When little Che-the-avocado started his life on the shady vines of a South American avocado tree, he had no idea that he was part of the largest tinder pile of economic downturn the world was yet to see.
All markets are currently doing well; there has been a rally across the board. The Hang Seng, the Shanghai stock index, KOSPI – the South Korean Index, MOEX – the Russian index, DAX in Germany, SANSEX in Germany… even here at home with the ASX. Everybody is up. It’s all guns blazing! The sun is shining, people can go to cafes and eat with their friends, we can socialise in groups and all the connections we made on dating apps can come to fruitful conclusions. The world, friends, is healed. Happy days.
If you believe all of that, then I have a bridge I want to sell you in Antarctica. Yes, the markets are up, but they are up from the bottom of the barrel. They cannot even see the shadow from the light from the top yet. Also, this is just a rally before the fall. There is always a rally.
Look at the Dow Jones’ rally against all the odds. Looting, riots, New York as the infection state – it seems nothing will keep a good stock down. There has been some movement to fix the oil war, but that is only one of a multitude of issues. The riots will pull confidence out of that market. Not to mention unemployment in the US, depending on how the figures are tallied and by whom, which is somewhere between 14.7% and 25%. Higher than during the Great Depression.
The Chinese market also rallied high, but is a fragile ecosystem with fear of the US imposing more sanctions due to the new security law imposed on Hong Kong. The fact that Trump did not take this opportunity to impose a penalty on China, either directly for its actions on Hong Kong or through an indirect stab over COVID-19, shows how crucial the US – China trade deal is to both countries’ economic recoveries. We know that Trump is hot to boil and not afraid to throw some punches. It also highlights how single-minded the Chinese government is in its 40-year plan, it will never let a good crisis go to waste (seriously, if countries were ever able to float on the stock market, China would be the Berkshire Hathaway of safe investment).
The global lock down is still new. We will only start to feel the effects of this on a broader scale in the next few months. North American Mexican restaurants will lose or go out of business with no avocados for their guacamole. South American farmers will lose trade with nowhere to sell their avocados… it is avocadogeddon, people!! And, if you look closely, you will see that the demise of economic civilisation started and ended with the avocado. Foolish millennials were lured in to spend their life savings on this hipster delight, essentially ruining their futures in an unrecoverable way, and now that hard-seeded soul has taken out the American continent!! Is this the rise of Che-Acoado?! Who can stop the madness??
Facetiousness aside, my point is everything is connected. We still have a global shut down and, if that was all we had, the world could rebound. But that isn’t all: we have riots in the US, which has more to it than a poor man losing his life. The response has been well out of proportion, even for our free-speech-loving Americans. It is the tension of unemployment, isolation and uncertainty. There is uncertainty because no government can tell its population when this will end or even proffer a guesstimate. They can loosen restrictions and hope that it will work out, but international travel in any meaningful way has a penciled-in date of 2023!!
The next step in our economic downslide is the fall in rates of large borrowing, mostly by the development sector, large tower constructions and broad acre subdivisions. The issue here is that most of the money borrowed for these types of ventures is from the private money lending sector, family offices and mortgage funds. These types of establishments rely on money from private investment pools and these investment pools are drying up as investors need their funds back in their own pockets. The effect here will be, at the end of the loan terms, the developers will have to pay their loans back in full. Now, you might think it is easy: loans have an expiry date and, if you took out a loan to buy something and you knew the repayment date was coming up, you would pay it back. Easy. The issue is culture, particularly here in Australia, where developers like to live on the edge and in over extension. The vast majority of developers rely on extensions to their facilities or refinancing. The issue here is that if there is no money to refinance with… start act two of our economic play.
As these developers will not be able to make good on their loans, properties will be taken and sold at a discount, which will drive down market prices, making other lenders scared to issue capital and make the majors black list lending to certain post codes, which will make more developers fall over (sound familiar? Welcome to the 2009 GFC).
It is all connected, my friends, but my question is: how bad will this one be? There are so many more threads to pull on here than there were in the GFC. There are many avocado farmers the world over. The Australian government has already started the push proper economic stimulus, they have released the first round of incentives to people who build new property or renovate with $25,000. I say hold out for the $50,000 in a couple of months.
My warning is this, only fools rush in. The stock market has rallied up on a false positive, being pushed by people buying on the way up. The clever people are the ones selling now who bought low and will buy again in a month or so when we crash again and they will buy the same stocks from the people they sold them to. Be patient and wait for REAL growth, this will come when there are REAL solutions.
My tip is this: if you are going to eat avocados, have some self-respect and do it in the privacy of your own home with some pepper and salt and a small spoon 😉
Stay safe, help yourself and help someone else if you can too.
Love you all,