Juggling Dynamite

Canada’s TSX stock index (which most Canadian funds and managers are designed to track up and down) peaked in September of the 1990 to 2000 expansion cycle. Then it crashed 50% over the next two years, recovered into June 2008, and crashed 50% a second time in the 2008-09 cycle.  Though it rebounded into 2014, it’s had violent fits and starts since and has only managed to eke out a nominal capital gain of 1.95% annually over the last 19 years. A run-of-the-mill bear market loss of just 28% from here would return the TSX to its September 2000 top once more, and mark 20 years of a wild ride and zero capital gains.

Such is the secular bear game of snakes and ladders that we buy into from record valuations (knowingly or not).

Weighing in at 32%, Canadian financial companies are, by far, the most defining sector in the TSX.  That’s risky concentration at the best of times, but especially coming off a ten-year expansion cycle during which earnings multiples have leapt, and Canadian households and businesses have taken on world-famous indebtedness.

As shown in my partner Cory Venable’s ex-dividend chart below since 2002, financials (in blue) led the TSX (red) into the 2008 peak and 2009 bottom, then recovered and have remained range-bound since 2018 even as the TSX made a marginal new high in September.

In the sell-off over the last two days, financials have led, falling nearly a percent more than the TSX overall.

With defaults and insolvencies coming from below-average levels over the past decade and now rising across the country in both businesses and households, the banks are due for a ‘normalized’ period of higher losses.  Years of quantitative easing extended the multiple expansion-debt-addition phase, and also magnified the bear market now looming for bank shares, the TSX, managers, funds and all the ETFs that track it.

The third quarter saw a 14% drop in Manhattan property sales.  Some of the weakness is attributed to a fall in foreign buyers and a new “mansion tax” on apartments over $2m which came into effect July 1st and pulled some transactions forward into the second quarter.   As prices soften though, the supply of listings is likely to accelerate further, see Manhattan real estate prices take the biggest tumble since the financial crisis:

“…the number of apartments coming onto the market suggests a continued oversupply and softening prices — especially at the high end. The supply of luxury listings — or those in the top 10% by price — hit the highest level since data started being recorded 15 years ago, Miller said, with nearly 2,000 apartments listed for over $3 million. There is now nearly a two-year supply of luxury apartments.”

Because half of Manhattan apartment buyers typically use cash with no mortgage, the market is less susceptible to interest rate changes there than in most other places.  But that doesn’t mean the market is insulated from downturns and selling pressure.

As explained so vidily in Robert Frank’s 2011 must-read book The High-Beta Rich, at the end of long-asset price expansion cycles, asset-intense owners, economies and government revenues tend to be less stable and diversified than most imagine.  As revenue streams fall, the need for cash liquidity intensifies and sellers become more and more motivated (needy).  The liquidity crunch tends to go global, as owners are concentrated in the same asset markets globally.

In this recent segment, Robert Frank reports on knock-on effects now weighing on commercial real estate too.  Here is a direct video link.

Interesting discussion on the business of documentary making.

Bloomberg’s David Westin sits down with American filmmaker Ken Burns, who discusses his latest project, “Country Music”. Burns explains how he decides what stories to tell, leadership qualities in filmmaking, and the complicated and celebrated fabric of America.

Here is a direct video link.