The Reflation Trade to Back Now


Oh boy, Aussie housing is roaring back.

The Australian reports that the number of new loans approved in July was the fastest rise in five years.

Get the picture?

The powers that be are deliberately reinflating the market.

How fast things can turn.

It was only earlier this year that I put aside a piece from a well-known fund manager that projected five reasons house prices could continue to fall.

Everything is clearer in hindsight. Perhaps no one was to know what a whimper the royal commission would turn out to be.

Sure, the banks’ reputation copped a hit. But show me anyone that lived with the delusion they gave a crap about their customers?

The main game for them is still in play: making a motzah by leveraging Australians into property…

It’s first home buyers that are driving this resurgence.

The state governments of Victoria and NSW are giving them stamp duty breaks.

The banks are lowering both their interest rates and their eligibility criteria.

It’s unlikely to stop any time soon, either.

The Morrison government is launching a scheme next year, which will allow 10,000 of them only required to put down a deposit of 5%[1].

And news just in: Homebuilder Simonds Group says it expects next year to guarantee qualifying buyers 15% of the money needed to raise a deposit[2].

More credit equals higher prices.

Over the weekend, The Age published a piece on the new Chief Executive of the Bank of Queensland. And we also have a relatively new chief at the Commonwealth Bank of Australia

Why are these appointments notable?

Well, because the way for these men to prove themselves is to make their shareholders more money. Banks do they that by financing more borrowers.

This is extremely interesting if you’ve read a new classic of finance that was just released…

A surging bank sector will drive markets up

It’s Richard Vague’s A Brief History of Doom. According to Vague, it’s the ‘procyclicality’ of banks which drive the boom bust cycle that dogs the world economy.

What does procyclicality mean?

It means that all banks will expand at the same time in the quest for more profits, bonuses and market share.

At an individual bank level, it’s the rational thing to do. It’s when they do it as a group that we end up with a credit boom.

This drives up asset values until they become too fragile to sustain.

Aussie banks are now on the hunt for borrowers in a big way, and there’s more than enough population growth to keep them churning over.

The Aussie property downturn is finished. That doesn’t mean we won’t still be subjected to an endless litany of doomers preaching otherwise.

Of more concern for us today is the psychological effect this could have on the share market.

That might sound strange. The connection may not be immediately obvious.

But a rebounding property market will feed into more confidence — and more money — flowing into the share market.

It’s also notable that gold has recently lost some of its lustre. The fear trade seems to have subsided.

That’s not to say it can’t come back. Indeed, my only hesitation with the idea of a rising Aussie market is that something overseas trumps local enthusiasm.

We still have Brexit and the trade war in play. These could lead to volatility in late September and October.

Then again, one wonders if the average punter is even paying attention to these issues anymore. God knows they’ve dragged on long enough. The world keeps turning regardless.

Now’s the time to be punting small-caps

Certainly, right now, there are a lot of nice stock moves happening across the market.

I mentioned yesterday that you could have made 10 times your money in iSighthis [ASX: ISX] this year.

Annoyingly, I mentioned this stock in these very pages back in May without recommending it. It was 66 cents then. It’s nearly $1.60 now.

The reason I’m bringing it up is because the stock is in The Australian Financial Review today.

It brings to mind one of my favourite adages: ‘If it’s in the news, it’s in the price’.

Meaning, this stock has most probably had its run.

You generally don’t want to buy something splashed in the mainstream press like that (if only it were the easy!).

The next stock you could potentially make 10 times your money on is likely to start from a lower base, and be less well-known.

If you’d like some ideas on that, get on board the reflation trade right here.


Callum Newman Signature

Callum Newman,
Editor, Profit Watch

‘Morrison Targets First Home Buyers…’, The Age, May 12, 2019.

[2] ‘Demand to Surge…’, The Australian Financial Review,