All year I’ve taken a positive line when it comes to stocks.
My way of playing the current dynamic is to accumulate shares on the cheap now with the idea of selling them in 2–3 years.
But to do that you have to feel comfortable share markets aren’t going to meltdown today like they did in 2007.
The mainstream media is bluntly suggesting this is what you should be worried about…
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| Source: Australian Financial Review |
Experience tells me this parallel is wrong.
The concern for investors right now is that bond yields are rising.
This is a valid concern.
However, it’s not as clear cut as many would have you believe.
Years ago, I put aside an article that demonstrated that decades ago, investors thought rising bond yields were good for stocks!
Market beliefs aren’t always as rock solid as they seem.
We’ll see how things pan out.
However, more importantly, the parallel to 2007 is invalid because the 2007 crisis was a real estate crisis.
Now…
One of the most fascinating dynamics in the market today is what’s going on with US housing.
This might sound a bit obscure to us here in Australia.
But housing is crucial for middle class America, and middle-class America drives American GDP. That drives the world economy!
US mortgage rates are now over 7% for a fixed 30-year loan.
That’s high, and it’s driving affordability way down to levels not seen in decades.
Anyone would think that this would kill the market.
Not so, it seems!
What’s happening is more nuanced.
Existing homeowners with a loan from previous (cheaper) years can’t believe their luck.
Current mortgage rates mean nothing to them.
And there’s no way in hell they are going to move to another house (with another, more expensive loan) if they can help it.
Property listing firm Redfin says about 82% of current US mortgages are below 5%.
That means most existing homes are ‘off market’ unless the seller can’t help it.
This, in turn, is boosting new construction.
The Wall Street Journal reports this week:
‘The pace of new-home sales so far this quarter has been higher than in the second, and that in turn means housing construction will likely provide a boost to third-quarter growth in gross domestic product.
‘While down from the surge registered shortly after the pandemic struck, new-home sales are around where they were in 2019, which at that point was the best year for sales since 2007.’
Doesn’t seem too bad, does it?
OK. I go along with all that. Here’s the real head spinner. First home buyer sales are going up, not down, in the USA.
The Australian Financial Review cited one real estate professional as saying…
‘The average age of a first home buyer in America was 33, and their income was getting stronger, allowing them to deal with higher borrowing rates.
‘They have better jobs than in the past and more of them are working from home.’
If this doesn’t scream strength as far as the US economy goes, I’m not sure what else can.
By contrast, higher rates are killing consumer sentiment and spending power for younger Australians.
The majority of middle-class Americans are getting along just fine.
That’s the core of the American economy.
But what about those rising bond yields scaring everyone?
There is a limit, I think, to what the Fed and the US government can tolerate on this.
Therefore, I expect some sort of manoeuvre from them to put a lid on yields and drive them back down.
In the 1940s, for example, the Fed just bought the bonds to suppress the yields.
In the 1970s, the American government guaranteed the security of Saudi Arabia if they recycled their dollars back into American debt.
Who can the Americans corral to buy their never-ending stream of bonds?
It might be China. Don’t laugh. Back in July the 100-year-old Henry Kissinger made a surprise visit to China.
Why?
The public reason was apparently climate change. Who knows what was said behind closed doors.
Take that with a grain of salt. That’s speculation.
However, my read of history says that the USA will defend the the US dollar system at all costs.
All we can do is watch — and wait.
Best wishes,
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Callum Newman,
Editor, Money Morning
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