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Running on a hamster wheel? There’s a reason for that…

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I’ve found a bug in the economic system that explains why most of us have such a crappy experience of it.

One of the great challenges western economies face is the concentration of market power.

Australia actually has one of the worst track records on this front. Try to think of an industry that isn’t controlled by a small group of companies – many are controlled by just two: Coles and Woolies, Bunnings and Mitre 10, Virgin and Jetstar/Qantas, Optus and Telstra, MacDonald’s and Hungry Jacks, the big banks, the energy sector… it goes on.

Now, economic theory tells us that this is bad. The concentration of market power leads to consumers being gouged and rent-seeking behaviour.

(I think I just described the Australian economic model right there.)

So we have “competition policy” and the ACCC – to make sure that our markets stay competitive.

But there’s a bit of a bug in this theory.

The idea that competition is good seems to come out of Darwin’s theory of evolution. Species in competition with each other push each other to be bigger, better, faster or simply just smarter.

(I didn’t get this brain by accident).

The fastest animal on earth is the cheetah. The second fastest animal on earth is cheetah food – gazelles.

The competition between cheetahs and gazelles creates faster and faster animals.

And so this theory of competition has given us the two party political system, and a judicial system based on competition between prosecutor and defence, for example.

And it has given us the modern economic orthodoxy that says so long as there is genuine competition, even if it’s only between two companies, then the economy and the consumer is better off.

So where’s the bug?

The bug is with where we place the perspective. Competition between cheetahs and gazelles creates faster species, and that’s kind of cool, but what about for the individual animals? For them it kind of sucks. They’re in a system where they’ve got to constantly work harder and harder just to survive.

The species evolve, but only by keeping individual members of those species under pressure.

Or what about companies? Say a company develops some new tech and increases it’s market dominance. That’s good for the company and good for its shareholders. But it’s not good for the economy, and the ideal economy would see that market dominance quickly eroded, and shareholder returns fall.

Same story with the labour market. A competitive labour market is good for employers and the economy, but it’s hard work for the individuals inside it. Any surplus they capture – any wage premiums they’re able to secure to make their life a little easier – again, ideally these advantages are quickly taken away.

In competitive economies, individuals are locked in constant, grinding competition.

This is the restlessness that lies at the heart of the modern economy.

Either you go towards the concentration of market power, and accept the evils that come with that, or you keep everyone in the economy toiling away on their hamster wheels, in endless competition with each other.

And they’re the only two possible outcomes.

Do you see how both outcomes kind of just suck for the individuals?

And so we’ve created a system that is good for our abstract ‘economy’ but sucks for the individuals who have to exist within it.

Does that sound like a good design to you?

We need a new system (he says, stating the obvious). I don’t know what that system looks like, but until then, we need to be developing strategies that bust us right out of the system and the tyranny of competition. You need something that puts you in a different game altogether.

For me it was property and a knowledge company. But whatever it is for you, you’ve got to find it.

You can’t run a hamster wheel forever.

No BS Friday: What the tele-evangelist taught me about cashflow

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Hoarding is a human instinct, but it can skew your priorities as an investor.

Why do those hardcore Christians in America hoard food for the apocalypse?

Have you seen those guys? There’s like one particular tele-evangelist guy – says he’s a priest – that has a cable TV show. He got a bit of attention when Trump was elected because he firmly believed that Trump was God’s favoured candidate.

I would have thought if God was taking sides, he wouldn’t need our help to get his man elected.

[Shock: Divine hand identified in vote-rigging scandal.]

You might know him actually. His name is Jim Bakker. You might remember him from the 1980s, when “Jim and Tammy” (his wife), got convicted for embezzling $160 million from their flock.

And for you other property nerds, he convinced 165,000 people to fork over $1,000 each to help him build a resort at his Christian-themed water park. If they chipped in $1,000, they’d be entitled to a four-day stay in the resort, every year for the rest of their lives!

(The resort was never built.)

Anyway, without his signature hair and a new wife, he’s back on TV. And from what I can tell (and I could only watch so much), his new business model seems to be selling buckets of food to Christians.

Yup. Buckets of food. Buckets that have a 35-year shelf life. You can get curries, pancakes, slop. You name it. You can even get a Mexican themed “Fiesta Bucket”.

(Seriously, who on earth is buying this stuff.)

And for just a few thousand dollars you can buy yourself an 8-year supply of slop. And from the safety of your fortified bunker, you and your heavily-armed friends will be able to comfortably ride out the End of Times.

It all seems to be based on an unconventional interpretation of the Revelation. Normally, it says that the righteous will be raised up into heaven, and the rest of us (I’m guessing I’m probably not on that guest list), will be left to our own devices when the devil is given control of the world.

In Jim Bakker’s cosmology though, the righteous have to endure the Tribulations with all the other sinners before they can hope of being redeemed.

And Tribulations go better with a bucket of slop.

Yeah, nah, I still can’t get my head around this. I just can’t imagine how this makes sense to anybody. You believe in a God that is very picky about who is righteous and who is not, (a list that includes Donald Trump!), that God is very active in shaping the world to His liking, but when it comes time to wrap it up, he’s just going to leave all the righteous ones to their fate, so that only the ones with a big enough stash of slop will survive?

Am I missing something?

I think religions over the years have done a pretty good job of fingering people’s fears. And what I think happens is that our world has become so complex and so complicated, that many people feel an intense kind of fear that they just can’t name. They can’t get a handle on.

But then along comes the tele-preacher and says, yeah, there’s a good reason why you feel scared right now. That’s because there’s a massive wrath-God about to send the whole joint up in flames.

“Oh thank goodness. I thought I was crazy. That just makes so much sense. Better buy some buckets of slop then.”

It is a massive to release to be able to give your fears a name, and it is something that people will pay money for.

QED.

Anyway, this isn’t where I was planning on going with this piece. I didn’t plan to sink the boot into Jim Bakker and his sheep – sorry flock. What I find interesting about it is the psychology of hoard = safety.

This idea is primal and deep, but we need to disentangle ourselves from it is we’re going to make it in the world, and particularly make it as investors.

Let me break it down.

Hoarding is a fear response.

If you always believed that whatever you needed would come to you, you wouldn’t hoard anything. You’d just wait for it to arrive.

And I think most creatures on earth live like this. The only animals that hoard seem to be those that live in places with extreme winters, where the sources of food do all dry up. The rest lead a simple life. Eat when you are hungry. Make babies when you are full. Repeat.

Humans, however, hoard all the time. Not just through winter, but all the time. Our hoard instinct is constantly turned on.

And again, I think this comes from living in a world that is scary in ways that we just can’t understand.

Like, we can’t predict if the global economy will be up and running in a year or two, so better save up just in case. Better buy lots of food and weapons, and build up a bank of social credit so I can call in some favours if I need to.

We cannot predict what will happen, so we cannot predict what we will need.

(Spending several millennia growing crops that would periodically fail also probably drove this instinct pretty deep into the psyche.)

So hoarding is a natural response. It tempting to say it is humans being greedy, but I don’t think many people are taking more than they think they genuinely need. It’s just that they don’t know what they will genuinely need, and want to make sure they have a sufficient buffer.

Anyway, in a financial sense, we’re talking about wealth. Wealth is hoarded money.

And again, nothing wrong with that. I like wealth.

But as an investor, there’s something just as important as wealth, and that’s cashflow.

But cashflow doesn’t have an instinct driving it the way wealth does.

I mean, we like cashflow. We can see that it’s useful. We can tangibly get a sense of what it enables.

But it just doesn’t sit on top of an evolutionary drive the way wealth does.

I don’t get a soothing sense of safety out of my cashflow situation. But when I look at my bank balance, I breathe a sigh of relief.

(Ahhh. So many buckets of food right there.)

So where wealth accumulation is given a helping hand by our instincts, our drive to build cashflow is a little more naive, or pure. We’re like little birds, just eating the bugs as they come, when they come.

Cashflow comes when it comes. The seasons turn, rental income comes in.

But I think this difference helps us understand why most investors don’t give cashflow enough attention.

I mean, most get there eventually. After you’ve lost a few deals because you don’t have enough serviceability, you start to appreciate cashflow.

But when we’re starting out, most of us just aren’t giving cashflow the attention it needs.

And I think that is why many investors stumble three or four years into their journey.

If they’ve put all of their energy into wealth, and haven’t created any cashflow, they’re not really getting a first hand taste of the benefits. They’re stashing benefits away for a future self, but there’s nothing for them in the here and now.

You need cashflow to keep you nourished. It is a gift you can give yourself, either through some nice things, or best of all, free time.

Wealth is great, but cashflow is the juice of the here and now.

And since it is the juice of the here and now, it is in the realm of abundance.

When we’re focusing on cashflow, we’re closer to the birds and animals, just trusting that the rains will come, and the fruits will grow.

But as I’ve said before, the human is unique because it straddles time. It lives in the here and now, but must also live in the future as well.

And so there needs to be a balance. A balance between the here and now, and the future. A balance between the hoarding of wealth and the spending of cashflow.

The only point I want to make is that our drive for cashflow just doesn’t have the same biological drive that wealth has. So, left unchecked, we can naturally end up a little out of whack.

So my recommendation is, give a little more thought to your cashflow situation. In your mind, try to see it as just as important as your levels of wealth.

This is the ticket to being a harmonious and successful investor, I think.

Robot-traders? This is frightening!

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I love a good tech story, but this one is downright scary.

For some reason I went down a bit of a rabbit-hole with high-frequency trading and robo stock traders this week.

I thought I’d share a bit of that with you here, not to make the point that the stock market is rigged (you knew that already), but just because the way it is rigged and the way the robot traders work, is just kind of mind blowing.

So yeah, money and tech. Two of my favourite things.

Ok, so I’ll admit I had no idea how robo-traders worked. When I first heard about them, I imagined a robot like Dexter from perfect match, going through stock-picking newsletters and picking the ones it liked.

But I then learnt it had something to do with algorithms, which again I thought was about mathematical ways to pick stocks, or pick market momentum – technical analysis on steroids.

But the truth is much scarier.

And we have a Hedge Fund guy named Brad Katsuyama to thank for that truth.

He noticed that his capacity to execute trades was falling. That is, on the computer systems traders use, they have something on their screen that tells them the stock price, and how many stocks are being offered at that price.

So say, Westpac, WBC at $2 a share, with 100,000 shares on offer.

In 2006, if Brad saw there was 100,000 stocks on offer, and he wanted to buy them all, he’d get them.

But in 2007, if there was 100K on offer, he’d be lucky to get 80K.

In 2008 it was down to 70K. And by 2009 it was down to 45K.

The screens would tell him that there were 100K, on offer but if he tried to buy them, he’d get less than half of what he wanted.

That was a problem.

At first he thought it was just the market moving at the same time as he was trading. But even in slow moving stocks, where trade was thin, he’d get the same problem. He realised some sort of event was shifting the market, and he was that event.

So he went digging. He discovered a few very interesting things.

The first is that that 100,000 shares was not housed at a single exchange, but was rather distributed across 13 different exchanges. (This is America we’re talking about).

And when you executed a trade, you didn’t put your order in with an exchange, you sent it to a ‘Smart Order Router’. The router would then split it up and send your trade on to the relevant exchanges to complete the trade.

Thing was though, the trades didn’t arrive at all of the exchanges at the same time. The further away the exchanges were, the longer it took.

(I ripped these images from a talk he did recently).

This created a window of opportunity for the robo-traders.

When Brad looked into it he found that there was about 2 milliseconds between when the trade arrived at the first exchange and the last exchange.

He thought, wow. That’s pretty quick. It takes 300 milliseconds to blink your eye, so 2 milliseconds (0.002 seconds) was fast, right?

Actually no. When he looked into it, the robo-traders could get their trades to the exchanges in 476 micro seconds. A micro second is a millionth of a second. So that’s like, 0.000476 seconds.

That’s insane right?

How does time even make sense at that level? It is beyond human comprehension.

But the robots got it. And the robots were using their speed to their advantage.

What they would do is ‘front run’ Brad’s trade.

So when he says, buy 100K WBC and hit go, the robots get in front of his trade. They would withdraw their sell offers and buy up WBC for themselves to sell on to him at a profit.

And so while there’s 100K on offer when he hits his button, by the time the robots have run ahead of him and done their thing, he’s lucky if he gets half of what he wants.

He calls this latency arbitrage – using the time lag between servers to your advantage.

I still find it mind blowing. This is how lots of people make money these days. By getting super fast robots to run ahead of people’s legitimate trades and mess them up.

And I mean a lot. On some days, 75% of trading volume is done by robots.

Madness.

It gets worse. Brad reckons that stock exchanges don’t make money on helping people execute trades any more. (They actually offer billions of dollars in ‘rebates’)

Rather they make their money by selling super-fast tech and super-fast data to the robot masters.

That is, they are enabling latency arbitrage. They are creating a class of people who have more info than others, and who then use it to their advantage.

Stock exchanges are enabling insider trading.

Just balls-out madness.

Seriously. Why would you?

Until a robot shows up to auction one day, I think I’ll stick to property.

The sector where investors are ‘settling’ for 8% yields

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Cashflow can be a killer, but it’s on tap in this segment right now.

Cashflow is always a killer.

It can bring down otherwise healthy businesses, it can derail otherwise successful portfolios.

And in the early days investors will often go for equity and capital gain. Nothing impresses people like a portfolio worth millions.

But by the time they realise they need cashflow to keep the whole show running, it can be too late.

And this is a tough cashflow environment right now. If you look at what’s happened to yields in residential property over recent years, we’ve seen a compression that’s taken them back to bare bones at best.

I mean, look at the latest data from CoreLogic:

In Melbourne Gross (and that’s gross!) yields are a smidgen over 3%. In Sydney they’re not much better at 3.2%.

I don’t know how you make it work with gross yields of 3%, and really, if that’s what buyers are accepting, then they’re probably not trying hard enough.

And yields get a little better when you move out to the smaller capitals, but not all that much.

Right now in residential property, there’s not a lot of cashflow for investors to hang their hat on. You can still get good returns, you can still get cashflow positive properties, but you’ve got to search a little harder – put a little more time in.

And that was all well and good when interest rates kept heading down and capital values kept heading north, but the APRA restrictions are seeing interest rates nudge up, with the threat of even more nudging in the offing.

Cashflow could become the make or break issue more many investors in 2019.

And in that context, I found this article in the AFR about BIS Oxford’s commercial property outlook interesting.

It noted that the past 5 years have seen a massive boom in commercial property, especially in office and industrial.

There were points there where the Internal Rate of Return (more or less equal to Gross Yields) were running at close to 20% in Sydney Offices!

BIS notes that these levels were never going to be sustainable, and over the next five years, they are going to be wound back.

But this is the thing. Even with them winding back (which is itself due to prices catching up and growing faster than rents, rather than rents falling), we’re still looking yields in Sydney and Melbourne around the 7-8% mark.

Don’t you feel sorry for those commercial property investors – having to suffer through yields of 7-8%? I might send them a Christmas card.

And this is for offices and industrial, and those commercial segments tend to be dominated by CBD offices and large industrial centres. Smaller scale commercial investments – the kinds of things easily accessible to ‘mum and dad’ type investors – those things typically come with a yield premium.

So 8 or 9%, even 10% is easily achievable – if you know what you’re looking for. (You need to know what you’re looking for.)

But how is this possible? How is commercial property still delivering this kind of cash flow to investors, while residential property is just slugging along?

The thing to remember is that residential property is being held back by a string of recent APRA restrictions – restrictions specifically designed to slow the market down.

APRA never threw the hand-brake on commercial.

I mean, compare the APRA restrictions put on the two sectors over the past 18 months or so:

Residential
• Investor lending growth capped at 10% pa.
• Interest Only lending capped at 30% of new loans
• Much tighter income and expense reporting
• Compulsory Credit Reporting across the financial sector

Commercial
• Corrected typo on p.17 of ADI Commercial Lending form.

That is, APRA hasn’t hassled commercial the same way it has hassled residential. And so commercial is still tracking in line with the economic fundamentals – where economic activity is picking up and unemployment remains low.

So even as the hectic pace of the recent five years unwinds, we’re coming back to some very solid fundamentals.

Which means the yield, and even the capital growth outlook for the right commercial properties is still very, very strong.

That means, for cashflow hungry investors, commercial property could be a strong option.

Most investors won’t touch commercial – and really, they probably shouldn’t. The cross-over from residential to commercial isn’t hard to make, but there are some important things you need to be aware of.

But personally, since I happen to like cashflow very, very much, I could see the balance of my purchases in 2019 tipping more and more towards commercial… at least until the APRA restrictions wash through.

I mean, we all like cashflow, right?

NO B.S. FRIDAY: Scientists stumble on remnants of alien civilisation

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We may have just found the first proof that alien life exists.

Ok this is about space, aliens, theories of advanced technology, and the power of wonder. I’ve just had this stuck in my head this week, and I was wanting to right something about it, but it’s not property, it’s not makets, it’s not persuasion.

Where do I put it?

Of course. No B.S Friday. Because this is about being grateful for this wonderful strange old universe we’re living in.

So this all started about a week ago when someone sent this article about some weird asteroid to me.

So I had a look. I’m always wary about crack-pot theories about space on the internet, so I scroll down to see who wrote it.

Chair of the Astronomy Dept at Harvard. Ok, we’re not talking about some tin-foil hat crank then. This is science!

And what’s he writing about? The first ‘interstellar’ object ever discovered.

On October 19, 2017, the first interstellar object, ‘Oumuamua, was discovered by the Pan-STARRS survey. The experience was similar to having a surprise guest for dinner show up from another country.

They weren’t looking for it. They just happened across it. It was an asteroid, they think, but not one of those common ones that are trapped in our solar system. But one travelling between the stars, boldly going where no asteroid has gone before.

And it shot right through our solar system and out the other side.

But that’s not exactly right either. It’s more that our solar system, which is actually traveling quite fast, sailed right on past ‘Oumuamua, which was sort of stationary.

And this is where things start to get a bit weird:

‘Oumuamua is like a buoy sitting at rest on the surface of the ocean, with the solar system running into it like a fast ship. Could there be an array of buoys that serves as a network of relay stations or road posts, defining the average galactic frame of reference in interstellar space?

Now I’m starting to wonder if this is a spoof. But it’s on the blog of Scientific American. As far as I can see, it’s legit.

But it gets even weirder:

We do not have a photo of ‘Oumuamua, but its brightness owing to reflected sunlight varied by a factor of 10 as it rotated periodically every eight hours. This implies that ‘Oumuamua has an extreme elongated shape with its length at least five to 10 times larger than its projected width. The inferred shape is more extreme than for all asteroids previously seen in the solar system, which have a length-to-width ratio of at most three.

… The Spitzer Space Telescope did not detect any heat in the form of infrared radiation from ‘Oumuamua. Given the surface temperature dictated by ‘Oumuamua’s trajectory near the sun, this sets an upper limit on its size of hundreds of meters. Based on this size limit, ‘Oumuamua must be unusually shiny, with a reflectance that is at least 10 times higher than exhibited by solar system asteroids.

… The extra push exhibited by ‘Oumuamua’s orbit could not have originated from a breakup into pieces because such an event would have provided a single, impulsive kick, unlike the continuous push that was observed. If cometary outgassing is ruled out and the inferred excess force is real, only one possibility remains: an extra push due to radiation pressure from the sun. In order for this push to be effective, ‘Oumuamua needs to be less than a millimeter thick but with a size of at least 20 meters (for a perfect reflector), resembling a lightsail of artificial origin. In this case ‘Oumuamua would resemble the solar sail demonstrated by the Japanese mission IKAROS or the lightsail contemplated for the Starshot initiative…

Let me get this right, Abe. We found this weird object in space, that is most probably less than a millimetre thick and at least 20 metres long, but possible a couple of hundred metres long..?

And it’s just sitting there?

The Kepler satellite revealed that about a quarter of all the stars in the Milky Way have a habitable planet of the size of the Earth, with the potential to have liquid water on its surface and the chemistry of life as we know it. It is therefore conceivable that interstellar space is full of artificially made debris, either in the form of devices that serve a purpose on a reconnaissance mission or in the form of defunct equipment. However, to validate an exotic artificial origin for ‘Oumuamua, we need more data. As Carl Sagan said, “extraordinary claims require extraordinary evidence.”

I don’t really have anything to say about this. I’m not an astronomer and the opinions of an amateur philosopher aren’t really useful.

But I just wanted to share the sense of wonder that I felt. The way my mind spins beautifully when I imagine intergalactic civilisations leaving strange sign-posts just floating around in the cosmos.

The sum of human knowledge is still just a drop in the Ocean. There is still so much we don’t know.

And when we look at all the problems we face right now, that is comforting. We’re making a mess of things at the moment, but of course, we are. We don’t know anything about how the universe works, or what or who else is out there.

It drops me back into humility and wonder.

And I think we all need that from time to time.

JG

I love Labor too! (..but voted Liberal)

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The Liberal party is in serious trouble, but I think investors have something to look forward to.

So seems Labor’s landslide victory in Victoria caught everyone off guard.

I’m still amazed that this can happen. Facebook and Google know what kind of aftershave I use, but we still can’t get a good handle on voting intentions? Seems a bit buggy to me.

Anyway, the results are in. The Labor Love Fest is off the charts. Biggest win in a generation. I’ll explain what I think it means for wealth strategy in a sec, but first I wanted to step back and look at the bigger picture.

Now, no shortage of ink is being wasted on the Liberal Party autopsy and a good chunk of that is pointing the finger at the shenanigans in Canberra, especially the knifing of Malcolm Turnbull.

But I actually think there are some broader structural issues at work, and I worry that the Liberal party is about to get blindsided into oblivion.

Seriously, they might be toast.

First, I think they’re underestimating where the average voter sits on a lot of issues, and in states like Victoria, the average voter is a lot more ‘progressive’ than I think they realise.

How do I know this?

Daniel Andrews told me so.

“Progressive” is a relatively new term in the Australian political vocabulary, and it’s never really featured much in political branding. And you wouldn’t use it much anyway. It’s like ‘conservative’. Conservative might describe your base, but you’re trying to win votes in the political centre, so you use language that speaks to that.

But Daniel Andrews is using “progressive” and using it a lot.

In his short victory speech he said, “Friends, we are the most progressive government in the nation. We are the most progressive state in the nation.”

And it’s not new. Remember when the Gay Marriage issue was decided:

The most progressive government in the most progressive capital in the most progressive state…

This isn’t an accident. This is deliberate language use, and the Labor party must know it’s polling well. Which means that it’s a term that now sells to the political centre in Victoria.

To the Liberals, and their infamous conservative faction, this is very bad news.

They must have known they were taking a gamble. In knifing Turnbull, they were saying they were willing to risk some inner city seats to save some marginal seats in Queensland. But then they f-ed it up royally, when, rather than making Dutton leader – the only person who could save those seats in Queensland – they gave us Morrison, who is just a bit yeah, nah with everybody.

So they sacrificed Victoria and achieved nothing.

But there’s something else Andrews is doing here. He’s not just speaking to the centre; he’s creating a Victorian political identity. He’s saying Victoria votes for progressive parties just because it is Victoria.

If he can succeed in getting people to associate “progressive” with “Victorian” – to see them as one and the same – then he will have locked Labor in for a generation.

It’s like the blue state / red state phenomenon in America. States like California are locked in blue states (Democrat), and proudly so. It becomes a badge of pride.

Victoria is Australia’s first blue state (or red state really).

This is clever. Very clever.

And I don’t know the Liberal party has a counter-play. To do something similar, it has to go against the tide of history. They could try to take Queensland, but it’s hard to imagine a Queensland Premier running a campaign around “the most conservative government in the most conservative state.” It’s a promise to be backward looking. It doesn’t have the same ring to it.

And to do so, they’d need to abandon a large chunk of their voter base – the voters that don’t really resonate with the term ‘conservative’.

Voters like me.

I’ve voted Liberal most of my life. I did on the weekend. But I don’t identify as “conservative”. I don’t look back at the past and think we need more of that. I’m forward looking. I’m excited about change. I’m excited about the future.

I’m much more Malcolm Turnbull than Peter Dutton.

I vote Liberal because I believe individual freedom should be society’s primary goal. I vote Liberal because I believe enterprise and endeavour are the cornerstones of a successful society. I vote Liberal because I believe that our soft hearts need to be guided by sensible, hard heads.

It’s never been about whether there’s enough flags or bibles in our schools.

So the Liberal party is in trouble. Unless they can figure out a way to build a tent large enough to hold both their progressive and conservative voters, it will tear itself apart.

… if that hasn’t begun already.

That’s my thoughts.

And so, I promised I would look at what I think it means for wealth strategy too.

I think the Victorian election showed us we’re on the verge of a Labor nation. I think the Coalition is in trouble Federally and in most states.

If they get the mandate I expect, like they did in Victoria, then expect some pain. Expect a tough response to the Royal Commission. Expect no mercy on the interest only to principal reset. Expect negative gearing to go.

That might freak some people out. Amateurs might bail out of the market at that stage.

But I think Labor will be smart enough to try and spend their way through the pain. Expect a spending spree based around ‘fairness’ – first home owner grants to low income earners, an increase in the dole, more money for schools, hospitals and infrastructure in general. Stuff like that.

In the medium term, that will give the economy a boost. There’ll be more for everyone (so long as commodity prices continue to support the budget bottom line).

So keep your eye on this. Don’t bail too early. Look for serious reform and strong but sustainable spending.

There might be some short term pain, but it will pay off in the medium term.

And watch for that term ‘progressive’. See if the media picks it up and runs with it.

My secret: Why I love this segment so much

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The secret is getting out. This segment is a gold mine.

Townhouses are the new black.

I’ve been saying this for a little while now, but I wonder if people really get the long run drivers that are lining up behind the townhouse segment.

And I’ll let you in on a little secret. This is the segment that excites me most right now. It’s where I’m putting my money. I’ve got three substantial deals in play right now, all less than 500 metres from my office.

If you want to know the details, I made a few videos about them. Have a look here.(this is a video I made for last years Xmas sale – so ignore the chat about that)

In many ways, townhouses have been Australia’s quiet achievers. The Australian mythology still attaches itself to the sprawling quarter acre block, though that style’s heyday is well and truly behind us now.

At the same time, most commentators eyes have been on the emergence of the high-rise sector, as our CBD landscapes have been recast, and people worried about whether anyone would ever live in these “dog boxes in the sky”.

But in the shadows of all this, townhouses have quietly gone from strength to strength.

And the number of townhouses getting approval each year has more than doubled over the past five years, in NSW and Victoria. In NSW, they’re now adding 13,000 a year. In Victoria it’s about 10,000.

This is at the same time that the growth rate for detached housing approvals has actually turned negative. That is, the number of approvals this year was less than the number approved last year. That’s in both NSW and Victoria.

This is a structural trend. This isn’t about the housing cycle. This is about a restructuring of the housing market in Australia, away from detached housing.

The drivers of this are reasonably easy to identify.

And largely it’s about economics. People are hungry for affordable housing options, and townhouses offer something that is cheaper than house and land, but with more privacy and amenity than high-rise.

A lot of families I know could see themselves in a townhouse, but wouldn’t really consider apartment living.

The politics of townhouses is interesting too. Politicians are under pressure to provide more housing to cater to our booming populations.

However, local residents value their leafy amenity, and don’t really want to see a skyscraper go up next door to the kindy.

In that sense, townhouses offer a sort of political middle ground. They allow councils to meet their housing targets, but in a way that doesn’t get the NIMBY brigade too offside.

And look, high-rise design has come a long way, but they do change the feel of an area significantly. On the other had, townhouse design can be a lot more flexible, and often fit in much more harmoniously with the existing streetscapes.

The other driver is lifestyle. Modern life is more outwardly-orientated. We just don’t spend as much time at home as we used to, and that’s a great thing.

But it means that people want their home to be functional and comfortable, but they put a lot of value on location and amenity too.

And that’s created a really interesting segment – and a really juicy segment. Luxury townhouses.

When townhouses first entered the scene, it was as a kind of poor man’s house. That is, if you couldn’t afford a full house, you might settle for a townhouse.

And townhouse design reflected that economics – it was cheap.

These days though, people are valuing location and amenity, and want their townhouse to reflect their aspirations.

They want all the fittings, they want the appliances, they want the designer feel.

There is a market, and a growing market, for high-end townhouses.

20 years ago, the phrase “high-end townhouse” didn’t even make sense. Today, it’s a lucrative segment.

And so if you look at the deals I’m doing, I’m using these long run drivers to my advantage.

I’m backing council demand for urban infill, I’m positioning my developments well, and I’m aiming at the upper end of the market.

And right now, it’s working out very nicely. In the three deals I share with you in the videos, I’m looking at making a million dollar profit off each one.

I’m happy with that.

So yeah, townhouses are the new black.

And we haven’t seen anything yet.

Mark the date. It will be the death of freedom

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We should be terrified. But no, we’re throwing money around all over the place.

This week I became genuinely scared for capitalism, democracy and freedom. And I’m not sure people really get how serious this is.

I’m talking about Amazon, and specifically Amazon’s announcement of their second American headquarters – HQ2.

They decided to split HQ2 into three actually – two major headquarters in New York and another in Virginia, and then a third auxiliary headquarters in Texas.

The thing was though that Amazon effectively created a bidding war for cities across America to try and woo them to their town. The literally travelled the country, like some tech version of the Olympics Hosting Committee.

And some cities were going to incredible lengths to try and land their headquarters (and seriously, if it can be split in three, it’s not a “headquarters” right? It’s a glorified office building.)

And this is the thing. The seductive package New York city and New York state ended up offering Amazon will cost tax-payers $3 billion dollars.

$3 billion fricking dollars.

Now the liberals are whining that this is money that should have been spent on schools and orang-utans or whatever, and they’re kind of right, but it’s also missing the point.

Think about what’s happening here. Amazon is effectively monster stomping through retail right now. Pretty much anyone who sells anything is feeling the hot breath of Amazon on their neck.

Marketing guru Scott Gallaway says he goes to 50 Board meetings a year, and right now, there’s only one question in every company he goes to – “what do we do about Amazon?”

Last week Roger David, which has been putting men into underpants for 70 years, announced it was going to close by Christmas. 500 jobs lost. Not the first and not the last.

So remember the Amazon phenomenon is a zero-sum game. For every job Amazon creates, it destroys at least one in the broader economy (and probably the ratio is higher than one because “efficiency”).

So this $3 billion dollars Amazon is getting is not about seeding new economic activity. It’s about transferring economic activity from traditional retail over to Amazon.

It’s about giving Godzilla a handout and a massive competitive advantage while the villagers are screaming and heading for the hills.

Why isn’t Roger David getting $3bn?

And don’t get me wrong. I’m not against the emergence of online. I’m worried about the emergence and total domination of just one company. That’s not good for competition, and it’s not good for capitalism.

Can I make this story worse?

Well, why did Amazon pick Virginia? Word is because it’s a short hop to Washington.

Amazon already has 77 full-time lobbyists and a $100m dollar budget.

Excuse me?!? I’m trained in the art of persuasion. Do you know what carnage I could wreak if I was working full-time on it, with 76 full time staff? Seriously? What the hell do they do all day? Oh, and give me a $100m dollar budget..? Forget it.

There’s also grumblings that a recent tender for American’s defence communications system (the Joint Enterprise Defence Infrastructure cloud, or JEDI – nup, really not making it up), was tailored made for Amazon to win it. Like, they were literally the only company who could fulfil all the criteria.

So yep, the biggest company in America now has control of Defence communications.

What could go wrong?

And this is the thing. Amazon started as a book store, then it moved into retail, now cloud services and tech…

Where does it stop?

It doesn’t.

Amazon’s aim is simple. To control commerce. To control trade. It’s not about the products. It’s about the trade itself. It sells the water but it wants to own the pipes.

All of them.

Fully realised, the economy will never have known another monopoly like it. It makes OPEC look like amateur hour.

Do you see it?

But maybe you think it can’t happen here? Maybe you think the fortifications around the Coles and Woolies duopoly are just too solid…

Here’s a scenario. Amazon gets $3bn from the government (because they’re idiots), Bezos himself tips in another $3bn, because to him its chicken feed. Then they go to the venture capital guys and say, we’re going to take over Aussie retail, because we can. They chip into a war chest of $50bn because everyone loves the smell of money, but they barely need to touch it. Amazon just sets up a rewards program so that for every $100 of groceries you buy, you get $10 worth of Amazonians (their patented crypto currency) to spend on literally anything on the planet.

Coles and Woolies are in receivership in six months.

At that point, it’s done and dusted. Everything bought and sold anywhere on the planet will be done through Amazon.

Amazon determines the price. Amazon determines the access. Amazon determines the range.

And there won’t be diddly squat we can do about it then. In the modern world, trade is life.

And Amazon will control it all.

So everyone’s worrying about totalitarian tendencies in Russia and China, but that’s not what we should be scared of.

We should be scared of Amazon.

But no, instead, we’re throwing money at them like it’s nobody’s business.

Madness.

How to make and how to lose $100K in 13 months

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Flipping always looks like a great strategy in the good times. But are some investors about to come unstuck?  

 Sometimes you strike it lucky in property.  

Like this story of a guy on the Gold Coast who flipped a parcel of land for a $130K uplift.  

(The story appears in the UK’s Daily Mail, because there’s a picture of him with his girlfriend in a G-string. Pure class).  

A 23-year-old man has made more than $101,000 profit after buying a plot of land and mowing it twice. 

Anthony Dart, 23, bought the property on the Gold Coast for $310,000 and 13 months later he sold it for a staggering $439,000. Mr Dart told Daily Mail Australia he made a solid profit of $101,000 after expenses. 

The young entrepreneur was shocked by how much the property appreciated in value in just over a year. 

Hats off to him. From what I know of the Gold Coast market, at that price I expect he bought under market value, and that’s what made those kinds of gains possible.  

And with property prices on a tear-away in recent years, a lot of people would have similar stories.  

Trouble is though, people seem to think that these kinds of stories are the norm.  

Amazing deals like this happen when you do your research and buy under-market, or when you do your research and buy in an area primed for growth.  

That is, when you do your research.  

If you’re not doing your research, then you’re only going to get these kinds of results if you get lucky. And if you’re relying on luck, then you’re just gambling.  

And all gamblers lose at some point.  

Western Menbourne might now be about to become a case in point.  

There’s been a bit of a frenzy going on out there in recent times around house and land packages.  

It’s pulled in a lot of speculative activity, with buyers looking to flip their purchases before settlement.  

As prices stall though, there’s an air of panic brewing:  

Speculators who hoped to get rich on a boom in Melbourne land prices are “panicking” as settlements loom and they can’t find developers to on-sell their sites to, according to Resi Ventures’s Khurram Saaed, who has been developing for 15 years. 

Mr Saaed said he was getting one call a week from panicked speculators, including one buyer who had put down $21 million in deposits on a number of sites and risked losing all their money. 

“These are people who have been successful in other business, and who have just bought land with no due diligence in the hope of making a lot of money in three to four years’ time by flipping the site prior to settlement,” he told The Australian Financial Review. 

And there’s been a strong rise in people taking to gumtree to offload their properties, as real estate in general takes longer to sell:  

A rising number of land owners in Victoria are selling off-the-plan housing lots on classified advertisement and community website Gumtree ahead of their expected settlements next year. 

In the first three weeks of October, nearly 50 advertisements have been uploaded – more than twice the number in September – offering sales of lots in communities like Dahua Group’s Orchard project in Tarneit, Satterley Property Group’s Botanical in Mickleham, MAB’s Merrifield in Mickleham and Stockland’s Edgebrook Community in Clyde and Cloverton in Kalkallo. 

Other land sites for sale are in places such as Greenvale, Melton, Lyndhurst and new suburb Weir Views, all of which are about 20 to 35 kilometres from the Melbourne CBD. 

I’d be keeping a wary eye on this space.  

I don’t think the growth corridors of Western Melbourne were bad places to invest, if you were genuinely investing. I think they’ll be decent going forward.  

And I wouldn’t say no to buying there now… but I would be driving a very hard bargain with eyes wide open.  

But if the flipping spree was as widespread as they say it was (possibly isn’t, who knows), then some extra diligence really is in order.  

Don’t say I didn’t warn you. 

JG 

How to make and how to lose $100K in 13 months

by

Flipping always looks like a great strategy in the good times. But are some investors about to come unstuck?

Sometimes you strike it lucky in property.

Like this story of a guy on the Gold Coast who flipped a parcel of land for a $130K uplift.

(The story appears in the UK’s Daily Mail, because there’s a picture of him with his girlfriend in a G-string. Pure class).

A 23-year-old man has made more than $101,000 profit after buying a plot of land and mowing it twice.

Anthony Dart, 23, bought the property on the Gold Coast for $310,000 and 13 months later he sold it for a staggering $439,000. Mr Dart told Daily Mail Australia he made a solid profit of $101,000 after expenses.

The young entrepreneur was shocked by how much the property appreciated in value in just over a year.

Hats off to him. From what I know of the Gold Coast market, at that price I expect he bought under market value, and that’s what made those kinds of gains possible.

And with property prices on a tear-away in recent years, a lot of people would have similar stories.

Trouble is though, people seem to think that these kinds of stories are the norm.

Amazing deals like this happen when you do your research and buy under-market, or when you do your research and buy in an area primed for growth.

That is, when you do your research.

If you’re not doing your research, then you’re only going to get these kinds of results if you get lucky. And if you’re relying on luck, then you’re just gambling.

And all gamblers lose at some point.

Western Menbourne might now be about to become a case in point.

There’s been a bit of a frenzy going on out there in recent times around house and land packages.

It’s pulled in a lot of speculative activity, with buyers looking to flip their purchases before settlement.

As prices stall though, there’s an air of panic brewing:

Speculators who hoped to get rich on a boom in Melbourne land prices are “panicking” as settlements loom and they can’t find developers to on-sell their sites to, according to Resi Ventures’s Khurram Saaed, who has been developing for 15 years.

Mr Saaed said he was getting one call a week from panicked speculators, including one buyer who had put down $21 million in deposits on a number of sites and risked losing all their money.

“These are people who have been successful in other business, and who have just bought land with no due diligence in the hope of making a lot of money in three to four years’ time by flipping the site prior to settlement,” he told The Australian Financial Review.

And there’s been a strong rise in people taking to gumtree to offload their properties, as real estate in general takes longer to sell:

A rising number of land owners in Victoria are selling off-the-plan housing lots on classified advertisement and community website Gumtree ahead of their expected settlements next year.

In the first three weeks of October, nearly 50 advertisements have been uploaded – more than twice the number in September – offering sales of lots in communities like Dahua Group’s Orchard project in Tarneit, Satterley Property Group’s Botanical in Mickleham, MAB’s Merrifield in Mickleham and Stockland’s Edgebrook Community in Clyde and Cloverton in Kalkallo.

Other land sites for sale are in places such as Greenvale, Melton, Lyndhurst and new suburb Weir Views, all of which are about 20 to 35 kilometres from the Melbourne CBD.

I’d be keeping a wary eye on this space.

I don’t think the growth corridors of Western Melbourne were bad places to invest, if you were genuinely investing. I think they’ll be decent going forward.

And I wouldn’t say no to buying there now… but I would be driving a very hard bargain with eyes wide open.

But if the flipping spree was as widespread as they say it was (possibly isn’t, who knows), then some extra diligence really is in order.

Don’t say I didn’t warn you.