Tuesday, August 6, 2024

Financial Market & The Economy

The financial market collapse has nothing to do with the economy.

The financial market collapses because there are no more greater fools coming after them.

Everybody is looking for a way out of the financial market without losing money.

They are all stuck with financial assets with prices so high that they are ridiculous. Everybody knows that but who is to blink first.

So there is no one to blink first. Everybody is looking for a common excuse to dump the market.

That excuse is the economy.

Everybody knows that the economy has been gone for several years now, ever since covid, ever since the Russia invasion of Ukraine, ever since the CCP cracks down on its own private sector and scare foreign investors.

Everybody knows that the economic problem will be covered up by a major war where sentiments are brewing now and threaten to blow up anytime soon.

The global economy is in trouble because all economies have reached the limits of their government debt financing and the limits of zero interest money supply expansion.

The impact of relentless money printing in the last decades, apart from stimulating the China economy, has been to create a real estate bubble as evidenced by ordinary working people being unable to afford basic housing in the home land. Real estate in capital cities around the world has been fed by corrupt money inevitable from excessive money printing.

The adjustment in the real economy that needs to be seen is in the real estate sector. This has been long in coming because banks are trying very hard to stall the adjustment. Banks are inundated with actual and potential bad loans in real estate for which they are probably inadequately covered by their provisions. The collapse of the real estate in major cities and the collapse of major banks are the next major things to look out for.

This reaction in the financial market is probably major -we do not know how much the adjustment will be this time. Stocks and all kinds of financial assets include cryptocurrencies have been way over inflated. The extent of the adjustment will depend on the amount of spare cash that investors still have to buy up the fallen financial assets. If there is little money floating around, then financial asset prices will be depressed. This may spend problems for banks if they have been funding financial assets all the while.

The real estate adjustment depends on the state of the economy. The real estate sector needs rental to support their mortgage repayments. If business prospects are bad, then rentals will be low and insufficient. Real estate prices will have to fall. Probably by a sharp margin as well.

Bankers have a lot to worry about.

Finally, the saviour of the human race will be the IT sector, the electronics, the digital and everything that has to do with electrical and electronics. The feeding frenzy before has been a new frontier of technology which has brought about a new way of living. Everybody now interfaces with an electronic device.

But technology is now so well developed and embedded in consumer goods such that there is no necessity by the average person to constantly change the rice cooker, the TV, the laptop, the handphone. We are quite happen with what we already have now, thank you. So ends consumer demand for electronic goods.

The last frontier seems to the electric vehicle. Well, for now, no.

I think the human race has developed technology so rapidly in the last three to four decades that it has exhausted the possibility for further enticement of the human greed and curiosity. We are quite happy with what we already have. Our children are quite happy with what we have given them. There is no need to make more babies.

The one last adjustment that is needed is to align the cost of real estate with the purchasing power of the average person. With the end of indiscriminate money printing, there is no more corrupt floating about. The price of real estate in prime locations will have to adjust downwards. How much depends the quality of new jobs being created and the salaries they pay.

The economy is taking a path of its own to adjust. It has very little to do with the current financial market adjustment. The chicken have come home to roost.

1 comment:

walla said...

That the world economy is at the tipping point today of disintegrating should surprise no one.

Whether from property, stock, bond or other asset plays, making easy money comes at the price of ignoring value-creation so as to chase speculation.

The implosion of the Japanese stock market quickly stanched by announcing no more interest rate raising shows a major aspect of an economy these days is basically a balancing act between two players: central banks and speculators. The value-creators in the US, for instance, are just the big Seven stocks, add Nvidia, whose investments in AI are ahead of any palpable returns today leading to suspicion of monopolism, thus the emergence of market hype.

Similarly, crypto players are a rebel force against central banks and governmental intrusions in financial flows. They hash encrypted tokens in blockchains to earn processing fees and their prospect of trading their mined finds. What was grinding and hard mining of minerals in hot open fields is now arm-chaired keystroke excavations in the deep and dark web.

That crypto is rising again shows the sentiment against central interference is still burning bright independent of whether it is Trump trying to capitalize on that trend for his own what-else personal political benefit making no difference.

Whether it be an effect on stock markets or cryptocurrencies, central banks have only interest rates as a tool to try and massage market expectations. Black Monday's they will try to prevent but will speculators read them and the markets well enough to continue their speculation at pains of awaiting the first super-crystallisation such as happens suddenly when a little dirt into a concentrated liquid hardens it into solid?

The economy today is less about real value-creating because it is getting harder to achieve or find real value from what is being done, and more about speculation even if the risk of getting a bad hand increases with greater velocity. In the end, cash may return as king but then again in which currency?

That, only Zen masters can answer - but after copious imbibing of a bubbly beverage.