The Paradox of Investing Revealed


And so the wheel keeps turning. All week we’ve been keeping an eye on Aussie property. The bullish signals keep coming.

What’s the latest?

The financial regulators are going to make it easier for small Aussie banks to issue mortgages.

Perhaps a better word is ‘fairer’.

As it stands today, the major banks have an advantage. They put aside less money for each loan they create.

That gives them an edge over banks like ME Bank, Bendigo Bank and the Bank of Queensland.

I’m not sure what the original rationale was for this tiered system. 

The small banks have fought against its unjustness for quite some time. It appears their wails have been heard!

The Australian Financial Review reports…

The big four banks will face stronger competition from second-tier banks, which will be able to offer cheaper home loans and sharper deposit rates when the regulator moves to even the playing field for banks in the weeks ahead.

Let’s not get bogged down in a discussion of bank capital ratios. It’s a touch dry for a Friday!

All we need to observe is that anything that loosens credit is a positive for Aussie property values.

I say ‘positive’ in the sense of prices rising rather than falling.

Too bad for the young, the homeless and the poor.

Asset inflation it’s to be!

Let’s get on with digging over how stock markets are looking…

US stocks: Choppy — but not disastrous

The air is being punched out of the US market at the moment. You know the reasons. Trade wars. Uncertainty. Inverted yield curves.

I’m not so sure this is the end of the bull run, however.

My old mentor always taught me to keep an eye on cash levels.

This report from Reuters four days ago jumped out at me…

Cash is still king for investors heading into the summer slowdown…

Data and interviews with global wealth managers show that hoarding has continued at unusually high levels even as global stocks have rallied this year amid conflicting signals after the central banks’ U-turns, mixed macroeconomic data and fresh tumult in Washington’s spat with China.’

Historically, markets only collapse when everybody has ploughed all their cash in, then juiced it all with extra leverage as well.

This is the paradox of investing. As Warren Buffet puts it, you have to be greedy when others are fearful, and fearful when others are greedy.

That Reuters report is interesting for another reason.

It cites a wealth manager who says the most common question he gets from clients is: When will the business cycle end?

The Economist touched on the psychology of this current market dynamic this week.

Investors believe we’re in the ‘late’ period of strong employment, high asset prices and revived animal spirits (relative to the times coming out of the last bust).

That brings with it one problem: Everybody is paranoid the end is close and recession is just one glitch away.

That makes everyone jittery.

What to expect in this environment?

You can expect sharp, punchy selloffs as these rolling recession scares occur.

I think that’s what we’re seeing in the US stock market (and oil) now.

But these lower prices also become tempting for all that cash sitting on the sidelines.

It would surprise me in the slightest to see the market bought back up as this is drawn out.

Investors are seeking shelter in the bond market currently. The yields on offer there are not going to make anyone much money anytime soon.

If these recessionary fears subside, optimism could return and stocks will begin trending higher again.

These periods aren’t always fun. But some heat coming out of the market isn’t time wasted.

It gives you time to go over new investing ideas while stock prices aren’t moving much.

When will it be time to get out of stocks completely? I can’t say for sure. It would be complete vanity and idiocy on my part to suggest I can pick the top.

But I’m pretty sure it won’t be the trade war that brings the markets down.

It will be something none of us are watching or appreciating that blindsides us all…and investors will have ploughed all their money into the market by the time it hits.

Watch for that.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch