The Base of the Financial System Is Different to Mainstream Thinking

Most investors assume that the global financial system is based on the stock market. This is a common mistake.

The global financial system is based on banks that lend money backed by real estate. Bricks and mortar, not stocks and paper.

Think about it.

You need a loan. You have proof of income and the ability to make regular repayments. The bank asks if you own your home.

If you do, and have equity in your home, you’ll easily get a loan. If you don’t have equity in your home, it’s harder to get the bank to agree.

The disconnect in perception about the financial system is why many investors fail to understand the nature of big booms and busts. Short-term volatility in US stocks is assumed to mean the US economy is under pressure. But it’s not true.

If you think a recession is coming in 2018, I happen to think you’re wrong. After years of calling for a downturn, the mainstream press is finally starting to agree. This suggests we’re getting closer to a top, but it’s still got some time to move higher.

We use the real estate cycle knowledge to judge this opinion — hundreds of years of real estate cycle knowledge.

At Cycles, Trends and Forecasts, Phil Anderson developed the real estate clock to help gauge the turning of the cycle.

18-Year Real Estate Clock

Source: Phil Anderson’s Cycles, Trends and Forecasts
[Click to enlarge]

Since 1800 in the US, every single cycle has developed in the order represented on that clock. Phil proves it in detail in his book, The Secret Life of Real Estate and Banking. You can get it on Amazon.

The broader US economy is fine. House prices in the US are still climbing. In fact, house prices are at record levels all around the world, as you’d expect for this time in the cycle.

Many investors have looked on in wonder as US markets have continued to climb to record highs every couple of months. This is what markets do when they rise from the ashes of a prior crisis. They climb a wall of worry.

They always have, and they always will. It’s just how it works. It has happened this way in every cycle since 1800. 

Short-term volatility can spook people the world over. But we’ve recently witnessed very low volatility. Access to credit is still cheap, and interest rates are still at very low levels. This looks unlikely to change anytime soon.

Sure, the Trump administration looks like it’s in disarray. Business leaders have been leaving his advisory councils in droves. Last year, there was uncertainty about tax cuts, but these plans have been pushed through.

Plans for infrastructure spending have found the going a little tougher.

Once they’re back on track and the powers that be find a way to implement Trump’s plans, the US economy will find another gear. Any hint of success in infrastructure spending will drive the US economy even faster than it’s grown in recent years.

There was uncertainty last year — typical for a year ending in ‘7’. But fear and anxiety at this point of the real estate cycle are normally short-lived. We simply haven’t seen a major bust at similar points during previous cycles. And that goes back to 1800.

Let’s put this into perspective. The US has a $15 trillion economy. It’s the most diversified economy on the planet.

Business leaders and entrepreneurs don’t wait for governments to get the ball rolling. They like to get on with the business of doing business.

We humans are a resilient lot. The mainstream likes to paint governments as being in control. But, deep down, we know that if we want to get something done, we have to do it ourselves.

And this is what the diverse US economy does so well. It looks to the future and comes up with ideas to keep growing. It doesn’t want to lie down and wrap itself up in cotton wool.

The only time this happens is at the end of a real estate cycle. But the end of the real estate cycle is still some years away.

So what do we make of all the comparisons coming out between now and 2008?

If you follow our work over at Cycles, Trends and Forecasts, you’ll know we don’t agree with a doom-and-gloom scenario.

It was a land crisis first and foremost that brought on the GFC. The problem transmitted to the financial system later. That’s why we watch the US land market for signs of trouble.

And it can’t be too bad.

Reuters reported last year that Norway’s sovereign wealth fund paid US$223 million for a 48% stake in a New York City property.

They’re clever people, the Norwegians. At US$975 billion, their fund is the largest of its kind. They built it from oil royalties instead of letting the oil profits go to private businesses.

New York properties are seeing the world’s largest increase in values since 2008. This is moving perfectly in accord with the US real estate cycle.

Your trading and investing will vastly improve if you understand this dynamic.

So, take stock market dips in your stride. There’ll probably be a few this year, and some of them will be deeper than anticipated.

But they’ll be short-lived until the time is right. Go here to learn more.


Terence Duffy,
Lead Researcher, Cycles, Trends and Forecasts

Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come — which he details in Cycles, Trends and Forecasts.

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