Sell

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Submitted by davelj on June 2, 2020 - 5:27pm

In my view...

You should pretty much sell every risk asset that you can - pretty much. This recent rally is a gift from the market gods to de-risk in the face of financial armageddon.

Amazingly, incredibly, beyond all reason... the S&P500 is down just 10% from it's (significantly overvalued) February all-time high. Despite what's likely to be 15%+ peak-to-trough decline in GDP, 15%+ unemployment, profit decimation, overwhelming corporate and personal bankruptcies, myriad bank failures... and no bullets left in the Fed's gun where rates are concerned... stocks levitate. I would argue that this stock market is the most overvalued US market I've ever seen - possibly including 1999/2000.

And it's all a trade - just like all of the classic sucker rallies. Only the big liquid names are moving and driving the indices higher. No one wants to actually "hold" anything. Everyone thinks they'll be the first ones out the door.

The good news is that the banks are *much* better capitalized than they were going into the Financial Crisis. The bad news is that they're going to need every dime of that capital to stave off a crushing wave of bad commercial and CRE loans. Drive down whatever street near you has a lot of strip malls. I live in Mexico now but I drove down Broadway in Chula Vista the other day and just looked on either side of the street - restaurants, nail/hair salons, small hotels, miscellaneous services and retail... at least 1/3 of these businesses will fail by year-end. They simply do not have the wherewithall to survive. And the others will limp along for years afterward. Virtually all restaurants are fvcked. Even if they can seat using social distancing guidelines, only a small percentage can break even. It could be 18 months before there's a "normal" restaurant business. Hospitality (resorts, hotels, vacation rentals)... fvcked. Total wipeout. Airlines and other human transportation... fvcked. Energy... fvcked. I could go on and on and on. And then think about the employees of all of these businesses... there could be 10 million jobs that simply don't return to the US economy for several years - even after there's a vaccine.

Yeah, there will be a bump in economic activity after we hit bottom and then followed by the vaccine (whenever that becomes available). But that bump will ultimately leave the economy (still) in a pretty big hole and, to add insult to injury, there will be a certain, albeit modest, percentage of folks whose behavior is going to semi-permanently change even after things normalize. They're going out less, traveling less, spending less, saving more. When you have a highly-leveraged tanker like the US economy that grows 2-3% in a good year and all of a sudden you have a modest percentage of folks that change behavior like that... you have a long-term disaster on your hands. As the saying goes, "everything important happens at the margin"... and at the margin, things are going to he11 in a handbasket.

Another piece of good news is that the bank regulators are trying to get ahead of things and using forebearance tools - as opposed to capital tools - to try to right the ship. I think that's smart - they should've done more of that during the Financial Crisis (as opposed to cramming capital down everyone's throat) - but... it's still going to get very, very ugly. There are so many permanently damaged businesses out there - eg, think about all of the commercial real estate and how these owners are going to deal with massive waves of bankrupt leasees. Yes, there are regulatory tools that can help but when you see these being pulled out, you'll know the Powers That Be are panicking. This freight train is going to level pretty much everything in its path - I'll be very surprised if it's not worse than the Financial Crisis.

Drive around your town or city. Look around. Think about the businesses that aren't coming back. Think about the folks whose jobs aren't coming back for a long time. Think about how behavior is going to change even after things begin to normalize. Think about the leverage and how the banks are going to cope with all of this. Think about what this means for corporate profitability - short-term and long-term and then what that means for nosebleed-level stock valuations.

Meanwhile, our fair-haired Nero fiddles while Rome burns.

Discretion is the better part of valor. Sell.

I could be wrong. But I doubt it.

Submitted by Escoguy on January 7, 2021 - 9:22pm.

SD,

Thanks, #8 is in the pipeline. Locked today at 2.875% for 30 yr fixed. Was a nice touch with the new conforming limits as I only needed 20% down to get that rate as investment. Contracted back in August so solid equity pickup. It's a bankruptcy so it takes some time. Too bad these are rare.

Close is scheduled for Feb 22nd. Just take things in stride and try to stay humble.

Recent one (not mine but same neighborhood) had 20 applicants in just a few days, so rental market is very strong.

Still a little stunned that #7 could sell for six figures more than a few months ago.

That being said, was about to make a weird prediction.

I've done some consulting work at Sempra/AMN over the years. One of my co-workers who was very anti real estate since 2014, was convinced prices were too high etc. So he put all his money in stocks and some in bitcoin. We do exchange trading ideas, I even picked up a modest amount of bitcoin.

Now that things have taken off for him, he is starting to revisit his premise on real estate. It can get old living in hotels even if it is "cheaper" so he's finally coming around to potentially buying.

So that boring old asset class of real estate may end up getting an unexpected push here and there from other assets which have had a great run recently.

He is starting to see the value of asset preservation and has that luxury now that his assets are getting close to 1M.

Sure there are others like him out there.

Submitted by sdrealtor on January 8, 2021 - 2:32pm.

None of us are that special. There's someone else in the world like each of us.......except me ;)

Submitted by Escoguy on January 8, 2021 - 3:24pm.

Yes that is certainly a big part of it.

The psychology if knowing you are "charting your own course". Thus my general caution with any enterprise about economic forces and motivations which we can only partially grasp.

Herd mentality or as my wife says "monkey see, monkey do" is a huge force.

But if we go back to Greenspans reaction to the 87 crash, lowering rates, smoothing the markets has been more and more a priority.

In some ways, it is surprising how long it too the real estate market to catch up to the financial markets (realizing the effect of govt support) via bond buying/quantitative easing/fiscal policy.

So much of the neoclassical book on economics has been put on the shelf. We're all Keynesians now. Growing up, I never thought that would happen.

It annoys my 15 y.o. son when I talk too much about this.

Needless to say, not just talking my book but policy favors a portfolio of real estate/stocks maybe with a touch of gold. I don't think I'd want more than 1-3% allocation to crypto but it is clearly on the upswing.

Main message is that cash is for short term needs but not really an asset to hold any more unless you are in the ultra high wealth. It's just as good to have an asset to borrow against when needed with Helocs at 2.25%.

These policies have made our common fate more interwoven and we are more interconnected that we realize. I could go on. Getting vaccinated next week and look forward to more face to face engagements in the month after.

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