striking a very bearish note on the US Magnificent 7, he discusses the pain that predicting crashes too early causes finance professionals but how private individuals have advantages as long as they step back and look at the data, as he shares his advice for investors following a legendary career. Here is a direct video link.

Some bonus content from Wilf’s conversation earlier this week with the Founder, Chairman, and Long Term Investment Strategist at GMO, Jeremy Grantham, this time focusing on the biggest long term risks he sees for the market, and humanity, including toxicity, declining fertility and climate change. Here is a direct video link to part 2.

Grantham’s logline:

“Don’t be conned into being super optimistic by the professionals, by the industry that makes money from overconfidence–lots and lots of money. Um, look around for signs of crazy bubbly behaviour, to the moon, to the moon sort of thing. Um, which we have seen as splendidly these several years as we have ever seen in history, which is a high hurdle.”

In a series of heart-stopping swings, since mid-December, the tech-heavy S&P 500 and Nasdaq are currently up 2.9% and 2.7%, respectively, while the US dollar (as measured by the DXY) has fallen 10% against major trading partners. The more economically sensitive Dow Jones Index is down 2% since December, while the S&P 600 (small-cap companies) is down 10% since the November 2024 peak and down 3.7% since November 2021.

Still, the consensus remains extremely bullish, and FOMO (fear of missing out) is rampant.

Under the indices, the most cyclical segments of the US stock market are in various stages of decline: S&P 500 autos & parts (-31%); home furnishings (-30%); homebuilders (-28%); office REITs (-21%); media (-16%); residential REITs (-12%); retail REITs (-10%); US regional Banks (-11%); and Dow Transports (-11%).

In Canada, the TSX has fared better, up 5.9% since December 6, 2024, helped by a rise in precious metal companies (XGD, +25% since October), while its heavyweight fossil fuel sector (XEG) is down 11.8% since April 2024.

Little covered by financial media is the fact that Treasury bond prices have been rising with much less volatility and principal risk than equities. Not counting interest payments received, Canada’s 3-year Treasury bond is up 9.5% since March 2024, the 5-year bond is up 8% since August 2022, and the 10-year bond is +10% since March 2022.

Not surprisingly, a world full of salespeople promoting equity allocations insists that Treasuries are for dummies and stocks are for the savvy.

Corporate bonds, meanwhile, are priced as if risk-free, with investment-grade bonds yielding less than 1% over similar-dated treasuries and low-quality “junk” bonds less than 3% — about half the historical yield spread norm.

Conflicts of interest are so endemic that US President “Pump” Trump is openly promoting financial products and those of his supporters while publicly demanding that the central bank slash interest rates.

With tariff threats and inflation still lingering, the US Federal Reserve and the Bank of Canada are set to maintain policy inertia this month. Their reticence is understandable, but with the labour market weakening and loan delinquencies leaping, rescue efforts will come later than usual this cycle.

A record 11,400 Americans turn 65 every day amid extreme capital risk in their savings.

Approximately 30% of the population belongs to the 55+ age group, who own some 79% of all stocks and equity funds (Deutsche Bank research), now trading at irrationally high valuations—the S&P 500 is priced at a whacky 210% of US GDP. We’ve never seen such madness.

When prices ‘correct’ the pain and suffering will be widespread and difficult to recover from later in life.

I’m tired of pointing out the obvious, and I’m not sure who needs to hear this, but we are living through a wild confluence of factors.

Minimizing capital losses has to be the priority. That requires staying focused on our own financial plan and not succumbing to popular delusions.

Toronto home sales rose 8.1% in June, but were still 35% below the decade’s average; the average home sale price dropped 5.2% year-over-year to $1,151,600.

Condo sales in Toronto have declined by 75% over the past three years (-37% in Vancouver) and are down 22% from June 2024; at the same time, new listings are up 25% year-over-year.

Toronto mortgage delinquencies are surging at a rate much faster than the rest of the country. In two and a half years, the delinquency rate more than tripled (3.67x) from the record low in Q3 2022 (chart below via Better Dwelling, see Toronto Mortgage Delinquencies Have Tripled, Highest In Over A Decade):

The rising delinquencies are just one of the compounding issues materializing in Toronto real estate. After a nearly 26-year run where the market seemed invincible, there’s been a sudden shift with sales plunging to multi-decade lows for both new construction and existing homes. At the same time, the market has the most inventory on record—yet prices remain lofty.

Nationally, the average Canadian asking rent is down 2.75% year-over-year, and this is beginning to show through in the CPI statistics. Services make up more than 60% of Canada’s Consumer Price Index, and nearly 30% of the index is driven by shelter costs that are now deflating. The trouble is that the average Canadian asking rent of $2,125 in June remains 28% higher than $1,701 in June 2021. Rents and home prices will need to drop significantly further to return to a reasonable percentage of household income.

The good news is that market conditions (increasing supply, flat population growth, and below-average sales) are likely to continue suppressing shelter costs for some time–much needed to help restore affordability. But this is bad news for those who bought, refinanced, or lent against properties near cycle highs in 2021-23.

While publicly traded Canadian Real Estate Investment Trusts (as represented by the XRE index) have rebounded since April, the basket remains 12.7% lower than its peak in January 2023.

The same Canadian real estate index fell 59% from February 2007 to March 2009, when Canadian home prices declined by just 8.2% nationally, as measured by the Teranet–National Bank House Price Index. Canada’s financial share index (XFN) fell 51% over the same timeframe.

The average Canadian home sale price has so far declined by 18% since the peak in February 2022, when fear of missing out (FOMO) drove many irrational financial decisions.

Adjusted for inflation, the average Canadian home price fell by roughly 25–30% nationally between 1981 and 1985—food for thought.

For those with the attention span and patience to follow and understand cycles, there’s a lot of opportunity in the making here, but only when we can resist the siren song of consensus views.

The discussion below addresses some of the history and headwinds facing real estate in Canada’s most populous areas.

Our guest this week is Ben Rabidoux—Founder of Edge Realty Analytics and North Cove Advisors, and one of the most respected voices on Canadian housing and economics. In this episode, he joins Dave to tackle some of the biggest questions facing Canada’s real estate market today. From the condo market crash to vacancy rates for rentals to the role of HELOCs and immigration policy, Ben explains how we got here, what’s coming next and what it all means for affordability in this country. He also shares the story of catching Fortress as a fraud and offers a candid take on whether Canada is too soft on white-collar crime. If you care about housing, affordability or the future of Canada’s economy, this episode is a must-listen.  Here is a direct video link.