Overseas Real Estate

Hey China, you in or you out?

September 6, 2017 by Jon Giaan

Are Chinese buyers really abandoning Australia?

I’m wondering if this is all BS.

The talk recently has been that the Chinese are “abandoning Aussie property”.

Take this story from the AFR the other day:

Chinese real estate agents are reporting a sharp drop-off in Australian sales over the past six weeks as new property taxes take effect, while others report Beijing’s tighter capital controls are also hurting demand.

…David Wang, the vice-general manger of international sales at Chinese agency 5i5j, said sales of Australian property had dropped 80 per cent in July.

And he’s expecting an equally poor result or even worse figures in August.

“The main impact is from the introduction of new taxes in Australia,” he said.

Mr Wang said the Australian government may have “over-estimated the attractiveness of the market” for Chinese buyers.

I’ve seen variations of this story doing the rounds all over the place. Most haven’t questioned whether it’s true or not. They’ve just accepted that for some reason, China is just not that into us anymore.

“Have you found someone else?!?”

But you’ve got to remember that these Chinese real estate agents would love to see the recent sling of taxes aimed at foreign buyers removed. It’d mean more money for their clients, and more money for them.

So when they’re throwing numbers around like an 80% drop in sales, I tend to be a little sceptical.

The other thing to remember is that without Chinese and foreign buying, it’s difficult to square away what’s actually happening in the Australian property market right now.

The key chart here is this one. This tracks dwelling prices and mortgage finance.

You can see here that Housing Finance Commitments and Dwelling Price Growth normally move in lock step. That makes sense. It’s finance that buys houses after all.

But what’s interesting is that that relationship has broken down over the past couple of years.

Finance fell away, but dwelling values held up.

The other thing that’s interesting is that this is pretty much another one of those ‘just Sydney and Melbourne’ stories.

The break-away has been clear in Sydney…

…but most pronounced in Melbourne…

It’s not such a story in the other capitals.

So it begs the question: What’s with the disconnect? What’s caused it? Will it persist?

Of course, the most likely culprit is Chinese buyers. Why?

Because Transparency International (a corruption and money-laundering watch-dog) reckons that 70% of Chinese buyers buy with cash.

Cold hard cash.

So you’d have to imagine that that the Chinese would have to be a big part of the story. A large influx of buyers – the majority of who pay with cash – would certainly help explain why the relationship between finance and house prices is breaking down.

However it does suggest that the Chinese buy is bigger than we imagine.

Right now, the data we have isn’t saying that the Chinese buy is huge. The NAB survey reckons that foreign buyers account for 11.6% of new properties (trending upwards) and 5.6% of existing properties (trending downwards).

But remember this isn’t the official data. This is just some survey work from NAB. It might not be the full picture.

And the official data?

Well, that’s awkward. There doesn’t seem to be any.

(I’m sure it’s not that important.)

Fairfax did a little digging. (Interestingly, when I went to find this on The Age’s website, it’d been taken down. I had to go to the Illawarra Mercury for the link… Too hot to handle???)

Foreign purchasers are buying as much as 40 per cent of all new apartments in Melbourne, with new figures showing a surge in a tax raised from offshore investment.

Official data, released to The Age under freedom of information legislation, reveals that a tax on foreign buyers of residential property, introduced in mid-2015, has become a significant money-spinner for the Andrews government, with revenue almost doubling in a year.

The tax was levied on 4,000 transactions.

However, while the tax now generates substantial revenue of more than $133 million, it is not specifically itemised in state budget papers.

Property industry insiders and analysts believe this is because of the political sensitivity around foreign ownership and declining housing affordability.

The figures come as a separate analysis by leading property advisory firm Charter Keck Cramer found about four out of 10 of Melbourne’s new apartment purchases are to offshore buyers.

4,000 foreign transactions in a year in Victoria alone. The Chinese account for 40% of new apartments in Melbourne. 70% of Chinese buyers paying with cash. An ongoing disconnect between finance and prices….

Hmmm. I’m not a detective. But all these pieces of the duck are starting to look like a duck to me.

And that duck is not saying that the Chinese have “abandoned” Australian property. Far from it.

That duck is saying “Quack Qvaaaak Quvakk.” That loosely translates as the Chinese are here, they’re here to stay, and they’ll keep contributing to house price growth.

Some academics at Griffiths University said that between 2004 and 2014, a quarter of the price growth in Sydney and Melbourne as due to foreign buyers. And that was before finance and prices disconnected and the cash buyers landed.

Maybe it’s even more.

But that’s the problem with having world-class cities. They become world-class investment destinations.

That doesn’t change over-night.

So yeah, to me it all says, let the taxes stay. And take the self-interested whinging with a grain of salt.

What have you heard about the Chinese buy?

Trump, property and how to suck at propaganda

June 7, 2017 by Jon Giaan

Three property experts fail to get there message right, while Trump is out on his own.

So a bit of a mixed bag this week. The things that stuck out for me this week weren’t so much in the data, but in the stories people are telling.

Propaganda is a fine art, even in property, and here are three complete fails and one total home run.

The first is from Real Estate legend John McGrath:

Have you noticed that the speculation has started? The property market is “grinding to a halt”. The boom is over. The banks have lent too much. The bubble is going to burst…

The key is not to panic…

… The two most likely eventualities are as follows:

The pace of growth in property prices will slow down but not stop. Property prices will keep growing but at a lesser rate per year.

We have a minor correction, where the market will do as it has done before and give back about half of the prior year’s growth, so that would be around 5%…

… If you are in the market to buy, don’t put it off because you think prices will plunge – it never happens that way. Take a sensible measured approach, set a budget and buy the right property for you.

If you are thinking of selling, now’s the time. It feels to me like we’re at, or close, to the peak of this cycle, so if you want to fully capitalise on this boom, now is the time to sell.

Ok, so in short, don’t believe the hype. The market is not going to crash, and now is the perfect time to buy, and the perfect time to sell.

Only a real estate agent could pull that off with a straight face. I’d agree that the negative press is overblown (again!), but I’m not convinced I see prices falling or even stalling.

This “peak of the cycle” business is classic real estate fodder. What better way to convince people to sell than tell them that the market has peaked?

But you also need buyers, who will just sit on the sidelines if prices are falling, and so we have the logical double-twist with half-pike that says prices will fall, but only a little, creating the perfect time to buy, the perfect time to sell, and the perfect time to pay a real estate agent a nice fat commission.

Pull the other one John.

The second fail is from Macquarie Bank. They reckon the Bank Levy will have a “disproportionate and unintended consequences” on their operations and they may have to move offshore.

I think the “I’m taking my bat and ball and going home” argument can pack some weight if you’re a well-loved Aussie icon, like Holden or Vegemite. But who is going to cry for Macquarie?

All it says it that your only interest in Australia and Australians is purely financial, and you’ve got a bit of a glass jaw.

Don’t let the door hit you on the arse on the way out.

The third fail was from the apartment lobby, through Sue Jong, chief operations officer of Chinese real estate portal Juwai. They were complaining about the recent changes in NSW that slugged foreign investors with extra fees. She said:

“This policy could decrease foreign investment in NSW new property by as much as 15 per cent.

With every misguided new policy proposal, foreign investment will decrease along with new housing construction, housing affordability and construction employment.

For every unit a foreign buyer purchases, they enable developers to build four more homes for first-time buyers and investors.”

I’m not sure about that last stat. Sounds a little suss to me. But one thing I could tell you is that if I owned a highrise apartment in Sydney, I’d be praying for a 15% fall in foreign demand, since, by law, that demand must go into new dwellings.

And adding more dwellings to an already oversupplied market can only lead to more downward pressure on prices.

I think there is real anger in the community about the way some shoddy highrises have been thrown together, have flooded the market, and have neglected the needs of locals just to serve foreign investors.

In most people’s minds, Ms Jong just said the government’s policy was a good idea.

Fail.

Lastly, and just because I couldn’t resist having a go at it, was Trump’s ‘Covfefe’ gaffe.

In case you missed it, apparently, Donald Trump forgot to lock his phone, and arse-tweeted the free-world.

The internet, of course, went into melt-down.

The narrative, of course, is that Trump is unhinged and unpredictable, and can’t manage basic things, like his phone.

But am I the only one who thinks it was deliberate?

The tweet was left up for hours, even though the White House would have known within minutes what had happened.

And what does it say about Trump? It says Trump isn’t filtering himself. He’s not passing his messages threw focus groups, before spewing up the most banal version possible to the listening public.

For Trump’s base, he’s just reinforcing the message that he’s “authentic” and “not a politician.” They go nuts for that stuff.

And what was the complete sentence there? “Despite all the negative press…” That will mean different things depending on who you are. If you’re part of his base, he’s talking about a vindictive press that’s out to slander the President. If you’re not, then it has been a pretty gruesome month in the news.

So no matter who you are, here’s a funny word to break things up a bit: covfefe.

It’s genius right?

If only he’d use his talents for good, not evil.

What do you make of it?

NO B.S. FRIDAY: How you can “cash-in” on the big tax cuts coming…

February 10, 2017 by Jon Giaan

Trump’s got some big tax cuts on the table. But where will all that money end up? I’ll tell you.

Picture this. It’s 1974. America. Cars are long and brown. Suit pants are tight and brown. Mary Tyler-Moore was the bombshell I’ll always remember.

It’s the early afternoon. Dick Cheney and Donald Rumsfeld walk into a bar. It’s the Two Continents Restaurant in the Washington Hotel.

Across the yellow and brown paisley carpet, over near the puffy, golden-brown curtains is a serious and dashing young economist. Arthur Laffer. He rises to meet them.

President Gerald Ford has just put a bunch of tax hikes on the table. Cheney and Rumsfeld are spewing. They are ideologically opposed, but the only thing more unpopular than tax hikes is debt, and the US government is piling it on.

They need a way to stop this tax-hike madness in its tracks. Enter Arthur Laffer.

Over lunch, Arthur explains that there is (theoretically) a tax rate that maximises government revenue. There was an optimal tax rate.

He also says that, counter to what most people think, raising taxes doesn’t always increase total revenue.

He put it like this. If the tax rate was zero, then the government’s take is nothing. Zero percent of anything is zero. However, if the tax rate is 100%, then the government takes everything and all economic activity ceases. Why work if the government takes everything you’ve got? At this point, the government’s tax take is also zero. 100% of zero is zero.

So somewhere between the zero take at zero percent, and the zero take at 100% is an optimal tax rate that maximises government revenue.

Arthur got out a napkin and drew a diagram to help them understand what he was saying. It looked like this:

He never invented the concept, and it was never particularly insightful, but this is what is now known as ‘the Laffer curve’. It made him famous and made his career. He’s still banging on about it.

Apparently Cheney wasn’t so impressed with it at the time, but others could see the implications.

If the tax rate was currently set higher than the optimal tax rate, then decreasing the tax rate could actually increase government revenue.

And if that was true then it was a magic pudding. You could give everybody a tax cut AND increase government revenues and pay for everything you needed to do.

The central idea was that tax cuts would spur economic activity and tax revenue would actually increase. There were no losers. Only winners.

(Apparently at this point Rumsfeld got so excited he bombed some remote north Asian villages.)

And so Cheney and Rumsfeld, with the intellectual cover Laffer provided, started pushing for the idea to become Republican policy.

The idea took a little while to take hold. Maybe due to modesty. There was no way of proving where the country currently sat on the Laffer curve.

It could be that the tax rate was too high. But it could also be too low, in which case cutting taxes would actually decrease revenue. There’s no practical way to know. You can’t test it.

But by the time Regan was running for office, it was a central platform. It became known as supply-side economics.

It also became known as trickle-on economics, in the sense that if you gave tax cuts to the rich, they would go and trickle on poor people.

“Edwards and I got so high last night old chap, that we stumbled into the servants quarters and took a trickle on Jeeves. Fwah fwah fwah.”

Oh no, hang on. Trickle-down. It was trickle down economics. Give money to the rich and it would trickle down through the rest of the economy, like salty champagne.

Really, how any body took these ideas seriously at the time I have no idea. But they did. And the tax cuts happened.

And the economy under Regan had a dream run for a while. And it cemented supply-side economics into conservative political lore.

Don’t get me wrong. I’m not against tax cuts, but I think you need to be clear why you’re doing them. Cutting taxes so you can maximise government revenue is a bit silly. I don’t even think ‘maximising government revenue’ is a worthwhile aim.

(We should be aiming to keep revenue to a minimum, subject to achieving our social goals.)

But the real fallacy I think is imagining that tax cuts will have a permanent affect on activity.

At best they create a temporary stimulus to the economy, that slowly works its way through the system, and ultimately disappears from the growth rate stats.

That is, tax cuts cause a level shift (which might be awesome if that’s what you need), but not a permanent change to potential growth rates.

And in a mature economy, where consumption is maxed out, like in Australia – then that tax-cut stimulus will trickle-down and pool in the prices of fixed-assets – property to be specific.

And this is what we saw with Regan. Supply-side economics created a land-price boom that took ten years to work through the system.

And now there’s Trump. He’s definitely the most aggressive trickle-on’er since Regan (especially if you believe the Russian dossier).

Modelling shows that most of his proposed tax cuts will go to the top 1% of income earners, who are right now giddily trickling their names into the snow outside the White House.

Laugh it up, but we know that property and land will be the ultimate beneficiaries of the tax cuts.

And if other countries feel competitively pressured to follow Trump’s tax cuts, then we’re potentially looking at another global land-price boom.

People will argue about how good tax cuts are for the economy.

But land, as always, will have the last laugh.

How will Trump’s tax cuts reshape the world?

Chinification

January 24, 2017 by Jon Giaan

The Chinese economic model – built on debt and secrecy – has found a new outlet store: Australia.

You know, I kinda like China’s gumption. Through an era where the anglo way was the only way as far as economic development was concerned, China remained sceptical.

And while they were being lectured by the West about free-trade and capital flows, I think they saw it for the smoke screen that it was.

“It was low tariffs and free flows of capital that made you rich, was it? It wasn’t slavery, military conquest and the covert over-throw of democratically elected opponents then… No? Really?”

And so they have steadily developed their own way of doing things.

What that way exactly is, is a bit of a mystery. So much so that you wonder if even anyone in China really knows what’s going on.

And China has long since passed the point where most ‘free’ economies would have collapsed in on themselves.

Like Japan. Japan got too high on the debt-juice, and is still wrestling with the hangover twenty years later.

But it hasn’t quite played out that way in China. And partly that’s because the Chinese authorities still have some control over everything.

So say developers borrow too much to build a bunch of buildings nobody wants. In Australia that could bring the banking system to its knees. But not in China. You just order the local governments to buy up the buildings, and the banks to go easy on the debt repayment schedules.

Problem sorted.

And so the Chinese economy looks kind of bananas, but then it’s doing it own thing so who knows how it’s going to play out.

And if the truth be told, even the Australian economy, with a monetary system disconnected from anything real and sky-rocking household debt looks pretty bananas too.

But that’s the modern world. Everything is bananas. What’s a monkey to do?

But then things got a little weird over the weekend, with two data-publishers in China ‘going dark’.

Reuters was running the story:

At least two major Chinese private providers of home price data have stopped publishing the figures, at a time when economists are split whether the red-hot property market will remain a driver of the economy in 2017.

The China Index Academy, a unit of U.S.-listed Fang Holdings, has stopped distributing monthly housing price index data for 100 cities that it usually issued at the start of the month.

The academy told Reuters on Friday it had suspended distribution indefinitely, without giving a reason for the suspension.

“I don't know who exactly is making the order, and it's not mandatory,” said a source with knowledge of the matter, who declined to be identified as the topic is a sensitive one.

E-house China, another influential private real estate consultancy, has also indefinitely suspended its monthly housing price index for 288 cities.

“Judged by current conditions, we won't publish it in the future… Housing prices are an extremely sensitive matter right now,” a source with knowledge of the matter said on condition of anonymity.

The Chinese property bubble has been drawing ohhhs and ahhhs from the kiddies for ages, so now what? The Chinese government bans the data because it doesn’t like what the data is saying?

“I fixed it. I’m a fixer.”

So normally this would be a “not my circus, not my monkeys” type thing, but I think Australia could well be inside the fallout zone.

And the thing I keep thinking about is all these Chinese developers, who have developed their business model under the firm and protective hand of the Chinese state, coming and setting up shop here.

I mean, you look at the coming apartment glut, which is as obvious as the nose on my face, and you think, what are these developers thinking?

And maybe they’re not thinking. Maybe they just don’t even care about supply and demand projections.

Maybe they just happily build, safe in the knowledge that someone will buy it. If it isn’t the public, then the state will always step in.

Chinese developers have totally changed our urban landscape, and they’re still coming. From the AFR:

Chinese developers roared back into Melbourne in the final five months of 2016, snapping up three-quarters of development sites as they shrugged off concerns about apartment oversupply, tougher planning rules and higher property taxes.

Real estate agent CBRE said 75 per cent of the 45 Melbourne development sites they transacted between August and December were sold to mainland Chinese buyers.

“We’ve sold more properties to Chinese buyers in the past five months than in any other five-month period since 2009,” said CBRE national director Mark Wizel…

Bananas.

I don’t really worry about what impact its going to have on the Australian financial system. Aussie banks stopped lending to these things three quarters of a year ago.

But I do worry that Australian cities have become an outlet store for the Chinese development model. Chinese money is funding Chinese developers to build apartments to sell to Chinese buyers.

Who the hell signed up for that?

And how far can we trust a state that is willing to flip the switch on it’s own data providers? And how closely do we want to be tied to an economic model that’s only sustainable so long as everyone is kept in the dark?

These are big questions. Huge.

Why are we still not talking about it?

What do you think China’s up to?

A ‘pillowcases of cash’ story…

December 13, 2016 by Jon Giaan

When cash = liberty.

I don’t know if you caught up with what’s happening over in India. It’s amazing stuff.

Basically, Prime Minister Modi has outlawed the old 500 and 1,000rps notes. They’re being replaced with new ones.

On the same day the America went to the polls, Modi announced that the old notes – worth something like $10 and $20 bucks each, were no longer legal currency. Indians had until the end of the year to deposit them with a bank and start using the new ones.

Doesn’t sound like such a big deal right? It wouldn’t be such a drama if you couldn’t use your 10s and 20s…

But that’s the thing about India. In India, the black market is huge. Only 2% of Indians pay income tax!

And so most Indians – well most of the wealthy – have mattresses and mattresses stuffed with cash.

And that’s exactly the point of the call-back. Modi is trying to bring all of the hidden black-market money back into the light.

And since Indians can only deposit 250,000 rps (about $4000) without proof that they’ve paid taxes, rich Indians are in a panic.

There’s stories of people trying to buy a year’s worth of fruit, or maid services, or yoga lessons – up front!

Other people are ploughing it into designer shoes and dresses or gold jewellery.

Some people are simply burning it or dumping it in the river. There’s several stories of people fishing pillow cases stuffed with cash out of the Ganges river.

And so many industries that rely on cash – from cosmetic surgery to wedding planners – are taking a hit. The real estate industry is in a flap too. Apparently it’s common for 60% of a property’s purchase price to be paid in cash, under the table!

How do you get finance for something like that??

The NY Times is running a story about a guy who had just sold a property and had received 3.5 million rupees, or about $60,000 in cash. He was now hiring 14 low-income people to deposit 250,000 rupees in old notes and launder the money back to him – less a small commission for their trouble.

Wild. And in proof that the “Incompetent Government” league table is extremely competitive, this major change has come with major blunders.

The government failed to make sure it printed enough notes, so even people seeking to exchange legitimate cash had to wait in long queues, if they could get it at all. Worse still, the new money doesn’t fit in the existing ATM machines and they’ve all had to be reworked.

And without money to help the gears go round, India’s previously booming economy has ground to a halt. It’s on track to post a fall of 1-2% this year.

But these SNAFUs are not enough to deter Prime Minister Modi from taking it further. He’s been talking about making India a “cashless society” – even though cash currently accounts for 90% of transactions, and 85% of worker pay.

You don’t make it to the top of the incompetent government leader board by letting facts like that get in your way.

But perhaps this isn’t incompetency at all..?

A few weeks ago, global investment bank UBS called on Australia to eliminate $100 notes. From the AFR:

“Removing large denomination notes in Australia would be good for the economy and good for the banks… Benefits would include reduced crime and welfare fraud, increased tax revenue and a “spike” in bank deposits.

In Australia, 92 percent of all currency by value is in A$50 and A$100 notes, the larger of which is “rarely seen,” according to the UBS report. Removing bigger denominations would boost digital payments in a country where the use of cash payments is continuing to fall, the analysts wrote…

The program would also be positive for banks. If all the A$100 notes were deposited into accounts at the lenders, household deposits would rise by about 4 percent, the UBS analysts said. That would likely be enough to fill the big banks’ regulatory-mandated net stable funding ratios and reduce reliance on offshore funding, they said.”

I was surprised to find that 92% of our cash is in 50s and 100s. It is true that you don’t see a 100 all that often.

So maybe it is true that most 100s are tied up in the black market and organised crime. We do probably want to do something about that.

But I get very nervous when I hear about plans to phase out notes, or cash altogether. Kenneth Rogoff’s been going on about going cashless for years.

For me, cash gives you a way to opt out of the banking system. If there’s no cash, then you’re forced to use an intermediary institution. You’re forced into the system.

I could think of many good reasons why you’d want to keep the banks at arms length – maybe you think they’re all about to collapse, or maybe you’re a dissident worried about the state ‘flipping the switch’ on you.

And what happens as we push further and further towards negative interest rates. What happens when we have to pay banks to hold our money? We could take our cash out and just sit on it, but if cash doesn’t exist, then you’re just forced to pay for the convenience of wealth.

This feels like a slippery slope to me.

You might say that $100 notes wouldn’t be missed, and that maybe true now, but it wasn’t that long ago that the $20 note was serious money.

Inflation keeps on keeping on, and soon we’ll spend 100s the way we currently spend 50s.

If we give it up now, there’s no guarantee we’ll get it back, particularly if it’s not politically convenient to give people the option at the time.

And you might say that this is targeted at criminals, so if you’re not a criminal you’ve got nothing to hide.

This is deeply flawed logic. I’m not a criminal now, but I reserve the right to become one if the state goes rouge. If the government decides it wants to persecute millionaire trouble-makers, I’d like to have as many options open to me as I can have, thanks.

I feel conflicted about this every time I revel in the convenience of pay-wave. But as they say, the price of liberty is vigilance.

And when it comes to the concentration of power in the financial sector, we have to be particularly vigilant.

So watch out for this one. They can have my 100s when they prise them from my cold dead hands.

What do you reckon? Is India on the right path? Would you go cashless?

Trump throws America a bone

November 28, 2016 by Jon Giaan

Trump is looking like a pragmatic President, and that could be just what America needs.

It looks like Trump’s positions on a lot of things are softening. Especially some of the most controversial topics.

To me, it points to what kind of President Trump will be… and that might be just the President America needs.

Trump’s win was definitive. He won the Presidency but Republicans also won both houses.

It was a rout.

It Trump was truly the unhinged demagogue that his critics painted him to be, he’d be having the time of his life. With Democrats bent over the couch, he’d be pumping the White House full of whatever crazy, half-baked legislation came to mind.

He’s not limited by what’s politically achievable. He can do anything.

But we’re not seeing Trump gloat or announce plans for a 4^th Reich. In fact, we’re seeing just the opposite. In a lot of areas, he’s throwing his opponents a bone.

For example, he’s backed away from campaign promises to prosecute Hilary Clinton and “lock her up”.

He’s also softened his position on torture as a means of getting information out of prisoners. After a chat with General Mattis, he said he now thinks there are better ways.

And on climate change – an area where much of his base are in firm denial – he has said he’s looking at it closely but “keeping an open mind.”

And for a supposed misogynist, he’s nominated a lot of women for prominent roles.

Of course for some people, none of this is good enough. This is Trump just being deceitful, and softening us up before he unleashes the full-horror of his hard-line agenda.

But to hold to that line of thinking, you’ve got to look past what Trump is actually saying and doing right now, to what you imagine his actual thoughts and intentions are.

(Just quietly, it’s probably in your head.)

For me, I think it points to two possibilities, both of which are a positive for America.

The first is that Trump is just a pragmatic deal-maker. He knows that some of the extreme opinions in his camp were never going to fly, and to get really great things done, you need to bring people together.

So this softening is about opening the door. Saying, look, I know we had some differences, but let’s work together.

That’s a good thing.

However the other options is that Trump is going to China.

Back when Nixon was elected President in the 70s, he campaigned on taking a very hard-line with China – no engagement, no concessions.

It was very popular with his base. However, when he came to power, he then went to China, and started to patch things up.

But people weren’t disappointed in him. Because he had taken such a hard line people trusted him, and supported his mission.

I think Trump may be working to a similar play-book.

Take climate change. This issue’s has become totally stuck in the US. If Clinton had won, republicans would have fought her efforts on climate change tooth and nail. Their base would have demanded it.

The only way out I can see is for someone like Trump to take up the issue – to go to China and pull the right more towards the centre.

From gun control to trade, there’s a lot of “China”-like issues in America right now.

A pragmatic President with a capacity to move his base – and Trump is nothing if not persuasive – has the potential to achieve a great deal.

Potent times for America.

Is Trump actually a ‘uniter’?

Why I’m moving to America… and you should too.

November 23, 2016 by Jon Giaan

Trump is creating a refugee crisis.

If you want a bit of a giggle, head over to Trumpugees.com .

It’s a website set up by a real estate brokerage in Canada – DeClute Real Estate.

It offers advice to Americans about how to immigrate to Canada, how to legally purchase real estate, but most importantly, “Escape the coming of Trump!”

You just don’t know with Canadians. It looks like a piss-take, but it could actually be real. They certainly have all the info you need if you want to make the move – plus a neat little sales funnel for their brokerage services.

And it did seem like a lot of Americans wanted to leave the night Trump won the election – the Canadian Immigration Website crashed due to a flood of visitors.

But is it really a thing? You hear a lot of Americans say that they’ll move to Canada with every election, but how many of them actually do. I can’t imagine it’s all that many.

I think the few that actually do bother looking into it would find that it’s kind of hard and kind of expensive, and actually, they really like the neighbourhood where they’re living, especially now that amazing new café has just opened up on the corner I mean, omg, have you tried their coffee?

Maybe I’ll just stay put and complain on the internet.

I mean it is kind of bullshit isn’t it? For starters, it’s a total pants-dropping brown-eye to genuine refugees. There are people living under political regimes that have explicit agendas to murder certain sections of the community. There are countries being torn apart by war.

All people have on Trump is that they don’t like the tone and flavour of the things he’s said, plus a whole bunch of imagined crimes that he’s secretly planning in his head.

That doesn’t make you a refugee. That makes you a selfish opportunist.

And if you don’t like where the country’s going, stick around and do something about it. Don’t just pack all your Mac gear into your electric hybrid and head for the border. Roll up your sleaves and get involved.

That’s how democracy works.

Democracy was not designed to give you exactly what you want all the time. If you’re not willing to work for democracy, why would democracy work for you?
Trumpugees.com also has a list of “celebrity Trumpugees” – famous people who have said they’re bailing on America if Trump wins. The list includes Miley Cyrus, Samuel L. Jackson, Rosie O’Donnell and Whoopi Goldberg.

I can just imagine how bummed Trump is about this.

“Don’t let the razor-wire gate at the border hit you on the arse on the way out…”

(Actually, I imagine Donald Trump is a fan of Samuel L Jackson. I mean, who isn’t?)

But personally, I think these celebrities will be quietly eating humble pie in the coming weeks.

I think that there isn’t all that much work for Hollywood A-listers in Toronto.

And once they realise how much tax they’re going to have to pay, I imagine they’ll turn their self-centred little tushies around.

And that’s the interesting thing about what’s shaping up in America. We’re looking at a pretty dramatic restructuring of the tax code.

Personal income tax is dropping to 25%, tops. Corporate tax is going to 15% (down from 35%).

But it’s not all one way. Californians just voted for higher taxes. Proposition 55 extended the “temporary” 13.3% tax rate on California’s high-income earners, the highest marginal tax rate in the nation to 2030. It applies to people earning over $250,000 – or 1.5% of the population.

It applies to celebrities.

And these celebrities are probably looking at a 25% Federal marginal tax rate and thinking, this all looks pretty good. They’re probably telling themselves stories about how, actually, they don’t really like the cold and they’re afraid of getting eating by mooses.

And at 25%, I think half of Australia is probably thinking about moving there too.

I don’t know how many people actually choose where they’re living based on tax rates. Personally I love Australia and the Aussie lifestyle. But still, there has to be a point…

But we know for certain that corporations don’t care much for lifestyle. They’ll set up shop wherever it makes the most financial sense. And if America goes to a 15% corporate tax rate – making it one of the lowest in the world – we could expect to see a lot more interest in US investment.

It’s what we saw in Ireland and the UK when they lowered their tax rates.

(Though Apple just got pinged by the EU for receiving “illegal state aid” from Ireland.)

No doubt about it. It’s crash or crash through with the Donald. His tax plan is about making the country more enticing for everybody, including indulged do-goody celebrities.

What do you think? Is he on the right track?

Could this trigger another GFC?

October 4, 2016 by Jon Giaan

Is this the trigger for the next GFC?

Remember when Lehman Brothers Bank collapsed in the US, started the GFC, and almost derailed the entire economy?

Yeah? Well if you missed it you might get a second chance to enjoy the spectacle. German giant Deutsche Bank looks like it’s about to go under.

Deutsche is one of the largest investment banks in the world, and much larger and more global than Lehman ever was.

And they’re in trouble.

Even though the ECB is giving away free money (see Tuesday’s blog), their profits have been hammered. It’s one of the quirky things about negative interest rates – it plays havoc with bank’s margins.

And so Deutsche shares have been on the skids as profitability takes a hammering.

To make matters worse, the US Justice Department just made a $14 billion dollar claim for damages around the GFC. Deutsche played a lead role in the sub-prime mortgage crisis.

$14 billion sure sounds like a lot, but is it?

Yes. Yes it is.

Given Deutsche’s market capitalisation is only $18bn, it’s huge.

And what’s worse, it’s a lot more than anyone was expecting, especially Deutsche Bank. So far their adamant they won’t be giving the yanks anything like that much money, but it’s enough to give investors the jitters and hammer the share price….

… to the lowest level in over twenty years…

And following a pattern and play sheet that has eerie similarities with Lehman Bros.

If this isn’t making you shift nervously in your seat, it should. Deutsche isn’t some pissant developing economy bank. This is one of the most established and largest banks in the world. It is also the corner stone of German’s economy – which is pretty much the only European economy that’s got any spark to it.

It’s balance sheet is equal to 58% of German’s GDP. It lost almost $7bn last year. What’s worse, as the subprime crisis showed us, it’s no stranger to creative accounting and the derivatives market.

Zero Hedge estimate that Deutsche’s derivative position (which have to have a counter-party somewhere) is worth about 42 trillion euros. Yes, that’s trillion with a ‘t’.

To put that in perspective, this chart compares that 42 trillion with German GDP and Euro Union GDP.

Oh—meeeeh—Gaawed!

And seriously, who knows where those losses go. Deutsche is a global bank. I’d be watching Aussie banks nervously if Deutsche goes over.

And as Deutsche Bank goes down like a Led Zeppelin cover band at a funeral, politicians find they have their hands tied.

Deutsche executives are waving their hands like mad, begging for a lifeline, but the political establishment have totally wedged themselves.

Last weekend, German Chancellor Angela Merkel waded into the mess, announcing in a briefing that there could be no government bail-out of the bank.

It’s tough talk. It’s what people want to hear. Unless those people are investors or people considering trading with the bank in the near future. In that case, it’s positively frightening.

So Deutsche Bank would be thrilled with that announcement, just as they’re battling a confidence crisis.

And given a Deutsche failure would probably bring down the euro, the European union, and Merkel’s government, you have to wonder if she’s thought it through. But senior officials are on the record as saying that the German Chancellor was adamant that bank would not be rescued. There could be no state assistance if the bank was unable to raise the capital it needs to stay afloat, and she was not planning to intervene to get the American fine reduced. If it was in trouble, it was on its own.

And really, what choice has she got? The politics are terrible.

Germany, with their Chancellor leading the charge, have set themselves up as the hard-arsed financial responsibility Terminator in the euro-zone. Two years ago, it happily let the Greek bank system go to the wall. It let ATM’s freeze and close as a way of whipping the feisty Syriza government back into line.

And this year, through an unfolding Italian crisis, Germany has insisted on enforcing euro-zone rules that say depositors – that is, ordinary people – have to shoulder some of the losses when a bank is in trouble.

So they can hardly turn around now and so, oh, no, it’s different now. Deutsche is a German bank so they get special treatment.

There’d be riots from Athens to Milan.

But then can they really unleash a shock of that magnitude on the country? On the world?

It’d be a massive body-blow to Germany, but Europe pretty much relies on Germany to drive growth these days. France and Italy are already at zero growth, and Britain was doing ok but now it’s heading for the exits.

And the financial system is complex and interconnected. There’s no telling where the losses would wash up. You could probably kiss a whole bunch of troubled Italian banks goodbye, and with that, a few French and Spanish banks.

And hello GFC-2016.

It’d be a very courageous decision to let Deutsche go to the wall. But then what kind of message would that send. The rules of global finance are very strict, unless you happen to be huge and embedded firmly into the arse of the global economy. In that case, you can do what you want.

This is an ugly, ugly business. If you’re taking more defensive positions with your portfolios these days, I wouldn’t blame you.

Speaking of which, apparently the share of stocks on the ASX rated as a “buy’ is at the lowest level in years.

I’m just going to leave that there.

Is this enough to cause another GFC? Is it going to wash up here?

Europe is doomed… Here’s why it matters to you.

July 26, 2016 by Jon Giaan

Germany is financing debt with negative interest rates. This is the beginning of the end. Seriously. Europe is doomed.

Last week, the German government was paid to borrow money.

This is the new world order. Everything is flipped on its head.

Germany was able to sell 10-year government bonds at a negative yield. That is, investors paid for the privilege of lending Germany money. If you bought these bonds and held them to maturity, you would get back less cash than you originally put in.

No accounting for inflation. Nothing. Nothing but a guaranteed loss.

If there are any of those investors out there, I’m willing to let you lend me money for free! Total bargain. Limited time only.

If this sounds nuts, it’s because it is. Totally nuts.

Think about what it means. We all worry about the budget deficit here, but what if we were being paid to borrow. It doesn’t matter. In fact, the government should just be borrowing as much as it can at those prices. They’d be crazy not to.

New schools, new hospitals, a vitally important netball court? Doesn’t matter. Put it on the tab.

It’s the interest burden that makes debt a time bomb. It grows and grows, and at some point you’re borrowing to pay off the debt. That’s the dynamic that brings governments down.

But Germany doesn’t have to worry about that. There is no interest. In fact, they’re getting paid to borrow. Whee.

But why on earth would anyone pay the German government for the privilege of lending them money?

The answer? What else are you going to do with it? Institutional investors are running scared. They just want to be able to hold on to their money. In a world where it looks like you could lose your money at every turn, the promise of getting 99% of it back in 10-years, starts to look good.

(Also a lot of investment funds are required by their charters to hold a certain percentage of bonds in their portfolio, so they’ve got no choice but to grin and take it in the yield.)

A Contiki tour through Europe is like a trip through an old folks home these days. You never know who’s going to drop off next. Could be Britain thanks to Brexit. Could be Italy thanks to a collapsing banking sector. Could be Denmark thanks to a poor showing at the Eurovision contest.

In this context, Germany, who can still get around without a Zimmer frame, looks relatively spritely. Robust even. As the strongest economy on the block, it enjoys the privileges that come with stability – in this case getting paid to borrow money.

So Germany is laughing all the way to the Bundesbank. But how does the rest of Europe feel about it?

Because while Germany is getting paid to borrow money, Greece is being forced to sell off its ports to the private sector (by the Germans, and oh look, here’s some German investment banks waiting over here.)

And Italian tax payers are on the hook for bailing out the banking sector, and their bond holders, again.

Now, I’m not saying that Germany engineered this situation deliberately, though I am a massive fan of engineering. But how long can this go on for?

Rather than bring Europe together, the EU runs the risk of actually entrenching divisions, and making things worse.

In a world where investors are skittish, they’ll herd towards perceived safety (Germany), while running from perceived risk (Greece.) Greece can’t borrow money at any price. Germany is getting paid to do it.

How do you put a positive spin on that?

Its one of the reasons why Brexit was such a body-blow to the European project. Of all European nations, Britain probably had the least complaint about EU membership. There’s the immigration story of course, but the economy was relatively strong. People were happy to lend to the British Government. Britain wasn’t getting screwed over by suddenly finding itself in the same feeding lot as big countries like Germany and France.

But they voted to leave anyway.

So Britain’s exit must surely have inspired the populations of other, smaller EU countries – countries that are cutting public spending because its become too expensive to borrow money.

In my mind, the European Union is dead in the water.

It’s time to start thinking about a post EU world.

But how do you even prepare for that? What does an orderly EU break up even look like? What does a disorderly one look like?!?

Forget Lehman Bros and the GFC. We’re talking about the removal of the world’s second reserve currency, the break up of one of its largest trading blocks, and most likely in a bitter and spiteful political sh!tstorm.

I don’t even know how to start thinking about it. I’m going to try figure it out… watch this space. But I’d welcome people’s thoughts about to play it. I know we’ve got a lot of cluey investors connected to this blog.

But I think the time to start preparing is now.

I have seen a few people say that now is a good time to go to Gold. That might be true, but are you buying gold in US dollars? What happens to the US dollar when it’s only real competitor suddenly evaporates?

It spikes right?

That means the value of gold denominated assets (like gold) will fall. So gold doesn’t look like a great play to me.

Anyway, the ending has begun. Time to prepare for a Brave New World 2.0.

If Europe goes down, is that good news for Australia? Or Bad?

I voted ‘Leave’ – Does that make me a racist?

June 28, 2016 by Jon Giaan

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First up, the important news… Looks like I got it spot on.

Last Friday I predicted that England would lose in the Euros and exit the Union.

England unbelievably lost to Iceland this morning 2-1.

Now to the trivial but interesting…

I had a little drink when England left the EU – that doesn’t make me a racist.

Intellectuals and do-gooders, you’re all being taken for a ride.

There’s been a few bull-sh!t stories doing the rounds since Britain voted to leave the EU. There have been all sorts of morons paraded about who had no idea what they were voting on. There were some deliberately misleading stats that seemed to show that pro-Leave voters were racist, tree-haters.

And then there was a supposed spike in Google searches for “What is the EU?” after the vote. (Turns out that “spike” was only 1,000 searches.)

And so it all feeds into a narrative. Leave voters are naïve, racist morons, who had no idea on what they were voting on, and have done themselves a massive disservice.

(See Reginald. That’s why ordinary people shouldn’t be allowed to vote.)

It’s bullsh!t.

And why didn’t more people see it coming? When the banks, the politicians and the major press all line up on an issue, I start to get worried.

Evil is most effective when it keeps itself bland. And right now, in England and around the world, we’re being blinded to the bland by the sensational.

The story that’s running like it’s got legs of steel springs is about a ‘Leave’ vote being driven by a racist and xenophobic fear of dirty brown people. That’s what everyone who voted “leave” is secretly worried about, whether they admit it or not.

And there’s lot of evidence for this. There’s a reactionary politician blatantly whistling to racist elements. There’s a handful of skin-heads making trouble. A progressive MP is murdered.

How did England get so racist?

Now, I’m not saying that this isn’t happening. I’m not saying that there aren’t people voting Leave solely because they don’t like the way brown people smell. Sure they exist.

But to say that this sentiment explains the entire Leave vote is a bit ridiculous.

But this is the story that sells.

Why? Because it has become a badge of intellectual pedigree and cultural evolution to be anti-racist.

And I get that. For a long time, people were judged for what they looked like and where they came from. And I mean a long time – like the full length of human history.

But we’re past that now. These days, it’s not ok to judge a book by a cover. And that’s a good thing. It’s an excellent thing.

But the trouble starts when it is used to express your identity. It’s a way to express how sophisticated and advanced you are.

“My ring-tone is Nepali tribal music, I wear vegan sneakers, and I’m anti-racist.”

When it starts serving this function it becomes energised. Once it’s energised, it’s fodder for newspaper headlines and click-bait media.

Imagine two headlines:

“Britons anxious about distribution of global trade benefits.”

“Britons say, ‘F@#k Off! We’re full.’”

The second one speaks to your identity as a sophisticated anti-racist. You can be outraged. You can share it on your facebook wall. You can use it to shore up your identity as an evolved, anti-racist human.

Regardless of whether that’s what’s going on or not.

And are you going to check? Are you going to see if that is actually what the issue is? No, of course not. All the papers are saying it so it must be true. The politicians and the banks are saying it. Besides, there’s all this social media street cred on offer.

So the story goes round and round, until pretty much no one doubts that it is “fact”.

But what is the truth then? What is the bland and boring truth that we’ve been (deliberately?) blinded too?

Well, I’m not sure I have the answer, but maybe Trump does.

(Wait, wait! Hear me out.)

One of the things that you keep hearing is that this is the Trumpinisation of Europe. The same forces that are taking Trump to the White House helped the Leave vote get up.

And what are those forces?

“Hate, Jon. Hating towel-heads and brown people and people who don’t eat Trump Steaks, Jon. That’s what Trump’s about. Geez, Jon, don’t you read the papers?”

Is it? Or is this just the sensational story playing out again?

What’s the one theme that comes up again and again, in every speech Trump makes?

It’s not race.

It’s not terrorism.

It’s trade.

Every speech Trump makes he talks about how American has been sold out by its leaders. How America has made bad deals. How the trade arrangements are no good for the American people.

Most people think Trump rallies are 2 hours of dreaming about the good old days of white-supremacy and practicing goose-stepping.

But consistently, a good part of his speech is given to trade. Why? Because that’s what his base cares about.

Workers at the bottom of the skills ladder were told that globalisation would be good for them. They’d leave the factory floor and become graphic designers and computer programmers.

But it didn’t happen. The factories closed and America moved on. If you didn’t have the skills or beard to be a hipster game-designer, tough-titties. America had no sympathy for you.

And if you complained about globalisation, you were labelled a xenophobe and a racist.

By who? By the forces that were benefiting most from globalisation.

Who was that? Banks, big media, politicians….

Are we connecting the dots?

Let me spell it out. Big money has used progressive and sensitive people to shame poor people over their reservations to blindly put their head in the jaws of the global economy.

Frankly, it’s disgusting. I’d want to ‘leave’ that kind of relationship too.

Progressives and intellectuals, you’re being taken for a ride. “Race” is a side-show. The real story is who walks away with the money.

Why don’t we talk about that.

Where’s the money to be made in these times?

The big manipulative banks are predicting recession in England, what do you think?