Follow the Booming Signal from This Dysfunctional Asset Class

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Oh my Lord. The bullish signals just keep coming in this mad, mad financial world. But they’re never on the front pages of the newspapers. Lucky we can do some of the work for you.

You simply have to take note of the recent news out of Japan.

This is a major development — one of the most bullish signals I’ve seen in recent years.

The US$3.2 trillion war chest

The Wall Street Journal reported last week that life insurers in Japan are now considering investing overseas to combat the low yields — if there is any yield — in the Japanese government bond (JGBs) market. One analyst the Journal cites says these JGBs are no longer functioning as an asset class.

Here’s the deal with this. These life insurers have to earn a benchmark return so they can pay out on their policies. This is standard stuff.

Traditionally the Japanese life insurers have bought Japanese government bonds. That’s because the bonds carry a conservative risk profile and are denominated in yen. Presumably the insurers don’t like going overseas because it adds currency risk to their investments.

That’s changing. The yields on Japanese government bonds are now so low — if not actually negative — that they don’t have any choice but to look elsewhere.

OK, you might think, why the big deal exactly? Well, these Japanese insurers control US$3.2 trillion in financial assets. Their buying power is enormous. That’s the first thing to note.

The second is the awesome financial strength still in Japan even after 20 years of stagnation.

You only ever hear about the massive Japanese government debt. That’s just something to note.

Perhaps this is the key quote from the Journal: ‘Nippon Life said Friday it had set aside ¥40 billion ($360 million) for new commitments to infrastructure equity funds that put money into power plants, airports, schools and other facilities.

Infrastructure, infrastructure, infrastructure. There is just so much of this building going on around the world, it’s staggering. And there’s still so much more that could come.

Now how much of this US$3.2 trillion will flow into Australia I don’t have any estimates or figures for. But it wouldn’t surprise me to see more Japanese money flow here, with our higher yields and secure property rights. Certainly keep your eye on where the Japanese are going.

Because where any infrastructure goes in, the surrounding land values will rise. If they do invest in Australia — and there is no guarantee I admit — it’s just another reason why Australian property can go higher.

If you are in any doubt about the principle behind this, don’t be! The men in government even spell it out for you. Consider the case of the mooted high-speed rail line between Sydney and Melbourne.

Now take this from The Age:

John Alexander, an advocate for fast rail since he entered Parliament in 2010, said high speed rail would “liberate” regional towns, potentially tripling property prices and relieving housing pressure in the capital cities.’

Yep. The government even tell you where the gains are going to go. That’s why we track policy decisions like this closely to help narrow down the areas to analyse for investment.

But, of course, if you’re planning on entering the property market you need to consider financing.

And there’s been another interesting development in that space that we need to take note of today…

Lower rates equal mortgage savings

According to the Australian Financial Review earlier this month, the number of people refinancing is almost at record levels.

Check it out…

For the first time in four years, Aussie Home Loans says the number of loans it is arranging for owner-occupiers who are refinancing has overtaken lending to fund new purchases of properties.

So far this financial year, the Commonwealth Bank-controlled broker says 28.5 per cent of its loans are for refinancing by owner-occupiers, compared with 25 per cent for property purchases by owner-occupiers.’

But the banks are in an intense war for mortgage customers as loan growth subdues. So they’re going after each other’s market share.

This can result in substantial savings to the mortgagee. Of course, this just capitalises straight back into higher land values.

Suffice it to say the Monopoly economy we’re all in can keep chugging along as it’s currently doing. If you want to know more about how to take advantage of all this, go here.

Best wishes,

Callum Newman,
Associate Editor, Cycles, Trends and Forecasts

Ed note: The above article was originally published in Money Morning.

Callum Newman

Callum Newman

Callum Newman is the editor of The Daily Reckoning and Associate Editor of Cycles, Trends and Forecasts. He also hosts The Daily Reckoning Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect. To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to The Daily Reckoning here.

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