Juggling Dynamite

The US (in light blue below, courtesy of The Daily Shot) is at the high end (see diamond) of its 20-year forward price-to-earnings (PE) multiple, but it is not the only highly valued market today. New Zealand is the most expensive, and Canada (in yellow) is also near the high end of its historic range. Only a handful of emerging markets (on the far right of the chart) are near historic low valuations.
Bloated by a handful of US tech-AI cos, the premium of US stock prices over the rest of the world (below in black since 1970) is the most extreme since the 2000 tech bubble.At the end of 2025, the U.S. accounted for about 62% of the global market cap when the nine most expensive U.S. tech stocks were included, or around 41% excluding those nine mega-caps, ICAEW. The concentration is staggering. Back in 2007, the U.S. share of the global market cap peaked at 29.6% — so, it has roughly doubled since then.

Meaningful shelter from the popping of a US-centric stock bubble is hard to find. Global fund flows are leveraged off of one another, so when US stock prices tumble, contagion spreads as investors and speculators raise cash everywhere that they can.

Recognize it or not, we are living through one of the most extreme periods of investment risk in history. The corollary of this setup suggests that the inevitable bust will also present one of the most valuable long-term investment periods in history. The art is to be prepared and able to take advantage of it (as in 2002 and 2008) when that opportunity finally arrives. Grantham’s discussion below offers further context.

Jeremy Grantham joins Excess Returns to discuss The Making of a Permabear, mean reversion, market bubbles, AI, the Magnificent 7, and the long-term lessons investors can take from his career at GMO. We cover why he rejects the simple “permabear” label, how he thinks about valuation and bubbles, why AI may be both transformative and dangerous for investors, and why long-term thinking is so hard but so essential. Here is a direct video link.

Last week, we learned that Canada lost 47,000 full-time jobs in April, while part-time employment edged up by 29,000. April’s loss means Canada has shed jobs in three of the first four months of 2026, for a total of 112,000 jobs lost since January. Nationally, the unemployment rate rose 0.2 percentage points to 6.9%.

Employment fell in Quebec (-43,000), Newfoundland and Labrador (-5,200), Saskatchewan (-4,000), and New Brunswick (-2,700), while Ontario gained 42,000 jobs. As students seek summer jobs, the unemployment rate among youth aged 15–24 rose to 14.3%.

Highly indebted households are starting to crack under the pressure of monthly payments and rising living expenses.

Many current homeowners bought during the 2019-2022 FOMO (fear-of-missing-out) frenzy. Some elders mortgaged their homes to give downpayments to children and grandchildren and co-signed on loans with family members. Some will need to delay retirement or return to work to make ends meet.

The latest Office of the Superintendent of Bankruptcy (OSB) data shows insolvencies have been consistently grinding higher over the past year. At a 17-year high in March, the volume was second only to the 2009 financial crisis (shown below since 1988).

The OSB received 143,353 insolvency filings in the 12 months ending in March, 4.2% higher than last year. That makes it the second-highest 12-month period ending in March on record, 4.5% behind the 2009 record. Insolvencies are just part of the story. See Canadian Consumer Insolvencies Approach 2009 Record Highs:

Insolvencies don’t capture all debt stress. Many failures stay buried on lender books as missed payments, restructurings, or loans quietly extended. It’s not uncommon to roll all consumer debt into a mortgage takeout or HELOC.

Then there’s the fact that 2009 was the peak of the global financial crisis. Today, we’re approaching that level while the economy is supposedly fine. We also have the benefit of knowing 2009 was the peak in hindsight. Today’s data doesn’t tell us whether this is the top or just another step to the top.

As of the first quarter of 2026, non-performing mortgage loans in Canada reached approximately $7.2 billion — an increase of about 150% since 2022. These are “Stage 3” loans, meaning they are more than 90 days overdue and considered in default. (source: JDL Realty).

Borrowers who secured mortgages in 2020–21 at rates under 2% are now seeing renewal offers in the 4–5% range. Equifax Canada has noted that non-mortgage delinquencies have reached levels not seen since 2009 — families juggling late car payments or credit card bills are in a weaker position when their mortgage comes up for renewal (source: Nesto).

Results from Bank of Canada stress testing suggest that the share of mortgages in arrears by at least 90 days could rise to a level comparable to, or higher than, levels reached during the 2008–09 global financial crisis under a prolonged trade war scenario (Bank of Canada).

The Greater Toronto and Vancouver Areas are the most at risk, along with regions with high exposure to tariffs, where job losses are most evident (CMHC). The major stress test for the Canadian mortgage market is 2026-27 as the pandemic-era renewal wave crests.

The Office of the Superintendent of Canadian Financial Institutions (OFSI) predicts that rising residential mortgage arrears and defaults are the number one threat to Canada’s financial system (OFSI 2026-27 annual risk outlook report, April 2026).

Not priced in — to the end of Q1, Canada’s Big Six banks had reported near-zero write-offs against their multitrillion-dollar loan book — and Canadian equity investors are heavily exposed to disappointment. Since the end of March, Canada’s finance sector shares have bouncd 13.6% and +7.7% year-to-date, and comprise a whopping 32.5% of the TSX index and all of the portfolios that track it.

A few charts to illuminate the start of another week.

First, another look at the record overvaluation in tech and tech-related companies (dark blue below via topdowncharts.com) versus the S&P 500 traditional cyclicals (light blue) and defensive sectors (black) since 1973. Again, the conclusion here is not that traditional and defensive stocks are cheap but rather that tech and tech-related sectors have never been so inflated. This makes the entire index and all the portfolios that track it the most vulnerable to mean-reversion losses in at least 53 years.

Fresh highs in stock market indices (S&P 500 shown below in dark green) have opened a glaring gap between “Wall Street” sentiment and the University of Michigan Consumer Sentiment Index (red below) since 2024. Finance is supposed to be a service that supports and feeds off the real economy. When finance is euphoric, and its customers are depressed, something is fundamentally broken and unsustainable.

Current market conditions are so extreme that the masses believe they are normal and durable. Such assumptions have historically proven painful.

There is a reason that young people are unable to launch and fertility rates have plummeted. Since the tech wreck in 2000, governments and central banks have repeatedly bailed out the finance sector and asset prices at the expense of everything else. But in the end, a shrinking pool of customers is a recipe for stagnation and eventually deflation.Aging asset owners increasingly need buyers to cash them out. The widening spread between would-be buyers and would-be sellers suggests that transaction prices lie somewhere below the current ask.

The segment below offers a worthwhile macro update.

DiMartino Booth with Competent Investor’s Tom Bodrovics: Warsh’s Fed Takeover-A Quiet Coup Brewing? Here is a direct video link.