Part II: Bet the House On Bitcoin!?!

October 4, 2017 by Jon Giaan

Last week it was Bitcoin Basics, this week I tell you why it’s awesome… or could be…

This week I’m going to tell you why you should mortgage your house and sink it all into Bitcoin.

I’m not really telling you that. That’s not my actual advice. I’m just doing it to see what the arguments are. I started this journey as a bit of a Bitcoin sceptic, but I’ll try put that all aside here and see what the cryptocurrency actually has going for it.

So it’s not really me. If it helps, imagine me in lederhosen and speaking with a German accent.

(stop touching yourself.)

So why is Bitcoin awesome?

The first thing to remember is that Bitcoin is a currency. It’s a form of money. It’s something you use to buy goods and services.

There are some teething problems that make that function a little buggy right now. Bitcoin doubled in value in August, and that’s not something currencies normally do.

But we’re in the adoption phase. In time, Bitcoin will become fully adopted and its price will stabilise.

And when we’re talking about currencies, remember it’s price really points to relative value. What is the Aussie dollar worth against the Yen? What is the Bitcoin worth against the USD?

And remember that all the currencies on earth at the moment are increasing in quantity. Governments are printing more of them each year. The number of Bitcoin is growing too but at a much slower rate. And ultimately, the number of Bitcoins that can ever exist is fixed. You technically can’t make any more of them.

This dynamic alone means that Bitcoin must continue to appreciate against all other ‘inflationary’ currencies.

But if Bitcoin becomes a truly global currency – it’s already traded around the world, and is legal tender in Japan – then there is some seriously huge upside to people who get in early.

Right now, on current pricing, the total value of all the Bitcoins in existence is about US$70bn.

That’s a lot, but it’s also nothing. In Japan, M2 – the supply of money – is worth about US$10 trillion. In the US, M2 is worth $13 trillion.

So say Bitcoin expands to be a currency on par with the Yen – accounting for the same amount of global transactions. That would imply a coefficient of expansion of 135x. Or if it grew to be the same as the US dollar, that would imply a coefficient of expansion of 194x.

Let me spell that out so you know exactly what I mean. If you mortgage the house now and put $1m into Bitcoin, then when it grows to rival the US dollar – which could be only a decade, who knows? Then when that happens, your Bitcoin holdings will be worth $194 million US dollars.

I know, right?

And if Bitcoin grows to become THE dominant currency in the world, becoming the main form of money across the globe..? Forget it. Too many zeros to even make sense of.

This is the upside potential of Bitcoin. That’s why even though we’ve seen some crazy growth numbers in recent months, we’ve barely started.

This is still the ground floor. The doors to the elevator/rocketship haven’t closed yet.

Now critics would say, “But Bitcoin isn’t real. It’s not a real thing.”

But show me a currency that is real.

Take the Aussie dollar. That used to have gold standing behind it. You could take your money and trade it in for gold.

Not any more. The only thing supporting the Aussie dollar is the Aussie government, and the only thing supporting its price is a shared understanding of its value.

It’s nothing but an agreement. It’s nothing but a social contract.

But don’t stop there. Go back to gold. What’s gold actually worth? Take away all the social contracts and shared understandings around gold and what have you got? Not much. Some shiny rocks.

Go back in time and offer a cave man a 5kg bar of solid gold. What will he give you for it? A bite of his mammoth, at best?

There isn’t a money alive today that is ‘real’ in the sense that Bitcoins critics like to use it.

The US dollar isn’t ‘real’ and it’s worth $13 trillion.

But then don’t all currencies need a government to give them legitimacy?

That used to be true. Track the history of money and money emerged under the protection of city states. Once a structure emerged that had a monopoly on violence and could enforce its own rules, then money emerged to facilitate trade.

Money needed someone to enforce the rules around money. It simply died without it.

But this is the genius of the block-chain.

Trust doesn’t come from some authority structure. Trust is built into technology itself.

The value of Bitcoin is set in an open market, and the distributed ledger of the block-chain ensures that no one can mess with the results. What the market says, is.

So the integrity of the Bitcoin currency is the integrity of the block-chain, which is a communal and collective effort hard-wired into the technology.

And if anything, compared to conventional currencies where the supply is controlled by governments on the basis of policy, whim or self-interest, Bitcoin is far and away a more transparent and predictable entity.

In turn, that transparency and predictability gives it value – and we’ve barely scratched the surface of that value.

Finally, it is true that there are other cryptos out there, and the crypto ecosystem is becoming crowded. Bitcoin is still the biggest fish in the pond, but there are others who want to take its place.

But like most things in life, there is a first-mover advantage. Bitcoin was out of the gates before most cryptos were even concepts. It is established. It has set the standard.

And if you want to buy one of the other cryptos, these days you have to pretty much go through Bitcoin to get to all of them.

But how many cryptos does the world really need? Consumers want one – they don’t want the hassle of managing hundreds of currencies. That’s the mess we’ve got now.

So I see Bitcoin consolidating its domination of the space, and setting sail for $200 trillion.

So toot-toot. Time to get on board.

(No, not really.)

What do you think? Have I covered it? I know I’ve got a few Bitcoin traders in the readership here… What other arguments are there for Bitcoin?

Also, for the people who do have Bitcoin (Karan Goda – keen to hear your thoughts) are you holding for the long run, or are you cashing out at a certain price? What price?

NEXT TIME – I flip it all on its head and tell you why to avoid Bitcoin like the plague. You can then tell me which argument is more persuasive.

What pros am I missing?

Bankrupt hedge fund guru wishes he bought property

September 20, 2017 by Jon Giaan

If a bear dies in the woods, is anybody listening?

This week, the world lost a great bear. Hedge Fund guru Hugh Hendry is closing his fund.

Hugh Hendry is a bit of a legend in managed fund circles. With a name like Hugh Hendry, he was always destined for funds management, politics or porn. He chose the lesser of three evils.

In 2002 he launched Eclectica – a contrarian fund for people with more money than all of us combined. At the time, the fund attracted a lot of attention… and a lot of money.

And in the early years, it made good money. It made great money. And the contrarian strategy saw Hendry and co. well positioned to ride out the GFC.

But since the GFC, its returns have been disappointing to say the least. 2011 was its best year, but even then it only posted 8.6%, only slightly bettering the market.

Every other year, however, it underperformed the market substantially.

And 8 months into this year, already down 10%, Hendry decided to throw in the towel. The great bear howled its last howl, rolled over and died.

Essentially Hendry’s bet – that the radical money-printing experiment that followed the GFC was only going to end in tears – turned out to be wrong.

The theory was impeccable. The case was well argued. The mechanisms were obvious. It was just never true.

And ultimately, in his farewell letter, Hendry capitulates completely. The nightmare scenarios of the GFC just never came true, and right now, the economy looks pretty good.

Right now, Hendry “is not bearish on anything.”

In fact, the outlook is positively sunny.

“If anything we feel more convinced that our thesis of a healing global economy is understated: for the first time in an age all parts of the world are enjoying synchronised economic momentum and I can’t see it ending for some time…

… The implications of a sustained bout of economic growth are good for you. It’s good because it should continue to underwrite a continuation in the positive performance of global equities. I would stay long. It’s also good because I can’t see interest rates rising abruptly to interrupt the upward path of equities. And commodities have already acknowledged the upturn in the fortunes of the global economy and are likely to trend higher still. That’s a lot of good news.”

Oh, how the mighty have fallen.

For the record, Hendry still maintains that the markets are broken. Quantitative Easing created massive disruptions and misallocations of capital. However, the fallout from these misallocations has been largely contained, and the real economy is recovering and gathering steam.

And if the economy keeps doing well, time, ultimately, heals all wounds.

The GFC might still get a rehash at some point, but to Hendry, it doesn’t look like it will be soon.

I find this all fascinating because it still feels like the contrarian mindset is the dominant mindset.. (I know. Ironic)

Most people still don’t trust the economic recovery – we’re still calling it a recovery. It all feels fragile. The ghosts of the GFC still linger and are now rubbing shoulders with Trump and Kim Jong Un.

It can’t end well.

But how long does it take for confidence to take hold?

How many years of “recovery” do we have to see? How low does the unemployment rate have to go? How many contrarian hedge funds have to keel over and die?

More and more the tone of commentary is brightening. More and more people are saying, you know what, maybe things aren’t that bad. Maybe the economy has got legs.

Given this emerging shift in sentiment, I would actually say that the worst is probably behind us. The global economy is gearing up for a solid spell.

This is all great news for Australia – as a small open economy, our fortunes flow with the world. And if it’s true as Hendry thinks that, “commodities… are likely to trend higher still,” then it is fantastic news for Australia.

These past five years have been a bit of a battle for Australia, mostly because our major trading partners, apart from China, have been struggling.

But what happens if they all start finding form?

What happens to Australian growth rates – rates that are already the envy of the world? What happens to the unemployment rate? What happens to wages?

And what happens to property prices?

Just look at how well property has done with all the headwinds under the sun being thrown at it.

Now imagine what happens if it starts getting some tailwinds. Imagine what happens if incomes start gathering speed again.

In my mind, if Hendry’s thesis plays out and the global economy continues to go from strength to strength, it is very hard to see property prices decelerating.

In that scenario, the only way is up.

Mark my words.

The other point I’d make is that sentiment always flows this way. At first, there’s only a few dissenting voices, like Hendry. In time, the herd capitulates and the contrarian view becomes the dominant view.

And by then, your opportunity to make real money has passed you by.

There are no guarantees in this game, but my bet is that Hendry won’t be the last bear to cop it in the neck this cycle.

The mood is shifting.

Mark my words.

Where do you think we're heading (globally speaking)? It's it's black clouds and storms ahead or bright skys and tailwinds?

New opportunities everywhere.

September 13, 2017 by Jon Giaan

Should you be getting into marijuana stocks?

There’s a big market here, but one big swing factor.

There are two new big-dogs in the world today and I’m talking about emerging (hype-driven) opportunities.

One of them is Bitcoin, I’m researching everything to do with that market and will be reporting back my finding within the next two weeks.

The other is marijuana. Let’s begin…

In Japan, the Emperor wears hemp.

He has done for centuries. The hemp plant – of which ‘marijuana’ (the plant you smoke to get you ‘high’) is just one strain – has had a long and fruitful connection with humanity.

Hemp oil was being used by the ancient Egyptians as a medicine.

NASA was using marijuana to help astronauts unwind from a tough day on the space station.

(No, I just made that last bit up.)

But then marijuana (and with it hemp) went out of favour. It became a prohibited substance. The hemp industry got shut down.

(Many people say it was Dupont and the cotton industry that got hemp shut down – mounting a massive scare campaign about the dangers of marijuana.)

Whatever the case, it’s been illegal for about a century.

But now, it seems, the tide has turned. In America, there are now more states where marijuana is legalised to some degree or another than there are where it isn’t.

It’s a radical social experiment, but one that is creating a billion dollar industry in the process.

And for people in the right place at the right time, a small fortune.

This chart here has some of the big success stories. If you put just $100 into some of these companies just three years ago, you could be banking some incredible returns.

One company turned $100 into $35,500 for you! Nice!

Of course, not everyone’s a winner. The alcohol industry for example. They’re not stoked about it. Alcohol and marijuana seem to be in competition with each other.

In states where marijuana is legal, pot sales are growing exponentially, while booze sales are flat or falling.

Take this chart from Washington state.

Quarterly marijuana sales have boomed from $23.6m just a few years ago to over $300m today.

Some people are saying that the marijuana industry is going to be bigger than the manufacturing industry in the US by 2020. It’s pretty huge.

And the stereotype is that marijuana is for teenage boys with their X-box and Dominos pizza.

But if you break it down and look at who is actually using legal weed shops in the US, it’s a surprisingly broad cross section of the community.

It’s only very slightly tilted towards males, and it’s tilted towards younger cohorts (25-34) but not massively.

To me, that looks like an industry that’s got legs.

Ultimately the American experiment is a case study in how governments can make or break a market.

Sometimes government regulation is a good thing. I personally prefer to live in a world where there isn’t an open market for personal nuclear weapons. I support government regulation in that industry.

However, and I know this will come as a surprise to many of my readers, the government isn’t always perfect.

It doesn’t always make great decisions. Often, it actually makes very bad decisions in order to protect the interests of the rich and powerful.

(I know! It was a shock to me too. I’m sorry. I really should have made sure you were sitting down first.)

So is all hell going to break loose if we legalise marijuana? It seems unlikely. Marijuana has been down the priority list for the police for a while. It has never been particularly expensive or difficult to get.

And we’ve got by.

And some argue that there’s a signalling effect here. That if we legalise marijuana we’re telling kids that it’s ok to get off your face.

That’s kind of the message we started sending when we legalised alcohol again if you’re using that logic. And if you’re taking moral guidance from the government you probably need to have a good long chat with your priest.

So personally, I see this having a very small impact on the fabric of society.

So if you’re ok with the moral dimensions, and I more or less am, then the question is, where is the money?

This is a tricky one. We’re really looking for the government to make a market here. There are a number of Australian companies getting ready to launch when Australia finally starts down the path towards legalisation.

But the government is sending mixed messages here. Some days it looks like their stance is softening. Other days, it looks like it could be years down the track.

As I’m sure you know, it’s cash-flow that kills most start-ups. For marijuana stocks in Australia that could mean a whole lot of stranded companies with state of the art infrastructure and nowhere to deploy it.

And the longer the Australian government drags it out, the more opportunity there is for foreign companies to fully gear up and get ready to expand.

I mean, let’s say Australia doesn’t open the door until well after 2020. By that stage, the American marijuana industry will be starting to consolidate. Large players will start to emerge. They’ll have developed all the tools they need – technology, business models, finance partners.

They’ll come into the market full guns blazing, just as our little Aussie battlers are trying to get off the ground.

They’ll probably get slaughtered.

And right now, it seems that the government is going the wrong way for people interested in backing Aussie companies. I know a hemp farmer up in Northern NSW. They’d been gearing up production of low-THC (the stuff that gets you high), high-CBD (the stuff that has medicinal properties) crops.

The government had been moving towards making CBDs legal.

But then the Therapeutic Goods Association surprised everyone and said, actually, no, CBDs will remain illegal. You have until October to wrap things up.

It looks like they’re stuffed.

So this is the danger here. If you’re investing strategy relies on the stroke of some bureaucrat’s pen, your strategy is built on an institution that has been corrupted time and time again.

So there’s a substantial amount of risk there.

And that’s one of the reasons why the returns are so high. Can you predict what the government’s going to do in two or three years? Sometimes it’s a coin toss.

So look, yes, there are potentially some huge returns to be made out of the marijuana industry. I’m looking at some options myself.

But be aware of the risks. The government was happy to hang a whole bunch of hemp growers out to dry. They’re not going to give a toss about your investments.

That’s not to say it’s not worth it. But marijuana stocks belong in the risky tail of your portfolio, I reckon.

Have you made money from the marijuana hype? Are you sold on it, or are you staying well clear?
Do you think it’s a bubble about to burst, similar to techwreck2000?

Whispers of the next boom

August 2, 2017 by Jon Giaan

Warning – the economy might actually be a whole lot stronger than we thought.

Okay, little bit of a news flash.

You know that “moderation” in house prices we’ve been waiting for? That little bit of a pause we were expecting to let reality catch up? That softening, that slow-down, that plateauing?

Might not be coming.

In fact, in as much as there was a slow down / pause / time-out in the naughty corner, it might already be behind us.

And the next boom might only be a few months away.

How do I know this?

Well, I don’t. Not for sure. Some economists will tell you they have a crystal ball, but sooner or later the market comes along and gives them a swift kick to the crystal balls and their reputations shatter.

But, you’re always operating with less than perfect information.

And the thing that really jumped out at me was this report from the economists at CBA.

They were taking a look at the labour market data, and I was shocked at how strong recent months had been.

In my mind I’m still assuming that the labour market is still softening, wages growth is weak, and there’s little fire coming from that sector of the economy.

But that’s not what the data says at all.

In fact, if you believe the last four months, the economy is gearing up for another bull run.

And I know a lot of my readers are a canny bunch, and don’t put too much stock in the “official” numbers. And they’re right to be sceptical. So when they say the unemployment rate is 6%, you have to take that with a large grain of salt.

That said, the trends are useful. If the unemployment rate is going down, from whatever number it is, then house prices are normally growing.

So even if I don’t believe (or care about) the exact levels, I am watching trends.

And as I said, right now, the trends are actually pretty promising.

The take home chart from the CBA report is this one. It compares employment growth with GDP:

You can see that they tend to move together – which makes sense: you need to employ people to make stuff.

But right now a gap has opened up. Employment growth is heading north. We’ll have to wait and see what GDP does.

So the gap will probably close pretty soon, based on past experience. But which way? Will employment correct, or will the economy bounce?

Again, hard to say for sure, but the employment data is looking pretty solid.

Because when you break it down, all the signs are good.

Like the split between part time and full-time employment growth. We’ve actually seen a switch-out, with full-time employment growth picking up, at the expense of part time employment growth.

That’s a good thing. Firms tend to employ people part time when things are tentatively picking up, and when the future seems more certain, start employing people on a full time basis.

And when you break it down by state, it’s also looking strong across the board.

Victoria continues to lead the way (“spectacular” was the word CBA used), but growth is also holding up in NSW, and there’s been a quick bounce back in Queensland.

And even in the smaller states, and even in WA, we’ve seen employment growth pick up strongly in the past four months.

This is especially good news for WA. I can hear the pollies across the Nullarbor breathing a huge sigh of relief. Employment growth has picked up, and the unemployment rate has dropped significantly.

Perhaps WA has turned the corner?

So it’s all looking pretty solid.

Surprisingly solid even.

But look, I don’t want to lay my crystal balls on the line here. These are early days, and you can’t be too certain about which way trends are going until they’ve had time to properly establish themselves.

But by then, everyone knows about them.

So the scenario I want to flag is that the economy has actually got more traction than we thought. That’s going to keep feeding through to employment growth, and that in turn will help drive property demand and property prices.

Property price growth moderated over the first half of this year (though Sydney and Melbourne are still pushing at double digits), but maybe that’s all we get. Maybe once the rubber hits the road and the economy really gets going, we’ll start pushing back towards 10, 12 percent growth.

And when you look at the population growth data, that’s not so far fetched.

Of course, it could all still get derailed by something. Trump could bomb someone or China could get the wobbles. But in the absence of any sort of shock, you’d have to think that the most likely scenario is continued growth from here.

Economies do move in cycles after all.

We might not be quite ready to lock it in, but we need to start thinking and planning for it.

So watch out! Good times ahead.

What’s the feeling in your crystal balls?

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?

Six LJ Hookers go bust… is China to blame?

May 3, 2016 by Jon Giaan

Does a failed ponzi scheme point to something more serious?

I’m guessing your probably saw this story about six LJ Hookers in Melbourne being shut down.

From the ABC:

More than 100 customers are owed “substantial” sums of money following the collapse of six LJ Hooker branches in Melbourne, with the couple involved in running the business under investigation for allegedly misappropriating their clients’ money.

The ABC has learnt that six LJ Hooker branches in Melbourne were shut down by the company’s head office last week with customers claiming that hundreds of thousands of dollars in deposits had gone missing.

In a statement to the ABC the real estate giant said that it had stepped in to end their relationship with the franchisee involved.

“On 21 April 2016 LJ Hooker terminated the franchise offices of LJ Hooker Glen Waverley, Keysborough, Box Hill, Mount Waverley, Doncaster and Burwood … due to a fundamental breach of its franchise agreements,” the company said.

The ABC understands the owner of the closed franchises Judy Thanh Truc and her husband Joseph Ngo, are accused of spending home deposits that were supposed to be held in trust for their clients.

So it turns out that embezzling clients deposit money and running off with it is a fundamental breach of the franchise agreement. No kidding.

Ms Truc has told the media that someone has tried to hack her account. But LJ Hooker refute this, saying they’ve never heard anything about any hacked accounts.

It’s all a bit embarrassing for LJ Hooker. JLH’s team was “Team of the Year 2015.”

But for the people who’ve just lost a deposit on a house it’s heart breaking. Haul ‘em over the coals I reckon.

So is it just a couple of rogue operators? I suspect it is, but my feeling is they may have been using the Chinese buying spree as cover for a bit of a Ponzi scheme.

If you look at the areas they were operating in, they were hot areas for Chinese buyers until recently.

And we know that Chinese buyers have found it tougher in recent times, both to get money out of China, and to get finance in Australia. There’s growing reports of Chinese buyers failing to make settlement.

So it wouldn’t surprise me if these guys had siphoned off some of the flow of Chinese money for themselves, using tomorrow’s buyers to pay off today’s. But when that flow started to dry up, they were caught short.

And their customers are suffering for it.

We’re hearing similar stories of Chinese hardship in Sydney. From The Australian:

Asia-based buyers scouting homes on Sydney’s upper north shore are requesting delayed settlements and are walking away from deals as local banks clamp down on lending to buyers who earn income offshore, and China tightens restrictions on outflows.

Agents marketing properties in well-heeled suburbs, including Wahroonga, Pymble, Roseville and Killara, have noted price falls of up to 3 per cent and softer levels of demand, as the appetite from Asia-based buyers falls away.

Other sources indicate price falls could be as high as 8 per cent.

“We’ve noticed it since November and the number of overseas buyers is dropping,” Savills Cordeau Marshall chief executive Craig Marshall said.

…“They know what’s going on here, and they’re tightening up on funds leaving the country; it’s absolutely going to continue to have an impact on our market.”

And for real estate agents that have grown used to the flow of Chinese money, that’s not good news. Witness the recent profit warnings that the recently floated McGrath’s has announced.

As I said, Chinese money is being squeezed by two thighs. The first is tighter lending conditions in Australia. In recent weeks, Westpac, CBA and ANZ have all announced much tougher conditions for foreign buyers, and a refusal to accept foreign income in serviceability calculations.

Yep, not that long ago you could say that you were getting money from a Chinese-based fairy-godmother, and still get finance.

Those days are gone.

At the same time, the domestic situation in China is also getting tougher. The Chinese authorities have been fighting hard to maintain the value of the Yuan, and a big part of that is stemming the bleed of foreign capital.

That means it is much harder to get money out of the country. The days of the Chinese cash buyer may have come to an end.

What’s more, the rise of the Aussie dollar so far this year, means that Aussie houses have actually become more expensive, and they need to get even more money out of the country.

Based on currency movements, settlement is now going to cost you 10.5% more than 6 months ago – a typical settlement period on an apartment.

The Aussie dollar is now stronger than at any point in 2015, so every Chinese buyer is looking at a more expensive settlement than they possible planned for.

Of course, if Chinese buyers think the Aussie dollar will depreciate – something everyone is still waiting for – then delaying settlement could make sense. Faff around with settlement for a few months, and you could save yourself 5% or something like that.

It could be worth it.

Chinese money has been one of the big stories in property in recent times – particularly in inner-city, off-the-plan apartments. But it now looks like the tide is turning.

This will drag on growth in the immediate term, in the same way the inflow of money caused a short-term boost. In the long run I wouldn’t be too fazed.

But if you’ve been using Chinese buying to cover a real estate Ponzi scheme, look out. The tide is going out.

What do you reckon is going on here?

WARNING: 2016-2017 (Watch closely)

December 8, 2015 by Jon Giaan

I’ve been sharing this with my inner-circle… We will have a mid-cycle slow-down around late 2016 and into 2017… Maybe a mild-recession.

How do I know this?

Here’s information that I geek out on.

I don’t normally have a lot to say about shares, but here are some home-truths for the sheep out there.

That’s the thing about booms. They can make chumps feel like geniuses.

And after a bull run in Australia that’s lasted pretty much 22 years without serious interruption, we’re drowning in geniuses.

But that might all be about to change, and I’m not sure that these geniuses will know what’s hit them.

The saying goes that it is possible to make money in any market, and that’s true. But not if you’ve got no idea what you’re doing. If you don’t know what you’re doing, you’re going to get mauled.

And so I think 2016 and 2017 will be no market for sheep – those investors who have no strategy and are just ‘going with the flow’. They buy houses that give them a nice feeling in suburbs they know – regardless of the metrics, and they ‘buy the market’ with equity index funds.

Index funds in particular are about to cop a beating I think.

The story starts with Perth, where the teething pains of our transition to a post-mining boom economy are most keenly felt.

The AFR is covering the sombre funeral procession of economic data:

House prices have fallen and office vacancy rates in Perth CBD are now just under 20 per cent, the highest in the country and the highest in Perth since 1995. Predictions for next year have that vacancy stat reaching at least 24 per cent…

After years of Western Australia having an unemployment rate well below the national average, the state now faces the ignominy of a rate well above it at 6.4 per cent… previously surging migration into WA from other states and New Zealand has reversed direction…

Suddenly, online sites are selling second hand “big boys’ toys” – jet-skis and quad bikes and fast boats – very cheaply. Such bargains are likely to last indefinitely. Economic conditions are expected to get worse before they get better…

Maybe a little harsh, but we’ll see. The mining-led euphoria of 2010 is certainly long gone.

But in WA – and the other resource states of NT and perhaps a little unfairly, QLD, the mining transition is in full effect. In these states, growth has gone from faster-than-China to slower-than-Japan, in the space of a couple of years:

The outlook for the mining state’s labour markets is also sombre, as the large construction workforces continue to give way to much smaller operational workforces over coming years.

So far though, the Australian labour market still rides high in the saddle, with employment holding up, perhaps surprisingly given the pretty mediocre outcomes in GDP.

A lot of that has to do with the public sector, with government-dominated sectors like government, education and health responsible for the lion’s share of employment growth.

That’s not what you want unless you think “transition” involves emptying out the private sector and stacking the books with government jobs – never a sustainable strategy for growth.

However, things in the private sector aren’t all that bad. Confidence has picked up in recent months (the Turnbull turn), and hiring intentions are actually pretty solid.

So all in all, Australia’s got some challenges, but we’ve been through worst. I’m not buying into some of the doomsday scenarios that are out there.

Thing is though, that the Australian future is not reflected in the equities market.

Australia’s listed market has a much larger exposure to financials and materials (which includes miners) than other international markets – and these sectors’ share of market capitalisation are much larger than their share of the domestic economy.

This table compares Australian weights with American weights:

The short of it is that the Australian stock market does not reflect where the Australian economy is right now, or where it’s going.

The mining industry is coming to the end of a super-cycle. All miners are doing it tough right now.

In turn, this is making it harder for the banks, as a falling dollar (related to the terms of trade) puts pressure on their funding costs. This is coming at the same time as government policy is putting pressure on their mortgage books.

Banks and miners have enjoyed the best of times since the GFC. From here though, the base-case is a return to normal profitability, although it could be worse.

Given that reality, market weightings in the ASX200 are out of touch.

As Gerard Minack says, it is “overweight the past and underweight the future.”

And this is the reality of the ASX200. It is backward looking by design. The biggest companies are the ones that did best, yesterday.

And normally ‘buying the market’ – purchasing an index fund, is a safe, vanilla strategy.

But it comes off the rails when your economy is transition – where the superstars of yesterday are not the superstars of tomorrow.

And Australia is in transition.

Buying the market is buying the past, and positions you poorly for the future.

How many mum and dad investors do you think realise this? How many of them are buying blue-chip BHP shares just because they’re ‘blue-chip’?

How many financial advisers are telling them to seek out more ‘current’ portfolios? How many advisers even realise what is going on?

My bet is not many.

This is no time to be a sheep.

This is a time to get active and ahead of the curve. If that means education and skilling up, you’ve just got to take it on.

This transition will throw up many opportunities, but, by definition, the strategies that worked in the past just won’t work in the future.

Time to get ahead of the pack.

If you’ve read this far, good. I mentioned at the start a mid-cycle slow-down. What that means is that the larger cycle, which I expect to top out in 2025-2026 will still be in play.

With that in mind, 2016-2017 will present opportunities for those in the know. If you stay with me over that period of time, you’ll make s#!t load of money.

The mainstream will panic, as per usual, into inaction.

Are you ready for this mid-cycle slow-down (buying opportunity)?

Do you agree that a recession is around the corner?

Do you believe that property prices will be double in 2025 from these already crazy highs?

The end of Australia? Maybe…

September 24, 2015 by Jon Giaan

On some measures we look like an emerging economy- vulnerable. It’s time to get cracking. If we don’t, this could be the end of Australia as we know it.

Consumer confidence was up this week off the back of the warm and fuzzy “Malcolm feeling.” But feelings aren’t facts, and wear off fast. I’m here to drill down on the facts… and yes, I’ve got some concerns.

Just in case Malcolm was enjoying his first week in office too much, there was some news that sent a little shiver up my spine.

Last week, Brazil lost its investment grade credit rating, and was downgraded to “junk” status.

Ouch.

Three or four years ago it was all about the BRICs – Brazil, Russia, India and China. Now the wheels have fallen off the economy and the budget is in a real emergency. They’ve just announced $7bn worth of spending cuts, and an $8bn increase in taxes through a financial transaction tax.

And that still won’t cut it… even if it gets through parliament.

Could it happen here? No! We’ve got a gold-plated AAA credit rating. We’re a developed economy.

Thing is though, that that is less true than it used to be.

Because remember that Brazil was once a resources power-house too. But resources aren’t the golden goose they used to be.

If you look at Australia’s exports, Minerals and Metal Ores are down 34% since their peak. That’s bigger than the fall we saw during the GFC.

(Hat tip to: Alpha Beta Strategy and Economics)

But what’s going to fill the gap? Where’s the transition we’ve been waiting for. If you look at the prospects for exports, it’s not pretty. The high Aussie dollar that came with the mining boom, along with a willingness to let many industries go to the wall, has meant that many export-earners have withered and died.

As a percent of GDP, exports have gone backwards in pretty much every non-resource industry:

And that means we now have one of the narrowest export bases in history. In 2000, less than a third of our exports came from resources. Now just three commodities make up over half.

You have to go back to the Korean War Wool Boom in the 1950s to find such a narrow export base.

This is not a good thing. Multiple income streams are a source of strength. Ask any investor. Diversity is security. But now we have over half our eggs in one basket.

And that makes us more like Kenya than Germany. Before the mining boom our export concentration was more or less in line with other high-income countries. Now, some low-income countries like Nepal and Tanzania have more export diversity than we do!

Are we still a developed country? (High prices don’t make us developed.) Sure, we have first-world living standards, but the reality is a dependence on resources leaves us exposed to swings in global commodity markets like some banana republic.

And that means the budget is also dependent on a narrow base too. A $10 fall in iron ore markets can tear billions from forecast revenues.

It’s a slippery slope from here to Brazil.

A dependence on resources leaves us vulnerable.

It’s not hard to paint a terrifying picture. Imagine there’s some sort of global economic shock. Who knows what. It might have nothing to do with us.

But if global growth slows, demand for commodities can stall and prices will drop further.

At the same time as the government will be looking to sure up the economy, revenues will have the guts torn out of them.

They either go into austerity mode – cutting spending and raising taxes just as the economy needs them to be doing exactly the opposite.

Or they keep spending, the deficit balloons, and we lose our AAA credit rating. If that happens, bank funding costs go up (because the government guarantees the banks) and interest rates rise and/or they start calling in loans, just as incomes are falling and unemployment is rising.

Check-mate.

So am I saying that I wish the mining boom never happened?

Nothing like that. If anything, I think the mining boom just brought forward the inevitable for the manufacturing sectors. Automotive manufacturing was always going to struggle. The mining boom just gave the government the cover it needed to finally let the struggling businesses die.

In the sense that it ultimately freed us up from perpetually flogging a dead horse, it could be a good thing.

But now we’ve got some challenges ahead of us. And we’ve got to get cracking.

Because we’re about 8 years behind the rest of the world.

Most economies have had to do some soul-searching. What do you do when everything is made in China?

The mining boom let us put off that question, but the mining boom is over. Now we have to find our ‘why’. We need to find our purpose. What is it that Australia has to offer the world?

So there’s a question for you Malcolm. Welcome to the job. Now where are we going and how do we get there?

In a way, I think its like the nation just lost its job. You can look at retrenchment two ways. Either it’s a disaster, or an opportunity to start over.

That’s where we’re at now.

There’s never been a better time for men of vision. Time to step up Malcolm.

What industries should we be backing? What will the Aussie economy look like in 50 years?

Are Robots Destroying Your Wealth?

September 1, 2015 by Jon Giaan

Seems the wild ride in the share market last week has a simple explanation. Simple, but disturbing…

So last week was a bit odd wasn’t it?

At the beginning of the week it was all, ‘here we go’. I had friends calling me and telling me the next ‘crash’ was on.

And for a while there it looked like it was going that way. The previous week ended with so major falls in Asian markets, giving everyone plenty of time to build up a head of panic over the weekend.

Come Monday morning, markets opened and tanked immediately, wobbled and tanked again.

Come Wednesday everyone’s talking about the crash that was ‘coming’, as if another GFC was practically locked in.

But by the end of the day, nothing. Bargain hunters had snapped up some bargains, prices were supported, and it seemed like we were out of the woods.

Apart from everyone feeling a little sea sick from the wild ride the market had just given us, there was no damage done.

Still, it was a bit strange. And the pundits were talking about ‘unprecedented volatility’.

I think that’s a phrase you use when you have absolutely no idea what happened.

But I know what happened. I know who’s to blame for the wild ride we just had:

Robots.

Most insiders are pointing the blame at automated, high-frequency trading systems. Like robots. Just not very sexy robots.

These robots use their own capital and take advantage of small movements in price on a huge scale.

Say a price of a share moves 1c. That’s not very much, but if you’re trading in a thousands and thousands of units, suddenly that’s real money.

And with high-speed data connections, these robots aim to stay just a fraction ahead of the game, picking off opportunities from minor movements in price…

… to make big bucks.

And they’re major players now. The Securities and Exchange Commission in the US estimates that over half of the stocks traded every day on the US market are executed by robots.

But because there’s so many of these robots out there, and because they’re all working to similar strategies designed by the same people, and because no actual human has an oversight on what they’re doing, these robots can go a little rogue.

Not Terminator rogue, but rogue enough to do some serious damage to your nest egg.

And so that’s what caused last weeks shenanigans. Some bad news out of China was enough to set all the robots off, and we had some wild swings until a strong GDP print in the US was enough to settle the boat.

I don’t know if you lost money. I know a few folks who bought into the panic story, sold out, and certainly didn’t come out ahead at the end of the day.

But it was very profitable for some. Virtu Financial Inc., for example had one of its biggest and most profitable days on Monday.

“Our firm is made for this kind of market,” said Virtu CEO, Douglas Cifu.

And what does Virtu do – Virtu is one of the world’s largest high-frequency trading firms.

They build robots.

It seems that high-frequency trading pays off when there’s high volatility and large volumes.

Does this seem strange to anyone else?

So we have a system where robots are causing huge swings in volatility, and the companies that make the most money in those kind of conditions are the firms running the robots?

Anyone else see a conflict of interest here?

And if it would be funny if it were Wall St insiders ripping themselves off, but they’re not the ones picking up the bill. If the markets crash it’ll be the mums and dads who lose their nest eggs.

And now suddenly, it seems that in the stock market, the odds are stacked even more against you.

Not only do mum and dad have to find some good (and honest!) advice about what companies are performing well, but they then have to hope that their market doesn’t get over-run by robots.

It feels more and more like a casino. You might win. You might even win regularly. But the numbers are against you. Sooner or later the house gets their cut.

I mean seriously, how are people supposed to have any faith in a market like this?

There’s always risk with any asset class, but stocks and shares just seemed to get a whole lot riskier.

And last week Domain was running with the headline:

Spooked Stockmarket Investors Park Cash in Property”

“Shaken investors who endured a rollercoaster week on the Australian Securities Exchange will try to find their sea legs in the stability of property, economists predict, which could potentially push house prices up further.

“As a knee-jerk reaction, investors are seeing the volatility of the financial markets, and asking themselves, ‘where else can I go that’s not as volatile?'” St George Bank chief economist Hans Kunnen said.

“Property is an answer. They say, ‘I’m not having a bar of the sharemarket; I’ll stick with bricks and mortar.”

I think that’s stretching it a bit to say they’ll jump on a single week’s movements, but I think over the long run it has to be true.

I mean, as a property investor, I know I might be doing a deal with someone who knows a bit more about the market than I do.

But at least I know I’m not dealing with a robot – or a league of robots.

I know I’m in the game, and the game’s not rigged against me.

And so in the long run, I think it’s true. The stock market will become more and more volatile, and people will become more and more turned off.

And property will become more and more appealing.

There’s got to be limits to this idea, but the trend seems pretty solid to me.

Are you rushing into the market and buying the dips?

Does a share market volatility mean more upside coming for real estate?

NO B.S. FRIDAY: China takes nuclear option in ‘war on stocks’

July 24, 2015 by Jon Giaan

China is a case study in how, apart from a handful of theoretical economists, no one really believes in a free market

Has anyone else ben tuning into the bemusing spectacle that is the Chinese stock market implosion?

It seems that the Chinese government has effectively nationalised its stock market. People thought shares were disconnected from reality before. Now that disconnect seems permanent.

And China will dodge some short term pain here, but only by throwing credibility and it’s dreams of becoming a first-world financial centre on top of the grenade.

And so it’s just not clear what all this means. It certainly makes you stop and wonder about the shape of the Asian Century. China will continue to dominate affairs in the region, just through sheer size, but China’s economy looks more and more like a derailed freight train.

Still moving, and a force to be reckoned with, but who knows where it’s going to end up.

Over the past year, the Chinese stock market has been a classic suckers game. The boom was on. Every man and their shoe-shine boy was piling everything they had into the stock market. And the government was more than happy to leave the money taps on to – to try and generate a bit of pop in the consumption numbers.

As a result, the Chinese stock market went stratospheric. Share prices tripled in just 12 months. At the peak, half the companies listed on the Shanghai and Shenzhen exchanges were priced above an indecent 85-times earnings!

The smart money started bailing out. As it always goes in these things, it’s the shoe-shine boys, the farmers and office clerks left holding the baby.

With the institutional investors heading for the exits, prices started to teeter. The Chinese government freaked, and the central bank tried to juice the market even further by cutting rates and relaxing bank reserve requirements.

(That’s right, just as the financial system was coming under attack, the government dropped reserves. Banks don’t need all of those safety measures. They just get in the way.)

Rate cuts had always worked in the past, but the run was on, and prices were still falling.

So the government got it’s own hands dirty. It rallied the major brokerages to form a $19 billion fund to buy shares and waded directly into the market, on a massive buying spree.

But that’s the thing about panic moves like this. Once the people saw the government in panic mode, they wondered what the government was scared of.

And so now it wasn’t just the institutional investors. The mums and dads were heading for the exits as well. Prices were heading south fast.

And when the tide goes out you get to see who’s swimming naked.

And the feedback loop came through margin lending. Chinese punters were borrowing in large amounts, from both brokerages and more shadowy sources — like “umbrella trusts” and peer-to-peer lending websites — to buy shares, with the shares themselves as collateral.

(According to Goldman Sachs, at the peak, formal margin lending alone accounted for 12%of the market float and 3.5% of China’s GDP, “easily the highest in the history of global equity markets.”)

Margin loans were a booster rocket on the way up, but a massive stone around the neck on the way down. As prices fell, borrowers started getting ‘margin calls’ that forced them to sell into a falling market, sending prices into free-fall.

Amazingly, Chinese regulators who had been trying to rein in margin lending did a full 180. They waved rules requiring brokerages to ask for more collateral when stock prices fell and allowed them to accept any kind of asset – including people’s homes – as collateral for stock-buying loans.

They also encouraged brokerages to securitize and sell their margin-lending portfolios to the public so that they could go out and make even more loans. All these steps knowingly exposed major financial institutions, and their customers, to much greater risk.

So in the face of a major market melt-down, the government is actively encouraging people to take on more risk!

But wait, that’s not all!

China launched a ‘war on stocks’ and took that war nuclear. They closed down the market and outlawed selling. About half of China’s 2,800 listed companies filed to suspend trading. Chinese regulators also banned major shareholders from selling any shares for the next six months. They then directed companies to start buying back their own shares and instructed state-run banks to provide whatever financing was needed.

Then in came China’s Ministry of Public Security – the thugs usually responsible for crushing political dissent. They announced that they would arrest what it called “malicious” short-sellers. But it was clear that this meant anyone whose selling (not just “short” selling) interfered with the government’s efforts to boost prices.

The market stopped dead in its tracks. Chinese brokers refused to accept sell orders for fear of angering the authorities.

Ultimately the government won. The stock market ‘stabilised’.

But it’s only a ‘market’ in a pretty loose sense of the word now.

It’s wild stuff.

And China’s commitment to ‘market forces’ has been show to be pretty weak.

Part of me thinks that this all puts China back 20 years. It’s like the saying goes, market forces are the worst possible way to allocate resources – apart from all the other options ever experimented with in human history.

The Chinese economy is huge, but it needs to get even bigger. It’s still very early days in China’s development. Chinese citizens are still a long way from enjoying first-world life styles.

But it gets harder and harder to centrally manage an economy at these proportions. It’s hard enough to know what your economy and people need, let alone navigate the rat swarms of vested interests to get those things done.

But let’s not get too holier-than-thou. Governments, banks, big business – everyone’s got their finger in the pie, in every country.

It’s just in China, no one’s pretending otherwise.

Crazy days.

Where to for China from here? What does it mean for us?