More investors are playing Russian roulette
It has been eight months since the first Singapore Covid-19 case was reported on January 23. Together with the rest of the world, we have gone through different scale of travel restriction, country lockdown, shop closure, unemployment and recession.
Under the threat of Covid-19, a growing group of fearless investors still stand tall to prove that they are true-blue market contrarians. When other investors are cashing out and fleeing to safe havens, they decide to make the most of the situation and dabble into stocks and properties. When many are lamenting the loss of business or employment, they put their life savings and whatever cash on hand into option and margin trading.
In times of uncertainties, these big gamblers are eager to make one last bet in a lethal game of Russian roulette.
Here come the speculative traders
On March 27, Malaysia Prime Minister Muhyiddin Yassin announced the country’s Covid-19 relief measures with a 6-month suspension on loan repayments.
Instead of keeping the money saved from home mortgages for a rainy day, some people decided to put it in the equity market. One such amateur investor told the Bloomberg, “At first, I thought the extra cash would barely help me survive these tough times, but then I saw everyone jump into the stock market and make big money. I also jumped in and did well. It was better than just surviving.”
The article mentioned that “the boom in investing by newbies has also been a factor behind the meteoric rise in shares of glove makers and the recent surge in little-known Malaysian jewellers, with several of these stocks climbing more than 400 per cent since the start of the year”.
How much of the Malaysian government’s relief funds was spent on speculation in the stock market?
There is a side-effect of this pandemic: People working from home or under self-quarantine are spending too much time staying at home. They surf the internet and look for ways to make quick money. Gamblers from all over the world shift gear from sports betting to stock betting. Let me make that one last bet before the sun goes down. Let me bag that one last pot of gold before the markets collapse. Who cares whether the world will go into darkness for years to come?
In early April, Federal Reserve announced the injection of another $2.3 trillion to rescue the pandemic-stricken economy. However, the livelihoods of Americans are getting worse rather than better. The official figure of US unemployment rate is 8.4 percent in August, though the labor economists said the real unemployment rate is exceeding 11 percent. The Department of Labor reported roughly 55 million Americans have filed for unemployment since March.
Interesting though it may seem, the US stock market has been in rally for months when the country was hit hardest by coronavirus. The bull market was fueled by the impressive price surge of a few mega-cap tech stocks, namely Amazon, Apple, Facebook, Google and Microsoft.
A Yahoo Finance-Harris poll conducted in early September showed 21 percent of respondents have position in Amazon, 19 percent in Facebook, 18 percent in Netflix, 17 percent in Apple and 11 percent in Tesla. When there was a market correction these two weeks, S&P 500 and Nasdaq plummeted because of the lopsided concentration of trading volumes in a handful of stocks.
The poll also told us that 43 percent of individual investors are trading with leveraged options, margins, or both since the start of the pandemic. The results align with data from brokerage firms that young people or the millennials tend to have a bigger risk appetite in trading. By coincidence, Fed also announced earlier that it would purchase $500 billion of Treasury securities and $200 billion of mortgage-backed securities. Now we know where money from QE infinity has gone to.
Targeting millennial users, Robinhood is an easy-to-use and commission-free trading app popular for the young. In June, a 20-year-old university student killed himself after seeing a USD730,000 negative balance in his Robinhood account. The young trader was living with his parents, had no income but was approved almost a million dollar to trade with leverage. What a game of Russian roulette he was lured into playing!
Embracing the hi-tech and biotech mania
The current stock market is nothing but a gigantic playground for technology and pharmaceutical stocks with historical high P/E ratios. Zoom Video, Datadog and Teva Pharmaceuticals are three high profile stocks with P/E ratios over 1,500.
On Tuesday evening, share prices of electric-car maker Tesla dived, wiping away US$50 billion from Tesla’s market value when investors were deeply disappointed by lack of tangible deliverables by CEO Elon Musk. Is Tesla the next big thing or just a PR show with empty promises? A Deutsche Bank strategist said Tesla has added the equivalent of eight Ford Motors or 27 Renaults in market value since March. Among the 65.5 million vehicles sold in the world last year, Tesla only delivered 367,500 cars or 0.56 percent of the total. It is interesting to know how many investors who own the stock drive a Tesla.
Recently, well-publicized IPOs is the media darling highlighted by almost every analyst. Jack Ma’s record-size Ant Group IPO has sparked market frenzy not seen since the dotcom bubble days. The highly overvalued Alibaba affiliate company targets to raise US$35 billion in Hong Kong and Shanghai dual listings next month.
Meanwhile, countries are racing for a coronavirus vaccine. Many are placing high hopes and believe that a vaccine can solve all the existing problems in the world, including a killer virus, a global financial crisis and a fading superpower. Investors worship any company which has the slightest association with the pharmaceutical or healthcare industry.
Sounds familiar? We had the same red-hot market during the dotcom boom in 2000. This time it is the vaccine bubble and the healthcare mania. They all have one thing in common – all trading high in the bubble territory. Institutional and retail investors alike are carried away in a wild speculative frenzy. As economist John Maynard Keynes said, “Markets can stay irrational longer than you can stay solvent”.
Are housing loans really cheap?
Our private residential new sale market is no different from the overheated global stock market. Developers, agents and the vested media are desperate to make one last attempt to sell whatever they have on hand and pocket the last dollar, while homebuyers are eager to make one last property purchase in a bottomless recession.
1) Buy now because of low interest rate?
Think low cost of borrowing is a good reason to buy properties now? Think again.
Many assume that Singapore interest rates will follow the Federal Reserve to keep interest rates low for the next three years. Interest rates of saving and fixed deposit accounts are likely to fall between zero to 1 percent. But will banks offer attractive home loan rates for long? US interest rate is only used as a reference for banks in Singapore when adjusting rates. They can raise home loan rates any time when there is a need, regardless of what the world bank is doing.
Housing loans with floating rates can be a double-edge sword. Once banks decide it’s time to increase rates, they act like shooting bullets – fast and fierce. In mid-2005, I was still paying 1.3 percent for my housing loans. Then came a few rounds of revisions. By the end of 2006, it had already shot up to 4 percent. The banks dated back the effective date a month earlier so borrowers had no time for refinancing or repricing and were forced to pay high interest rates.
You can easily find low interest rate in a property sales pitch these days. But in 2004, the banks were offering zero interest rates for the first year. I signed up one housing loan with legal subsidy and a cash rebate that equals 5 percent of the loan amount. That’s what I call an attractive home loan. Can you find any offer near that in the market now?
But even with zero interest rates, few were keen to buy properties in 2004. In contrast, investors were buying properties in the 1980s when mortgage rates were above 10 percent. Because savvy investors evaluate an investment based on profitability or net return.
I rented out my first private home for $1,800 in 2002. A friend told me they used to rent a similar unit in the same project at $5,000 in the 1980s. If you buy a similar unit now, you can hardly find a tenant willing to pay a rent that can cover your mortgage, maintenance fee and property tax.
So what’s the point of investing in properties just because of low interest rates?
2) Buy now because property is a safe haven?
If property is a safe haven, why recently we have over 34,000 property owners asking their banks for mortgage payment deferments?
A crisis easily triggers a chain reaction of default payment: When employers can’t pay salaries, tenants can’t pay their rent. When there is no rental return, landlords can’t pay their mortgage and need to defer repayment.
Property is one of the most illiquid assets in the financial world. When you have cashflow problem, you want to sell your home or investment property to raise funds. Unlike stocks that you can cash out online in a matter of a few clicks, you need to wait for end of circuit breaker, months to find a buyer and 12 weeks to complete the transaction.
Above all, when your finances are affected by Covid-19, you are ineligible for any Covid-19 Support Grant if you live in a property with annual value of ≤$21,000. From October 1, those applying for Covid-19 Support Grant cannot own more than one property. That means it doesn’t matter whether your second property is tenanted or has a positive return, you are still ineligible for any financial support from the government even if you have pay cut, job loss or financial difficulty.
When it is time for payback
Before the outbreak of Covid-19, global debt has already reached US$255 trillion by 2019. Can countries continue to borrow more without repaying a single cent? How can they possibly pay back the astronomical amount of debt – continue printing more money, depreciate their own currency, or go rob others who have savings?
What did history tell us about ancient empires that believe they have a money printing machine? The Roman Empire kept producing silver coins of poor quality in circulation so that the government could spend more money. The results were worthless money and runaway inflation. The once greatest empire in the world finally collapsed by 476 A.D.
In September 2008, the financial weapon of mass destruction (mortgage-backed securities stamped with AAA ratings) exploded and triggered the subprime crisis. Five trillion US dollars were wiped out and six million people lost their homes. Outside the US, this man-made catastrophe drove the world’s economy to the brink of a total collapse.
Many countries, companies, investors and individuals think it is the new normal to keep leveraging, borrowing more, piling up debts and using new loans to cover old ones. This morning China’s second-largest property developer Evergrande had to halt trading of their bonds after a deep dive of prices, following rumors that it was asking support from the provincial government for a potential debt default that could rock the country’s financial system.
Unfortunately, you as a debtor cannot wash your hands off easily like the World Bank or Donald Trump, or devalue your country’s currency to lower your debt and pay back much less to your creditors. There is no loan in the world that the borrower is not obliged to pay back. Just like the popular quote in the Hong Kong gangster movies: It is you who make the choice. Be prepared for the payback.
There is always human greed before every financial disaster. When the time comes, some people have to pay the price. And this time there are a lot more people, including the greedy, the naïve and the innocent, are going to pay the price. Things are going to be very ugly.
P.S. For the health of our club members, Property Club Singapore will not be organizing any seminar or workshop during the Covid-19 period. Members are now free to watch seminar videos of Year of the Pig Property Strategies and Singapore Property Market. Just log in and access them under the “Members Only” tab.
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– Buying My First Private Property Online Course
– How to Buy Good Quality Properties Online Course
– Choosing Prime Properties In Singapore Online Course
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