Today, Profit Watch offers you a reminder that might make you sleep a little easier at night.
After all…it’s been a wild ride in the markets over the last few weeks.
It’s tempting to stay glued to your screen to see what the Dow Jones is doing. Or to wonder where the ASX 200 might be going.
But please try to remember this one thing…
The most important asset class in the world is not the stock markets that trade across the globe.
It’s not all those government bonds out there either.
What is the biggest asset class? And why should you care?
Read on to find out…
Aussie Property Expert’s Bold Prediction for 2026. Discover More.
This asset class dwarfs stocks around the world
The Economist has made this easy to see recently.
They produced the following graph to show that the biggest asset class is in the world is in the real estate market, in particular, residential housing…and by quite a way.
See for yourself…
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| Source: The Economist |
There’s a chance you might be surprised by this. But maybe not…
Here’s why I bring it up.
The chance of a complete financial meltdown is less likely when the outlook for housing looks relatively benign — as it does to me today.
The core of the financial system is the world’s land values, and the bank credit that’s issued against it. The chart above shows this.
Most middle class consumers have their wealth tied up in housing.
I’m not being sanguine about where stocks markets can go from here, or the risk of recession.
I’m simply suggesting why I don’t see another GFC on the cards anytime soon.
Here in Australia the property upswing is kicking in. My colleague Catherine Cashmore showed this in her most Cycles, Trends & Forecasts throughout the year.
National housing values jumped over 1% in February.
This is not unique to Australia either. UK house prices had a sluggish 2019.
But they rose a strong 1.9% in January over the same time in the previous year, according to the Financial Times.
New mortgage approvals in the UK are at their highest number since 2015.
Let’s jump across the Atlantic to the US.
Last week, US Treasury yields hit an all-time low.
This could conceivably take mortgage rates in the US below 3% for a 30-year fixed loan.
It’s almost incredible.
The Wall Street Journal cites an industry firm that says refinancing activity in the US has nearly doubled over the past three quarters — and this is data before the Fed’s ‘emergency’ 50 basis point cut last week.
This activity has the potential to bolster US consumer spending because their debt servicing costs go down.
We can’t say for certain because it’s possible fear of the coronavirus keeps people afraid.
But it does take stress off their monthly expenses.
Then we come to the wild card.
That’s China…
Bond investors are a savvy bunch usually
One thing that worried me about the recent COVID-19 outbreak was the effect this would have on Chinese developers.
They are heavily indebted, and the Chinese shutdown is blocking the number of sales they can make.
It’s generally not a great recipe when firms with a lot of debt have their cash flow shut off!
Yet the market doesn’t seem too concerned. We can say that with some confidence because Chinese developer debt is holding its value.
Let me explain…
There are a lot of opinions that blow around in financial markets. But there’s no mistaking when money begins to exit.
Those bonds would be selling off if the market was worried about the solvency of Chinese developers.
Some market greybeards give much greater credence to the bond market (as opposed to the stock market) when it comes to assessing future risks and outlook.
One reason for this is that there’s much more retail participation in the stock market compared to the bond market.
Stocks are a little more prone to over exuberance and despair.
Regardless, our little world tour today suggests that the biggest asset class in the world is in fairly sturdy shape.
Residential house prices are rising…mortgage rates are dropping…and even China is yet to pose a problem.
All these could change or shift if the COVID-19 outbreak gets worse.
At least you’ll sleep a little better tonight.
Best wishes,
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Callum Newman,
Editor, The Daily Reckoning Australia
PS: Australian real estate expert, Catherine Cashmore, reveals why she thinks we could see the biggest property boom of our lifetimes — over the next five years. Click here to learn more.
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