The Illusion Of Liquidity
Hey Jessvestors
So I'm pretty much the poorest know it all you'll ever meet when it comes to investment. I'm not very emotional about money and I tend to look at the maths, which can be a mistake because if enough people accept an idea to act irrationally the markets will reflect that and the maths won't matter. That's the case with the current financial state the world is in, too many people acting on emotions and this has created common fallacies people have accepted as rule of law.
One of those fallacies has to be the illusion of liquidity.
Image path - fifthperson.com
Consumer liquidity
The consumer is delusional when it comes to liquidity and that is evident by the number of people storing their wealth in their homes thinking it's "safe" or a reliable store of value when it's nothing more than profit from the greater fool. The only reason housing has gone up and continues to move that way has been through the banks' favourable terms for leverage in this sector, the massive population growth which increases demands and the appeal of it being a human need or rather basic human right. These 3 factors have contributed to a series of exploitation and a housing market that is well overpriced.
So back to my issue of liquidity, the consumer things I bought this house for 500 000 it's now worth 1 000 000 wow I'm a genius! It only took me 20 years to double my money. This is a basic assumption and common misconception that you made money but in fact, you may have not, depending on the following.
- The devaluation of the currency through inflation over the 20 years
- The interest rates
- The demand for housing
What is worth to you isn't what its worth to the market
So while your home may be worth a million its purchasing power could be far lower. Then we need to factor in the cost of upkeep and the interest you paid to square off your home. Now it comes time to sell, you need to put it on the market, wait for offers, pay a real estate agent and some cases a lawyer and hope that there is a greater fool willing to pay more than you paid for it.
While there have been many a greater fool it won't always be that way and what goes up must come down. As income remains flat, as people cannot leverage as they are saddled with debt, as population declines in developed markets.
The supply of greater fools reduces and the so-called "liquidity" in your home starts to erode. You may value your home or neighbourhood at a certain price but the market now comes into play and dictates the price through demand price discovery and liquidity in the market. Depending on the cash available to interested parties will be what your home will be worth.
So your home is what people are willing to pay for it, so if you need to sell you'll have to take that offer and not what you thought the home is worth.
Over leveraged and underperforming
Yes, this may sound scary but this is how effective markets should be working! Malinvestment needs to be punished for capital to flow to places its most productive in, yet today we continue to build a market of hoarding cash through the printing of cheap money.
Derivatives and other financial products have helped corporates also leverage up when we look at the stock market today its at all-time highs even when many of those companies earnings are flat or in decline. In many cases, they've become shadows of their former selves and instead of producing to create products the market needs, they leverage their assets and future income to get more cheap money to buy back stock and financialise the business instead of running the business.
Image source - zerohedge.com/
Leverage by definition isn't a bad thing but it has been bastardised and we're basing valuations on fairy dust and not what the market values companies, homes or shares at but we're creating false valuations and calling it liquidity.
Have your say
What do you good people of steem think? Do you think we've overestimated things? Are we living on too much fake money or speculative value?
Holla at me in the comments! All my commenters I will now refer to as Jessie. Jessie is a good friend of mine, but Jessies got a girl, and I want to make her mine.
So have at it my Jessies! If you don't have something to comment, comment "I am a Jessie."
Let's connect
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