Juggling Dynamite

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.

Happy Friday!

The S&P 500 has soared over 12% since the start of April, and 7% since the start of the Iran war, thanks to a +40% rebound in chip stocks. Half the rally has been accounted for by five companies — Alphabet, Nvidia, Amazon, Broadcom, and Apple.  At the same time, broader sectors like financials have posted near-flat earnings growth, and healthcare has negative growth. If we weight all 500 companies equally, the index has actually fallen slightly.

Consumer sentiment in May fell to a fresh record low of 48.2 as the US 30-year fixed mortgage rate rose above 6.5%. Homebuilder stocks are off about 20% from their 2024 highs, and consumer companies are feeling the gloom. Consumer discretionary bellwethers like Whirlpool are down 58% since last July, and McDonald’s hit a new 52-week low today, -18% since February and now back to the same level as April 2023.

“War in Iran resulted in recession-level industry decline in the U.S. as consumer confidence collapsed in late February and March.” — Marc Bitzer, CEO of Whirlpool, May 7, 2026

Consumer staples companies are generally more defensive, but the sector is down 6% since February, with companies like Heinz down 18% since last July. Kraft Heinz CEO Steve Cahillane cited struggling consumers in his earnings call this week:

“They’re literally running out of money at the end of the month. We’re seeing negative cash flows in the lower-income brackets while they’re dipping into savings.”

Gains in semiconductor stocks have pushed high-beta shares to record outperformance relative to the lower-volatility, more economically sensitive sectors of the S&P 500 (as shown below since 2014, courtesy of The Daily Number).

The market cap of so-called “defensive” sector stocks has fallen to a record low 15% of the S&P 500 market cap (below since 1975, courtesy of Augur Infinity). It’s not that defensive sectors are deeply discounted; it’s that the 8 most expensive companies, all in tech, have distorted the index so much that they account for a bloated 38% of the S&P 500 market cap.Another way of looking at it, market breadth is unusually weak, with the share of S&P 500 companies outperforming the index average near the lows seen in other tech-led manias in 2021 and 2000 (below since 1990, courtesy of The Daily Shot).The S&P 500’s Cyclically Adjusted Price-to-Earnings ratio (CAPE) at over 41 times is a level seen just once before at the internet-inspired bubble peak in March 2000 (shown below, since 1870).On a forward price-to-earnings basis, things are not much cheaper (as shown below, since 1960). The masses are either oblivious or don’t care because they believe that valuations no longer matter. This belief was also widely (and wrongly) held at the market peaks in 2021 and 2000.For an excellent overview, see Greg Ip’s, AI Is Distorting Practically Everything About the Economy;

Start with the broadest measure of growth, inflation-adjusted GDP. It grew a respectable 2% annualized in the first quarter. Beneath the surface, though, are two economies: AI and everything else.

Personal consumption, the biggest component of GDP, grew a relatively muted 1.6%. Investment fell in housing, business structures such as office buildings and factories, and transportation equipment like trucks and aircraft. Meanwhile, investment soared 43% in tech equipment, 23% in software and 22% in data-center buildings.

My back-of-the-envelope estimate is that the AI economy grew 31%, the non-AI economy just 0.1%.

It’s unclear how long Artificial Intelligence can replace human workers and sustain an economy dependent on growing consumer demand. AI certainly doesn’t buy financial assets and homes. Something’s gotta give. Ponzi schemes can only continue until a growing share of investors ask to sell or make withdrawals. And with each passing day, more and more people are.