Keep your powder dry. Don’t pull the trigger until the grind begins to end.
“Why are you getting ready to invest, Dymphna?”
Ok, I was making the point earlier in the week that there wasn’t going to be a V-shaped recovery.
A few people asked me then, well, why are you getting ready to invest – if there’s not going to be a recovery.
That’s not quite what I said, so let me make it a bit clearer.
What I said is that there’s not going to be a V-shaped recovery. That is, the economy is not going to snap back in a month or two and it will be like nothing ever happened.
That’s not how it’s going to play out.
There will be a sharp rebound from current levels, but keep in mind those current levels have about a quarter of the economy in moth-balls.
We’ll snap back from there, but that’s when the hard work begins. The economy will grind lower, the multipliers will take effect, and things will get rough – maybe for a full year after the ‘snap-back’.
So you can think about these as separate phases – the crash and the grind.
And it’s what happens after the grind that’s interesting.
And this is what we saw in the GFC. There was the crash as the banking system teetered on collapse.
That was followed by the grind as the cancer spread to the broader economy. That lasted about 18 months.
After that though, all the stimulus measures that had been put in place started to take effect, and the economy, and asset markets in particular, boomed.
And the ground work for the Covid post-grind boom is already being laid.
You can see it in this chart here. This is the M1 measure of money-supply in the US.
So you can see M1 has jumped from $4 to $5 trillion.
Wow.
The Fed, like every central bank around the world right now, is printing money like crazy.
And what’s happening right now makes the GFC money printing look tame.
It took us 5 years to go from $3 to $4 trillion – itself on an accelerated path after the GFC.
It took just three months to go from $4t to $5t.
So it’s faster but it’s also different. The Fed is buying everything it seems, and that money is making its way directly into deposits. You didn’t see that after the GFC – at least not in such an extreme way.
And if we think the relationship between the money supply and asset prices is something around the 1:1 mark, which is what this chart seems to suggest…
Then if we’re talking about a 25% increase in the money supply, then we’re possible talking about a 25% increase in asset prices.
There’s a lot of uncertainty around those numbers – how it plays out on the ground – but the scale and direction doesn’t seem to be contested.
So I think what will happen is that all this money printing will backstop the economy and prevent it from a total wipeout. There will still be a ‘grind’ but we’ll avoid complete catastrophe.
However, like always, government money is slow to come off. The recovery will be patchy and many sectors will want stimulus to remain. If the government tries, the markets will “tantrum” like they did through the post-GFC “taper tantrums.”
And so the stimulus will remain long after the economy has found its feet again.
At that point, all this money goes from being a back stop to a stimulant, and will drive asset prices higher. And since we’re on such an extreme dose, the effect will be huge.
I think this helps explain why share markets are at all time highs right now (alongside the fact that there’s been a shift to retail investors who don’t know what they’re doing). Share markets are looking through the crisis to the money printing and the asset price boom on the other side. I think they’re underestimating how bumpy it will get, but it’s still a rational expectation.
Australian Property
So let’s think about what this means for Australian property.
Like we saw through the 2010s, all this “excess liquidity” will seek out safehaven investments. Australia is having one of the better Covid experiences, and Australian property will be very attractive.
At the same time, as I’ve written about before, immigration will probably snap back quickly, while housing construction will fall to record lows.
The Australian housing market was in shortage before Covid, so this only gets worse.
That will create upward momentum in prices, and that momentum, even if it’s small, will make Australian property one of the best performing asset classes on the planet.
At that point, Australian property will become an excess liquidity magnet.
And it’s off to the races we go.
Speed of recovery
I think the other thing that’s interesting here is that the Global Central Banks seem to be mainlining liquidity in a much more aggressive way. After the GFC, money printing was still focused on keeping rates low, and was contained to the inner core of the financial sector.
This time round, the Fed is just buying everything, M1 is booming, and it really seems to be old school “money printing to juice demand” type policy.
That means it is moving through the financial system much more quickly, and that means asset prices could boom much more quickly as well.
Crash-grind-boom
And that’s why I’m expecting this cycle to repeat – the crash, grind and boom cycle.
We’ve had the crash. The economy took a massive hit.
That will multiply through the economy, and we’ll get an extended period of grind. That’s the phase we’re in now, and it hasn’t peaked yet.
But after that? That’s when the stimulus fully kicks in and we see things boom.
It’s what happened last time. It’s what will happen this time.
And that’s what I’m betting on.
DB.