Wow, a lot has happened in the last month since I posted. I hope everyone is home and safe, practicing social distancing, probably the third most searched word in google after coronavirus or covid19. Stock markets have been volatile to say the very least. People’s retirement accounts are down, their downpayments, if invested in the market, have taken an absolute beating. So what does this all mean.
Well, there is little question that we will take a hit on the gdp. Total productivity is the only thing that matters, and if we are all at home, we can’t be that productive. Also, with such an intertwined economy what we have is a high level of operational leverage. What does that mean? Well, our modern businesses have become efficient in capital usage, so in normal processing times, what we have is the maximum deployment of resources (think of it like operational leverage) which basically maximizes the output when compared to the amount of capital input deployed. So in a way we can say this is extremely efficient. However, when we have so much operational leverage what it means is we do not have a ton of free capital sitting around doing nothing (or waiting for a rainy day). This means that businesses are especially not predisposed to weather storms like a sudden stop in economic activity. There will be quite a bit of business closures and also job losses. And this will affect the housing market in the short term.
However, what we have seen is swift actions from the central banks. The federal reserve has committed to basically unlimited quantitative easing. They have basically committed at the minimum about 700 billion dollars of long term capital and 1.5 trillion of short term (how that translates to long term balance sheet operations remains to be seen). So depending on how long this drags on, we have to make educated guesses to the balance sheet of the federal reserve, would it be 5 trillion, 6, 7, 10?: Who knows. But it will be much bigger than what it is today. While this doesn’t directly translate to money supply, it will however affect asset prices in the long term. So taking a longer term view, once you survive this short term problem, prime assets of all types should perform. That is exactly how I am positioning myself because I am a long term investor and over the long term the balance sheet size of the central banks matter.
I have continued to be long on real estate, gold, and index etf and have added to them in the recent months. I am not a qualified professional, so please seek a professional opinion. This is simply my two cents.
