Now here’s a bit of fun…
Literally this time last week I told you real estate speculators would move in wherever Amazon decides to place its second headquarters in the USA.
Now the proof is right in front of us.
The Wall Street Journal reports…
‘Speculators are raising funds to invest in real estate near the winning site—wherever that may be—or are gathering cash commitments so they can pounce immediately after the winner is announced.
‘Others are buying up shares of a real-estate firm that owns much of the property in a north Virginia city that many consider a leading contender.’
This is not even a story I’ve followed that closely.
Forecasting this kind of thing becomes much easier when you realise most behaviour in today’s economy is simply people chasing something for nothing.
That’s the name of the game.
Once you’ve nutted out this basic fact, you know any development around credit and bank lending is important too.
We’ve got some significant news around this…
For example, remember subprime?
Well, it’s coming back…
Here’s a simple equation…
The better your credit history, the more you can borrow.
In America, the dominant credit number is known as the FICO score.
This figure influences billions of dollars when banks make their lending decisions.
The Great Mining Collision
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However, we get the same tension in every business cycle. Eventually banks satisfy the demand for loans from the highest quality borrowers.
The banks then drop their standards a little, and then a little more.
One way to do this is to fiddle with the credit scoring methodology.
The company that produces the FICO score is preparing to roll out a new way of calculating it for those that don’t quite hit the normal standard.
The details are less important than the potential and desired outcome: more borrowing.
Make no mistake. This is all being done with the urging of regulators.
Contrary to what you may think, they want people with no or low scores to gain access to credit. It helps bring them into the consumer economy. The intentions, in one sense, are honourable.
But, clearly, over time, the risk profile of bank assets (their loans) goes up. A rising economy and low interest rates can obscure this basic fact for a long time.
It’s only when things go bad do we see who lent too much to borrowers vulnerable to any change.
I don’t think we need to worry too much about that angle yet. For our purposes today, it’s enough to know that credit access is easing in North America.
That could help lift the US economy in 2019. Consumption dominates US GDP.
And that’s true of Australia as well…
Why the Aussie economy is doing better than you might think
We can only watch company earnings updates to see how things are tracking here.
A few of these have filtered out lately, so let’s take a look at what’s been happening…
A warning flare went up last week when The Reject Shop [ASX: TRS] said the retail environment was weak, and they weren’t hitting their early sales targets.
TRS fell 40% after that announcement.
However, arguably it’s the business model that’s the problem there, and not the consumer.
The stock actually peaked eight years ago — at a much, much higher price — in 2010.
It’s exceedingly unlikely to get back to those giddy heights. It could grind lower or sideways for years from here.
I don’t read too much into that announcement, as far as the general economy goes.
Virgin Australia [ASX: VAH], by way of contrast, grew revenue by 9.7% in the last quarter. That was above expectations.
Flight Centre [ASX: FLT] is still growing earnings, too, although the stock has been sold down hard in recent trading.
The risk of oil going higher is likely to weigh on these types of travel stocks for the foreseeable future.
But there are two reasonable signs that consumer spending remains OK.
And this is where our attention turns to the banks. Their stock prices are weak. They’re taking a hit to earnings on two fronts.
One is the money they’re now putting aside to compensate customers.
The other is the slowing credit growth to property investors.
The question now is how aggressive are they willing to be in order to cut costs and grow their loan books again?
They are unlikely to remain idle for long.
We’ll keep tracking this in these pages.
One final thing…
Yesterday, I told Small Cap Alpha readers about an upcoming event between my colleagues Shae Russell, Jim Rickards and James Woodburn.
It’s to do with the gold market. I’ll be tuning in, because nobody is more surprised to see gold flying than me.
I didn’t expect much from the gold sector this year, and in fact, it’s about the only one booming right now.
Incidentally, this is something Shae has been forecasting and anticipating since June.
Gold in Aussie dollars is now a whopping A$1,700+. This is pouring cash into the industry. It’s more than reasonable to assume we’re going to see mergers, takeovers and exploration finds as this money gets put to work.
Shae’s building up a list of the best micro gold stocks on the ASX to trade in the coming boom.
But let her tell you all about it in Agora Financial Australia’s first live-recorded webinar. It airs this time next week at 7pm AEDT.