Trump’s Silent Pump Priming

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There is one advantage to locking yourself out of the house, as yours truly did last week. You get to meet new people.

In my case, the locksmith that turned up to let me back in. He was a nice guy. Mind you, $150 for one minute’s work would put a smile on anyone’s face.

That’s all it took to open my front door. In fact, it was so easy I had a deadlock installed as well.

We had a chat while he went about it. For some reason, he told me he lived in Cheltenham (Melbourne) and had bought there 16 years ago. He paid something like $200,000 for the house.

The median price for houses there now is around one million dollars.

Presumably, my locksmith is sitting on a good chunk of equity.

He’s not alone thanks to the global property boom over the last decade or so. Over in London, it’s showing up via school fees and renovations. This is an important variable to watch…

The lynchpin of any economy is here

The English property boom happened in London and Southern England. They account for 87% of the rise in housing values since 2007.

Today, this area is still seeing rising mortgage debt even though transactions and prices are no longer rising.

People are borrowing against the equity in their property to spend elsewhere. This is one way how changes in real estate values can transmit to the real economy. It’s done via bank credit.

This nexus between housing and banks is the most crucial variable in the economy. It’s no coincidence that the Australian real estate market has cooled after the regulators came down hard on bank loans to investors.

Banks are THE lynchpin of the economy.

That’s why I’m sleeping a little better after last week.

I’m sure you’ve read or heard enough about moves in the Dow Jones to know it’s been volatile lately.

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That’s the way it goes in the stock market sometimes.

But it also brings out bearish commentators who get the media spotlight and spook everyone.

Today’s Profit Watch is the antidote to that.

Several of the big US banks just reported their third quarter earnings.

The results were good.

Healthy banks equal a healthy economy

Jamie Dimon is the CEO of JPMorgan Chase. He’s also become something like a revered old wise owl of US finance.

He suggested back in August that the yield on ten year US Treasury debt could go to 4% or 5% because of the strength in the US economy.

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That forecast is looking a little more prescient in the light of the last few weeks.

You’ve read all the bad news over this year about trade and higher rates and all the rest of it.

It’s yet to show up as a danger in US finance…

JPMorgan reported a 24% rise in profit from a year ago for the quarter just gone.

Wells Fargo, another bank, was up 32%.

JPMorgan’s net interest margin expanded too. That’s consistent with what I’ve been expecting. Banks, all else being equal, benefit from rates going higher.

From the Wall Street Journal:

Bank executives sounded sanguine about rising bond yields. “This is what we expect; this is what we want,” JPMorgan Chief Financial Officer Marianne Lake said on a conference call. “The long end of the curve going higher is good if the economy is expanding.”

Default rates are trending lower, too.

This is a powerful hint that the US economy is chugging along just fine.

More US companies are due to report their third quarter earnings over the next few weeks. In general, they should prove positive, if strength in the US economy is any guide.

This should steady the market. Then there’s the perennial ‘Trump’ card to play…

Trump 2020 campaign wants higher stock prices

Here’s something to keep in mind.

Trump’s re-election campaign for 2020 has probably already started.

Part of that will be his desire to keep the US economy pumped up for as long as possible. junemountain

I’ve reported a few times since his election on the effect deregulation could have on credit growth in the USA.

Not only that, but there’s a law (part of Trump’s previous tax package) that allows US investors to defer capital gains tax if they roll their proceeds into ‘opportunity zones’ in disadvantaged neighbourhoods.

The US Treasury Secretary suggested it could see US$100 billion flow into these areas, mostly through real estate development.

One man cited in the Wall Street Journal is quoted as saying opportunity zones could be: the biggest thing to hit the real-estate world in perhaps the past 30 or even more years.

Gains from these projects may not be taxed at all if they held for over ten years.

This could be an extraordinary boom for construction in the US over time.

Two things I’m watching from here to decide whether to stay invested in the stock market: the health of US bank earnings. And Trump’s silent ‘pump priming’.

This saying refers to governments juicing up the economy through spending and other measures.

Here’s my take as of now – the US market to make new highs again before 2020.

Regards,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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