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Macro Australian Economy

Why No Crisis Will Hit in 2023

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By Callum Newman, Thursday, 28 September 2023

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 won’t meltdown today like they did in 2007. Read on to find out why I’m sure there won’t be an ’07 repeat…

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…


recession in the media

Source: Australian Financial Review

[Click to open in a new window]

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,

Callum Newman Signature

Callum Newman,
Editor, Money Morning

All advice is general advice and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

All advice is general advice and has not taken into account your personal circumstances.

Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

Callum Newman

Callum Newman is a real student of the markets. He’s been studying, writing about, and investing for more than 15 years. Between 2014 and 2016, he was mentored by the preeminent economist and author Phillip J Anderson. In 2015, he created The Newman Show Podcast, tapping into his network of contacts, including investing legend Jim Rogers, plus best-selling authors Jim Rickards, George Friedman, and Richard Maybury. He also launched Money Morning Trader, the popular service profiling the hottest stocks on the ASX each trading day.

Today, he helms the ultra-fast-paced stock trading service Small-Cap Systems and small-cap advisory Australian Small-Cap Investigator.

Callum’s Premium Subscriptions

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All advice is general in nature and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

The value of any investment and the income derived from it can go down as well as up. Never invest more than you can afford to lose and keep in mind the ultimate risk is that you can lose whatever you’ve invested. While useful for detecting patterns, the past is not a guide to future performance. Some figures contained in our reports are forecasts and may not be a reliable indicator of future results. Any actual or potential gains in these reports may not include taxes, brokerage commissions, or associated fees.

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