Markets have been on a tear.
Worldwide. Not just in the US, SG has gotten a nice 20% recovery, US even more, and other countries as well.
So... of course there's lots of self doubt on my end. Am I wrong? How wrong am I? At this point, looks like I'm very very wrong.
And here's where I feel that the disparity between theory vs reality comes in.
COVID has or is supposed to have messed up 2020.
Most of the world has some form of lockdown since mid March. It has been 2.5 months.
Even though many countries are planning on opening up slowly. It's not immediate.
So I would think it maybe 6 months before things are fully open again.
6 MONTHS. Half a year. Businesses CANNOT have felt nothing. There MUST be pain.
Consumption has dropped drastically for half a year.
Tourism is almost non-existant.
US has 40 million people unemployed.
Hertz, JC Penney, other businesses have filed for bankruptcy protection.
People are still losing their jobs. The retrenchment isn't over yet.
Even when countries reopen, I doubt people are going to jump on the next plane to go for their holidays. I doubt people will jump on the next cruise that leaves their shores.
Tourism is estimated to be around 10% of GLOBAL GDP.
In total, Travel & Tourism generated US$7.6 trillion (10.2% of global GDP) and 292 million jobs in 2016, equivalent to 1 in 10 jobs in the global economy. The sector accounted for 6.6% of total global exports and almost 30% of total global service exports.
https://destinationsinternational.org/industry-reports/world-travel-tourism-economic-impact-report
Even though it's numbers in 2016, but it's a fair enough estimate.
It just means tourism contributes to a significant portion of global GDP.
And this also means that potentially global GDP has dropped by 5% for 2020.
6 months of tourism lost...
Consumption and jobs just doesn't jump back to pre-COVID as though nothing has happened once lockdown is lifted.
As businesses reopen, and as consumption slowly recovers, then more jobs will be created.
If you're a business owner, you'll start business again. But you won't hire the same quantity of staff yet. Until you're sure business has picked up then you will hire more people. And with 40 million unemployed, business should pick up slowly cos consumption SHOULD be limited.
Sure. Businesses WILL recover eventually.
Also, loss in revenue should have a larger impact on earnings. Cos many businesses are run on loans. A drop in revenue will have a larger impact on the bottom line. Loans and rent still need to be paid. If you make $100 on good days, and have to pay $80 in expenses... Those expenses don't go away. But the revenue will drop. So it's easy to incur losses due to a drop in revenue.
All this is in theory...
Then we have the reality of what's happening in the markets.
Everything is up... And up significantly.
There's multiple ways to look at this.
1. My theory is very very very wrong.
2. Markets are expecting things to jump right back once lockdown is lifted.
3. Discount rates have dropped very low due to low interest rates so asset prices are lifted.
4. Many other potential reasons. No one knows which is true. Everyone gives their 2 cents worth of why... but no one can confirm what's happening. Who knows who is right? Could be a mix of everything...
Now... I'm someone who works on theories.
For me, I believe that the science works. Maths works.
The problem is... how long does it take for it to work?
Even if you exercise, it takes time to lose weight.
So for me, I believe that the market is overpriced.
The last earnings numbers were for 31 March 2020. The horrible numbers haven't appeared yet.
The numbers for 30 June will be more reflective of the actual impact of COVID on the economy.
In the US, many renters have provisions. They cannot be evicted during this period. They have rent deferral programs. These all need to be paid. It's not debt forgiveness. It's just deferred. So it's possible that the issues haven't appeared yet. The landlord still haven't felt the pain yet.
For me, my theory is correct. I cannot believe otherwise. Of course, that is my own world view.
Everyone should have their own views and beliefs, else how to make decisions in life right?
For me even though I believe in my view, there's one problem... What if markets NEVER reflect the existing market conditions.
What if now... asset prices are high, the economy is bad...
And somehow the market manages to "fake it until it makes it"...
So what if the asset prices remain high for 1-2 years. UNTIL the economy actually recovers.
It's possible...
Cos... Sometimes a company can be under valued. That's what value investing is about. To find stocks which are under valued. So similarly, the opposite can happen. Markets can be overpriced for a very long time.
So to me, based on the current economy, the market is overpriced. There is a lot of optimism that things will just bounce back.
If not, then it could mean that investors are actually willing to take lower earnings for their investments due to lack of alternative places to park their money. It could simply mean that the economy is so flush with money that investors just need things to buy...
Reminds me of the story during the Great Depression. Where people didn't spend their gold, cos waiting will just make gold more valuable. So if people just don't sell their investments. The market will never go down.
So how? I also don't know... LOL...
Theory vs Reality.
If reality goes on for too long, then the theory MUST be wrong.
But for me, I still believe in the theory. I could be wrong... and I'll have to pay for my mistake... See how in the coming months...
Once again...
These thoughts are my own analysis and thoughts, please do not use it as an indication to buy or sell. Please do your own research before making any decisions.
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