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You are here: Home / Archives for election

House prices defy cross-dressing politicians…

September 5, 2013 by Jon

iStock_000006991355Small

Yesterday I made the point that the governments of the day don’t have that much impact on the property market over the short-run.

The charts show that prices normally do better after Coalition victories, but I argued that this was all about pre-existing momentum, and not about any significant policy differences. A year just isn’t long enough for policies to take effect.

And yet, I also said that a Coalition win this time round will give prices a bigger kick than if Labor wins.

So how does that work? How does it matter and not matter? How is it relevant and irrelevant?

The key here is confidence, and ‘the mind of the herd.’

As I’ve been saying for a while in these blogs, we’ve pretty much had all the property boom ducks in a row for a while now. The missing piece has been confidence.

And more than any other factor – more than interest rates, more than affordability, more than Renovation Rescue – it is ‘the herd’ that determines where the market goes.

Modern markets are like this. It’s what happens in sophisticated and highly-leveraged economies. Once the opportunity for speculation opens up, and once you can use credit to take on positions you could never hold with cash – the instinct of the herd starts to matter.

Now I’m not saying this is a bad thing. It’s just the way it is. But it does mean that as investors, we need to keep a close eye on the herd. We obviously need to understand the fundamentals driving the market, but if we get too caught up in the technicals, and lose sight of where the herd is going, then we can get trampled.

And a lot of really successful investors out there, guys like Warren Buffett, they just seem to have a sixth sense about where the herd is going. And by staying one step ahead, they can turn the power of the herd to their advantage.

Because the fundamentals (let’s call it the market for short) and the herd aren’t always flowing in the same direction. Sometimes they move together – the early stages of booms and busts for example. Sometimes the herd can still be going north while the market’s turned and is heading south – think about the years just before the dot-com bust for example.

And sometimes the herd can be leaning against a market that is trying to push forward. And that’s what I reckon we have right now.

Have you ever seen a bunch of penguins waiting to jump off an iceberg? They all gather at the edge, knowing that there’s food in the water, but also the possibility of dangerous predators. There’s safety in numbers, but no one wants to be the first penguin in the pond.

And so they all hold back. The waiting game goes on and on, until one of them jumps (or is pushed), and then over they all go, in one big rush.

That’s the kind of situation we’ve got right now. The market is pulling hard in one direction, prices are on the rise, but still the herd is holding back.

What will it take to tip the herd into the water?

What about a Coalition victory?

Ok, how would that work?

Basically, herd mentality works on what every individual thinks every other individual is thinking.

So what is the herd opinion about a Coalition victory?

Well, the Coalition owns the economy. In the public’s mind, the Coalition are better economic managers. It may or may not be true, from year to year, from treasurer to treasurer. But it doesn’t matter. It’s the perception that counts.

Studies have shown that in the public’s mind, the Coalition is dad, and Labor is mum. It’s a little mental short cut that a great number of people have taken on, without even realizing they’ve done it. So you go to the Coalition when you think you need a bit of level-headed, no-nonsense discipline. You go to Labor when you want a softer, caring touch.

And so the Coalition owns the economy, defense, law and order. Labor owns health, education, social services.

These little mental short-cuts (because humans have lazy minds at the end of the day) are incredibly hard to shift. We don’t trust cross-dressing politicians. No one believes the Coalition when they say they care about health (though of course they do.) And no one believes Labor when they say they’re all about the economy (though what government could ever not be?)

This is the herd mind.

And so everyone in the herd, will be looking at everyone else in the herd, and thinking, “if the Coalition wins, people will think the economy will get better. There are already signs that the market has turned. They’re going to jump in. The market’s going to go up.”

And they’ll be right. Whether the economy will or won’t do better is immaterial. Everyone thinks it will. Everyone knows that everyone thinks it will.

It becomes a self-fulfilling prophecy.

And so a Coalition victory could be just the trigger the market’s been waiting for. It could be a massive boost for property, though of course we’ll never know the counter-factual if Labor had won….

Now I’ve made a lot of money over the past 6 years under Labor. And I intend to make a lot more money over the next 6 years as well, whoever holds office.

But I haven’t spent too much time worrying about politicians. I’ve done it by staying ahead of the game. I’ve tried to rely on data sources and opinions I can trust. I’ve tried to spend time worry about the things I can control and influence, and ignore the things I can’t.

And I’ve tried to keep my finger on the pulse – to stay one step ahead of the herd.

These are the three keys to successful investing I reckon. Abbott’s not going to make you money. You’re going to make you money.

Get active. Get involved. And develop your own game.

And don’t spend too much time sweating the election. These three keys are everything and all you need to do.

Filed Under: Blog, General, Property Investing Tagged With: election, election 2013

How do you vote if you want a property boom?

September 4, 2013 by Jon

man voting on elections in australiaSo what’s my prediction for the weekend?

Richmond to beat Carlton by 1 point… Go tiges!

Ok, I know everything is about the election this weekend. And a lot of people have been asking me what I think will happen. Now I’m not paid to have an opinion about that, and I don’t really care, but I can tell you what I reckon it means for property.

So it seems the most likely outcome at this stage is a Coalition win. In a nut shell, if that happens, it should be a solid boost to property.

Now I’d love to tell you that the reason for this is that the Coalition has a raft of superior property market policies, or that their management of the economy is going to be just that much better.

Maybe Hockey will do a better job at the helm. Maybe he won’t. But unless he really fluffs it up, it’s not likely to matter much.

The fundamental drivers of a property resurgence are already in place (and if you really want to find a hero in all this, look to Glenn Stevens). The market has already asserted a clear trajectory that all the policy in the world will find difficult to shift in the next 6 months or so.

And a decisive win will bring back to the market the only thing that’s been missing so far: confidence.

There’s an interesting question here. Do elections normally have much impact on the market? RP Data published an interesting note last week, looking at what happened to property after the last 5 elections.

“The five most recent federal elections have been: 3 October 1998 (Coalition win), 10 November 2001 (Coalition win), 9 October 2004 (Coalition win), 24 November 2007 (Labor win) and 21 August 2010 (hung parliament but Labor take power).

Screen Shot 2013-09-04 at 10.07.09 AM

Looking specifically at the change in home values over the 12 months following a federal election you can see that in 1998, 2001 and 2004 home values rose however, following the most recent two elections home values have fallen.

The strongest annual increase in home values following an election was 2001, with values increasing by 16.4% followed by the 1998 election where values rose by 10.7% over the following year.”

So, based on this evidence alone, it’s a pretty clear win for the Coalition. House prices rise after Coalition victories – at least in the short run. So is it locked in stone? Or is this all just a coincidence?

Well, first of all, 5 elections is a pretty small sample, and it ignores some massive mitigating factors.

Like the GFC.

One of the biggest global shakeouts in history rocked Australian property through the Labor years. It touched every real estate market in the world. Australia did well to avoid a more horrible fate.

So Labor should feel justified that this comparison is a bit unfair. But it won’t help them much. It’s this story that’s taken root in the Australian public’s mind. And once it’s taken root, all the data and argument in the world won’t shift it easily.

Take the debt story. I’ve been surprised that Labor hasn’t gone harder on this. It is true that (some measures of) government debt have risen in recent years. Why? The Coalition has been able to gain real traction with the argument that it was “Labor Waste”.

But spending was more or less the same under the Labor and the preceding Coalition government. It’s just that the Coalition had a boom that was bumping up the tax take and government coffers. Labor had a GFC and a collapse in tax revenue.

So should Labor have cut spending then? Well Joseph Stiglitz, a Nobel prize winner in economics argues that Labor’s response to the GFC was text book perfect (coming from a guy who actually writes text books.)

He argues that a big splurge of spending early in a crisis is just what you need to maintain confidence, and it actually helps protect tax revenues and the budget bottom line over the long run.

(Of course a resurgent mining boom was a big help as well, and that had nothing to do with Labor.)

But Labor has been completely ineffective in selling this message. This is partly due to Abbott’s effectiveness in opposition, and partly due to their own internal disarray.

If I were Labor, I would have gone much harder on this. In hindsight, as we launch into the 23rd year of uninterrupted economic expansion, it was the perfect thing to do. Housing busts in the US, the UK and Ireland should have been scary reminders of a fate that we were lucky to avoid.

Of course the Coalition government would have done exactly the same thing, so it’s not really about skill. But never the less they’ve allowed the Coalition to out-sell them on a simple message that current debt levels are entirely about ‘waste’. Labor could have easily done more to counter it.

But due to their own incompetence and a raft of other policy mistakes, they’ve given the coalition a massive free kick.

And now, on top of the surging markets that followed previous Coalition victories, a year from now the scoreboard will chalk another win up to the Coalition. RP data report that house prices nationally are already up 4.9 percent over the year. Sales volumes are up a bumping 19 percent. The momentum is already there.

And so it gives the Coalition the chance to engrave their central idea deeper and deeper into the public psyche. The Coalition is just better at managing the economy.

And this idea is gaining so much weight, that it’s becoming a self-fulfilling prophecy.

More on that, and some herd psychology, tomorrow…

Filed Under: Blog, General, Property Investing Tagged With: election, election 2013

Who can you trust?

August 27, 2013 by Jon

Australia - Election 2013

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

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

And they’re both wrong.

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

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

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

Both arguments are simplistic, stupid…

… and wrong.

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

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

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

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

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

It’s all the politics of fear.

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

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

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

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

Pretty uninspiring.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Whatever. Shift happens.

Filed Under: Blog, General Tagged With: abbott, election, mining boom, rudd

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