Introduction

Recent developments in global stock markets have raised alarm bells for investors. With significant declines in major stock indices and a myriad of economic uncertainties, many are questioning whether the stock market is still a viable investment avenue. This article explores the current state of the stock market, highlights the risks associated with equity investments today, and argues why real estate might offer a more stable and lucrative alternative.

This is what happened in the British stock market two days ago:

 

This is what happened in the American stock market two days ago:

 

This is what happened in the Japanese stock market two days ago:

I- The Current State of the Stock Market:

1. The Collapse Begins in Japan:

All around the world stock markets took a tumble and almost every single big stock took a big dip. Where did this stock market collapse ? 

It has begun in Japan. 

Japan’s stock didn't have just some bad days this week but it had its worst days in almost 40 years. In fact, it crashed worse today than anytime during the pandemic and the other day was worse was the black monday in 1987 an infamous day when the world lost trillions of dollars in the stock market in just a few hours. But why did this happen ?

2. Factors Behind the Japanese Market Decline

carry trade:

Well there are some hypotheses, one is something called a carry trade. 

Japan over the last few years has actually kept their interest rates low and have experienced very little inflation and so a lot of very big corporations and wall street firms have been doing is borrowing tons of money in japanese yen with low interest rates and then taking that money and invest in it in other currencies and stocks of other countries like in Australia and US that have much higher interest rates pretty much these large investment firms borrowed cheap money in Japan and have been using that debt to invest in the US and it is estimated that between 5 and 10% of the entire american stock market is on this kind of carry trade.

But what happens when that cheap money from Japan has their interest rates go up? 

You see! …

Interest Rate Hikes:

Japan has not raised their interest rates since 2007 meaning that they have been a safe bet to borrow cheap money for nearly two decades but in March this year, Japan raised its interest rates for the first time and they did so again just six days ago. 

Meaning for now all of the wall street firms and financial institutions that have been relying on JApan’s cheap borrowing cost, now are worried that their payments will go up on their debts or that they will no longer have access to cheap money for future investments into the stock market 

Stock market appears to be showing signs of collapse right now and that is fear of a real recession.

3. Is it the Great Depression The Global Stock Market ?

After WWI the world was expecting to experience something like great depression. Eventually, something terrible was supposed to happen after the war and the Spanish Flu decimated the world population and global industries. And one somewhat brief recession did happen in 1920 and 1921 a single-ear recession that was fairly quick but also a very large downward spike. 

But then the world was called the roaring 20s a time when we hear about the gittz and glam and wealth explosion that everyone got to experience 

So the roaring 20s when the asset prices began to skyrocket and debt was very cheap to borrow. What followed after that was exactly the great depression, the worst and the longest economic downturn in modern history, a horrible economic decade that essentially needed a world war to take the world out of the economic downturn and now today investors fear we may be following a similar pattern.

4. Recession Indicators

- Gross Domestic Product (GDP)

We experienced a brief and sharp downturn in 2020 then asset prices skyrocketed again for the better part of three years and now there are some fears we might be heading into a very long recession. And this is serious.

Now if you follow the global news, you will know that a lot of countries like Canada and Germany have actually been in a GDP per capita recession for a few years now. However high immigration numbers are making the GDP increase therefore governments and wall streets are able to say that the whole economy is going well and everything is fine and dandy even if it means the average person is actually losing economic grounds. 

- Unemployment is serious

Furthermore, there are other signs that of a looming recession, unemployment in the USA keeps rising and job creation keeps falling. In fact the unemployment rate is the highest it has been since the pandemic started. And here we should talk about the Sahm rule. “If the average unemployment rate over a three-month period is more than half a percentage point higher than its lowest level in the past 12 months, it suggests that a recession may be on the way.” 

In other words it is a fairly reliable recession indicator that indicates a downturn if the three month moving average of the unemployment rate rises by half a percentage point from its low in the previous year.  Now let's go to numbers and calculation:

Unemployment rate in July 2023: 3.5%

Average unemployment rate for the past 3 months: 4.13%

The lowest level of unemployment in the past 12 months: 3.5%

So the equation is the following

4.13-3.5= 0.63

0.63>0.5 

It's a mouthful but essentially if unemployment keeps steadily rising a recession always follows.

- Yield Curve Inversion:

There is also another indicator that has been flashing signs of a nearby recession and that is government bonds: an inversion yield curve occurs when the interest rate on the short-turn US treasury bonds exceeds that of a long-term treasury bond. Normally long-term bonds have higher yields than short-term ones due to the greater risk over a long period. However during periods of economic uncertainty. The investors prefer the safety of long-term leading to higher demand and lower yields on these bonds compared to the shorter term ones. Essentially this means that investors seem to think that the USA has a lot of uncertainty about the economy right now and these investors demand a lot of return in order to invest in short-term bonds because they view it as a very risky investment. 

So the near term seems risky and the long term seems relatively okay.

-Consumer Spending:

Another sign that is pointing to a serious recession is actually from the people themselves. 

In the USA what percentage of the American economy do you think is from consumer spending? Is it 20%? 30%? 50%? Well it's actually 70% of the entire american economy and so when people spend less money a recession is more likely to happen. 

Recently consumer spending has been increasing but slowing slightly increase over past few months but the more important thing to note is even though consumers are spending little more this is also coming at a time when debts and bankruptcies are also skyrocketing for these we understand that consumers are spending more in the form of debts and if economic conditions fet poor enough when the average of american can no longer pay. Well then we have the 2008 financial crisis all over again. 

5. Volatility and Geopolitical Risks

-VIX Indicator:

In addition to all of these signs we talk now about the VIX which is a volatility indicator in the stock market and unfortunately it has spiked to such high that the only time that was higher was when the pandemic started and they announced the virtual shutdown of the entire economy =. So this VIX being so high is a very worrying sign that investors are extremely uncertain about the stock market future in the near term. 

-Geopolitical Tensions: 

Final red flag is the fact that one company skyrocketed in valuation over the 48H or so when all of the global markets were melting down. This company is Lockheed Martin, the largest military company in the world. Initially  Lockheed Martin stock rose by over 20% signalling that some investors somewhere began to see a lot of value in investing in the American military now eventually that stock did fall back to earth but it brings us to understand that there is fear in the financial market that there will be a  war. Besides, the war in the middle east mentioning that hours ago news has been coming out about Iranian attack on Israel appears to be likely and this comes after Israel assassinated one of Hamas leaders. So, depending on the Iranian attack, the US and the western powers might get pulled further and the odds of the war are escalating more seriously than they were just a few weeks ago. And not even to mention the war in the Ukraine which hundreds of billions of dollars are still being poured into by the United States government

6. Government Debt and Monetary Policy

Debt Levels:

a ticking time bomb that appears to be getting more attention as of late that is the US government spending right now. We are at a point in history where 30% of the federal budget is being paid off by taking out debt and in fact a lot of that debt is getting created to pay off previous debt and that debt was created by paying off a pre-previous debt and so on.. Right now the government is on track to actually run out of money pretty soon. In fact every 100 days the US is adding 1 trillion dollars to the debt and it is only getting worse.

Monetary Theory:

the USA along with many other countries in the world seem to be adopting this thing called monetary theory also known as money printing essentially meaning that you don't have to care about debts as long as you keep increasing money supply and this is worrisome because according to history events, one of the key signs of a dying empire right before it falls is these two exactly things: not paying debts and increasing money supply.

In today’s image we can assume that the debts will come due and the entire system could come crashing down if it doesn't get corrected very soon. And that is the major concern that investors have at this moment, if the American economy will no longer be able to withstand these massive deficits year after year and that  is why there is a big fear about what will happen to the American economy and what resides within it.

 

II- Why Real Estate Investment Makes Sense?

1. Stability and Tangibility

Less Volatility: Real estate generally provides more stability compared to the stock market. While stock prices can fluctuate wildly from day to day, property values tend to be steadier. This means that, as an investment, real estate is less likely to experience dramatic swings in value. Unlike stocks, which can quickly lose value due to market volatility, real estate is a physical asset. This tangibility often means that, over time, property values usually rise, offering a more predictable investment outcome.

2.Reliable Income flow

Rental Income: One of the key advantages of real estate investment is the ability to generate steady rental income. Unlike stocks, where dividends and returns can vary greatly, rental properties provide a consistent source of revenue. This reliable income can be particularly beneficial during economic downturns when stock market returns might be uncertain. For investors seeking financial stability, rental income offers a dependable way to support their financial needs.

3. Inflation Hedge

Value Preservation: Real estate is also a good way to protect your money from inflation. As the general price level in the economy rises, so do property values and rental incomes. This means that real estate can help preserve your purchasing power over time. In contrast, inflation can erode the value of money, but real estate typically appreciates, keeping pace with or even exceeding inflation rates. This quality makes it a valuable asset in times of economic instability.

4. Long-Term Appreciation

Asset Growth: Over the long term, real estate properties usually increase in value. This appreciation can lead to significant capital gains for investors. While stock prices can be volatile and subject to market trends, real estate tends to grow over time. This makes real estate a strong choice for those looking to build wealth gradually. The long-term growth of property values often surpasses the returns from stocks, especially during periods of market volatility.

5.Reduced Risk: 

Real estate investments often behave differently from stocks, so having both in your portfolio can protect you from the ups and downs of the stock market. When the stock market is down, real estate may still perform well, providing a buffer against market downturns. This diversification is a crucial strategy for managing risk and achieving more stable returns over time.

Conclusion:

Given the current state of the stock market investors are confronted with considerable risks. Conversely, real estate investment stands out as the most logical alternative for investors.