There is now a general feeling in capital markets that a return to normal – or at least, a return to a new normal – will take longer than previously expected. What economists’ originally forecasted to be a quick “V” shaped recovery was then downgraded to be a slower U-shaped recovery and has now become a potential “W” shaped recovery due to the possibilities of a second wave of the virus.

Yet equity markets, especially the tech heavy Nasdaq continue to rally. Indeed, the much followed index is actually up 2.2% year-to-date. Crisis? What crisis? But it easy to forget that so much of the economy is not tech, and that tech does not exist in a vacuum totally uncoupled from the rest of the world. As people have stayed home and spent more through their mobile devices then of course tech does well. But this is at the cost of spending elsewhere. And what spending there is significantly underwritten by government programs.

As time progresses there will be of course significant divergence in all asset classes as the new normal becomes embedded. This can already be seen in the Nasdaq Tech index versus other equity market performance. It will also be seen as the work from home revolution gathers pace, as seen via @bryanbeal on Twitter.

Below is a picture of a home in San Francisco:

Compared to a property in Ohio:

The threat to cities, megacities and both commercial and residential real estate is huge. Once seen as an asset than never goes down, property is going to have to be revalued downwards. The old adage “safe as houses” will no longer apply. Most service companies have switched to working from home so seamlessly that it seems absurd that it didn’t happen earlier. As KPMG states, a fifth of office space to be ditched in WFH future, forecasters claim – Andy Pyle, head of UK real estate at KPMG, said: “Ultimately, I would expect there will be a need for less office space and also different office space. My guess is that the fall would be somewhere between 10-20%, on an individual company level on average.”

The investment mantra of the most conservative family offices used to be: “Gold and Real Estate, and nothing else”. With social distancing and technology enabling work from home not going anywhere, real estate is no longer a safe haven. That just leaves Gold.

Of course, many are surprised Gold has not moved higher especially when – just looking at the US – one sees how much government and central bank action there has been (as of April 30^th):

• $484 billion Paycheck Protection Program and Health Care Enhancement Act .
• An estimated US$2.3 trillion (around 11% of GDP) Coronavirus Aid, Relief and Economy Security Act (“CARES Act”)
• $8.3 billion Coronavirus Preparedness and Response Supplemental Appropriations Act and $192 billion Families First Coronavirus Response Act.
• Federal funds rate were lowered by 150bp in March to 0-0.25bp. Purchase of Treasury and agency securities in the amount as needed.

And those are just the headline measures. There are plenty more and the above is being repeated in some shape or form across almost every country on the planet.

All this borrowing and printing will either have to be dealt with like any other liability throughout history. Default, inflated away, renegotiated or printed away, or paid back. Every one of those options, apart from the final one, further undermines credibility of the system. This systemic risk of course will push money towards Gold simply because it is finite, out of governments control and now is seen to be pandemic proof.

And with the rise of apps and services such as Goldex, gaining exposure to Gold could not be easier. No longer is buying Gold the preserve of the super-rich or their family offices.

The real economy is in trouble, and it will take years for any shape of a recovery, despite what central bank fuelled stock markets are trying to say. And this is before we really understand how people’s habits have changed. What will happen to towns and cities, to public transport, to skyscrapers with elevators, to office space requiring social distancing? How will the depreciation of value in these assets affect the financial system and the real estate market? There is a lot of pain coming in real estate if valuations are to be really “true and fair”. This second order effect of the virus has yet to be really considered at length, but it seems unlikely, in cities and retail parks, offices, airports and train stations that “safe as houses” will continually to be valid for much longer.

Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.