What moves the market?
That’s easy. If you’re talking about the stock market, the answer is earnings and interest rates.
But is that it? Can anything else move the markets?
Well, according to one controversial theory, there is something else.
And it’s not what you might expect. Although, when you listen to the rationale, it all makes perfect sense. And it could have a major impact on how you invest.
Here, we’ll explain…
We’ll be upfront and say that we’re sure we won’t be able to do justice to this controversial theory here, but we’ll try.
If you want a full, detailed and fascinating explanation, go here.
But the short version is this: What you might think moves markets isn’t what actually moves markets. Not in the long run, anyway.
Sure, in the short term, a bunch of things move the markets: interest rates, earnings, the US Federal Reserve, the Reserve Bank of Australia, unemployment rates, terrorist attacks, and so on.
But in the long term, the key to the movement of markets involves understanding one thing: land values.
It’s all about land values
Controversial economist Phillip J. Anderson, along with his colleagues, explain this entire theory in full detail in one of our most popular monthly journals, Cycles, Trends and Forecasts.
In simple terms, it goes something like this. The derivation of all value in asset prices is from land values.
It’s not difficult to figure this out. Take the gold rushes of the 19th century, both here in Australia and in California.
Prior to the discovery of gold in places like Castlemaine, Victoria, the land value was likely worth next to nothing. But once prospectors discovered gold, the value of land skyrocketed.
Because of this boom in land prices, other prices soared too. Hotels — which may have charged one pound per night before the gold rush — would have been able to charge two pounds, three pounds or more per night.
Shovel sellers (assuming there were people selling shovels in that area at the time) may have charged 50 pence for a shovel before the gold rush. After, they may have been able to charge many times that.
But the only reason they could do so was because the land had become more valuable.
Take another example: infrastructure. This story from Bloomberg should explain everything:
‘Subway networks are crucial to housing market dynamics in metropolitan cities such as New York, London and Hong Kong. Upcoming subway extensions in the trio of global financial hubs — including New York’s Second Avenue subway, London’s Crossrail and the Shatin-to-Central Link in Hong Kong — will likely reduce commuting times and boost home demand in some submarkets. Conversely, apartment rents may fall temporarily around subways shut for repair, as may occur during maintenance of New York’s L train stops in 2019.’
Now, the revelation that infrastructure spending can increase property values may not be new to you.
But what may be new to you is the idea that land values have such an important impact on the rest of the economy.
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Think of it this way: When land values rise, due to improved or new infrastructure, it can create a land boom in and around that area.
This land boom will usually result in increased borrowing and lending. That means bigger margins and profits from lenders, but it also means more revenue and (potentially) profits for those involved in the infrastructure projects.
But most important of all (if we understand this controversial theory correctly), the biggest beneficiaries of this boom are the landowners.
That includes those who can sell their land to the developers, and those who hold onto their land and benefit from higher prices as new economic activity comes to the area.
Easy, right? Sure. Just one thing — don’t for a minute think this is a golden goose that always lays golden eggs. Beneath this is an economic cycle. It moves between periods of expansion and contraction.
Get in at the right time, and investors could make a fortune. Get in at the wrong time, and investors could lose a fortune.
The key to understanding the right and wrong time is part of the service provided by the team at Cycles, Trends and Forecasts. We believe this is one of our most valuable services.
If you’re not familiar with it, check it out here. Just do us a favour — go in with an open mind. What you’ll read and learn is like nothing you’ll have seen before.
For The Daily Reckoning