Juggling Dynamite

According to the latest Canadian Association of Insolvency and Restructuring Professionals, 2024 saw a 15-year high in Canadian business and consumer insolvencies—about 375 daily. The group expects pressure on companies and consumers to continue in 2025 amid threats from potential tariffs and mortgage renewals. See, Insolvencies in Canada rose 12.1% in 2024, led by business filings:

The Bank of Canada has lowered its benchmark interest rate to three per cent, down from a high of five per cent, as the economy has weakened.

However, homeowners renewing mortgages in 2025 are likely still facing higher monthly payments than when they last locked in a rate, and prices on many everyday necessities are still more expensive than they were a few years ago.

Businesses are also under pressure.

Of the 1.2 million Canadian mortgages that renew in 2025, around 85% were contracted when the Bank of Canada’s overnight rate was at or below 1% compared with 3% now.  Those with fixed rate terms have not yet had to confront the payment leap compared with pandemic-era interest rates (dark blue bars below, courtesy of Toronto Star):

While Canadian mortgage rates have decreased from more than 6% in late 2024 to around 4% today, payments on renewal are significantly higher than when rates were in the 2% range four and five years ago.

How long the Trump bump will continue in stock prices is everyone’s guess. Still, great expectations increase room for disappointment, and nothing matters more to long-term investment returns than the level of fundamental valuation at the starting point.

Donald Trump comes back to office astride extreme confidence and the most highly valued stock market of all time, even more inflated than at President Hoover’s inauguration months before the Black Tuesday crash of 1929.

Today, the market capitalization of seven tech companies accounts for a record 32.4% of the widely benchmarked S&P 500 index (leaving the remaining 493 companies to comprise a record low 67% of the index (shown below since 1980 via Goldman Sachs and Global Markets Investor).

Hyped on A.I. mania, the S&P 500 is trading at 37x (CAPE) earnings expectations, compared with 28x at the start of Hoover and Trump’s first term and 8x when Reagan came to power in 1982. From present CAPE levels, the widely held large capitalization stocks are projected to average -5.2% annually over the next seven years after inflation (GMO data). Meanwhile, downside exposure is endemic with 70% of retirement savings concentrated in equities.

The total market value of U.S. stocks at $61.4 trillion is 209.3% of the last reported GDP ($29 trillion). On this measurement, famous as Warren Buffet’s preferred gauge of prospective equity returns, U.S. stocks are priced for an average annualized return of -0.4% over the next decade, assuming the current dividend yield of 1.16% is reinvested. In March 2000, just before tech stocks crashed by 80% and the broad market halved, U.S. stock prices peaked at 175% of US GDP.

By comparison, Canadian stock markets totalling $4.89 trillion in 2025, trade at 162% of Canadian GDP ($3.019 tn), and compared with 153% at the 2008 cycle peak. If dividends are fully reinvested, Canadian stocks are projected to return 4% annualized over the next decade. Any withdrawals or fees reduce dividend reinvestment and return prospects further.

No wonder, Buffet’s firm Berkshire Hathaway holds a record 30% of its capital ($325 billion) in cash today (shown below since 2004).

Trump’s proposed tax cuts can also be compared with the Reagan tax cuts of the early 1980s, which started from much higher tax rates (the top marginal rate was 70% in 1981 versus 37% today) and much lower government debt levels (30% of GDP in 1980 vs. 120%+ today), and policy interest rates that were above 18% (vs. 4.25% today). Unlike in 2025, in 1981, policymakers had luxurious space to ease financial conditions and lower tax rates in response to recessions, which they did in various ways for the next 40 years.

Today, demographics are also the inverse of the Reagan presidency, when 85% of the population growth was in the working-age population (25-64). Now, eighty percent of population growth is among seniors (65+), and similar trends are challenging most countries; this is not something governments can fix. Least of all, a government that has vowed to deport undocumented workers and reduce the flow of new immigrants.

The next 90 days promise to be eventful and offer further insight into how many moving parts may unfold. The most rewarding investment opportunities come while the masses are liquidating; that is yet to come.

Hoisington Management’s Fourth Quarter 2024 Review and Outlook is now available at this link. Always worth a mull. Here’s the main takeaway:

“…fundamental determinants of inflation indicate the prospects for slower price increases are even more significant than in any year since the late 1990s. In addition to the growing factory capacity glut and rising UR [unemployment rate], the percent decline in modernized world dollar liquidity (WDL) reached another record low in the fourth quarter. The accelerating decline in WDL will intensify the liquidity/money squeeze domestically and globally. We estimate the trend-adjusted real M2 declined further in the fourth quarter. Since the Fed’s first reduction in the policy rate in September, critical consumer and small business borrowing rates have remained unchanged or increased. Such considerations argue that lower inflation will lead to a surprising drop in thirty-year Treasury bond yields in 2025.”

Lacy Hunt discussed his analysis in detail with Adam Taggart this week.

Recession fears seem to have faded from the headlines, as the “no landing” scenario seems to have won out — on Wall Street at least. Attention is much more focused on a possible boost to economic growth from the policies of the new Trump administration, as well as concern that inflation could prove stickier and more stubborn to tame than the Fed hopes, resulting in higher for longer bond yields. So, were the deflationists wrong? For a true expert’s view, we have the great fortune to sit down today with one of the greatest living economists, Dr. Lacy Hunt, former Senior Economist to the Federal Reserve Bank of Dallas, as well as several of the world’s largest global banks. Here is a direct video link.