Doom & Gloom vs. Buy Buy Buy...

[Billy Zhao]

OK, since it's a very popular topic here and both sides don't seem to agree on anything (like the world we are living in right now), I'd like to offer you what I saw (from an "almost" 3rd party perspective) and hopefully generating a rational discussion:

Question: Why we are seeing the equity market (stock) and the real estate market are going through the roof despite the current economic meltdown?

The simplest reason I see is not greed generated speculation like the pre-2008 housing boom and the pre-2000 dot com bubble. Rather it's a fear-induced reaction. The big difference between this round of the business cycle and previous ones is how aggressive the Feds intervened and how little push back the society reflected (hence the little interest in the congress to tame it down). The fear what I see is not a crash in the market, but a severe devaluation of the dollar (inflation). Large funds initially follow the same playbook to deal with recession by going conservative and hoarding cash. However, with the Feds (and the federal government) pumped trillions of dollars into the market, it essentially force corporations and financial institution to act rather than wait out. In other words, people are worried more about their money becoming garbage than they worried about the assets they own will lose value. 

Furthermore, the Feds and the government essentially signaled that they are going to continue to pump money into the market. This consistency has pushed all the world governments also pumping money into their market to keep the economy going. The extra amount of liquidity more than enough to compensate for the lost productivity and natural velocity of money transactions due to COVID.

Another point I see is that the economic devastation disproportionally affects a segment of society -  the service industry, hospitality industry, some retail, travel, commercial real estate, to name a few. But it didn't affect or even positively affect some other industries. I have some friends in certain sectors that seeing their volumes went to an all-time high due to orders of larger orders of assets/equipment. Online retail, not just Amazon, is having the greatest year. IT industry seems to be just fine. Some companies realized that they can have the same productivity without all the expenses of travel and office space, they actually become more lean and productive!

All these are showing a tale of two cities.

Are we in a speculative bubble like the Dutch Tulip story? Sure looks like it when I see listings getting multiple over-the-asking price bids on the same day when they hit the market. There is definitely fear that people are worried about inflationary risk and their wealth will shrink. In other words, holding on to cash is stupid. But there is also this opportunist view that they have no choice but to keep borrowing and acquire assets no matter how expensive they become because they will only become more expensive. 

The only way for the equity and other asset classes to lose value rapidly is either the stop of liquidity (bank stop landing, people stop buying, or massive default) or all of sudden the money supply shrank due to governmental action like raise interest rate rapidly, etc. I don't think the likelihood of that is very high at the moment. 

Warren Buffet said, "be afraid when others are greedy, be greedy when others are afraid". 

The reality, half the country is afraid, half are greedy. His sage advice just became an oxymoron. 

Your thought?