General – Page 36

Predictions: Sorry…. I was right (Part 1)

August 29, 2013 by Jon

How did my predictions turn out in the last 12 months?

Now I know I put across a lot of controversial views in these posts. Partly I do it for fun. I’ve always been a bit of a sh*t-stirer.

But mostly I just see that as my job. To tell it like it is – even if that means that a lot of people won’t agree with me, or I end up tipping some sacred cows.

As my old man said, ‘make money, not friends.’

Actually, don’t listen to Dad. That’s terrible advice.

But my point is I don’t do this for popularity, or for a bit of an ego boost. That’s what karaoke’s for.

I’m just sharing with everyone my view of the world and what’s going on – and how I reckon you can make money in times like these.

But now that this election is being defined as a battle between who you can and can’t trust, I thought I’d step forward, and let my record speak for itself.

Comparing my trust-worthiness against politicians might be setting a low bar, but bear with me. What have I been saying over these past year, and did I get it right?

And if you followed my advice, did you make money?

Well to start with, I’ve been saying for a long while now that arguments that Australia was on the brink of bursting property bubble or economic calamity were totally overblown. In my words:

“Claims that Australia is facing a financial meltdown are rubbish.”

I’ve been saying that for a while. And how’d I do on that one? Well if we had had an economic meltdown, or a property bust, you’d know about it. You wouldn’t be hearing about anything else this election.

Ok, perhaps that was an easy one. It always seemed unlikely (to me at least). But there were a lot of people predicting the end of the world, and just for the record, I wasn’t one of them.

But let’s go for something more specific. House Prices

In November last year I wrote:

“If you take the last three rate cutting cycles (1996, 2001, 2008) as a guide, you’d normally expect house prices to be up between 15 and 20 percent this far into a rate cutting run.

And that means house-prices have some catch up to do. The rough maths suggests that they’re at least 15 percent behind the curve…”

I was highlighting the fact that house prices had a lot of upside potential, especially since interest rates had fallen to such lows.

When I made that call, there had only been one quarter of decent growth posted – certainly no clear trend starting to assert itself.

But since then, we’ve had three quarters of solid growth. According to the ABS, house prices were up 2.4 percent in June and 5.1 percent over the year. Still some way to go to 15 percent, but we’re certainly moving in the right direction.

And if you take the June quarter pace of growth, even if there’s further acceleration from here, you’re still looking at 10 percent year on year. A steady pace puts 15 percent within reach in less than 18 months.

But there’s every chance that prices will keep accelerating, and we could get there a lot quicker.

So on my books, that core promise is still well on track.

What about interest rates?

In February this year, Paul Bloxham, Chief Economist at HSBC was saying that the rate cutting cycle was over and the next move was up. I thought he was nuts:

“Interest rates are going nowhere.

Why?

…what’s inflation doing?

Nothing. It’s going nowhere. It’s right at the bottom of the RBA’s target band and going nowhere fast.

So if the RBA was worried about this “asset price inflation”, they’d have to make the argument that 1. there was a bubble, 2. that the bubble was about to burst, and 3. when it bursts it’s going to take the economy down with it and drive inflation through the floor.

That’s a pretty big call to make.

And could you imagine just how much of it would hit the fan if Glenn came out and said, “Hey, we’re jacking up rates and adding 300 bucks to your mortgage. Why? Because we think your homes are worth too much.”

Forget it. He’d be torn to pieces. And once the dust settled, he’d be lucky to still have a job guiding tours around the currency museum.

Rates aren’t going anywhere, buddy.”

And then in another piece around the same time, commenting on RBA forecasts:

“…the thing that really jumps out at you is just how many uncertainties there are in the outlook – or more specifically, the lengths the RBA went to point them out.

They’re giving themselves plenty of room to cut rates further if they want to. I’d say they’d be expecting their hand will be forced at least once or twice more this year (in the best case scenario!!)”

And what have we had since then? Two rate cuts. And there’s ample scope for at least another one before the year is out.

Perhaps I could be chief economist at HSBC

The point is that over the past year or so, my predictions have pretty much been on the money.

Not bad for a fly-by-the-seat-of-his-pants ruffian, hey?

But the real question is, if you followed my advice, did you make money?

Who can you trust?

August 27, 2013 by Jon

I will tell it to you, straight… No sugar-coating.

In an election campaign battle that has all the drama and power of tough kiddy tae kwon do (have a look, very funny video), Rudd and Abbott have finally found something to agree upon.

And they’re both wrong.

Amazingly, both Rudd and Abbot are singing from the same hymn sheet when it comes to the mining boom. And they’re both way off key.

For Rudd, the mining boom is about to end, plunging Australia into economic calamity, because China is powering down. Our best customer is taking a breather.

For Abbott, the mining boom is about to end, plunging Australia into economic calamity, because Labor’s carbon tax killed the mining boom.

Both arguments are simplistic, stupid…

… and wrong.

What’s the deal, why are both the PM and the PM-in-waiting talking down the Aussie economy and the mining boom?

For Rudd’s part, he’s trying to draw out Abbott’s small target strategy. Abbott’s main line of offence so far seems to be leveraging of the public conception that any pack of monkeys could do better than Labor, and hey, we’re those monkeys.

So Rudd’s trying to scare people. China is powering down, the mining boom is over, and you need a government with actual plans.

For Abbott’s part, he trying to focus attention of Labor’s most unpopular policy, and make it guilty of a sin it could never be capable of. The carbon tax and the MRRT were pretty ineffective. Everyone agrees on that. But they can’t be both ineffective and devastating at the same time. You can’t have it both ways.

And so Abbott is simply trying to scare people – Look at the mess they’ve made already. Imagine what other havoc they might wreak if we gave them another term. Nobody’s safe.

It’s all the politics of fear.

The psychology of fear is interesting. We’re hardwired to pay more attention to threats than to opportunities. A monkey who loses sight of the tigers for the berries, isn’t a monkey for long.

So the parties pay lip service to actual policies and the things they will do for you, but they know the messages that will sell are the messages of fear.

Labor’s campaign slogan is classic. “If he wins, you lose.” Be afraid. Very afraid.

And so the election boils down to both parties trying to present themselves as the least scary option.

Pretty uninspiring.

As investors, it’s important to be aware of this human “threat attention” bias, and the structures that are built upon it. The entire media and newstertainment industry is an example. Good news never made a paper sell.

And so the media will sell us the bad news stories we want to buy. Drive-by shootings in suburbs you’ve never heard of. Disease pandemics in small countries you can’t pronounce. A rout in shares you don’t own. On and on it goes.

The economy is collapsing. The property bubble is bursting. Aliens have infiltrated the White House. The mining boom is over.

As investors, we need to see through this bias in the media and get a read of what is actually going on.

Trouble is though, there are feedback loops. If a story gets repeated enough times in the media, people start to accept it as fact. It becomes a self-fulfilling prophesy.

And that’s what worries me about all this fear-mongering from both sides of politics right now. Repeat a lie enough times it becomes the truth.

Call me foolish, but I’m worried that people might actually start listening to our politicians. And what will they hear?

“The mining boom is over, China is slowing.”

“The mining boom is over, it was Labor’s fault.”

Suddenly there’s a consensus that the mining boom is over. The public accepts it as fact. But it’s just plain wrong.

Oh woe is us! Isn’t there someone we can rely on to tell it to us straight? Who will save us in this darkest of hours?

Enter Glenn ‘Gunslinger’ Stevens, a junior economist on each arm.

Glenn’s been going out of his way to keep us on the straight and narrow, and protect the name and honour of fair Miss Truth.

According to Glenn, the mining boom’s not over, it’s just “changing gear.” It’s just going through a “phase shift”.

The prices boom has passed, and commodity prices are down from their peak in 2011. Our terms of trade are down around 18 percent, but Stevens (and most economists) reckon that even when the slide is over, it will still be higher than it was when the mining boom started – leaving us all better off.

The investment phase also now looks like it has passed its peak, but investment is still expanding. It’s not going backwards. BHP is not pulling down mines. It’s still growing, just at a slower pace than before. And it was a mind-blowing pace before.

But the key here, as Stevens points out, is that the next phase, the production and export phase, has barely started. He reckons volumes of iron ore are rising by about 15 per cent a year. Shipments of natural gas won't start increasing strongly until 2015, and will probably have several years of very strong growth, and then remain high for years and years.

The boom is far from over. No economic calamity. Just an orderly phase shift. No tigers. Just marginally smaller berries.

But that won’t stop the pollies from trying to tell you that the world is ending.

Whatever. Shift happens.

Coming home to the lucky economy…

August 22, 2013 by Jon

Man, it’s good to be home.

I love travelling, but there’s nothing like walking back into the house you love, all the familiar smells and quirks, the plumbing where it’s supposed to be, drooling into your own pillow once more….

It’s good to be home.

Travelling is a gruelling adventure. Totally worth, but it does take it out of you. Even when you’re spending most the day by the pool drinking cocktails, like I was.

Oh to be 18 again. With legs to run me up and down the Eifel Tower all day. It gets harder as you get older. And we’re only getting older. That’s why I’m trying to squeeze in as much travel as I can now. No one’s organising Contiki tours for senior citizens.

(Now there’s a gap in the market.)

Let me lay one of my favourite travel quotes on you:

“To travel is to discover that everyone is wrong about other countries.” – Aldous Huxley

Good ‘ol Mr Huxley. Locking yourself in a room and eating LSD is a difficult road to the truth, but he got there.

And this quote cuts right to it I reckon. It certainly struck me travelling around Greece. The media here had primed me to expect riot cops on every corner, students with stones and Molotov cocktails, desperate grandmothers selling their record collections and the cutlery from a blanket in the town square…

But it wasn’t as bad as all that. Not even close. Sure, things are tough. Really tough. And it’s taken a toll on the national mood. But life goes on. The business of living – doing what you can to earn a buck, catching up with your friends, eating, drinking, fighting, making love… it goes on.

Life has it’s own will and it’s own energy. And we’re a very adaptable species. And if we have others to share our misery with, over a couple of glasses of ouzo, then we will count our blessings, take heart from the things that really matter, and get on with it.

This is a good lesson for investors. Our fears always have a bark that’s worse than its bite. We run through worse case scenarios. What if property prices took a 20% hit? The picture we paint in our minds is horrifying. We’re dressed up like some gypsy refugee, begging for bread, unable to upgrade our i-phone 4’s.

But in places where the worst case scenarios became a reality (like Greece), life isn’t a disaster. There’s some adjustment to be made of course, and adjustments are painful in the short term. But often it gets people focused on the things that really matter – our family, our connections, our selves… all the things that money can never buy.

And our ‘quality’ of life never takes the hit we think it will.

What’s the lesson in this? Don’t let the size of your imagined fears put you off.

How about another travel quote?

“A boat in the harbour is safe, but that’s not what boats are built for… Twenty years from now you will be more disappointed by the things you didn’t do than by the ones you did do. So throw off the bowlines, sail away from the safe harbour. Catch the trade winds in your sails. Explore. Dream. Discover.” – Mark Twain

If you let your imagined fears – the sum of all worse case scenarios – prevent you from taking action, you’ll regret it in the long run. Whether it’s travel or investing, it doesn’t matter. The bold and adventurous get more out of life.

But look at me. I spent two weeks swanning around Mediterranean bars and you think I’d single handedly crossed the Sahara or something.

But it’s an important lesson for right now, I reckon. I was only gone a couple of weeks, but it feels like a couple of months. Am I wrong, but has market mood shifted a huge step since I’ve been gone?

Suddenly the outlook’s a lot brighter than it was.

A lot of it has to do with the surprise result that Europe managed to grow it’s way out of recession in the June quarter, ending 18 months of GDP slide. Growth of 0.3 percent was a solid surprise to the upside, though the burden still falls to ‘old Europe’ with Germany leading the way. 0.5 percent growth in France was encouraging though.

If you look at this graph (of quarterly growth), Europe is now levelling pegging with the US, who has also returned to form. It’s a very encouraging sign.

At the same time, business confidence across the G7 (the seven biggest and most important economies) is bouncing back. Minack Advisors have cobbled this chart together from various national indicies.

It’s rough on a level sense, but it’s the relativities that are instructive. And on that measure, looks like we’re back to the pre-GFC average – or where we were in the middle of the ‘09 boom.

For Australia, this is fantastic news. We’ve been relying on an Asian driven mining boom to keep us striding along while the rest of the world dithered. But now, even though the mood also seems to suggest China is on a good track now anyway, looks like we might now be able to rely on the rest of the world for a bit of export support.

That’ll be a nice change. A very nice change.

And these changes will dominate anything that going on domestically – even the election…

One last travel quote for you:

“The whole object of travel is not to set foot on foreign land; it is at last to set foot on one’s own country as a foreign land.” – G. K. Chesterton

Coming home, I’m reminded of just how special Australia is, and just how lucky we are. As investors, as citizens, as families. I’m lucky to call Australia home.

And it is very, very good to be home.

Brits being led to the slaughter in Greece?

August 20, 2013 by Jon

Real estate or building land for sale

You’ve got to feel sorry for the Brits don’t you?

The economy’s in the doldrums, it rains 350 days a year, and the cultural culinary high-water mark is a shepherd’s pie. Meat AND mashed-potato… IN A PIE!

Genius.

But I feel most sorry for the poor old mum and dad British investors. Ignorant, naïve and cashed-up. Everything a scammer could hope for.

And now a text-book guide to everything that can go wrong in off-shore property investing.

You’d think they’d learn. There’s been 20 years of investing horror stories, across the Mediterranean, but they keep coming back for more.

And right now, here in Greece, there are a whole bunch of specialist agencies lining up to market bargain basement Greek property directly to the Brits. Some of them are probably ok. Some of them are probably shamelessly criminal.

One of those organisations is the Greek government itself. Apparently you can now rent out the treasures of ancient Greece – places like the acropolis – for fashion shoots or music videos… for a modest fee.

Maybe if we ever go broke we could do something at the Sydney Opera House, like put on a concert. Oh wait…

But there are shysters out there playing off the British dream of a cute little holiday villa in the Mediterranean. And who’s going to help them do anything about it. MI5?

I’ve been looking around at property since I’ve been here (I can’t help myself. Some people like looking in Galleries, I like looking in real estate windows…) And there are some bargains here to be sure!

I’ve seen places, quality places, going for discounts of 50-70 percent. Premium inner city houses, stunning water-front villas. There are some incredible bargains on offer.

Because the debt crisis has had a huge impact on the Greek property market. And the truth be told, a down turn in property was underway well before the debt crisis hit. Actually it was one of the key causes.

But now property prices nationally are 30 percent lower than they were three years ago.

And in the 5 years leading up to the GFC, an average of 150,000 properties changed hands every year. Now, Greece is lucky to post 10-20,000. Volumes are down an incredible 90 percent!

A 30 percent fall in prices, a 90 percent fall in volumes? That’s a property market that’s been decimated. But it’s also a property market that’s offering up some incredible bargains.

And new taxes on property are pushing even more sellers on to the market. If it isn’t a buyers market, I don’t know what is.

And it’s a market that’s attracting buyers from all over Europe, not just the UK. Snare yourself a piece of paradise at bargain basement prices!

But I wonder if the British mums and dads really know what they’re doing – if they really understand the risks.

It highlights some issues that everyone thinking about offshore property investment should be aware of.

First of all, the Greek property market is not particularly sophisticated – definitely not relative to Australia. There’s still no one website to look at all properties available for example.

So buyers are relying on buyer’s agents to source their properties. But how much can you trust your buyer’s agents? Often, they just work on commission, so unless they think you’re going to be a repeat customer, they don’t really care what piece of crap they flog you.

You think the Brits would have learnt this lesson in Spain. A lot of folks bought there, completely sight unseen! And then it turned out that quaint little villa with water-views was actually a hovel with a garbage tip aspect. And there was nothing they could do about it.

The second issue is the difficulty of navigating a foreign legal minefield. Greece doesn’t have a reputation for being light on red tape. And there’s still a lot of uncertainty around the legality of foreign title.

Again, you’d think their experience in Turkey would have been instructive. There were a lot of cases there of transactions that lacked the proper documentation, which meant that down the track they were null and void. There were also cases of Brits rocking up to find that the title had actually been put into the name of the buyer’s agent’s cousin.

And how many do you think had the pockets or the wits to try and drag someone through the Turkish legal system? You’re a long way from home.

The other thing I wonder is how many of them are hedging, or even really understand the currency risk involved…

There’s always the Pound / Euro risk. It’s not really clear which way that might go. There’s a lot of factors to consider.

But what about the risk that Greece exits the Euro? That still remains a possibility. Those Brits could find themselves with a euro-based mortgage against an asset denominated in next-to-worthless drachmas… scary.

And then there’s sovereign risk. Foreign property owners (with no vote!) would be tasty targets for tax hikes to try and fill the budget black-holes.

It’s a minefield.

Now I’m not saying Greece is a no-go zone. I’ve been keeping an eye out myself. There are some incredible bargains. And if you could afford it, and you bought well, a piece of paradise is a piece of paradise, no matter what happens to the economy.

But you really need to know what you’re doing if you’re going to invest off-shore. Or at the very least, you really need to partner with someone who does, and who is someone you can trust!

Get that in place, and Greece could be an incredible opportunity.

But if you don’t you’re just a lamb to the slaughter. Makes me wonder how many unsophisticated Brits are being led up yet another Mediterranean garden path…

The Real Greek Crisis

August 15, 2013 by Jon

Socrates

Someone was telling me that a University here in Greece had a new policy on security guards. To save money, they’re firing all the security guards, and only keeping on those with masters degrees of PhDs.

Now, I don’t know if security is a more complex business here in Greece. But I thought it was more of your Cert IV kinda skill set – not a university degree.

And you can’t imagine someone’s invested in a PhD with the hope of cracking the security guard market. Something’s going wrong here.

And I think it goes to the heart of the crisis Greece is in – when you have an educated people, unable to find meaningful work.

And I’m not joking or trying to be punny when I say it’s a tragedy.

Take Olympia. She’s been our waitress at our favourite little café here in Mykonos. She’s mid-20s, bright and articulate, speaks perfect English, and has a masters degree in Social Work…

… and waits tables for lazy tourists like me.

If you think that’s a waste of potential, it is. It’s a waste of her talents and it’s a waste of the contribution she could have made to her country.

I’m not bagging working at a café mind you. For some people it’s great. For some it ties in with their lifestyle. Some have a passion for it.

But Olympia’s got no passion for her job. If she could be working in her field, she’d toss in her apron at the drop of the hat. No, it’s the economy that holds her here.

The youth (under 25) unemployment statistics in Greece are horrifying. At last count, 64.2 percent of people of working age under 25 didn’t have a job.

That means only 1 in 3 are working. It’s a depressing stat if you’re one of the two hoping to be one of the one. The numbers are against you.

It’s a tragedy in Greece, but it’s ugly across Europe.

Euro Unemployment

This chart shows that youth unemployment is up to 56 percent in Spain, and up over 40 percent in Italy.

Only Germany have anything looking like a full employment rate for it’s youth – which again shows just how different the euro zone economies actually are from each other – and how hard it is to keep the wriggly bag of roosters that makes up the euro together.

If this isn’t a crisis, I don’t know what is. I believe the children are the future (because that’s logically true by definition). But if the future is being lumped with an erosion of productive skills as well as massive set-backs to their self-esteem, what will the future look like?

Not pretty.

Normally, it’s the unskilled that have the hardest time finding work in a struggling economy. Again, this is almost true by definition. If you don’t have particular marketable skills, it makes you less marketable.

But it’s gone further than that in Greece and continental Europe. A full 30 percent of 20-35 year old Greeks are university educated. In Spain, it’s 40 percent. It’s the most educated generation in history, and it’s all going to waste.

Think of all that knowledge and energy embodied in those young minds – all that investment – just going to waste. Spectacular fruit left to rot on the tree.

I ask Olympia if she has any regrets about studying and studying so much.

“At first, I was happy with the choice. I enjoyed the topic, and I wanted to work in the field. Now I wonder if I should have studied something that could get me a job overseas. Like finance and commerce. Maybe medicine. If I had my time again…”

The irony is that Greek needs social workers now, perhaps more than ever. Six years into recession, on a lot of measures the crisis in Greece is topping the Great Depression in the US, and is lasting longer. With more and more people out of work, Greece is at risk of running into a humanitarian crisis as well.

“Sure, there’s lot of social work to do,” says Olympia. “But who’s going to pay for it? All the municipal governments are broke. There’s no money.”

And so how did Olympia, originally from Athens, end up waiting tables in Mykonos?

English.

Here, being able to speak English gets you a lot further than any experience you have in hospitality. Olympia spent some time in the UK when she was younger, and had a knack for languages.

Today, it’s her saving grace. “If I couldn’t speak English, I don’t know what I’d be doing. I’d been looking for work for over a year in Athens, and couldn’t find anything. So I came here. But I don’t know what I’ll do when the season ends. I don’t want to think about it.”

Maybe she’ll go back to Athens and join the rest of her disaffected generation on the streets of Athens. She doesn’t look like the rock-throwing kind, but desperate times make for desperate people.

Or maybe she’ll just throw it all in and try her luck overseas. The numbers on the leakage of skilled and educated professionals out of Greece are staggering. A recent study by the University of Thessaloniki found that more than 120,000 professionals, including doctors, engineers and scientists, have left Greece since the start of the crisis in 2010.

That’s a real Brain Drain. And just when Greece could really use that talent. But who can blame them?

For some of the young here, unemployment is all they’ve known. And when you feel you can’t make a valued contribution to your society, it eats away at you. It scars you.

For their sake, and for the sake of Greece’s future, they need to get on top of this problem fast.

When your carers forget to care, and learn how to throw stones instead, you’ve got a real problem on your hands.