Juggling Dynamite

The investment sales world loves to talk about the defensive benefit of holding different equity sectors and global markets.

The pitch is that there’s always a bull market somewhere, so we can always-be-buying risk-on products. The US stock market is heavily concentrated (39%) in the top 10 most expensive companies today (dark blue bar below). No problem, we are urged to ‘diversify’ abroad. The trouble is that other global equity markets are nearly all more concentrated than the US (shown below, courtesy of ISABELNET.com).

Moreover, today, inflated prices are global, with equity valuations at historic highs across all major markets (the 12-month forward price-to-equity multiple, shown below in orange, versus the median for each region over the past 20 years).

In real life, correlations are strongly positive across global markets, particularly in sell-offs. Case in point, all major stock markets except Russia’s (MOEX) have been negative over the past week (in red below). Diversify this.
Protecting capital from the downside of asset bubbles requires more than just different equity marketing wrappers. Crypto isn’t holding up, precious metals and credit are slipping, too. Cash-like equivalents and short- to medium-term individual Treasuries with fixed maturity dates are the most stable allocations — unfortunately, few people hold them in any meaningful weight.

It’s tough to buy low when the masses are maxed out at all-time cycle highs, with little to no cash on hand for buying opportunities that come in bear markets. Poor risk management means the masses often bear capital risk without capturing the promised rewards. In the end, the house gets richer, and individuals end up losing over full market cycles. Rinse and repeat.

After the 2008 financial crisis, more than a decade of zero-interest-rate policies drove an explosion in private credit products and funds that were initially marketed to institutions and pensions under the oxymoron of safe ‘high-yield’.

Then, from March 2022 to May 2023, a record succession of central bank rate hikes took the US Fed rate from .25 to 5.25% in 14 months.

In the liquidity crunch that followed, stock prices dove, credit markets froze, and real estate entered an ongoing mean reversion. Needing cash, private funds shifted their marketing focus to retail investors as the next pool of necessary greater fools. It worked for a while.

Private credit vehicles, known as semi-liquid funds, were an engine of growth for giant private investment firms, including Blackstone, Ares Management and Blue Owl, providing lucrative management fees and helping quadruple assets in BDCs [Business Development Companies] since 2021 (charted below).See, Investors ditch private credit funds on rising worries over bad loans:

Many affluent retail investors were drawn to the space by the high dividends on offer, with annualised total returns eclipsing 8 per cent over the past decade, according to S&P Global. The recent cuts as well as asset sales at some funds “reignited credit-cycle fears” across private credit, said Paul Johnson, an analyst at KBW.

Fast forward to 2025, and investors began trying to exit private credit funds as they took losses on bad loans, and concerns intensified that AI would wreak havoc on the software companies they had financed. In response, funds have increasingly gated withdrawals and income distributions. As usual, blocking exits intensifies panic and increases the urge to get out.

Once more, investors are learning that there is no such thing as a free lunch or safe high yields. While would-be-sellers swamp willing buyers, asset prices are headed lower. The clips below discuss some of the contagion risks.

Dan Rasmussen, Verdad Capital founder, joins ‘The Exchange’ to discuss the state of the private credit market. Here is a direct video link.

“This will be a shakeout. I don’t think it is going to be short-term,” Marc Rowan, CEO and co-founder of Apollo Global Management, says during a discussion with Bloomberg News Editor-in-Chief John Micklethwait at Bloomberg Invest. Here is a direct video link.

Macro shocks are a constant throughout time. The market impact is often dramatic in the short-term. Longer-term, outcomes vary depending on the level of optimism that was priced in when the shock hits.

Coming into 2026, most asset markets were exhibiting excessive optimism -pricing the best of all possible outcomes. Just one example: the S&P 500 came into the year trading at 28x its trailing 4Q 2025 earnings — among the top 4 most euphoric episodes since 1900 (shown below, courtesy of B of A). Historically, periods of sharp mean reversion have always followed. Sentiment tends to be contagious.

Other global markets have been less optimistic than US large cap stocks, but in comparison to delirious, less crazy can look relatively better, and still be irrational.

Canada’s TSX index has a very small tech sector and yet, the ‘risk-on’ Canadian stock market leapt with tech-soaked US markets into 2026.  The NASDAQ (below in red since 2024) peaked in October 2025, while the TSX (in black) rose into January. Both are selling off today, and although fossil fuels are up sharply, the energy-heavy TSX is down more than broader US markets.

While the US dollar is up sharply against the basket of global trading partners, it’s weaker versus Canada’s loonie. The thinking is that higher oil prices may keep the Bank of Canada from further policy easing.  It’s a question of how deeply Canada’s economy and stock prices contract. With Canada’s housing market now in its 4th year of mean reversion, the Bank of Canada’s resolve to hold is still to be tested.

Periods of rapid leverage expansion often appear like progress until liquidity tightens. Like recent years, in the mid-2000s, structured credit markets grew rapidly outside traditional banking channels, supported by reckless lending and wilfully blind underwriting assumptions. Stress began in narrow segments before spreading more broadly in 2007–2010.  The NASDAQ (below in red) peaked in October 2007, while the commodity-centric TSX held up to June 2008. Both then collapsed in unison as risk-on markets imploded through March 2009.

In the last tech buble, the NASDAQ peaked in March 2000 and the TSX in August 2000; again both then tanked together into the fall of 2002.

None of us can know what happens next in world events. But that’s always true. What’s different this time is that capital risk has rarely been higher, and after a period of record over-valuation, the masses have a painful payback period due.