Disaster - Bad star

04/06/2020 in finance, economics using tags 2020, macroeconomics, export economy

“Time in the market” vs “timing the market”? I call BS. You can time the market, and I just did. Anyone who regurgitates that phrase is unaware of how capitalism really works, and the theory behind price action. If you see a meteor falling from the sky, are you bullish or bearish? Technically the meteor already crashed last month, but what are the ramifications? What hasn’t happened yet? A huge wave of defaults, zeroing out stocks across the board.

I say this still, most stocks and equities are overvalued to the appreciating dollar. The dollar appreciates because spenders instantly became savers in the last 2 weeks. If spending does not occur, the economy practically freezes, and debts begin to default across the board, slowly but certainly.
The worst thing to happen at the end of a bubble is the slowdown of velocity as leverage starts eating away at savings. Companies that did not keep their own rainy day funds will end up getting bit by this. In these scenarios, debt-ridden companies will no longer be able to afford having employees, so they will be layed off and furloughed first. Rainy day funds are discouraged in an inflationary economy.

This is probably the worst time to be in any kind of debt, or assets in any markets propped by leverage (in particular, the slow moving, highly illiquid real estate market) and the best time to have liquidity. Cash is king first, and then it becomes trash. Despite all the money printing, more gets “burnt” in a sell-off. Taxes are going to increase as a consequence whether we like it or not judging from the spike in bond purchasing. Property taxes will increase to pay for the spike in unemployment benefits, and property values would likely decrease as investors are pushed out of real estate once we hit the interest rate floor. Even municipal bonds could be at risk, as state governments have to either increase property taxes or sales taxes to cover for the sharp rise in unemployment.

At the moment, energy seems to be a high risk/high reward play. Crude oil has never been this cheap adjusted for inflation, and we may be headed for a cliff as there will not be enough capacity to store all that crude. This strange economic scenario may result in the strategic reserves filling up, where more drastic actions are needed, such as slapping a tariff on oil imports. The media keeps regurgitating “negative oil”, but this is only a bluff. I’m pretty sure none of the big oil players want to get to a point where their oil is all of a sudden worth nothing. The economic damage of shutting off pumps would ripple through the oil industry, so this will likely force the government’s hand in slapping tariffs. Although I’m pretty sure poorly run shale oil companies will go bankrupt despite what happens, and honestly, they should go bankrupt for being highly leveraged. The lower leveraged oil companies will survive this, as well as any feedstock companies willing to take advantage of this unique scenario whereby they increase their plastic feedstock stockpiles at a bargain.

Cheap oil can typically spark manufacturing booms, but a manufacturing boom would be difficult given the current regulations in place. With the record jump in unemployment, mobilizing a workforce towards unskilled manufacturing will be a momumental effort. We may even see a massive migration of Americans out of cities and suburbs and into low income midwestern states by the Mississippi river. This cannot happen until the economy slides even further, and it won’t happen without a severe reduction in rent and property values. This takes many years to accomplish, and it’s very painful, but I think it may become inevitable as people search for cheaper places to live.

This is a disaster that has not happened yet, but there is a good chance of it happening soon. If you’re going to be buying stocks at this crazy time, first estimate the amount of debt that that company will be in before you buy anything.


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