Asset Prices to Boom

Point 5 on our Calnan Flack Economic Cycle Action Plan

16th of February, 2021

The size of every boom is dependent on the level of credit that is created and how much of that credit finds a home as speculative investments. The more extreme the amounts of credit created, the more that speculative assets will be bid up and the bigger the resulting boom and bust.

This is why a speculative bubble-like GameStop Corp (GME.NYSE) as it crashes can’t on its own create an economic depression.

Why?

Not enough credit was created for the GameStop Bubble.

It’s the same reason that we kept saying property would not be affected by the Covid-19 outbreak. Whilst it remained a Health Crisis and NOT a Credit Crisis, our property investments would escape the virus relatively unscathed.

As we emerge from our Mid-Cycle slowdown, we can now expect an increase in the level of available credit which will inevitably be directed into speculative investment.

For this to happen we need to see the banks increase their participation in the extension of credit. Currently restrictive government policy is being moderated and the gradual increase of property prices is reducing the banks “Loan to Valuation Ratio” on their lending books, which is laying the foundations for the coming boom.

Investor and consumer confidence is increasing exponetially and we are starting to see a continual relaxation of both bank lending standards and legislation aimed at not only increasing the flow of credit but also encouraging new technologies to be embraced, ready for the Australian Banking system to undertake a revolution.

In a previous blog titled “Follow the money. Watch the Credit. Enjoy the BOOM

Follow the money. Watch the Credit. Enjoy the BOOM

I stepped you through the legislative changes that have occurred since the start of this cycle. These will continue right up till the next Bust!

For those of you who have followed our work for some time this should come as no surprise. It still might be shocking, just how regularly this process repeats but it should not surprise you.

In keeping with this theme, the Australian Parliament has passed some further legislation recently to help ensure our banks embrace the current technological uprising.

New Comprehensive Credit Reporting (CCR) laws have been passed expanding the depth and breadth of information our banks have to report to credit agencies. This mandatory reporting of customers credit histories will include more detail and greater context of their financial behaviour.

Previously your credit report only had to provide information regarding your credit inquiries, defaults and any serious infringements.

Under the new mandatory requirements, banks must broadcast the dates you open and close accounts, types of credit you have accessed, credit limits, up to 24 months of your repayment history and of course any financial hardship information including defaults and late payments they have on file about you.

Many see this as a real positive, where those with clean financial records will have greater and easier access to credit. It’s likely that the credit products you will access will be more appropriately priced in accordance to your risk of default.

It will mean that those with black marks on their files will find it harder and harder to hide and could lead the industry to have tiered pricing based upon the risk of the borrower.

The banks are trying to sell the positive spin pointing out that customers’ credit histories will be more accurate and reliable, which will be true. The other side is for those customers who unfortunately experience financial difficulty I’m not sure I quite swallow the banks line that these new disclosures will be better for these customers as it will allow the lenders to place their financial difficulties within “more context” when being assessed.

But what really jumps out at me with all of this is when you consider these newly mandated requirements within the context of the new Open Banking Regulations and how the banks will deal with this increased flow of information.

Banks will HAVE to embrace technology to handle the increased flow of information. As more technology infiltrates the banks and more and more data is kept in a digital manner it is only a matter of time before the vast majority of loans will be assessed by Artificial Intelligence without human intervention.

And I haven’t even mentioned the Nano-Banks and the employment of Artificial Intelligence that are just starting to gain some traction in the banking sector.

Recently I recorded a really interesting PAFO episode with entrepreneur and tech innovator, Luke Howes discussing the prodigious wave of new technology innovations. Luke specialises in the financial sector and he can attest firsthand to the technology developments that are engulfing the Australian banking sector.

This may seem like a large step for many banks to take, as currently many of their processes, rules and procedures have led to these corporates acting in a manner that could be better described as “Artificially Unintelligent”

Ultimately though technological gains will be made.

Price competition will ensure a point when the cost of technology is cheaper than human labour and let’s face it, the assessment of a loan application is rules driven, something that can be converted into a mathematical equation.

It’s the perfect job for an “Artificially Intelligent” banker.

With that said and AI assessing our loan applications, it’s not difficult to take the leap of faith and consider the infallibility of AI’s assessments.

Could it be that the banks actually start to believe that “this time it’s different” because there isn’t the fallibility of a human involved in the assessment process? That the cold, clinical lightning-fast analysis of our application, that has been reduced to a simple string of ones and zeros, could be evaluated perfectly?

Is it true that your Local AI Banker could NEVER make a mistake, thus rendering the Boom Bust cycle redundant?

All hail the marvellous banking sector and their technological advancements.

Although we are not there yet, the movements are afoot. Recently the NAB axed another 12 regional branches citing lower foot traffic and the higher adoption of digital banking as the reason. The COVID-19 pandemic has hastened our adaptation of technology, but this was a well-established trend before the pandemic began.

Money has NEVER been cheaper.

Investor confidence is growing with every survey.

The national average vacancy rate is UNDER 2%, with many capital cities sub 1%. And companies just continue to report increasing profits and growing demand. BlueScope has twice issued profit upgrades within the last two months.

There is still ample time in this cycle for credit standards to further loosen lending, resulting in a flood of cheap credit that will no doubt find its way into speculative assets. Watch this space because the coming credit avalanche will capitalise right back into asset prices.

Property is the perfect benefactor of this and it’s something that we love helping our clients invest in.

These productivity gains are likely to be felt throughout the economy as a whole resulting in increased profits and increased stock prices.

We are hurtling towards Point 5 on our Calnan Flack Economic Cycle Action Plan and can “Expect rapid appreciation in asset prices”.

It’s a great time to get advice to ensure you capitalise on the opportunities that are being presented, so it’s up to you to get on board.

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If you want to avoid the mistakes of not understanding the dangers of investing without an understanding of the Economic Cycle, then why not have a chat to us about how we could help?

You have nothing to lose except a few minutes of your time and everything to gain.

So… let’s get started.

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