July 2025
There’s an old joke that even a broken clock is right twice a day. At the risk of sounding (and acting) like a broken clock, I wanted to take this opportunity to reiterate a concern that many people have heard me express previously: markets are expensive and therefore risky.
To compound matters further, United States President Donald Trump is again threatening to impose tariffs on a wide variety of nations, this time starting on August 1st. Mark Carney is leading the Canadian delegation in trying to workout a new arrangement that many hope will be less punitive then might otherwise be the case. It remains to be seen if this can be accomplished, and at any rate, no likely not be finalized before the August 1st deadline. That’s just another way of saying that geopolitical instability remains the topic du jour. Irrespective of what the final outcome looks like, there is a consensus that tariffs will ultimately settle in at a level that is not been seen in over half a century. Supply chains will be disrupted, and inflationary pressure will accelerate.
The concerns raised in the previous paragraph are unique to the ascendancy of President Trump and 2025. What follows is a summary of broad macro indicators that have been flashing red for many years prior.
To begin, The US national debt now stands at over $37.1 trillion. Legislation passed earlier this month guarantees that deficit spending will accelerate in the United States, and it is already over $2 trillion a year. Such profligacy is not sustainable. It goes along way to explaining why Trump is demanding Federal Reserve chair Powell lower rates. Of course, the previously referenced inflationary pressure makes that proposition unlikely.
In addition, professor Robert Shiller’s CAPE (cyclically adjusted price earnings) ratio stands at 38.8 as of July 24th. That’s the highest it has been since the .com bubble burst. It is more than twice as high as the historical average.
Further still, the so-called Buffett ratio favored by industry icon Warren Buffett stands at 212 as of July 24th. That’s the highest it has been in all of recorded history.
Both the Buffett and Shiller metrics are suggesting The US stock market is in a major bubble. One thing that Shiller has been quick to point out is that his ratio cannot be reliably used to time market tops. Schiller has also written a groundbreaking book called ‘Narrative Economics’, where he shows how group think and herding often take place as a result of a certain narrative taking hold. My view is that one such narrative is that the global economy can withstand higher tariffs, while simultaneously avoiding both a recession and a market pullback. What we saw in the days following the so-called ‘Liberation Day’ tariff Announcement of April 2nd was that the global economy can be extremely skittish when confronted with news that is worse than expected.
In the last days of July, that begs the following questions:
• What do you expect the new tariff rate will be for Canada?
• What do you expect it will be for other nations?
• How will markets react?
• What will the impacts be regarding geopolitical stability, inflation and supply chains?
The concerns raised and the questions asked are not new. People who have been following me know that I have been worried about these things for literally years already. I do not want to be the financial services equivalent of chicken little. For years, I have tried to resist breathlessly screaming “the sky is falling!”. Rather, I have tried to remain dispassionate and factual in pointing out that there is massive, possibly even unprecedented, risk associated with current valuations in the American stock market.
There is another old saying: the market can remain irrational for longer than you can remain solvent. My clients have been getting solid single digit returns for years now, with very little volatility along the way. The returns have been solid, but not spectacular. My view remains that the payoff will come when the inevitable draw down happens. I don’t know when. I don’t know why. I don’t know how severe it will be. I don’t know how long it will last. What I do know is that bear markets have not been eradicated – and that we are way, way past due.