Juggling Dynamite

Merryn Somerset Webb interviews GMO co-founder and notorious caller of market bubbles Jeremy Grantham. Grantham, who also serves as the firm’s long-term investment strategist, leans into his more than five decades of investing experience to explain the current “super bubble” in the markets. He comments on when we’ll see a correction, the fate of the green transition and why he’s so concerned about population decline. Here is a direct audio link.

The good news is that shelter prices are finally retreating; the bad news is that this has significant knock-on effects for existing owners, debtors, lenders, and many other feeder sectors.

Thousands of Canadians are missing mortgage payments — especially in Ontario and B.C. — as the affordability crisis stretches household budgets to the limit despite multiple interest-rate cuts. Here is a direct video link.

Reducing foreign students is needed to correct prior excesses, but another negative for housing demand, revenue, and employment. See, ‘New home buyers are nowhere to be found.’ Toronto-area January new home sales near ‘record low’ despite excessive inventory, falling prices.

The decline in foreign students at Georgian College will have far-reaching local impacts. Here is a direct video link.

Delinquencies and motivated property sellers are rising sharply in America, too. While U.S. new home completions rose 10% year over year in January, for-sale listings rose 4.8% year over year, and buyer demand fell back to 1995 levels. See, Home buyers are finally getting the upper hand again:

A dearth of buyers has slowed down the housing market. U.S. existing-home sales fell 4.9% in January from the prior month to a seasonally adjusted annual rate of 4.08 million, the National Association of Realtors said Friday. Last year, home sales fell to the lowest level since 1995 for the second straight year.

And prices continue to trend higher. The national median existing-home price in January was $396,900, up 4.8% from a year ago.

Mortgage rates are just below 7%, adding hundreds or thousands of dollars to the monthly cost of homeownership from just a few years ago. The costs of insurance, property tax and homeowners association fees have all been rising briskly in many parts of the country.

The inventory of unsold completed homes for sale rose to the highest since the last US housing bust began in 2006.

Government spending cuts further erode demand and increase motivated selling in the property space. Private businesses that feed on government employees and contracts are also taking a hit. See DOGE move to slash federal leases threatens office-market recovery:

The Trump administration’s move to terminate millions of square feet of federal leases and sell government buildings threatens to weaken a fledgling recovery in the U.S. office market, from California to Washington, D.C.

Elon Musk’s Department of Government Efficiency has targeted nearly 100 leases at government agency offices for termination or consolidation. The Trump administration is also considering selling two-thirds of the federally owned office buildings that are empty or underused.

After the U.S. election, Trumphoria swept financial markets with parabolic moves in many risk assets into the new year.

However, the realization may have dawned in the past month that government spending cuts, fewer immigrants, and tariffs mean more job losses, lower economic growth, and fewer passive capital flows into the stock market.

From its January peak, Bitcoin is -16.2 %; semiconductors (SMH) are -9%; the tech-heavy Nasdaq is -5.7 %; the small-cap Russell 2000 is -10 %—and still below where it peaked in September 2021; the Dow Transports Index is also -10 %; the Dow Industrial Index is -3 %; and the S&P 500 and Canada’s TSX are both down about 2.5%.

Cyclical sectors are in full panic mode, with the S&P 500 Homebuilders index down 32%, the auto sector down 29%, and Oil (WTIC) down 14%.

For now, at least, fears of disappointing growth and earnings have overcome fears about inflation.

On the upside, Treasury bonds have been rallying, with the 10-year U.S. Treasury price +5.2% since December 1. This has brought the 10-year yield down from 4.8% to 4.3%, the lowest since December 12 and July 9, 2024, before that.

Correcting the financial mess and policy-made economic dislocations of the past decade was never going to be pain-free. The electorate has little pain tolerance and fickle affection. With home prices wobbling and layoffs rising, weakness in widely held stocks will be the final straw. Consumer and business sentiment are souring all over the world.

As Elon Musk began underwriting the new president, Tesla shares became synonymous with Trumphoria, doubling in price from October to December 2024. But most are focusing on the 37% drop since December and counting. What have you done for us lately?

Asset bubbles are a mirage; they look great until they disappear, and then most people are left more thirsty and desperate than ever before. Being a capital owner and manager is a tough and dangerous job in these conditions; being a politician is even worse. Unrealistic high hopes are certain to be disappointed.