Sta Hungry Stay Foolish

Stay Hungry. Stay Foolish.

A blog by Leon Oudejans

A happy New Year with even more irrational exuberance

Monetary expansion by Central Banks reached unprecedented levels in 2020. This expansion boosted prices on financial (eg, bonds, shares) and property markets (real estate) rather than in the real economy. These price increases are considered to be profits rather than price inflation, following guidelines (eg, accounting). Also see my 2019 blog: The inflation conundrum.  

Late 2020, Axios Markets gave an astonishing example: “Tesla is now more valuable than the combination of the world’s top seven traditional auto makers, despite only delivering half a million cars this year.” Notebold and italic markings in quote by LO.

The main exception is on the commercial property markets: rents and values are decreasing. Retail was already in decline and Covid-19 has accelerated the pace of its decline. See my April 2020 blog: A dead retail canary in a corona coal mine (3). Hence, the commercial property market is still connected with the real economy (eg, sale of goods and services).

The absence of a relationship between the real economy and its markets would usually suggest the existence of an economic bubble that will eventually burst, like the dot-com bubble (1995-2000). However, I expect that Central Banks will maintain their monetary expansion to prevent an economic and financial crisis and during most of 2021. 

As of mid March 2021, our pre-pandemic normal life should return during Spring and Summer because viruses are then destroyed by UV-C sunlight. Hence, contaminations and hospital admissions should decrease sharply. Perhaps, retail business life will have survived until then. However, viruses will return in Autumn and Winter 2021. Businesses may then finally surrender to reality. 

Either late 2021, or sometime in 2022, Central Banks and governments may need to accept this reality as well, and stop their ongoing monetary expansion. This should cause an avalanche of (business) closures and unemployment. That reality should sink irrationally high values on residential property and financial markets.

Ultimately, the economy and its markets will have to end a long period of irrational exuberance and will have to find a new and sustainable equilibrium. In the meantime, 2021 will mostly resemble 2020, a.k.a. our annus horribilis

1999 (1982) by Prince

artist, lyrics, video, Wiki-1, Wiki-2, Wiki-3

(2000 zero zero, party over, oops, out of time 

So tonight I’m gonna party like it’s 1999)

Note: all markings (bolditalicunderlining) by LO unless stated otherwise.

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