How Any ‘Fool’ Can Succeed in Australia
It might be cold down here in Melbourne but things are heating up in the United States.
I’m not talking about the coming summer in the Northern Hemisphere. I’m referring to the US financial system.
You see, most people will have you believe that rising interest rates are bad for the stock market.
In fact, my view is supported by what we’re seeing right now in the market.
The minutes from the Federal Reserve’s last meeting indicate they are going to raise rates again in June.
The market has priced this in already. And yet, notably, US stocks are still trading just under their all-time highs.
In my view, they’re going higher.
Analysts are putting together earnings estimates for the S&P 500 for the next two years. Currently, the price-to-earnings multiple is 15.66 times for 2019 and 14.23 times for 2020.
These are not crazy valuations considering the profits pouring into many US companies.
But there’s another reason I’m excited for the US stock market: The Wall Street Journal reported this week that US banks had a cracking first quarter.
In fact, it was their most profitable quarterly result ever, with return on equity the highest since 2007.
All told, US consumers and businesses are happy to borrow.
Here’s what appears to be happening:
The Fed only controls short-term interest rates via its conventional tool of jacking the federal funds rate up or down.
The Fed’s been pushing this rate up.
However, the market sets the long-term rate, as long as there’s no quantitative easing (QE) taking place.
Like the Fed funds rate, this long-term rate has been rising too.
You might have seen in the news recently that the 10-year Treasury yield has gone over 3%.
It’s usually better for banks when the spread between the short-term and long-term rate is wide.
That’s not the case right now. This ‘yield curve’ is still quite flat.
But it appears US deposit rates are still an exceedingly cheap source of funding for US banks.
So it appears the banks are benefiting from the rise in the long-term rate, but the Fed’s move on the short-term rate hasn’t hurt them yet.
This is good news for Aussie investors.
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How the US could keep booming
The more that US banks lend, the more credit creation that occurs in the US economy. This is bullish.
It also defuses the worry about the Fed running down its portfolio of bonds, or QT, as it is now.
There could be plenty more profits for the banks as well.
This week the US Congress passed a law to lift regulations off thousand of small and mid-sized US banks.
These restrictions were brought in after the 2008 crisis.
Trump is now dismantling them.
Those in favour of the bill say that it will expand lending and grow the US economy. Those against it say that it will be a return to the reckless days of financial chicanery that led to the last crisis.
Both arguments have merit.
There’s no doubt that more bank lending is positive. The big question is: Where is it going?
If it goes into margin lending and property loans, the US will see higher stock and real estate prices.
If this bank credit goes to businesses, American industry will keep booming.
Take the example of Angelo Christian, a mortgage broker working in Houston.
He’s more than happy to find loans for subprime borrowers. He gets a nice big commission, and hands the risk over to the US government!
Bloomberg reports: ‘Many of Christian’s customers have no savings [sic] or low income.’
These loans are bundled up before a US government agency securitises and insures them against default.
Of course, all these financial shenanigans happen because the US — like Australia — allows housing to inflate in the first place.
This is mostly people chasing the ‘free lunch’ in real estate.
All the bank regulations in the world aren’t worth a damn unless that changes.
And that’s not happening anytime soon.
There’s nothing you and I can do about it, so we might as well keep making money from it.
You do that by recognising that you live in a financialised economy that devalues wages and production in favour of rent-seeking behavior.
But you don’t have to believe me.
Australian millionaire Dick Smith admitted this very thing in a recent profile:
‘People think I’ve made my fortune out of electronics and publishing after I sold Australian Geographic to Fairfax for $41 million.
‘I’ve made far more money by just buying commercial properties close to Sydney Airport and on the Pacific Highway and I’m embarrassed by it.
‘I don’t like it because you’re not doing anything. I just make all this money and any fool could make money in Australia, which is one day while it will be corrected.’
Well said, Dick!
Editor, The Daily Reckoning Australia