A Greenlight to More Mortgage Debt

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Here’s a guiding philosophy we like to keep close at hand here at Profit Watch headquarters: The market is designed to fool us 100% of the time.

It was only last week that asset markets looked to be turning down in a big way. Suddenly everything seemed scary and dangerous.

We stuck our ragged bull flag in the ground and defied the gloom. Now the storm clouds seem to have passed again.

Where’s that glimpse of blue sky coming from?

Donald Trump has now come out and said proposed tariffs will be shifted back to December instead of going through in September.

That took US stocks back up in their last trading session.

You could call this a short-term relief rally.

After all, we’ll still have to wrestle with the same problem the closer we get to December.

But for the moment, the market is happy to go along with the idea that there’s more time for the US and China to negotiate a peace deal.

There’s also the fact that the collapse in yields in America makes shares more appealing with regard to their dividends.

That could prop up the market, as long as the macro outlook remains relatively benign.

We’ll see on that. There are two far more important stories that I saw this morning.

One in a hundred thousand people won’t see the significance of either. This is part of your Profit Watch advantage…so make use of it!

America’s recovery is thanks to this

The Wall Street Journal reports that mortgage debt in America surpassed its previous 2008 peak in the second quarter just gone.[1]

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Yep — it now stands at an astonishing US$9.4 trillion. It’s been expanding since 2013.

Why do you care?

This credit expansion has underpinned the US economic recovery and fed into the US stock bull market.

It’s why the world economy (and stock markets) have weathered all the doomsters over the years.

The financial system spins around the dynamic between land values and the credit creation of the banks.

If these are rising, the financial system is robust. When they fall, the house of cards collapses.

Few people will point this out to you. Once you see it for what it is, you realise we’re all slaves to the 1% who control it.

Ninety-five percent of us will spend 20-30 years paying off mortgage debt — usually created from nothing — to own something that is already there…land.

It’s why modern economies are saturated in debt, poor wages and rent-seeking behaviour.

We need not dig too deep into this today, except to say that most mainstream commentators don’t focus on the US real estate market as much as they should.

But it’s vital for the average American — this is where the average US citizen holds the majority of their wealth.

That’s not all…

When banks lend, new money enters the economy and generates economic activity from the increase in purchasing power.

The importance of the property market doesn’t end there…

US homeowners can tap into a huge pool of equity because of the big uplift in housing values in recent years.

This could underpin consumption for a long time to come.

But there’s a second story circulating that could prove even more compelling.

Here’s a warning. It’s a bit obscure and takes a bit of explanation to understand. But it’s worth it.

Here’s the story…

Easier credit scores = more borrowers

America has two financial institutions called Fannie Mae and Freddie Mac.

These guys buy mortgages off banks and then package them up for investors.

Investors buy these securities for the income yield that comes as people pay off their mortgages.

That’s the background.

The major question that relates to Fannie Mae and Freddie Mac is: Which mortgages will they buy?

You only need a passing knowledge of credit and finance to know that different borrowers come with different risk profiles.

The more relaxed these rules, the more mortgages that can be created.

Here’s the big reveal.

The US authorities have just signed off on lowering the bar for the mortgages that Fannie Mae and Freddie Mac can buy.[2]

This is big. Fannie Mae and Freddie Mac back nearly half of US mortgages.

They’ll now be required to consider an alternative credit score that will likely let more people qualify for home ownership.

Hello!

All the ‘lessons’ and ‘rules’ of the GFC are being overwritten.

This is not something that will show an immediate effect. But it’s perfect proof that the US real estate cycle has years to run.

America has been underbuilding new homes for years and has a growing population.

The prodigious wealth being created from its technology companies is generating huge appreciation in capital values in select cites all over the country.

And now we have the groundwork being laid to let more and more borrowers into the market.

This will likely take US mortgage debt well into record new highs over the next five years at least. 

This tells us nothing about the short-term direction of the US stock market.

But it suggests the fundamental bedrock of the US economy — the property market — is a lot more secure than most people assume.

I doubt the average American even understands Trump’s tariff policy. But they understand if their house is rising or falling in value.

This latest development suggests US housing will keep trending up, with the usual regional dips and rallies along the way. 

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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