Knowledge Source

Your freedom to create wealth...

You are here: Home / Archives for Blog

No B.S. Friday: This humbled me. Totally humbled me.

by Leave a Comment

Your responses to the Power Challenge really showed me just how far I have come and how much I have to be grateful for.

Ok, I’m still blown away that over 100 people made it all the way through the Knowledge Source Power Challenge.

This really is phenomenal. I am totally humbled that people gave it their time and energy, just as the year was lifting off the tarmac.

I know you all had a 1000 other things to do this month. But I’m blown away that there are that many people in this community who are willing to back themselves, invest in themselves, and who have enough faith to answer a call to action when it comes.

And having read through the responses, I’m so amazed at the positivity, the passion and the radical self-responsibility that came through again and again.

I wonder if people get just how much this juices me up.

And for me it’s been a powerful reminder of just where I’m at in life right now.

It wasn’t always this way. I used to be stuck. I used to be surrounded by people who thought it was all too hard, or too unfair, or just too cruel to give it their all – to invest themselves in their dreams.

… to put their hearts on the line.

But reading through the responses I can see how far I have come.

I can see that I’m now thick in a tribe of passion. Everywhere I turn now I meet people who are backing themselves, who are taking action, who are getting it done with a smile on their face.

This is not normal. This is not the way most people live. This is the not the disempowered mud that most people find themselves stuck in.

We are the lucky ones.

I am a lucky one.

And I am truly grateful that people are willing to come with me on this journey – that they’re willing to even consider whatever insane advice I sprinkler all over the internets.

When I started these blogs, it was because I felt like I had something to give, even if I didn’t know exactly what. I was transitioning from young buck to wise old man (in step with my greying beard).

And I was at a stage of some sort of completion. I had become untouchable financially. I was well and truly sorted. And part of that journey was developing the inner resources that made financial success possible.

So I felt qualified to share something.

So I share from an intimate personal space – from my own personal experiences. … and then just hope that people resonate with it.

I still find myself writing stuff and then wondering, what the hell are people going to make of this? This kinda worked for me. But am I just tripping? Maybe for some people this is going to be totally inappropriate advice.

I don’t know their situation. I don’t know what particular challenges they are working with, what particular wounds they are trying to heal. Maybe they actually need to be a little less Jon Giaan, and a little more Elmo or something. I don’t know.

So yeah, take it all with a grain of salt. This is just one man’s journey from broke no-hoper to millionaire on a boat.

You have to feel it out for yourself. Only you can know what is right for you. Part of the journey is learning to litmus test everything against your own truth.

But yeah, today I find myself a little less worried about not meeting people where they are at.

Because having just done the Power Challenge – over 450 people took part, over 100 made it all the way through to the end – and having read through the responses, I feel like I have a better sense of what our “tribe” is.

I am lucky enough to be part of a tribe that is passionate, inspired, open and action-orientated. A tribe where self-responsibility is a focus, drive is a virtue and pretence can be left at the door, thanks. And it is a tribe that encourags and celebrates success.

That’s pretty awesome, right?

Today I see that. I see how far I’ve come. And I see how much I have to be grateful for.

So a big BIG thank you to you all.

I did say I was closing the Power Challenge today. Maybe I’ll let it run through to the end of the weekend before drawing out the prizes.

If you want to get on board, you can catch up with them here, or hit them all at once. I reckon you could get through them all in less than half an hour. And people are telling me that’s it’s given them real clarity, direction and motivation.

This is the full list of challenges:

Challenge One: Energy

Challenge Two: Know your pain

Challenge Three: Take the reins

Challenge Four: Radical Honesty

Challenge Five: Connection

Challenge Six: Receiving

Challenge Seven: Pure Desire

Challenge Eight: Full Permission

Go on. Change the tribe you run with. Change your reality.

Heartfelt thanks again

Even the bears are relaxed – no recession this year

by Leave a Comment

How likely is a recession this year? Not much.

With prices in Sydney and Melbourne now down 10% year on year, some people are asking me if I think this means we are headed towards recession.

It is true that there is a ‘wealth effect’ – as property prices go up, people feel wealthier and start to spend more. That goes into reverse when prices start to fall.

But I still think Australia will be ok. There will be a period of adjustment, but my guess is that we should avoid recession, and bounce back fairly quickly.

I thought it was interesting that Gerard Minack – one of Australia’s most bearish hedge fund advisors was taking a similar view. I tend to find myself on the sunny side of Gerard most of the time. So it makes me think that if even he is pretty relaxed about our current state of affairs, then we should be right.

Anyway, he reckons that while the wealth effect is in effect, there are some important ‘countervailing forces’ that should keep the boat afloat, and help us avoid a US-style GFC.

First, the mining capex boom inevitably bust, but the bust has now almost run its course (Exhibit 2).

Second, while Australia is building a lot of houses, the pace is normal relative to population (Exhibit 3). (JG – he means we’re not creating an over-supply of housing.)

As a result, Australia’s rental vacancy rate is below average and falling, versus the US vacancy rate that last cycle was above average and rising (Exhibit 4).

A turn lower in residential construction still seems likely in Australia, but there seems less scope for the residential downturn to king-hit growth, as it did in the US in the last cycle (Exhibit 5).

Third, high population growth costs, and one of the costs is rising infrastructure spending (Exhibit 6).  This is a particularly job-intensive sector.

The net effect of the mining capex bust ending and the cranking up of infrastructure spending is that investment spending has rebounded (Exhibit 7).

A fourth, less important offset, is the ramp up of LNG exports (‘mineral fuels’ in Exhibit 8).  This will statistically add to GDP, although it will be calorie-lite growth: the employment tied to these exports is low; very little of the revenues are going to be collected by the government; and shipping so much gas offshore has created a domestic gas shortage, a key reason behind rising domestic energy prices.

At the end of the day, Minack recognises that Australia is in a period of adjustment. We are working through some challenges.

But he also reckons that these challenges have mostly already been priced into markets (Aussie dollar, bonds, equities). He doesn’t see value in shorting any of these things right now.

For these short trades to work, an Australian recession has to be your base-case scenario. For Minack, he just doesn’t see that happening.

And that’s what I reckon too. Yes, house price declines will give everyone a bit of pause for thought.

But the Australian economy is much more than our housing market. It is much more complex and dynamic than just that.

And Australia still has an awful lot going for it. There is still a lot of growth to be had and money to be made.

I mean, even the bears think so.

Is The Global Economy Making Our Property Prices Fall?

by 1 Comment

What does the “globalisation of property” mean for investors?

Do you want to invest in the global economy?

You don’t have a choice.

Even if you’re investing in boring old properties down at the end of the street, these days you are still investing in the global economy.

We are all globalists now.

We’re in the middle of the Knowledge Source Power Challenge and today I wanted to have a look at why I take such an interest in the global economy, and why relentless self-education has to be one of your habits.

Bloomberg was running the story last week about how a number of property markets across the world are following each other lower. You thought it was just Sydney and Melbourne, but no, we’re not alone there.

In Manhattan, the median condo price dipped below $1 million for the first time in three years. Hong Kong home values endured their longest losing streak since 2008, while prices in outer London neighborhoods fell for the first time since 2011. Sydney home owners are grappling with the worst real estate slump since the 1980s.

Luxury residential prices are growing at the slowest rate since 2012, according to a Knight Frank index of prime properties in 43 cities…

Governments became concerned the gains were unsustainable, and reacted with measures aimed at curbing the flows of international money…

Similar dynamics are playing out around the world. The number of home sales in Vancouver dropped 32 percent in 2018 from the previous year, following a series of new taxes, stricter mortgage rules and rising interest rates.

Median prices in Auckland registered their first annual drop since 2008 after the New Zealand government passed legislation to restrict foreign buying that it said was partly to blame for escalating housing costs.

Home prices have dropped 11 percent in Sydney from their 2017 peak after government restrictions on foreign purchases and tighter credit.

I knew this was happening but it was interesting to see the data all in one place.

It’s on the IMF’s radar too. Last year they released a report showing that house price growth has become increasingly synchronised at both the city and country level, particularly since the global financial crisis.

The global economy is a new beast. Financial markets are integrated, inflation trends are global in their reach, interest rates are synchronised thanks to free-flowing capital, and institutional money managers tend to hunt in packs. Taken together, all property markets, even your humble little suburb, are global property markets now.

I mean, it used to be the case that houses were just consumables. They were just things people lived in.

Then, with the rise of the property investing class, they became assets. They became things we invested in as well as lived in.

And now, with the integration of the world’s financial markets, they are behaving like financial assets – like stocks and bonds. What happens here depends on what investors all over the world are doing.

This is the new reality. Property is a global financial asset.

And it means we need to keep one eye on what the global economy is doing. We need to keep our vision broad.

Now that is easier said than done. I’m lucky enough to have a research assistant who keeps me up to speed. (Of course I’ll share the gold with you here – watch this space).  

But for now, it is just enough to take an interest in this space. And even simply being aware that property now behaves like a global financial asset will put you a good stride ahead of the pack.

But the broader point here is that no strategy survives for long. The world is changing. Strategy’s that made sense five years ago are obsolete now.

So we have to treat our education and development as an ongoing concern. It’s not a do-it-once, set-and-forget type thing.

You need to be constantly curious – how can I be better, stronger, more savvy?

Curiosity is the key. Ask the question, and the rest will take care of itself.

Power Challenge 5/8: Connection

by 153 Comments

Your opportunity to win an I-pad – and make a full-power start to the year. Challenge Five – Connection

Ok, so this is the Knowledge Source Power Challenge – your opportunity to set a cracking start to the year and win some great prizes.

It’s not too late to get on board. This is where we are at so far:

Challenge One: Energy

Challenge Two: Know your pain

Challenge Three: Take the reins

Challenge Four: Radical Honesty

Challenge Five: Connection

Challenge Six: LOCKED

Challenge Seven: LOCKED

Challenge Eight: LOCKED

Staying with relationships, and after having committed to a little more honesty on Friday, let’s have a look at how we can use our connections as a source of strength.

The truth is that humans are a pack animal. There’s a theory that (some of us) shed our fur so we could have more intimate connections and more ways to build social cohesion.

(Rub my belly and I’ll practically do anything for you.)

The uniquely human neo-cortex is devoted to language and managing our social relationships. We didn’t get to the top of the food chain through opposable thumbs alone – we did it because we could work in teams and build cultures of knowledge that could be passed down through time.

We are social by design.

And so I think that if we’re cut off from our ‘pack’, it is a stress that starts to niggle at our biological organism. By the same token, the more intimate connections we have, the more we are touched, and the more we feel supported by our pack, then the stronger and the more confident we feel.

And I’ve learnt that if there’s anything I can do that will make me feel more confident and more powerful, then I will do it. Don’t underestimate the challenges that we’re facing.

So this is for you challenge for today. Tell us what it is that makes you feel supported by your pack, and how you’re planning to tap more of that energy this year.

It really could be anything. Humans are multi-spectrum beings. It could be a regular phone hook up with your brother. It could be Ladies’ Night at the day-spa. It could be sport (which is primarily an excuse for grown men to have a cuddle, let’s be honest).

But look for the connections that give you strength, that give you confidence, that increase the depth of your resources.

Note that I’m not talking about connection as a way to increase your sense of meaning. Looking after an infant gives you purpose, but it doesn’t increase your power. What connections give you strength?

*** BONUS CHALLENGE ***

Pay particular attention to the individuals that give you strength. So say if, like me, your footy team is a source of strength for you, pay attention to which individuals in particular really lift you up.

Or what friend always inspires you? What friend always has your back?

Now send them a short note. Just say, “Hey, been doing a bit of thinking over the break. Just wanted to let you know you’ve always been an inspiring influence in my life. I appreciate having you around.”

This year, give a little more attention to the power connections in your life, and be open to the energy that is returned.

That’s it. Hit up the comments section and let us know

Where and how do you connect with your power pack? How can you do it more this year?

BONUS

Send someone a short note of gratitude. Tell them you’re glad they’re in your corner.

And let’s power-up, together.

Jon

Ps – It’s not too late for anyone to get involved. If you’re sending someone a note, why not invite them into this challenge? There’s still three more juicy challenges to go.


Power Challenge 3/8: Take the Reins

by 202 Comments

Your opportunity to win an I-pad – and make a full-power start to the year. Challenge Three – Take the reins.

Alright, the Power Challenge is in full-swing. There are 360 (so far!) heroic individuals who have committed to making this an awesome year. I’m giving you eight quick but deep challenges to see if you are fully in alignment.

(Think of it as a tune up for your success engine.)

There’s still time to get on board. Find the challenges here. As long as you do all eight challenges some time this month you’ll be eligible for the prize draw. I’m relaxed like that.

Ok, so challenge number three. This is about self-discipline.

The road to self-mastery begins with mastering the body.

The Buddha said that the conscious mind’s controls the body the way a rider controls an elephant. The elephant is strong, and has agendas of it’s own. It won’t just do what you say unless you have established control.

So today, I want you to hit up the blog and write down one thing that you’re going to do this week that goes against the instincts of your body.

Maybe it will be taking a cold shower. Maybe it will be going a day without food. Maybe it’s walking up the stairs to your office, which was Stephen B’s answer to our first challenge. (Stephen, you’ve got to come up with something else.)

Think of just one thing you can do this week. Declare it to everyone on this blog.

Then do it.

And when you do it, whatever it is, I want you to pause just before you do it and watch for two things.

1. The Whingeing

First, listen to your body’s excuses. Standing on the edge of a cold lake, you might here yourself complain, “It’s too cold, I’m might catch a flu, I’ve just eaten, I look ridiculous in these budgie smugglers.” Sometimes your body is crafty. Sometimes just whingey. But it always pushes back.

But notice how your body sort of has a capacity to over-ride your inner monologue. Notice how your body’s thoughts can be mistaken for your own thoughts, if you’re not watching carefully. Notice how your boldest agendas can be derailed by the worst and whiniest instincts of our body.

This happens to us ALL. THE. TIME.

There is an art to knowing when your mind is raising reasonable objections, and when your body is just being a little wuss bag. It takes time to know the difference.

2. The Loving Command

Second, I want you to force yourself to do whatever it was you were planning to do. Jump into the lake. Get up at 5 a.m. Fast.

(Actually, fasting is great because you are constantly being presented with temptations.)

Whatever it is, assert your authority, assert your control, and just do it.

But as you’re doing it, I want you to hold an attitude of “loving command.”

Don’t go hating on your body. Don’t go screaming at your body, “Shut up you flabby ball of failure. We’re doing this. I’m throwing us in this lake. F-youuuuu!”

No. Hold an attitude of loving command. Say, “I can see you don’t want to jump in this lake. I know that it’s cold. But I want this for us. And I have the reins. I am in control.”

And then do it.

I think an attitude to loving command is the key to having sustainable, heart-centred self-discipline, which in turn is one of the key pillars of success.

So that’s it. That’s the third challenge. Share the act of discipline you’re going to commit to this week right here in the comments section. And then watch for those two things – The Whingeing and The Loving Command.

I really believe it will help you grow a more powerful self-discipline and self-mastery this year.

Power on!

Jon

Ps – Why not rope somebody else into this challenge. Who do you know who could travel the road of mastery with you? Forward them this email and get them on board.

No BS Friday: Xmas – why we’re all in the same sad boat

by

If there’s not a touch of sadness to the closing of the year, you’re missing something.

Are you doing Christmas right?

My mind is already there and I did want my last blog of the year to be something upbeat – like a whiskey-bottle-shaped present, in shiny paper and a bow, sitting under the tree.

Hmmmm. Can’t wait to open this little gift from Uncle Jon.

But I’m not actually feeling that. I’m not feeling full of Christmas cheer and the blessings of the season.

That will come when the laptop is shut and my wife and I are watching the Royal Tattoo on the ABC, and getting into the opening rounds of our annual Jelly-Twister tournament.

Such a special time of year.

But right now, I’m not a jolly old fellow.

The year is ending. We’re pretty much done.

And when I look back on what I’ve done, there’s a lot to be proud of. I grew the business. I got a few successful deals up off the ground. I grew my wealth and reduced my waistline. I found new depths in my relationships.

It was a success. Sure.

But if I’m honest, there were misses there too. There were goals I just didn’t quite hit. There were deals that could have been done better. There were things I said to my loved ones that weren’t coming from my highest, most compassionate self.

And now the year is done. 2018 is closed. From this point on, 2018 will just live in memory and our history books. Before we know it, we’ll be looking back on 2018 the way we look back at 1998 – a fading memory, full of obsolete technology and loved ones who are no longer with us.

The past is a different country, and we are already pulling away the shore.

We’ll never set foot in 2018 again.

And I had big plans for 2018. I remember this time last year. I was pumped. I was excited. I was going to own 2018. It was going to be my pivotal year – the year I really switched it on and burnt my name into the sky.

(I’m realising now I tend to say that about most years.)

And sure, it was a good year. If I’m honest – and when I say honest, I kind of mean grateful. The fact that I can wake up in this beautiful country and live this blessed life is nothing short of a miracle. Anything less than awe-struck gratitude is kind of just dishonest and ungrateful.

(I probably didn’t spend as much time in awe-struck gratitude this year as I should of either.)

So yeah, if I’m honest, it was a good year. It was full of blessings and miracles. The pigeons of fate continue to poop their lucky poops upon my greying head. I see that. And I’m thankful.

But the close of the year is also bitter-sweet. I could of done more. I could of achieved more. I could of lived larger and more courageously. I could of drunk more deeply from the well of joy and beauty. I could of worried less and had more fun.

Measured against the yardstick of my dreams and my potential, I came up short.

Again.

And yeah, I know. To 7 billion people on the planet I just sound like a spoilt idiot right now – like a moron who just doesn’t know how good he has it.

But I think this is the price you pay for being driven and passionate – when your day-dreaming imagination gives you regular tastes of what might just be possible – when it lays out a glorious future before you, and tells you that this is what you were born for.

So much promise. So much potential.

And it’s what happens when you just don’t accept the hands life deals you – when you refuse to go with the flow. When you take responsibility for your life, when you live in agency, then the results are yours to own – your failures as much as your victories.

So I am owning my failures. As the year closes, I have to admit that 2018 just wasn’t all it could have been.

Ho, Ho, bloody Ho.

And maybe what I’m really railing against here is my own mortality.

2018 is done. That’s another year scratched off the ledger of my life. That’s another year I won’t get to do over.

And there’s a lot I want to achieve with this life. There’s stuff I want to get done, celebrities I want to take out to dinner.

I’m at an age now where if I died tomorrow, it wouldn’t be a shock or a tragedy. It’d be a loss, sure. “He was taken a bit early, they’d say. “But he’d had a pretty good run…. and you saw how much he used to drink.”

I am not a spring chicken any more. And I get less springy and less chickeny every year.

And in many ways, my star is already waning. In Japanese sword, they say that the peak of your power is 42. Beyond that, your inner power starts to fade. You can still become more powerful and more effective, but from 42 onwards, you need to lean more heavily on your skills and the power of the elements.

And I feel that. I don’t bounce back from Christmas drinks the way I used to. Every now and then I fancy a nap, and that’s unusual for me. Some days, I just can’t be arsed at all.

Getting old sucks.

And each year the field of your potential narrows. When you are young, worlds of possibility are open to you. You could be a scientist or a fire-fighter or a professional footballer.

With each passing year, more and more options stop being available to you. At this point, there is absolutely no way I could become a professional footballer, no matter how much money I threw at the problem. That door is forever closed.

And each year, more and more doors close, until finally, towards very end of your life, there is only one door left – the door into death and the other side.

And look, I hate that. I’m having a good time here. I enjoy exploring the world and tasting the fruits it has to offer. If there was an alternative to growing old and dying, I’d take it.

But there isn’t.

Christmas just reminds me of that. The year is done and I am a step closer to a state with no potential.

And I wonder if I’m not alone in this. Christmas is a notorious time for depression and suicide.

Typically, people put that down to how stressful the season can be, or how Christmas itself can be a stark reminder of how alienated and isolated you are.

I’m sure that’s true.

But I also wonder if it’s because Christmas brings in the closing of the year, and the closing of another door.

It’s natural to reflect on how far you’ve come, how much you’ve achieved, or if you’ve achieved anything at all.

Time just slips away from us. If we’re not spending it consciously, then it’s very easy to get to the end of the year and think, “Whoops. I really didn’t get anything done this year at all. I’m not a step closer to any dream I have.”

Faced with that thought, of course it’s easy to get depressed.

Hmmmm.

Well hasn’t this Christmas message become a bundle of joy? Sorry. I didn’t mean to bring the Grinch.

But I also don’t want to shy away from this either. I know this time is tough for a lot of people, and if you’re reading blogs on the Friday before the Xmas break, then I guess you have an appetite for meaningful reflection too.

So what is there to say?

  • 1. Time is precious and our time here is short.
  • 2. Spend your time wisely because you won’t get it back again.
  • 3. Be conscious of your mortality and the doors that are closing around you, but know that any time not spent is awe-struck gratitude is wasted.
  • 4. Have compassion for your companions on the road. We are all in the slow process of dying and shuffling off the earth. We all have to watch our power and potential fade. That sits heavy in every human heart, but it’s something we can all relate to.
  • 5. Celebrate what you do have, and who you do have, with everything you’ve got.

So I guess this is what I want to leave you with as I sign off for the year. The poignant, beautiful absurdity of life.

Thanks for travelling with me. I hope you’ve found something interesting to reflect on in these blogs. And I hope the Christmas period comes gently to you, and it is rich in all the things that matter to you.

I’ll be back early in the New Year, ready to give life my very best shot.

I hope you’ll join me.

Merry Christmas and a Happy New Year everyone!

Three traps for investors in 2019

by

Looking ahead, there’s going to be a couple of key challenges next year…

Ok, the year is almost done and dusted. I’ve already started wearing my boardies into the office. My work-ethic has already switched over to margarita mode.

But let me drop a few thoughts on what 2019 has in store for us, and what I reckon the key themes will be – and what the key themes guiding my investments will be.

Theme 1 – Cashflow is King
With growth tapping out in 2018, and the Royal Commission and ongoing regulatory pressure meaning that we’re probably looking at a slow start to 2019, investor focus is going to shift further towards yield and cashflow.

On top of that, if Labor gets in at the next election (which I reckon they will if they can keep Bill Shorten’s profile low enough) then we’re probably looking at them delivering on their promise to reform negative gearing. That will change the yield equation even further, and put an even greater premium on cashflow performers.

That might shift the focus of investor activity out of the capitals (where average yields are ordinary at best) towards higher-yield regions.

This could have some interesting effects. Investors aren’t used to hunting for yield. There might be some adjustments, and investors will need to be careful.

For example, if you go to one of the data providers and look at their Top Twenty Yield Reports for example, then you’ll find the cashflow capital of Australia is Cairns. Right now, average yields on apartments are around 8%.

So investors are going to pile into Cairns, right?

Well, I hope not. I mean, there might be good manufactured growth plays on offer, but the yields equation is a trap.

I always thought the high yields in Cairns were to compensate investors for lousy growth – prices have been practically flat for decades.

But that’s only part of the story. Take a look at this property here for example. It’s an attractive unit in the premium suburb of Palm Cove. They’re taking offers over $230,000, and it’s currently tenanted at $320 pw.

Those numbers are pretty wow. That’s like a gross yield of 7.5%.

But then read a little further, and the Body Corporate Fees are $11,000 a year! (Lush lagoon pools, cyclone insurance, elevators etc.). So on a fully tenanted rental income of under $17,000 a year, you’re paying $11,000 in Body Corporate Fees, before costs.

That’s a yield of like 2.5%.

Not much to like about those numbers, especially in an area that has underperformed on capital growth for years.

Investors beware.

Bonus thought
While we’re thinking about traps for investors, let me ask you this. Is it illegal to rent your property to a friend?

No, of course not.

Is it illegal to lend your friends money? No, of course not.

Is it illegal to lend your friends money so they can rent your property at inflated yields so it sells at a higher price?

Probably, but it might be hard to discover or prove.

As focus shifts to yield, make sure you’re doing your due diligence on what the market is doing, not just particular properties.

Theme Two – Townhouses to Hold Focus
As I’ve written previously, the composition of construction in Australia has shifted heavily towards townhouses in recent years, particularly in Sydney and Melbourne.

Townhouses offer families a liveable but more affordable option, and townhouses themselves are politically sellable – they create more affordable stock without turning into an area into sky-scraper land.

What’s more, given the focus on cashflow outlined above, and given that negative gearing will probably be preserved for new builds, I expect townhouses to continue to come to the fore.

Townhouses can offer attractive yields to investors and developers, especially if they’re built well in popular locations. I’ve been focusing on townhouse development for a while now. I don’t see any reason to change that in 2019.

Theme Three – Decentralisation is a Pipe Dream
I expect a few market analysts to get a bit frothy about the regional markets in 2019. It’s easy to make the case – the capitals are consolidating, and decentralising the population is going to be a hot battle-grounds going into the election.

However, I reckon decentralisation will remain a pipe dream. Population flows where jobs grow, and I don’t know how you force migrants, or anyone, to live out bush. We’ll get a lot of chatter, but I don’t expect much will come of it.

I think the regions will continue to grow, but not spectacularly. They’ll be good targets for manufactured growth plays, but I wouldn’t be expecting anything spectacular in terms of natural growth.

Don’t believe the hype.

Have a Great Year Everyone

So that’s my thoughts about the year ahead. I hope this year has been a successful one for you, and I hope you’ve got something out of my musings. Tune in next year for even more market commentary, political insight and inappropriate comedy.

The stuff I’m famous for.

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

by

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

by

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!

by

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.