Let’s start by utilizing a dictionary and defining the word recession: “a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.” Under that definition and because of the global crisis during the pandemic, one could argue that we have been in a recession for quite some time since we haven’t had much GDP during these times and we were stimulated to have any consumer domestic spending whatsoever. The real problem actually stemmed from before the pandemic, and I would like to explain why…
When the previous administration was in office, they virtually slashed taxes on the top 1% of companies with the promise that it would create higher wages and possibly more investments into bringing a lot of the production back to the US. The problem is, it didn’t. Most of the executives in the most profitable companies took that extra cash and just simply bought back stocks (where they were also shareholders) and that would create an artificial demand that would raise the value of price per share which would inherently increase their net worth via assets they have gained and already had. You can kind of see where I am going with this but it actually goes a bit deeper than this which I will cover in the next paragraph as well as give some background on how I even know any of this stuff.
I used to actually work at a trade desk setting up foreign accounts for traders who knew everything about the stock market here in the US but needed access to our markets which our firm provided. The reason I mention this is because I as a real estate professional have always been told to avoid these types of discussions which have always frustrated me because I understand this better than most of financial advisors or lenders for the world I came from prior to working in this industry. So let’s talk about the deeper conversation behind these tax breaks that happened prior to the pandemic. I will walk you through about how a large shareholder makes a large order for shares in the public markets.
When someone is getting ready to make a large order into a company (specially own they work for to avoid insider trading), they must file with the SEC that they plan on making such a purchase. This seems like an honest trade; however, this is where the big dogs (otherwise known as hedge funds) have access we retail investors do not have access to. So what happens is, these hedge funds make calls on margin (means buying shares using borrowed cash to acquire more assets) and that takes away even more of the total available shares causing the price to go up much higher and force more demand to come on as retail investors start buying as well. This of course created one of the fastest growing economies (on paper) that we have ever seen on Wall Street. Then, the pandemic hit and a lot of these people got out just days before the correction.
Let’s call this part one of what I like to call the asset bubble...
