Rampant US House Flipping Set to Boost ASX
Here’s something you never thought would happen…
US President Donald Trump might disappear from Twitter for a while.
The Wall Street Journal reports that the average American wage is going backwards accounting for inflation.
Higher prices are eating whatever pitiful salary growth is showing up.
But don’t despair…
It doesn’t mean US stocks can’t keep firing higher and lead the world into a final leg-up of this historic bull market.
The mainstream press would have you believe this low wage growth is a result of slack productivity. It’s an assumed correlation that politicians in particular love to spout.
But that couldn’t be further from the truth.
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The huge gains that the US economy produces are captured in the asset markets. The rich get richer and the wage slaves get the dregs. Australia is no different.
But you don’t have to take my word for it. Here’s an interesting graph I came across recently…
Source: St Louis Fed
As you can see, corporate profits are booming while average wages go nowhere.
All up, US stocks and real estate are currently experiencing a bonanza.
Case in point: In the 12 months to March, US corporations have returned almost US$1 trillion in stock buybacks and dividends.
The March quarter saw the highest level of buybacks since 1998. There’s plenty more to come too.
Why do I bring this up?
People are not fools. The average American will know that their regular job won’t secure a comfortable retirement. I think they’re increasingly going to look to property and shares to get ahead. This is going to rev up the asset markets even more.
There are already signs that this is taking shape…
The US house flippers are back!
A report by Attom Data Solutions last month noted that house flipping is at an 11-year high. So much for learning the lessons of the housing crisis! Precisely zero has changed.
On top of this, last month a banking deregulation bill passed the US Senate, easing rules for small and midsize banks. Now it’s off to the House of Representatives. Trump could sign it into the law within a few weeks.
How does this affect Australians?
This legislation is another step in dismantling the regulations brought in after 2008.
It means small- and mid-tier banks in the US get less regulatory oversight and more incentive to grow their asset base — think more loans and deals.
Not only that, June could be another big month for the US financial sector. The Fed is due to release the results of its ‘stress tests’ of the big banks.
When this happened last year, it was good news for US bank shareholders.
The Fed gave the banks the greenlight to start paying out higher dividends and buying back stock.
This was important because, for years, the US banks had been hoarding cash to meet strict requirements to make them more resilient to economic shocks.
But because of the booming US economy, the big US banks have more money than they need to set aside.
That means another increase in payouts — possible measured in double digits — is likely this year.
This is likely to drive the financial sector of the US market higher.
And it’s a big part of what gives the US market as a whole a sturdy base across a range of industries…
The tech companies practically print money every month.
The financial sector is showing strength.
And the energy industry is booming in the US. There’s so much oil coming out of Texas that they don’t have enough pipelines or trucks to handle it all.
Reuters reports that even the US small-cap sector is firing. Trump’s previously announced tax cuts have boosted earnings for small companies. But they’ve held much steadier than the main indices lately.
This is attributed to the idea that recent headlines which sent the big indices down — such as the trade war — don’t affect many of these businesses. They service the US market and don’t have overseas operations.
It’s something to keep an eye on. The small-cap sector is a reasonable bellwether for the market outlook.
Notice something else that can draw in the punters and retail buyers over the remainder of the year…
The VIX is falling again
The VIX is known as the ‘fear’ index because it measures volatility in the market.
It spiked in February when the market sold off by 10%.
The VIX is now back down to where it was in January.
If it stays down, more money is going to feel comfortable finding a home in the stock market.
That would likely ensure the US markets start pushing up into new highs again.
Assuming that’s the case, it should provide a strong lead for the Aussie market.
All told, we’re setting up for a truly exciting second half of the year.
That’s why I keep making the case that the time to be accumulating stocks is now.
Don’t die wondering.
Editor, The Daily Reckoning Australia