Money has no more meaning under Covid
We are now more than a year in. A lot has happened. Covid cases have gone up and down multiple times in many places around the globe. So has the market.
First it was Gold, then equities took off, cryptocurrency went “to the moon”, pump and dump stocks went soaring, only to come crashing back down.
What is happening? Why is the market acting this way? Why is the market reaching all time highs at what is supposed to be the worst pandemic since the Spanish flue?
If businesses can’t open, what is propelling the market to higher summits?
We have heard this many times since the beginning of this craze, “The market does not reflect the economy”. Yes this is true, but how? Well what goes on on Wall Street (and on our phones with apps like robinhood, e-toro etc) represents money flowing in and out of equities. Not money flowing in and out the cash register.
Money exists to be spent
By nature currency was created to transact. When you restrict spending and limit transactions, money starts to lose its meaning.
For the lucky people who were able to maintain a job in the age of Covid-19, a large portion of them are working from home. As this helps to reduce the transmission of the virus. Home is not where we spend the most money. Online shopping aside, you can’t really spend much money at home.
For these “work from hom-ers”, most of them are saving more money than before the pandemic. This is not by good finantial practice, but by obligation. It’s not that I am trying to save, it’s just that I just don’t need as much when I’m stuck at home.
Buying a 100 dollar online course just isn’t as fun as riding an elephant in Thailand or spending a day at the spa. Why don’t I just save that money until I can go on vacation again or go to see a nice NBA game?
Saving money in the bank isn’t a wise thing to do either. Over time idle money in your account depreciates compared to stocks or real estate. It is widely known that putting money in the stock market protects you from inflation and allows appreciation over time. It is the most accessible investment today. This is why everyone is flocking to the stock market at the moment. Retail investors make up more than 25% of the market. The daily volume is up more than twice of what it was in 2019. Plus with stimulus checks coming in for most Americans, a large portion is spending their check on stocks and similar investments.
With idle Covid-dollars, people are pouring money into the stock market, either to trade or to invest in semi-long term ideas. This rise of capital in the market has affected the global price of equities across the board. The NASDAQ is at all time highs, as well as the DOW, NSYE, DAX and Japanese NIKKEI indexes.
As investors keep receiving salaries that they cannot spend, they are throwing their money at the market where they can “watch it grow”. This pattern is not natural and shows how inefficient the market is. On top of this, since the government is issuing more and more currency, inflation is inevitable. This only creates more motivation to buy stocks leading to more inflated prices.
As I cannot predict what people will do with their invested money once businesses open up, will they take it out of the market? Will they keep their investments for the long term? Who knows. However, one thing is for certain, there will be proportionally less capital injected into the market once the Covid-19 pandemic comes to an end.
When the markets become more efficient, prices will adapt. Real estate prices will follow the market as market winners will afford more. Commodities will likely follow as well due to the fact that productivity hasn’t doubled like the stock market has.
All of this leads to the rise of prices, and the loss of the dollar’s value.
Stay safe, be careful.
Remy
