In 2008, why did the markets crash?
Interest rates were raised, many people couldn't pay mortgages, many asset backed securities didn't do well, many CDS/STS and other derivatives got called due to the defaults and banks had liquidity problems.
Cos... Debt...
Interest and loans still needed to be paid.
This was made worse by the leverage of the derivatives where more insurance on debt was sold than debt itself. So when the insurance needed to payout, there wasn't enough money to go around.
Fast forward to 2020...
What do you think is happening?
Same same but different?
Virus fears caused people and Governments to shut down, stop going out, reduce consumption.
A lot of folks are just hanging at home living on basic necessities.
Many people will lose their jobs, think restaurants, flights aren't flying, hotels, retail outlets will still hire the same number of people?
Due to decrease in demand, manufacturers will also reduce headcount.
So what happens when people lose their jobs?
Remember?... Debt...
Interest and loans still need to be paid.
What're banks going to do?
Many businesses are run with significant debt.
Many people still have to pay for their home mortgages.
Reduced consumption and loss of jobs... What do you think?
Rent still needs to be paid... Retail, logistics, commercial...
FYI... For many food shops, based on talking with friends, the whole month's revenue is mainly to used to pay expense. Only maybe 3 days worth of revenue is considered profit. Means for for 27 days, a food business is paying expense, and the last 3 days what the sell, they make it as profit.
So what happens when demand drops 50%?
Scale that up to all the businesses in the whole world.
So in the end, all the fixed cost gonna deal a lot of damage to the economy.
Businesses or individuals will have issues paying up their fixed commitments.
Maybe not you yourself, but there's a good chance people will lose their jobs.
In the US, it's common to hear people have no money to buy groceries, especially during this period. People like paycheck to paycheck, and people can get laid off very easily.
So there's probably still more pain to come.
Companies haven't even started to go bankrupt yet.
What if Malaysia extends the lockdown for another 30 days?
Historically, market downturns don't recover overnight. They don't fall for 2 weeks and suddenly recover.
Market downturns last for 3-6 months, sometimes years before they start to recover...
You want to buy shares? Sure...
Remember you'll probably not be able to pick the bottom, so maybe if you're lucky you can catch it 10% near the bottom, but do you want to buy 10% before it hits the bottom, or 10% after it hits the bottom?
If you buy it 10% before it hits the bottom, how sure are you that one of the stocks you bought isn't one that's potentially going to go bankrupt?
So it's probably better to buy it when it's going up, and all the companies that are going bust are already bust and the worst is behind.
Interesting times we live in...
If you're stable and set up ready to take advantage of this situation, good for you.
If not... then watch how this situation plays out and remember it, and remember to be ready the next time it happens.
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