Out With A Thud

It seems everywhere you go, the talk of the world is AI, short for artificial intelligence. I don’t get the hype to be honest. I am still hoping they will perfect natural intelligence, before we move on to the artificial variety, but alas, here we are.

AI is the tech boom of the 2020’s, akin to the internet bubble of the late 90’s. Anyone even remotely associated with AI has seen massive increases in their stock price – with the darling of AI – Nvidia leading the way.

For anyone that has been asleep for the last 24 months, Nvidia has been on fire, and just keeps setting all time highs, with the stock going from $112 in Oct 2022, to today’s price of around $794.00 a share.

So, why do you as a mortgage agent in Ontario, or B.C. or out on the East Coast of Canada care about some super hyped tech stock in New York? Let’s explore.

They say that everything takes longer than you think, but happens quicker than you can imagine. Well, they would be right. In today’s ever connected world, things like stocks, bonds, currencies, and yes, even housing, all seem to trade in tandem. Ever since the meltdown of 2008 when central banks dropped rates well below where they should have, every asset class seems to move together these days. The latest stock market infatuation is AI, and more specifically Nvidia. Personally, I think Nvidia has a lot of suspect accounting, and has managed, at least for now, to maneuver around US chip tariffs. However, as with every other company that looked great at one time, it will come crashing down with a thud. Probably not next month, maybe not even 6 months from now, but at some point, regulators will connect the dots, and Nvidia will go the way of Nortel, Enron, Worldcom, etc. etc.

Now, again, this isn’t really a big concern to you ( unless you have like most retail stock traders dumped a sizeable chunk of your life savings into the stock at or near these all time highs ), but it should be a concern to you professionally, and here is why.

As of last week, the market capitalization of Nvidia ( market capitalization is the share price x the number of shares outstanding ) was larger than Canada’s entire GDP ( GDP being the value of all goods produced, and services rendered ). Now, market cap to GDP really has nothing to do with each other, but just sit back and think about it. The shareholders of Nvidia – just one single company, have more money than Canada’s entire economic output for an entire 12 months. Basically, the market performance of Nvidia in any given trading day is more important – economically, than what every business in Canada does on a single day. Let that one sink in.

Here is the problem. Nvidia is too far ahead of itself. The stock simply cannot keep going up. A lot of sins are covered up by rising prices. Sounds a little bit like Canada’s housing market in 2020 and 2021, eh? But, eventually something comes along and upsets the old applecart. In the case of Canadian housing it was some increases in interest rates. In Nvidia’s case it could be a lot of things – we just don’t know. Keeping in mind that what the buyers and sellers of Nvidia do is larger than the entire Canadian economy, if more people sell, that could lead to a lot of losses. Here is what I have experienced over the many years of working in both the equity markets, and the mortgage space, and why my endless yammering is meaningful to you:

I promise you that your clients have down payment funds stashed in stocks like Nvidia – or the stock market in general. We saw it with tech stocks in the late 90’s, we saw it with crypto over the last few years. People simply don’t know what they don’t know. If Nvidia starts to drop – or tank, it will start to drag other tech stocks, and most of the stock market in that direction. Since the stock markets are generally concentrated in the top few names, and downdraft could be quite serious, and could happen quite quickly. Your client’s down payment could be 10% or 20% or 30% short come closing day. Do yourself, and your client a favour and make sure the funds are put into a HISA, or something similar.

Market sentiment will follow Nvidia, and the tech stocks. People who make a shit load of money trading AI stocks feel pretty confident and spend. This is good for the economy, and for other assets like housing. People who are getting margin called on a dropping stock do not buy things, like, for example, a bigger house.

When we start to see new records set, like, say for example, Nvidia market cap being larger than Canadian GDP, it usually tells me we are at a market top. Of course, people will tell me 1000 reasons why I am wrong – at that is okay. You need naysayers in order for it to be a market top. Every single time we have seen monumental records set in the past, it is usually within 30 to 60 days ( looking backwards ) that we see a peak in the markets.

The economy is already faltering a bit in Canada right now, and the US is starting to see some slight consumer pullbacks. This will get a lot worse when the stock market starts to fall. Normally when we see the economy falter, the central banks ride in on their shiny horses, drop rates, and save the day. I would be willing to bet that narrative does not play out this time. Both the US Fed, and the BOC are wanting to make sure we don’t see the housing problem repeated, whereby lower rates drove up housing prices. A faltering economy may just be that – a bad fricking economy. You need to prepare your clients for that. I have had many conversations in the last 2 weeks where clients are using terms like ” When interest rates fall “, and ” my house will go up in value, because the Bank of Canada can’t let prices drop “. You, as the professional need to back them down on that talk. Interest rates going down is never guaranteed, and in the current environment, may not even be the baseline. Make sure that your clients are well versed in what could actually happen, and see how many of their life choices could potentially be based on their assumptions.

I promise you that if we start to see a faltering stock market, and I think we may be closer to that than many think, then all asset prices will start to react in sympathy. Bonds will probably go up due to uncertainty ( perhaps leading to some fixed rate reductions ) the USD will strengthen against most currencies ( buy your US if you have a trip planned ), and asset prices, especially illiquid assets like art, housing, Rolex watches, etc. will start to drop.

Also lets keep in mind that tax time is just around the corner. Anyone with taxes to pay needs to get the funds from somewhere. Selling your winning stocks, like, oh I don’t know, Nvidia, is a great source of cash to pay the taxman. If enough people sell around the same time, it could lead to some major outflows, and start the downhill journey in motion.

Talk with your clients, make sure they are well protected no matter what the stock market does, and ensure their assumptions are based on solid, sound choices, and not some half baked bullshit they heard a You Tuber rambling on about. God knows there is a lot of people who write blogs, give their opinion – right or wrong, and yammer on about financial concepts…..wait a minute…..I mean, you know, make sure the advice is solid.

I can assure you we are not out of the woods, and until we have a large event, the recovery cannot start. In order to get the All Clear signal, we need to see a bit more pain, ending in one final painful event. Until then, we struggle on.

Help your clients, use your professional intelligence, and I assure you that your client will be forever thankful. AI is a tool, and can probably be used in some applications going forward. However, the tool is only as good as the craftsman. Be a craftsman at your trade, and the only problem you will have is a tax problem in the years ahead.