6 Critical Question You Must Ask Yourself During This Crisis
There are a lot of things going on during this Covid crisis. Its no secret that something fundamental is shifting and given the sleepiness of the masses, probably a good 98% of people out there are too busy to take notice of how everything is changing while the “new norm” becomes the everyday norm.
Unlike most of my rants, this one is not so much about investing specifically but about exploring a few more profound and existential questions that everyone ought to be asking.
So here we go.
1. How are people recovering fro Covid-19?
Throughout mainstream media, they have made it abundantly clear that there’s no cure for Covid-19. They have said that until a vaccine is out, there’s no way to open everything back up to the way things were prior to Covid. While more than 2 dozen countries and organisations are currently working on a vaccine at various stages of development, the narrative continues to be that “we have to wait till the vaccine is out” before life goes back to normal and international travel can resume unrestricted.
Regardless of whether you support the idea of a vaccine or not, you have to ask this fundamental question:
If there is no cure for Covid-19, how are people recovering?
There are “treatments” and various medical procedures that have “helped” people recover… but the part I don’t understand, and you ought to be asking, is how the hell are all those people that have recovered, done so while being infected by a disease that supposedly doesn’t have any cure?
And if whatever has helped them “recover”, is good enough for them to be back in the community, then what is the purpose of having a vaccine – especially one that’s not tested and where pharmaceutical companies have been given blanket exemption from having any liability for any side-effects or mishaps that occur after a person takes the vaccine. Quite interesting… don’t you think?
2. What good has come from dropping the interest rates?
From a fiscal policy point of view, dropping rates is meant to lead to greater economic activity. The assumption being that while money is cheap, many will borrow and spend. This decision is made at the central bank level but the benefits are contingent upon commercial banks allowing for that borrowing to take place.
If you have been following the narrative, you will know that banks aren’t actually giving out cash loans willy nilly. Despite various central bank guidelines around loosening some of the lending criterion, such as: reduction of loan to value ratios, reduction of DSCR (debt service coverage ratio) and allowing for a higher IBM (income to borrowings multiplier); it is still down to the banks to lend money based on their own internal business rules and risk mitigation factors.
If you’ve been through our Real Estate Investment BASICs course, then you will remember that banks lend against risk. Your income and ability to meet loan repayments is a function of how much risk you can mitigate for the bank. Given the rapid job losses across multiple industries and sectors, it is logical for the bank to ask question #5, which you should be asking yourself as well.
Dropping interest rates has made money cheap for 2 sectors of the economy instantly. One is the banks themselves. A lower rate means they have lower cost of capital and higher profit margins.
Second is the financial industry in general. This “money being cheap” concept only sticks if you have the borrowing power to begin with. Do SMEs have that borrowing power? What about the bakery down the road?
Unlikely, not unless they’re prepared to mortgage the first born and both their kidneys to get that loan. Because that’s what it looks like to be the case for so many people across New Zealand, Australia , USA and so many markets around the world
3. Why is activity in the property market not declining yet
To understand this, you have to go back to the middle-school economics class around supply and demand. You will know that when supply drops, prices rise. However, such price increase is not always only because of a drop in supply (which implies an increase in demand), but also because of the “difficulty in purchase” of the particular commodity in question – in this case, a property. Not everyone can buy a property now, no matter how cheap.
With the tightening of credit, resulting from the increase in overall risk to a person’s ability to service a loan, banks are taking a far more conservative view, than your mortgage broker will lead you to believe. Money is cheap. But that cheap money is not for the masses. Most of it is already used up. The money that’s still in the system, is not cheap. It is high-risk money (from the eyes of a lender) and the bank is in no rush to loan it out.
The bank has little incentive in taking unwanted risk. The government will never blame them for not taking the risk, because they’re being “responsible” in ensuring the stability of the financial system; but at the same time, when these same banks have significant decline in profits (due to lower lending), the government will happily step in, to help them out – aka bail them out. Are you following the conundrum in this?
Right now, you will see real estate companies coming out saying, “activity is great, we have heaps of listings, transactions are still taking place and we don’t see any major downturn in the short term” – Sure, they’re bullish. Its their job to be bullish because that’s their bread and butter.
While there’s a lot of activity in the real estate market (in terms of listings, auctions and offers), pretty soon, the reality is about to hit home. Here’s why.
On the one hand, central banks have tried to make money cheap and encourage borrowing to induce greater spending. On the other hand, the lenders, the channels through which money gets lent in the consumer market, has tightened the flow. This is leading to a massive drop in the “ability to purchase”, which will soon be reflected in prices.
This drop in price is not due to lack of demand. Its due to lack of the ability to purchase.
Tightening of credit by the banks causes more weaknesses in the economy, which then leads to more forced selling of houses (because landlords may not be solvent for long if tenants start downsizing and leaving) and puts more downward pressure on prices.
So an action (tightening of credit) that’s there to maintain the integrity of the financial system, leads to the economy slipping further into recession.
Its the classic case of the serpent eating its own tail.
Now…. Add to this the fact that we won’t have all those offshore buyers coming in like they did, no more immigration for a good 2-3 years and severe downside risk of the recession deepening, you’ve got no fundamental driver that can support the housing market at this stage. At least not for the foreseeable future.
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4. What is going on with foreign trade
In most developed markets, roughly 60% of the GDP comes from consumer spending. From understanding the question above, you should realise that if money in the system gets tighter, naturally, spending is going to have to take a hit too. This is what you will be seeing reflected in those nuclear GDP numbers expected this quarter.
However, of the remaining 40% of the GDP, there’s a large portion that comes from global trade. This is particularly true for large export nations like Australia, US, Canada, UK and others. With such massive travel restrictions in place, most export nations might barely be able to maintain ongoing export contracts, let alone secure new ones. There’s no question that this covid madness has stunted international trade like no other event in the history of mankind – not even the second world war.
So if global trade is declining, with no vaccine in sight, no timeframes for when life will go back to some form of normal and no new jobs being created, what is the game plan for bringing the economy back on track?
You should start realising the downward risk is not just a story of doom and gloom from a pessimistic point of view – it is bloody real.
5. How Secure if Your Job or Sector?
If you’re an employee, it is absolutely crucial for you to ask this question. Last week, I wrote an article about this subject, but haven’t published it yet. I will, on Wednesday net week (I hope). Its a big long read and required a lot of research before I could put it out there.
In a nutshell, you have to consider the risk your industry, sector or employer is exposed to. Besides just the basic question of “will I still have a job in 6 months time”, you should also start developing your own risk strategy for weathering the storm – because trust me when I say this: We’re only about a third of the way through the trailer. The movie still hasn’t begun yet.
The next 6 months are absolutely crucial for countries like New Zealand, Australia, United States and the UK. If you look at the calendar of key events across all these countries, you’ll realise that besides election time in the US and NZ, there are severe risk events on the horizon with various subsidies and stimulus packages coming to an end within weeks from now.
Its an important question to ask. How secure is your financial future and income stream over the next 6-9 months. Along with this question, also consider asking yourself the following:
How agile are you?: If the need arose, how quickly could you move from point A to point B? I don’t mean that in the physical sense, but also in terms of your occupation, profession, mindset, and a general ability to be flexible with circumstances.
How liquid are you: If the need arose, how quickly could you raise enough cash to make up 12 weeks worth of survival inventory? What could you liquidate? How quickly could you liquidate things?
How skilled are you: What’s your level of skill with regards to jumping across industries or occupations? Are you pretty tech savvy? If not, then you’re exposed to greater existential risks over the coming 5 years.
6. Are You Sleeping Or Awake?
Now this might sound rather weird but you must ask yourself this question in the context of your awareness of what is really going on around you. The current generation or even the previous one, doesn’t talk about real issues anymore. Everything is woke, full of cancel culture and downright PC. What else can be expected when you take away the human quest for knowledge and reason, and replace it with a bashful narrative powered by the hard left.
I cannot remember the last time I heard someone quote something from Nietzsche, Schopenhauer or even Kafka. It seems all the great philosophical works from these stalwarts of human thought has been lost, forgotten or disowned. Sad.
Make the effort to find your own truth. Why? Because you owe it to yourself and your next generation. With the shift that’s happened and is about to come, if you are not prepared, what will you do? Who will you blame? If you haven’t managed to create a secure income stream for yourself in the next 2-3 years, what are you going to do when all sorts of enforcement start getting slapped on people for variety of things, ranging from not taking the vaccine, not wearing a mask, sneezing in public, or who knows what else.
The bottom end of the workforce has been decimated systematically over the last 3 decades due to automation and various other things. Now it’s the culling of the bottom end of the white collar world that is about to get affected. Low end white-collar jobs are not going to be a necessity for anyone. So… will you have a job in the next 6-12 months? Is now a time for you to pick up new skills? Is now a time for you to learn how to create and multiply money? Or are you just happy to remain where you are, too busy for your own transformation, careless and paralysed by indecision.
Think about it.
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