Finance & Fury Podcast: Recent Episodes
Finance & Fury
There is zero formal financial education through the standard schooling system. Your formal education prepares you for your career and making money! ...but after graduation you're on your own trying to figure out what to do. This leads to a lot of frustrated, furious people!
Finance and Fury picks up where your formal education left off, providing a unique insight into the world of economics, personal finance and building wealth with three different episodes each week.
To start the week, in Mondays' episodes we look directly at personal finance, so you can act independently and make your own financial decisions - not follow the crowds. Let's be real here, how well is that working out for the ‘average’?
Say What Wednesdays – Each Wednesday we give you the answers you are looking for and respond to questions from our listeners (that's you!)
Furious Fridays – Each Friday we explore often misunderstood topics about finance and the economy, shedding some light in dark places, and challenging some common misconceptions.
In this episode, we look at sunk and prospective costs using the Commonwealth Games as an example. The aim of this is to see how to make better financial decisions in your everyday lives.
In this episode, we discuss private equity investments versus investing in the share market. As this asset class has become more accessible to every day investors, is it worth it?
In this episode, we explore the Buffett indicator. Can this metric be used to predict the performance of the share market in relation to its average return?
In this episode, we look at the current state of governmental policies to solve poverty. We will be looking at the current solutions to the problems of economic inequality and poverty and then some alternatives.
In this episode, we will look at economic incentives and human nature and how our responses to incentives can be our best and worst quality at the same time.
In this episode, we look at strategies to minimise tax or maximise wealth benefits prior to the end of the financial year.
In this episode, we look at the news about US debt defaults from reaching their debt ceiling. Whilst a default is unlikely to happen, what does this mean for financial markets now and into the future?
In this episode, we look at how the seeds of communism came from the free-market ideals that contributed to the breakout of the French revolution.
In this episode, we look at the concept of the financial curse, looking at the Goldilocks ratio of the financial system.
In this episode, we look at if regulations can solve societal problems. To explore this concept, we will be looking specifically at drug regulations to see if this has been a positive or negative detriment on the economy and society.
In this episode, we look at if we even need Central banks but as they are probably not going anywhere anytime soon, we look at how to negate their negative financial effects on your own life.
In this episode, we break down the real harm that Central Banks do to the population of each country and by extension, the economy.
In this episode, we break down the real harm that Central Banks do to the population of each country and by extension, the economy.
In this episode, we will look at both sides of the arguments for and against a housing crash. Is the property market going to see a further decline, beyond what has already occurred? Or is it on the path to recovery?
In this episode, we look at the collapse of Credit Suisse and the role bail in legislation played in their deal with UBS. We also look at the moral hazard this creates, in an effort to see if the current legislation works in our favour or against us.
In this episode, we focus on the liquidity issues within the financial system and if this could turn into solvency problems in banks. Or can all of these issues be solved by central banks throwing more money at the problem?
In this episode, we look at the risk in financial markets over bank runs, and the liquidity fears and contagion risks ramping up in the financial sector. Is it something legitimate or white noise?
In this episode, we will be doing a deeper dive into the superannuation policy proposals from Labor. We will be looking at who will be impacted and what to watch out for over the coming years.
In this episode we compare investing through managed funds and exchange traded funds (ETFs). Whilst they are the same in many ways, we look deeper into their structure, pros and cons and when to use them or when not to.
In this episode, we break down an article written by the Treasurer of Australia that argues for the government to have a more active involvement in the economy and financial markets, describing it as "values-based capitalism". Can this really better your daily lives?
In this episode, we break down investing within the share market, between choosing large, mid or small cap? We go through what different capitalisations are, their characteristics, and how these differ in their performances.
In today’s episode, we will be looking at how population growth affects economic output, along with what the optimal population growth rate is, depending on the economy that you live in.
In this episode, we look at the recent Ipsos survey with predictions on the year ahead. How accurate have these predictions been in the past and do the results spell trouble for the share market in 2023?
In today’s episode, we look at the economics and viability of solar energy at large, along with the cost benefits analysis when it comes to putting this on your home, viewing this from an investment perspective.
In this episode, we look at geopolitical risks and their effects on equity portfolios. We explore how certain events impact asset pricing, what events can be ignored and how to help mitigate any risks.
In this episode, we look back at 2022 and how to remove one major cognitive bias that impacts our ability to make financial decisions or, make rational choices in general.
In this episode, we look at the history of taxes and what I believe is a new type of tax that we will face, being a tailored carbon tax based around your spending.
In this episode, we explore the concept of liquidity and what role this plays towards investment risks. We also look at the current issues with Blackstone and if illiquidity is really a bad thing, or something that can protect investors from themselves.
In this episode, we look at a road to regulation for stable coins and the fallout this would have on markets.
In this episode, we break down the economic factors of productions and rather than applying these to an economy, look at using these principals in your everyday life to maximise your own life and personal wealth.
In this episode, we go through a full summary on the FTX collapse and lessons that can be learnt. We also look at the many moving pieces along with the potential fallout and implications for crypto markets at large.
In this episode, we look at the economics of Hollywood and how this has changed over time – to help look at the potential future of their revenue streams. We compare those that produce entertainment to those that demand it.
In this episode, we look at the roles of Central Banks and if they go bankrupt, will they bring the economy and global financial system down with them?
In this episode, we look at hedging international investments. But what does hedging mean, and how can it help or hurt your investment returns on international investments?
In this episode, we look at if borrowing to invest is still worth it with higher interest rates. We also look at if it is better to reduce debt or use it to build wealth?
In this episode, we look at the chances of Australia going into another recession and compare this to the last one that we were told we had to have.
In this episode, we look at one of the most disruptive factors for real economic growth.
In this episode, we will be looking at a better way to select an investment than relying solely on historical performances.
In this episode, we will be doing a deeper dive into historical returns, particularly focusing on if past performance is useful when selecting investments.
In this episode, we look at some recent data from the ABS. We look at the statistical concept of poverty, how to focus on what you need and not to compare yourself to others and averages.
In this episode, we look at some results from the recent Dalbar study, tracking the average investors behaviours. We break down why chasing returns is the biggest mistake the average investor could make and how to avoid this.
In this episode, the aim is to look at what the root causes of financial stresses are and talk about strategies to reduce these, both initially but in the long term by implementing strategies in your own lives.
In this episode, we look at Belt and Road initiative and along with the domestic debt problems that China is currently facing. Signs are starting to point to lowering economic growth but could these lead to a major economic collapse?
In this episode we look at why credit growth has become the most important factor when determining property price movements. We look at why credit growth matters and what fiscal and monetary policy decisions over the past 30 years have created price increases and declines.
In this episode, we look at recent policy promises from politicians on the rental housing market. Are these the solution to achieving affordable rent? Or can they hurt those they are seeking to help along with the investors who own the properties?
In this episode, we look at a historical example of inflation from an expansion in the money supply. We also look at the difference between inflation from money supply increases in comparison to inflation coming from a lack of supply.
In this episode, we will be looking at investing in IPOs and if this can be a strategy for sustainable above market returns, or if this is simply a capital trap for investors.
In this episode, we look at some historical performances of portfolios from Jack Bogle, Warren Buffet and Ray Dalio. We look at the allocations that have provided the most consistent returns but also why this may not be the best thing for long term returns.
In this episode, we look at some alternative solutions to solve inflation in the long term beyond interest rate increases. We explore supply side economics to look at helping to reduce prices in the long term and increase our capacity to demand.
In this episode, we look at the influence the RBA has and will have on housing prices. We look at interest rate movements and regulations and how prices are expected to respond.
In today’s episode, we break down the history of share markets, focusing on the ASX, to look at how we ended up with the system we currently have. We also look at the makeup of the ASX 100 years ago and how this has changed over time.
In this episode, we will be looking at the economy of the 1970s, the share market correction that occurred and what contributed to this. The aim of this episode is to see if will we experience the same sort of market conditions, or if what we are dealing with is something completely different.
In this episode, we look the pros and cons of both sides of the passive or active investment argument. We review the historical performance of average active manager to the index that they track and explore why they under or overperform.
In this episode, we look at the works of Fama and French. Two men who stated that it is impossible to outperform the market, whilst also providing a later framework to do so.
In this episode, we look at using Real Estate Investment Trusts (REITs) as a way to gain exposure to real estate investments and compare this to direct property ownership. We go through the pros and cons of this structure and explore where they can fit in to an investment allocation.
In this episode, we answer a question from Jason on how much you need to retire. We look at an article by the ABC on this subject and explore the figures and assumptions used, as well as considerations that need to be taken
In this episode, we answer David’s question about cash assets that held in managed funds or ETFs. We discuss look cash held in unitised investments, look at allocations based around your goals, as well as the opportunity cost of investing in defensive funds.
In this episode, we answer the question from David. We look at bond pricing theory and compare this to when prices of bonds change, before or after interest rate changes are announced.
In this episode, we look at the looming Russian debt default and if this is the catalyst for another financial collapse or simply another blimp on the radar. We will look at the ramifications from a Russian debt default and what this could mean for global financial markets.
In this episode, we look at that it is almost impossible to time the exact bottom of the market. However, we look at four indicators to tell when financial markets have been oversold and are become cheap to purchase.
In this episode we look at some long-term data and explore the reason that holding the course of an investment strategy works better long term than trying to guess what will happen in the short term. We go through four key facts to remember when your emotions are telling you to sell.
In this episode, we look at the core reasons as to why markets fall, explore the economic consequences of the Russia-Ukraine conflict to determine if this is a genuine cause of concern for financial markets. We also look at if there can be a buying opportunity through an overreaction from financial markets
In this episode, we look at Robert Kiyosaki’s comments on negative gearing. In doing so, we will cover what negative gearing is, does it really help property investors and has it led to property price increases?
In this episode we look at the average financial position of the Australian population. The aim of this exercise is to provide a bit of a wakeup call if you are below the averages, and to help provide strategies to close the gaps. But in the end, you should only compare your financial situation to yourself from yesterday and build towards your own financial independence.
In this episode we do a breakdown on the Richest Man in Babylon. We go through a summary of the classic rules of money that helped me build a solid financial foundation early in my financial journey.
In this episode, we look at an alternative method to traditional budgeting where you instead allocate your financial resources. We explore the concept of paying yourself first and the general categories to direct your cashflow to better your financial position.
Hi – hope you’re all going well and welcome to Finance and Fury.
In this episode – look at cryptoasset investments and the increase in accessibility for retail investors through alternative structures – as in Western economies – US, EU, and Aus – these are becoming available for retail investors through structures like ETFs – i.e. exchange traded funds
- This comes off the back of Treasurer Josh Frydenberg- looking at a series of regulatory and tax proposals covering digital wallets and crypto assets – focus being on reducing scams and fraud
- The move could also include the introduction of an outline for central bank digital currency - which has been covered in depth already in previous episodes – may cover any actual announcement when there is more news about the actual policy
- In past episodes - Covered the BIS framework for what they consider cryptoassets – many have viewed this as legitimacy given to crypto – but it is legitimacy purely in the form of an asset – not a currency which was the original concept as a medium of exchange
- But these recent legislative developments seem to be an adoption from financial institutions to make money – and potentially a barrier to entry for anyone looking to get into supplying crypto – need for a DAO – decentralised autonomous organisation – another topic for another day – but institutions see money being made and want a piece of the action
- Late into last year - the Commonwealth Bank of Australia announced plans to support trading of 10 crypto assets on its app, which has 6.5 million active users.
- On top of this – there is a new megatrend – Crypto ETFs –
Before we get into that – I want to make one observation - Two ways cryptoassets have been treated by governments – it is based around those countries that adopt and those don’t – and instead outright ban cryptoassets – this has been based around the power dynamic between politicians and companies, in particular banks and investment firms – in other words – who politicians are beholden to based around funding interests
- Lets first look at countries where the politicians are not influenced by the lobbyists from major global banks – something like China – where the politicians are de-facto controllers of the economy have greater control over the banks due to having a semi-communist/fascist makeup – they have done their best to ban cryptoassets
- We have seen a lack of innovations in investment products and outright bans on certain investments in cryptoassets – as well as enforcement from governments
- But in countries where companies – in particular the financial system through lobbyists have the power to influence the politicians who make the rules – essentially, those that are the other way around from China – we are starting to see a adoption of crypto assets – not as a currency to replace what the central bank provides – but as an alternative asset class that banks can capitalise off through the demand of the population
- Banks and most companies have one goal – to make money – every company wants to do this – investment managers and banks do this through what is known as FUM – the funds under management – the more money that people invest in their products, the more revenues they can generate due to percentage charges – in additional to brokerage
- I did an episode on the BIS framework a while ago – where they actually defined crypto assets – and talked about the securitisation of traditional assets, such as shares or bonds – in essence – the central banks of central banks sees no problem with the financial system in the west adopting crypto – as long as it is an asset– not as a currency or as a replacement to the fiat monetary system we have in place – as they have their own designs in mind – there can be no competition for the medium of exchange –
- It is the building block for confidence in the economy – plus – taxation is the key to this – the government needs one single currency they can domestically track and monitor to make sure they get what they determine is their share of your money through taxation.
- Banks will make a lot of money through governments allowing retail investors the ability to purchase crypto related assets through banks/asset managers – which is why there has been large lobbying efforts from institutions like Goldman Sachs and other banks for this regulatory push
- I did an episode on the BIS framework a while ago – where they actually defined crypto assets – and talked about the securitisation of traditional assets, such as shares or bonds – in essence – the central banks of central banks sees no problem with the financial system in the west adopting crypto – as long as it is an asset– not as a currency or as a replacement to the fiat monetary system we have in place – as they have their own designs in mind – there can be no competition for the medium of exchange –
- In the end – investment managers (fund managers and the banks) will make money through Investment products if people purchase them (i.e. their FUM increases and based around the same % they make more money – 1% at $1bn is more than 1% at $100m) – they will get their hands on anything they can that investors want to hold – and the more they want to hold an asset, the higher the money made from a MER/ICR can be
- Banks and most companies have one goal – to make money – every company wants to do this – investment managers and banks do this through what is known as FUM – the funds under management – the more money that people invest in their products, the more revenues they can generate due to percentage charges – in additional to brokerage
Now – this is Not advice – general information only based around what product are available in the market – need to take into account your own personal situation - Two types of indirect investments – An ETF with an underlying crytpoasset and those that are considered crypto adjacent
First type – underlying crypto – these are the simplest
- Let’s call this Indirect cryptoassets – In a way, this has been the moment the investment world has been waiting for - ETF Securities appears set to be the first Australian ETF provider to launch a listed security that tracks the spot price of two of the world’s largest cryptocurrencies, Ethereum and Bitcoin.
- This is still Subject to regulatory approval – but if passed - ETF Securities is set to launch into the crypto world – this will done through a partnership with 21Shares, who are the largest crypto provider based in Europe. The agreement will see ETF Securities launch Australia’s first Bitcoin and Ethereum ETFs
- The two listed funds will be able to be purchased through the ASX rather than purchasing through a wallet or off someone in the blockchain:
- The ETFS 21Shares Bitcoin ETF and ETFS 21Shares Ethereum ETF will provide Australians with a way to invest in Bitcoin and Ether, via funds operated by ETF Securities, in partnership with 21Shares.
- BTC and ETH had been two of the two major cryptoassets classes over the past decade and those with the most traction.
- Once they receive final approval, both ETFs are set to trade on the ASX and Chi-X exchange.
- This will increase the access for every day investors – but on top of this – access through superannuation for those with platforms that allow access to ASX ETFs
- This can have major ramifications – mainly through the increased level of FUM – The more money that can flow into an asset – and the higher the desire = the higher the prices can climb
- The actual structing of this asset is unknown – the PDS isn’t available at this stage as it is sitting with ASIC – but if it is like their precious metals funds it shouldn’t rely on future contracts
- In the U.S. regulators appear to be reluctant to approve a spot Bitcoin ETF (which holds actual Bitcoin rather than futures contracts), placing Australia ahead in the game.
- The ETFS 21Shares Bitcoin ETF and ETFS 21Shares Ethereum ETF will provide Australians with a way to invest in Bitcoin and Ether, via funds operated by ETF Securities, in partnership with 21Shares.
- The second type – is a different Crypto assets – many ETFs are not exactly crypto – it is crypto adjacent = through purchasing companies that deal with block chain and other crypto related activities –
- Australian fund management company BetaShares’ new crypto company exchange-traded fund (ETF) has been in massive demand due to the underlying securities
- There is a Capital Appreciation Portfolio Diversification (CRYP) fund which enables investors to gain exposure to 50 pure-play-listed crypto companies from around the world, such as exchanges, mining companies and equipment firms.
- Some of the top companies on CRYP include Galaxy Digital (12.0%), Marathon Digital(11.3%), Coinbase Global (10.7%), Silvergate Capital (10.2%) and MicroStrategy (9.4%).
- Investors blasted through the existing ETF record of $5.8 million ($8 million Australian dollars) within minutes and soared to a total of almost $31.3 million ($42.5 million AUD) by the end of opening day, signalling massive pent up demand for crypto exposure on the ASX.
- Many people want to demand these assets – so the prices of these funds can be elevated with the increase in FUM
- But – since its launce in November 2021 – the price has dropped by 40% - sitting at its low point at around $6.8 when it closed on the first day of trade for $11.19
- Plans for more investment products beyond just what has been allowed to date – BTC backed bonds - Goldman Sachs, and a handful of other tier-one US banks, are figuring out how to use bitcoin as collateral for cash loans to institutions,
- Emulating tri-party repo type arrangements (a way of borrowing funds by selling securities with an agreement to repurchase them, involving a third-party agent) - banks are exploring ways to follow the same path of not touching bitcoin, like other synthetic products.
- Goldman is working on getting approved for lending against collateral and tri-party repo - And if they had a liquidation agent, then they were just doing secured lending without ever having bitcoin touch their balance sheet, whilst still using the price of this as an offset
- Goldman is not alone; a handful of big banks are following the trail blazed by crypto-friendly banks Silvergate and Signature, both of which announced bitcoin-backed cash loans earlier this year
- The regulatory stance on activity like this remains complicated – but ETF providers are likely to start moving into this space
- Emulating tri-party repo type arrangements (a way of borrowing funds by selling securities with an agreement to repurchase them, involving a third-party agent) - banks are exploring ways to follow the same path of not touching bitcoin, like other synthetic products.
Things to watch out for – remember all of this is general information only – not intended to make a financial decision based around
- There is a shift in western countries – an acceptance of major crypto assets – great if you are into crypto – but don’t confuse this as another step towards something like BTC becoming a dominant medium exchange – where you will be able to use your BTC to purchase goods at Woolworths or other places
- Instead – this is in an essence enshrining crypto assets as something that purely has a monetary value attached to it based around the demand for the product –
- Looking at the nature of speculation around cryptocurrencies – there were many uses and hence, many individuals demanding this – people needed it as a medium of exchange for illicit activities, others were thinking that it was going to replace fiat currency, others have purchased it because they think the price will go up – hence a speculative bet – what this round of legislation does is further enshrines the concept that it is purely a speculative asset with no fundamental valuation –
- But Crypto ETFs are an inferior product to owning the actual crypto - with prices potentially becoming disconnected from the underlying asset on a daily basis – especially if it is based on future contracts –
- It also introduces third party risks – you don’t hold the asset but simply the ETF – which represents the price of the asset
- But it is an easier method for a lot of people to access ownership in Crypto – hence, demand capacity and asset flow can increase – all else being equal, this translates into an increase in the price
- If every person who invested invests 1% of their portfolio into crypto as a hedge/alternative asset – then prices would increase dramatically
- But the market is complex and unregulated at this stage – which means that it is still the wild west – especially with volatility – BTC and ETH are not at risk of being some scam with a new coin listing – but they can still be risky due to price fluctuations
The major thing to remember when thinking about to invest is to ask yourself one question: How does this help me achieve my goals?
- Everyone has different goals – passive income targets, purchasing a property, retiring debt free – a range of different targets – but the question should be always “how does this asset fit within my plan to achieve my goal” – if there is an investment that doesn’t fit this plan, then maybe it is something to double check
- If you are interest in crypto – then these expansions are good news for you – you will have greater access to these forms of investments or if you are looking to diversify
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. Sorry for the break over the past two months – been busy with moving into our newly built place – been in a process of trying to clear out lantana and fallen trees from 5,000sm – that combined with helping take care of my daughter and the excess work in a led up to the end of the year I didn’t have time to get an episode out – sorry – all weak excuses aside – in this episode – We will go through Critical thinking for making investment decisions to make 2022 your best year yet
This is a great episode to start off 2022 – as this can become your most powerful ability to make correct decision when it comes to where to allocate your finite resources – everyone on earth has finite resources financially – even Jeff Bezos or Elon Musk has only so many billions they can spend – this is a massive amount – but without creating more – if they spend it all the money runs out –
- Your individual ability to maximise your wealth - Is based around your ability to decern the correct financial decisions to make time and time again – making just one decision, or getting lucky once often isn’t enough to help maximise your wealth in the long term – can help in the short term – but over a long period of time, such as 20-30 years, you will make many decisions – each of these can compound off one another or they can result in set backs
- the aim of this episode is to try and teach a method of critical thinking
- not only can this be applied to this year to help work towards your financial goals – but for the rest of your life – in every area of your personal life when making a decision – when applied correctly – you will become a master of critical thinking
- What we will discuss is a process that helps to make a decision based around your personal situation that will equate to the best outcome for your as an individual – hence – this can be the most powerful tools in your arsenal – if you have the ability to make more correct decisions, over time, the further the compounding effects start to accelerate your life outcomes – those previous decisions become a compounding outcome the more of them you make
- Thinking critically isn’t taught – but it is something that we all have the ability to do
- We are all born as critical thinkers but this is beaten out of us from an early age – especially through institutionalised schooling – we don’t think but learn to absorb and regurgitate information
- Kids are in a constant state of learning – which is why they ask ‘why’ so often – they are trying to learn
- In high school – how many times do you ask the question “why” or “how” something works the way it does – most assessment is to get as high a score as possible on a rubric grading system and you get a grade from A to F, or out of 100 – so you lean how to get a high score without critically thinking about the assessment
- But it is never too late to start critically thinking
- We are all born as critical thinkers but this is beaten out of us from an early age – especially through institutionalised schooling – we don’t think but learn to absorb and regurgitate information
3 Steps to critical thinking – Identify the correct question, evaluate and then make a decision
- at its core - The solution to critical thinking is really four simple words: Why, does, how and what? These are four simple words that help anyone to develop their critical thinking skills in all areas of life
- The key to thinking critically about investments – or anything in reality – is this skill that can be applied to any area of your life – which requires you to think about things – the only way to really think about something is to ask yourself the correct questions, then evaluate these – helping you to narrow down to the correct decision
- The very nature of understanding a question comes in the form of understanding the answer – but many of us have no idea about the answer to our own questions
- Sure – you can sit back and have someone else spit information at you – which you can blindly follow – but this isn’t critical thinking – it is being told what to do and following without a fuss – but this can lead you down the wrong path
- The key to thinking critically about investments – or anything in reality – is this skill that can be applied to any area of your life – which requires you to think about things – the only way to really think about something is to ask yourself the correct questions, then evaluate these – helping you to narrow down to the correct decision
Critical thinking is important – allows you to come to the correct conclusion for your own situations
- Taking a step back and looking at my own personal experience when it comes to initial meeting with clients - Most people I have met don’t think about the investment itself and if it is best option for them – they simply want to invest into an asset class because they have heard of others doing it – i.e. their critical thinking around making a decision is that others have done it – i.e. monkey see monkey do – is this real critical thinking?
- Some examples – Someone in their mid-60s who is looking to retire in the next few years purchases an investment property that is leveraged at 80% because they went to a seminar about property investment
- Why might this be the incorrect decision? Take a minute to think about this – if they are looking to retire, they won’t have an income to cover the debt and costs, so the property will need to do all of this – and at 80% LVR – if interest rates rise their net incomes would decline
- If you haven’t thought up a question and then answered your question at least 10 times on one decision, then likely not critically thoroughly about the initial problem – potentially creating a poor outcome
- Which when it comes to investments can be costly – but being able to narrow down your own decision process to get the right outcome is simple if you start to practice and implement this process
- Some examples – Someone in their mid-60s who is looking to retire in the next few years purchases an investment property that is leveraged at 80% because they went to a seminar about property investment
- Our decisions can be influenced easily – it is impossible to avoid a flow of information that aims to influence your decisions – from media, friends and marketing – many brand names in the supermarket sell for double the price of some generic brand even though they have the same active ingredients – like Panadol or ibuprofen
- Critically think about it – see some ad about a product or a news story – need to ask questions about it beyond the surface level – in a way, you not to not trust your initial response – but ask further questions about this
- When it comes to investing - People want to invest to make money – that is simple - but this isn’t thinking critically
- There are plenty of situations where someone puts money into something and it goes up – was this situation critically thought through or was it luck? This can then reinforce the behaviour to not critically think
- 3 Steps to critical thinking – Identify the correct question, evaluate and make a decision
- Critical thinking is about asking and then answering questions – this is where the core four words of Why, does, how and what come into play
- Answering questions isn’t about simply wrote answering based around what you assume the correct answer to be – but taking the time to answer each in full
- A simple rule I have for myself when critically thinking about any subject or question – is asking at least 10 questions prior to making any decision – and then aim to answer them in an unbiased way – if there is an opportunity cost to this, i.e. another alternative – do the same for that and see which answers match best with what I want
- This can be hard – the very way we search questions can be biased and result in a biased result
- Works in a chain – example – one question can open the door to other questions – and it should – once you get to the bottom of one answer – this will naturally open the door to many other questions
- You need to evaluate each of these questions through answering these in full – once you have your answers – you hopefully have thought through your situation to make the correct decision
- Critical thinking is about asking and then answering questions – this is where the core four words of Why, does, how and what come into play
Let’s look at some Examples – First step it to determine what you want – through critically thinking about it – ask yourself questions – say you want to invest, and you come to the conclusions that this is to generate a passive income to retire early – then you have to make a decision on what to purchase
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Property – I want to buy an investment property – why? To make money is not a good enough answer – It goes back to the basics of investing – everyone invests to make money – so you need to deeper in questioning your motives and what this property can do for you - what do you want it to do for you? Is it to get Capital growth or an income return?
- If income, does a property help this? Go further – what income can you get? Do the calculations:
- Let’s look at an average apartment investment property in Brisbane and debt servicing and run through some numbers – so you need to ask yourself some questions, like: How much are you purchasing the property for? What is your estimated rental income? What will it cost you in outgoing cashflow? How long do you plan to hold onto it? What level of capital growth do you need to make it worthwhile?
- Let’s say the initial purchase price is $550k – you would need to cover around $18k stamp duty plus a $110k deposit – so you need $128k of initial capital and you end up with a $440,000 loan
- You could rent this property out for $480 per week or $24,960 p.a. which after agent’s fees of 8% is about $22,963 p.a. in net rent – for outgoings, you have rates and BC which say are $3,500, landlord insurance at $1,500, other outgoings like utilities and maintenance at $2-3k p.a.
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Your total costs are about $7,500 plus monthly PI interest repayments of $2,050 assuming a 3.8% interest rate on an investment loan – so what do these numbers translate into: A net cashflow loss of about $9,140 p.a. – so you would need to put $760 p.m. of your own cashflow into maintaining this property – this brings up another question: is this feasible from your current cashflow?
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Also – what are you after if it is income then this property may not be for you – is it capital growth? Then do you expect this property to at least go up by $10k in value each year?
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These are all initial questions – but get a deeper understanding about the dynamics of property
- What affects capital growth? Interest rates, number of properties and demographics = supply and demand - If you do your research and come to the conclusion that it is Low interest rates and demographics – then you are better positions to answer the next question in critical thinking – are interest rates going to remain where they are or go lower to help
- Are apartments in the area susceptible to an increased supply: available land for development and the demand for this
- Another question to ask: What affects net income – interest rates and the property being tenanted and in demand – if interest rates go up by 1%, your net cash outflow increases from $9k p.a. to $12,300 p.a. or around $1k p.m. – so can you afford this? Also, is this property in an area that is highly demanded by those that rent in terms of demographics?
- What affects capital growth? Interest rates, number of properties and demographics = supply and demand - If you do your research and come to the conclusion that it is Low interest rates and demographics – then you are better positions to answer the next question in critical thinking – are interest rates going to remain where they are or go lower to help
- Once you have done this exercise and answered each question that comes to mind – time to evaluate –
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If it ticks all the boxes and you get the answers to satisfy your conditions – then you can make an affirmative decision – but another final question should always be: ‘is my capital better put to use elsewhere’? Which brings up an alternative
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Shares – I want to buy shares – Why? Again, making money isn’t a good enough answer – what do you really want from it?
- Reason for purchasing shares – capital growth and income through dividends – which one is more important to you?
- Do you know what you are doing? This is important – as shares can be rather volatile – if you don’t know what you are looking for with individual share purchases, is there a professional manager you can outsource your decision to?
- Do you need to diversify and outsource your investment decisions through purchasing an ETF or managed fund?
- Go through the numbers: Say you take the $128k of capital in the property example and invest it in a few ETF’s?
- Depending on the ETF, you could comfortably earn around $6,000 of positive income p.a. – this can be reinvested into the investment over time helping the investment compound
Really – it comes down to what you want to achieve and critically thinking through your decision
Critical thinking summary – Three stages – Identify the correct question, evaluate and make a decision
- Critically thinking is about asking yourself the important questions and answering them – then once you have your answers compiled – you can make a decision –
- Write each of these down – keep track on paper and not all in your head as this can lead to information fatigue
- Try not to get bogged down – it can be hard with information overload – but in a way this is a good exercise – it is practice – the more you practice this process the more it can be refined – helps to make quicker decisions and come to a conclusion
- It can be overwhelming at first but don’t let this put you off – think of it as practice - if you are having trouble – set a limit of questions – at 10 or 15 – if you reach this, then more on – taking no action can often be worse than being inactive
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury – In this episode, we will be looking at the future of property prices based around recent changes in lending assessment, bond yields and what this means for interest rates
- It comes as no surprise when I say that property prices have gone up a lot over the past 2 years – well above forecasts – at the same time, and in a causal manner, interest rates and bond yields have declined to record lows – but is the party coming to an end sooner than expected? As there are some emergences in the bond markets which may spell an interest rate increase ahead of schedule – putting downwards pressure on property prices -
- There is a bit to unpack here – do so in three parts – we will go through the current state of the property market – then what happened last week in the bond market in Australia – then what this means for central bank policy on interest rates
To start with - Looking at housing prices – Almost in lockstep – prices have increased at rapid rates across the world, reaching new heights in many cities –
- But rural and urban markets have shared in the spoils - which is noteworthy for two reasons
- First – lockdowns and movement restrictions have given rise for remote working – which has actually weakened the case for urban housing – but yet prices in urban areas continued to rise
- Second - housing affordability in cities was already heavily strained even before the latest irrational exuberance in property took hold - yet the lack of affordability of homeownership for large parts of the population has evidently not been an obstacle to price increases
- Why is this the case? Record low financing costs have increased borrowing capacity for property buyers –
- Plus – there is an entrenched expectation that most people hold when it comes to property in Australia – that is of long-term value gains which has made owning a home so appealing that the price level doesn’t seem to matter – FOMO – it can be hard to wait to buy, if you think that in doing so the prices will be 10% higher next year, as this is what you are used to seeing
- These higher prices have led to higher household leverage levels - as the current acceleration in mortgage volumes clearly demonstrates – Data from CBA shows that across the country, the new average mortgage across the whole of Aus (higher in Syd and Melb, lower in NT) stands at $580,900 – which is up by around 16%, or $80,000 over the past 12 months – is it any wonder why prices have gone up by so much?
- This has exacerbated worsening affordability, unsustainable mortgage lending practices, and a rising divergence between prices, household incomes and rents – all of which have historically served as forerunners of a housing crises
- But as long as financing costs trend toward zero, property prices, incomes, and rents can continue to decouple from the real ability of borrowers to cover these debts
- These have been trends just not seen in Australia, but worldwide - As a result, the growth of outstanding mortgages has accelerated almost everywhere in the last 12 to 18 months, and debt-to-income ratios have risen—most markedly in Canada, Hong Kong, and Australia
- Due to this - pressure is mounting on governments and central banks to take action – even before lockdowns - Lending standards were being relaxed due to ever declining interest rates over the past decade – Overall, housing markets have become even more dependent on very low interest rates, meaning a tightening of lending standards could bring price appreciation to an abrupt halt in most markets
- New entrants into the property market have to borrow increasingly large amounts of money to keep up with higher prices – or even people wishing to upsize to a new property - As a result, the growth of outstanding mortgages has been growing due to the relaxed lending standards and falling mortgage rates.
- Therefore - ever-higher property prices and leverage levels imply ever-higher risks due to the property market being under the spell of a dangerous narrative – that the party will keep going
- The main barriers for borrowing that most households face is now based around creditworthiness – i.e. how much people can borrow – so once that obstacle is cleared, coupled with the expectation of ever-growing house prices – this has exacerbated the FOMO making homeownership look attractive regardless of price levels and leverage that it costs
- This rationale may keep markets running for the time being – whilst interest rates are low - But it’s not sustainable in the long run. Households have to borrow increasingly large amounts of money to keep up with higher prices – resulting in higher levels of principal repayment each month – on top of the risk that interest rates rise
- Does all of this mean we are in a bubble? – looking at a paper released by UBS on the Global Real Estate Bubble Index - Price bubbles are a recurring phenomenon in property markets across the world – but the term bubble is a little tricky
- The term “bubble” refers to a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts – this is because all because the price of something increases massively, to almost unsustainable levels – it doesn’t mean that it is a bubble – because ironically it is only a bubble if it pops – if rates stay near zero, or even go negative and stay there, property prices can continue to climb
- But historical data reveals a pattern that exists with a bubble in the property market – the most typical sign is that of a decoupling of prices from local incomes and rents, as well as occurring at the same time as imbalances in the real economy, such as excessive lending and construction activity
- But again – even prices in Sydney are not considered to be in a bubble unless there is a turnaround in interest rates – otherwise the decade-long upward trend of house prices is likely to continue, given ongoing population growth
- But there are some risks to the property market now emerging – coming from APRA and the RBA
Over the past month - APRA has started trying to reduce lending risks – directing banks to tighten up their assessment
- Price growth has clearly outpaced local incomes, stretching affordability and thereby increasing dependence on easy financing conditions even further. The growth of outstanding mortgages is accelerating again, as households are taking advantage of historically low interest rates – even people who own property are refinancing to make renovations on their existing property – Therefore - A tightening of lending rules would likely result in a setback for prices.
- It is now recommended by APRA that banks increase their 'buffer' from 2.5% to 3.0% on top of their loan serviceability rate
- This is the assessment that banks take when you apply for a loan – they look at what you could afford based around this serviceability rate, not the current interest rates
- However - Only two years ago, APRA's loan serviceability floor was set at 7.25% - this was more or less a hard fix – but at interest rates dropped, pressure built to change the rules which took force in 2019 -
- Today - On a 1.99% home loan, a borrower would be assessed on their ability to repay the mortgage at an interest rate of 4.99% - the interest rate plus the new APRA buffer of 3.0%
- In reality - serviceability rates are also often calculated on standard variable rates, which are higher than discounted rates that most banks offer – but it is still lower than 7.25%
- This change is expected to reduce the borrowing power of property buyers by around 5%
- Therefore, using some simple maths – each 0.5% of serviceability rate equates to 5% of borrowing capacity – As an example, someone who could borrow $1 million under the old buffer could now only borrow about $950,000 – but now compare this to the rules prior to 2019 – if the serviceability rate was 7.25% compared to say a standard variable rate of 5.5% (2.5% standard rate plus 3%) – this is 17.5% more that people could still borrow, even after the tightening of the lending rules
- While the banking system is well capitalised due to their ability to bail in with equity or capital notes - increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building
- The expectation is that housing credit growth will run ahead of household income growth in the period ahead – this means that more tightening could come to help curb the level of leverage – where the buffer rates increases to 3.5% and beyond
- What is interesting, is that these moves from APRA came after a recent RBA's post meeting statement flagged the importance of loan serviceability buffers –
- Which brings us nicely to the new development with the RBA -
- It is now recommended by APRA that banks increase their 'buffer' from 2.5% to 3.0% on top of their loan serviceability rate
Looking at The RBA - have said they will keep interest rates on hold until 2024 – giving forward guidance to the market, that rates will be on hold until at least until this time – to achieve this in practical terms through monetary policy, the RBA has been helping the bond markets through market operations, purchasing bonds of the secondary market to keep yields at their current target rate for 3 years at 0.1% - by any other name this is called QE
- But going back to Thursday last week – Or on the 28th of October depending on when you are listening - The RBA made no offer to buy the next trance of government bonds – they declined to buy the April 2024 line of bonds as part of their regular market operation, even though the yields of these bonds were already above their target of 0.1%, sitting at 0.16% - This created a shock to the market – Central banks had given clear guidance that they would do whatever it took to keep the yields of these bonds in line with the cash rate – but all of a sudden, they reneged on their agreement with not a peep
- As expected - the market responded poorly – by dumping these bonds, resulting in the price dropping and pushing the yield up further to 0.30% -
- The market waited to see if this was just a blunder – or if they were waiting until Friday – Friday came and no purchase were made – so more of these bonds were sold off and the yields spiked even higher to 0.67%
- Remember that a yield is the % return based around the price of the bond
- The fact that the RBA out of the blue decided to not purchase these bonds, which are a core part of their stimulus programme – started stoking market speculation that there is going to be an early hike in interest rates than previously thought
- This failure to deliver on what the RBA has promise has fuelled markets expectations that rates will have to rise much earlier than 2024 – based around the current pricing – it appears that the consensus is that there will be a 50 basis points of tightening by mid next year, and 100 basis points by year end – so interest rates will be around 1% by the end of 2022 – rather than being 0.1%
- Offshore events added to the drama and probability that this may occur - with the Bank of Canada stunning markets on Wednesday by ending its bond buying altogether and flagging a hike as soon as April 2022. We also had many Central banks, including is New Zealand raising the reserve cash rate by 0.25%
- The RBA is now under intense pressure to do something at its monthly policy meeting at the start of next month – where they will either defend its yield curve target, soften it, or drop it altogether.
- The RBA currently aims to buy A$4 billion a week in bonds as part of QE programme – This was always going to be reconsidered in February 2022 – But this recent unexpected withdrawal from purchasing bonds could signal the end to this plan sooner rather than later
- This action signals that the first-rate hike back to 0.25% could occur sooner than later, compared to 2024 – followed by four more moves to 1.25% by the third quarter of 2024
- Overall – if any increases in interest rates occur, then it can be expected that these will be shallow and gradual based around a tightening cycle – it is unlikely that the RBA will increase interest rates to 1.25% in one go next year - given the elevated level of household indebtedness
- But this increase in interest rates ahead of schedule does put a potential downwards pressure on property prices
- Given that an increase by 0.5% in serviceability rate creates a reduction of 5% in borrowing standards – an increase to 1.25% for the interest rate results in around 12.5% less borrowing capacity – which means that the part may be over for ever increasing property prices – as people can borrow less and the costs to borrow become more stark
- but on top of this, an increase in servicing costs - If the average mortgage is $580,900 – then an increase of 1.25% results in an additional $7,261.25 p.a. in interest repayments – there are around 10.3m properties in Aus, and around 6m of these have a mortgage attached to them for which this average is based around – doing some rounding, that means that an additional $43.6bn will be spent on interest costs of owning a property
- This takes funds away from other spending in the economy and puts a downwards pressure on GDP spending
Summary –
- Property in Australia is being spurred by interest rates, no surprise here – due to the increasing amounts that people can borrow, increasing the capital available to big her amounts on property – it is supply and demand
- If the RBA fails to follow through with their commitments to keep the 2-year bond yields at 0.1%, instead letting this spike to closer to the free market rate of 0.67% due to not purchasing these bonds – This could mean that an interest rate increase is likely to happen sooner rather than later –
- If increases in rates occur before is anticipated, this will have major impacts on the market –
- Servicing costs of households will increase
- From an Asset pricing perspective – prices of property could decline – or at the best reach a stagnant growth until wages and immigration rates catch up
- The market is currently addicted to almost free money – needs this to continue for price growth to continue, if not the prices of assets would come back in line with the fair value that interest rates represent
- The current price of property is technically a fair value based around record low interest rates – if interest rates go up, then the fair prices, or market price, would go down for property – if rates go negative, then prices can continue to grow
- Will the increase of rates and the decline in property be this week – probably not – but can we trust when the RBA has been telling us? No - the forward guidance has been that they won’t increase rates until 2024 – either they will do this on the exact day these bonds mature – in April – or there is a chance that this occurs ahead of time –
- Either way – this is a warning – for those new home buyers – if you are purchasing for the first time – make sure you can afford repayments at a buffer of 1 to 2% interest rate above your current margin
- If these market predictions come true, it would dampen the potential price growth that property has been going through – so don’t be banking of some short-term capital growth from a property purchase – to purchase now and be able to accumulate equity quickly to upscale
- Based around the rough numbers from CBA – borrowing declines by 5% per 0.5% in interest rates – so prices have the potential to decline – putting pressures in LVRs
- For existing buyers as well – same thing applies – make sure your cashflow can afford the interest repayments – if anything, this is an opportunity to get ahead of mortgage repayments before the interest rate cycle reverses
- If these market predictions come true, it would dampen the potential price growth that property has been going through – so don’t be banking of some short-term capital growth from a property purchase – to purchase now and be able to accumulate equity quickly to upscale
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
https://www.ubs.com/global/en/wealth-management/insights/2021/global-real-estate-bubble-index.html
https://tradingeconomics.com/australia/2-year-note-yield
Welcome to Finance and Fury. Currently, the prospect of stagflation is being seriously debated by economists and policy makers across most economies – the big question is – will we suffer stagflation – and if so, how do markets react?
- The first stages of an energy crisis are currently in the making - In Europe - natural gas prices have tripled in the last three months – with rising petrol prices across the globe – even in Aus, petrol prices are up –
- Why do energy prices matter and what does this have to do with stagflation? Energy is an input into everything – transportation, manufacturing, even keeping office lights on – all of this flows through into increasing prices over time
- Coupled with this – annual CPI currently is sitting at 5.3% in the US, 5.8% in Poland, 7.4% in Russia and 9.7% in Brazil – even Aus is at around 3.8% - so all countries are sitting above their target rates – the countries suffering the most severe inflation are those suffering from supply shortages
- The major concerns are that these energy spikes in conjunction with supply shortages will lead to lasting inflation – and due to the potential of slowdown in economic output (which is also related to the supply shortages, leading to less economic activities) – economies have the potential to enter a stagflation situation
- Stagflation was a phenomenon that plagued the economies of the world back in the 1970s – you had an energy crisis, with soaring prices, which had flow on effects to every sector –
- You also had slowing economic growth, where a few quarters in the mid-70s hit negative GDP growth rates - and there were accompanied with higher levels of unemployment – and due to energy prices, massive levels of inflation
Defining stagflation – what does this actually mean?
- Relating the term stagflation simply to the economy of the 1970s is a little too simplistic – just saying that it is a time where there is inflation, lowering GDP, a wage-price spiral and high unemployment doesn’t quite define the issue at hand
- This is because the issue is, there is no hard definition of stagflation when it comes to the metrics involved with the actual definition – i.e. how much inflation needs to be present, and what does the growth rate of the economy need to be to equate to stagflation – so here are three broad definitions for stagflation that can narrow this down
- Growth around zero or negative, and inflation well above target
- Growth below trend and inflation comfortably above target
- a strong slowdown in growth and strong pickup in inflation
- Out of these, instead, what if we say that ‘stagflation’ is a period where inflation expectations are rising above the central bank target rate and growth is slowing and is below trend (i.e. expected to drop below growth forecasts)?
- This is a softer definition and much easier to apply – if inflation reaches a rate of above 3% and is expected to climb higher, and economic growth, as measured by GDP is forecasted to be 3% but turns out to be 2.5%, i.e. the forecasted nominal rate – then do we meet stagflation? I would say that this would be a situation where an economy would be in a stagflation environment
- There’s just one problem: when compared to the economic environment of the 1970s - looking at the current state of the economy, things are a little different
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Where then do markets actually sit? Look deeper at inflation expectations and GDP growth
- To start with – looking at the US – inflation is high – at a 13 year high at around 5.4% - However – the US manufacturing Purchasing Managers' Index(PMI) has risen over the last two months whilst inflation rates have remained the same over this time period
- The PMI is an indexof the prevailing direction of economic trends in the manufacturing and service sectors – if this is on the rise, then it is expected that the costs for manufacturing and services is expected to increase – this leads to further inflation expectations down the road
- In Australia – The PMI has dropped heavily since July – so we seem to be doing better than the US – with lower potential inflation outbreaks
- To start with – looking at the US – inflation is high – at a 13 year high at around 5.4% - However – the US manufacturing Purchasing Managers' Index(PMI) has risen over the last two months whilst inflation rates have remained the same over this time period
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Scenarios of slowing growth and rising inflation clash with most forecasts - recent moves in inflation expectations, especially in the US are a bad situation – but growth doesn’t seem to be slowing at this stage – especially when compared to how the 1970s played out
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Over the past 18 months - GDP growth rates have gone through negative downturns – most western economies saw around three quarters of GDP growth rates – but will this continue?
- Well no – they rebounded rather quickly – US GDP dropped by around 9.1%, then sat at -2.9% and -2.5% over the next quarters respectively, but then rebounded to 12% growth – this 12% is a rebound from the bottom – so will calm down in terms of growth rates – but what is more important is the nominal level of GDP – this is sitting at about $20.9trn, from the peak in 2019 of around 21.4trn – or a $500bn loss
- Australia’s GDP actually peaked back in 2012 at just shy of $1.6trn – crashed by 2016 – then recovered – but still lower at about $1.3trn
- But the question is, will growth rates revert back to negative – or below forecasted growth?
- Well no – they rebounded rather quickly – US GDP dropped by around 9.1%, then sat at -2.9% and -2.5% over the next quarters respectively, but then rebounded to 12% growth – this 12% is a rebound from the bottom – so will calm down in terms of growth rates – but what is more important is the nominal level of GDP – this is sitting at about $20.9trn, from the peak in 2019 of around 21.4trn – or a $500bn loss
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It doesn’t appear to be the case at this stage – not when growth forecasts have been slightly downgraded – to explain this further – if say you expect annual GDP to be 1.5% p.a. and it grows by 1.6% - this is a great result – because it is above forecasts – but is it really? Not if inflation is around 5% for the long term
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In Australia – Growth has rebounded after a negative growth period – dropped to negative 6.2%, then sat at -3.7% and -1% over the next quarters respectively rebounded to 9.6% in the second quarter of 2021
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Where we are sitting – if growth can pick back up – and maintains a positive position – and the last quarter of rebounded growth wasn’t just a once off that helped to mitigate the negative period of growth – then the only concern is inflation, not stagflation – but the risk to financial markets still remains – But many economists predict that growth with stagnate from here - stagflation is economists’ base case expectation - even though many have cut their GDP forecast while hiking their inflation outlook –
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Because to add another element to this issue - Asset pricing also couldn’t be more different between now and the last episode of stagflation in the 70s
- When looking over the 100 years – ever since the Fed was created - the 1970s represented the lead up to an all-time high for nominal interest rates that occurred in the 1980s - and an all-time low for equity valuations – had nominal rates in the US
- Comparing this to the markets today – we are at all-time lows when looking at both nominal and real interest rates – whilst witnessing all-time high valuations for almost every asset class – property, equities, fixed interest, even commodities – gold, copper, etc.
Historically - How do shares perform during stagflation – Spoiler alert: it isn’t great
- in situation where stagflation does emerge – you seeweak historical performance of most equities – this is why even the term stagflation can freak out investors
- This being said - equity investors who are active today have likely had little experience with stagflation first hand – it would be rare to find an active investor who was participating in markets back in the 1970s -
- since 1960 – there have been 41 quarters (17% of this time period) that have met these criteria, but the vast majority of those occurred between the late 1960s and early 1980s – since the 2000s - stagflation has been virtually non-existent
- Over this time period - the S&P 500 has generated a median real total return of +2.5% per quarter – however in these stagflation quarters, the average return per quarter fell to -2.1% - This is actually worse than the returns when you had either weak economic growth or high inflation by themselves
- Most of this weakness during stagflationary environments has been attributable to pressure on corporate profit margins – due to inflation, declining profit margins and real earnings have been incurred, which indicates that companies struggled to raise prices quickly enough to offset rising input costs - P/E multiples have also declined modestly during stagflationary periods alongside rising interest rates.
- Another issue with the market compared to the 1970s and now is the amount of debt that corporations have – It was hard to try and find accurate data on this going back this long, best was the 90s – but the BIS did release a paper showing that as a % of GDP, corporate debt in the US has gone from about 40% to 80% from 1970 to 2020 – in addition, household debts are through the roof -
- Why does this matter? inflation is already showing up and impacting monetary policy.In just the last three weeks, many central bank rates have increased their interbank cash rates - 25bp in New Zealand, 25bp in Russia, 50bp in Peru, 50bp in Poland, 75bp in the Czech Republic and 100bp in Brazil – beyond NZ, each of these countries are already suffering high levels of inflation
- since 1960 – there have been 41 quarters (17% of this time period) that have met these criteria, but the vast majority of those occurred between the late 1960s and early 1980s – since the 2000s - stagflation has been virtually non-existent
- One final reason why markets can take a downturn during stagflation periods could be due to the wealth effect – i.e. not just economic growth declines but also the declining growth of household wealth – this can become its own self-fulfilling prophecy – if people are expecting tough times, or going to need additional cash/funds – they sell assets – which drops asset prices
- Household net worth has grown by a median real rate of 0.5% per quarter since 1960, but just a 0% rate during periods of stagflation.These periods have also been associated with declining household allocations to equities, helping explain the weakness in equity valuation multiples. Home prices have typically declined in real terms during stagflation while gold has appreciated.
Who are the winners and losers during stagflation?
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Nobody is really a winner in this environment – the population suffers due to monetary policy, the prices of goods increasing and growth slowing, leading to potentials of job losses
- When looking at shares – some perform better than others - Who are the winners in this scenario
- Looking at sectors - Energy and Health Care have typically generated the strongest returns during periods of stagflation. That may explain why during the past month, Energy has been the strongest sector in the market, rising by 14% alongside an equivalent surge in crude oil
- Healthcare may just be a coincidence – or simply be able to reprice better than other sectors – but energy makes a lot of sense – when energy prices go up in stagflation environments – energy companies can made additional revenues – therefore a good hedge has been energy providers in this environment
- Who are the losers - Industrials and Information Technology have generally lagged most during stagflationary environments - IT sector is less cyclical now than it was during the stagflationary years of the late 1960s to early 1980s due to the compositional shift toward software and services firms. Today, however, the sector’s massive long long-term growth profile has given it a longer “duration” than most other equities, making it particularly sensitive to real interest rates
- It is estimated by investment banks like Goldman that a 0.3% increase in the cash rate would knock some 15% off tech stock prices
- For industrials - construction and engineering, infrastructure, transport and commercial services – many of these are sensitive to interest rate costs due to financing for capital expenditure
- When looking at shares – some perform better than others - Who are the winners in this scenario
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Both of these sectors are sensitive to interest rate rises which would occur if central banks aim to combat inflation
The biggest question when it comes to stagflation – will the high inflation be temporary? It is almost a given that growth will be low – low in the terms of nominal rates – but if inflation is too high, then real growth may be near zero or negative
In summary – The market is focused on stagflation; it just hasn’t quite decided what that term really means
- Where we currently stand – many view the surge in energy prices as temporary, and that the most comparable period to the current stagflationary scare is more comparable to 2005 when CPI hit 3.5%, energy prices were booming and Stagflation was in the news a lot – it even graced the cover of The Economist - These fears eventually passed as growth rebounded and inflation moderated - so 2005 may provide a useful reference point for a scare that comes far short of the 1970s
- My "gut feel" is that while risks to financial markets are high, due to monetary policy responses, especially on the inflation side, the phrase “stagflation” is being used too aggressively at the moment – time will tell
- We don’t appear to be in this sort of environment – the economy isn’t looking great – many assets are overvalued – growth is lower than the average of a decade ago, and inflation expectations are rising –
- But the risk of stagflation don’t appear to be present at this stage looking forward over the next 12 months
- If you are concerned about stagflation – the best play historically has been energy shares and precious metals, like gold – this isn’t advice – but just general information based around historical occurrences
- But the trouble with energy is that it is cyclical – once the fears of stagflation blow over – or even if stagflation hits – once the decline to the market takes place, then energy shares tend to lag the next cycle of the market
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. I was looking at an interesting survey that is regularly conducted – so in this episode What do investment managers think the top risks to the markets are?
- This is a survey that Deutsche Bank regularly does where it surveys investment managers and Wall Street participants –
- The results help to gives some insight to the thinking of portfolio positions from those that control some of the largest levels of money flows in the investment landscape –
- This is interesting because of what actions investment managers take in response to their predictions – if they think markets will go down, they might be slightly more defensive in their allocation – or sell off some of their higher growth holdings – resulting in a decline of those shares - What happens to the price of assets on markets often occurs ahead of any event materialising – prices move at first due to the anticipation of an event materialising
Looking at the DB survey - One of the questions that the 600 participants were asked: “Which of the following do you think pose the biggest risks to the current relative market stability?” – where they had 13 answers in total to choose from – These are not in order – but I will list all 13 out and let you think about what you think the biggest threats are to financial markets and see how it stacks up against the predictions of wall street
- Domestic policies (such as tax or spending that governments make) – This partially relates to Fiscal policy – the policy that governments make, how much to tax people, what stimulus packages are taken, if business are to be shut down due to lockdown restrictions
- Worries about the debt burden – This is the risk to domestic governments, particularly in the US that the increase in the debt has on markets – can the government repay their debt obligations?
- Geopolitics – This is international politics which could affect markets – this ranges from hot wars, such as if a war between the US and China breaks out over Taiwan – which is very unlikely – all the way to a tariff policy on commodities
- Worries about longer term structural consequences of the covid shock – supply issues from government shut downs
- Waning vaccine efficacy – this can be a risk to markets as it can spell further government shutdowns and restrictions
- An uneven global vaccination campaign and economic recovery – this relates to countries having different policies to one another
- New variants that bypass vaccines
- Tech bubble busting – FANG shares and other large tech companies which make up a large portion of markets like the NYSE and Nasdaq collapsing – this is possible when looking at their PE ratios
- Strong economic growth failing to materialise or being very short lived – Policy makers have forecasted good growth of GDP coming out of a slump in GDP – this has been prices into the markets, so if it doesn’t materialise then markets can negatively react
- A Central bank policy error – For example – not increasing interest rates when they should – continuing QE longer than necessary – tightening too quickly
- Fiscal policy being tightened too quickly – the stimulus measures being reduced too quickly
- Higher than expected inflation/bond yields – inflation materialises at a higher rate than anticipate – and bond yields start to rise – which means their prices have collapsed
- Other – could be anything else
So what do you think? – No right or wrong answers – the results are simply the opinions of the 600 survey participants
- Is it Covid related – with vaccines not working as promised, or a new variant coming out?
- Is it due to geopolitics, or domestic policies, like a debt burden?
- Or is it central bank related, with policy errors or fiscal policy being tightened too quickly?
- Or is it inflation and bond yields being higher than expected
The poll shows that it appears that the fears from government responses to covid is officially over - According to the latest monthly survey of 600 global market participants conducted by DB - for the first time this year, the biggest perceived risk to markets is no longer government responses to covid. Instead, the top three risks are:
- higher than expected inflation and bond yields – This is the highest by any margin – 74%
- central bank policy error – where a CB may tighten too quickly – i.e. increasing interest rates rapidly to combat the number 1 perceived risk of higher than expected inflation
- strong growth failing to materialize or being very short lived (i.e. stagflation and/or recession).
- These three are rather related – in reality –
- Inflation materialises – with no growth – such as a stagflation event – then central banks may respond but make an error – then this exacerbates the issues
Overall – higher than expected inflation/bond yields are the biggest perceived risk by professional investment managers – but the flow on effects from this are really what matters
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So lets break these three down further – looking at what wall street anticipates from here
- The most likely catalyst for the coming correction is in the form of higher interest rates – higher than expected at least – coming from a shock to interest rate rises that are out of cycle or not foreshadowed in the forward guidance
- Or at least that's what this survey suggests – when asked “with regards to 10 year US treasuries, will the next full 25bps move be higher or lower than current levels?” – the vast majority, or 84% of survey respondents expect the next 25bps move in 10Y yields to be higher, and just 11% lower.
- In reality though - only 5% of the respondents were honest saying that they don’t really know –
- DB then asked respondents if they believe the policy error for major central banks - Fed, ECB, BOE - is going to be too dovish or hawkish
- Dovish refers to keeping policy too loose for too long – such as what has happened for the last 11 years in the USA – and may other countries in the world
- Hawkish refers to being too hard in a short period of time with policy – such as tightening too quickly
- The most likely catalyst for the coming correction is in the form of higher interest rates – higher than expected at least – coming from a shock to interest rate rises that are out of cycle or not foreshadowed in the forward guidance
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The risks were seen as high everywhere but the Fed/ECB were seen more likely to keep policy too loose with the BoE expected to err on the hawkish side.
- Dovish – 42% for the Fed, 46% for the ECB and 20% for the BOE
- That they will get it right - 24% for the Fed, 26% for the ECB and 20% for the BOE
- Hawkish - 33% for the Fed, 21% for the ECB and 45% for the BOE
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So overall the consensus is that the US and EU is likely to continue to have low rates when compared to the BoE –
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When combining two of the top three results – that is Looking at the combination of higher inflation and lower real growth – i.e. stagflation - the next question is “what are the risks of stagflation over the next 12 months according to your definition?” the concept of your definition is an interesting one – as technically there is a fluid definition of stagflation - where there is no overwhelming consensus definition for "stagflation" based around the levels of growth and inflation –
- I.e. does a 3% inflation with 2.5% GDP growth equal stagflation? Technically yes – but this is pretty normal for some western nations and wouldn’t be of concern
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For now – lets look at three simple categories – all of which can technically meet some definition of stagflation
- A strong slowdown in growth and a strong pickup in inflation – 25% of participants agreed with this definition – with most expecting a very high or high chance of this occurring in the UK – not as much in Asia or the US – but 40% chance in EU
- Growth around zero or negative and inflation well above target – 45% of participants agreed with this definition – again with the higher chances in the UK But very low chances of around 15% in Asia and 20% in the USA -
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Growth below trend and inflation comfortably above target – 30% of participants agreed with this definition – again the UK was the stand out with 75% of the respondents believed that that this was very high or highly likely
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When looking at inflation expectation – the survey asked “the fed currently believes the recent increases in inflation are largely transitionary. Which of the following statements most accurately reflects your view?”
- Virtually all transitionary – 2% - Mostly transitionary – 62% - Mostly permanent – 31% - Virtually all permanent – 3% - Don’t know – 2%
- This is an interesting result – as the answer to this question all depends on how you view inflation – the fact that we get 5% inflation this month – but then inflation goes back to 2% next still means that whatever inflation has been incurred is still permanent – unless we get deflation the following month – therefore – 100% of respondents should respond with ‘virtually all permanent” – but what they are referring to is the % increase over time – is 5% permanent or will this go back to 2.5%? This is what the respondents are answering
The final question of relevance – and what is most important to investors – the end result of market prices – “in your opinion, do you think there will be an equity correction before the end of the year?”
- When asked if there will be an equity correction before year-end, only 29% said no, while solid majority, or 63%, expect a drop between 5 and 10% before year end.
- Just 8% expect the coming drop to be bigger than 10%.
- Then 29% think there will be no correction of magnitude – However market sentiment has changes slightly over the past month since September – Going from 58% to 63% for those that market will decline by 5-10% - but then those that think more than 10% has gone down, -10-8%
So in summary – did your views line up with wall street?
- Wall street think the biggest risk to markets are
- higher than expected inflation and bond yields – This is the highest by any margin – 74%
- central bank policy error – where a CB may tighten too quickly – i.e. increasing interest rates rapidly to combat the number 1 perceived risk of higher than expected inflation
- strong growth failing to materialize or being very short lived (i.e. stagflation and/or recession).
- Most think that the biggest risk is increasing interest rates – with transitionary inflation
- And that markets will have some mild declines between now and the end of the year – dropping by 10% at max, given markets have already dropped by 5%
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. In this episode we will be looking at the Property market in China and focus on the Evergrande developments – in particular if there is actually a timebomb starting to surface – and look at the potential contagion risks to the rest of the world – such as the Aus and US
- Many in the press are comparing what is happening to Evergrande as another Lehman’s moment – which was one of the defining collapses of a financial institution that lead to the flow of effects culminating in the GFC – it is understandable that the media takes this route – Lehman’s is a recognisable name and fear and doom scenarios generates more clicks and sells more adds – but is this worst-case scenario true? Is the collapse of Evergrande really going to lead to another global financial crisis?
- A few weeks ago – we covered where the next financial collapse is likely to come from – between the USA and China - Two factors were the focus – leverage and contagion risks
- Looking at leverage - Credit growth is a major risk to almost every market – both from bonds from investors and lending from bank of financial institution borrowing – both of these are relevant to the private sector in China
- Credit growth is even a concern in Australia – APRA worried about banks and lending – they have increased their servicing cost by 0.5% - worried about credit growth vastly outpacing income growth
- But the major focus for any systemic issue is the contagion risks – if one company defaults, does this create a GFC, or just a collapse of an isolated entity – The loss potentials are substantially different between both scenarios – one is investors in a company losing money versus every investor globally losing funds due to collapsing markets world wide – the degree they collapse also is different
- If Evergrande fails – what does this matter? At this stage - The irony of the contagion risks is from the increased news coverage that this topic is being granted – if a topic is covered in the news everywhere – this creates uncertainty and fear – investors can panic – this creates real market declines, so the risk of market declines become a self-fulfilling prophecy – even me covering this topic can create some level of risk aversion, which may cause people to sell off investments – but is there more than just the normal fears in the markets from media coverage occurring?
- Looking at leverage - Credit growth is a major risk to almost every market – both from bonds from investors and lending from bank of financial institution borrowing – both of these are relevant to the private sector in China
To start with - What is happening in China – We need to look at their property market, or more specifically the debt that property developers hold – especially in relation to Evergrande and Chinese economy at large
- Chinese economy - the rise and fall of Evergrande is tied into the economy of China quite heavily –
- Evergrande is China’s second largest property developer – but this ranks around 147th in the world – but it is the most indebted property developer in the world – which should start to ring some alarm bells – it’s on balance sheet liabilities amount to around 2% of Chinas GDP – off balance sheet – this could be higher – and likely is
- A company in isolation with debt isn’t much of an issue – but a company with too much debt can be a problem – In isolation this isn’t too much of an issue – if the company defaults but business in other sectors of the economy continues as normal then markets may go down a bit but then continue as normal –
- but what if this one company is a sign of greater systemic issues - where most of the companies in your country in this sector have the same problems – that of having too much debt that they are likely to default on? Especially in the property sector –
- The BIS released a paper showing that Chinese non-financial companies have 160% Debt to GDP, versus in the US where it is about 80% - so double in China compared to the US – Property also has an overweight on GDP compared to the US
- It is estimated that property development makes up around 25% of China’s GDP – this growth has been fuelled by Debt – this is a major issue for the CCP -
China property market – the history over the past 20 years
- The increase in demand for property and the increase in pricing has been fuelled by massive amounts of urbanisation – rural workers/population moving to cities for work and a better income for their families
- High demand for properties in desirable cites has massively inflated the property values in these urban environment – developers often sell every property in a development in advance of the construction even starting
- This has led to lower quality – contractors skimming on materials to lower costs – where constructions can actually collapse in a few years after completion
- Prices to income ratios – results in a situation where you have generations of people living in one apartment trying to repay the loans
- We think that Australia is bad – and it is – but many major cities in China, such as Shenzhen see 43 times the average household income in property prices – compared to Sydney which was around 13 times at the peak of the market
- Speculation – large increases in property prices saw massive speculation in developers – if you think that the property that you will construct today can lead to a 50% gain in the next year or two – then you will likely borrow large chunks of money to bank on this trend
- Lead to many apartments not being rented, and purchasers buying up more than one property – but the limit per family is capped
- The population is also limited in what they can invest in – so property is where most of the upper middle class and beyond put their life savings
- Large property developers are politically connected – But this has created moral hazard – every loan given, or bond investments have been made based around how likely it is for the government to bail out these developers
- Rather than on their ability to meet the debt repayment cashflow
- Moral hazard is a large component of any investment or economic decision – as an example – say you have an expensive car – now in one situation you have comprehensive insurance and in another you have no cover – in which situation are you likely to drive a little more recklessly, or park this in a car park unattended overnight?
- Same goes for insurances – especially if you are forced to have insurances – you may as well use it for your premiums – such as health insurances – But what if we are talking about a government backing debt for bail outs – and that is the expectation of the markets – this creates a moral hazard -
But China realised they have a debt problem – as well as a moral hazard problem - so policy makers tried to reign this in – focusing on moral hazard first and foremost
- Policy changes – the CCP put together that their economic growth is mostly paper/debt based – where the growth they are receiving in GDP is funded through borrowing from property expansion – which is not sustainable in real terms
- They want to transition their economy to more long-term sustainable growth – real estate is the most important sector in their economy at the moment – but this is debt reliant – they prefer real returns – which is why you see a push towards resources and other manufacturing sectors – but a real issue in China is the affordability of property
- Look at government policy across the world – they always say that they promise to tackle issues of property affordability – but then comes a situation where prices are starting to decline – what do governments do? Create policies to help prop prices up to avoid a decline which could have further reaching issues – governments don’t want bubbles, but they don’t want a collapse
- China appears to be the first government in a long time to not follow this pattern – they are trying to change moral hazard – and expectations in the market -which can easily lead to collapses in the property sector
- Rather than bail out Evergrande – which would be easy for the CCP – it appears that at this stage they have decided to let this company deal with their own problems
- This is technically how it should be – but it is rare to see this response
- I think this is mostly due to their Hard lines polices – trying to reduce the economy reliance on debts – They actually introduced three hard line policies on property developers in Aug 2020
- These are hard limits on property developers – relating to their liability to asset ratios, net debt to equity ratios, cash to short term debt ratios – all of these are important when it comes to developers who fund their projects using debt now for equity in the future
- Had an instant effect on property development firms – no longer could you raise capital through debt funding as most developers were above the allowable ratios
- What made this is worse, is they had to reduce their debt levels – to do so they were quickly forces to sell down assets and taking losses – this caused prices of property to fall, so the valuation on their assets started to go down
- This made it worse - These losses make their ratios look worse – making these companies need to deleverage further – this can lead into a downwards spiral
- These are hard limits on property developers – relating to their liability to asset ratios, net debt to equity ratios, cash to short term debt ratios – all of these are important when it comes to developers who fund their projects using debt now for equity in the future
- On top of this – because the prices of property started to slow as well last year – to make more pre-sales – Evergrande needed to offer some discounts on the pre-sales – this lead to less liquidity available – less liquidity meant they don’t have the money to fund debt repayments as they come due
Evergrande itself – In the property sector – the company acts like a conglomerate
- Property development, property management, and Wealth management products –
- They are looking to sell of property management – recoup $5bn
- But wealth management products – WMPs may be a concern – this is around $6bn –
- Small number – but investor fury has made this more of a social issue
- But these investors were told they would get a guaranteed 12% return on their investment p.a.
- This money was used to help close funding caps that the parent company had in construction –
- This is fine, as long as the returns on the property sales in the year are more than 12% to repay investors -
- But for a time they weren’t – this meant that new investor flows had to be used to make repayments to existing investors – in the process there was less to help close the funding gap –
- But then add onto this the slump in sales – then you start to have a real issue – as more and more new investor flows need to be used to repay existing investors – which is the basis of a ponzi scheme – but moral hazard still existed – investors had the certainty in their own minds that this was a sure bet – as any defaults would be covered by the government
- The issue is based around the moral hazard – investors thought their returns were guaranteed with little risk - but where it can get bad is contagion risks
Fallout effects – will come from two areas – property domestically in China – which will spread out and have their own issues – as well as contagion risks throughout the economy and throughout the world
Property prices in China –
- Can see a decline – if they liquidate and need to sell off the property development – could see a fire sale of assets and property prices decline
- The fact they are trying to sell quick is bad for property – fire sales see massive price reductions
- Domestic fallout –
- People who have placed deposits on properties that may never be built – lose those funds People who have invested in the WMPs – will also lose money – you will start to see some social issues
- This will reduce the trust in property investment –
- Evergrande employs lots of people – around 4m – which would be huge for a country like Australia – but out of a population over around 1.4bn is about 0.29% of the population
- People who have placed deposits on properties that may never be built – lose those funds People who have invested in the WMPs – will also lose money – you will start to see some social issues
Contagion risks – who owns the debt and are there any derivatives on this?
- Look at the debt - $300bn of debt – bonds issued – estimated that only around $20bn of this is overseas debts – the rest is domestic – these foreign bonds are priced in at around 25-30c on the dollar – depending on their maturity
- China is a large economy – it can pretty easily soak up these losses – even though $300bn is a large amount of debt to cover
- This is owned across 128 banks and 121 non-bank institutions
- Investment managers – investing in risky emerging market debts - Ashmore group, BlackRock Inc, UBS and HSBC hold $450m, $400m, $300m, and $200m, respectively – which isn’t too much for these groups to absorb
Best case scenario – Evergrande will be allowed to collapse – the parts will be bought up by other developers in the nation at a fire sale rate – i.e. getting a good discount
- The People Bank of China will also likely buy out some of the debt - Like JP Morgan Buying Bear Stern back in the GFC – with help and oversight from the FED – but this doesn’t solve all the problems
- But the issue comes back to the moral hazard – the CCP wants to minimise speculative risks
- Evergrande by itself defaulting isn’t a risk for markets – but it does spell some risks – of over leverage throughout the system – if many other developers start to see the same systemic issues of overleverage and issues in meeting their debt obligations, then you get into further trouble
- Fantasia – another property developer failed to make a bond payment - missed $315 million in payments to lenders – created further fears that financial strains in the country's outsized property sector are spreading beyond the troubled Evergrande conglomerate. S&P and Moody's slapped "default" credit ratings on Fantasia
Lessons to be learnt –
- The moral hazard and the belief in a sure thing – the belief before the GFC is that debt on peoples homes was a sure thing – not many people would default all at once, so package up 1000s of mortgage holders debt and make bets on this
- But due to this belief, lax lending standards were employed – this then turned out that due to the belief that things couldn’t go bad, resulted in them going bad due to too much risk
- How this is different from the GFC – Derivative used in making bets on the property market
- Credit swaps, derivatives on CDO – this doesn’t seem to be occurring in China – and the banks’ ability to eat losses on the debt isn’t too great to not be able to recover
- Lehman’s collapse was considered to be the plug of the dam being pulled in the GFC – property prices dropped, people defaulted on debt then Lehman went into default – but only due to their exposure to complex CDOs and derivative positions –
- If these don’t exist on Evergrande – which it appears at this stage they don’t – then there is less contagion risk –
- But who knows – there is no way to tell until it is too late – however, there hasn’t been much in the way of transaction in credit default swaps in banks like HSBC which have greater exposure to the Chinese debt markets
- It took Lehman over a year to default and go bankrupt – so time will tell how this pays out
Where things could get worse – is if more developers start to default – showing greater systemic risks
- My gut feel is that the China growth from property is coming to an end –
- This will likely have larger effects on the commodity markets – such as iron ore – than it will on the global share market in the short term – but if their property market starts to decline due to defaults on developers and a lack of trust – this leaves their economy very susceptible
- Your guess is as good as mine as how this will turn out – we will keep an eye on this
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. In the last episode we talked about finding meaning in life, even in the worst of possible situation. That topic leads in nicely with purpose, which we will be covering in this episode.
- As Finding a purpose gives life additional meaning – and having fulfilment in life through having meaning helps to fuel a purpose – which further fulfils meaning – quite a symbiotic relationship – But to build on this purpose and work towards this, goals are also important -
But Finances are important – which can also be seen in the concept of resources – as cash/money is a medium of exchange to purchase resources, or other investments – either way, having infinite resources or money without purpose or meaning is worthless –
- What is the point of having millions of dollars if you have no reason to wake up every day?
- Most of us don’t find ourselves in this position – but if we have no financial means, or resources, then fulfilling our purposes can be harder – finding meaning can still be achieved if you have no money or place to live, but unfortunately, the way that society is structured does require some means of resources to cover the outflows for living – even if you buy some land outright, you still need to pay rates
- So, what financial goals are you working towards to have enough to achieve your end goal – as well as maintaining purpose and having meaning in life?
- This is not just about being able to accumulate investment or make money, but be happy along the way and feel like you are fulfilling your purpose and find meaning is waking up every day –
- The journey to financial independence is a long road for most people, so having something to work towards and enjoying the journey allows you to actually wait it out – rather than work for 2 years and then start to hate your working life – life is about the journey, not the destination
- How do you go about this? Find your purpose – and find some career where you can generate an income to direct toward financial resources to build towards financial independence – how do you achieve this? Get some goals in place
- This is not just about being able to accumulate investment or make money, but be happy along the way and feel like you are fulfilling your purpose and find meaning is waking up every day –
First step, if you don’t already know what it is – is to figure out what your purpose is – this is the path that will give you guidance
- It is important to find your purpose as if you don’t know what you want, it is impossible to get it.
- ‘what is the meaning of life?’ – I actually see this as a rather silly question – as there is no one overall meaning to life, if this is considered to be our collective existence, except to exist and eventually die
- But there is a meaning to your life – at the individual level and family level – we each have desires and goals, which go towards forming our own individual meaning towards our existence – Therefore, you just need to find your purpose and live up to your potential in achieving this – this actually goes back to last week’s episode – because state and politicians do try to give the perception that there is a collective purpose for a whole society that will fill everyone with meaning -
- you need to decide what you want and what is important. You have to Be clear why you are here!
- To do this – you have to look at what you want – not what others want
- When we are younger and getting out of school, we are often looking for meaning and some direction in life – we have very strong influences from either our school, parents or friends in what direction we take
- At lot of this has to do with programming in life – where we simply follow in the path of what is easily laid out in front of us – so this slowly changes our real purposes to conform to the new social norms or what is set out in front of us. This leads to taking actions in life which will get the approval of others rather than ourselves
- We are told from childhood the word ‘no’ and ‘don’t do that’. While this was said to help protect us, it has led to crushing dreams.
- While conformity has been important in evolution (by not sticking out and getting ousted by the tribe), it has lead into conforming to a normal level of life or living someone else’s dreams.
- This is why you need a reason to get out of bed in the morning which is your purpose. If you have this purpose, something to work for, you will be successful and happier along the way.
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So – how do you find out what your purpose is? – if you don’t know, to figure this out requires a bit of brain storming.
- It requires the creation of a list – where you need to write some lists of things that are important in your life. At financeandfury – there is a workbook which can help – but this has 3 columns:
- I care about, What I am great at, I love doing – try to write 20 things for each: total of 60
- The more the merrier – doesn’t have to be something big, more = more brainstorming
- beside each one put a plus or minus against it – if you really enjoy or are great at = put a plus against it.
- something that you just put in there to make up the numbers, put a minus sign against it.
- From those from each list – select the top 2 with plus signs against them – put them in the below this
- This will leave you with 6 things in total.
- You might find that the things you are great at are the things that you love doing, because you care about them!
- common to see this sort of overlap as generally, if you enjoy doing something, you are normally pretty good at it!
- This is how you find your purpose in life. It will take some playing around with to get right. Be honest with yourself.
- example: care: Making a difference in lives, great at: personal finance, I enjoy doing: Teaching
- Different iterations of this – but form a purpose statement – once sentence - where you use your skills at what you are great at, to do the thing that you care about, in a way that you enjoy doing
- It requires the creation of a list – where you need to write some lists of things that are important in your life. At financeandfury – there is a workbook which can help – but this has 3 columns:
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Making a difference in peoples lives through teaching and advising people about their personal finances.
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It really is that simple and needs to be refined over time, but what is really important is action. Taking action towards your purpose will be the difference between following your purpose versus following someone else’s.
Once you have your purpose statement, you need to know what you want out of it: getting the vision right and start achieving it! Time to build a vision of your ideal life - Having a purpose is the reason to get out of bed each day.
- Having a vision, allows you to complete a picture of your ideal life.
- A vision is an ideal picture of how you want your life to look. It is what you want the future to hold for you. But you have to make it happen! – Negotiating with your current self for your future benefit
- Your vision should show you where you want to head and provide some motivation and focus to help achieve this. Life happens, there will always be setbacks but the best way of overcoming setbacks is keeping your long-term vision in mind and working towards this.
- So how do you build your vision? - first step is to make three lists,
- What I want: This list is for the material things you wish to have in your life. From houses, cars, even owning a business.
- What I want to be: This list is for the type of person you want to be, from happy and positive to being a leader in your field.
- What I want to achieve before I die: This list is practically a bucket list where you can think about the things that you want to achieve in life.
- Under each heading, you need to list 20 things for each one so once you are done you should have 60 in total.
- hard to come up with 20 things for each, so listing small things or expanding on larger ‘wants’ can help. So instead of just saying ‘I want to be successful’, list out individual items which mean success to you.
- Once you have a list of 60 things - sort through your lists and placing each in to seven areas of your life.
- This covers off 7 areas in total. For each one you need to have a clear picture of what each area should look like!
- Work/career – What are you doing for your career? Is it something that you enjoy? Is it something you can have freedom? Can you make a lot of money from it?
- Finances – What does your financial situation look like? Are you out of debts? Do you have a portfolio of investments, paying you an income? This is the key to financial independence after all. You need to have enough in finances to give you all the free time in the world to focus on everything else.
- Free time/Recreation – What do you do in your free time? Are you going on holidays each year?
- Health/Fitness – What is your ideal fitness? Are you 80 still in great physical and mental health?
- Relationships – Marriages, kids, parents, everyone etc.
- Contribution to the world – Do you give back to society?
- Personal goals – What do you want to do before you die? Can fit into the previous – so merge
- Remember, that your personal vision is where you want to be – so you need a clear picture on what it looks like, what it feels like, you should almost be able to taste it!
- Purpose is what drives you towards this – but goals set out the actions on what to take
Goals - hone your inner GPS – help to fill in the gaps and reverse engineer some steps to build your ideal life
- Goals are the ‘building blocks’ of your vision - want to lose weight, start saving or investing?
- these aren’t really goals - they are just good ideas.
- arbitrary goals that don’t align up to our vision typically fail to be achieved – no motivation through resistance
- This is why having your vision and knowing what you want is so important.
- can’t achieve something if you don’t know what it is, and you must actually want it
- Put a goal against each vision to build your purpose
- Where I want to be: Vision
- Where I am: Personal inventory
- Fill in the gap! Reverse engineer - nobody is going to make your dreams come true - action on your goals will!
- Smart Goals
- S – Specific: Who, what, where, when, how & why? – Comes back to the overall vision for each
- M – Measurable: Something measurable on what you want to achieve.
- A – Attainable: Believe that your goal is attainable, developing the skills and attitude to achieve them.
- R – Realistic: Must represent something that you are willing and able to work towards. The bigger the better – This can create a high motivation!
- T – Timely: This anchors a timeframe by when your goal will be achieved. Putting a date on a goal allows for you to break this time down and with it, the goal in to smaller segments.
This is where knowing exactly what you want to achieve really helps as the more definite your vision is, the more details you can use when defining your goal.
Now it comes time to do an action plan on your goals. The last part is the hardest, especially if you don’t know how to.
However, what you are trying to do is likely what someone else has done, or knows how to do.
We all stand on the shoulders of giants - Isaac Newton: So you can ask for help from them.
One of the best bonuses from this is an Increased happiness from working towards goals! Achieving them is great, but working towards them and planning them gives bigger dopamine releases, studies have found. This is why setting goals is really important as well, not only to achieve your vision, but to enjoy the ride along the way.
That is it for this episode. In summary:
- Try to find what is going to get your out of the bed in the morning – purpose
- You can sit around pondering what is the meaning of life, but it is much easier to find the meaning of your life
- Set your SMART Goals based on your vision.
- Break it down into small achievable tasks.
- Do your action plan Once your reverse engineer - Ask people/research what needs to be done.
Remember to go to Finance and Fury to get the pdf workbook for this
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. I’d like to start a serious conversation about the individual self and our drive for meaning within society.
This relates to economics and by extension, personal finance – as economics focuses on how the individual incentives drive decision making – all with the aim to maximise our utility – i.e. gain the maximum benefit – which could mean we driven by money, freedom, or some other purpose - What drives the way that we act? - so in this episode, we will be adding a philosophical element to this topic – this episode isn’t about the property or share market, so if that is why you tune in - feel free to not listen – the purpose of this episode is more abstract – and aims to help those who want to help themselves through making sense of the current state of the world and prospering through this –
To do this – we will draw on some of the teaching of the greatest philosophers through history – like John Locke, Carl Jung, and Viktor Frankel to name a few – this will be a bit of a longer episode – as there is a lot to unpack
If you are still with us - To start with, I am going to read a passage from Carl Jung’s book, The Undiscovered Self – 1958 – then we will break this down to unpack the individual in relation to society and the state
- “Instead of the concrete individual, you have the names of organizations and, at the highest point, the abstract idea of the State as the principle of political reality. The moral responsibility of the individual is then inevitably replaced by the policy of the State. Instead of moral and mental differentiation of the individual, you have public welfare and the raising of the living standard. The goal and meaning of individual life (which is the only real life) no longer lie in the individual development but in the policy of the State, which is thrust upon the individual from outside and consists in the execution of an abstract idea which ultimately tends to attract all life to itself. The individual is increasingly deprived of the moral decision as to how he should live his own life, and instead is ruled, fed, clothed, and educated as a social unit, accommodated in the appropriate housing unit, and amused in accordance with the standards that give pleasure and satisfaction to the masses. The rulers, in their turn, are just as much social units as the ruled, and are distinguished only by the fact they are specialized mouthpieces of State doctrine. They do not need to be personalities capable of judgment, but thoroughgoing specialists who are unusable outside their line of business. State policy decides what shall be taught and studied.”
- There is so much to unpack in this one paragraph alone –
- The first few lines look at once individual responsibility has been replaced by the policy of a Government – the differences of the individual are no longer celebrated in society – it is used to create an us versus them mentality – when a government have two primary parties, politics becomes a sceptical, like a game of rugby, AFL, cricket, NFL – there are two teams competing for the win – and each side has their supporters – and each side has some level of animosity towards the other – often not much, but you can see this spill over – like in some south American football (i.e. soccer) games
- Once we get to this point – there is no need to focus on the individuals rights or happiness – as we are supporting a team – “goal and meaning of individual life (which is the only real life) no longer lie in the individual development but in the policy of the State” – therefore, the state (or government) tries to replace your own individual goals with public policy – in a utilitarian way - this then leads into the state focusing on their own definition of public welfare and the raising of the living standard – which requires increased authority of the state
- The desire to increase public welfare and raise the living standard is a noble goal – but unfortunately centralised powers have a hard time actually achieving this goal – and throughout human history – I cannot find any examples where the state, when given extreme powers to achieve this goal, have been able to deliver in the long term – otherwise the USSR, Cuba, North Korea, Cambodia, Vietnam, Venezuela and the list goes on, would have been able to economically outperform countries with less centralised state control – and provide their populations with higher living standards
- This ties back to the statement “the policy of the State, which thrust upon the individual from outside and consists in the execution of an abstract idea which ultimately tends to attract all life to itself” – the state tells you how you should live in an abstract idea – which through social reinforcement leads to a trend, where public consciousness starts to sway towards this end – this is where sentiments such as eat the rich come from
- Remember – the economy is the sum of our individual economic output – so the more power the individual has to better their lives, the better the society and at large the economy become – plus, one single policy cannot be utilitarian by definition, as every individual has different goals and desires, so there is no one size fits all style of policy making
- The desire to increase public welfare and raise the living standard is a noble goal – but unfortunately centralised powers have a hard time actually achieving this goal – and throughout human history – I cannot find any examples where the state, when given extreme powers to achieve this goal, have been able to deliver in the long term – otherwise the USSR, Cuba, North Korea, Cambodia, Vietnam, Venezuela and the list goes on, would have been able to economically outperform countries with less centralised state control – and provide their populations with higher living standards
- Jung’s insights here do seem profound – given this book was written in the 50s – but in reality, we as humans have not changed in this time period – and the same governmental forces existed throughout Jung’s life - Remember – people were drafted to go half around the world to fight wars in WW1, WW2, Korean and Vietnam wars – over 16m men were drafted in the US alone in these wars
- We actually have access to more information than ever – through the internet and platforms like youtube - in response – governments and state media needs to try even harder to shut down any alternative information
- But just like a sports team – people choose who to believe, follow and root for
- The one major difference between Society now compared to a few decades ago – we have legislation on legislation – which has created a more complex society and economy – this legislation has had one demonstrable outcome – increased government control through more and more laws – there was a book written over a decade ago – Three felonies a day – which covers people unknowing breaking laws – the fact that the average person can break three laws every day and not realise this is a sign of the over legislation of society
- Does any of this really matter? Yes and no
- Yes – these laws that politicians put in place are the framework in which we live – and if you put all of your hopes into the state solving your problems, you might be less likely to take agency over your own life – to find your purpose and solve your own problems
- No – Because we can try our best to work withing that framework – the more the overreach of the state – the more it just requires additional effort to overcome the laws – legally to prosper – but the important thing is to at least retain some semblance of freedom to make choices that can benefit ourselves –
- What becomes the issue here is the ability to make choices all depend on rights
- If society reaches a point where there is a loss of the induvial self – and loss of the individual rights – then what do we have as a society?
This is where we move on to John Locke – with the concepts of your rights – you might call the human rights, I prefer to think of them as natural rights
- Rights are a concept meant to help us define the ethical limits of human behaviour in society
- In other words - what types of interactions with other people are and are not acceptable?
- But rights are based around an individual and societal moral agency – if we are going to make any claims about what is right and wrong in society, the individual must be able to choose how to act – this is the very nature of free will – the individual should be allowed to act in their own best interest – as long as this does not infringe on another person – i.e. I cannot steal from you
- There is where the individual should be held accountable for their actions if it impacts on the rights over others
- This is the distinguishing factor between natural (aka negative rights) and positive rights – natural rights are those that protect the individual – nobody has the right to take your property, or coerce you into any decision – but positive rights by their definition require that you are infringing on the natural rights of someone else
- This is where the original concept of Rights was distinct from privileges or entitlements – it’s not about demanding free stuff at the other persons expense (which would be a positive rights) – it is about how we act to better our own situation in life and in response, how we expect others to act – positive rights are a relatively new concept which take away the agency of the individual – as positive rights need to be enforced by an expanding state – i.e. through legislation as enforcement
- At the very base of natural rights - We should all have the expectations to not be assaulted or murdered, or stolen from or enslaved by other individuals
- Also – we have the expectations to not be coerced by other people – or imprisoned without cause – in other words, we should be secure in our property rights and sovereign selves
- The corollary to all of this is the responsibility to uphold those same rights for everyone else – these are all the basis for natural rights –
- Functioning societies all over the world depend on people and institutions respecting individual rights – I did an episode a few weeks ago on freedoms – and how we have been lucky for quite some time – but when a state and by extension, the society is lead into not respecting individual rights – the more volatile society gets and the poorer the population becomes over time
- At the very base of natural rights - We should all have the expectations to not be assaulted or murdered, or stolen from or enslaved by other individuals
- It comes back to moral agency and responsibility – rights holding agent is both capable of demanding their rights be respected – but also demonstrated the ability to respect those same rights in others
- This is something that every human can do – even if we don’t always do this – But Rights are specific to human beings – without the concept of the self and our natural rights, we are no different from animals
- Animals can’t have genuine rights - they are neither capable of respecting the rights of others – nor are they held personally accountable for their actions when they are in breach of another’s rights
- No polar bear or shark will ever be arrested or put on trial for murdering and eating a seal to survive
- No seagull will be put into a prison for sealing your chips at the beach – as this is the easiest way for them to find food - On top of this – they wouldn’t comprehend it if they were –
- As a society – we need to respect the moral agency of everyone – we sustain society through voluntary interactions – this is reduced at every stage when governments increase their control over our lives
- Imagine that we have a government that promises us that they will pay for our food and housing – in this situation we would want to have all the pros and none of the cons – live in a house that we choose and eat the food that we want – in reality this isn’t the case – as the government will only spend $100 per week to cover your housing and $50 to cover food costs
- Let’s say that we do get to spend all we went on housing and food at the tax payers expense – even though in reality this is never the case, as if nobody is working where does this tax based come from? - but let’s say in a hypothetical situation, we can live in a mansions and have all of our desires paid for - all of these pros can actually lead to some major cons for us as individuals – if life becomes so easy that you no longer need to stive for anything, or have a purpose to wake up every morning – essentially removing any meaning to your life, does this help or hinder you?
- It is hard to have any meaning in life if all your desires are now met – there will be outliers who still want to forge their own path – but this is likely a minority of the population at large
- In the situation where the government is in complete control – we often see populations become apatetic and drift into nihilism – this is a perfect situation for the totalitarian state
- The state can highjack our inbuilt desire to follow the path of least resistance – naturally we want to get what we want in the easiest way possible – without governments, this leads to innovation and an ingrained purpose to prosper on our own – but with governments – we can be provided what appears to be the easy way out - but if we always take the easy way out, does this make us stronger or devoid us of purpose?
- Without the right to make our own choices and have the freedom to fail – individual purpose can be diminished further
With this framework in mind - How do we find meaning in the worst of situation - Viktor Frankl’s philosophy of Logotherapy can help to answer this – he himself lived through a number of concentration camps under the Nazi, where he was separated from his wife where she died, plus his parents and brother – he came up with this theory in the camps where people could still find meaning and happiness –
- Logotherapy is based on the premise that the human person is motivated by a “will to meaning,” an inner pull to find a meaning in life. The following three principles are the basics of logotherapy:
- Life has meaning under all circumstances, even the most miserable ones.
- Our main motivation for living is our will to find meaning in life.
- We have freedom to find meaning in what we do, and what we experience, or at least in the stand we take when faced with a situation of unchangeable suffering.
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Frankl wrote extensively on discovering meaning – and the importance of suffering and sacrifice
- According to Frankl, "We can discover meaning in life in three different ways:
- by creating a work or doing a deed;
- by experiencing something or encountering someone;
- According to Frankl, "We can discover meaning in life in three different ways:
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by the attitude we take toward unavoidable suffering" and that "everything can be taken from a man but one thing: the last of the human freedoms—to choose one's attitude in any given set of circumstances"
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This is where finding work that you find fulfilling, which can also provide you a monetary compensation is important for two reasons – gives you purpose but also, the path to create your own financial freedom –
- By no means does this mean that life will be easy every day – this is against the point – the point is to find some purpose in life, whether this is doing a trade, or some service role in society which you can earn a living – then work towards your end goal of generating enough in material wealth to become self-sufficient – where you now have the choice to continue working – if it bring you fulfilment -then most people continue to work
- You can also find meaning through building strong relationships within your community
- If someone finds meaning through certain actions which are promoted by governments – where the government choose to use their final freedom
- i.e. things like universal basic income – the individuals attitude towards a certain situation can be coerced into agreeing with the government – then their individuality can be said to no longer exist, but simply follow the collective doctrine – but ironically at the same time, this individual will find meaning in this – even though this stance is antithetical to their own self interest in the long term –
- Frankl also noted the barriers to humanity's quest for meaning in life. He warns against "...affluence, hedonism, and materialism..." – if someone is purely living for money, with no higher purpose of enjoyment of their job, providing for their family, or some other form of fulfilment in what they do, such as providing a public benefit, then the quest for meaning in life can be stunted
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This comes back to Jung - “Instead of moral and mental differentiation of the individual, you have public welfare and the raising of the living standard. The individual is increasingly deprived of the moral decision as to how he should live his own life, and instead is ruled, fed, clothed, and educated as a social unit, accommodated in the appropriate housing unit, and amused in accordance with the standards that give pleasure and satisfaction to the masses.”
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Frankl observed that it may be psychologically damaging when a person's search for meaning is blocked by governments, or even other people. Positive life purpose and meaning has either been associated with strong religious beliefs, membership in groups or a community, dedication to a cause, life values, as well as having clear goals.
- In this framework - maturity emphasizes a clear comprehension of your life's purpose, having a direction to follow, and intentionality which contributes to the feeling that life is meaningful.
To give an example from your own personal situation - I have found a transition in my own life over the years – from being very materialistic and monetarily focused, to my family needs and community focused – strengthen relationships with neighbours and build a community
- I’ve been thinking about this over the past few years – if someone was living off the gird, fully self-sufficient, as well as being in a community of others – the government would need to really totalitarian to affect them – this is why I have been designing my own life in this way – to become more self-sufficient as possible – not reply on supply chains as much as possible – but this is hard – it is much easier to go to WOW or Coles to buy broccoli and sweet potato compared to growing this yourself –
- I know that it will take decades to build towards these goals, but that gives some long term purpose, something to work towards
- This is the beauty of this philosophy – everyone can come to their own conclusion – what is correct for you and what matters – it is all about finding your own path and purpose in life – I would recommend anyone interested read the works of Jung, Frankl and Locke
In summary -
- The point of this episode is to help find your own purpose in life – create your own leaning in life – build goals and desires – then use your ability as an individual to create your vision in life
- Find your own meaning – do not let others or the state dictate to you what you should do
- Don’t become nihilistic or let the state of the world get you down – if you are unhappy, explore these feelings and look at where you would like your life to go
- Come up with a game plan to achieve your ideal outcome
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. In this episode, we will be looking at investing using a moat.
- Moats are an effective tool for defence historically – you would put one up around a fortified structures – such as a castle or town – can be filled with water or not, many different types and variations – but the whole aim is to make a location more defensive from attacks – so what does a moat have to do with investing?
- Well – in this episode we aren’t talking about defending your castle from some medieval invaders – we are talking about moats that can be identified to provide some defence for your investments – in particular – we will focus on Economic Moats -
What is an economic moat?
- An economic moat – simply put – is the ability of a business to maintain a competitive advantages over its competitors
- This – like a moat around a castle - helps a company to protect its long-term profits and market share from competing firms – which in this analogy would be the attackers
- a competitive advantage is essentially any factor that allows a company to produce goods or services better, or more cheaply than its competitors – this means that this company is likely to outperform its competitors due to capturing a larger market share and therefore, generating better profits
- Castles also had competitive advantages – you could place one on top of a hill – or have a drawbridge across a moat – making it harder to breach the gates – no two castles were exactly the same, as the landscape and designs of the time all vary from location to location
- This is the same when looking at shares in a company - When talking about companies – a competitive advantage is evident if the company has been able to maintain a market share due to a combination of different competitive advantages – essentially putting it in a monopolistic or oligopolistic environment
Different types of economic moats – There are several ways in which a company creates an economic moat that allows it to have a significant advantage over its competitors – we will go through 6 types – But by no means are these all-inclusive -
- Cost Advantage - a cost advantage that competitors cannot replicate can be a very effective economic moat.
- Companies with significant cost advantages can undercut the prices of any competitor that attempts to move into their industry, either forcing the competitor to leave the industry or at least impeding its growth. Companies with sustainable cost advantages can maintain a very large market share of their industry by squeezing out any new competitors who try to move in.
- Successful Resource companies often have a cost advantage over their competitors – when you look at this industry – the price of the materials can vary – but if you have the lowest costs – you can weather the storm
- BHP – has a cost base of just under $12 per tonne for iron ore – this is the cheapest in the industry – when prices plummet to $40 – they are still making $28 – a good margin – when the prices are around $125 – they are making a killing
- The next best is Fortescue with $15 per tonne – but that $3 is still a large difference – 25% more in costs
- This comes with economies of scale – which leads into the second competitive advantage
- Size Advantage - Being big can sometimes, in itself, create an economic moat for a company
- At a certain size, a firm achieves economies of scale where there can be synergies between businesses – or they can control the supply chains as well
- This is when more units of a good or service can be produced on a larger scale with lower input costs. This reduces overhead costs in areas such as financing, advertising, production, etc. Large companies that compete in a given industry tend to dominate the core market share of that industry, while smaller players are forced to either leave the industry or occupy smaller "niche" roles.
- High Switching Costs – This is a tricky tool that companies can use – increase the costs to switch between them and their competitors products
- Thinking about Apple and Android for a second – I have had a Samsung phone for about 13 years now – after having an iphone for about 2 years prior – I made the switch, but I remember the difficulty in not only switching IOS – but also the transfer of contacts and data – it is almost like starting from scratch
- This is where the size advantage can also come into benefit - When a company is able to establish itself in an industry, suppliers and customers can be subject to high switching costs should they choose to do business with a new competitor. Competitors have a very difficult time taking market share away from the industry leader because of these cumbersome switching costs.
- Intangibles - Another type of economic moat can be created through a firm's intangible assets, which includes items such as patents, its brand, government licenses and other factors which give it the edge over competitors – such as loyalty
- Strong brand name recognition allows these types of companies to charge a premium for their products over other competitors' goods – generic brands versus the house hold names -
- Patents or IP can also block any competitors from entering your industry
- Barriers to entry – This can either be in the form of legislative restrictions or a high cost of capital to enter the industry
- Airlines are an example – as well as other highly regulated entities – can have not only legislative hurdles to overcome, but also upfront capital –
- Which can be hard to raise – either need wealthy investors, or banks to lend – which they are not that likely to do unless it is a low risk enterprise for them – smaller loans of $1m are not too great a risk – but loans in the hundreds of millions to start a larger company are almost impossible for a start up to come by
- Soft Moats - Some of the reasons a company might have an economic moat are those factors which are harder to quantify – this might be from exceptional management or a unique corporate culture – this is because a unique leadership and corporate environment can contribute to a company’s ability to generate a competitive advantage, adding to their success and profits
- Airlines are an example – as well as other highly regulated entities – can have not only legislative hurdles to overcome, but also upfront capital –
- Companies with significant cost advantages can undercut the prices of any competitor that attempts to move into their industry, either forcing the competitor to leave the industry or at least impeding its growth. Companies with sustainable cost advantages can maintain a very large market share of their industry by squeezing out any new competitors who try to move in.
Economic moats are generally difficult to pinpoint at the time they are being created. Their effects are much more easily observed in hindsight once a company has risen to great heights.
From an investor's view, it is ideal to invest in growing companies just as they begin to reap the benefits of a wide and sustainable economic moat. In this case, the most important factor is the longevity of the moat. The longer a company can harvest profits, the greater the benefits for itself and its shareholders.
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Many of the best businesses often encompass more than one of these economic moats – let us look at a hypothetical example -
- Say there is company A – and they have sent all of their production overseas, whilst there competitors are domestic – this has reduced their labour costs and costs of production by around 40% - this allows them to undercut the prices of competing companies producing the same product
- This low prices lead to an increase in the number of customers buying your good, as you are now – lets say 20% than the next competitors for the same product – from this - you see an increase in profits
- But - it probably wouldn't take very long for your competitors to notice that you have offshored and follow suit – therefore, now their cost decreases can match yours – and they can likely drop prices by around 20% more – or lets say they go to 25% decrease – which would eat into their profits by still make an additional profit of 15% instead of 20% - These other produces would start to lower this companies market share and profit – in response they may need to lower their prices as well
- However – lets say that you have been using your profits and investing in R&D – you develop a new technology that allows you to get 30% more efficiency out of your product – making it 30% better for the same price
- Over this time, your competitors will have no way of duplicating your methods – therefore, your competitive advantage is protected by your patent
- So in the end – your economic moat is the patent that you hold – not that you started producing overseas at a lower price
- In the end - a company's economic moat represents its ability to keep the competing companies at bay for a longer period of time – in a way that is not easily replicable
- As the strategy of offshoring was replicable – but the patent isn’t
- The interesting thing about moats is that they have no obvious dollar value
- Real world examples – Amazon –
- Cost – Amazon have developed a low cost offering – often delivery is nothing, or lower cost than something like Aus post – the goods prices are also often the lowest in the market – due to supply chains that are straight to the producers
- Size – due to size, they have a massive distribution network – can get you anything, and in the quickest time
- Intangibles – have a major brand name – would have to go to some Amazonian tribe to find someone who doesn’t know amazon – ironically talking about the company here
- soft moats – the soft moats relate amazons ability to lobby and have a legal department in every state to petition the local politicians for lower taxes and some subsidies to take business to the state – many other businesses don’t have the clout of amazon to negotiate such deals
- These moats are all well and good – but how do they stand up over time - One of the basics of competitive market theory - is that, given time, competitors will adopt and adapt your practices – this can erode any competitive advantages enjoyed by a firm
- This is more likely to occur in nations with relatively free markets – where firms are allowed to competing for competitive advantages – if any company innovates and adopts a superior model – at a lower cost or better product – then other companies will copy as soon as possible – in a truly free market – there is nothing to stop these companies – therefore in the long term – it would be almost impossible for any company to maintain a long term competitive advantage – it would be gone, and better for us – we get better goods and lower prices
- But when it comes to a monetarily and politically controlled economy we live in – where do you look for competitive advantages – as they do exist – and are actually easier to pick than in a truly free market
- Frist – look for any companies with superior operations – this can mean that have the market share of sales, or excess profits in their industry, or the brand name recognition –
- The reason these two are important is that they are outside of normal market competition – existing larger companies have a competitive advantage over other companies that don’t have the same political or economic influences that they do – this does disrupt what would occur in a theoretical free market – so reality does need to be accounted for
- It is important to identify what moats of the business are likely to last – and which can be replicated – i.e. is it a shift in business practice which can be easily replicated – or is it some form of competitive advantage that allows this company to stand alone
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Things like businesses practices can be replicated – but the political connections and lifeline protections are harder -
This leads into the application of identifying moats and selecting shares
- Say you have identified a company with a moat – does this mean that you rush in and buy? Technically not – the second part of moat investing is all about the fair value of the company –
- This is where this style of investing does require some degree of value investing applied to it – so if you identify a moat company that is priced at $40, but has a fair value based around future cash flows of $30, you may not purchase this company
- This is for one major reason – back the concept of a moat – for defensive purposes – therefore, being more defensive, investors would purchase at a below fair value – or at the very least, not at a 30% increase in value
- In the end - The goal is to not just find businesses that have moats, but undervalued businesses that have moats – this is easier said than done -
- This strategy does sound great – but how well has it actually performed – due to being a value-based approach of undervalued businesses who possess a moat – a moat value investment strategy has underperformed other strategies
- Over the past few decades – when measuring purely based on return - index or a growth approach would have performed better
- This is where if a company has a real moat around it – it likely isn’t trading below fair value – other investors would have identified the moat and purchased around this –
- an important factor may be ignoring the fair value approach – but at the same time not blowing it out of the water –
- Traditionally – fair value is paying a sum less than the fair value – but what about purchasing at the fair value – or 10% above?
- This is the real problem with this strategy – unless this is your fulltime job – the market will likely notice the moat before the individual investor
- So how do you apply the use of moats when it comes to investing –
- Individual shares – You can spend some time understanding the individual shares, or there are also some researchers that provide a moat rating – like Morningstar and you can get an idea of a company’s potential from sites like simply wall street – these can be a useful tool
- Active managed funds – You can look at some fund managers who use moats and value approaches – or at the very least a moat approach – especially in the large to mid-cap of the market this strategy has historically worked well to protect a downside
- ETFs – There are a few ETFs that tilt a portfolio to focus on certain factors, like moats through the quality of the companies
Summary - All businesses have some sort of competitive advantage – especially once they get to the size of being listed on the market
- So, it can be side to assume that once a business has grown and survived long enough to get listed on a share market – there is some advantage – but is it a long-term competitive advantage? Or can competitors catch up and perhaps even overtake it?
- The idea of moat investing is to identify companies with competitive advantages that can persist long term and then invest if the price is attractive
- This can help a portfolio limit risks where the underlying investments can maintain their market share and continue to deliver performances
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury – For this week’s episode we are answering a question from listener David – surrounding some options to save for a home deposit
“The conventional wisdom is to save for, say, a home deposit in a bank account with as high as possible interest rate. However, recently it seems house prices are rising quicker than I can save, and interest rates are lower than CPI.
If my goal is to have a sufficient deposit in ~3 years’ time, what are your thoughts in keeping savings in a conservative (or even higher risk?) mutual fund instead? Wouldn't a low-risk fund be less risky than cash during an inflationary period?”
This is a great question – and brings up an important point – is the long term conventional wisdom on saving for a home deposit in cash no longer wisdom but a horrible idea? Especially in the current economic environment where your cash savings are earning a negative return in real terms when accounting for inflation – so let’s have a look at this and look at some alternatives
- Historically - that conventional wisdom of saving for a home deposit in cash has been ingrained in the deposit saving strategy – and for a very good reason – that reason has been due to volatility in the short term – why take any risk on your savings if you can generate 4-5% p.a. in interest returns and inflation is only 2%?
- However – if you are getting 0% interest return and inflation is 3% - does this sound like a good idea?
- Also – home prices have been booming since interest rates have declined, with 2- or 3-year fixed rates being in the high 1% range – this has fuelled increases in prices which are beyond what cash can provide
- With home prices increasing and no returns on cash savings – you need to constantly save more and more to make up the short falls
- Example – want to buy a $550,000 home – need $110k as a deposit – plus $10,600 for stamp duty
- Say it will take you 4 years to save for this – but in this time property prices go up by 15% - same property is now worth $632,500
- Now you need $ in deposit and $14,300 in stamp duty – this is a further $16.5k in deposit and $3.7k in stamp duty – so this may take you a further 6 to 12 months to save for – in which time property prices can go up even further
- So what do you do? Just keep saving more, or look at investing these funds in the hope of getting a decent return?
- This is a very important question – due to this increase in price of property and the opportunity cost of keeping funds in cash – are there better alternatives?
- The issue with using savings to invest into growth assets, such as shares, especially with the aim that these funds increase in value in the short term, is that this is investing purely based around hope – and that hope is that the invested funds increase at a greater rate than a savings account can provide by the time you need to use the funds
- The irony is that these days a savings account will likely provide you a 0% return in nominal terms = a negative return when accounting for inflation and the price increase of property
- This leaves savers in a horrible position – either save more to minimise the short fall or – invest funds in assets that can provide an above property price growth level of return
- But this investment needs to help balance any risks – especially in the short term
What are some alternatives to saving in cash?
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Let us look at a Conservative investment fund –
- Conservative funds are those that have the majority of their allocation in defensive investments
- Their allocation is normally a majority of FI assets and some cash – with a smaller allocation to shares – both Aus and Int to help generate some growth returns
- The aim of these funds is to normally get a return of a few percentages above cash rates
- As an example – there is the Vanguard conservative index fund – either in ETF or managed fund versions
- The comparative returns of this fund have been good – especially when compared to cash –
- Cash returns over the past 3 years on average has provided 1% p.a. which is far below most peoples target when incomes to achieving a savings rate
- Conservative funds are those that have the majority of their allocation in defensive investments
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How has the conservative fund performed? Over the past 3 years it has provided a return of 6.5% = 4.5% of this has been income with around 2% being capital growth
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Looking even further out – you have the 5-year average returns of 5.54% – the income return has been 4.75% and growth has been around 0.68%
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In hindsight – and as a comparative tool – investing funds in the vanguard Conservative ETF would have provided additional capacity to save than pure saving funds in cash – but investing Is always perfect in hindsight
- Conservative fund has around 62% in FI and 8% in cash – total of 70% defensive – then has 18% International shares and 12% Australian shares – this significantly reduces its volatility when markets take a downturn
- Look at volatility – Looking back over time –
- Drawdown analysis - What happened in GFC? – In 2008 – fund lost 2.5% - but then had a total drawdown of 10% by 2009
- Recently had a drawdown in 2020 of 7.5% - but thanks to markets recovering it didn’t stay there for too long
- The average larger drawdown beyond the two outliers has been about 2.5% when the market does down (has occurred 5 over the past 18 years)
- Rolling return periods – 1 year rolling returns – there was a 2 year period where the returns were around -5% - if you invested in 2008 then by 2010 you would have not made any returns
- Drawdown analysis - What happened in GFC? – In 2008 – fund lost 2.5% - but then had a total drawdown of 10% by 2009
- Conservative funds – high allocation to bonds and cash – allocation to shares as well –
- Compare the opportunity costs for savings between getting 0% and 5% - based around historical returns a conservative fund would have worked better
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But what about looking forward – everything in hindsight is a fantastic strategy – but how would this form of conservative investment fair if interest rates were to rise –
- Likely not well – given the make up of the funds is 62% fixed interest – this asset class would likely suffer in pricing if interest rates rise –
- It invests in index funds – the index of bonds is many large countries Government bonds - due to the size of debts that governments have issued on fixed interest
- These bonds have QE propping up demand for the bonds – but if interest rates need to go up due to inflation concerns, and the liquidity dries up in response, what happens to the bond market?
- Likely not well – given the make up of the funds is 62% fixed interest – this asset class would likely suffer in pricing if interest rates rise –
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Pricing of a bond – every bond is issued with a fixed coupon – often that of the interbank cash rate of the nation
- Say interest rates of Aus go back to 1% - would you buy a bond for $100 if it was only paying 0.1%? Likely not, as you may want to save funds in the bank and get 1%, or close to it – so what has to happen to bonds in response to incentivise investors? The price of the bond needs to drop – if it is 10 years out from maturity, the price of the bond would be $91 – if were a 30 year bond, the price would be $77 – remember each of these bonds would have a current price very close to their face value = a potential loss of 10-20%
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Therefore, cash may actually provide a better return in the short term than a conservative fund – which in this time period may likely have a near 0% if not negative return.
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As over the last few quarters – the aggregate bond index can decline by about 0.8% if fears of inflation and interest rate increases are priced in
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The flip side of this – if interest rates were to increase, property prices may stagnate or even start to decline – this would mean you need less in savings to afford the same home – but it would also mean that you likely have less in a conservative fund
Alternative options – if you are a first-time home buyer – you may have some better alternatives than saving in personal funds
- First home SSS – Using superannuation is a viable strategy in most situations, even though it can be a little restrictive.
- It essentially allows for larger savings through the reduction in total tax paid on the level of savings (through not receiving it as a taxable income).
How it works:
- From 1 July 2017, individuals can make voluntary contributions of up to $15,000 per year and $30,000 in total, to their superannuation account to purchase a first home.
- Pre tax conts. – Taxed at 15%, along with deemed earnings, can be withdrawn for a deposit.
- Done through employer – Salary sacrifice – rather than saving personally
- Self employed – Can still do and claim a deduction on personal conts later
- Must remain within concessional (pretax) cap of $27,500 – this means that whatever your employer puts in, plus your SS needs to be below $27,500
- Withdrawals will be taxed at marginal tax rates less a 30 per cent offset and allowed from 1 July 2018.
- Amount of withdrawal = Net contribution plus deemed return (90 day bank bill plus 3%)
- 3.1% currently – will change as the RBA cash rate changes
- Who is eligible - You can start making super contributions from any age. However, you must be 18 years old or older to request a determination or a release of amounts under the FHSS scheme.
- Also, you must have: never owned property in Australia – this includes an investment property, vacant land, commercial property - Eligibility is assessed on an individual basis. This means that couples can each access their own eligible FHSS contributions to purchase the same property. If any of you have previously owned a home, it will not stop anyone else who is eligible from applying.
- Amount of withdrawal = Net contribution plus deemed return (90 day bank bill plus 3%)
Examples and looking at a comparison -
- Individual earning - $60,000 a year (or anyone earning between $45k-$120k for a rate of 34.5% including the Medicare levy) – Never bought a home before
- They direct $10,000 of pre-tax income into superannuation
- increasing her balance by $8,500 (after 15% tax)
- Continue for 3 years – Contribute up to $30k in total
- Withdraw $26,700
- Net contributions of $25,500
- Plus deemed earnings on those contributions (3.1%) each year the funds were sitting there
- Withdrawal tax of MTR (34.5% inc Medicare levy) minus 30% offset
- $1,202 in tax paid
- Net withdrawal - $25,500
- $5,850 more than if saved personally in cash ($11,700 more if you are a couple than if you were saving these funds personally)
- Now – if you had invested your net income at the same rate in the Vanguard fund – left with $20,955 – so even at a higher earnings rate of 6.5% - the FHSSS would have provided a better result
- This scheme has two things working for it –
- First is that the returns are guaranteed – regardless of what your super does, the deemed earnings will be the RBA cash rate plus 3%
- The downside to this is that if your superannuation does decline, then you are withdrawing a larger lump sum whist the account value may be down – as an example, your net contributed amount may lose 10%, but you would still be withdrawing an amount as if it had earnt the 3.1% p.a.)
- Secondly – it is tax effective – the saving of funds through superannuation allows you to save some additional funds through reduce your tax burden
- The downside is that a maximum of $30,000 can be put towards this, which after tax is $25,500 – or $51k for a combined couple –
- Given that property is rather expensive – this may get you half of the way towards a deposit for the average home in some major cities, excluding Sydney or Melbourne
- First is that the returns are guaranteed – regardless of what your super does, the deemed earnings will be the RBA cash rate plus 3%
This leaves the option of continuing to save either in cash or looking at an alternative option – such as investing in a conservative ETF –
- Monthly investing into a conservative fund –
- The longer the timeframe, the better –
- If you are 10+ years away from a deposit, then you can look at something higher growth
- In the end – it is impossible to say what will provide you with the best return in the short term – i.e. 3 years – as nobody knows the future
- But over longer periods of time, statistics and averages start to play a bigger role
I hope this helps to clarify things.
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury
- This episode, look at where the next financial crisis may come from – Will it be from the USA or from China? This is a question I was thinking about the other day – as there is a lot of talk about the Chinese economic being built on a house of cards and at risk of collapse – but if this does collapse, will it lead to a world-wide economic recession? Or, will the USA beat China to the chase and trigger the next collapse?
- So, in this episode – we will look at the likely nature of the next financial collapse and whether this will be triggered by economic issues in the USA or China
Looking back in history - the idea of a global financial crisis is relatively new in the scheme of things
- it has and can only occurred in times when economies are interconnected in terms of trade, or financial reliance – in the modern era – this is coined as globalisation – but the trigger has tended to come from the economically dominant country in this economic system – i.e. the most connected nation that a global economy is reliant on
- Therefore – it is no surprise that over the last 100 years, the United States has become the primary source of economic collapses that have spread to throughout the rest of the world
- In reality - over the last 200 years, the USA averaged a financial panic every twenty years – which over this timer period puts it in competition with the UK for the most occurrences of economic disaster of any country on the planet –
- What is different is the size and scale on these panics’ effects on the rest of the world – The USA has only really been an economic powerhouse from the post WW1 Era – hence previous panics, such as the Railroad panic of 1873 has far less effect on the global economy and their financial markets when compared to an event like the GFC, or even share market collapse that preceded the great depression of the 1930s
- There is an emerging trend within an interconnected global economy – when the major economic powers catch a cold, the rest of the world starts to sneeze – Which brings up China – which over the last few decades has emerged to be the second largest economy behind the USA – where both countries are heavily reliant on one another – USA relies on China for consumption and debt funding, and China on the USA on net exports and reinvesting those funds in treasury notes through foreign exchange – but this relationship can be rocky
- Almost like business partners who have grown to hate one another over the years – but both parties know that without the other their business would fail
This brings us back to today’s topic – the next financial collapse
- Regardless of where it comes from - The form of the next financial crisis will very likely be initiated from the financial system – and in the from excess levels of leverage within a fragile system, created through speculation
- Technology and innovation have adapted in regards to leverage as well as investors access to leverage –
- When looking through all financial crisis – whist the triggering cause has differed – the common characteristic has been that the economy become fragile due to excess levels of leverage – i.e. borrowed money creates additional asset bubbles and exacerbates downturns
- Looking back in history - the crash of 1929, which triggered the great depression, came from an overleveraged market that was built up through the introduction of margin loans in the previous decades, as they became popular around the 1890s - then the requirements of these loans, that have the shares as collateral, became even more loose in the early 1900s – leading to the build-up and eventual collapse of the share market –
- Skipping forwards to the 2000s – systems of leverage had evolved dramatically - with CDOs, as well as synthetic derivatives which first came into use in the 1980s – These instruments combined with speculation lead to the inevitable collapse that occurred in the GFC
- In the modern era we are now looking at highly leveraged crypto positions using derivatives, as well as the age-old overleveraged markets both in property and shares –
- So - regardless of the technology of the mechanism that the money flows into - one common characteristic stays the same is that financial corrections comes from over-leveraged positions that occurred due to speculation – in other words – the higher the level of capital which can be introduced into an economic system under speculation, the greater the risks are to that system
- Technology and innovation have adapted in regards to leverage as well as investors access to leverage –
- This brings us to today – where the fact that leverage has been allowed to increase at ever increasing pace due to low interest rate policies globally means that at some point – the mount of excess leverage that exists within the economy increases beyond the productive level of the economy – hence it becomes speculation – therefore, at some level it must come unstuck
- Speculation through leverage (i.e. debt) – used to have an opportunity cost – the concept of an economy having a near-zero interest rate policy like we currently have in place was considered to be extreme monetary policy and only to be utilised for emergencies – but in a country like the US, this has been in place since 2009 – rates did rise from 2016 to 2020 to 2.5% but then came back to 0.25% and will likely be there for a number of years – like is the case in most economies – Aus is at 0.1%
- The economy is a complex system – it is almost impossible to understand fully – when one input it introduced, there is no way to tell what the economic consequences will be long term beyond the first order of consequences
- Whilst not a perfect analogy – think of the economy as the human body – a very complex system with many different factors as inputs – some people are allergic to peanuts – whilst others aren’t
- low interest rates act as a pain killer to the economy like morphine to the human body – when someone goes into an emergency and break their leg – they will likely get morphine to help relieve the pain – and understandably so – but normally after the initial pain has been endured and the bone is set – the morphine is reduced and eventually removed – because what happens otherwise? It is an opioid – and highly addictive – if you stay on too long you eventually get hooked and this can lead to a dark road –
- Your life can fall apart and at some point - you either die from an overdose due to needing to increase the load of the dose - or have to detox – which is also not a fun process – this is where much of the world economy is currently at – we will need to detox from low interest rates at some point – or see an economic death – in the form of a monetary reset
- Regardless of this fact – Monetary officials are still working off the theory is that low interest rates allow individuals and businesses to borrow money and pay less interest - which should encourage further spending throughout the economy and support the multiplier effect and economic growth
- but this theory neglects the Cantillon effect – where the money is first received – receives the highest level of benefit – and as the increase of borrowing and level of debt is directly injected into the property market, as well as injecting liquidity into the share market – these are two of the primary areas which have seen pricing move into overvalued territories – i.e. they have seen rises dramatically in price in a short amount of time that isn’t proportionate to its value
- This also makes sense from a risk perspective – when interest rates are low - money becomes cheap and investors can afford to invest more money into higher-risk asset classes – the opportunity cost of losing money becomes less – i.e. if you can borrow for 2% then the risks of investing in the share market are lower than if you had to borrow funds at 7% p.a. – where you need a higher hurdle rate to compensate your borrowings – this also leads to a spike to asset prices
- In most economies - the signs of a boom are everywhere - House prices are soaring, demand for consumer goods is high, financial markets are at record levels, commodity prices are booming with iron ore and copper is hitting fresh records
- This is where asset bubbles can then lead to recessions when the flow of new money stops or slows significantly and prices drop, causing some to lose large sums of money – this is due to the leveraged nature of speculation – the amount of money can artificially be increased by borrowings – so if borrowing are recalled, the nominal rate of money is reduced at a greater rate than otherwise possible
What would trigger such a crash?
- To be honest – I have no idea – it could come from any number of reasons – and likely will not come from one induvial cause, but instead be a cascade of events to lead to a complete market collapse –
- This being said - markets are essentially deep into the late stages of a bubble and is over leveraged – but as long as leverage can continue to grow, there is no reason for this gain to drop – but if it doesn’t, there are many sectors that are susceptible to deleveraging – through interest rate hikes or call backs from financial institutions
- Many businesses have had to borrow more money to finance their revenue losses through the lockdowns
- Property markets are up – with people borrowing more and more, increasing the overall household debt levels
- Share market is up – combined leverage rate of margin loans are at elevated levels
- Governments are also highly leveraged – with government deficits increasing at accelerated paces
- At some point, something will spook the market – whether it be some more inflation, the threat of an interest rate increase resulting in major market defaults – and central banks not willing to start up the printing presses to bail out these companies - your guess is as honestly as good as mine
But where will it come from? USA or China – which are both rapidly growing in unproductive debts – so let’s look at each one separately
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Risks from China – this is the most populous and second largest economy in the world – it also has the largest rates of economic growth in history – transitioning from a improvised nation to an economic powerhouse within a few decades – pulling hundreds of millions out of poverty – which is fantastic – and speaks volumes of the power of a free market compared to centrally planned economies (China started the transition in 1978 out of) – where individuals were empowered with the ability to incentivised to keep what they produce – in terms of labour and being paid a wage, or even agriculturally – which is what sparked Chinas transition of population starvation from the 1980s
- But this meteoric rise is not without its issues – many of these are overlooked – because when things are going well you tend to not pay attention to the underlying problems
- The number one issue to the Chinese economy is unproductive debts - China’s debt has grown dramatically over the past decade and is one of the biggest economic challenges confronting the ruling Chinese Communist Party - which actually has just turned 100 this year
- The CCP has identified the ballooning debt pile as a potential threat to its economic stability, and in recent years tried to reduce the economy’s reliance on debt for growth – as well as rebalancing levels of public debt within private debts
- China’s build-up of debt to fuel economic growth has raised fears of an eventual collapse - So, what factors would precipitate such a collapse? And if one were to occur, how would it affect the rest of the world? How can Chinese policymakers guard against financial crisis?
- Looking at the figures – and a big disclaimer – all of these figures are generally based around what China reports – so there is no way to tell that these are accurate – not only exclusive to China, as it is hard to trust any Government Data
- China does have high levels of debt – but not the same ratios as many western nations –
- China’s overall debt was 270.1 per cent of gross domestic product – increasing by 10 times over the past 15 years – which is a massive increase
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However – unlike many other nations – this level of debt is in the non-financial corporation sector – compared to counties like Aus where it is in household debt
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Around 70% of their domestic debt is in non-financial corporations – only 10% is in household debt
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Almost all of this lending is official, coming from the government and state-controlled companies. Over the years, China has been lending to emerging economies such as those in Africa.
- On top of this debt – their Loans to low-income countries - According to a report by the Institute of International Finance in January 2021, China's outstanding debt claims on the rest of the world increased from about US$1.6 trillion in 2006 to more than US$5.6 trillion as of mid-2020, making China one of the biggest creditors to low-income countries.
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Now - China is starting to see the pressures of an over-leveraged nation – up until now they have seen strong consistent growth – One major factor that is keeping their economy from collapsing is FDI -which is increasing year or year still
- Whilst there is real growth – people will see their quality-of-life increase – but everything good has to come to an end –
- Due to urbanisation of population – major cities in China’s property markets are incredibly inflated when compared to disposable incomes
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But this overleverage economy is susceptible to downturns in the leveraged markets
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Risks – Collapse from business debts – also, defaults from African nations
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But Chinas interest rate is around the 3.85% - far from a ZIRP – so they do have the capacity to lower interest rates further
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Risks from USA – comes from the level of their overall debts and their financial system complexity
- There is little new here – the real economic output of the USA is now becoming stagnant again – infrastructure and manufacturing, as well as gas jobs are now on hold, if not gone completely, due to politics
- But the USA does have one thing going for it – the Federal Reserve – if any market declines occur – the Fed is well positioned to step in and bail out any market declines
- But this saving grace is their economic destruction in the same sequence – one hand can give whilst the other hand can take everything away – the propping up of financial markets can occur for an indefinite period
- All whilst the real economy, i.e. real economic employment, can come crumbling down, amongst it all
- I think that America still has one or two more systemic crashes in it before China becomes another source – it all has to do with reliance and banking policies
- China to date has been a relatively segregated financial system – when looking at the interconnected markets of financial derivatives and speculative leverage, China surprisingly has low levels of connectivity – USA is still number 1 – therefore, there is a higher level of risk from their financial system – a small risk can snowball
Risks to Australia – the same risks as in the past – both China and USA have highly correlated economies to Australia
- The risk to Australia from China comes in the form of demands for our goods – which is our export market of many of our natural resources
- But regardless – when looking at historical crashes that have dropped out market – these have come from financial market crashes -
In summary – in my personal view – the next triggering event will likely come from the USA – the world is more reliant on the USA than China at the moment – I know that in Australia, our net exports are a different story, as we are likely more reliant on China as an economy – but we are talking financial markets here – where the ASX is more closely linked to the US markets than the Shanghai Composite or the Shenzhen Component Index
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. In this episode we are going to look at the different factors to consider when deciding on how you should select investments
- This is an interesting topic – as everyone will have different factors that influence their investment decisions – but the ultimate outcome for most people is to make money – i.e. you wish to receive a return on your initially invested capital – and do so at a rate that beats your opportunity cost – i.e. the next best use of the funds, like repaying debt
- But this is easier said than done though –
- So in this episode – we will look at the major factors that influence investments and see which one has had the largest impact on out performing the index as well as minimising volatility – in other words, what has provided the best returns over the past 20 years at the lowest comparable level of risk – we will also look at if these trends can help to provide some insights into investing moving forward
- I think it goes without say that this episode is not advice, but just general information based around a historical analysis – because we are not taking into account anyone’s personal situation
Why do investments perform the way they do?
- This question has an obvious answer – the price of an asset is based upon the supply and demand of the investment – if the demand is high and the supply low or capped, then prices will rise – but it isn’t this simple – it is easy to say that an investment is simply in high demand with lower supply – hence the price goes up – but this becomes more complex when trying to figure out why this has been the case? Why have certain investments been in higher demand than others?
- focusing on the different factors that investments can have attributed to them can help to understand this nuanced question – this is where factor investing comes into the picture
- What is Factor investing? It is an investment approach that involves targeting quantifiable characteristics – these quantifiable characteristics are what are referred to as “factors”
- These can help to explain differences in investments and how they have performed – both in terms of returns as well as volatility, which is the measurement of risk
- Now - a factor is any characteristic that can explain the risk and return performance of an asset
- The approach to identify these is considered to be quantitative – hence it is based on observable data, such as an investments price in relation to its financial information, rather than on relying opinions or speculation
- characteristics that may be included in a factor-based investing include two general categories – being that of macroeconomic factors as well as style factors -
- Macroeconomic factors – these are the larger picture economic factors that tend to influence markets at large
- Economic growth – This includes an investments exposure to the business cycle
- Real interest rates and inflation – which focuses on the risks of interest rate movements and the exposure to changes in prices that a business faces from price increases
- Emerging markets – these can be beneficial however are exposed to political and sovereign risks, as well as currency risks
- Liquidity – exposure to illiquid assets
- Each of these factors is important at the macro level – but instead – we will look at the other factors based around investment style factors
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Those of Style factors – These include the value, volatility, momentum, quality, and size of the investments
- Value – A share is considered to be of value if the current price is considered to be discounted relative to their fundamental value, also known as fair value –
- As an example – say a share is trading at $10 – but some analysts punch the numbers and determine that this company, based around its free cashflow and growth prospects should only be worth $8 – then this would not be a value purchase – however, if a share was valued at $15 and trading at $10, then this would be an obvious buy
- Therefore - value investments aim to capture excess returns through purchasing shares that have lower prices than their fundamental value
- There are many different methods used – but most commonly, value managers track price to book and price to earnings ratios, dividend growth forecasts, and the present value of free cash flows as part of their fundamental analysis
- Value – A share is considered to be of value if the current price is considered to be discounted relative to their fundamental value, also known as fair value –
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The best way to think about value investing is when you see a special at the supermarket – if an item is on sale, for 30% reduce price, are you more or less likely to purchase the item?
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So in essence - The value factor attempts to capture excess returns to shares that have low prices relative to their fundamental value. This factor has generally performed best during economic recoveries – when fundamentals matter more to investors
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Minimum volatility – This is a focus on stable, lower risk shares – i.e. those that are consider safe harbours, such as blue chips and have stable business models and often provide a service with a moat around them – essential consumption with companies like WOW or COL would be an example
- There is some research that suggests that shares with low volatility earn greater risk-adjusted returns than highly volatile assets – so whilst the total returns may not be as high as some small cap companies, they can have less of a downside –
- e. – a share providing a 10% return with a 10% volatility has a better risk adjusted return than a company providing 15% return with a 22% volatility p.a.
- These numbers are also based around the averages – because a risk adjusted return does not equate to an absolute return – as previously mentioned, one share may provide a return of 5% p.a. at 5% volatility, whilst another provides returns of 10% p.a. at 15% volatility – which would you prefer?
- It does depend on your situation – but higher returns for more volatility can be acceptable
- This comes back to the measurement for volatility – which is often done in the form of a variance – which can be further reduced to a standard deviation
- This measures the potential price movement of an asset from its mean value over a certain time period – most of the time this is from a one- to three-year time frame
- But volatility measures upwards movements as well as downwards – so if a share hypothetically does go up in value a lot over 3 years, even if it doesn’t have any major downturns in this period it would still look volatile
- There is some research that suggests that shares with low volatility earn greater risk-adjusted returns than highly volatile assets – so whilst the total returns may not be as high as some small cap companies, they can have less of a downside –
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The low volatility factor attempts to capture excess returns to share with lower-than-average risk – however this factor has generally performed best during economic slowdowns or contractions - when the downside risks of volatility are their highest – because remember that volatility also measures the upside movements – so being in low volatility shares in a bull market can lead to underperformance when compared to the index
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Momentum – These are shares with strong upwards price trends – i.e. Shares that have outperformed in the past tend to exhibit strong returns going forward as long as their trends continue – because of this - these momentum strategies are grounded in relative returns from three months to a one-year time frames
- The momentum factor attempts to capture excess returns to shares with stronger past performance – and it has generally performed best during economic expansions
- This form of investment factor does require a higher level of active management behind it – it requires to buy into momentum as it is commencing and to get out prior to momentum fully losing steam – which is easier said then done
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Momentum can work very well whist there is momentum behind the price movement –
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To explain this further – take for example a movie review – if you are deciding on what to watch, you are more likely to choose a movie that has a high audience ratings as well as if friends or family are telling you that it is a good movie – if it is highly recommended and your friends tell you to watch it, then you will likely watch the movie, boosting the viewer numbers – This doesn’t mean you will like the movie – but the trend is set and due to social conformity, you don’t want to be the only one who hasn’t seen this movie – the same sort of factors work their way into the share market – investors don’t want to be the only ones that miss out on the returns – so more people demand the share and the prices continue to rise – however – like movies, once everyone has seen it, the hype behind the movie starts to wane, box office numbers go down and people move on to the next blockbuster
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Quality – This is the representation of investing into financially healthy companies –
- quality shares are often defined due to the company having low debt, stable earnings, consistent asset growth, and strong corporate governance
- Investors can identify quality shares by using common financial metrics like a return to equity, or debt to equity and earnings variability as well as dividend growth – so there is a fair bit of fundamental analysis required
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The quality factor attempts to capture excess returns in shares of companies that are characterized by their quality metrics – therefore this factor has generally performed best during economic contractions – there is some overlap with quality and value investing – most managers who focus on value investing will look at quality companies and make investing decisions based around the price of the asset compare to the fair value – but for a pure quality investor, they will just buy the company if it is of high quality, even if the price has is above the fair value
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Size – This is the purchase of smaller, higher growth companies - Historically, portfolios consisting of small-cap shares exhibit greater returns than portfolios with just large-cap shares
- This is why I have been a major fan of small to microcap companies when putting together a portfolio, especially for myself when it comes to getting higher capital growth over the long term –
- The low size factor attempts to capture excess returns of smaller firms (by market capitalization) relative to their larger counterparts. It has generally performed best during economic recoveries
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This strategy can have higher levels of risk however – but by investing in the lower end of market caps of the share market, it can help investors capture the size factor for additional capital growth over large caps
These are the style major factors – But what is the purpose of this considering these factors when investing –
- From a theoretical standpoint – why would anyone try to focus on size over the quality investment factor? – why not just invest in the index? the purpose of doing so is for three major reasons - to enhance diversification, generate above-market returns and to lower risks when compared to the index – but most importantly – tailor the allocation towards which of these is most important to you = would you prefer lower risk or higher returns?
- When looking at Diversification - factor investing can offset potential risks to investing in shares through targeting shares that provide long term drivers of returns – such as quality or momentum, which often have different performance cycles
- when markets crash equities tend to move in lockstep with the broader market – where the price of these go down across the board – however in down turns, some securities don’t decline by as much
- You might also want to invest in shares at a lower volatility, or risk when compared to the index – Through focusing on a diversification between different types of shares, in different sectors – the risks of investing purely in one factor or sector of the market is reduced
- But On top of this – you can focus on certain factors of the market that have lower volatility – such as the low volatility share factors
- You might also want Higher levels of returns – This is where Certain factors can also provide additional capital growth above the index, but with higher levels of volatility
- When looking at Diversification - factor investing can offset potential risks to investing in shares through targeting shares that provide long term drivers of returns – such as quality or momentum, which often have different performance cycles
- In short – investors can focus on certain factors that meet their returns profiles – In every investment there will be all three components present (diversification, risk and returns)
- But through investing in certain factors – you can help to tailor an allocation towards your investment goals – do you want less risk/volatility? Do you not care about risk and just want higher growth? Do you want growth whilst still managing risks?
- What factors help to achieve these sorts of goals? To answer this, we need to look at what are the risks and returns of each have been from 2000 to 2020 - comparing the risk and return of each factor compared to the MSCI World Index
- Value – return of 7.9% p.a. with a risk of 17.9%
- Minimum volatility – return of 7.6% p.a. with a risk of 11.1%
- Momentum – return of 9.4% p.a. with a risk of 14.8%
- Quality – return of 8.7% p.a. with a risk of 13.9%
- Low size – return of 8.0% p.a. with a risk of 17.0%
- Compared these to the MSCI world index – which had a return of 6.6% p.a. with a risk of 15.6%
- This time period of investments had some major ups and downs – but over the past 20 years, all five of the factors have had greater historical returns than the benchmark index, and some have also had lower risk –
- If you are going for the highest returns - momentum investing would have provided the higher level of annualised returns – out performing the index by 2.8% p.a.
- This makes sense from a perspective of following trends – but interestingly it has also had a lower risk, measured through volatility, when compared to the index
- If you are going for the lowest level of risk - Not surprisingly - Minimum volatility has provided the lowest risk – but also had the lowest return – it did out perform the index by 1% over this time period, but was 4.4% lower in the measured level of risk
- Quality has also had a decent return with a relatively low risk – I find this interesting as some of these factors can overlap – remember that value and quality investors look at similar metrics, but the major difference is the price that they have set to their entry points – hence, if a share has momentum behind it – a value manager will likely not purchase this, whilst a quality manager will
The downsides to this style of investing – trying to guess which factor to focus on and actively manager this yourself –
- These attributes are readily available for most securities and are listed on popular share research websites – but it required the researchers to be correct and for you to constantly be checking to make sure the shares still meet the factor you wish to invest in
- Trying to pull this off perfectly is impossible, trying to pull this off well is hard – but there are professional ETF managers who do this style of investments
So in summary –
- If you are looking for high growth returns then small size, quality or momentum have historically provided above market returns over the longer term
- However – if you are looking for lower risks in equities – both quality and minimal volatility shares can help to achieve this compared to the index – not to say that these investments don’t lose value, because they do in the short term, but historically they have had lower downside volatility when compared to the index
- But through investing in certain factors – you can help to tailor an allocation towards your investment goals –
- So depending on what your return requirements are, this style of investing can help to get investors closer to their returns profiles
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. This episode we are going to have a look at investing in megatrends.
When investing – there are many different approaches people can take – people have different return requirements – hence, when constructing a portfolio of investments, you may try to isolate certain sources of return – such as capital growth or income focuses
- If you are retired and needing a passive income, then an income focus is more important – so purchasing share that pay FF dividends, or owning a property that has no leverage or debt on it will be the focus
- If you are an accumulator – you may wish to focus on capital growth, or target sectors of that don’t typically pay out high level of income returns, but have the potential for higher levels of capital growth – such as technology or healthcare shares
- As part of this focus on capital growth – one method that is available to investors is to target specific investment themes – or “megatrends”
- This is where investors focus on high growth opportunities in sectors of the economy that are expected to grow at higher rates than the economy at large
- So in this episode - we unpack what megatrends are, how they can be identified and invested in, and what they can offer investors as well as the dangers to look out for
What are megatrends?
- A megatrend is a long-term structural shift that transforms economies – I studied these trends in a course at Uni, UQ which offered – Evolution of Economic Systems
- It involves trends of technological and demographic changes – as well as creative destruction
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To be classified as a megatrend – they have to have defining characteristic that distinguish them from normal economic cycles in the way that any changes they create are enduring – i.e. long lasting beyond a normal business cycle
- One of the biggest examples in the past 100 years is that of the creation of cars - this ended the industry of horse drawn carriage industry within 30 years
- This created major economic destruction – as not only did it displace a use for horses which were seen as a major economic good, but also those involved in providing carriages, driving those carriages as well as breeding the horses – ask yourself, who would invest in horse drawn transportation in the modern era? But go back to 1850 and this was a major business
- The invention and effect of cars (or automobiles) was dramatic and long lasting - Creating cars did not just make humans more mobile, it also created the modern geography of cities, including highways, suburbs and shopping centres.
- One of the biggest examples in the past 100 years is that of the creation of cars - this ended the industry of horse drawn carriage industry within 30 years
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But it did take a number of years to get off the ground – as initially cars were only available to the wealthy who could afford the new novelty – but as supply ramped up with many competitors coming to the market, prices started to drop to the point that cars started to become affordable
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The introduction of the television is another example – this was first introduced to Australia in 1956 in a commercial capacity – and by 1975 there was a television in most households
- Television wasn’t just a revolution for media and entertainment, it has also had profound social and cultural impacts.
- We have also had the megatrend of the internet – But this is where two or more megatrends can combine to create another dominate force in the economy, which translates into investment opportunities – In our current world – this would be in the form of streaming services, like Netflix
- What megatrends all have in common is they are intertwined with demographic and technological changes -
- However – to take off fully, they typically need to be allowed to occur by governments – i.e. the legislative power – we saw this back in England with cotton gins – which are a machine that quickly and easily separates cotton fibres from their seeds, enabling much greater productivity than manual cotton separation – this is also called ginning – but in the UK back in the day, to be granted a business licence you needed to seek royal assent - so the inventor of the cotton gin went to the Queen of England for a licence to start a business using this new technology, but was denied due to the economic destruction this would have caused – so they went to France and got granted the right to start their business
- Like all megatrends - the uptake in the use of the technology or service is usually exponential; at first there is a time-lag for adoption, then soon the megatrend is everywhere – which is why the UK soon allowed cotton gins to not fall behind the garment production of the French
- Needless to day - Megatrends can have implications for investors who can correctly identifying and act on them
- Those who invested in media businesses in the 1960s, went on to reap super profits. So too did those buying into computer businesses like Microsoft, Apple and IBM in the 1970s for the PC revolution. This is all an exercise in hindsight of course, however, illustrates the power that megatrends can play in shaping markets and investment outcomes – but there are also megatrends that just turn out to be part of a normal business cycle before creative destruction swallows them up – such as blockbuster
Examples looking forward - Transformative Technology, Society & Lifestyle, Health & Wellness, and Environment & Resources.
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Transformative Technology - Such as cloud computing, 5G, robotics, automation and artificial intelligence, and machine learning.
- Technological breakthrough is the most obvious and has been a defining megatrend since the industrial revolution, which created factories and modern mechanics,
- But investing in disruptive technology is easier said than done. With many investors missing out even when the opportunities stare them in the face.
- The better question to ask is where might technological breakthroughs come from this decade? One possibility is robotics, automation and artificial intelligence (RAAI), or “industry 4.0”.
- There was Industry 1.0 – this was the Mechanization and the introduction of steam and water power
- Industry 2.0 Mass production assembly lines using electrical power, Industry 3.0 – was about automated production, IT systems, and robotics
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Industry 4.0 is about looking forward – it includes smart factory, Autonomous systems, IoT (or the internet of things), machine learning - Industry 4.0 is the increasing automation of manufacturing and services, such that machines manage other machines—via “machine learning”. In concrete terms, industry 4.0 is where businesses use modern robotics, the internet, and big data to create remotely controlled factories, self-driving cars, and self-programming computers and more.
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When looking at existing businesses as an example - Amazon’s giant warehouses come to mind
- Historically, warehouses consisted of static shelves. Workers would come and add or remove items to and from the shelves as supplies and demand came in – each industrial revolution has increased the capacity of this economic environment – from people having to carry the goods through horse and buggy and manually lift the goods to shelves – to having trucks transfer the goods and machines like forklifts doing the heavy lifting
- However – looking forward – In an Amazon warehouse, the shelves are all mobile and moved by robots. The robots move items as customers buy them via a complex barcoding and computer system. Thanks to machine learning, the robots holding trending or popular items, have learnt to move nearer delivery points. In this picture, much of the work done by humans, has been replaced by machines
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This trend once introduced will likely not decline – so there is potential for further investment growth in this market segment
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Society & Lifestyle – This comes in the form of demographic changes like aging populations, the growing middle class in emerging economies and the further expansion of social media
- This is one of the more complex megatrends due to the tie into other megatrends – as an example -in emerging markets, especially India, the population is getting younger – however - in developed countries, especially Japan and North Europe, populations are ageing – so in some areas of the world – there is an ever-greater amount of social life that moving online where millennials’ purchasing power is increasing, but in others the older population make up more of the social fabric of economic spending – what they spend money on also differs – however – across the board, online spending is increasing as well as socialisation online as well as working environments and socialisation
- The major winners of social life moving online have been Facebook, Apple, Netflix, Google and the other so-called “FANG” stocks. Facebook and Google have replaced newspapers as the primary distributors of information and cannibalised their business models (selling audiences to advertisers)
- As part of a work demographic trend - Women entering the workforce has caused a booming day-care industry
- Demographic changes promise to create winners and losers, however, investment opportunities at this stage are less straightforward. India and China collectively have 1 billion young people, most of which are heavy internet users thanks to smartphone availability. This creates a strong runway for the digital economy in emerging markets. Meanwhile, aging populations have meant Japan buys more adult nappies than children’s nappies.
- Aging populations have consequences for robotics and automation which will be required to meet labour shortfalls and likely consequences for healthcare – this brings up the next trend
- Health & Wellness – this includes biotechnology, genomics and gene editing technologies of the future
- the healthcare megatrend has been in play for a number of years where as there in an increasing demographic of wealthy older population across developed nations, there is naturally an increase in the money spent on medicines and longevity technologies
- Healthcare spending is growing faster than GDP in most countries, data from the World Health Organisation indicates. This means that that the healthcare sector is taking an increasingly large share of the global economy. Most of the growth owes to government support, which is substantial and increasing. Governments’ hands have been forced into greater healthcare spending.
- On top of this, you have the wellness movement - Wellness refers to the growing concern with diet, exercise and lifestyle that has developed in developed countries – This predominately is within the younger generations which represents a different market share from that of the aging population
- But perhaps more problematically, obesity is climbing in many western countries. According to the WHO, the percentage of overweight adults is approaching 40% globally. Healthcare problems stemming from obesity are manifold – or in other words, obesity leads to many different health conditions - including heart conditions, diabetes, and some cancers – so health care providers have no shortage of demand for their services – both from the elderly population but also from younger portions of the population that require medical treatment due to obesity or other antithetical health behaviours – such as alcoholism or obesity
- however, healthcare technologies are also improving, tying into the first megatrend. Biotechnology has been a major area of development
- Environmental & Resources – this is part of the global political trend in the west to transition away from fossil fuels towards renewables and technology like battery storage – however - countries that we export our production to, such as China or India aren’t beholden to the same regulations, which is why we see the trend of any energy or pollutant heavy industry being outsourced to these countries –
- This brings out the next megatrend – the western developed nations are focusing on sustainable energy and emissions when it comes to production of economic output - Batteries are essential for sustainable energy, as they store the electricity produced by wind, solar and hydro. Renewables are receiving renewed attention and government policies and subsidies – weather efficient or not – this is where hundreds of billions of dollars are anticipated to be spent in this industry
- the healthcare megatrend has been in play for a number of years where as there in an increasing demographic of wealthy older population across developed nations, there is naturally an increase in the money spent on medicines and longevity technologies
So these are the four main areas of megatrends - The criticisms of investing in thematic trends – you are buying overpriced growth shares –
- Purchasing into thematic ETFs can result in buying expensive in vogue share, where their valuations have stretched too far due to people over purchasing these shares – i.e. they can have a negative earrings but be overpriced
- This is due to the market likely being already aware of the megatrend and hence has already “priced it in” to a shares price – which can often occur overoptimistically
- Tesla is an example - featured prominently in criticism to this effect in recent years, with many investors saying that Tesla is a “bubble”. This line of criticism is often extended to argue that investors are better off buying into “value” stocks, which are companies that trade on lower price-to-book or price-to-earnings. Or simply buying a passive market weighted index fund like the S&P 500 and not taking any long-term views.
- This brings up another point - that just because a company’s share price looks expensive, does not mean it cannot rise further – this is based around traditional metrics – where if a company has a PE of 40+ it is considered growth – but this could mean that other people still want to buy and the PE rises further
- As an example - the rise of Afterpay is an example of this dynamic – a company with no PE due to having lost 10s of millions of dollars each period can be valued at the same market cap as Telstra
How to access – you can try and select the share you think is going to do well yourself
In my opinion – the better way would be to buy a basket of shares in a megatrend – through an ETF - there are many ETF providers for this form of investment thematic
- Megatrends can offer investors a lot - But trying to guess what the next trend is and accessing them has not always been straightforward.
- Previously, investors would have to research and identify the trend themselves, do all the work identifying potential winners, then go buy them
- With the rise of thematic ETFs over the past few years - megatrend investing has become more readily available
- Thematic ETFs are a new arrival in Australia and have become a popular tool for investors
- Thematic ETFs work like the familiar ETFs and index funds: they follow indexes. However, the indexes they track are devised specifically to target megatrends - They can in some instances be built by research houses or consultancies with specialist knowledge of a megatrend.
- How to select a thematic ETF - When selecting thematic ETFs, investors need to ask a series of questions.
- First and foremost is about the megatrend the ETF aims to target. Do investors find the megatrend convincing? How sustainable is the growth? And what does the evidence and data say about the theme?
- You can select an EFT for each specific megatrend – AI to demographics – so do you purchase one, or split between each?
- Secondly, investors must ask how the thematic ETF targets the megatrend. Does a thematic ETF offer true to label exposure to this megatrend? How does it go about identifying the companies driving a trend? How are they weighted when they are purchased? What is the overlap between this fund and any other funds or ETFs an investor might already have? A good thematic ETF should give true to label exposure, have a process for picking the right companies, and not hug a famous benchmark.
- First and foremost is about the megatrend the ETF aims to target. Do investors find the megatrend convincing? How sustainable is the growth? And what does the evidence and data say about the theme?
In summary – these investment trends can provide additional growth for the future – but only if the trend continues
Getting the right selection is important – historically this has been hard for an individual to achieve – but in recent times with the increase of professional managers providing these services through ETFs – accessibility has increased – but the issue comes back to identifying the correct megatrend and then relying on the ETF to purchase the correct companies to capitalise on this trend
A google search can give you a list – let you come up with you own decisions – this isnt advice – but some of the major providers are ETF securities, Blackrock with ishares and statestreet are just to name a few reputable providers to look at
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. As you might have seen, Brisbane has won the bid for the 2032 Olympics – but is this a good thing for the SEQ economy and the people living in it? in this episode we will have a look at the economics of the Olympics – we will Look at the costs and benefits of hosting the games – to see if firstly Brisbane/QLD is going to benefit – and if there is economic gain for being the host –– Lots to unpack here – lets get into it
Introduction - The Olympics have evolved dramatically over time
- From going all the way back to the Ancient Greek times – to the first modern games which were held in 1896
- Over time – like many things – Olympics became more commercialised – as over the past 60 years, both the costs of hosting the games and the revenue potentials have grown rapidly – but it seems like the costs have growth at a greater rate than the revenues - sparking controversy over hosting the games – as to whether it is of any benefit to the host city
- A growing number of economists argue that both the short- and long-term benefits of hosting the games are at best exaggerated and at worst non-existent, leaving many host countries with large debts and maintenance liabilities – so is this true? And if so, what does this mean for QLD and Australia at large
- I’ve got the data from a few studies – but the main one we will be looking at is – “Going for the Gold: The Economics of the Olympics” – link in the show notes at www.financeandfury.com.au
Costs Incurred When Hosting the Olympics
- On the cost side - there are three major categories – 1) general infrastructure such as transportation and housing to accommodate athletes and fans – 2) specific sports infrastructure required for competition venues – 3) and operational costs, including general administration as well as the opening and closing ceremony and security.
- General Infrastructure – One of the major expenses is the general infrastructure to accommodate the anticipated wave of tourists and athletes that descend upon the chosen city - cities commonly need to add roads, build or enhance airports, and construct rail lines to accommodate the large influx of people as well as build an Olympic Village to host the athletes
- The International Olympic Committee (IOC) requires that the host city for the Summer Games have a minimum of 40,000 hotel rooms available for spectators and an Olympic Village capable of housing 15,000 athletes and officials.
- Event Infrastructure - The Olympics also require spending on specialized sports infrastructure. Because of the somewhat obscure nature of many of the events, most cities do not have the facilities in place to host all of the competitions – Think about some of the events, from cycling, needing a velodrome to skateboarding which has been recently added – there are now 41 different sports, of which there are about 340 events all needing different facilities – all of these events and sports need tailored spaces to facilitate the events
- Additional Expenses - Once the facilities are in place, the Games require spending for operations including event management, transporting and accommodating the athletes, as well as the opening and closing ceremonies, and security
- General Infrastructure – One of the major expenses is the general infrastructure to accommodate the anticipated wave of tourists and athletes that descend upon the chosen city - cities commonly need to add roads, build or enhance airports, and construct rail lines to accommodate the large influx of people as well as build an Olympic Village to host the athletes
- So, what does this all cost? An accurate financial accounting of Olympic expenditures in various cities is very hard to find
- Firstly - It can be difficult to disentangle spending on Olympic building projects from planned infrastructure improvements that might not be attributable directly to the games – such as the Brisbane Airport getting a second runway
- Secondly – many of the costs are incurred behind closed doors and never fully disclosed – As an example - Submitting a bid to the IOC to host the Olympics can costs millions of dollars. Cities typically spend $50 million to $100 million in fees for consultants, event organizers, and travel related to hosting duties – as an example - Tokyo lost approximately $150 million on its bid for the 2016 Olympics and spent approximately $75 million on its successful 2020 bid
- But these costs are private due to reforms taken by the IOC – The people of a city don’t get a say as much anymore as to whether they wish to host the Olympics – the public used to in plebiscites but in many cases, people voted to not host the games – so what the IOC has done in response is to introduce a reform, one of which is putting all the bidding behind closed doors. They’re sick and tired of being embarrassed by cities dropping out. So, the process is now secretive.
What are the Benefits of Hosting the Olympics –
- There are some major categories of benefits that exist in the short term and long term: the infrastructure and employment in the lead up, benefits of tourist spending during the Games; the long-run benefits or the “Olympic legacy” which might include improvements in infrastructure, foreign investment, or tourism after the Games – but also intangible benefits such as the “feel-good effect” or civic pride
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Short run benefits – Employment, Infrastructure and revenues and the intangibles
- Employment and spending in pre-Olympics phase - Any large public works project such as the Olympics can lead to a short-run increase in economic activity in the run-up to the opening – but these are dependent on the level of slack in a region’s labour and capital markets (i.e. if there is higher levels of unemployment) – and the GDP figures can be inflated by expansionary fiscal policy (i.e. through government expenditure)
- Many Government forecasts show that the short-term benefits in revenues are higher than the costs of the games - However - these before-the-Games predictions are rarely matched by reality when economists look back at the data
- the studies show actual economic impacts that are either near-zero or a fraction of that predicted prior to the event. Nearly all of the analyses follow the same pattern. Researchers collect any type of regional economic data that is readily available such as employment, personal income, GDP, tax collections, or tourism figures, and then analyze the data before, during, and after the Olympics in search of any changes that occur either during the event or in the preparation stages – their findings are that there is no real changes
- Employment and spending in pre-Olympics phase - Any large public works project such as the Olympics can lead to a short-run increase in economic activity in the run-up to the opening – but these are dependent on the level of slack in a region’s labour and capital markets (i.e. if there is higher levels of unemployment) – and the GDP figures can be inflated by expansionary fiscal policy (i.e. through government expenditure)
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I won’t go through all the numbers for each of the games – but there can be an initial increase in employment for jobs whilst the construction is going on – but these drop off soon after these works have been completed – so it is a temporary boost at best
- But this is only really a benefit when employment conditions are considered ‘sack’ – the construction and infrastructure industry within Australia is not hurting for work – from clients I speak to in this sector, this is the busiest they have ever been – if things continue then these jobs won’t be new jobs – but a re-allocation of existing jobs – therefore little economic benefits will be created – this has been the case in many of the previous games as well – those working on the construction were already employed – the unemployment numbers didn’t reduce – due to desire and skills – if you are someone who is unemployed in the hospitality or business sector, are you going to all of a sudden go out and get qualified in contribution and apply for a role in this sector for a few years whilst things are being built for the games? The answer is likely – no!
- Also – the economic gains through realised profits are concentrated to the construction, hotels, and hospitality industries – many of these can be international companies – so the money flows out of the nation
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The major potential benefits comes in the form that any basic infrastructure improvements have the greater potential to continue benefiting the cities into the future – such as transportation benefits –
- Plus - Whatever the bill in the end is - half of the costs are covered by the Federal government and the rest from the state – So if QLD upgrades roads and transportation, the Federal Government covers half the costs
- initial revenues during the games – These are broadly classified into Broadcasting rights, tourism, sponsorship, ticketing and licensing
- sponsors, media, athletes, and spectators typically visit a host city for six months before and six months after the Olympics, which brings in additional revenue – plus the influx of people that come into the country for the games -
- But who gets this revenue? These are split between the IOC and the host city –
- television rights have represented nearly half of total revenues of the games, with the IOC sharing around 30% with 70% going to the local Organizing Committees. Revenues from international sponsors are split between the IOC and the Organizing Committees, while ticket revenues, domestic sponsorships, and licensing fees are kept by the host city.
- There is no doubt that money is made through hosting the games – but the question is whether these revenues make up the money spent on the games – because otherwise the state is left with larger debts to service as well as potentially unused facilities costing further maintenance costs, meaning more debt – and QLD already has pretty large debts
- Another form of economic boon that is advertised is tourism for the economy at large – but is this level of tourism an increase to the normal levels?
- Tourism - the “crowding out effect” occurs in relation to cities hosting the Olympics – this is when the crowds and congestion associated with a mega-event dissuades other regular tourists or business travellers from visiting the host region – Every host country has seen a significant drop in tourists in the year that the Olympics are being hosted, nullifying any effects that the influx of people that Olympics may have brought with it – regular tourists avoid the area
- This can bring up another major failing of standard before-the-fact economic impact analysis in regards to tourism – this is the assumption of the multiplier for expenditures – Someone going to the Olympics may have less of a multiplier than a regular tourist –
- Costs spent on tickets for travel, accommodation and the games are high – accommodation prices increase as well as travel tickets – leaving less to be spent elsewhere
- Intangibles - While spending directly associated with the Olympics is typically insufficient to cover the costs of staging the Games, short-run intangible benefits must also be considered. Host cities frequently experience a “feel-good effect” both in the run-up to and in the wake of mega-events
- Long run benefits - First, the Games might leave a legacy of sporting facilities that can be used by future generations. Second, investments in general infrastructure can provide long-run returns and improve the liveability of host cities.
- A positive legacy of sporting facilities is the least promising of these claims - due to the nature of the sporting events sponsored by the Olympics, host cities are often left with specialized sports infrastructure that has little use beyond the Games, so that in addition to the initial construction costs, cities may be faced with heavy long-term expenses for the maintenance of “white elephants.”
- Long run issues – Many of these sites are going to be white elephants - The reason why they didn’t exist before the Olympics is because there was no economically viable use for them – so once this Olympics ends, this factor doesn’t change - Many of the venues from the Athens Games in 2004 have fallen into disrepair. Beijing’s iconic “Bird’s Nest” Stadium has rarely been used since 2008 and has been partially converted into apartments.
- General infrastructure improvements clearly have the potential for better returns if they are implemented well – but there is always the issue of the athletes’ villages – in most cases these are converted into another use after the games – I have stayed at the Whistler Olympic Village accommodation as it was converted into a hostel – this has been the case with many Olympic villages, where they are converted into dormitories for universities, hostels or other accommodation sites.
Let’s look at the estimates for the Brisbane games and compare this to the previous games –
- The Brisbane bid documents forecast most of the Games income – these are all in 2032 Dollars – the revenue will come from ticket sales of around $1.2 billion, domestic sponsorship of $1.5 billion, broadcasting rights of around $800m, and the IOC would contribute another $900 million – Including other Revenues the total is estimated to be $4.5bn AUD
- The bid predicts economic benefits of hosting of around $17 billion nationally, with about $8 billion of that for Queensland – This is a pretty staggering estimate – and is likely using some pretty generous assumptions – remember this is against an estimated cost budget of around $5bn
- The real issue is the cost estimates - Past Games have shown that the final budget for staging the greatest show on earth is many times more than originally planned- The budget has ballooned to US$15.4 billion, twice its winning bid of US$7.5 billion in 2013. And it could be more – audits by the Japanese government are pinning the figure at more than US$25bn to $30bn – there were additional costs due to the delays, but these are estimated to be around $3bn – the major issue for them is the lack of ticket sales and tourism – leading to one of the biggest losses for hosting the Olympics
- Is Tokyo a stand out in overspending? Looking at past games – Athens 2004 – Cost estimate of $3bn, spent $16bn, Beijing 2008 Cost estimate of $20bn and spent $45bn (most ever), London 2012 - Cost estimate of $5bn and spent $18bn, Rio 2016 - Cost estimate of $14bn and cost $20bn (smallest blowout) – Tokyo - Cost estimate of $7.5bn then spent at least $25bn
- Minimum blowout of 42%, maximum of 433% - average of around 2.5 times for these games – Going back to Every Olympics since 1960 has run over budget, at an average of 172% in inflation-adjusted terms
- Why do we expect the QLD Government to be any different? May see a cost blowout from the original bid to be around the $13bn mark –
- The one saving grace is that Brisbane's bid, similar to that of the upcoming Paris and Los Angeles Summer Olympics in 2024 and 2028 respectively, will focus on reusing existing venues, refurbishing existing sites and using temporary venues where possible (i.e. ones to be destroyed or removed after the games are done).
- For south-east Queensland, that means using a lot of the venues established for use hosting the Commonwealth Games in 2018 – also instead of the white elephants of Athens and Rio, the hope is that any venue built will also be used down the track – but this is still only a hope – any newly constructed venue is likely to be underutilised
- Is Tokyo a stand out in overspending? Looking at past games – Athens 2004 – Cost estimate of $3bn, spent $16bn, Beijing 2008 Cost estimate of $20bn and spent $45bn (most ever), London 2012 - Cost estimate of $5bn and spent $18bn, Rio 2016 - Cost estimate of $14bn and cost $20bn (smallest blowout) – Tokyo - Cost estimate of $7.5bn then spent at least $25bn
The Bottom Line
- Hosting the Olympics tends to result in severe economic deficiencies for cities – there are some exemptions however
- If a city already has all of the infrastructure to host a games and doesn’t need to outlay any capital – then the costs will be negligible compared to the revenues – however, as has been the trend, cities selected have all needed to increased their infrastructure and facilities to host an Olympics
- Therefore - The economic impact of hosting the Olympics tends to be less positive than anticipated - as most cities have ended up falling massively in debt after hosting the games – and many are left with needless facilities that unless they can be repurposed, end up costing the tax payer on an ongoing basis
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This begs the question - If the Olympic Games tend to offer only a low chance of providing host cities with positive net benefits, why do cities keep lining up to host these events?
- First, even if the overall effect of holding the Games is typically negative, large projects will still create winners and losers - most bid to host the games are spearheaded by leaders in the heavy construction and hospitality industries – which are the two sectors of the economy that stood the most to gain from the city hosting the Olympics.
- Second, economic concerns may only play a small role in a country’s decision whether or not to stage the Olympics. The desire to host the Games may be driven by the egos of a country’s leaders or as a demonstration of a country’s political and economic power.
- As an example - is difficult to explain Russia’s $51 billion expenditure on the 2014 Sochi Winter Olympic Games or China’s $45 billion spend in the 2008 Beijing Summer Olympics
- Until you look at these are countries where the government is not accountable to voters or taxpayers, it is quite possible for the government to engage in wasteful spending that enriches a small group of private industrialists or government leaders without repercussions
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This can also be the case for democratic states that have an disengaged voting base
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The best situation for a nation the benefit from hosting the games is that the city is a large developed area with a high demand for sports and already existing facilities and accommodation – therefore the costs can be kept to a minimum and the benefits can be in the form of new revenues –
- If a city is relatively small – such as Brisbane – then the games in the long term can be a total waste
Going for the Gold: The Economics of the Olympics - https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.30.2.201
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. In this week’s episode, we will be looking at the demand for property in Australia.
If you haven’t listened to last week’s episode – it may be worthwhile – discussed supply of property in Australia – this week we will be focusing on demand – which in conjunction with supply = the price of property
- When looking at property price movements – there is an equation to crack – low supply and high demand = price gain
- e where has limited supply but lots of demand is likely to see some rise in the property price over the medium to long term
- the reverse is true – if you have areas with high levels of supply – or the potential for supply to increase over time at a capacity beyond demand – then prices may not rise and at worse, actually fall.
- As part of this equation – it is important to look at not what is happening now, but what is likely to happen in the future –
- If you are looking at what is happening now – then you will be buying into a market based around current dynamics – which may not hold up in the future –
- As an example - somewhere with limited supply now, but currently has very high levels of demand is likely to already be very pricey – the issue with buying something that is expensive is the further upside capacity that the property may have can be limited – but let’s say that in the future demand stays high, but all of a sudden supply catches up
- This is often the case if it is possible – due to developers wanting to get in on the high demand
- So, if you have inner city areas with high demand – then developers are incentivised to develop this region and therefore -supply will increase – this can do so at a greater rate then other areas if there are lots of infill or greyfield sites, which we covered in last week’s episode
Demand for property – look at what are the drivers of demand, current state of demand and how to identify areas that will be in demand in the future
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This comes from people and their wants and need – peoples demand is represented in property in the form of how many dollars someone is willing to purchase a property for – but this one output (of how many dollars people are willing to purchase a property for) has many different inputs –
- Desire and demographics – The number of Buyers and where are people demanding property –
- The number of buyers comes in two forms – population growth and relocations within a nation
- If population growth is high and people are relocating to certain areas – this can manifest in higher demand
- Centre for Population still expects Australia’s population to grow – but it is likely to be 4% smaller — or 1.1 million fewer people — by 30 June, 2031 due to boarders being closed
- The number of buyers comes in two forms – population growth and relocations within a nation
- Desire and demographics – The number of Buyers and where are people demanding property –
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Where people want to live can be very subjective – as people have different desires – but often this will be in a close proximity to work, or retirement lifestyle living, as well as facilities like shops, schools and transportation
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Desire can also be influenced by emotion – when emotions run hot, in demanded areas – can see FOMO
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There has been a shift - Looking at demand through a lense of demographic demand - many people have had a chance to re-evaluate their life circumstances over the past 18 months - Offices were shut and remote working took over – inner city retail and hospitality has been dramatically altered - moving forward people may work from home at a greater rate and not be as drawn into cities
- This means gone are the days where our ‘home’ was simply the place we rest our heads and enjoy some downtime between work and our social lives –
- If you can leave your home and be within walking distance of, or a short trip to, a great shopping strip, your favourite coffee shop, amenities, the beach, a great park
- That’s why choosing the right neighborhood may become even more important – as the saying goes, location, location, location - This is key because it is estimated that 80% of a property’s performance is dependent on the location and its neighbourhood.
- The more liveable a neighbourhood is – the higher the chance of capital growth – but again, only if supply cannot be replicated
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Beyond the demographics of property – another very important component of demand comes in the form of affordability – how much people can actually afford – if the population has no money, or cannot borrow funds to put towards a purchase, then the price demanded will be lower
- interest rates are at historic lows – this technically means that housing affordability per $1 is as cheap as it ever has been
- Remember that this does not mean that properties are cheap by any sense of any metrics – it simply means that for every $1 that you borrow, it is now the cheapest that it has historically been due to low interest rates
- So you can borrow more dollars and you can afford to pay back this balance due to low interest rates – however it isn’t really his simple – as the principal component of the loan repayment also increase
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The RBA has declared that the interest rate will not increase until unemployment is back to within its preferred range of around 4.5% and inflation is back within a normal band – which may be 2024 based around their forward guidance
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Demand in the form of affordability can always be viewed as an aggregate – when talking about demand for property – it is important to look at what is in demand and where – as these areas can hold up better if interest rates were to rise
- As an example, lets say, using some hypothetical numbers, that overall demand declined in NSW, QLD and VIC by around 10% – but what does this mean? That is where it is important to break these numbers down
- Did demand for apartments and houses decline at the same rate? Or did apartments go down by 20% whilst homes only went down by 5%?
- Looking at Sydney as an example - Demand for units has increased the most over the past year, with demand for houses broadly flat – why?
- An influx of first-home buyers, as well and investors coming back into the market in 2021, has contributed to the increase in interest for units
- When looking at a measure of demand - auction clearance rates are a decent measure to gauge the human emotion
- Sydney – 79.1%, Melbourne – 77.6%, Brisbane – 81.6%, Adelaide – 89.9% - these are all good measures – but looking forward –
- However - in many areas – apartments will underperform houses – even if they are in slightly higher demand – mainly due to supply as we discussed in last week’s episode – A report by the federal government’s National Housing Finance and Investment Corporation (NHFIC) predictednew housing supply would exceed new demand by about 127,000 dwellings in 2021, and 68,000 dwellings in 2022, with Sydney and Melbourne to have the largest excess supply of housing stock – mostly coming from apartment developments
Moving forward some areas will strongly outperform others - How do you identify these locations – i.e. What makes some locations more desirable than others?
- Physical location – locations that are gentrifying and are expected to become good neighbourhoods due to their lifestyle locations
- This means destination suburbs where there is a wide range of amenities that are within walking distance or a short drive are likely to outperform in the future.
- At the same time, many of these suburbs will be undergoing gentrification – these will be suburbs where incomes are growing, which translates into people’s ability to afford higher levels in prices
- A good neighbourhood means different things to different people, but there are some key factors that help to determine which locations have the potential to grow in value faster in the future.
- Generally, a good neighbourhood is determined by the physical location, suburb character, and its close proximity to amenities such as a shopping strip, park, coffee shops, education, and even some jobs.
- In planning circles, this concept is known as the ‘20-minute neighbourhood’. Many inner suburbs of Australia’s capital cities and parts of their middle suburbs already meet the 20-minute neighbourhood tests, but very few outer suburbs do because there is a lower developmental density, less diversity in its community, and less access to public transport.
- So what to watch out for is up and coming neighbourhoods – those that are likely to go through additional population density over the next 10 years – which is the key driver for more amenities being places in – i.e. shopping centres, restaurants, gyms and transportation
- This means destination suburbs where there is a wide range of amenities that are within walking distance or a short drive are likely to outperform in the future.
Where the overall price comes into it - Supply and demand combined needs to be accounted for
- As previously mentioned - Rising property prices are the result of Supply and Demand coming together
- When supply is higher than demand – it is considered a buyers’ market – sellers must compete by offering lower prices to attract buyers
- When demand is higher than supply – it is considered a sellers’ market – as buyers now must compete by offering higher buyers
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Demand looking forward –
- For the last few decades continued strong population growth and declining interest rates has been a key driver of demand
- Australia’s population has been growing by around 360,000 people each year – this translates into around 180,000 new dwellings needing to be built each year to accommodate all the new households
- However - 60% of this growth comes from immigration - so in the short-term population growth will fall with boarders shut
- For the last few decades continued strong population growth and declining interest rates has been a key driver of demand
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But Australia’s planners think that our population will reach 40m people in the next 30 years – so overall population growth will still be one of the highest in the world
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Home prices rather hot at the moment – and this may slow down over the next few years – however auction clearance rates remain high and emotions are running high at the moment - with FOMO having become a key driver of property price growth
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finance approvals are also are at record levels – showing that more people are looking at getting into property at the moment due to low interest rates – but if rates go back up then these approval levels may start to decline
- For Supply – the concentration of 85% of the population in 9-10 cities has helped condense the new supply coming to market
- There is no more land supply to add to the most desirable areas to live in as these are currently built out – the only increase in supply in these inner-city suburbs will come in the form of apartments – however – unless you can afford a property for $1.5m + then buying a home in one of these areas may be outside of your price range – therefore you may need to look at outer lying suburbs that are expected to go through high levels of population growth with a limited supply of land – i.e. already built out
- Australian house price forecasts - Price movements – for 2022 and 2023 – from core logic and Westpac economics – these are just forecasts – there is very small chance they are going to be exactly accurate
- Sydney – 4% then -6%, Melbourne – 6% then -6%, Brisbane – 8% then -1%, Perth – 4% then -1% and Adelaide – 6% then -2% = so for Australia wide – gain 5% in price then see a reduction of prices in 2023 by 5%
- It is expected that more expensive areas will outperform – in nominal terms –
- The current property cycle was initially characterised by all segments of the market rising – other than inner-city high-rise apartments – but some areas have risen faster than others – as the high end of the market has lead growth in property values
- Looking at some of the data from Corelogic – they break property into 3 tiers – high, mid and low - the high tier is the top 25% of property values in any given region, with mid being 50% of dwelling values and low being the lower 25%
- Based around these number – the top tier dwelling values are around $1m+
- In the recent bull run on property - The top tier saw prices go up by 1.8 times the mid and 2.25 times the low tier property when measures as a percentage – so if the low tier increases by 1%, then the top tier would have increased by 2.25%
- This is due to many of the factors previously mentioned – areas already built out and in high demand will be more expensive already – but they can see higher levels of capital growth for houses – not apartments – but also for people wishing to upgrade in housing
- Those already in the top tier were likely not looking to upgrade (i.e. trade in property) – so lower supply of these properties – lead to property price gains
- Add on the fact that interest rates have been low – allowed for additional increase
Summary – it is impossible to tell exactly what the future of property prices has in store – many variables – but you can get a better idea about price movements by focusing on the supply and demand potentials for property -
If it is a PPR purchase – then a greater level of emotional attachment can occur with this purchase – if it is the right property for you for the long term, you can afford the debt repayments, even if interest rates rise and you have a decent level of equity for the property (20%) – then buying into a market that has seen price gains may be the correct decision
If you are purchasing a property for investment purposes – or to hope for capital growth over the years before trying to upgrade properties – then you can look for properties in areas that you may not want to live due to proximity – but others may
If we are looking at investments – ideally – look for areas which have seen supply cap out but demand yet pick up are potentially areas where prices can rise – this will differ from city to city, suburb to suburb– every city will have different supply and demand characteristics
Also - within cities you will see the breakdown of home versus apartments – as we discussed last week, there are different breakdowns between each of these for what the historical average supply has been and where this supply is likely to come from
What to avoid would be apartments in suburbs surrounding CBDs – i.e. 10kms out from the CBD
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. In this episode we look at the future of the supply of property in Australia.
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We will talk about the availability of land in Australia, look at the population density and supply of developments, as well as what the future supply has in store – assuming that the demand stays constant, then the areas with under supply will see price gains – those with supply abundance will see price stagnation
- Australia is a unique country – outside of places like Antarctica, or Greenland with massive land masses but with relativity greater areas of unliveable space – compared to many other nations, we have a high rate of urbanisation with high levels of unused land
- Looking at the land use in Australia – Area KM2 and portion of Australia as a %
- Land for Intensive uses (mainly urban) 16,822 0.22%
- Rural residential 9,491 0.12%
- Australia’s population is estimated to be 25.5m - of this population around 86% of people are living in urban areas –
- This is fairly similar to many other western nations – US is about 83%, UK 84%, France 81% - then you have nations like Singapore or HK – sitting at 100%
- What is different is the portion of the land that goes towards housing this urban population – US have 3% of the nations land that houses this urban population, and in the UK it is 5% - remember that Australia is 0.22% - or 13.6 and 22.7 times greater respectively
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So in Australia - Using some simple math – Just under 22m people are living in 0.22% of the nations land mass
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There are some major reasons for this –
- First - Large portions of Australia are rather inhabitable - 18% of the Australian mainland is considered to be desert, but about 35% of the Australian continent receives so little rain that large population centres never sprang up there – Fresh water is always important, but also rainfall for vegetation for food and livestock – apart from Antarctica, Australia is the driest continent on earth – so much of our land has reduced liveability
- But when accounting for the inhabitable land – assuming it is 35% of the continent – then this still means that the land use for urban population is 0.34% - or 10 times lower than the US
- Secondly - The period of settlement of Australia – focused on the coast and major harbours or river inflows
- Over time – major cities sprung up – Sydney, Melbourne, Brisbane, Canberra, Adelaide, Perth – but not in the same manner as other nations that have had hundreds of additional years of development in a different technological era – where the population was given a greater chance to sprawl before technology made urbanisation easier – Urbanisation is only possible in developed countries due to technology
- Transportation and infrastructure, as well as water and food supplies used to be the major issues for having large sprawling cities
- Transportation and infrastructure – cars, trains, buses, roads – sewage and power – all important to house millions of people in a dense urban area
- Water and food – the ability for people to live in cities is a hard logistical task -
- this does come back to transportation and infrastructure – how do you produce enough food and provide enough fresh water to people in the millions – but then you need to transport this into city centres – just in time supply chains
- Because Australia was starting to grow in population when these problems had mostly been solved – there was no need for population sprawl like in many other nations where the burden needed to be spread out before technology and innovation took over – When comparing Australia to other nations with larger levels of land supply – this starts to become obvious –
- Big cities – London makes up 13.5% of the UK population, or New York making up 2.5% of the US population - but Sydney makes up 21% of the population of Australia
- This limited supply of land surrounding these major cities when accounting for demand is a large part of why the price of property in London, New York and Sydney is higher relative to many other cities in these respective nations
- Where does this leave us as a nation when it comes to property supply in the future –
- We have a massive potential to achieve property affordability in Australia when compared to a nation like Singapore – but not in a practical way based around the way that we live, or want to live
- If every person living in cities moved to rural areas, we would see more of a normalisation of property prices
- i.e. the price of rural properties would rise, whilst CBD prices would decline – on average property could become more affordable -
- But as previously mentioned – this is not how many people want to live – most people need to be close to their place of employment or alternatively, wish to have the lifestyle that a bigger city affords – therefore, people wish to live close to cities – hence to help with population growth and demand for property, additional supply needs to become available
- We have a massive potential to achieve property affordability in Australia when compared to a nation like Singapore – but not in a practical way based around the way that we live, or want to live
- First - Large portions of Australia are rather inhabitable - 18% of the Australian mainland is considered to be desert, but about 35% of the Australian continent receives so little rain that large population centres never sprang up there – Fresh water is always important, but also rainfall for vegetation for food and livestock – apart from Antarctica, Australia is the driest continent on earth – so much of our land has reduced liveability
When looking at the property supply development – what are the options to increase the supply of land?
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more realistic expectations and what town planning is likely to focus on is considered grayfield, greenfield brownfield and infill development –
- Grayfield land is economically obsolescent, outdated, failing, or underused real estate assets or land.
- name coming from the "sea" of empty asphalt concrete that often accompanies these sites – we all know these types of areas – run down places with lots of older industrial sites/sheds that has seen prices go up
- Many of these areas used to be formerly-viable retail and commercial shopping sites but have suffered from lack of reinvestment and have been "outclassed" by larger, better-designed, better-anchored malls or shopping sites - major tenants have vacated the premises leaving behind empty shells – or they are currently rented but the owners offer large prices to buy up these premises
- Similar to greyfield – we have Infill development - within an urban community, it is the construction on any undeveloped land that is not to be considered on the urban margin
- We all have seen this type of development – a developer buys 2-4 old properties located in an inner-city suburb and puts up 100 units in their place
- This development could also be called "land recycling"
- Grayfield land is economically obsolescent, outdated, failing, or underused real estate assets or land.
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Infill has been promoted as an economical use of existing infrastructure and a remedy for urban sprawl
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A greenfield is an area of agricultural or forest land, or some other undeveloped site earmarked for commercial development, industrial projects or other construction projects.
- Around 20% of Australia’s land is Nature conservation and other protected areas (includes Indigenous uses) – this area is not going to be available for greenfield – but with the right regulations – many other areas of supply could be opened up
- When driving outside of cities – you can often see lots of available land – if it has trees on it or is open fields – assuming that it isn’t already owned by a private individual – this would be considered greenfield
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Many housing estates come into existence through greenfield development – but these can take a number of years longer than to infill - master-planned community such as major housing estates can take between 12 and 14 years to complete – this is from the initial developer purchase of the land, to regulatory planning, all the way to the first person moving in
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So, the options will be between green, greyfield and infill development for city areas
- Greenfield developments – housing completions – most often in new estates outside of the CBD – in outer lying suburbs – often 30+ minutes’ drive to the city centre
- Greyfield and Infill developments – multi-unit completions – these will be the supply of property within the CBD radius
Areas around Australia – Stats from Urban Development Institute of Australia
- Sydney – Long run average is around 31k p.a. of new residential market supply
- Since 2016 – supply has been above the long run average –
- But this average is broken down between greenfield housing completions and multi-unit completions – at the last update:
- greenfield housing completions – 8k
- multi-unit completions – 27k
- The supply of units to houses is very different – many more apartments being completed
- Melbourne – Long run average is around 38k p.a. of new residential market supply
- Since 2016 – supply has been above the long run average –
- greenfield housing completions – 18k
- multi-unit completions – 24k
- Units to houses are closer – more units than houses
- Since 2016 – supply has been above the long run average –
- Brisbane and SEQ – Long run average is around 19k p.a. of new residential market supply
- Since 2015 – supply has been above the long run average –
- greenfield housing completions – 11k
- multi-unit completions – 11k
- Almost a 50/50 ratio between houses and apartments
- Since 2015 – supply has been above the long run average –
- Adelaide and Perth are similar – both see a fairly even distribution between houses and apartments
- Like Sydney – the ACT stands out for apartment completions – but the total completions are vastly lower – the long-term average is around 3.8k – of those 800 are greenfield and 3k are apartments
Looking at these trends and how to apply these to what this means for Property prices –
- when demand outstrips supply – prices will rise for property – but when supply outstrips demand – prices will fall
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This supply can be broken down into houses (both existing and greenfield) as well as apartments (infill)
- The future of housing property – limited supply close to the CBD - and uncertain demand
- So in other words - Greenfield and infill will bear the brunt of property availability for major cities moving forward when it comes to homes and apartments
- However - The closer to the city you get, the higher the probability that it is either greyfield or infill
- As For apartments – greyfield and infill development will be where the supply of these properties come from
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For the increase in supply of property in homes, this will come from outer lying suburbs
What to look for and what to avoid – purely looking from a supply perspective –
- Available greenfield and greyfield areas need to be paid attention to
- For homes – if you are buying a home in an area with a lot of available land surrounding it – then there is a higher chance that you may not see any capital growth for a while until the land is fully developed
- For Apartments – if you buy an apartment in an area with either a lot of old run down homes, or commercial sites that are looking a little old – there is a chance that many new apartments can spring up around you
- This equation is more detrimental than for residential properties – as a few residential properties or one commercial property can turn into a hundred+ apartments
- If you are looking for capital growth – it is best to avoid areas/sites that can be developed with increasing the supply of property – i.e. increasing the residential capacity through multiplying the number of houses from the same land supply
- This is mainly relevant to apartments – if you have a block of land in an area (with a house on it or not) that it is hard to increase the supply of land – i.e. everything is already built out on – then this can see capital growth
- Suburbs with limited available land and new houses, i.e. not derelict properties – that are closer to the city and do not have the capacity to be built out – these can rise in value – or at least maintain much of their value –
- The sector that is unlikely to grow in capital value – assuming demand stays constant – are apartments – the supply can outstrip demand easily compart to greenfield –
- For greenfield projects – as time goes on, you need to start looking further and further out from the CBD as the land supply gets soaked up
- However – for greyfield or infill projects – you will find this land often within 5-10km of the CBD – the maths for this exchange doesn’t bode well for supply versus demand – think about turning 2-4 properties into 100 – this only works if you own one of the properties being turned into the 100 – as you can command a higher price – but if you own an apartment in the area and now this is turned into one of thousands – then the supply can outstrip demand – which means that there are few people who can demand your property
- This is just one side to the equation – need to look at demand – which will be covered in next episode
http://udia.com.au/wp-content/uploads/2020/03/State-of-the-Land-2020-Summary-of-Headline-Statistics.pdf
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome To Finance and Fury. Is the market at risk of de-risking? Bit of a mouthful – but over the past 12 months the share markets has been going on a run with higher flows of capital going to higher risk shares over those that could be considered defensive shares – those with lower historical risks due to the backing of fundamentals, such are earnings
In this episode – we look at the cycles of share markets – looking at the longer-term trends of periods of risk taking and periods of risk avoidance – in which prices of different segments of shares can move independently from the overall index price movement – index may be going up but segments of the market can decline in prices
As previously mentioned, certain sectors of the market have performed very well over the past 12 months – Tech sectors, financials, commodities and other highly leveraged share sectors have performed well - This has seen segments of the market start to underperform the index in Australia – as a massive chunk of the ASX is made up of the banks and commodity companies – in the US, the upper end of the index is tech companies and financials
- In Australia - Under performance has occurred in the historically lower risk segments of the ASX – communication services, industrials, utilities, Health Care, even Gold mining companies – whilst these companies are all incorporated in the ASX index, it means that other companies have outperformed by a larger margin
- If the index is 50/50 split between lower risk and higher risks segments, and the index has performed 20% over the past 12 months – in reality any combination of returns could have occurred to get this aggregate outcome – however – let’s say that higher risk shares have provided a 40% return, whilst the lower risk segment have provided 0% returns – then this means the index would have performed by 20% over this timeframe – in hindsight, where would you have wanted to be invested? The lower risk shares, the index, or the higher risk segments of the market? Obviously, the high-risk segment
- But what about looking forward? Can these higher risk share categories constantly outperform?
Markets have cycles – ups and downs – the nature of market volatility –
- But these ups and downs of the market are viewed as an aggregate of all shares in all sectors when viewed as an index – but what makes up the index? Thousands of individual shares
- When separating out the underperforming companies to the over performing companies, the ASX has had an incredible return – especially over the past 18 months
- Growth/Risk companies have returned 70% over 18 months
- Value shares have returned only 8% over this same time period – this by itself is a below average return, but when compared to growth companies, it is a significant underperformance
- The prices of shares is based upon the behaviours of the investors in the market –
- The price responds to inputs – the number of buyers and sellers in the market – which can be broken down further into economic human action which is actuated to what is anticipated
- Praxeology - is the theory of human action, based on the notion that humans engage in purposeful behaviour, as opposed to reflexive behaviour (like increasing saliva in your mouth when you see food and are hungry) and other unintentional behaviours (like slipping over on ice)
- People want to make as much money in markets as possible – so when economic dynamics are present – the market is anticipated to respond in a certain manner – therefore, people change their investment positions around this, and the price of these shares change – how much of this is a self-fulfilling prophecy is anyone’s guess – regardless, the historical numbers don’t lie
- When it comes to investing – whilst emotions can be the catalyst to your response, which may not be rational or in your best interest, people believe that they are responding with purposeful behaviours when investing – that is to make the most money possible – or to avoid losing money – even if the end result does not work out in this manner – i.e. you end up losing money – you still are acting in a purposeful manner – even though it may not be rational or work out for us in the long term - we have myopic risk aversion built into us epigenetically
- There is no such thing as perfection – a humans we will always get things wrong – but our behaviours to help avoid further losses in markets is to follow crowds – if everyone is selling and we aren’t is there something wrong with us? Do we not know something that they do? Our brains then think that obviously, they know more than us, then this means we also need to sell – which locks in potential losses in the portfolios
- This is the issue with human behaviours in the market – because the market is millions, if not hundreds of millions of investors participating in the selling and purchasing of securities which are publicly available to anyone
- So in the end the price of any share comes down to the sentiment of the market – supply and demand –
- When markets are hot, they are hot – when they are cold, they are cold – this cycle follows human responses to the inputs provided to the market – i.e. all publicly available information which translates into market sentiment
But this behaviour translates into both rational and irrational investment behaviours – when greed is prevalent in the market, fundamentals are thrown out the window – therefore risky companies do well – but when sentiment turns, then investors can have the realisation of their precarious positions – want to exist these and seek other unloved investment opportunities
- Average cycle from 1955 for the S&P500 index – full cycle is around 70 months or just under 6 years – this is the average, some go for 50 months, some for 100 months
- The share market can be broken down into two share segments – PE expansion companies and EPS Growth companies
- Remember - When I talk about the market – I am talking about the millions of buyers and sellers that exist – who each are making their own decisions on whether to purchase a security or not
Phases of the market cycle – four phases, despair, hope, fundamental and optimism
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Despair – this is the stage where the market sentiment is basically in despair - investors which make up the market are worried about losing money on their investments, so they are selling – this creates a situation where prices on listed securities decline – when you have an excess in supply of sales orders, the prices will decline – often quickly when not money people are willing to purchase in this period of despair – this cycle normally lasts around 13 months
- Drawdowns – historically the market has declined by 26%
- PE Expansion companies have declined by 23% and EPS focused companies declined by 3%
- So the brunt of the market decline has been due to Growth companies, with value companies seeing lower declines
- Hope – this is the next phase that the market enters into after the initial despair – that is hope that market returns will become positive once again – but there is little fundamental reasoning for this – lasts on average for around 11 months
- Therefore the shares that do the best in this period are those that investors are investing in our of hope – i.e. those that do not have much basis in regards to logical reasoning why people should be purchasing them
- As an example – let’s say that a company is expected to grow their earnings 20% p.a. for the next 10 years, this would sound like a great investment – but what if they are starting off at a point of a negative $200m of net earnings – then after costs they are expected to break even in 10 years’ time
- The price of this share going up massively in this period is an example of hope – the hope that the projections of this company become manifest – these is a chance they do not, there is a chance that they do, but investing in a company today that is losing money to see potentially bigger earnings growth in 10+ years is an example of hope – investing out of hope that a company will do well in the future even though it is losing money today – the issue with this is that anything can happen in the market – this company could be out competed and replaced by a competitor – or their costs go up, or revenue growth is now what was estimated – therefore, the investment into this is purely based on hopes of major returns in the future –
- Therefore the shares that do the best in this period are those that investors are investing in our of hope – i.e. those that do not have much basis in regards to logical reasoning why people should be purchasing them
- Drawdowns – historically the market has declined by 26%
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The more people invest in their period, the greater the overall returns to companies will be – i.e. the more hope there is in the market that we are out of the worst, the better the overall returns because more investors are willing to sink their money into the share market
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PE expansion companies do really well in this period compared to the market returns – the market returns have been 32% - whilst the PE companies have been 42% - which means the fundamental companies are sitting at a negative 10% returns
- This creates a situation where if you were investing for fundamentals, you would have been sorely disappointed
- Fundamental – this is where the market starts to regain some sense of pricing and focus on what matters – earnings and underlying performance of companies
- Risk is attractive in periods of high hope – but the fundamentals begin to matter more when hope in the market has gone
- When market fundamentals matter and clearer heads prevail, then the focus on fundamentals become more prevalent in markets
- The market is still up in this period – at a total level of 34% - but Value companies account for a return of 54%, whilst growth companies are at a -14%
- This cycle of the market is the longest – at 32 months
- Optimism – when the market is getting into the late stage of the cycle – when the price gains of the fundamentals companies outstrip the reality, people think that the tough times are over, and that things are looking up for the future -
- In this cycle – the market tends to move by 25% and last for around 14 months
- The PE companies grow by 23% of this and the EPS companies grow by only 2% - fundamental companies no longer justify the prices based around their cashflows and the previously unloved PE companies are back in favour
- Optimism prevails for around a year – before the cycle repeats
- Then the despair kicks back in and PE companies crash whilst value companies decline as well, but not by the same extent – important to point out that these timeframe have been the average over the past 66 years, doesn’t meant that every cycle is the same – some may see much longer periods of despair, like in the GFC, or shorter periods such as at the start of 2020, where despair only lasted 3-4 months instead of 13 –
- But what is important is understanding the cycles – every cycles timeframe will be different – every returns for each segment will be different in absolute terms – but what will be the same is that when thing are in despair, value companies do better than growth, when hope is present, growth companies do better than value, when fundamentals are important, value companies do best and then in the final stage of optimism, growth companies do well again
Certain shares do well in certain cycles – In only two stage of the cycle do fundamentals do well – so 2/4, or 50/50 are fundamental shares outperforming - but it is for the longest period of time that they do so, which makes up around 64% of the cycle
- Risk and High beta shares do well due to emotions in the market – not realities – they also suffer at the extreme ends –
- The largest downturn for fundamental companies is -10% during the hope period whilst the market is at an overall positive return – however growth companies lost 23% and 14% in the despair and fundamental period respectively, which underperform the index significantly
- Where does the market currently stand? It appears that we are still in the hope period – but we may be nearing the end of this stage in the cycle – This means we may be soon be entering into the fundamentals period – timelines are off – but the return comparisons in magnitudes and market cycles are still on point
- There was a despair period back in march and April of 2020 – hope soon took over, which has lasted for the last 12-18 months – now things are starting to calm down and due to economic realities like inflation and potential interest rate increases, fundamentals are now more in focus
When fundamentals become important – however, the timeline will likely be off this time – the growth companies may continue to shoot the lights out – but if the market starts to turn, the things to look out for
- Value – Assess the expected cash flows and earnings, dividend payments
- Enterprise value and book value
- Intangible elements – management and brand
- Quality – prefer higher quality companies with proven business models (not start ups with no market share or proof of concept for their product)
- Resilient and financially robust – and have higher operating efficiency
- Sentiment - An improvement in the expectations
- Can this relate into higher expected flow through into better earnings and cash flow, dividends – leading to capital growth
- Risk – are they lower volatility
- Lower sensitivity to the market (measured by Beta)
- Or a purchase that allows additional portfolio diversification
Summary –
- Whilst growth companies have outperformed value companies in two of these periods including the current one we are in, not only do value companies have a greater time period being positive, they also avoid the long term declining trends when markets have a downturn
- From here – there is a high chance that fundamentals, value companies will become in favour with the market
- What could drive the risk rally further from here is a lowering of the cash rate and a general optimism in markets that the economic reality doesn’t match – however this is totally possible –
- But at some point this trend of hope will fall flat – leaving the currently in vouge share susceptible to a decline
The risk rally can continue – but the better place to be in risky assets based around historical data is the non-hope assets – those that have earning backing them, and can provide some basic utility to society
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. What does your future have in store for you? It is hard to say exactly – so instead, what does your ideal future look like? You might be thinking about next year, the year after that, or 20 to 40 years in the future – Let’s say that in regards to this question – think about once you have achieved financial independence – i.e. finished your working life and are retired – where are you, how are you living, what are you doing and how are your funding this? Have you become a grey nomad, are you living by the beach, spending your time playing golf?
- This is a big question – if you have never really thought about this before then you probably can’t form a good mental image of this without taking the time to think about it – In this case, it may be worthwhile to stop listening now and spend some time to figure this out – if you need help, or some templates, we have some at the website – financeandfury.com.au – register to the members section for free and get all the handouts and tools
- But if you do have your ideal picture of what your financial independence looks like - Everyone listening to this will be different in what they are picturing – having a different idea about what they want to do in retirement, how much this will cost them, and how they are going to fund this – some people will want $300k p.a. and other will want $50k p.a – I see this in my daily life in advising clients – everyone has different wants and capacities to achieve this
- This difference is great – everyone has different desires, dreams, things that make them happy – as well as financial recourses to turn their goals into a reality – as an individual, you have the right to choose how you live your life, both now and in retirement
- But as an individual, your ability to achieve your desired outcome really comes down to your freedom of choice – which comes from the freedom that society allows the individual to have – where the laws of a society are dictated to us by Governmental powers
- Your freedom to choose what you want to do – your ability to choose where you live, how you travel, what you do with your money are all incredibly important when it comes to determining your own financial freedom
- You also have the freedom to choose how you will fund this – though business, personal investments, superannuation, property – but all of these are subject to legislative risks – if the government that you live under doesn’t allow property rights, or you to own anything, like North Korea, then you are out of luck – you will never have a retirement as the state isn’t going to fund your retirement, and you have no capacity to accumulate wealth towards your retirement – as private ownership is outlawed – you work until you die, scraping by every single day in an effort just to feed yourself
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This is where Freedom is important – if you had no freedom of choice and had to rely on a centralised entity deciding for you, where if the state has the power to give you everything, they also have the power to take everything away from you
- But this is why we are lucky to live in this country – we have one of the most generous social security schemes in the world – but on top of this we still do have incredibly high levels of investment and financial independence freedoms – this makes me very appreciative when looking around at what is happening in other countries around the world - look around at most other nations in the world –
- Cubans are protesting in the streets for their freedom – they have been living under communism for decades and want their own self-liberty
- South Africa turning inwards on itself through rioting which is destroying economic infrastructure which will further exacerbate their economic decline with supply issues of the basics, like food, medicines and energy
- But this is why we are lucky to live in this country – we have one of the most generous social security schemes in the world – but on top of this we still do have incredibly high levels of investment and financial independence freedoms – this makes me very appreciative when looking around at what is happening in other countries around the world - look around at most other nations in the world –
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Or North Korea as previously mentioned, or Venezuela – where 90% of the population lives under severe food shortages – the average population lost around 11kg in 2017 alone – but those at the top live very well – not like an economically free nation, it is purely the politically connected and politicians themselves that live well – due to the centralised nature of the state
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What is happening in these countries is a stark reminder that no matter how free or economically powerful a nation once was – there is always the ability for it to slide into decline with governmental central planning – but also how lucky we are to not be living under a completely centrally planned economy
- There is one simple test to determine where the best countries to live are – look at where people want to move – nobody is trying to emigrate to nations with highly centralised governments – people are trying to flee these nations
- There has been a common trend through history – the only walls communist/socialist nations have ever had to build are those that are stopping people from leaving – which again limits freedom of movements
- Freedom to choose is the most important thing for you to be able to achieve your financial independence – But the more power the state is given, the less your freedom of choice inevitably becomes
- I love freedom – but I have to work within reality – there is no free society – that is basically anarchy where there is no government and no centralised laws – in which case society would fall back onto the non-aggression principle
- There has never really been a society with no government system – even small tribes acted as mini-monarchy’s – with a tribal leader –
- Based around the current government systems of democracies in most of the developed world – There is a score of the Economic freedom index – done by Heritage.org
- Australia is one of the highest-ranking countries on this list
- Property rights are cornerstone of any economic freedom in my POV – i.e. you legal right to own assets
- This comes down to having a strong legal framework that protect property rights, and a robust rule of law mitigates corruption - When the enforcement of your rights is high, expropriation is highly unusual, and enforcement of contracts is reliable
- Compared to other third world nations - The judicial system needs to operates independently and impartially and can enforces laws against bribery and corruption effectively when they are discovered
- Sadly – Australia has been declining in property rights since 2015 – we were at 90 out of 100, but we have dropped down to 81 out of 100 – still very good when compared to many other countries – but this declining trend if it continues means that in 30-40 years, we may be no better off than many other nations currently experiencing economic worries
- Under a democracy - Your freedom isn’t normally reduced significantly overnight – it is done through one piece of legislation by another over years – every new law introduced technically mitigates the individuals’ rights – remember there are around 180 new laws and amendments to laws in Australia that occur every year
- Negative rights, or as the US constitution states, God Given rights – actually date back to the natural rights based around the Greek philosophers works – in the US constitution it is stated as “Life, Liberty and the pursuit of Happiness” – which are seen as inalienable rights which all humans are born with, and which governments are created to protect
- Instead – the thing that many people are worried about is that it is the governments that are infringing on these rights as opposed to protecting our rights
- When it comes to your own inalienable rights – I believe that anyone who works and puts the resources needed into themselves should have the right to retire exactly how they wish – if they work towards this then you should be able to achieve your desired goals, but based on your own economic reality
- This isn’t to say that someone who has never work or never invested has the right to retire to a multi-million dollar property on the coast and get $250k p.a. in passive income at the tax payers expenses – but based on my experience, more people have pretty achievable retirement goals -
- But if someone has done everything right, through planning for this and directing the necessary financial resources to this goal then they should have every right in aching this
- This boils down to the real issue - getting off the system is almost impossible unless you work at it – if you never worry about where you will be financially in 20-30 years then you may have a problem – where the state determines what you are entitled to
- But using the system that is in place to better your life through using our economic freedoms shouldn’t be taken for granted – it should be something that is taken advantage of and used on a daily basis -
My only concern for people being able to achieve that goals over the long term is that property rights are taken away – such as a communist system
- for anyone to achieve their desired outcome in relation to retirement – they need to own something – otherwise they are living off the state and hence living the lifestyle subscribed to them by the powers that be
- The issue is that under any state where people aren’t allowed to own anything, there is no funding mechanisms for social security – i.e. taxation or a government that can print money without hyperinflation the economy – in other words, not living in a centrally planned economy
- However – where we currently sit - As long as property rights are retained – there is still a lot of freedom that you can take advantage of –
- When comparing Australia to countries like Cuba or South Africa, Venezuela, North Korea – is much better off – better take advantage of it and not take it for granted – not taking this for granted is one of the most important points of this whole episode –
- When people think that they are hard done by, or deserve more – they turn to the entity that can provide them with what they want – in private employment – this is your boss – you ask them for a raise and if you are producing more than your output then you deserve this – however, in a democracy then for those who are not working or willing to allocate a portion of their income towards their futures can turn to the government as the solution to their problems
- The issue is that the more people rely on the government – the more they give away their own individual freedoms and ability of choice – the more this happens the less freedom the population is given when it comes to achieving their desired goals
This episode isn’t meant to be as pessimistic as it sounds – because there is a way out of this at the individual levels
- At the societal level – I have no idea if there is a way around the slow reduction of economic freedoms – democracy is always going to shift towards a system of having greater government controls – the more a government control the more they can promise – governments have something that people want, so they vote them more authority to provide this – it is a cycle of all nations/empires through history – they rise and they fall – this is something that is outside of our individual control
- But as individuals – we need to come up with our own gameplan – we cannot rely on the government to determine what we need in our daily lives – they have never met us, and as we opened the episode on, everyone’s needs are different – hence no one policy or level of social welfare can provide what is needed for the population at large – as this is made up of millions of individuals
- One of the greatest quotes which hammers home this fact is by Thomas Sowell - "No one will really understand politics until they understand that politicians are not trying to solve our problems. They are trying to solve their own problems - of which getting elected and re-elected are No. 1 and No. 2. Whatever is No. 3 is far behind"
- This is where everything comes back to Creating your own freedom – within the legal framework provided to you by the government - This comes in many forms depending on how you go about this – your ability to gain financial independence, do what you want, is reliant on you -
- The first step is to Find out how you wish to spend your time – and how much this will cost – if your current lifestyle is what you are comfortable living with, then great – if not, what would it cost you to do what you want?
- The rest of the planning is centralised around this point of reference – the end target to achieve your retirement goal
- Then - Focus on what you have property rights over and Get into the game –
To break this down further - Look at your goals – lifestyle requirements and passive income requirements
- Lifestyle – Everyone needs somewhere to live – which comes back to owning a property –
- This is a big one – property prices are high – the only thing that can bring these down if you don’t own property is a major increase in interest rates, but central banks/Governments don’t want this to occur – so getting into property has priced many people out of the market – but getting in is still important – if you don’t currently own property, set goals to achieve this -
- Mainly for Self-sufficiency –
- Passive income – investments and retirement assets – this helps to build your own self-sufficiency to become independent from needing to work or requiring government assistance
- Financial independence is great – but there are two major issues with this – price inflation and shortages – These go hand in hand in a way – shortages create price inflation, but price inflation creates shortages in what you can afford – which means your passive income and investments don’t provide the same level of consumption as they would in today’s dollars – normal inflation of 2.5% p.a. should be accounted for anyway – there are tools on the website to help with this – but if inflation is 5% p.a. instead, or there are a few years where inflation reaches 10%+, this can reduce your purchasing power
- I aim to keep my expenses down to a minimum through becoming food, water and energy independent over the next 5-10 years – this means that we can be less reliant on my financial resources in the worse case event that we suffer a severe economic downturn
The end game – what to do in your own life -
- Focus on high-value priorities and goals – then work out how to get there
- But the most important part is don’t take for granted the freedoms we currently have to build wealth – there is no financial freedom without having freedom in a society
- Seeing people currently trying to escape nations where there are no economic freedoms is a reminder that we have things pretty good – and that they have a view that they are entitled to the basic freedoms we take for granted – as opposed to thinking that we are entitled to other people’s money – which over 50 years could lead to a system where governments are given the power to strip all economic freedoms away from people
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury - Is ESG investing the way of the future and good for your portfolio?
Within the last few years, large publicly listed companies and investment managers investment are really paying attention to what is known as an ESG score – which stands for environmental, social and governance – it is meant to be used as a determinant on the sustainability of investments – the concept of sustainability it is growing in prominence in every sector of the economy, but particularly within institutional investments and publicly listed companies
In this episode – I want to look at what is ESG, how it is determined and scored, and can following this trend and only investing in ESG companies help your bottom line when it comes to long term returns?
To take a step back – society has been moving towards greater levels of sustainability and environmentalism – with this shift – Publicly listed Companies are becoming concerned with where they fit into this – as well as investment managers wishing to purchase these companies
- if you are a fund manager investing in a weapons manufacturing company, is this an ethical investment based around ESG metrics? If it doesn’t score well and your mandate determines that you cannot invest in low scoring companies then this would have to be excluded from your portfolio – even if the world is going to war and Raytheon is about to make a lot of money
- But from Raytheon’s point of view – you want to be considered by professional investment managers to be an ESG company so that that institutional money can flow your way – because if you are cut off from that market, your share prices will suffer and you would be failing your duty as a board member to maximise shareholder value – i.e. providing returns to shareholders
- So major corporations are becoming very engaged with the parties that provide ESG scores to help not only incentives further investment in their business – but also to help determine from an outside/institutional perspective if the company is worth investing in – as public investors have shown an interest in putting their money where their values are –
- This has also seen the rise of many managed funds, brokerage firms, and ETF providers offering products that employ ESG criteria as the sole determinant for investment decision making – people want these products so the market is providing to meet this demand – but does following ESG scores as a criteria for an investment strategy actually work for a long term investment strategy?
What is ESG - Environmental, social, and governance criteria are a set of standards for a company’s operations
- Environmental criteria consider how a company performs as a steward of nature - can include a company’s energy use, waste and pollution, natural resource conservation, or treatment of animals
- criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks - For example, there may be issues related to a company’s ownership of contaminated land, or its disposal of hazardous waste and management of toxic emissions, or its compliance with government environmental regulations
- Social criteria examines how it manages relationships with employees, suppliers, customers and communities
- Does it work with suppliers that hold the same values as it claims to hold? Does the company donate a percentage of its profits to the local community or encourage employees to perform volunteer work there? Do the company’s working conditions show high regard for its employees’ health and safety? Are other stakeholders’ interests taken into account?
- Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
- A big one I have seen is ethics of the company, board composition and transparency – does the company uses accurate and transparent accounting methods and that stockholders are given an opportunity to vote on important issues? Do they have a diverse board, or is it all old white males? Are there any conflicts of interest in their choice of board members, do they use political contributions to obtain unduly favourable treatment, or do they engage in illegal practices?
- ESG investing is sometimes referred to as sustainable investing, responsible investing, impact investing, or socially responsible investing – however – this is very similar to CSR - Corporate social responsibility
Based around these criteria - an ESG score is calculated –
- An organisation’s ESG score is a numerical measure of how it is perceived to be performing on each of these criteria – Each of the Environmental, social, and governance criteria are given an individual score then it is combined into one
- The key word in this score is ‘perceived’ - An ESG score is calculated based on how an organisation is seen to be performing – that is, how its behaviour relating to ESG issues is reported – not what it is actually doing behind closed doors
- Just as with the building of corporate reputation, there is a gap between reality and perception. While a business may have a strong policy around carbon emissions and waste reduction, or a system of transparent, performance-based promotion, if that information is not in the public domain, it won’t impact its ESG score.
- Alternatively – if a business has a face value of supporting every social movement whilst enacting policy behind the scenes that is antithetical to these values, then this is not picked up in these scores - ESG scores don’t necessarily reflect the internal reality of a company - as ESG scores only measure how corporate behaviours are reported and the face that they put on to the public
- Therefore, a reality gap exists – and poses a risk – as if you are basing investment decisions purely around an ESG score, then this not meet your investment desires if you are trying to invest in a socially responsible way
- Let’s have a look at a few examples – when comparing the ESG risk scores
- Disney – they have a wonderful public perception – and own a massive chunk of media and merchandising rights – theme parks, movies with the rights to Marvel, Star Wars, media as well, like ABC in the US – they also have merchandising rights, so many toys are marketed and made – where are they made? Well, it has become apparent that it may be slave labour – through internment camps in China –
- So – based around the issues with the use of Chinese free labour – how would they rank? Pretty poor you would think - ESG Risk rating is Low based around the official metrics – 14.9 – Actually a lower risk than Netflix – they are given a ranking of 87% by CSRHUB – which is an ESG rating agency
- Another example – Tesla – Most people would consider this company as very environmentally friendly – good social governance – and is great for society at large – on a score of 0-50 – where 0 is no ESG risks, meaning it is the cleanest company on earth with the best contribution to society and lots of diversity in the board and management – where would you place Tesla – 10? 20? – well it is 31.3 – which is high risk – CSRHUB gives them 38% out of 100%
- But good news – BWM, or Daimler are all lower – 27.7 and 25.2 - CSRHUB gives Daimler 87%
- To put this in perspective – BHP has an ESG risk rating of 30.1 – with a 75% rating - so Tesla is a lot lower – even BP Oil got 64%
- Disney – they have a wonderful public perception – and own a massive chunk of media and merchandising rights – theme parks, movies with the rights to Marvel, Star Wars, media as well, like ABC in the US – they also have merchandising rights, so many toys are marketed and made – where are they made? Well, it has become apparent that it may be slave labour – through internment camps in China –
- How are these risk scores calculated? Because does it make sense that these companies rank where they do?
- It comes down to who is doing the scoring - Analysis companies use various calculation processes – but these scores are done at the behest of these companies – If you are a major company, you go to a rating provider, hand over all your information and they come up with a score – some of those scores I mentioned come from Sustainalytics – a subsidiary of Morningstar – one of the worlds top rating agencies - the others come from CSRHUB
- Due to the individual companies’ methodologies – it is actually harder to determine what contributes to an individual score – as these will vary depending on which analytics they employ. Research by State Street showed only a 0.53 correlation between ESG scores for the same subjects between another provider, MSCI’s ESG ratings and Subanalytics – therefore there is about a 50% relation between a score on their board, or their environmentalism – so one company that may seem to be an ESG champion on one site, may not be on another
- This is all due to the fact that ESG scoring is the measurement of perception rather than reality - so ESG data systems can be largely subjective and vary dependent on which company is doing the rating
- so how does anyone make an accurate investment decision based around these wildly varying metrics?
- The answer is that you really can’t under their current form ESG ratings and scores are often based on voluntary company self-disclosure and partial data.
- The issue is that most ESG scoring systems from some companies include an analysis from publicly available print and social media content – so if a companies social media profile supports social movements domestically, whilst using slave labour abroad which is not incorporated into the metrics – this company will appear to be a higher rating on ESG than a company that doesn’t participate in the same practices, but isn’t as active in changing their twitter profile
How does an ESG investing approach help with portfolio returns –
Looking at a few examples –
- Australian iShares ESG fund – Holdings, CBA, CSL, WES, MQG – but then FMG, Transurban, Newcrest, James Hardie – and Xero – so in the top 10, three are mining companies – performance wise this was only created this month – so no data
- Other Funds – BetaShares has an Australian Sustainability Leaders ETF – 1 year is 17.79%, 3 years is 10.80%
- The benchmark index of the Nasdaq Future Australian Sustainability Leaders Index – which the BetaShares fund has underperformed by 0.5% at every stage
- Another Australian Fund is Van Eck - 1 year is 25.02%, 3 years is 10.17% or 5 years of 7.59%
- In comparison – the ASX300 provided 28% over 1 year, 9.74% over 3 years and 11.2% over 5 years
- iShares Core MSCI World ex Australia ESG Leaders ETF – Returns of 30% over 1 year, 14% over 3 years and 14.5% over 5 years
- International index - 28% over 1 year, 14.8% over 3 years and 15% over 5 years
- There is no clear winner – The indexes have slightly outperformed in the long term
Can this be a good investment for the long term – as more people start ESG investing?
- There could always be the issues of "Bad" companies performing very well and missing out on this –
- However – due to public perception – A company with a higher ESG score may start to gain more traction in regards to investment inflows – especially from financial services companies such as JPMorgan Chase, Wells Fargo, and Goldman Sachs – and ETF providers in Australia
- The very nature of more money flowing into highly rated ESG companies could be a long-term investment – not for the actual performance of the companies themselves in fundamental terms – but from a perspective of more money flowing into these companies and hence the prices go up
- Even for one of the largest investment sectors within Australia - Superannuation funds – Their mandates may limit or eliminate non-socially responsible investing
- We have seen the divestment from Coal within superannuation funds over the past 12 months – coal companies on the ASX are not faring well – most have seen a decline in prices over the past few years – many saw a loss in EPS recently with coal prices plummeting to $50USD a tonne in July 2020 – but it is back to all time highs at $136USD a tonne – so coal companies may actually rebound quite a bit – but this component of return may not be included in the ESG investing
- Brings up interesting issues – as a super fund their fiduciary duty is to provide long term returns for the sole purpose of their members retirement - choosing investment strategies based entirely on investments classified under ESG and socially responsible investing score could start to lag markets depending on the score allocated to companies
- Remember – score can be subjective – large companies with a good social presence and the ability to have great PR
In summary –
If you are going to be investing only in Large cap companies and using ESG metrics – probably nothing to be gained here – they will all have great ESG scoring based around the metrics and how companies determine these scores –
Mid and Small cap companies – these may be left unloved by these types of funds – but this is where a large chunk of capital growth comes from the market –
Companies at the top that have a large portion of the market shares have limited capital growth when compared to new companies coming in
If you are going to invest – then invest – if you are looking for ESG – don’t rely on metrics from companies providing these – decide if a company meets your ethical criteria
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury - The big question on many investors minds at the moment is if inflation is going to be transitionary, or something that is going to set into the economic framework for the long haul – maybe not for the next decade, but for the next few years at least – if you listen to Central Bankers, the inflation within the economy is transitionary i.e. going to last a few quarters then revert back to normal, if you listen to investment pundits, it is something that could set into the economy for the long haul – i.e. the next few years – so who is right?
In this episode – we will look at inflation – an often-misunderstood concept – because when talking about higher inflation it is important to focus on what type of inflation is occurring – as well as what is important to the economy – so we will look at the core concept and types of inflation, the current causes of inflationary pressures and try to see if this is something that is just going to be a momentary shock to the economy and your purchasing power, or if it is going to be persistent for the next few years and something that could really affect not only your own wallet – but also financial markets due to an increase in interest rates, and potentially a dramatic one at that if central banks need to combat inflationary effects similar to that of the 1980s.
To start with - It is important to define inflation – as many people have different definitions of inflation and what price increases are actually important to them – I talk to many people about this, it is interesting as people see inflation as something different
- Now - the very definition of inflation as per the government’s measurement of statistics is based around price increases of a basket of goods and services – measured by the consumer price index (CPI) – IMO this is not a great representation – the collection of these statistics can be very biased, based on what is included in the basket and how it is collected – there are 10 baskets in Australia - food, alcohol & tobacco, furnishings, health, transport, recreation, insurance & financial services, housing, education and communication – each of these go through trimming (normalising outliers) as well as hedonics (adjusting for quality increases) – so it is a pure measurement of a price increase and is often an underrepresentation to the actual price increases seen
- An important point is that housing doesn’t represent the costs of your mortgage or the price of buying a home – we will come back to this later – but as an example, the CPI for housing is a negative 0.9% over the past quarter – whilst the price of timber and construction has increase massively over this time period – so take this with a grain of salt
- What are these price increases, being measured by CPI representing? Goods and services we buy from private companies – which aim to be competitive – a company in a competitive environment won’t increase their prices just because money supply has increased – if they do, they will lose business to other competitors – assuming the market is competitive
- But what creates price increases? Does a company want to charge as much as possible and make a profit? Sure – but what creates a situation where this is not possible? Competition – the more supply on the market allows for competition between distributors, so monopolistic prices cannot be charged (which are always higher than that of a free market economy)
- Market prices of supply and demand – Particularly at the moment, looking back over the past 18 months – coming from Supply shortages –
- What have we seen over the past 18 months – small business being shut down – small business has always provided some form of competition in supply – remove this you are left with only an oligopoly of suppliers, especially in the distribution services – on top of this there has also been the issue of direct suppliers, those producing the goods, like farms which have seen shut down – this creates a situation where less competition is present in both the production of goods as well as the supply chains which distribute these goods
- Also, you have Increase cost to businesses – labour costs of employment have been a major point of contention over the past year since government unemployment benefits kicked in – the best example of this I have seen has been in the US where there is no federally mandated minimum wage – Unemployment benefits equate to around $15USD per hour – so if a business is going to hire someone for $15USD to fill a role, would you take this role if you had to work 9-5, 5 days per week? Do nothing or work full time for the same salary? This brings up the economic cost of your time – say a role was advertising for $17 per hour, would you then work for a benefit of $2 per hour? When compared to not working - probably not – it is the equivalent of trading your time for $2 per hour – a business would need to offer well above market rates to employ people to get the people they need to operate a business – this increases the cost to the business – which leads to an increase in prices being passed through – I have seen some stories from the US where hospitality services like MacDonald’s cannot find anyone to work – so they need to offer higher salaries – which results in higher prices of goods provided
- This beings up the concept of Productivity – for every dollar invested, what is the return in business – if you are spending $1 then as a business owner you hope to see at least $1.01 in return – however with additional costs of labour over the current economic cycle, this reduced this capacity for business owners to turn a profit – due to a situation where businesses were shut down for large chunks of the year, hurting their supply potential, but then when they are allowed to re-open, they are now competing with the government in the form of unemployment benefits – this further compounds the effects of a restricted supply – so assuming demand stays the same, this allows those remaining companies to increases their prices – not only to compensate for the loss of revenues (if they have had any, because large companies have not seen this) – but also to account for the increase costs to the business -
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On the other hand – you have monetary theory of inflation - which states that the increase in the money supply will lead to an increase in inflation through reducing the purchasing power – the more money there is, the less valuable each dollar is
- This is true –when the money supply has a limiting factor, such as under the gold standard – i.e. where the increase in the gold supply would lead to inflation through a reduction in the purchasing power of the population directly – as you used to be able to convert your paper money for gold – but also when the monetary supply increase is distributed equally to the population
- The trouble is that this monetarist theory goes back to monetary systems like the gold standard – where monetary increases which were backed by something decreased the relative value of each dollar, or even ounce of gold – and the financial system wasn’t the major recipient of any increase in the monetary supply – then an increase in the money supply would represent a reduction in the purchasing power of the population –
- take Spain as an example after the gold rush that occurred after looting the Aztecs (and other tribes of south America) – they say that due to their over supply of gold, that prices of things started to increase – well this was due to this gold being distributed amongst the population eventually, first through repayments of debt that the Spanish crown had – which was then siphoned through the hands of the monarch, to nobles to the everyday individuals – so due to the abundance of gold in Spain, the purchasing power of one ounce was now lower – so it did lower their purchasing power – however when looking at today, most of the money supply increase does not end up in our hands and due to the fiat nature of the financial system, an increase in the monetary supply doesn’t correlate to an increase inflation rate as it did in the past – especially due to the way it is measured by monetary officials
- To look at this point further – there has been a massive increase in the money supply occurring since the 1970s – but this got ramped up to a new level from 2009 onwards – the introduction of un-conventual monetary policies like QE increase the base money supply – US saw an increase of their monetary base by 10.58% p.a. for the decade from 2010 to 2020 – did inflation rise by this level the way it is measured? No, it averaged 2% p.a.
- This shows that the inflation effects were contained through the nature of credit growth – i.e. the increase in lending increasing the price of property and other assets, such as shares
- This brings up another major point – in particular when it comes to Australia - If inflation is considered to be the reduction in purchasing power of your dollar – then no area of the economy is more prevalent then the property market
- If you could buy a property 20 years ago for $100,000 and today the same property is selling for over $600,000 with no improvements or renovations – then this is an average inflation rate of 9.4% p.a. over this time period
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The government statistics do no consider the effects of the monetary expansion through credit growth on inflation of asset prices – this has really hurt the Australia dream – owning a property to get into the game and start to see some equity growth
- Hence – the inflation to reach this dream has been eroded by almost 9.5% per annum, well beyond the average household’s capacity to save – which due to the current ZIRP environment is actually a disincentive to save – i.e. you get 0% interest whilst seeing inflation eat away the real value, let alone the fact that you potentially need to save a further 9.5% p.a. each year for a deposit that you wait
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If people are looking for correlation of anything when it comes to monetary expansion and increases of prices, it isn’t CPI, but credit growth and hence property price increases which have been the most correlated
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This brings up the biggest question of all – what inflation really matters to you and how is this created?
- is inflation caused by the money supply increase, devaluing your purchasing power?
- is inflation the measurement of prices charged by businesses on goods and services, caused by supply and demand?
- or it is the price increase of assets – essentially devaluing your purchasing power over time?
- the truth is, that it is a muddied version of all three when it comes to what is important to you and I – they all matter
- Inflation caused by the money supply increase is seen where this money goes – which over the past 20-30 years has been asset pricing – particularly property but also shares to a lesser extent
- This has been great if you have been in the game for the past 10-20 years – but if you a new entrant, then you are buying in at the top of the markets in the hope that the same monetary policies continue - but in essence this has created a large barrier to entry – especially for housing
- But over the past 20 years - Inflation from business price changes have been seen as both deflationary and inflationary –
- Sectors that have seen less direct government involvement have seen deflation in prices – electronics – but only from non-monopolistic supplies – TVs, fridges, and other electronic goods, clothing, cars – all seen in real terms lower prices – think about buying any of these goods 50 years ago – it was very expensive and you got a worse product – today you get a great product for less in real terms
- Other sectors that are highly regulated – energy, health, education, housing, insurances – have seen a large increase in prices – but the two have managed to offset each other – so CPI in the way the government measures it hasn’t been particularly noticeable
- In this essence – inflation – the way it is measured and what monetary officials focus on hasn’t come from the massive flood of the monetary expansion – the CPI measurements we have seen have come from issues with supply chains – when compared to demand
- This is why I think the major issue with inflation at the moment has come from supply issues –
- Many companies being shut down over the past 18 months and not allowed to operate – labour costs increasing – so this needs to be passed on to consumers through price increases
- Therefore – if lockdowns and the limiting of supply continues – then prices definitely have the capacity to increase further, increasing the inflation measurements – In addition, if governmental support payments like unemployment benefits continue to be generous o the point they are anticompetitive to the free market with other businesses – this will also lead to an increase in the costs of goods due to increased costs of labour – being passed on in the form of an increased price of a good or service – if the world returns back to normal – not the new normal – then the inflation currently seen should subside – even if it does have the capacity to still increase costs in the long term
- As an example - one high year of inflation is still bad – it is due to the compounding nature of returns – Start with $1 – if inflation is 2.5% p.a – that good will cost $1.28
- Now say that inflation of 10% for 1 year leads to that good costing $1.10 – then it reverts back to 2.5% p.a. – in 10 years’ time it costs $1.37, which is a reduction of purchasing power by 33% in 10 years’ time when compared to inflation just going up by 2.5% p.a.
- So even transitionary, or one or two years of inflation can be damaging – especially as monetary policy is trying to combat deflationary environments through having low interest rates
So, in conclusion - Is inflation transitionary? – there are indications that broad-based inflation indicators are rising, but nothing is conclusive at this stage if this is going to be anything more than a transitionary effect – but this could always change in the coming months
- The case for looking at inflation being a long-term trend is usually based around a broad-based phenomenon – where the price of everything is increasing across the board – It is not just one or two sectors of the basket are going up in price – but that the whole economic environment shows a general price increase
- Think about inflationary episodes in economies around the world in the past and present – Weimar Germany always comes to mind – where the cost of everything was elevated – or today with Venezuela and other south American countries, like Argentina which have struggled with inflation for years – most of this occurred in a different economic environment but also with extreme government controls on supply
- I would go out on a limb and say that we won’t end up in this sort of situation if the economy is allowed to go back to work – the only thing that could lead to this is a massive shock to supply due to further lockdowns or restrictions of business, as well as extensions of the above market rate unemployment benefits
- Looking at what happened in 2020 - For the first time in decades central banks actually increased money supply well above demand – due to the forced shutdown of economic activity - the economy did not collapse due to lack of liquidity or a credit crunch, but due to the lockdowns and restrictions of supply – this created the major area of inflation we are seeing playing out now:
- a disproportionate amount of money flowing to risky assets joined by more flows to take overweight positions in scarce assets – in other words - the excess money made investors move from being underweight in commodities to overweight, as commodities are scares resources – creating an abrupt rally
- So what is the risk? - The history of the economy points to a similar pattern playing out - when money is aggressively printed and with this comes the excuse that there is no inflation – then when inflation rises, central banks and governments tell us that it is transitionary and to not worry – then this transitionary inflationary inflation turns out to be a longer term trend – then government/central banks present themselves as the solution to the problem –
- From the Government perspective – this involved imposing price controls and restrictive measures on exports – this would be the worst-case scenario – as it would further compound supply shortages due to prices being capped below the costs of production and sale
- The risk has always been the government responses – a free market can see inflation for periods of time, but this if often corrected as additional supply comes onto the market to soak up the demand
- But the real risks to markets – Central Bank policy – If inflation is overly persistent in the way that central banks measure this – will they then increase interest rates?
- This has massive flow throughs to the economy – not only in financial markets by reducing the present value of cash flow valuations of equities – but also increasing the financing costs of property, reducing the price capacity of credit growth, and with this price increases
- So the major question is: Will central banks tighten policy when government deficits are soaring and even a small increase in sovereign yields can generate a debt crisis?
- In summary - My thoughts are that inflation, the way it is measured by the government and what influences CB policy responses - shough only be temporary if things are allowed to go back to normal economic activity – but this is the real issue – many small businesses may not come back – which does increase the risk of inflation running away –
- Inflation in the context of asset price increases through credit growth is likely to continue – but then at some point if interest rates do go back up – it would slow
- This doesn’t mean that the areas that see the monetary expansion effects should be ignored – for example - property has been inflationary –this isn’t measured by statisticians and is hence ignored by monetary officials – whilst it is ignored by them, it is still important to you
- The issue with this is that CBs will let CPI run wild beyond the point of control before responding – but CPI will only run wild if government continue their absolute control over the economy through further economic shutdowns and reduction productivity through unemployment benefits
- The irony of this is if we actually viewed inflation as the increase of credit growth – rather than the increase of prices selectively edited by central banks – there would have been an increase in interest rates –
- Due to the largest spending components of most households being property, this could then lead to deflationary pressures as less people are willing to spend in the economy
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. This episode is to look at Central bank digital currencies - Central banks releasing digital currencies is an inevitability at this stage - proof-of-concept programmes are currently in the works across the globe - with more than 80% of central banks looking at digital currencies – The RBA is one of them
There is a lot of cover in this topic – we will define a central bank digital currency and go through why central banks are looking at pure digital currencies as an option – We will also look at what is happening in China with their plans for the distribution of the digital yuan – but also look at the alternatives the RBA is looking at
Defining the different forms of currencies in the modern monetary economy – physical and digital
- Physical money is easy - Think of cash in your wallet – either in notes or coins – this is physical money – when you log into your bank account and see digits on a screen – this could be considered a digital currency – but you can still convert these digits into physical money
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Digital currency is the name given to the electronic equivalent of physical money or cash when it is issued in a purely digital form
- Digital currency is managed, stored or exchanged on digital computer systems over the internet.
- Types of digital currencies include cryptocurrency, virtual currencyand central bank digital currency
- Under current legislation – you can still convert your digital currency into fiat currency, hence physical – you can withdraw digital forms of money – i.e. exchange BTC for AUD, then withdraw this AUD
- Currently – the digital representation of your physical money can be used via payments technologies such as online banking and electronic financial transaction point of sale – EFTPOS for short
- These payment methods are linked to commercial bank accounts in your own name, as well as deposit-taking mobile wallets, and gift, credit or debit cards – most people listening would have most likely used this form of payment – transferring the right to a physical currency digitally
- A CBDC is different to cryptocurrency – or cryptoassets based around the terminology used in legislative frameworks
- these are government sanctioned and centralised in their production – exactly like physical money - a cryptocurrency such as BTC or ETH does not – it is decentralised
- A CBDC would still have a ledger – but this would be centrally controlled and fully integrated into the financial payments system
- Currently - Every single day - Central banks are issuing conventional digital money to commercial banks that can then be exchanged with cash at par value – you go to an ATM to withdraw digital representations of your dollars for physical ones – the internet revolutionised this in the financial system
- banks used to have to store more physical currency – or at least a paper entitlement to this – to meet the demand of consumer payments - digital was never a consideration – with the decline in physical currency demand – less economic activity is conducted in this manner – so banks need to hold less physical cash - I remember going to Coles with my grandparents when I was a kid – they would take out cash for their weekly spending and pay in cash for everything – because this was how things were done in their day – today – credit and debit cards have mostly replaced cash payments
- In the current monetary economy - the RBA actually does issue digital currency to commercial banks through the provision of money into each bank’s account within the exchange settlement account (ESA) system — However – there is no major central bank that purely issues digital currency directly to the public
- Whilst most currency that exists is digitised – it can still be transferred into physical currency
- Digital currency is managed, stored or exchanged on digital computer systems over the internet.
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Plus – you don’t get your digital cash from a central bank – you get it through commercial banks
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The transfer of the monetary system from a physical currency to a digital one would be a form of a monetary reset - Let’s take a step back and look at the previous monetary reset that occurred –
- Under the gold backed currencies – you could convert your paper money for gold at the equivalent pegged value – until this was banned by Governments on the population – in the US from 1933 – but other Central banks could still convert currency for gold under the Brenton woods system – until 1971 when any form of gold standard was abandoned
- Think of a Central Bank Digital Currency as a similar process of reducing your financial freedoms – you can currently convert your digital money into physical money – but when the nation adopts a pure digital currency policy, this is no longer possible – no more physical cash – everything is digitised – the same as when the population was no longer allowed to convert the currency for the asset backing it – i.e. gold
- This brings us to a core component of this episode – the People’s Bank of China (PBoC) – which is one of the most prominent central banks globally, aims to be the first major central bank to issue digital currency for use by the general public and business – replacing physical cash
- This digital yuan will be fully produced and backed directly by the Chinese central government
- The underlying technology for this is different to the blockchain ledger, and will be controlled by the Chinese government and not distributed across the Chinese financial system - or any other nodes – like a decentralised ledger that crypto operates on
Why do Central Banks – particularly China’s want a digital currency?
- Based around the released papers - it is suggested that the Digital Currency electronic payment system will alleviate the risks to the financial system that are present with both physical money or cryptocurrency transactions – these are anonymous counterfeiting, money laundering and illegal financing
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This sounds like a great argument if you are a monetary official – on the surface - because under a purely digital currency, monetary regulators can completely monitor digital currency transactions – for them this is a major plus as they will greatly increase their financial and monetary supervision capabilities – but what about for the individual in the economy – who makes up the economy
- So, Governments and Central Banks want to track every transaction that someone makes – this is firstly in an aim to reduce the black market economy
- Black market economies emerge to fill in the gaps of an imperfectly legislated economic environment – with tradies in Australia – the 10% discount to pay in cash to avoid GST
- In other nations that are highly regulated through central planning – black markets emerge to provide goods as well as currencies to fill in a gap – because of limitations of government controls – these sorts of economies exist mostly in communist/socialist economies like Venezuela and North Korea
- Where there is demand – people will find a way to fill this through providing the supply – whether it be food or drugs – if people want it and the government wont allow it – it will likely find its way onto a black market
- So, Governments and Central Banks want to track every transaction that someone makes – this is firstly in an aim to reduce the black market economy
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The black market fills a hole to reduce the inefficiency of the government – allows the economy to function at a greater capacity than it would under a complete governmental control – hence, the introduction of a pure digital CB currency removes this natural phenomenon to help right any wrongs that central planning creates
- This is particularly relevant in nations which complete central planning – socialist/communist countries like Venezuela and North Korea, or the USSR, China and Cuba in the past – the only way for people to get an allocation of food was often through the black market – but at imperfect prices due to market disruption
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All of these operate on cash – which cannot be tracked and measured by the government - It actually creates a completely centralised and controlled economy – the monetary authorities may view this as a win – but for the every day individual, this limits their ability to maximise their economic output – the greater limitations occur in situations where economic transactions are limited by government – countries like Australia are relatively free – but in countries like China – this could really reduce the individuals living standards if they are both cut off from cash payments and restricted in the digital payments –
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The most alarming factor of all of this – especially for China – this relates to their social credit score system – monitoring what you spend your money on – allows them to allocate you a score
- If you spend too much on alcohol, or if you are hoarding too much cash and not being a productive member of society through investing or spending this, well – you will see your score lower – even if you are friends with an alcoholic – your score will lower – then you save, spending money, cannot travel, find accommodation to live and you become homeless quickly as you are completely cut off – you can also not beg for money
- This digital Cb currency from China has the added element of being able to piggy back onto what is already an incredibly authoritarian system of control of its population – where if you score is also too low – now you no longer have the right to access this currency and you are shut off – with no method of redemption
- From an Economic perspective – monetary officials want to create the perfect world – where they can measure spending down to the exact dollar and manipulate the economy through making adjustments to the money supply and interest rates – they can also get a measure on inflation
- They have been trying to do this for decades but with little effect – think about monetary policy for a minute – the control over interest rates is aiming to control behaviours of individuals that make up the economy – if there are lower interest rates, this based on the rational models that entities like the RBA have, which theorises that a lower interest rate should decrease the incentive to save cash and instead people will spend it – this should then increase inflation and then interest rates can increase over time – but these models aren’t perfect – as unintended consequences occur – what happened in practicality is that the lowering of interest rates to help increase inflation resulted in credit growth – i.e. mortgage sizes – where people were borrowing more money – whilst interest rate payments were lower per dollar borrowed, people now had more borrowed dollars – so total interest rates did decrease, but loan repayments for principal increased – resulting in more money flowing into debt repayment – hence less being spent in the economy – therefore the inflation never materialised as hoped
- Monetary officials think that these models aren’t perfect because they don’t have complete data – they don’t know how much exactly each individual is spending and where they are spending this – plus, inflation is currently measured by around 0.8% of households keeping a manual diary and reporting this back to the ABS – would be much easier to have a direct line to every transaction you make and measure the relative price increases – this equals a completely centralised and controlled monetary system
- What they never understand is that there I no way to control a complex system like the economy – any model is never going to work as the economy is non-linear – i.e. if you put in $100 to the economy expecting a multiplier of 2 under a linear system – you would get $200 – under a non-linear system you could get $20, -$50, $100 – who knows – inputs do not equal outputs
- In addition – thin about Welfare payment that governments and central banks can make – a recent proposal was made in limiting spending and transactions to a card where it could only be spent on food or other essential goods – no alcohol or withdrawn as cash to spend on who knows what – this would fulfill this if CB digital currencies came into existence
- But also – Digital currencies in their pure form are only from CBs to commercial banks – the invention of digital CB currencies allows for the expansion of helicopter monetary policies
- The payment directly from a CB to your bank account – this is the basis for economic policies such as UBI based around modern monetary theory – MMT
- So these CB digital currencies allows for a circumvention of fiscal policy – no longer goes a government decide on welfare payments – CBs can directly pay individuals as the commercial banks would no longer be required as a financial intermediary
- The end result of this is Central Banks increasing their Control over the economy –
- We already do don’t have a free market economy – money is the life blood of any economy – it is what facilitates the exchange system of the economy – but the control of the supply of money and the interest rate control affecting incentives to save or spend has completely destroyed the natural state of the economic and business cycle
- What is even more telling about the potential implications for us – is when looking at a speech given by the Bank of England’s chief economist in 2015 – where CBDC would be the ideal mechanism to implement negative interest rate policies – if you get charged to save, then you would withdraw your cash savings and put it under your mattress – but if this is not possible, you would have no options to either spend or invest the cash
- Increase spending – from both the population but from a central bank through just issuing more digital currency – as well as economic transfer payments directly to the population – if this doesn’t come from a government, and from the creation of the money supply – it isn’t technically debt represented on a balance sheet anywhere
- Under the current economic environment – for governments to spend money they don’t have, they get into a deficit and fund this through issuing a bond – with digital currencies directly issued from a CB – no government debt
- From a central bank’s point of view – a digital currency can also reduce the costs involved in handling, maintaining and recycling banknotes and coins throughout financial systems and economies
- It is true that it does cost money to print dollars and produce coins – There can also be currency shortages - Coin shortage in the US at the moment – the costs go up over time to produce these assets, whilst inflation reduces the real value of the currency
- I did some maths for Australia – looking at the 20c coin – it weighs 11.3g – and constitutes 75% copper and 25% nickel – well at current market prices this represents around 7c of nickel and 11c of copper – so even the raw materials are worth around 18c – let alone the manufacturing costs – so in producing a 20c coin, the RBA may actually be losing money if commodity prices continue to rise
- We already do don’t have a free market economy – money is the life blood of any economy – it is what facilitates the exchange system of the economy – but the control of the supply of money and the interest rate control affecting incentives to save or spend has completely destroyed the natural state of the economic and business cycle
- They have been trying to do this for decades but with little effect – think about monetary policy for a minute – the control over interest rates is aiming to control behaviours of individuals that make up the economy – if there are lower interest rates, this based on the rational models that entities like the RBA have, which theorises that a lower interest rate should decrease the incentive to save cash and instead people will spend it – this should then increase inflation and then interest rates can increase over time – but these models aren’t perfect – as unintended consequences occur – what happened in practicality is that the lowering of interest rates to help increase inflation resulted in credit growth – i.e. mortgage sizes – where people were borrowing more money – whilst interest rate payments were lower per dollar borrowed, people now had more borrowed dollars – so total interest rates did decrease, but loan repayments for principal increased – resulting in more money flowing into debt repayment – hence less being spent in the economy – therefore the inflation never materialised as hoped
China is serious about this – they are rolling it out -
- It will initially be distributed to all commercial banks affiliated with the Chinese central bank such as the Agricultural Bank of China
- First phase - it is designed as a replacement for China’s Reserve Money (M0) – this is the monetary reference to central bank notes and coins – it is essentially the base money supply on which banks can extend the money supply to commercial banks
- Second Phase - it will be distributed to large fintech companies such as China’s Tencent and Alibaba to be used alongside their WeChat Pay and Alipay inhouse payments respectively
- The first public testing is already going on - in October 2020 - China's central bank issued 10 million yuan ($2 million AUD) of digital currency to 50,000 randomly selected consumers
- This digital currency is available for transactions across 3,389 retail outlets in Shenzhen
- Next phases of testing - 4 key cities are going to be the first cities to test the use of the DCEP
- These cities will be closed economies – where pilot tests and this is testament of digital currencies - Beyond this first stage of domestic integration – China is thinking of internationalising the RMB by offshoring the yuan into Hong Kong and Singapore
- Multinational foreign firms – companies such as McDonalds and Starbucks will also take part in the DCEP testing alongside local hotels, supermarkets, postal lockers, bakeries, bookstores, gyms
Does this relate to Australia and why would cash disappear?
- Studies by the Reserve Bank of New Zealand (RBNZ) suggest there are two main reasons why cash could disappear
- Cost - The relative cost of its use of physical cash compared to digital methods – as we went through earlier in the episode – the major reason to get rid of a fiat cash is if it is worth more than what the value you attribute to it is – i.e. why spend 0.21c to produce a 0.2c coin?
- Undesirable outcomes – Central banks think that physical cash has a socially undesirable outcome – i.e. the attractiveness for tax evasion, money laundering and illegal transactions
- In Australia - large-scale cash transactions have been deemed such a social risk that in 2019 the Currency (Restrictions on the Use of Cash) Bill 2019 was introduced in Federal Parliament to ban cash transactions over $10,000 – this is a step to limit cash
- How the RBA views this topic on alternative digital payment methods
- Australia’s digital version of the Australian dollar (AUD) will be some way off
- In 2020 - The Reserve Bank today announced that it is partnering with Commonwealth Bank, National Australia Bank, Perpetual and ConsenSys Software, a blockchain technology company, on a collaborative project to explore the potential use and implications of a wholesale form of central bank digital currency (CBDC) using distributed ledger technology (DLT). This is part of ongoing research at the Reserve Bank on wholesale CBDC.
- From a central bank/governmental perspective - The benefits have been acknowledged to include
- improved financial tracking
- cost reductions from reduced production and general handling of coins and banknotes.
- In China, Australia and elsewhere, the cashless trend is seen to be strong with both business and consumer habits seen as key drivers in the likely seamless adoption of a DCEP.
- China is the first mover – where they are cracking down on crypto assets – as they are implementing their own digital currency - China wants complete control – any nation that implements this also likely wants complete control
- Be prepared for the next decade of change – as central banks adopt digital money – replacing physical currency
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. This episode we will continue looking at the crypto markets. In particular, we focus on the regulatory frameworks that have been released by the Bank for international settlements, BIS for short.
- One division of the BIS - the Basel Committee on Banking Supervision - released a consultation paper this month to provide a framework to every nation’s regulator of financial institutions on how to treat cryptocurrencies -
- Now – the Basel Committee on Banking Supervision is the world's most powerful regulator of banking standards and rules – it gets to decide what capital adequacy banks should focus on, as well as what assets should be classified as capital – if you have been listening for a while, you would have heard me mention this group – they are who APRA, who regulates superfunds and banks in Aus take their directions from
- So this recent release is meant to provide the framework for banks on how to treat different forms of cryptocurrency on their balance sheets - if they wish to start purchasing crypto
- The big question of this episode is if this is a major win for cryptocurrencies, as it was initially treated as purely based around market price reactions, or is this something that could actually damage the crypto markets through a financial system takeover?
- Firstly, it is important to note that this paper does not refer to crypto as a currency – such as the name cryptocurrency would imply – instead, they call them cryptoassets – implying that these are assets for banks or for the financial system to hold or trade these as assets – this off the bat could be viewed as an implied intent, where in the BIS’s view, existing cryptos will never be treated as a currency in the mainstream – but I wanted to mention this as I will be using the term cryptoasset throughout most of this episode when it is in relation to this prudential paper – please forgive me in advance as cryptoassets will be mentioned a lot
- Another important point is that this report specifically states that central bank digital currencies will not fall under this legislative framework – which also implies that this is a serious option that they are looking at and will fall under a different legislative framework – as an actual currency, not a crypto asset – which we will come back to next week
Start with the introduction to the BIS report –
- The BIS have noted that over the past few years, they have seen rapid growth in cryptoassets – with market capitalisation of these assets rising – sitting at an estimated $1.5 trillion
- But while the cryptoasset market remains small relative to the size of the global financial system – there continues to be rapid developments, with increased attention from a broad range of stakeholders – these stakeholders are some investment banks, since banks like JPM, Goldman and Citi have already launched their own crypto-focused businesses – I find it hard to believe that the BIS would view individuals as stakeholders
- In this report the BIS brings up the normal rage of concerns with Cryptoassets – including consumer protection, money laundering and terrorist financing, as well as their carbon footprint from the electricity usage
- But the big point of concern they focus on is that, quote: “The Committee is of the view that the growth of cryptoassets and related services has the potential to raise financial stability concerns and increase risks faced by banks.”
- In other words, crypto can be destabilising on the financial system – anything that provides some potential competition is destabilising if you are used to monopoly controls – this happens in all aspects of commerce – if you have a monopoly business operating who can fix prices and provide poor services, then a competitor appears, this is destabilising for your business practices, you will lose customers – so what to do? In most cases they simply buy out the competitor or have them shut down
- If banks were to start trading crypto using derivatives, then this could also pose a risk to the financial system
- The report also mentions that certain cryptoassets have exhibited a high degree of volatility, and could present risks for banks as exposures increases – these risks include liquidity risk; credit risk; market risk; operational risk (which include fraud and cyber risks); money laundering / terrorist financing risk; and legal and reputation risks – this basically ticks all the risk boxes beyond political/legislative risk – but to the BIS this isn’t a concern, as they impose these risks on the market
- To that end, the BIS Committee has taken steps to address these risks through producing this legislative framework – and they first started looking at this over two years ago, back in March 2019 – where the Committee published an article on the risks associated with cryptoassets – then in December 2019, the Committee published a discussion paper seeking views of stakeholders on a range of issues related to the prudential treatment of cryptoassets – remember stakeholders are entities with direct connections to the BIS – i.e. Central Banks and megabanks
- It is important to note that mega banks like JPM, Goldman and Citi group are very interest in securitising crypto – anything that can be securities to make a profit off is a bonus in their eyes – remember in the mid-2000s they were creating synthetic contracts off collateral debt obligations – i.e. peoples mortgages to try and made more money than simply what the interest payments could provide to a commercial bank
How does this legislative framework treat cryptocurrencies – or cryptoassets as the BIS refers to them – I won’t be covering the minute details for the sake of time, as this report is 20 something pages long – but if you are interested the links will be in the show notes at financeandfury.com – or you can look up Prudential treatment of cryptoasset exposures – but I will be covering the higher level implications of this framework
- Cryptoassets are defined as private digital assets that depend primarily on cryptography and distributed ledger or similar technology – these digital assets are a digital representation of value, which can be used for payment or investment purposes
- The prudential treatment of cryptoassets has been guided by three general principles:
- Same risk, same activity, same treatment: a cryptoasset that provides equivalent economic functions and poses the same risks compared with a “traditional asset” should be subject to the same capital, liquidity and other requirements as the traditional asset. The prudential treatment should, however, account for any additional risks arising from cryptoasset exposures relative to traditional assets.
- Simplicity: The design of the prudential treatment of cryptoassets should be simple. Cryptoassets are currently a relatively small asset class for banks. As the market, technologies and related services of cryptoassets are still evolving, there is merit in starting with a simple and cautious treatment that could, in principle, be revisited in the future depending on the evolution of cryptoassets.
- Minimum standards: Any Committee-specified prudential treatment of cryptoassets would constitute a minimum standard for internationally active banks. Jurisdictions would be free to apply additional and/or more conservative measures if warranted. As such, jurisdictions that prohibit their banks from having any exposures to cryptoassets would be deemed compliant with a global prudential standard
- This is an important point – as the framework is the minimum standards that need to be applied – if a regulator wishes to go above and beyond, or even ban banks for holding crypto, that is well within their rights and would be deemed compliant
In essence – what these principles do – assuming a bank is allowed to trade crypto - is break it down into groups of assets – Group 1 (broken down into A and B) and then Group 2
- Group 1 cryptoassets – these fulfil a set of classification conditions and as such are eligible for treatment under the existing Basel Framework (with some modifications and additional guidance). These include certain tokenised traditional assets and stablecoins
- Group 1 cryptoassets will be subject to at least equivalent risk-based capital requirements based on the risk weights of underlying exposures as set out in the existing Basel capital framework.
- The cryptoasset either is a tokenised traditional asset or has a stabilisation mechanism that is effective at all times in linking its value to an underlying traditional asset or a pool of traditional assets. In the case of underlying physical assets, they must verify that these assets are stored and managed appropriately
- All cryptoasset arrangements must ensure full transferability and settlement finality at all times. In addition, cryptoassets with stabilisation mechanisms must ensure full redeemability (ie the ability to exchange cryptoassets for cash, bonds, commodities, equities or other traditional assets) at all times.
- Group 2 cryptoassets – are those, such as bitcoin, that do not fulfil the classification conditions. Since these pose additional and higher risks, they would be subject to a new conservative prudential treatment
- These coins are the ones that people would be more familiar with – such as BTC, ETH, ripple, really any coin that isn’t a stable coin or a tokenized version of an asset like a share, bond, commodity or currency
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Each of these groups therefore have different Capital requirements for each banks reserve requirement - Similar to activities related to traditional assets that the banks hold, such as loans, bank activity related to cryptoassets will increase the operational risk charge to a bank within the Basel framework – due to cryptoassets being new and rapidly evolving, there is potentially an increased likelihood that they pose unanticipated operational risks in most cases to the banking system – this is basically saying that they don’t know the true risks to the financial system if banks start trading crypto
- Group 1 cryptoassets will be subject to the requirements set out in the Basel Framework for a normal asset that the banks hold – group 1 is broken up into two categories depending on the classification of the asset
- Group 1a cryptoassets: tokenised traditional assets – i.e Tokenised traditional assets use an alternative way of recording ownership of traditional assets through the use of cryptography - may be treated as equivalent to a traditional asset for the purpose of calculating minimum capital requirements for credit and market risk - In practice this means that a tokenised cryptoasset is treated the same as - Bonds, loans, commodities, deposits and equities in regards to capital adequacy requirements
- This is because this form of cryptoasset must confer the same level of legal rights as ownership of these traditional forms of financing, eg rights to cash flows, claims in insolvency etc.
- For example, a tokenised corporate bond held in the banking book will be subject to the same risk weight as the non-tokenised corporate bond held in the banking book. Similarly, if a bank holds a derivative on a tokenised asset, it will be reflected in the market risk charge in the same way as a derivative on the non-tokenised asset – so in the banks eyes there is no difference in holding a bond or a tokenised version of the bond
- so – a tokenised cyptoasset can be recognised as collateral for the purposes of credit risk mitigation if it falls within the framework
- Group 1b cryptoassets: cryptoassets with stabilisation mechanisms that seek to link the value of a cryptoasset to the value of a traditional asset or a pool of traditional assets through a stabilisation mechanism.
- Cryptoassets under this category must be redeemable for underlying traditional asset(s) (eg cash, bonds, commodities, equities) – things like a stablecoin – so whilst not a tokenised version of the asset, its value is linked to the underlying asset, therefore it is treated relatively similar – however
- Group 2 cryptoassets – are those that pose unique risks compared with Group 1 - as such are subject to the newly prescribed capital requirement – these are coins like BTC and ETH – anything that doesn’t have a tether to the value
- A risk weight of 1250% is applied to the greater of the absolute value of the aggregate long positions and the absolute value of the aggregate short positions to which the bank is exposed.
- A 1250 percent risk-weight is the equivalent in banking terminology to a 100% capital requirement
- So for bitcoin and Ethereum - this would require banks to hold $1 dollar for every $1 in "exposure" to those assets
- A risk weight of 1250% is applied to the greater of the absolute value of the aggregate long positions and the absolute value of the aggregate short positions to which the bank is exposed.
- Group 1a cryptoassets: tokenised traditional assets – i.e Tokenised traditional assets use an alternative way of recording ownership of traditional assets through the use of cryptography - may be treated as equivalent to a traditional asset for the purpose of calculating minimum capital requirements for credit and market risk - In practice this means that a tokenised cryptoasset is treated the same as - Bonds, loans, commodities, deposits and equities in regards to capital adequacy requirements
- Group 1 cryptoassets will be subject to the requirements set out in the Basel Framework for a normal asset that the banks hold – group 1 is broken up into two categories depending on the classification of the asset
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This is in line with the toughest standards for banks’ exposures on riskier assets, such as illiquid shares or junk bonds - So if the bank has a $100 exposure in bitcoin this would result in a minimum capital requirement of $100
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This also applies to cryptoasset derivatives positions with the potential maximum loss value under a RWA formula – This can be a bit of an issue for the derivative markets – as the RWA is often not the total loss based around the value of the trade, but the cost of the derivative contract – which is often many times smaller – as you are paying for a premium
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So in summary – if the assets are a tokenised version of an asset, or use an asset as an anchor for their value, then the banks can hold these and it can be treated as part of their capital requirements under the existing Basel III requirements – so banks can use this as part of CAR to against their RWA – under Basel III – you need to hold 8% of your RWA – which in Aus is calculated as 35% of your loans
My take on all of this
- This could be good news for crypto markets, as they now may see greater recognition by the most powerful financial institution on earth when it comes to providing direction on regulatory frameworks
- Or, it could be that the financial system sees another way to make some money – so why not take the plunge?
- There is nothing inheritably wrong with making money – but the way that banks do this, especially in the US is different from you or I purchasing crypto
- The issue with this is the structure of the financial system – as these banks are TBTF
- If you buy one BTC for $50k and it drops down to $10k, you have lost $40k which sucks – you will likely feel bad – but you can hold onto this and hope the price recovers
- But the way a bank like JPM or Goldmans make these trading positions is normally though the use of derivatives on these assets – they only put up a fraction of the funds and cannot simply hold if the prices decline – because of counter party risk – as each bank tries to get out of a position at one point of time – this can create major issues -financial system collapse –
- If you go bankrupt – then too bad – if a bank goes bankrupt – this becomes your problem – as banks will get bailed out – remember, they are Too big to fail
- The BIS notes that the extreme price volatility of some of these assets – particularly those in group 2 – have unproven track record of liquidity will make it challenging to hedge positions when providing derivative instruments or when manufacturing investment products that reference crypto assets
- There are any number of ways that this can explode in the future – here are just three I can think of off the top of my head
- One – Requirements for additional dollars or bonds to be printed to absorb the increase in the RWA for any bank holding category 2 of the crypto assets – Say BTC does go to $500k - Banks need to increase cash they hold if prices rise – banks don’t hold much cash relative to their overall asset and liability position – the balance sheet of banks is basically neutral – they have the same amount of liabilities as assets – so if the price of cryptos increases massively, then banks would need to have central banks expand the money supply further for them to maintain their CAR requirements
- Reminds me a little bit of the Mississippi bubble – the price of assets increases to the point that people want to cash out – but not for a worthless form of conversion such as the paper money being issued – if cash like the USD continues to be expanded at its current pace – people could request alternative assets destabilising the financial system - could create a major issue down the road
- Two – asset bubble through bank speculation and derivative practices – The GFC period was bad enough when you have banks speculating on newly created assets – whilst mortgages have been around for hundreds of years, the CDOs were relatively new –
- Through entering into crypto – banks are entering into a new territory of pure speculation – the buying and selling of cryptoassets by itself isn’t the issue – but the speculative practice of derivates and who knows what else they come up with in the years to come could become a major issue for the stability of the financial system – could both collapse crypto markets as well as shares and bonds if economic confidence gets hit
- Three – Additional risks, such as AML issues – if the banks do not act in good faith, because to be honest they do not have a good history of this – there could be a call by regulators for additional crack downs on crypto
- One – Requirements for additional dollars or bonds to be printed to absorb the increase in the RWA for any bank holding category 2 of the crypto assets – Say BTC does go to $500k - Banks need to increase cash they hold if prices rise – banks don’t hold much cash relative to their overall asset and liability position – the balance sheet of banks is basically neutral – they have the same amount of liabilities as assets – so if the price of cryptos increases massively, then banks would need to have central banks expand the money supply further for them to maintain their CAR requirements
So in summary – this legislation Creates a two tiered system for Cryptos – and opens the door for the largest financial entities to begin speculating on what is already a volatile asset
- For the two tiers - one is seen as good as the assets underlying it - The other – is seen as a very risky asset class
- So we may also see the rise of tokenised assets and a new wave of how the economy works
- In addition – it means that you will now be competing with the most sophisticated traders on earth – complex computer algorithms dictating market prices could see larger swings in volatility
- It goes without say that governments are increasingly focused on issues surrounding cryptocurrencies – especially with some central banks exploring digital currencies – this even came up in the recent G7 meetings this month
- So we will finish off the crypto series next episode looking at China’s Central bank digital currency
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
https://www.bis.org/bcbs/publ/d519.pdf
Welcome to Finance and Fury. This episode we will continue to look at what is happening in crypto markets. After last episode, we are starting a bit of a mini-series on crypto and digital currencies. This wasn’t originally intended but I have been doing more of a deep dive into this topic and there has been some timely news articles that I want to cover.
In this series, we will look at a few factors in relation to the crypto markets. Mainly governmental and financial institutional adoption of mainstream cryptocurrencies, like BTC. This series will cover the topics of firstly, el Salvador and other potential Latin American countries accepting BTC as legal tender, then Basel Regulations updates on banks/financial institutions accepting cryptos as assets and the implications this has on markets, and then to finish things off, China rolling out a digital currency that has been in the works since 2014. This may change over the weeks if I uncover any more interesting topics, but at this stage, this is the gameplan.
- But in today’s episode – we will be following on from last week’s episode where I give my personal thoughts on crypto currencies
- I mentioned last week that a few small nations may accept and adopt BTC – good timing – on the same day the episode was released - news that El Salvador was proposing the acceptance of BTC as legal tender came out – in the meantime, this has passed into legislation – so we will start the mini-series looking at this development
Now - El Salvador has become the first nation to formally adopt a cryptocurrency as legal tender
- and a handful of other Latin American leaders have indicated that they would follow suit – such as Paraguay and Panama
- Does this really mark a change in bitcoin’s reputation and acceptance on the global stage? Yes and no – Yes for developing/3rd world nations reliant on the US dollar and remittance, but no for any major economy who are standing firm on their own domestic fiat currencies or proposed central bank digital currencies
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Why has El Salvador made this decision? It isn’t as simple as them being the first adopter in a global trend - Let’s look at why – as it comes down to the make up of these economies as well as their reliance on not only remittances –
- El Salvador – small Latin American country wedged between Guatemala and Honduras – the last time there was this much buzz around this region was the football war of 1969, which was fought over a few issues but was accelerated by the FIFA 1970 qualifying matches – but it is a small country with around 7m people living in it
- But it is considered 3rd world – GDP per capita of $4k v Aus at $55k
- They are also heavily reliant on the USD – which is another legal tender in the country
- El Salvador – small Latin American country wedged between Guatemala and Honduras – the last time there was this much buzz around this region was the football war of 1969, which was fought over a few issues but was accelerated by the FIFA 1970 qualifying matches – but it is a small country with around 7m people living in it
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This is a problem for them as they are a net importer of goods – which means they can run out of USD – in other countries, you can just print more money – but El Salvador cannot do this
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Like many other Latin American nations - El Salvador’s economy is heavily dependent upon remittances – this is a term for funds sent home by citizens working abroad – i.e., an El Salvadorian works in the US and sends money home to family members – then this is remittance
- Remittances totalled over 20% of their GDP output in 2019 – and had only been growing over time –
- the economy in El Salvador has been struggling for years – their domestic economic output has struggled due to their internal economic issues, so they have become more reliant on external factors, such as the reliance on inflows of USD into the country to spend – they have also had some major political issues as well which we will come back to later in the episode
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The Governments move to adopt BTC is a very smart one from their president – when it comes to trying to maximise the remittance levels as well as potentially increase the crypto mining in the country – it works to achieve both ends
- Currently, remittances are delivered by money transfer services companies like Western Union – these are centralised and highly regulated under financial service regulations – this can be complicated between boarders – some nations disallow the transfer between boarders due to money laundering and counter terrorism financing laws
- Then to actually make the transfer happen through a money transfer service when it is permitted, it requires an in-person visit to an office and proof of identity for both the sender and receiver
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In El Salvador - there are around 500 Western Union offices across the country – but most of these are located in populated areas – so some of the poorer individuals living in rural areas of the nation can have limited access
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Let’s have a look at the current state of financial services in El Salvador - around 70% of the population is considered to be unbanked – this means that they lack access to a basic bank account – which is an issue for anyone wishing to save or conduct online commerce – this is why physical cash transactions are facilitated through money transfer services – who needs a bank account when your withdrawals are coming from these services?
- In addition – due to the governmental history and political risk of the country – many people don’t trust financial institutions – let alone have the capabilities to establish a bank account
- Now – lets contrast this to say a BTC transfer – these allow anyone with a mobile phone and internet access to send or receive funds -
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Also - BTC could be spent directly on goods and services, just as the US dollar is in El Salvador – all can be done though a wallet – so rather than someone going to Western Union and getting acceptance of the USD transferred to them, then withdraw the cash and then go spend this at their local store, they can simply be transferred BTC and then spend this on goods and services directly at a vendor
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it does sound a lot easier, doesn’t it? – but this is from a first world western perspective – which we will come back to in a minute
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But first – let’s have a look at how this could be great for El Salvador in the interim –
- If BTC prices continue to rise over time – and the population continue to accumulate more BTC in their wallets – then the prices of goods and services will become deflationary for them – i.e. they can afford to purchase more goods or services for the same amount of BTC
- As many crypto analysts suggest the price of bitcoin will rise over time – and let’s assume that it does – anyone in El Salvador that has BTC stored in their wallets can now afford more goods and services, especially whilst other goods and services are being pegged to the USD –
- This could potentially create an increase in wealth a consumption power by any lucky Salvadorians who has acquired and holds bitcoin if prices continue to rise
- If you invest 3 BTC in the country, you can also become a citizen
- So additional wealth and investment may come into the country
- Mitigation of environmental concerns around the electricity consumption of cryptocurrency – El Salvador has a large geothermal capacity – Geothermalpower in El Salvador represents 25% of the country's total electricity production and is one of the top ten geothermal energy producers in the world
- However – they are currently an energy net importer – and it isn’t cheap electricity prices
- So, if the government, or private energy providers invests in further geothermal capacity, then the Government invites mining syndicates to set up in the country to mine crypto at a low electricity cost – could provide a cost-effective method of accumulating coins – plus they can tax it – to help generate more government revenues – this could be a major plus to their economy – but this would take years to implement
- If BTC prices continue to rise over time – and the population continue to accumulate more BTC in their wallets – then the prices of goods and services will become deflationary for them – i.e. they can afford to purchase more goods or services for the same amount of BTC
This all sounds great – and any market innovations and adaptions in my book is something in the right direction – but is that what is going on here?
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Important to take a step back and think about the functional economy within El Salvador and the use of BTC – as a 3rd world economy - for those of us in the 1st world – we cannot really appreciate what daily life is like to operate in an economy like El Salvador
- For a functional BTC exchange to emerge – it requires the internet - Recipients of bitcoin realise their funds by connecting to the internet
- Does El Salvador have wide spread internet access in the country and is this the major method of transaction between consumer and vendor? – World Bank has the data on this –as of 3 years ago, only 34% of the country was using the internet or had access to the internet
- This right away may seem to be a problem – unless this government program is to give all of the rural or poor population a phone with internet capabilities – how are they going to function under BTC as a monetary exchange? Would be different if this was done in Aus – where around 95% have regular use to the internet – but in a nation without the very infrastructure to help facilitate this adoption, there is a major bottleneck
- Another major issue is that is appears that businesses are being forced to accept BTC – I am not a fan of this – I personally think it goes against the very core concept of crypto – that is should be voluntarily adopted and based around individual liberty – i.e. to get away from government control and oppression that the monetary system has paced on the population – now a government policy forces all vendors/suppliers in the country to accept BTC
- Based around the legislation translations I have seen – relying on translation, I cannot speak Spanish – but the government acceptance of BTC as a legal tender requires every single commerce transaction to have to option to be conducted in BTC
- If they breach this – they are now breaching the nations commerce regulations and suffer consequences
- It is essentially the equivalent of you going to the farmers markets and wanting to pay in BTC – but they don’t have the capabilities to accept this form of payment –
- I go to a farmers market and around half of the vendors only accept cash – rather than me paying on bank card or credit card – but this is okay – as it is all still AUD – it is just the method of payment which differs –
- With BTC – there is currently no physical widespread payment mechanism for this – if a merchant doesn’t have internet, how does this affect their business?
- For a functional BTC exchange to emerge – it requires the internet - Recipients of bitcoin realise their funds by connecting to the internet
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It is a big question – and one that the economy of El Salvador has been given very little time to adjust to – remember – we are not talking about a first world nation – that has the capacity to access internet and sign up to wallets if need be overnight
- I personally have never been to El Salvador – but I have been to many other 3rd world nations –and the cultural acceptance of certain technologies and pace of adaption that first world nations have shown shouldn’t be projected on any other nation
- Many of these nations do thing in their own time – and the approach of ‘if it isn’t broke don’t fix it’ can apply to many situation – so the very fact that the government may try to force your local street side vendor in El Salvador, who may not have access to the internet themselves to adopt and accept BTC overnight, let alone within the next 5 years may be a big challenge
- May put additional stressors on the population and hence the economy
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Another major issue is the volatility of BTC – I mentioned earlier in the episode that if BTC can continue to appreciate in value, then the price effect will be deflationary, assuming goods and services continue to be prices relative to USD
- This is where Adopting bitcoin as legal tender is not without its downsides – what is BTC all of a sudden decline in value by a substantial margin – this would have the opposite effect – through reducing the purchasing power of those holding BTC – creating an inflationary pressure
- BTC can be rather volatile – as an example – at the time of putting this episode together – the price of one BTC if $46k AUD, or $35.7k USD – this represents a decline of roughly 45% from the April high this year
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Volatility in purchasing power can be an issue – as it affects the individual’s ability to make consumption decisions – if you purchasing power can easily change by 10% +/- per day then this can create major uncertainty when it comes to make purchasing decisions, as well as selling decision – Now imagine that someone in El Salvador had received all their savings through remittance in the form of BTC – then over a month the price declined by 45% - this means they have almost half the ability to spend – so what do they do?
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Can create economic cycles within El Salvador – if BTC crashes – then purchasing power is less – so people won’t spend anything for a month or two – and wait and hope until prices rise - if the price does, then you may see a massive spike in consumption, with which supply cannot keep pace, then you get inflationary pressures in USD terms, then if this cycle continues, you may start to see the purchasing power of the BTC decline even further
- So there are some untested areas of the economy with this case study for a small nation adopting a crypto currency
My personal views – I may be completely off – but BTC being accepted as legal tender by the government may simply be a policy that benefits the upper classes of El Salvador more so than many of the poorer individuals who rely on remittance – those with money who are politically connected and already have internet access – such as cartels and political officials, corrupt or not – rather than the poor farmer trying to sell their goods on the street – this take may be cynical of me and I may be missing a major factor of this policy here – but based around the historical behaviour of the El Salvadorian government, as well as the capacity for the average population to accept BTC as a method of payment due to limited internet access, it makes sense to me at lease
- When you look at El Salvador or many other tiny Latin American nations – historically many of these countries are run as either a banana republic or as a narco-state – where there is an embedded relationship of corruption
- Who does this policy help? When you look at the fact that the majority of the poor don’t have access to the internet and will still be reliant on remittance from money exchange services – it may not be them
- The very lack of an internet connection in the nation stifles the adoption of the policy – plus puts a major political risk on businesses who are now required to fund to cost of getting a device and internet access to accept BTC payments
- But from my 1,000 foot view – take this with a grain of salt – as I am providing an analytical assessment without ever setting foot in the country or talking to the population – but the majority of the poor who cannot afford internet connections or smart phones may be left in the dust
- But those who have internet connections and have large amounts of capital to move can really benefit - Look at the current president and his actions – this is based on news stories, so no idea if they are true or not -
- The President wanted to secure a $109m loan from the US to militarise their police -the plan was opposed by both opposition parties who had the majority – game over right? Well - he ordered soldiers into the Legislative Assembly to help incentivise legislators to approve the loan until it passed in his favour
- He has also been accused of negotiating a deal with MS13, the most powerful gang in the country to provide less strict prison conditions if they can lower the number of public murders
- Gang presence is huge – MS13 and MS 18 are the largest crime syndicates in the country who are responsible for drug and human trafficking trades
- Who has the most money to flow into El Salvador – a group of local farmers, or a massive criminal network like MS13
- This isn’t a justification to ban crypto like BTC, as no other currency on earth has seen more criminal deal committed in it than the USD –
In summary –
- If this was a move where all major governments/monetary authorities were going to look at the same process, then this would be great news – but it is in reality a minor occurrence – as the capability to directly accept BTC for commence is lacking in the country, beyond those wealthy elite or drug cartels already set up for this
- but I hope it just helps to show a different side to the title that most people have read, showing that BTC is being accepted by El Salvador – as there is more to the story once you dig a little deeper
- I may be wrong, the internet connection and adoption by the local population may occur overnight, but time will tell –
- Next week – we will look at the evolution of the banking system in relation to crypto – in particular the Basel Committee views on the subject and their recently released guidance to banks around the world on how to treat crypto
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. This episode we will look at crypto markets as there is a fair amount of noise being generated in this space at the moment. Just a heads up that this will be a bit of a longer episode as there is a lot to unpack.
I have made my position on crypto markets fairly obvious in the past – if you haven’t listened to any of those episodes, I will provide a bit of a summary of where I stand in relation to cryptocurrencies – and whilst markets price dynamics has changed substantially over the past 3 years – my position hasn’t
- As an overview – I am not for or against them – many people have been able to create wealth through trading crypto – and all the power to them – this is great
- If people can successfully trade coins profitably, then this is fantastic – cryptos offer an alternative form of monetary conversion beyond traditional asset classes
- First – I have to explain my overall view when it comes to crypto - I like the concept of the blockchain – I also like the concept of cryptocurrencies like BTC –
- When it comes to the money supply and particularly the control of the money supply – I think they free market should be responsible for this – creating competition for money and with this interest rates changes based around demand and supply dynamics –
- Where we currently sit is a complete centrally planned money supply based around what a central authority deems as appropriate as not only the cost of money (being the interest rate) but also what the devaluation of this currency should be each year (which is the inflation rate)
- Put into this perspective – fiat cash is not a great medium of exchange for the population/economy –
- You are essentially guaranteed to lose money in real terms after record low interest rates minus inflation expectations – but it is great for those that provide the fiat
- but does this mean I am converting fiat money into these cryptocurrencies – well, no.
- If people do, then all the power to them – I hope the cryptocurrencies that people are buying can grow in prices at an accelerated pace – I personally have nothing against the crypto markets -
- When it comes to the money supply and particularly the control of the money supply – I think they free market should be responsible for this – creating competition for money and with this interest rates changes based around demand and supply dynamics –
- But I haven’t bought any? Well – there are a number of reasons – but the major one is Legislative risk –
- As we will look at in this episode – there is a massive potential for crypto markets to accumulate additional money flows – in other words – additional funds are available to purchase cryptos like BTC, ETH, or one of the other 4,000 currencies
- Everything else being equal – where legislation stays the same, and the interest from the population still continues to rise at the same level as is the current trend - There is potential for cryptos to go in up in value – and go up in value by a large margin –
- Taking this view – it is a numbers game – if most people in the world don’t own any BTC but are interested in buying some, and convert AUD, USD, or other currencies for these cryptos, then the prices will go up – purely based around the numbers who don’t currently own crypto -
This is the potential major upside for markets – let assume that there are no governments, or central bank controlled fiats – and that these entities even if they did exist have no interest in controlling the money supply – crypto has a lot of upside to it and would probably be the new medium of exchange people would use
- recently released report on the State of the Crypto Marketfrom Gemini - they polled 3,000 U.S. adults, ages 18 to 65 with $40,000 or more in household income
- This survey included 921 current cryptocurrency owners and 1,697 consumers who were interested in learning more about cryptocurrency
- Now – this survey sample size is small – but they have extrapolated this data and estimated that roughly 14% of the U.S. population owns cryptocurrency
- This number is actually fairly consistent with other estimates from surveys conducted - This translates to 21.2 million U.S. adults who own cryptocurrency – but based around interest in this subject - This number is expected to double over 2021 – going to 42m US adults – let alone the rest of the global population
- There is currently a large demographic of the population who could be considered crypto-curious – these people would be those who do not currently own cryptocurrency but have indicated that they may wish to purchase some crypto soon
- This group is significant in size – based around the current market demographics – has the potential to include 63% of U.S. adult population
- This doesn’t mean that every person in this group will buy crypto – but let’s say that even 30% do, well this is still a large increase from the current ownership demographic- with this comes additional money flow – hence, more potential to increase the price of BTC
- If everyone who is curious about buying cryptos, this is fairly bullish - so assuming that everything else stays the same in sentiment – where these individuals are still bullish for crypto, hence why they are looking to purchase – then prices have the potential to rise – the more people buy over sell, the more prices rise
- Beyond these survey results – it is becoming clear that crypto awareness is spreading – and the hope for acceptance is becoming more and more mainstream – this is promising for the future of crypto’s growth
- general knowledge about cryptocurrency seems to mirror what we hear in the news - Bitcoin is almost synonymous with crypto - few people are familiar with other coins – almost everyone interested in crypto has heard of BTC – but only about one third has heard of ETC
- Based around demographic trends - more than a quarter (26%) of current owners first acquired crypto in the last year - and 68% individuals have purchased crypto for the first time within the last two years
- shows crypto is starting to receive a widespread interest and it is growing fast – helping to push prices up
- While new cryptocurrencies emerge nearly every day, bitcoin still reigns supreme as not only the coin most people have heard of, but also the coin most crypto holders own
- Nearly 9 in 10 current crypto owners currently own or have owned bitcoin (87%)
- Compare this to bitcoin cash at 22% and litecoin at 21%
- The large majority of current crypto owners say they buy and hold crypto for its long-term investment potential. More than two-thirds (69%) buy and hold, compared to the 36% who actively buy and sell as a means to achieve profits and the 27% who actively use it to make purchases on the internet.
- All of this is very interesting – as prices for anything are determined by those looking to buy or sell – say a few million people with $100s of millions of dollars are looking to enter crypto markets – where the majority of these people are focusing on BTC – then this technically should mean that BTC prices are set to rise over the next few years – and they very may well -
But – the thing I am wary of is the legislative risk – this is the major thing that has made me personally avoid the crypto currency markets – again, I love myself a free market – and the blockchain with some particular cryptos are something that the libertarian inside of me really loves – but the libertarian inside of me also understands how governments act – in regards to their historical behaviours as well as the primary purpose of a monetary economy
- For those who aren’t familiar – we live in a monetary economy – i.e. we exchange a fait currency for a good or service – in the past, there have existed barter economies – when we exchange goods with one another directly – but then due to convenience – the market adapted to a monetary economy – where people started exchanging gold/silver or gold/silver backed IOUs as a medium of exchange – this was all conducted in a private manner and was working well
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why is this important for a government? A monetary economy is so much easier to collect taxes on – the government doesn’t want to collect 10 of your cows in annual income tax, they would prefer to take say 30% on average of your gross income – so the very early private monetary economies were taken over by state at the time – they effectively disallowed the use of privately minted coins with that which contained their own markings
- This can occur with any medium of exchange - in the modern era this has been the gold standard, then fiat currency – which is granted legislative power as being the only currency that can be accepted to pay taxes or debts – fiat currencies have a monopoly of force behind them
- if you sell BTC and make a capital gains, you have to pay this tax in AUD – not in BTC to the Gov –
- If you do not disclose this capital gain – and the government finds out about this through their reporting entities like AUSTRAC – then they have a monopoly of force to make you pay – ignore them for long enough, you can have an arrest warrant issued in your name and then police with guns are legally required to reprimand you until you pay what is owed
- When it comes to any monetary economy – under the prevailing thought - a centralised currency is required by the powers that be to accept taxes as well as the repayment of debts – it makes thing simple for them
- Think of your PAYG – you have a chunk of your fiat currency (AUD for most people listening) taken out of your pay cycle –
- Lets use a thought experiment – lets say that AUD is replaced with BTC – the reporting and control of this currency is outside of the governments hands – this is actually no good for governments under the current system for them to collect taxes or guarantee that they have a never ending supply of debt they can issue
- This can occur with any medium of exchange - in the modern era this has been the gold standard, then fiat currency – which is granted legislative power as being the only currency that can be accepted to pay taxes or debts – fiat currencies have a monopoly of force behind them
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They not only need complete oversight and visibility of the going on with this currency (so they get their taxes) – but control of the supply to fund never ending fiscal deficits
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But the bigger issue for them is the limited supply of certain cryptos – like BTC –
- Hard to continue to print, or increase the monetary supply of a currency –
- Technically this isn’t so much of an issue – as you just devalue the price mechanics – similar to how the price of gold was controlled by a central bank when this was the backing of money – you can artificially increase the money supply if you increase the price of gold from $15 an ounce to $35 – same amount of gold but now it is worth far more – even the romans devalued their coins by reducing the amount of silver in them
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But the major governments as it currently stands is not interested in adopting any existing cryptos – they are more interested in central bank issued digital currencies
- Some smaller governments around the world may chose to accept it – but the major governments won’t
- Digital coins - What form these take is anyone’s guess – China is currently looking at a gold backed stable coin – hence why they seem to be hoarding physical gold – and why they are starting to crack down on crypto access and miners
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But when it comes to governments and the adoption of a particular medium exchange – they do not like competition – when gold was the backing for money the governments made this illegal for individuals to own – unless it was in jewellery or collectable form – so if central banks are looking at their own form of digital coins – and if cryptos are seen as competition – which are a destabilising factor to the monetary economy – what are governments likely to try and do to competing digital currencies/cryptos?
- Competing cryptos are considered deflationary by monetary officials - rather than AUD being spent in the economy for GDP it is being converted to BTC – creating a deflationary effect on the AUD – requiring more to be printed to try and boost GDP
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Can the government ban crypto? Can they outright ban BTC, or ETH or ripple – well no – due to the nature of the blockchain it is going to be very hard, if not possible for a single government to ban the existence of a crypto
- But let’s take a step back – what do governments control – regulation of fiat currencies – control over ADIs – i.e. banks – in the modern financial era they have a never before seen control over this sector of the financial markets – from not only the supply of money, but from what you can use your own cash for i.e. cash restriction bill – limiting how much cash a private business can accept as payment for their services – which is open ended with restrictions – it is simply up the government to change their mind
- Much of the bullish behaviour of BTC has come from the expectation, or hope that many large multinational companies will accept currencies like BTC as payment –
- Has created a major bullish sentiment in crypto – saw the price go from $20k AUD to $85K per BTC – many other major crypto currencies followed suit- expectation that major companies like TSLA would accept payment is good news – and it is good news – until they turned around and reneged on this
- Also, other companies like Mastercard and BPAY said they are going to accept transfers and payments in cryptos like BTC – but lets look at their business/profit motives for a minute – if their business model is to make a percentage split on money spent through their chain, wouldn’t it make sense to adopt as many different methods as possible to make as much money as possible?
- so this adoption from companies like Mastercard may not be because they see BTC taking over fiat currency, but simply another way to make additional revenues
- But negative news surrounding this space – such as tweets from Elon Musk and news from the Chinese Government have created a negative sentiment for cryptos like BTC – saw a 50% decline in prices
- This is where it is important to look at what governments have control over
- China cannot ban the existence of BTC – but they can ban any financial intermediary from accepting a conversion from BTC to RMB – effectively controlling the flow of currency into crypto or vice versa
- Say you have a wallet and you are looking to get your BTC out into RMB in your own bank account – well China as the monopoly controller of these financial institutions can decline this transaction –
- You are still left with options – P2P conversions for other crypto currencies – or set up a new bank account offshore and convert your coins into another currency – which can then be converted back to RMB
- But let’s say that the US follows suit, or Aus – and slowly as part of a G20 agenda – no financial institutions across this jurisdiction are willing to convert any funds from a crypto wallet into any major fiat currencies – well, this is a major risk – it may never happen – but this all depends on the willingness of governments, not their ability – they have the ability but are rather slow at getting anything done – which the major concern that I have when it comes to these markets in their current form
- The way I view it is that crypto markets are being allowed to exist by the powers that be, as in their current state they pose no risk – central bank and fiscal mandates are to ensure financial stability – if all of a sudden, they deem that say BTC is creating issues with financial stability, either through consumer protection excuses or through deflationary pressures where fiat currency is being converted to crypto rather than being spent within the economy – well, daddy government may start paying more attention to their methods of controlling/regulating these markets
- Plus – what makes the crypto markets great in the eyes of many, makes it a money-making playground for others – such as the billionaires or whales within the market
- As an example – say I am an eccentric billionaire – and I dump $5m into some alt coin – more or less a meme coin like poocoin (real thing) – then I promote it and get other people to buy it, saying that it is going to go up in price – many other people start you buy and the price goes up by 2,000% very quickly through a self-fulfilling prophecy – I then sell my position and take profits – then I reinvest into another coin – promote this via twitter telling people that it is the next big thing and to invest all of their money – then I make a further 2,000% on this coin – and repeat this behaviour – I can make a lot of money – especially if people respect my public profile and I can reach enough people
- Now – this type of behaviour is commonly referred to a pump and dump scheme – you promote something where others then invest into it and it push the price up – I as a smart person know that the prices the current asset that I am promoting is not worth what it is trading it, so I sell – and take my profits – this is technically illegal on markets that are regulated by entities such as the SEC or ASIC – goes against market integrity rules – But for unregulated markets – this is fully legal –
- The unregulated crypto market is rife with market manipulation – and technically I see nothing wrong with this – I prefer an environment of buyer beware - it helps to create a more aware population – but when most of the population is used to the concept that some arbitrary rule or regulation will save them from these schemes – it can lead to undesired outcomes – where people lose money –
- But this sort of pump and dump is the day-to-day occurrence within crypto markets – Whilst it is not good for anyone duped by these schemes – this is the smallest risk that these markets face and markets will adapt over time – people will start paying less attention to what Elon Musk has to say and no longer respond to his signals -
- But this sort of behaviour can also bring is a large risk from a legislative perspective – this is consumer protection – that governments need to get in involved and treat cryptos as securities, falling under their legislative branch
- Say you have a wallet and you are looking to get your BTC out into RMB in your own bank account – well China as the monopoly controller of these financial institutions can decline this transaction –
- China cannot ban the existence of BTC – but they can ban any financial intermediary from accepting a conversion from BTC to RMB – effectively controlling the flow of currency into crypto or vice versa
So in summary – if people are making money from Crypto – that is awesome –
- I would prefer some form of naturally adopted medium of exchange that it outside of government or central bank control – to help maintain purchasing power
- This is where the blockchain has a lot of promise – but I also know that the government and monetary authorities don’t like anyone else playing with their toys
- This is the same position I have had for the past 3 years when it comes to each any every single coin –
- The prices may go up and down – but what are those prices measured in? Aus, USD, - and when governments bring in their own digital currencies, competing coins may be deemed too much of a risk
- So for me personally –prices have the potential to go up of crypto as more and more people adopt this – through converting their fiat for crypto –
- But as a store of value for the very long term – and as something that can provide me value through an investment – it is something I am not interested in
- I may be wrong – governments may change their minds and completely ignore crypto markets – but I am not willing to take that chance
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. This week we will be looking at the Mississippi bubble. I find it a very interesting story of speculation and devaluation – creating a situation of loss of confidence in an early form of fiat currencies –– Lessons to learn from this – I get asked the question a fair bit – what happens to the value of every asset when denominated in fiat currency if fiat currency fails – and it is a good question -
- But in this instance the Mississippi Company bubble can help to provide some direction for an answer when it comes to what happens when people are no longer willing to sell assets in exchange for a fiat currency –
- This story is similar to the south sea bubble episode I did – the Mississippi bubble can actually be confused as the South Sea bubble as the collapse occurred in the same year - during this period many millionaires would be created – and the French actually came up with the term millionaire a result of his most famous scheme – but these millionaires didn’t last long
- But the Mississippi bubble is actually more of a currency blunder than a true speculative bubble like the SS bubble – this is where the MB has an additional element to it – that it collapsed the confidence in the very currency used to finance the purchase of shares in this venture through the bubble prices of the assets
- The term bubble in the world of finance is normally applied to a situation when unusually rapid increase in prices of some financial commodity occurs – can occur in shares, real estate, orange juice, crypt, tulips – anything that has a price and people are willing to speculate on can enter a bubble – but a bubble isn’t technically a bubble until the initial rapid increase in price is then followed by an equally rapid collapse in prices
- Is something in a bubble if the prices go up 1,000% - it may be, but if the price never comes back down then it moves from being in bubble territory to the new status quo
- The price movements depend mostly on people’s perceptions – the money flow – if people think something is worth a lot or think the price will go up further – they will buy
- The perception is what fuels a bubble – the reality or a breaking in the perception is what causes it to come back to earth – if that reality never sets back in – or the perception meets or creates the new reality – a bubble never has to pop – but sometimes some exogenous force can piece the reality that perception has created – this is the same element with most famous price bubbles
- Has a lot to do with the modern monetary and financial system
Let’s start with looking at the history to the lead up to the MSB –
- We start in 1715 France – where the French monarchy was essentially insolvent – therefore the nation was insolvent (i.e. bankrupt)
- The French government had spent a lot of money in the many anglo-french wars – most recently on the war of the Spanish succession
- This is before fiat currency could finance budget deficits – gold and silver were money – if you ran out of these commodities or other nations to lend these to you, then you were in trouble
- taxes were raised to extremely high levels on the french population but the hole that warfare left in the French treasury was too deep
- So – what happens to nations when they can’t pay back their debts? France began to default on its outstanding debt and people feared for the future of the nation – if you have no money you have army, i.e. no protection from the English or Hapsburgs if they decide to march an army into your nation
- This was also the time of colonisation - the French controlled the colony of Louisiana which was a vast settlement in the interior of North America – think of the US today – this area was most of Montana, North and South Dakota, Nebraska, Iowa, Wyoming, Kansas, Missouri, Arkansas, Oklahoma, some of Texas and Colorado and Louisiana - France was the first European country to settle this area of North America (1699-1763) – so they ended up with almost 1/3rd of the current US geographic boarders
- This land mass was much larger than France – but on top of this the French knew little about it – let alone where it was – this was before the days of google earth
- But many had heard the rumour that this land was rich in silver and gold – which was the currency
- Enter John Law – was a Scottish financier born in Edinburgh and had talents in both gambling and finance
- Law was a Scottish exile he killed a man in a duel and fled to France in 1714 – at this time he renewed his acquaintance with the nephew of King Louis XIV, the Duke of Orleans
- The duke became Regent of France after the king's death in 1715 – under old monarchy rule – a regency was when the rightful ruler (i.e. the male child of the king) was below the rightful age to commence rule – normally at the age of 15-16 – so the regent - served as ruler while the rightful heir to the throne matured – which at this time was five-year-old Louis XV
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So John Law and the Duke of Orleans got talking – the Duke was looking for some solution to their solvency problems – whilst John Law was a bit of a gambler and was well versed in finance – match made in heaven
- Law thought it was the unpredictable and limited supply of gold and silver that was slowing the economy rather than France having a true economic problem of spending more than it could afford
- Law thought that by switching to a paper backed currency - more currency could be issued and trade would speed up – similar to a multiplier effect theory financed through fiat debt – i.e. the more money that you print and introduce into the economy, the more that people will spend and based around velocity, the greater the GDP output
- May 1716 – Law – who was the Controller General of Finances of France created the Banque Générale Privée = "General Private Bank"
- It was the first financial institution in France to develop the use of paper money
- It was a private bank, but three-quarters of the capital consisted of government bills and government-accepted notes – issued by the French Government
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The paper notes would be supported by the bank's assets of gold and silver and would circulate as a medium of exchange
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Paper money was a new concept for the French; money to them was silver and gold. Law believed that paper notes would increase the money in circulation, which, in turn, would increase commerce.
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However, the catch was that you could only deposit gold or silver, and withdraw in paper
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Now – Enter the Mississippi Company - founded 1684 – it was actually named the Company of the West from 1717, and the Company of the Indies from 1719 – but I will be referring to it as the Mississippi company
- This was a corporation holding a business monopolyin French colonies in North America and the West Indies – which the French held a large territory of – Under the monopoly agreements this company was the sole provider for any trade in their regions
- August 1717 - Law decided to expand his banking empire by acquiring the Mississippi Company
- How would this help the Government finance?
- The scheme to finance the initial operations of the Mississippi Company was simple. Law would raise the money by selling shares in the company for cash as well as for state bonds – the more state bonds that could be sold – the more France could get their way out of debt issues in the short term (debtors come knocking at the door – well they can now convert their debts for shares in this new promising company)
- Law accepted a low interest rate on the bonds which helped French finances while promising the company a more secure cash flow
- Also - the lure of the promised trade goods out of the monopoly company – i.e. gold and silver and furs brought out many eager investors in the Mississippi Company.
- It turns out that the Mississippi Company was a small part of a much grander empire Law was trying to create
- The next year in September 1718 - the company acquired the monopoly in tobacco trading with Africa. He also expanded the taxation rights over the colonies under the monopoly charter. He also obtained control of the companies trading with China and the East Indies
- January 1719 - Law's Bank Generale was taken over by the French government and renamed the Bank Royale - but Law remained in charge
- But this had a massive shift in confidence for those looking to invest - the crown was now the guarantor of all bank's note issue
- In effect – with this move - Law now controlled all trade with France and the rest of the world outside of Europe as well as having the guarantee of the French Government from defaults
- Under the French Governments ownership, but Laws control - The company next purchased the right to mint new coins for France and by October the same year it had purchased the right to collect most French taxes
- In effect - Law now controlled all of France's finance, taxation collection and money creation - He controlled the company that handled all of France's foreign trade and colonial development – this was Europe's most successful conglomerate – as confidence was high
- But all of these acquisitions over the years and to receive these privileges weren’t free – to buy the rights to collect taxes, rights to mint coins, rights of trade – these had to be paid for - these activities and privileges were paid by issuing additional shares in the company
- What is going on with the Mississippi Company share piece? – well it rose dramatically as Law's empire expanded
- Shares in the Mississippi Company started at around 500 livres per share in January 1719 (the livres was the French unit of account at the time).
- By December 1719, share prices had reached 10,000 livres, an increase of 1,900% in just under a year. The market became so seductive that people from the working class began investing whatever small sums they could scrape together. New millionaires were commonplace and wealth was booming – times seemed good – at the surface level
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As the stock price shot up - the amount of cash needed to buy Mississippi shares meant more money had to be printed to meet new demands – as shares were purchased using government debts or paper money
- This was the weak spot in Law's scheme – as he had a never-ending willingness to issue more bank notes to fund purchases of shares in the company
- Markets reached their peak in early 1720 – but prices began falling in January 1720 as some investors sold shares to turn capital gains into gold coin – normal profit taking behaviours – making almost 2,000% from a gain – but any sell off spelt disaster for Law – as if people wanted to convert the funds for gold or silver, there wasn’t enough to cover a large sell down
- To stop the sell-off - Law restricted any payment in gold that was more than 100 livres
- In Response to this the paper notes of the Bank Royale were made legal tender, which meant that they could be used to pay taxes and settle most debts – essentially the form of money that would emerge under Brenton woods era of monetary policy
- Law and the Bank Royale needed people to accept paper notes rather than gold – so the bank subsequently promised to exchange its notes for shares in the company at the going market price of 10,000 livres – to todays POV – this doesn’t seem like much – but what it effectively did when money was in somewhat of a limited supply was double the money supply overnight – you had the paper currency in circulation – but now you also had to account for the market cap of the Mississippi company shares
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It is not surprising then that inflation started to take off – where inflation reached a monthly rate of 23% in January 1720 – in the same month
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This effectively devalued the shares in the company – but this practice would continue in several stages during 1720 – as the value of bank notes was reduced to 50 percent of their face value with inflation
- By September 1720 the price of shares in the company had fallen to 2,000 livres and to 1,000 by December
- In the end – the fall in the price of the MC shares allowed others to take control of the company by confiscating the shares of investors who could not prove they had actually paid for their shares with real assets rather than credit – remember credit is seen as paying for the shares with government bonds (i.e. debt) or paper money
- By September 1721 share prices had dropped to 500 livres, where they had been at the beginning – a loss of 95% of the value
So, what went wrong – and what can we learn from this
- Obviously, the financial world between now and 300 years ago are different – but people and their behaviours are relatively similar
- Back in 1720 - people wanted gold and silver when they took profits from the sale of the MC - But Law capped redemption in gold and silver to avoid depleting his reserves - This removed France's paper currency from the gold and silver standard and put it on the Mississippi Company share price standard – while at the same time increasing the money supply by the market cap of the MC – then because the amount of paper currency afloat was now many times the actual reserves of gold and silver and hyperinflation set in
- People want a medium of exchange that they see as valuable – at some point in 1720 – people started to view the paper currency of the Royal bank as worthless when compared to gold or silver
- Because it technically was – this paper currency was meant to be backed by gold and silver – but it wasn’t to the extent it should have been
- The solution from the Royal Bank was the continue to print unbacked livres to inflate and support the collapsing Mississippi bubble
- Between then and now - It isn’t an exact comparison – but CBs today are providing a service that John Law with the MV company were doing
- Printing additional unbacked currency to help maintain the value of financial assets – mostly in the debt markets – but also in the share and property markets by keeping interest rates low to zero
- Our whole financial system is confidence based – confidence backs everything and it is the thing that holds the whole modern system together – if people no longer have any confidence that the value of something will maintain its current price – then they sell – the prices go down, then more people lose confidence, then these people sell, then more people lose confidence, then they sell – and so on – and in the modern economy – this happens quickly
- Think about Government bonds and the debt markets – if every holder of government debt were to sell in an instant – this would create a massive market decline
- Many central banks are expanding their balance sheets by buying government debts, companies – both equity and debt – which essentially have a monopoly on a lot of the market in their ownership
- For investors beyond this - Why don’t they sell? Because they have the confidence that Governments/Central banks will continue to provide QE – printing additional funds – increasing the money on unbacked dollars to help maintain the prices of government debt
- But this story of John Law and the Mississippi Company is as intriguing as it shows the issues that the monopoly powers have over the control of currency
- Especially when that currency is what is used to pay taxes, debts and buy goods and services
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. Today, signs of financial instability that are emerging in markets – why are inflation and rising bond yields affecting fiat currencies – and what this means for markets – modern economy is interconnected and complex – so do my best to break these all down
- There is a growing recognition that price inflation has the potential to increase significantly in the near future
- It has already increased significantly in certain areas – timber/wood, food, and petrol especially in the US with the hacking of colonial pipeline
- The official estimates state that this inflation will be a temporary phenomenon – with it reverting back to limited to an average of 2% p.a.
- But the markets are more worried about the fact that this may not be a transitional phase in the short term, but that inflation is going to linger for years – hence there is increasing speculation about the need for interest rates to rise – creating further uncertainty in markets and sectors starting to de-risk from growth shares
- For those who are familiar with monetary policy – if inflation is above the mandate of CBs policy, increases of interest rates are the typical response
- It is something that hasn’t really been seen since the 80s – but markets could panic that this is going to occur and with this – the growth companies that are relying on the lack of discounting of their cashflows in propping up their valuations could come crashing back to earth – specifically the tech sector of the market
- Where the probability of interest rates being increased is being reflected in the bond yield – in the US – the yield on 10-year Treasuries has more than doubled over the last year, Australia and most of the world is seeing the same phenomenon – all of this is occurring whilst QE is occurring to held artificially lower yields through buying up the additional supply of government bonds on the secondary market –
- who knows how high the yields would have spiked without QE
- Historically – and working in a world where fundamentals matter - equity markets have continued to rise during an initial increase in bond yields
- But Financial markets have become dislocated from fundamental realities – they are now more vulnerable to a change in sentiment – driven from central bank policy – this all requires a revision to fundamental theory – with an updated view to look at what the driving factors are of markets at this stage of the economic cycle
- Yields rising, or inflation peaking technically should have no effect on equity markets – but it is what economic responses that they point towards that do – in the modern era – CB policy and investor behaviour in response
- If a central bank changes their mind on interest rate policies – or how much to expand their balance sheet by through QE purchases – markets will react more than they would have historically to something like inflation kicking in – they are reacting to what a central bank will do in response to inflation – not the inflation
- This is because equity markets are purely driven more by money flows– i.e. money flowing in or out of share – buying and selling – which is the demand of the share market – if it is demanded, then people will buy more, money will flow into the markets, pushing up prices – the reverse is true
- Money flows can occur in a few forms – in response to the perception about the economy
- CBs - from policy like QE who are worried about rising yields on government debt
- Inflation rates and employment concerns – leading to changes in Interest rates -
- The perceived economic prospects – will GDP be strong, will companies have good profits
- When looking at some of the current economic prospects - commodity prices are soaring, and supply chains remain disrupted – both of these can lead to supply issues and inflation in prices of goods and services
- Commodities – inputs to goods and services – when their prices go up, it is passed on to consumers – Supply chains – when they are disrupted it lowers the supply of goods, and if demand stays the same then prices go up
- Even directly for consumers - oil prices go to petrol – coal, gas – go to power bills
- These factors on top of the expansions of money supply – which is expected to continue in the future – inflation rates have the potential to spike – if these are not simply transitionary through one or two quarters - higher interest rates may be brought in – which with the amount of debt and additional money supply – threaten to destabilise both financial markets and fiat currencies.
- For financial markets - The reality is – if interest rates rise – the money flows into assets can reduce – creating a limited price growth and if anything – a price decline
- For Fiat currencies – all currencies are debt – every dollar is an IOU to a central bank – with inflation, the value of these fiat currencies declines for the person holding it – so inflation for savers in a world where interest rates are zero
- People are converting their money for dogecoin – this says a lot about the state of the current fiat markets
- The concerns are that the money flows will cease – CBs will stop printing as much as a response to increase interest rates –
- So in effect - an interest rate rises will lead to less money supply flowing into assets such as shares and affect existing borrowers
- This would have dramatic effects on the property markets
- The interesting thing with markets is what is known or predicted is typically priced in – if an increase in interest rates is known before it takes effect – markets would have already priced this in
- This being said – what is not expected is what shocks markets – What shocks markets can be in the form of changes in expectations – for instance, inflation is expected – but CBs have said that interest rates will be on hold –
- Markets are hedging their bets – investors are starting to sell off some of the overpriced growth companies in the market – companies like TSLA – slowly being sold down
- But Public participation in equity markets is at an all-time high, not just through direct holdings but through passive index tracking funds and the like
- So the real risks to the markets at this stage of the cycle is that money flows will dry up thanks to responses to monetary policy – this will then spook investors –
- There will be an inevitable cyclical switch from greed for profits to fear of loss that defines the divide between bull and bear markets
- The bond market is pointing towards a bear market -
- considering the effect on market relationships as over many investing cycles it has been observed that bond prices conventionally top out before equities – it is a very reliable warning sign
- But today we see that there is a relationship between declining bond prices and rising equities
- The increase in bond yields will affect the cycle of money flow –
- Looking back – one of the largest debt markets - the 10-year US Treasury bond – saw its yield fall to 0.48% in March 2020 – this is when deflationary fears were around – then the S&P 500 index fell by 32% and commodity prices were collapsing due to demand fears
- The Fed and global CBs then did what they have always does in these conditions - cut interest rates to the minimum possible (zero this time) and it flooded markets with money ($120bn in QE every month in the US)
- Over the past year - equity markets recovered fully and have gone on to new highs and commodity prices are now rising strongly
- But the money supply isn’t being reduce in response – it has continued and is likely to continue - the expansion of base money by central banks is huge - From the beginning of March 2020 base money in the US, the world currency reserve has grown by 69% - this is an incredibility large increase – and it has been rapid – 12 months - likely behind rising commodity prices in part as the purchasing power of the dollar in international markets is falling – as most commodities are based on the global reserve – the USD
- When the outlook for the purchasing power of a fiat currency falls, all holders expect compensation in the form of higher interest rates or prices – this is inflation after all – the real value of $1 is less when there are now almost 70% more USD – due to time preferences – the expectation is that the currency will buy less tomorrow than it does today.
- When looking at CPI and bond yields – if we look at the official targets of inflation, at 2.5% - the dollar’s purchasing power should sink to 97.5 cents on the dollar in 12 months if it is accurate – so the yield on the ten-year UST should be at least 2.56% to compensate this - otherwise new buyers face immediate losses – but it isn’t which shows a concern for markets as if inflation is going to go up, investors in debt markets will lose out – which is why QE is needed –
- You will never hear a CB, like the Fed admit the erosion of the currency they manage – but it is happening
- It is only a matter of time before holders of all fiat currencies slowly realise these issues one at a time – further eroding the confidence in the dollar and other fiat currencies – this can fuel further money flow out of the dollar – into assets
- And as has been seen - commodities have soared in price along with other inflation hedges, such as cryptocurrencies, equities and residential property. Other than the purchasing power of currencies, prices of fixed interest bonds have fallen, which is why their yields have risen.
- So in effect - an interest rate rises will lead to less money supply flowing into assets such as shares and affect existing borrowers
- Commodities – inputs to goods and services – when their prices go up, it is passed on to consumers – Supply chains – when they are disrupted it lowers the supply of goods, and if demand stays the same then prices go up
- If a central bank changes their mind on interest rate policies – or how much to expand their balance sheet by through QE purchases – markets will react more than they would have historically to something like inflation kicking in – they are reacting to what a central bank will do in response to inflation – not the inflation
What risks are there to markets with a collapse of the value of Fiat
- For several decades successive – going back to the times of Alan Greenspan – Cb officials have admitted that a rising share market is central to monetary policy – they believe that it creates the wealth effect and economic confidence
- This has been evident from CB policy – especially last year – but these policies to prop up equity and property markets is always going to address any financial or economic collapse by inflationary means – through the money flow – coming from an increase in the money supply
- But this in turn creates a real devaluation of the dollar through inflation - the valuation basis for equity markets will shift - undermining prices based around low to no inflation expectation
- Even if the Fed tries to offset a decline in prices as markets start to price in inflation –
- Creating higher yields for bonds and greater preference for present values in cashflows today rather than in the future for equities – if the solution is to increase QE to feed more cash into bonds and equities – they are chasing their own tail and at some point, it will be impossible to offset the valuation effect
- Equities will almost certainly succumb to an interest rate shock at some point. At the same time, the increase in bond yields will undermine government finances.
- Even if the Fed tries to offset a decline in prices as markets start to price in inflation –
- In these conditions the Fed will be trapped - it cannot let bond and equity prices slide - investment sentiment would turn deeply negative creating further sell offs and further price declines- but nor can it stand back and let markets sort themselves out, because of the record levels of corporate and other debt which would become impossible to refinance
- But nor can it just print money in order to rescue everything, because the dollar will be further undermined and start to become even more worthless - That leaves it with only one alternative left to pursue, albeit with the greatest reluctance. And that is to raise interest rates — substantially
- From this earlier precedent – the central banks have made the choice to increase interest rates over printing more money – but only when confidence in the dollar is low – you don’t want to lose all confidence in the dollar – or your currency – get a hyperinflation event – so to save the currency at some point interest rate increases would be needed
- But today – almost every economy is loaded up with debt, much of which is unproductive. A sharp rise in interest rates to contain price inflation would drive the world’s economy into a humungous debt-induced slump – also government borrowing is already out of control – especially in countries like Japan and the US
- Whilst it would create a massive downturn in prices – it may be what is needed.
- We aren’t at this point just yet – but there are some consequences of rising bond yields – that is that they can bring a rapid shift from overtly bullish assumptions to a more considered bearish outlook
- Where instead of bad and inflationary policies being tolerated or even demanded by investors, their thinking turns on a dime to a fear of anything and everything
- Under these conditions - every turn of the central management of economic outcomes only makes things worse
- Such is the violence of market imbalances that plague the financial world with central banking environment – where under their control financial markets can face a rapid decline if major inflation spikes due to the artificial controls on money – through increasing the money supply and keeping interest rates near 0%
- In this environment – alternative assets can do very well – commodities, physical previous metals – and beyond speculation – this may be why many crypto markets started to rise over the past 12 months – people are looking for anywhere to put their money beyond fiat currencies or debts denominated in those currencies
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. This episode is a little outside of the box, the topic comes from a listener, Mario.
He asked the question of how does someone both manage and protect their wealth in times of war? and are there actual strategies that one can implement if a war was to break out?
So, in this episode we will look at if there are strategies that are implemented as part of managing a portfolio to safeguard against the impacts war has on share markets and other asset classes.
Before we get into that – there are some things to consider when looking at this topic –
- Wars are not all built the same – you can have civil war, boarder conflicts, or even major conflicts like a world war – since WW2 there has also been the potential for a full-scale nuclear war – leasing to a mad max/fallout post-apocalyptic world scenario
- There are always wars going on – 3 wars saw 10k more combat related deaths last year, 14 with 1k to 10k, 33 other conflicts
- The major consideration out of all of these - is your country affected? Countries ravaged by war suffer severe losses – in terms of life, disruption of resources, occupations
- Times have changed – Switzerland used to be considered an independent country – but now the world is interconnected in a way that would seem foreign to those living in through the times of WW1 and 2
- Wealth has changed – used to be mostly physical – and financial contracts have changed
- Back in WW1 or wars before - Those who offloaded wealth – nazis with physical wealth – to avoid it being confiscated – would do so in a physical manner
- Gold, artwork – this would be transferred to neutral countries like Switzerland
Whilst wars are awful – one piece of good news is that you probably don’t need to worry about most investments if a war breaks out – especially long term
- This is assuming that it is a similar style of war that we have seen – if it is a major form of conflict – say the US and the West versus China and Russia – in a nuclear fallout situation – the best investment would be in your own survival – making sure you have your own food, water and power sources –
- But the good news - if there can be any when wars are declared – is that most financial markets tend to not be negatively affected in the long term
- Markets don’t deal well with uncertainty well – if a major conflict were to erupt with major uncertainty, then the share markets may drop – but markets have seen many conflicts
- The major wars that affect financial markets have been financial wars – been raging since 2009/10 – with currency wars – but lets say a hot war breaks out – what are the safest asset classes to be in and how should you manage your funds
Asset classes to look at –
- Defensive assets such as bonds are not that safe in times of war – this is because Bonds generally underperformed during times of war – this is for two reasons
- war tends to be inflationary – you see massive supply shocks, increasing prices - bonds do not like inflation
- most bonds pay a fixed income and have a nominal face value to be paid back at maturity – hence their value dwindle when inflation rises – so inflation will traditionally drive the price of the bond lower to compensate for this factor
- governments tend to borrow more during wartime – creating more supply of debt which again tends to drive prices down
- Historically this has been an issue - but with CBs and QE – this isn’t as much of a concern, as long as QE were to increase to soak up any surplus supply – which would depend on the country
- How well the debt markets go really does depends on who is the likely victor of a war is –
- Bonds are debt issued by either governments or companies – if a war was to break out and a nations government gets overrun and its domestic companies get destroyed in their output – both see their ability to honour their debts being diminished – making the asset worthless – markets would respond poorly to this – so the price of the bonds would become almost worthless
- US bonds have historically been the favoured destination for investors since WWII – considered a global superpower – if a war breaks out tomorrow - the US will be the likely winner – not talking about their failed ‘nation building’ wars – like in Iraq and Afghanistan – there is really no winning those wars
- Looking at the losers of the war - Germany, Japan, Italy - fixed income had severely negative returns - German bill investors lost everything in 1923
- Going back further - German bonds investors lost over 92% in real terms after World War I. Admittedly inflation was virulent in a war-torn world, and fixed income is not the place to be in such an environment. In the chaotic, disorderly environment of the war years in the Loser nations, you can't sell bonds or cash in bills any more that you can trade stocks.
- So in most cases – if wars break out there is little upsides to bond markets – they can fail at their defensive purpose, and also provide lower returns
- war tends to be inflationary – you see massive supply shocks, increasing prices - bonds do not like inflation
Shares – these actually can perform rather well through longer periods of wars
- a review of market reactions during the major wars between 1926 and 2013 shows that the impact of war on US stocks were largely positive –
- WWII, the Korean War, Vietnam and the first Gulf War were all periods in which "both large-cap and small-cap stocks outperformed" their long-run averages
- more surprisingly still, volatility did not take off - indeed, markets experienced lower volatility than normal – in a sad way, markets may have become accustomed to war
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Share markets have largely shrugged off past geopolitical conflicts – they can initially see some volatility or losses – but recover rather quickly - Why would this be the case?
- As serious as wars get – you need to ask yourself how likely any wars are to have to have a material impact on the major economies of the world – with this flowing into affecting the fundamentals of corporate profits of the companies listed on the markets – most major markets have been affected by wars due to this reason – the companies are untouched by modern day conflicts
- Plus the U.S. has spent an estimated $6.4 trillion on wars post 9/11 - it appears willing to keep spending if things escalate – this is money flowing into companies that run the war machine – so it helps to boost markets
- Looking at history - From the start of WWII until it ended in late 1945 – the US market was up a total of 50% - more than 7% per year over the 6 year timeframe
- When including WW1 from 1914 to 1918, just under 4 years - U.S. stock market was up a combined 115% over this 10 year period
- Beyond the tragic loss of life – the US economy was largely unaffected – it saw a ramping up with many companies and resources being reassigned to the war machine
- It is in periods of major uncertainty where the share market suffers the most
- when there is a pre-war phase – i.e. there is an increase in the likelihood of war breaking out – this tends to decrease share prices - but the ultimate outbreak of a war increases them – interestingly – markets can predict, or determine the outcome of wars – as some examples
- Japan's market peaked in 1942 – as up until this point they were winning on all major fronts – technically controlled the largest geographical span of control of battles in human history – most of this was across water – but it was an immense theatre of war
- the US market turned around after the Battle of Midway in late May of 1943 – first major win by the US after getting beaten time and again by the initially superior Japanese fleet
- when there is a pre-war phase – i.e. there is an increase in the likelihood of war breaking out – this tends to decrease share prices - but the ultimate outbreak of a war increases them – interestingly – markets can predict, or determine the outcome of wars – as some examples
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that the British stock market bottomed at the time of the Battle of Britain in 1940 – major air conflict between the RAF ad the Luftwaffe – which the RAF ended up winning
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the German market reached its high-water mark in December 1941 - about 6 months after operation Barbarossa began (the German offensive on Russia) as it became clear that the casualties and likelihood of compete victory was in doubt
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But in cases when a war starts as a surprise - the outbreak of a war decreases share prices due to the initial uncertainty shocks
- this phenomenon can be called "the war puzzle" - but there is no clear one explanation why share increase significantly once war breaks out after a prelude -
- As an example - Iraq war – in the lead up to this war after 9/11 – The ASX fell by around 22% - but then investors were encouraged by the start of military action when it finally happened in 2003 – because it removed the uncertainty that had plagued markets up until then
- In essence how long a war goes for, what sort of damage is done, and what is priced in before it happens all play a role before investors refocus on the main drivers of financial markets - the economy and earnings.
- Over the past 100 years - markets have been conditioned not to overreact to political and geopolitical shocks for two reasons
- There is the belief that there would be no significant subsequent intensification of the initial shock beyond what has already been priced in
- central banks stood ready and able to repress financial volatility – i.e. print the way out of trouble
- Investors should technically be buying the dips
- Over the past 100 years - markets have been conditioned not to overreact to political and geopolitical shocks for two reasons
Gold - one safe haven that does do well in times of war is gold
- Gold has been a good hedge against geopolitical upheaval and uncertainty
- Looking at the history of Europe during World War II indicates gold and jewellery work fairly well to protect a small amount of a wealth – because back then this was purely what you could carry on your person - but there were risks to this - conquerors demand the physical assets - and your bank will give it to them – back then people would try to take their wealth with them – but now things are different – as you can have paper gold in the form of ETFs -
- If you have physical gold this is probably better – as long as it is stored in a secure location on your own property and assuming that an occupying force isn’t knocking down your door
- But when times are uncertain – gold can go well as a hedge to the initial shocks the share market can suffer from the build up to wars
Summary - But what are the takeaway lessons?
- For protecting wealth and getting positive returns in times of wars – the share market has been a better bet than bonds
- Gold can also provide a good hedge – also, I would guess that some crypto markets would do well also – hard for one single nation to confiscate a global market
- Over the long run, equities are the place to be — even in countries that are losing a war, because historically, even they have managed to beat inflation
- However - even in the countries on the winning side - money invested in equities should be diversified - no company has ever had a sustainable, forever competitive advantage
- The historical records indicates that equities over the long run in relation to war are highly likely to earn a return well in excess of the inflation rates as well as provide a positive return during the period a war is occurring
- Share in a stable country have a higher degree of certainty and can achieve a long-term better real return over the countries that may be the losers of any wars
- It is always good to diversify – if you are really worried about a war coming to Australia’s shores – shares can work better than bonds – if you are worried about a nuclear winter – then any financial investment is likely to do you little good – better to start building a bunker and buying some MRE
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. This episode we’ll be talking about latest federal budget that was announced this week - and the implications this will have for individual
There were many announcements in the budget – few good things like the reduced tax on innovated products – but we will be focusing on individuals
Many of these announced changes haven’t passed legislation yet – but very likely they will – the budget for individuals focused on taxation, superannuation and housing
Personal Income Tax cuts – not too much has changed here
- The Government continues its Personal Income Tax Plan with the announcement of a number of measures targeted towards low and middle-income earners – the changes to the tax rates is still expected to continue as planned
- The aim of this is to provide immediate relief to individuals and support economic recovery by boosting consumer spending
- Comes from the demand side of economics – allowing people additional income to spend more within the economy to boost GDP – as the majority of our GDP comes from consumer spending, allowing people to keep most of their own money can assist with GDP – but it does depend on how the money is spent
- Retaining the low- and middle-income tax offset for another year
- The low and middle income tax offset (LMITO) was a temporary measure introduced – but this has been extended for a further financial year to the 2021-22 income year.
- The LMITO provides a reduction in tax of up to $1,080 for those earning less than $90,000 and will be received on assessment after individuals lodge their tax return- basically it means you get an extra $1,080 back at tax time – it starts to reduce once you exceed the threshold – but it is still more money in you pockets
- It is estimated that more than 10 million low and middle-income earners are expected to benefit from the extended tax cut
- Save the Australian population $7.8 billion in tax - the government expects the extra cash will flow towards businesses, encouraging more employment or investment – boosting GDP by around $4.5 billion in 2022-23
- Right away here there is something that stands out – that they don’t expect all of these funds to be actually spent – consider the concept of the multiplier effect – where $1 within the economy should lead to more in an increase in GDP – granted that this can take more than a year to potentially materialise – but 42% is expected to be retained by individuals
- Self-education expense deductions
- The Government will also remove the exclusion for the first $250 deduction for prescribed courses of education. The first $250 of expenses relating to prescribed course education is currently not deductible. The measure aims to reduce compliance costs for individuals claiming self-education expenses.
- This is another minor change – but at least if you are taking a course to further your income capacity in your current job you can claim the full amount of your education costs
Superannuation –
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Superannuation guarantee increase – this isn’t specifically a part of this budget as it was meant to occur a number of years ago – but the increase in SG is occurring from 1 July to 10%
- The superannuation guarantee refers to the minimum percentage of earnings an employer needs to pay into their employee’s superannuation fund. The superannuation guarantee is currently 9.5%, but will increase on 1 July 2021 to 10%
- Can provide an additional boost to individuals superannuation – but might have some unintended consequences
- An individual’s superannuation balance is expected to benefit all things being equal – i.e. same wage levels and wage growth – but SG is based around wages
- Most employers look at total package – what will it cost to employ someone– wages plus SG and any other benefits –
- Wages of $80k used to have $7,600 of SG on them – total package of $87,600
- Now an employer either needs to find an additional $400 per employee or reduce any wage rises by $400 – as the new SG is $8k – this doesn’t sound like a great amount in the grand scheme of things – and that is correct – but an employer with 1,000 employees now need to find an additional $400k for this – and this is just the first of the planned increases – meant to increase to 12% - or for someone on $80k this is $9,600 or an extra $2k p.a.
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This equates to $200k for a medium employer with 100 employees, or $2m for a larger company with 1,000 employees
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there are pros and cons to this
- Pros are that at least people are forced to have savings for retirement
- Examples – someone starting off their career with $50k income – works for 30 years and gets wage growth of 3.5% p.a. on average – assuming super gets 8% return p.a.
- 5% - $827k in super
- 12% - $1.044m in super or $217k more
- The CC cap will be increased as well to $27,500 – this is another change that was already on the cards – but is coming into effect 1 July – the CC cap will increase by $2,500
- This means that people can salary sacrifice an additional amount each financial year
- This is a benefit – allows people more room to SS more into superannuation – this is good as the changes over the years have been to reduce the CC cap – even though over time with the devaluation of the dollar and inflationary pressures, it should have been going up
- initially this was an unlimited cap – then $150k, then $50k when I started in the industry, then got brought down to $25k.
- Superannuation Guarantee Eligibility Threshold removed
- The Government is proposing to remove the $450 per month minimum income threshold which determines whether employees have to be paid the superannuation guarantee by their employer.
- Currently, where employees are paid $450 or more (before tax) in a calendar month, superannuation guarantee is payable on those wages. This threshold was introduced to prevent the administrative burden of facilitating the superannuation guarantee for employers with employees in casual employment arrangements.
- This proposed measure will ensure lower income earners are not missing out on the benefit of having superannuation accrue for their retirement. In particular, an estimated 300,000 individuals would currently be eligible to receive these additional superannuation guarantee payments
- So the minimum monthly income threshold of $450 before super guarantee contributions are payable by employers will be abolished - given SuperStream and Single Touch Payroll exist, the admin burden has been lessened slightly – but one thing to watch out for if you are a casual worker is to make sure you track your super payments – make sure you have the one fund
- First Home Super Saver Scheme (FHSSS) changes aimed to increase uptake
- In the latest change to the scheme, the maximum releasable amount of voluntary concessional and non-concessional contributions has been increased from $30,000 to $50,000.
- Voluntary contributions made from 1 July 2017 up to the existing limit of $15,000 per annum will apply towards the total amount able to be released. This increase will apply from the start of the first financial year after Royal Assent, expected to occur by 1 July 2022. The increased cap will ensure the FHSSS continues to help first home buyers raising a deposit more quickly, primarily through the special tax treatment of super and associated investment earnings.
- Self Managed Superannuation Funds (SMSFs) & residency
- SMSFs have long been disadvantaged from a tax perspective where SMSF members are absent from Australia for extended periods of time. In this budget the Government proposes to relax the rules such that the SMSF and members now only need to meet two rules to be eligible for concessional tax treatment:
- The fund must be established in Australia or hold an asset in Australia
- The members cannot be temporarily absent from Australia for more than five years.
- Other changes that affect older Australians
- The Work Test has been proposed to be abolished - From 1 July 2022 Australians will no longer need to meet the work test to be eligible to make non-concessional superannuation contributions and receive salary sacrifice contributions after reaching preservation age
- The old rules were that anyone over the age of 65 would need to meet a work test to contribute to superannuation – make a non-concessional contribution or salary sacrifice contribution
- Individuals aged 67-74 years will still have to meet the work test to make personal deductible contributions
- The worst test is that you are working at least 40 hours in a 30 day consecutive period
- Downsizer contributions - From 1 July 2022, Australians over 60 years of age will be eligible to make downsizer contributions. Previously the downsizer contribution was limited to Australians over age 65. The other eligibility criteria for the downsizer contribution remain unchanged.
- SMSFs have long been disadvantaged from a tax perspective where SMSF members are absent from Australia for extended periods of time. In this budget the Government proposes to relax the rules such that the SMSF and members now only need to meet two rules to be eligible for concessional tax treatment:
Housing
- The government has established a new Family Home Guarantee, which will be awarded to 10,000 families with single parents, allowing them to build a new home or purchase an existing home with a 2 per cent deposit
- The Family Home Guarantee is set to allow single parents to purchase a property with a deposit as low as 2%, with the government guaranteeing the remaining 18%. Applicants can either build a new home or purchase an existing home.
- Usually, home buyers would need to save up at least a 20% deposit, or take out lenders mortgage insurance (LMI) which can leave them thousands of dollars out of pocket.
- The Family Home Guarantee is limited to 10,000 places. However, this will be spread out over four financial years – which equates to 2,500 spots per year - The Federal Government says about 125,000 single parents will be eligible for the scheme. That means only 8% of eligible families would benefit from the measure over the four-year period – or 2% per year
- Eligibility for the Family Home Guarantee - Single parents with dependants who earn up to $125,000 per year - must also be Australian citizens and at least 18 years old. The scheme is open to first home buyers as well as those who have previously owned a home.
- The New Home Guarantee - An extra 10,000 places in the New Home Guarantee scheme will be added for 2021-22
- This is similar to the family home guarantee – as the government guarantees the remaining 15% of the deposit value – so it can help to support first home buyers in building a new dwelling or to purchase a newly constructed
- The New Home Guarantee scheme helps first home owners build or purchase a new home with a deposit as low as 5 per cent.
- But that means existing properties are not eligible for the scheme, which limits the opportunities for prospective first home owners living and working in capital cities or built-up areas.
- With these measures as well as the FHSSS – can help people get into property
- But the thing to watch out for is that you are getting either a 98% loan or a 95% loan –
- In both cases the government is guaranteeing the remaining 18% and 15% level of funds that would be needed to make up the 20% deposit to avoid LMI – but I don’t believe that they are putting up the capital for you as a deposit –
- As an example – buying a $600k property – normally you need $120k as a deposit
- With the FHG – you need $12k – plus stamp duty (depending on if you are eligible to get any concessions on this depending on the state you live in) – But means you have a $588k loan
- So your repayments will be higher and you will still need to prove that you can afford your loan repayments with the bank
- With a 20% deposit at 2.8% = $1,972 p.m. in repayments, with 2% = $2,416 p.m. = extra $5,328 p.a.
- Other consideration is that if prices go down slightly, you would be left with more debt than property value – so you may be trapped in the property and cant sell unless you are willing to take the loss and come up with the funds to repay the bank
- HomeBuilder – 12-month extension of the HomeBuilder construction commencement period for existing applicants
- This was the $25k for new home construction or renovations above $150k – there has been massive delays in the building industry so the extension is in hopes that people where were expecting it won’t miss out
Summary:
- Budget for individuals does have some small improvements for individuals
- Extension for income tax offsets
- Additional superannuation for employees
- Additional foothold in the door for property – but can come at some risks to be aware of
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury.
- There are concerns at the moment when it comes to investing – and that is that markets are at their all-time highs – concerns aren’t that markets continue to go to new all-time highs, but that the market falls through in the short term – what goes up must come down – the major concerns are around how far this may go down
- This episode – want to go through how to minimise timing risks – in other words, how to still invest now and if you see the market go down, minimise any loss but also take the opportunity to profit out of this situation
- To understand this concept and market timing risks – need to understand the concept of probability – which comes back to market timing risks -
- I get the question a lot - Is it a good time to invest at the moment?
- This is at the core of timing risks - the speculation that an investor enters into when trying to buy or sell an investment based on future price predictions – fer examples - I think the market is going to go up so I go all in, but then it doesn’t – or I think the market will go down so I hold off, but then it goes up and I miss out -
- is now a good time to invest an important question – depends on what type of assets you are talking about and how you are going about investing – I always think that it is a great time to invest now – if you are talking about your expected position in 10 years time – it is about the time you spend in the market, not trying to time the market
- If you invest $100k today in an index fund, the probability that you would be in a positive position in 10 years’ time should be a sure thing, based on past performance – future performance shouldn’t be determined by past performance – but lets think about the market make up for a minute
- What is an index – a basket of shares – ASX300 is the top 300 companies listed on the ASX by market cap – you are buying a large chunk of companies in the large cap – but also 250 companies that may rise to be the top performers – overall, these companies should perform positively over the long term – there will be companies that do not, but the majority of the index should rise, and your position in underperforming companies should reduce as the winners take their place – it is all about probability – spreading your risk out amongst many companies to minimise the probability of loss
- Probability - the branch of mathematics concerning numerical descriptions – i.e. how likely an event is to occur - The probability of an event is a number between 0 and 1 - roughly speaking, 0 indicates an event that is impossible to occur, whilst 1 indicates certainty
- Flip a coin – you have a probability of getting heads or tails – 50/50 –
- Flip a coin twice – you have a 25% change of getting 2 head in a row – flip it 10 times, have a 0.1% change of getting all heads – so flip a coin 1,000 times you may see this occur
- Experience in the market – shows that there is always a probability of losses – but this can be minimised when investing well and implementing strategies if you are concerned about losses in the short term
- But – it brings up an important point of probability in markets –
- What is the probability that you invest now and are in a positive position tomorrow, or the next month, or the following?
- It all depends on timing – which can really be best boiled down in probability to luck in the short term – do you finally pull the trigger today, tomorrow, or next month?
- A lot of people talk about luck when it comes to investments – wrong way to think about it –
- Luck – when investing you make your own luck – if you haven’t invested in the first place then you see the market go up – this isn’t lucky – but if you hold off investing and see the market crash – is this a turn for the better? Or a lucky situation? Technically it is – but all of these situations are viewed on a short-term time horizon –
- Long term - You make your own luck – you either invest for your future or you don’t – those who say that others are lucky because their made money investing are often those who have never invested
- In the short term – it is anyone’s guess what markets will really do – In the short term, I am talking about day to day - month to month, or even sometimes, year to year – but what about decade to decade? It becomes very hard to be unlucky with investing when your time horizon extends out to 10 years
- markets have a tendency to increase in value over time – the increase in value through a long term time horizon decreases the risks for short term investing
- But what about the short term? Here is where things get more interesting -
Lets have a look at the numbers and probability – in particular, lets look at the ASX index for investing –
- One good illustration of this point is the holding periods that were positive – from investing from day one and waiting – for these figures we are looking at the ASX index, probabilities differ if you select one individual share, or even 5 individual shares – but for the index
- 1 day (the next day) – 54% that you were positive or 46% that you were negative – very close to flipping a coin
- 1 month – 62% chance that you were positive – so there is a higher probability that after a months’ time, you will have a positive return
- There is a higher probability that you are still in a positive position – but there is a 38% chance that the investment would be at a lower value
- 1 year – 78% - now we are getting into the positive territory that if you invested 12 months ago, you have a 22% chance of having a negative return – about 1 in 5 – so every 5 years on average you may invest and see a negative return – but looking at the longer term
- 3 years – 91% that you are positive – so if you invest and see the market drop day 1 after you invest, and this continues to be a market crash, you have a 9% chance that you are still at a loss – this assumes that you didn’t invest anything further at the lower points of the market to recoup your losses
- 5 years, 10 years – 100% - beyond 10 years – 100% - for 15, 20, 30 years
- Out of all of these, that these probabilities don’t mention is the level of positive returns - Going long term – looking at the past 120 years – or since 1900 from the federation of Australia
- History of the markets – ASX in particular – average returns of around 13.2% p.a. – so if you have held investments in the index for 120 years – which in reality no individual could manage – you have 0% chance of loss – and a better compounding return rate that warren buffet
- There have historically been periods where the market has been flat for a number of years – especially in real terms – i.e. after inflation
- 1914-1921 – market had a flat real return – period of 7 years
- 1929-1932 – flat real return of 3 years
- 1937-1944 and 1951-1958 both saw periods where the real returns were flat for 7 tears
- Largest stretch was 1970 to 1985 – 15 years without a real return – but inflation was in double digits
- More recently – the market was flat in real term for about 8 years, from 2009 to 2017
But markets have changed over time – what drives markets is different –
- Looking back – the periods of time that markets have underperformed, or been flat long term follow economic recessions/depressions – why? Markets were behaving rationally for their time – differences to today
- no endless liquidity injections – money was relatively finite before endless liquidity from CBs –
- Looking at the market since 1970s- when fiat came into existence
- bull markets and bear markets –
- Average bull market – 46 months – return of 130.1%
- Average bear market – 13 months – return of -35.8%
- So your probability of losses are still smaller than the gains from investing when viewed in the long term
- But capital preservation is important – lose 50% of your investment, have to make 100% on the positive to get back to your original position
- bull markets and bear markets –
There is no way to completely remove risk from investing – even cash technically has a risk to it – counter party risks of the banks - But there are Strategies to reducing timing risks – volatility -
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The first and easiest is behavioural – if you own investments – and the market go down – don’t sell
- This one is very simple – but effective – if you buy investments and the market declines – don’t sell
- This can be very hard – humans are risk adverse by nature – we have myopic risk aversion
- But if you remember that if you hold long term, you should be at least back to your original position in 5 years at the very worst case
- This one is very simple – but effective – if you buy investments and the market declines – don’t sell
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Often the feelings of wanting to sell occur right around the bottom of the market – you see a major loss and worry about markets going down further? Guess what? Most people who have funds invested feel this same way – some feel it at 10% loss, some at 20%, some at 50% - but at some point those who feel the fear start to be outweighed by those who get greedy and the markets recover
- Timing risk comes from trying to guess what the market will do in the short term
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The worst thing to do is sell – because how do you know when to get back in? The hardest part of selling is then getting the guts to then put your own money back into an investment that has caused you loss – which financially has hurt you – this financial hurt can linger worse than a physical pain – cut yourself, it will heal in a week or so, but the painful feelings of financial loss can linger far beyond this point – this affects your future behaviours – you would be less likely to invest again – past experiences affect future decisions – heuristics of human beings – one bad experience can ingrain a bias to avoid repeating this – hence you don’t ever actually want to invest again – so you never do and you miss the rebounds in the market and the long term performance this can provide
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Remedy to this is to Buy more – when markets go down, buying more can help avoid long term losses – but it takes some guts to put money into investments that appear to be declining in value – but if the only reason that they are going down is that everyone is selling, which has nothing to do with the underlying performance of the investments – then investing is basically picking up a bargain
- but sometimes you don’t have any capital left, to avoid this, another strategy can work
- DCA – dollar cost averaging is about breaking up timing risks – done full episodes on this strategy – last one was about 5 months ago
- Check out the episode “Dollar cost averaging - how and when can this best be used for investment purposes”
- But in summary – if you have $100k to invest now, and are worried about short term capital losses, then you can invest $40k now and the remainder over a number of months - $20k over 3 months, $15k over 4 months, or $12k over 5 months, or even invest $20k over 5 months – no one right way about it, depends on individual preference and investments being selected
- What is important is that the probabilities are being averaged – DCA – stands for cost averaging, costs are the prices of the market – buying the average price of the market over the time period you are investing – which comes back to probability
- ABI – Always be investing – done through Monthly investments
- If you don’t need the funds for years then market declines can provide an opportunity – shouldn’t be viewed as a painful experience, if you know markets will recover at some point – instead view it as an opportunity
- Deploying spare cashflow – keep investing in down markets, if you can afford to invest more, then do it
- Diversification – process of spreading your risk out – many people think this refers to buying say an index – of having 300 shares on the ASX – or a few thousand international shares – this is a method of diversification, but it doesn’t save you from a systemic market collapse – where all markets are crashing – real diversification comes through investing in asset classes which can preserve capital, or even gain in value when another is declining
- Strategy: Initially – invest in other asset classes - and rebalance over time –
- Diversification helps to minimise downturns in the short term through being in uncorrelated assets, or assets that have low levels of correlations
- Investing between asset classes – bonds, credit, alternatives, gold, etc. – but many people don’t want to own these investments long term
- Bonds – a lot of people I speak to don’t want to be in bonds if they have a 30+ investment time horizon, and I completely understand this – personally I don’t hold defensive investments like bonds –
- But they can provide a capital hedge against going fully into the share market – and aim is to get a better return than cash
- What you can do, is if markets decline then use your defensive funds to rebalance into the undervalued assets
- If shares go down, and bonds and gold go up, use those assets to buy back into shares – buying more of the assets
- Strategy: Initially – invest in other asset classes - and rebalance over time –
Summary –
- Markets rise and fall – long term – you aim to get positive returns
- Short term – i.e. 1 year, it is anyone’s guess
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. A few weeks ago we went through the NZ government tasking the RBNZ with looking at property prices with monetary policy.
- in that episode, we went through why it probably isn’t going to really work well – politically the perception is that the Government is trying – but for the CB to make housing affordable through monetary policy, their only real recourse is to increase interest rates which would potentially put many households into default – leaving to an oversupply in property and property prices dropping – but this may not actually create ‘affordability’ – it would create people who have declared bankruptcy, who then have a hard time getting another loan, plus it may lower the household incomes – affordability of property is the price of property measured against the average household income
- what was mentioned in this episode is that the central bank has basically said as much – and would refer back policy tips for governments to try and implement – this is the other end of the spectrum on the fiscal policy side – such as changes to the taxation system – this brings us back to today’s topic – and this is one of the proposals that the NSW government has when looking at property affordability –
- Major changes may be coming down the pike in NSW for stamp duty reforms – may set the example for other states to follow
This episode – we will look at the proposal to remove stamp duty and replace this with a form of property tax – in other words, pay less upfront tax and replace this with an ongoing tax
- We will also look at some examples of how this would work
- Most of the information from this episode is from the consultation papers, bot with NSW treasury and a few private
To start with - this proposal is nothing new – one paper I was looking at went back to 1996, another to 2016 –
- Because if anyone was politically/policy aware back in around the 2000s – the proposal was that with the introduction of GST at the federal level, it was meant to be the replacement of stamp duty charged by the states – so the GST gets introduced, then the states remove stamp duty
- As is with governments – don’t like to forego revenues – so GST was a double win for the states – keep collecting stamp duty and then get a distribution from the federal level through GST – which is distributed between the states
Before we get into the details of this proposal – let’s start at the beginning - What is stamp duty –
- Tax you pay on the transfer of an asset – stamp duty is triggered by a property transaction and levied on the sale price
- Stamp duty is also referred as a transfer duty, as it is a transaction-based tax paid on the transfer of property, both residential and commercial.
- The tax is paid by the purchaser of the property, based on the sale price – includes the price of the land and the building on it – essentially the market value
- Stamp duty has a progressive tax structure - the tax rate increases as the purchase price increases.
- first introduced in England back in 1694 under an act to help raise revenue to fight against the French towards the end of the Nine years’ war
- As an English colony this tradition carried – NSW introduced Stamp Duty 1865
- Stamp duty makes up a large chunk of every states revenues – NSW has a revenue of just under $32b
- Transfer duty - $8bn or 25% of the total revenue, land tax was about $4.6bn or 14.4% - but in total the NSW government makes around 40% of their revenues from property, in the form of transfers or ongoing land tax – note that this land tax is not rates – which are levied and collected by the local councils
- Interesting – one paper I looked at called Fundamental principles of stamp duty – had the revenues of NSW back in 1995 - $2.6bn was the stamp duty collection – but this made up around 43% of the state’s revenue back then – today this tax, whilst it has increased by $5.4bn, makes up about 18% less as a share of the total revenue - additional taxes have been introduced since, such as on gambling, other state levies, which have helped to reduce the portion
- NSW has some history in reforming Stamp Duty - From 1 July 2016, the NSW government abolished transfer duty on the sale of business assets, including intellectual property, goodwill and statutory licences.
Why is NSW looking at this proposal –
- The major reason is that over the past 156 years, stamp duty on property has become a large upfront barrier to entry to getting into the property market – not only getting into the property market, but moving from a current property into a new one -
- Since the 1990s - Property prices have grown, especially around the greater Sydney area – but on top of this, the tax rate of stamp duty has also grown – creating a compounding effect of the barrier to entry for property
- Initially the stamp duty rate was 0.5% - but on average now it is around 4% in NSW based on the average property price – it is a tried system – but on average it is about 4% - increase of about 8 times
- In the past 30 years, the average earnings over households in NSW have trebled, but the average house prices have increased around five times, and average stamp duty on dwellings has increased more than seven times – there is a problem here –
- With the compounding factors of higher prices, requiring more of a deposit savings, as well as costs to stamp duty, homeownership has declined, from around 70% in the 1990s to around 64% today
- To get into the property market – you have to personally cover the stamp duty – save for your 20% plus the stamp duty costs
- One of the studies done has estimated that stamp duty can add 2.5 years for an average worker to save enough to get into the property market – this is based on the average household saving 15% of their income on a deposit
- Goes without say that stamp duty has massively increases the transaction costs for getting into property – In 2009 NSW stamp duty revenue was 137% of the ABS measure of ownership transfer costs. By 2018, stamp duty was 384% of ownership transfer costs
- Economists also suggest that stamp duty can also hurt economic spending for the population - A review of nine recent studies of the Australian tax system indicates that each additional dollar of residential stamp duty revenue lowers living standards by about 90 cents. For stamp duty on commercial property, the impact is even higher, with an economic cost of $1.00 for every dollar of revenue raised.
- So, on average, almost every dollar raised in stamp duty has 100% economic cost – reducing consumer spending and GDP
But let’s be clear – the Government are not acting purely out of the goodness of their hearts for this change – they are looking to replace an upfront tax with an ongoing tax – in the form of a property tax
- We already have a Land tax - which is an annual tax paid on the ‘unimproved’ value of land
- We also already have rates – which is also based upon the unimproved value of land – however at the moment – land tax isn’t paid by many people in NSW – the numbers:
- For stamp duty – figure of about $8bn at the state level, with an average rates bill of $1,050 in NSW and 3m households, revenues by the councils of about $3.2bn, but for land tax there is a $4.7 billion revenue that is generated from about 180,000 land tax payers – this is an average annual land tax bill of about $26,000 per tax payer
- Focusing on properties, rather than the people who pay land tax, about 260,000 out of 3 million residential properties in NSW (about 8.5 per cent) are subject to land tax - then among commercial properties only about a quarter are subject to land tax
- a smaller number of people pay land tax – why? It has a high tax-free threshold, and there are many large exemptions, including the principal place of residence and farms.
This new property tax will not be land tax, or replace land tax or rates – it will be on top of these
- There will be some changes compared to land tax as it currently stands - The property tax would apply to each individual property, unlike land tax which is based on an owner’s aggregate value of landholdings
- But here is where the proposal is looking at two options –
- Tax based on the unimproved land values – which is how council rates are determined
- Property tax based on the market value of property – including the value of the land, buildings and improvements
- Is similar to rates vs stamp duty – rates are based upon the current unimproved land value – stamp duty is based on the market value of sale – I think it will likely be based on the unimproved land value – the council already does this each year – takes more work to try and calculate the market value – plus, it may cost too much on an ongoing basis
- It is estimated that the economic benefit of the reform would be approximately halved if the property tax were based on market values instead of unimproved land values.
The reform framework –
- Buyers will be given a choice of which tax to pay – anyone buying a new property will be able to do the sums themselves
- Pay upfront or pay on an ongoing basis
- Pros and cons for each situation – if you plan to move homes regularly, or live somewhere for a few years before upscaling, it may make more sense to take the annual tax rather than paying for stamp duty -or if you plan to buy your forever home where you will live in it for decades, it may be actually cheaper
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Property tax will be an annual tax on land value – the tax structure will likely be similar to rates, where it is based on the land value
- There will be a fixed amount plus a rate applied to the unimproved land value of an individual property
- The rates – depends on the type of property – four types, owner-occupied residential property, investment property, primary production (farmland) and commercial –
- All of these properties need to currently pay stamp duty if they are purchases – but only investment properties or commercial properties are liable to pay land tax, if they are above the minimum threshold – what are the rates:
- Owner occupied: $500 + 0.3% of the unimproved land value
- Investment property: $1,500 + 1% of the unimproved land value
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Farmland: $0 + 0.3% of the unimproved land value
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Commercial property: $0 + 2.6% of the unimproved land value
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If you are not buying a new property, there is no change to your current situation
- If you already own a property and have paid stamp duty, then you will not have to pay the potential property tax
- There will be window in which new purchases of property can make a choice, to receive a rebate of their stamp duty and to pay the ongoing property tax
- First time home buyers – the existing stamp duty concessions for FHB could be replaced with a grant of up to $25k
Looking at some examples –
- In 2020, the average unimproved land value for residential property across all of NSW is around $437,500
- Using the indicative property tax rates, the average residential property in NSW would be subject to an owner-occupied property tax of $1,812 per annum
- For metropolitan NSW the average residential land value is around $630,400 - corresponding owner-occupied property tax would be $2,391 per annum
- In comparison – let’s say there is 40% premium for the total values – taking the market values to $612,500 and $882,560 respectively –
- Stamp duty on these properties would be $22,897 and $35,052 – this represents paying for 12.6 years and 14.6 years upfront in stamp duty when compared to the ongoing tax for that is estimated
- The other thing to consider is that over the years, the unimproved land value of the property is likely to rise – hence the present value of stamp duty may not seem as bad
- Assuming that the average land value grows by 3% p.a. – takes the break evens down to 11 years and 13 years – so shaves about 1 and a bit years off – but they key consideration is the long term holding of a property
- If you plan to own the property for 20+ years, or retire into it – it may actually be better to still pay for the stamp duty
- Investment property – Say you buy a residential investment property in metropolitan NSW – the fixed fee plus 1% is about $7,804 p.a. – the stamp duty payable on property at the market rate = $35,052 – about 4.5 years of the annual ongoing tax
- Effects on investment property – make it less viable form a cashflow perspective – additional costs – rates, land tax, annual tax – rents would need to go up to cover this
Will this do any good?
- The government has forecasts that in the medium term, the property tax would create a revenue neutral situation –
- Currently, there are about 200,000 property transactions each year paying stamp duty. A long-run transition to a system where around 3.5 million properties pay an annual property tax would allow the Government to recover the revenue lost in the early years.
- From an economic perspective - Based on the current model, the proposed reforms could inject $11 billion back into the economy over the first four years, putting money back into the pockets of the people of NSW
- However – this may actually have a long term negative effect on consumer spending – when accounting for the increasd ongoing costs for households for holding property, this may initially inject $11bn in the economy over 4 years, but what about the annual opportunity cost for the money going into this ongoing property tax?
- Issue with models, impossible to accurately predict anything – especially when considering that it is all assumptions based and assuming that the money saved on stamp duty will be spent in the economy – as opposed to going towards a deposit or helping to cover the debt
- One big assumption is that the removal of stamp duty is that it has the capacity to increase household turnover – reducing the upfront transaction costs
- The Reserve Bank has noted housing turnover is positively related with household retail spending, particularly on durable goods such as furniture, home appliances and electrical or electronic devices, and renovation activity as new owners might choose to modify homes to suit their needs or existing owners add value before listing
- From an affordability point of view – trading the here and now for ongoing costs
- Residential – need to consider the pros and cons
- For investments – it may be better in some cases if the property is going to be long term hold – to pay stamp duty
In summary – the NSW Government views - Stamp duty is an inefficient and volatile tax that puts a barrier to entry for people getting into the property market
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. This week the topic is from a listener, Gabriel.
That is “how do you change your investment strategy over time as the portfolio value increases? more specifically, how do you see someone building a growth portfolio starting with $10,000 and what would they change when they get to $100,000? What about $1,000,000?”
This is a great topic, thank you for suggesting it.
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Everyone is different- no one right way to go about this –
- I have clients invested in a similar manner with $300k to $2m – because it is the right option to meet there needs – the only difference is how much is invested in each of the types of investments that make up their portfolios
- I also have clients with vastly different allocations – but again, this is depending on your needs
- Some want long term leveraged growth, so we looked at property or geared share funds
- there are some factors that can be used to help determine where someone should invest – which helps to determine an investment strategy based around the level of funds invested
- But the best thing to do is look at the end picture – where do you want to be – and build towards that
- This will help to answer this question better – to answer ‘what changes should be made once you have accumulated $100k or $1m’, the focus should be more so on what do you need your $100k or $1m to do for you
- To explain this further – say your end goal is to have a passive income of $50k p.a. - $1m in todays dollars - can fairly comfortably achieve this – but only if the assets generate an income yield of 5%
- Obviously with cost-of-living increases over the years the nominal value you will need is greater
- It is great to have $1m, but if this is in cash and you need an income, you are out of luck, as well as if you were invested in one single share that doesn’t pay an income, or even gold
- This is why having goals-based investing helps to determine this question
- Goals – to help work this out – for long term investment goals, there are considerations to help determine the investment strategy:
- Return needs – what returns do you need out of your investment? Returns have two components – growth and income – add these together and you get your total return
- Different assets have different return profiles – some are purely growth, others purely income
- They also have different factors that affect each of these returns – leverage on property, income of cash versus FF dividend paying shares at the moment
- Risk mitigation – do you need to protect your downside? If you are starting off with $10k – you would still probably need to protect from absolute losses. If you have $1m and are looking to retire, you might want to do this also, but is much easier to do with $1m compared to $10k: how can this be done?
- Diversification – ways to minimise your risk, in terms of volatility is to spread the risk out
- Risks – absolute and speculative – in other words, what is your risk of losing everything versus seeing some downwards price movements that are a natural part of any growth investment?
- Using the example above, if you buy one share with your $10k, the risks might be high for both speculative and absolute losses
- Now use your $1m to buy 100 companies at $10k a pop – your volatility will go down and so will the absolute loss potential
- Now – buy a property for $400k and use the remaining to buy shares – at $10k a pop then
- Now – buy a property for $400k, $550k of shares and $50k of gold – the volatility of your overall portfolio will decline further
- Defensive allocations versus growth components – Defensive assets
- Diversification – ways to minimise your risk, in terms of volatility is to spread the risk out
- Return needs – what returns do you need out of your investment? Returns have two components – growth and income – add these together and you get your total return
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Both of these factors will change over time as well – as you grow additional wealth, you can start to invest in some defensive assets to help secure your position, as well as purchasing additional assets as part of diversification
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The costs of the ongoing strategy – Different investment have different costs to them
- Looking at the strategy of buying 100 shares, that would cost you $995 with a brokerage platform like selfwealth – not too bad – makes up 0.1% as a transaction cost
- But now say you have $10k and want to buy 100 shares for the same diversification – at $100 each, cost you almost 10% of your invested assets to just get into the market
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Changes to a portfolio – CGT costs from rebalancing
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Also – depending on How are you going to accumulate the wealth over time can help to determine where to invest –
- Monthly investing, or saving up and making lump sum investments, or debt repayment and refinancing for equity releases from property
- All of these combined can help to work out the correct investment strategy – but remember the key factor is the end picture – what these investments need to be able to do for you. This helps to determine:
- What types of investments to purchase: shares, etfs, LICs, managed funds, property, gold, BTC
- How they should be purchased – directly, on a platform, personally or inside of a trust
- Also – as a quick note – any changes to investment strategies don’t necessarily mean a change the existing investment allocation, but start investing in additional assets
Now that that is out of the way - Let’s have a look at some examples to go through this
Starting out – options for a $10k investments
- When starting out with $10k – your options are limited due to the capital size –
- Not like you can buy an investment property with this – or purchase a managed fund directly due to minimums with investors
- Your options are likely limited to either a share, ETF or LIC or managed funds held on a platform to avoid the minimum
- Coming back to goals – if you aim is to work your way to $1m to help generate a passive income, what investment can work: Looking at the considerations
- Returns needs – depends on your timeframe – but if it is long term, you can generally focus on a good allocation to growth, with any income on top being reinvested in the portfolio
- Risk mitigation – This is probably one of the hardest parts when starting with $10k
- Direct shares are probably not the best option
- Costs for the strategy – share purchases would have the brokerage costs – ETFs, LICs have the brokerage and indirect MERs, platforms for managed funds would have administration costs and MERs for the funds
- Investment options – not investment advice –
- Can use some ETF index funds like Vanguard Diversified High Growth Index ETF (VDHG) – has 7 index funds inside of it – so rather than buying the individual funds, can just buy the one to save on some brokerage
- This initial step seems relatively simple – for purchasing an initial investment – the big question is how are you are going to build your wealth -
- Say you invest $10k in the index, over 10 years the average return is around 9% = $23,673 assuming that you personally cover the distribution tax and that the gross income is reinvested
- In 20 years, with the same assumptions, you would reach $56k, in 30 years, around $133k – so it is likely that you will need to put your own financial resources towards this end investment goal, in the form of monthly savings or accumulated savings in one lump sum
- Along the way – if you accumulate another level of savings, say another $10k, you can start investing this but also start spreading the investment allocation out –
- Technically – to reach $100k in a timely manner – in 10 years, your additional investments would likely be required
- Not comes the important question – where to invest these funds?
- It depends – if you are already holding assets that meet your long-term goals – i.e. passive income levels, then technically do you need to change anything?
- But if you invest $10k in a multi-asset index fund initially and want to make monthly investment of $2k p.m. for the next 20 years, this would technically reach $1.4m
- However – you would simply have this one ETF – and be paying $9.95 each month in brokerage, or 0.5% in transaction costs – if this ETF meets your needs of distributions, for these funds it has been close to 5% p.a. then this may be a simple strategy but in the end effective
- I hope this is starting to make sense – there is no one right way to go it – it is important to focus on what you need – changing a portfolio as it grows in value for the sake of changing it may not lead to a better result
- What having $1m in invested assets allows you to do is have a greater range of potential investment allocations without breaking the bank
- Technically you could split this $1m up between the VDHG funds underlying investments, so buy Vas at 36%, and so on until you replicate what this ETF is made up of – or just buy VDHG
- The more you have simply allows you to expand into other asset classes with higher cost barriers to entry – like property, with stamp duty as an example as well as deposit requirements
In summary – there is no one right strategy for everyone – because it all depends on what you need out of your investments
- Hence, first figure out what investments will help you to meet your goals – both in the interim and long term – because I have often found that they are similar
- In the interim you want to have a good return –
- The one thing to do is rebalance over the years – rather than buying purely high growth investments, can start to diversify into other asset classes as a hedge – this is for those who are more risk adverse
- Considerations along the way to help determine the investment strategy
- Return needs – Say you need long term growth with returns of 8%+ p.a.
- Risk mitigation –
- Defensive allocations – you don’t need any
- Diversification
- What would you change when you get to $1m?
- Hopefully nothing – beyond making some additional investments on top of what I already held
- This is the way I have set up my investments – have about 20 direct shares, a few index ETFs, 4 LICs, portfolio of 12 managed funds – I simply keep adding to my investments over the years
- When I started when I was 15 – I only had 2 shares – NAB and TLS not the best long-term investments, but have made many additional ones over the years
- Why I don’t like major rebalancing - Major cons with selling down a full $1m portfolio and repurchasing something else is GCT and transaction costs
- Instead - Along the way you want to be able to manage the allocation to fine tune this to where you need it to be
- But this is done through investing with your end goal in mind
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. Firstly, sorry for the delay in episode, been over a week now – daughter was born last week, so been pretty busy helping care for her and trying to find a time to record in between work – should be back to normal from next week
Interesting episode today – as one central bank in particular has now been tasked with the problem of housing affordability – This is the New Zealand central bank (RBNZ) – Can Central banks make property more affordable?
- If you are familiar with CBs – you would be familiar with the mandates that they get from the government – it is generally to keep annual inflation between a target range (1 and 3% for the RBNZ) and to also support maximum sustainable employment – trying to help job growth
- But in February 2021 - the NZ government formally added a clause to the RBNZ’s mandate, instructing it to consider housing prices in making monetary policy decisions
- The change has drawn attention – firstly, what this actually means from a policy decision point of view?
- Interesting – as it has the potential for governments to extend further into CB policy but also – goes in a contrary manner to the prime mandate of CBs -
- NZ has a history in being a canary down a coal mine - In 1989 it was the first to commit to a specific target for consumer price inflation – inflation target - target helped to lower self-fulfilling expectation of endless price rises that was occurring across most western economies in the late 70s and into the 80s
- From 1989 to 1991 - inflation fell from 8% to 2% - Soon after, most central banks had adopted targets
- Why extend the mandate to consider housing prices? The western world we have been experiencing inflation for years since the targets were brought out – not talking about CPI
- Today the runaway inflation rates are essentially asset price inflation
- consumer prices have been held in check by globalisation and automation – if anything deflationary fears have existed in regards to this – which is why interest rates have been reduced and, in the process, created easy money – but this easy money has been driving up the price of assets such as shares, bonds and housing
- Like many western nations - Home prices have risen steadily in the pandemic, and in 12 months through to the end of January were up 20%
- The price of a typical Auckland home gone to $720,000
- Inflation targets were brought out to reduce inflation below this level of price growth
- In NZ – The prime minister made campaign promises to provide affordable housing – so she has tasked the CB to consider the effects on housing as their policies have helped to push homes beyond reach for the lower to middle economic class – which includes younger first-time home buyers
- This isn’t only in New Zealand – in western nations, homes are considered “unaffordable” (more than three times median family income) in more than 90% of cities
- The $220tn global housing market is more than twice the size of the global stock market – but the housing market has much additional debt – so the risks of falling prices are compounded by failed mortgages and defaults – making economic downturns worse
- But in February 2021 - the NZ government formally added a clause to the RBNZ’s mandate, instructing it to consider housing prices in making monetary policy decisions
I do find that there is some bit of irony of this policy -
- New Zealand’s was the first CB with the inflation target – hence, interest rates became a tool to be moved to combat inflation – higher rates for higher inflation, lower rates for lower inflation – this monetary tool initially got inflation in line but over recent years, the inflation rate is below the target rage in many countries (in has been for 4 years in Aus, but not in NZ at the moment) – to help this and to try and stimulate the economy – rates keep getting lowered
- We are in an era of ultra-low interest rates which may be the inevitable destiny of monetary policy – but whilst CPI was declining, asset price inflation has been on the rise at massive compounding rates over the past few decades as an order of consequences from this - inflates the value of the assets beyond what they might “reasonably” be worth if interstress rates were a flat 5%.
- Governments worldwide have come to embrace easy money as a way to finance social programs and deficit spending, needing QE to make sure bond yields don’t go through the roof – but this has created a negative effect on financial stability and housing affordability.
Now the big question - Can central banks really make houses cheaper?
- Technically – yes – all it needs to do is increase interest rates massively to the point it puts a downwards pressure on property – but this would have some major downsides that are too great to justify this type of policy
- This becomes clear when considering the extent of monetary policy tightening that would be required to reliably control asset prices - Research from the San Francisco Fed found that it would have taken 8% of monetary tightening between 2002 and 2006 to completely avoid the housing bubble that preceded the 2007-2009 global financial crisis - For context, the federal funds rate has not been at this level since October 1990 – now that rates are near 0% in most countries, this would require a massive increase
- This move by the NZ governments move may not slow the housing boom soon – mainly due to the supply-and-demand dynamics being too strong
- Demand – low interest rates and lots of people wanting to live in major cities like Auckland
- Supply – Have a pretty urbanised country – technically not as urbanised as Australia
- The RBNZ has said that “they will have to take into account the Government’s objective to support more sustainable house prices, including by dampening investor demand for existing housing stock to help improve affordability for first-home buyers.”
- Monetary policy is unlikely to be the critical tool to ease New Zealand’s home prices – it could be, but it likely won’t be without abandoning their long running mandate of having an inflation rate of 1-3% and having full employment
- If rates are made tighter (in other words increased) the housing market could be dropped in price - but the entire economy could suffer. If growth slows and unemployment rises, it’s likely the price of homes will go down, but is that really what New Zealand policymakers want?
- Also – consider the term ‘affordable’ for a second – homes are considered affordable based against the metric of a household’s income – if an economic slump occurs and employment drops, reducing the median household income by 30%, but in the process, you see a 30% decline in housing prices, is this really a more affordable situation?
This brings up another important question – should central banks consider the impact of their policies on hard assets, like property?
- In making monetary policy, central banks generally focus on the prices of goods and services – which is CPI - but there are occasional calls for them to pay more attention to prices of assets, such as houses or the stock market
- This debate is not new – in the early 2000s it was actually a topic of global discussion by the Centre for Economic policy research – done by the Geneva Report on the World Economy called Asset Prices and Central Bank Policy
- This looked at the use of interest rates as a tool to pop asset bubbles
- However – this was shouted down - in 2002, future Fed Chair Ben Bernanke argued that it was crucial to use the right tool for the job when making policy. “As a general rule, the Fed will do best by focusing its monetary policy instruments on achieving its macro goal – price stability and maximum sustainable employment – while using its regulatory, supervisory, and lender-of-last resort powers to help ensure financial stability.”
- In the same 2002 speech, Bernanke directly addressed the idea that the Fed should meddle directly with asset prices: “I think for the Fed to be an ‘arbiter of security speculation or values’ is neither desirable nor feasible.”
- Sounds funny today – but this is going back almost 20 years ago – before the days of QE or SPVs that buy corporate debt or ETFs in shares
- But the very nature of a CBs mandated goals of full employment and price stability come with the flow on effects on housing, shares and the bond markets – you cannot expect to move interest rates without having an affect on these assets – so through not considering this factor has led to runaway prices
- However – now that the mandate given to the RBNZ from the Finance Minister appears to have a different priority - Rather than describing house prices as a potential threat to financial stability, the government mandate asks the RBNZ to consider the impacts of its policy decisions on housing affordability
- The RBNZ central bank officals came out against this – they are sceptical about the use of interest rates and instead prefer a macroprudential toolkit as opposed to trying to reduce housing prices for first-time buyers – as they believe this goal is better met by increasing the supply of houses and targeted fiscal policy
- Similar in the US - Federal Reserve Chair Jay Powell also thinks that using interest rates to deal with asset price bubbles is dangerous - prefers to turn to macroprudential tools for that purpose – in plain English, this means financial regulation from the governments end that aims to mitigate risk to the financial system – so it may mean that additional controls on lending are needed, or changes to deductibility on property – but this is unpopular for governments
- In a January 2021 Powell said, “We don’t actually understand the tradeoff between if you raise interest rates and thereby tighten financial conditions and reduce economic activity now in order to address asset bubbles and things like that—will that even help? Will it actually cause more damage, or will it help? So I think that’s unresolved. And I think it’s something we look at as not theoretically ruled out, but not something we’ve ever done and not something we would plan to do.”
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It seems like the government and CBs are trying to pass the buck to one another
- RBNZ – “We will be considering our financial stability policy settings via our prudential tools – like loan-to-value ratios, bank stress testing, and capital requirements – against particular types of mortgage lending. This is done with a view to moderating housing demand, particularly from investors, to best ensure house price sustainability.”
- But this is a recommendation that they can make to the Government to then implement -
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Looking at some of these other government-controlled factors outside the central bank’s
- In many developed economies, house prices are as affected by land-use regulations that limit the size and style of homes that can be built, which create artificial housing scarcity that in turn drives up prices - A 2017 New Zealand government study found that rules around building could account for 15% to 56% of a home’s cost depending on the area
- Also – things like taxes, with stamp duties are increasing the costs of housing – will cover this in another episode soon, as NSW is looking to replace stamp duty with an ongoing tax
- Directing central bankers to pay attention to the economic metrics of everyday life is always a good idea. But the problem of housing affordability is too complex to solve by tweaking interest rates alone
In summary – this policy from the Government of tasking CB to deal with it is smart – smart from a political stand point – when you campaign on affordable housing and the markets go up – then you need a scape goat
- Technically - NZ Government has selected the correct scape goat – but are still passing the buck
- I personally don’t think it will amount to much – the CBs power would be to increase rates, and crash the housing market – which may make homes unaffordable if the median wage gets hit in the process
- I mean, to lower property prices is simple – increase interest rates to 10% - people will default, be forced out of their homes and there will be a massive oversupply of property, pushing prices down – is that good for anyone? If you don’t own property, it may not be – as with this style of collapse also comes a wider spread economic collapse – if you are starting in your career, job opportunities may not exist, which could delay your home ownership journey further
- So the NZ CBs have said that they will monitor the situation but in effect, have passed the buck back to the government and fiscal policy
- It may hopefully bring more awareness to the issues that CBs play on our everyday lives – but as far as having an effect, it is a catch 22 – either way, it is an interesting development that may also spread to other CBS
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. Today’s episode is lessons from the nifty fifties – bit of a history lesson as well as looking back to lessons that can be learnt from this, to help not make mistakes of the past.
This is a particular bubble and market correct that most people wouldn’t be familiar with – especially when compared to the 1929, 1989, or 2008 crashes which were more world wide or a complete systematic risk
This mini-bubble occurred in the US back in the 1970s –
- the term Nifty Fifty is an informal designation that was given for fifty popular large-cap stocks on the NYSE
- These shares were particularly popular in purchases between the 1960s and early 1970s
- This basket of shares was widely regarded as solid buy and hold growth stocks – they were essentially Blue-chip stocks - your large companies that were considered lower risk
- The group included names like Revlon, Procter & Gamble, Philip Morris, Pepsi, Pfizer, Merck & Co, Eli Lilly, Coca-Cola, IBM, Gillette, Wal-Mart, Disney, Eastman-Kodak, Xerox and Polaroid – a lot of these are still household-names today, although some, like Eastman-Kodak are no more
- Some academics credit these fifty shares as being the primary reason the US had a bull market of the between the 60s and early 1970s –
- But this then turned into a subsequent crash and underperformance of the market through the rest of the 70s and into the early 1980s
- It is interesting – because when you look at a market/index – depending on the weighted allocation of a basket of shares – the performance of the top 50 large shares on an index that has thousands of shares listed on it is more important than all of the other shares combined
- As an example – think about the ASX – the top 50 companies make up between 70- 75% of the market cap of the index
- If these shares have a negative 10% return, but the remaining 2,700 shares have a positive 10% return, results in a negative 5% return to the index – due the weighting of the index – where what is most important is that the companies that make up the most of it perform well
- Where this gets even more concentrated is on an index like the NASDAQ –55% of the index weighting is held in 10 companies – Apple, Microsoft, Amazon, Tesla, FB, Alphabet A & C, Nvidia, paypal and comcast
- NASDAQ has done pretty well over the past 10 years – thanks to the rise of companies like Apple, amazon and tesla –
- Similar dynamics were playing out back in the 60s – thanks to a handful of shares -the NYSE rose significantly
- We will go through what happened in detail – but it is an example of what may occur following a period during which many new investors start joining the markets, which are then influenced by a positive market sentiment, providing a feedback from further positive returns, ignoring fundamental market valuation metrics in the short term – then a trigger catalysis occurs and the house of cards crashes down
Starting at the beginning - the most common characteristic by the companies in the nifty fifty could be described as investor optimism -
Looking back in time on the Go-Go Years
- The 1960s were buoyant years for the US economy and stock market. From the mid-60s the term ‘go-go’ was used to describe an aggressive way of operating in the stock market, which involved trading for quick profits.
- Many of these companies were either providing solid earnings growth, or there was the expectations of solid earnings growth in the future
- This attracted a lot of attention and new Investors came to the market
- This is actually a key feature of the 1960s that could be easily overlooked – and that is that there was a massive increase in the number of investors in the US stock market
- Seven times as many Americans held shares by the end of the 1960s when compared to 20-30 years earlier - In the summer of 1970, the US Stock Exchange unveiled a survey showing the country had over 30 million shareholders – population of 200m – so 15% of the population – but it was previously only 4.3m when the population was closer to 150m – which is 3% of the population
- Chicken or the egg situation – was the rising market the reason for new investors, or were new investors the reasons markets were rising
- Probably a bit of both – whilst throwing in there the population growth and increased in accessibility to the market
- As a population grows – there are more people who can invest – as the access to invest increases, the number of people invested will also rise – but what incentivises these people to invest is to generate wealth – so a rising market can expediate these factors
- One of the major factors in this which shouldn’t be overlooked was the increase in access to the market that occurred in the 1960s due to innovation
- The decade saw the rise of the professional fund manager - It was the period in which managed funds started to be established and saw large fund inflows – by the mid-60s managed funds accounted for around a quarter of all transactions in the market and this only rose over the next 10 years
- Back in the 1960s – the influx of new investors had only ever experienced a prolonged bull market, another factor sustaining the bubble in the Nifty Fifty.
- Probably a bit of both – whilst throwing in there the population growth and increased in accessibility to the market
- Either way – what materialised by the 1970s is that each of the large cap shares started to carry extraordinarily high price–earnings ratios – a PE of 50x was relatively normal - far above the long-term market average
- The group included names like Revlon, Procter & Gamble, Philip Morris, Pepsi, Pfizer, Merck & Co, Eli Lilly, Coca-Cola, IBM, Gillette, Wal-Mart, Disney, Eastman-Kodak, Xerox and Polaroid – a lot of these are still household-names today, although some, like Eastman-Kodak are no more
- What was said by many investors back in the 1960s is that these shares should be bought and never sold - became the majority holdings in many institutional investor’s portfolio (managed funds) as well as in personal portfolios
- But then the issues started to emerge – the major problem was the Price/Earnings ratios being sustainable in the long term
- The price/earnings (PE) ratio is a valuation measure which compares the market price of a company to its earnings per share – you take the price and divide by the EPS
- The PEs of some of the Nifty Fifty moved into stratospheric territory as the 1960s progressed. By the early 1970s, the highest rated companies, darlings of the market, were trading on stunning valuations: Johnson & Johnson (57.1x), McDonald’s Corp (71.0x), Disney (71.2x), Baxter Labs (71.4x), International Flavours & Fragrances (69.1x), Avon Products (61.2x), Polaroid Corp (94.8x) and MGIC Investment Corp (68.5x).
- We might compare these valuations with those of the top holdings in the NASDAQ – Amazon is about 76x, Tesla is at about 1,000x, NVIDIA is about 76x, with the rest of the between 30-40 PE
- Some of these valuations are around the same – but some like Tesla exceed it to the extreme
- Enter the bear market of 1970s
- The long bear market of the 1970s which started to emerge – triggered by the 1973–74 stock market crash– this was a rather long one as it lasted until 1982 before markets started to recover –
- The issue with a very large segment of the market cap – concentrated in a few companies with very high PEs makes the market more fragile – If a market correction occurs, the companies that are overvalued can be sold off harder and faster – the crash in 1973 caused valuations of the nifty fifty to fall to low levels along with the rest of the market, with most of these stocks under-performing the broader market averages
- Similar to the rise of the market – if the largest segment of the market is overvalued and crashes – then this can drag down the whole index
- These shares didn’t all fall in tandem though - they were dropping one by one - some of the share price declines to 1974 lows were huge: Xerox (-71%), Avon (-86%) and Polaroid (-91%). The vulnerability of highly-rated companies to rising risk aversion was revealed – due to them starting on massive valuations in the first place
- There is one notable exception to this group – and that was Wal-Mart – which is the best performing stock on the list – has provided a compounded annualized return over a 29-year period of 29.65%.
- This is actually a key feature of the 1960s that could be easily overlooked – and that is that there was a massive increase in the number of investors in the US stock market
But what happened to create such a drop in this segment of the market? It had been a long party for investors which had to come to an end – but there was no one cause – there was political instability with Nixon and Watergate, profit taking for investors, rising inflation
- I think one of the biggest contributors were rising interest rates, the end of the Bretton Woods monetary system and valuing growth – I’ve talked about the importance of interest rates and the yields on 10 year government bonds in previous episodes – this actually relates to one of the leading contributors for the market correction
- interest rates and discounting – the yields on the risk-free rate on a 10-year treasury – Say you have a company earning $100 today, but is forecasted to earn $200 in 10 years’ time
- When the risk-free rate is low – the discounting to present value for cashflows isn’t as severe – so why not hold out for that higher earnings in the future – but when the risk-free rate is higher, and discounting is higher as well – you start to care more about the cashflows today – in present value
- Take this example further – if the RF rate is 1% - and you have one company earning $100 today, but isn’t going to grow, versus another company earning $2, but is expected to grow at an earnings rate of 50% p.a. (which is huge for constant growth) – in 15 years’ time, which would have had the best free cashflow in PV? The company earning $2 today is worth around $2,303 of PV in cashflow, the company earning $100 is worth $1,386 – so the growth company is worth much more – but if the RF rate is 10.5% - they have the same PV in cashflow over a 15-year period
- Looking back on the risk-free rates – in the 1963 – 4% then started to rise, 1967 – went to 5.1%, 1969 – 6.7%, 1970 – 7.4%, 1975 – 8%, 1980 – 11.4%
- A lot of this had to do with the change in monetary system – and rampart inflation, so rates were pushed up to help combat this
- But had the effect of the valuation of companies starting to drop due to the discounting methods – so if you are a predicted growth company with a massive PE today – it isn’t good news for you
- Hindsight is 20/20 – and looking back, common sense suggests that many of these Nifty Fifty companies were in a classic investment bubble due to the investment flows and huge PEs - driven by what drives most bubbles - strong economic growth forecasts and plentiful liquidity (or money flowing into these companies) – pushes up valuations to unsustainable levels over the short-term
- This example does help to point out unrealistic investor expectations – and that nobody knows the future – what is the best company today may fall over tomorrow – people in the 50s and 60s probably though that polaroid was going to be the next big thing for decades to come – and it was – which is why it made the list – today it is a defunct company that filed for bankruptcy over 15 years ago and has been passed around in the private world, constantly losing valuation along the way
- Or even Xerox – Didn’t go bankrupt but has the same price today as it did in 1980.
What to do with this information – these examples do help to highlight the dangers of a long, late-cycle bubble for equity investors – as there are some similarities to markets today –
- New investors – similar to the 1960s increasing the access to markets - the increase of Index funds and ETF access over the past decade has had a similar effect, but magnified – this has been magnified by the internet, the increase in technology allowing increased access to equities
- Back in 1970 – 15% of the population owned shares in the US – today it is 55%
- The average wealth has also increased – so the amount of money through all of these compounding factors – i.e. more people investing with greater sums of money has had a positive inflationary pressure on markets
- New investors have only known positive markets – increases the level of exuberance in markets
- Looking at listings – so many new ETFs coming to the market – we have only really known a bull market since 2012 – have been some corrections – but the markets ended up with positive years
- People jump into them without even thinking or without any knowledge of historical performance of the underlying companies
- Market valuations – these are very high at the moment and concentrated in many well know large cap shares which are considered house hold names, or long term buy and holds – but there are some risks to this
- Interest rates - Current interest rates - estimated to be around 0.9% for the risk-free rate
- In 2018 – was about 2.9%, in 2001 – was 5% - has the capacity to increase valuations for companies not currently earning anything but may someday through the roof – but still – the PEs in some companies listed on the market are 0 or negative
- If RF rates do go back up - Markets will start to care more about current income/cashflow in present value cashflow when the risk-free rates rise – covered this last week on the case for value shares
- Technology and adaption – many competitors may come out and what is natural in business cycles – when companies get too big, it becomes hard for them to adapt
- Even high-quality businesses can be poor investments if they are bought at extended valuations – like with a house – you can have a very nice house – but if you pay twice the market valuation – it may take you decades to get your money back if you were to sell
- Buying a great company at a fair price is better than a great company at a massive price
- In financial markets – there should always be a focus on capital preservation - consider the potential downside of any investment
- In my view – one of the best ways to do this in the current market is to not hold purely large cap companies – nature of markets over time to replace market leaders –
- Still focus on investing for the long term – whilst many of the nifty fifty crashed in the 70s due to their extreme levels of overvaluation - if you had continued to hold stocks such as Walmart, Coca-Cola or McDonald’s, from the 1970s peak until the present day - you would have still made decent returns
- Interest rates - Current interest rates - estimated to be around 0.9% for the risk-free rate
- But as always – important to diversify property – and not pay more than a company is worth – and take advantage of downturns
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. Time for value? Looking at the value rotation occurring within the share market
- A value rotation is a term used to describe a shift in investment behaviour – where investors start favouring value shares instead of growth shares
- Previous episode – inflation expectations and what is occurring to bond yields – did an episode a while back on why growth shares have been beating value – however a rotation may be occurring – where value investing may start catching up in performance
- Value investing – buying undervalued companies based around their intrinsic or book value – essentially involves buying beaten-up or unloved shares
- Over the past half decade – growth shares have been in high demand – hence they have seen their prices go up – blowing metrics like PE ratios through the roof – but this has left large segments of the market untouched and undervalued compared to their growth counterparts
- Over the past three months – essentially since the start of the year – the mood of the market has shifted dramatically – which may be pointing towards growth shares falling out of favour
- This is because the prices of many large growth companies have been falling from their previous highs
- Looking back on the past 3 months – the best performing investment have been the US Russell 2000 mid cap index at a 35% return since the start of the year, so under 3 months in reality – EU shares have also done well – with returns on average of 20% over this time period
- However – tech has started to lag behind – the returns for this traditionally growth basket of shares is sitting at 15% - this is still phenomenal though – a 15% return in 2.5 months is a good result
- But why the lag? This group of shares was the cream of the crop – and in the words of House of Pain – rose to the top – so is it that the rest of the market is now just playing catch up, or is there really a value rotation going on?
- Well – yes – there has been a rotation from growth shares into value companies – hence this lag in tech companies in the past 2.5 months – but the key question is ‘Will this continue?’ or in other words, was this movement just a chance to buy neglected shares within the market, pushing up demand and their prices, or the emergence of a longer-term trend? And if so, for how much longer?
- So, in this episode, we will be trying to answer this as well as what would drive the rotation going forward?
To do this – we need to look at the state of the market and forecasts - Strong economic growth predicted in 2021 – and beyond
- the global economy looks set to boom in 2021 – this has been due to the anticipation of the initial hit of stimulus –
- Think of it as energy being introduced into a system – if you have a lot of glucose, or sugar, you can get a bit of an energy high – but this energy can soon burn out
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When looking at the underpinnings of growth predictions in 2021
- At the moment, massive levels of fiscal and monetary stimulus have been brought to bear on the global economy
- Levels as a percentage of GDP not really seen since the world wars in government spending – but what is different is that governments are already starting off at a very high debt to GDP level – based around economic theory, technically has less bang for your buck
- Looking at the US – post WW1 – there was debt of around $17bn, 16% of GDP – then by the start of the great recession and the introductions of the New Deals by FDR – this rose to about 42%, or $40bn, by the end of WW2 was sitting at about $270bn, or 118% GDP
- By 2020 – debt was $23 trillion and 110% of GDP – now it has jumped to $27 trillion as an estimate and 136% of GDP
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Now, the US is about to enact a US$1.9 trillion package on the heels of the US$900 billion program just passed in December last year – will mention that the majority of these packages have nothing to do with relief for Covid affected businesses or people – but the market has responded positively
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On top of this, the Federal Reserve did as much quantitative easing in six months last year as it did over the initial six years from its implementation in the post-GFC measures – i.e. from late 2008 through to end of 2014
- Other countries across the globe have also been aggressive with their policy stimulus in 2020 – in Aus we have gone from 46% debt to GDP to an estimated 70%
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Australia has started to engage in QE – and this is beginning to ramp up as well to help keep bond yields in the target range close to the cash rate of 0.1%
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The result – investors and markets became bullish – this has become well known – growth shares did very well based around lowering interest rates, funding costs, and lower inflation
- The outlook for 2021 is considered to be strong – there is a consensus view amongst economists – so take that with a grain of salt - what is now more critical is whether this strong growth momentum can continue beyond this year once the stimulus expectations are priced into the market – then, how strong will growth be in 2022, 2023 and beyond?
- Because what will happen post 2021 once the initial stimulus hit fades - or when the sugar high of the stimulus begins to fade?
- What will be left to drive the global economy forward from 2022 onwards? It is always possible that MMT emerges further and regular deficit funded stimulus becomes the norm – but this factor is unknown – so are there any signs of real economic recovery? If so – and importantly for this episodes topic - how would markets behave?
To best answer the question of a value rotation – look at if the growth frenzy is likely to continue and if not, value may be in the markets favour
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Thinking about this – one of the big drivers for growth has been the lowering of interest rates and positive reaction to additional stimulus –
- But with the yield curves starting to steepen, this has been pointing to the potential for increasing interest rates in the future – beyond 2024 – but markets are forward looking – trying to price in all future events today
- When interest rates change - in theory at least, the way companies are valued changes – as mentioned in previous episodes – this rate is heavily tied to the discount rate which is used to get the present value of a companies future cashflows –
- I.e. what are the profits of a company worth today
- The lower the discount rate – the less a dollar today is worth compared to a dollar tomorrow – so if a company is a traditional value business – with solid cashflow performance and profit stability/predictability today – the less this is worth to markets - so if you are a growth company if you don’t have any dollars today, the market doesn’t care as much
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The higher the discount rate - the more a dollar today is worth more than a dollar tomorrow – so the fair value of a company should in theory reflect their profits today more so than their profits tomorrow
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Therefore – the higher the discount rates, the more a company with strong fundamentals should be worth – indeed - over the past few months as the yield curve has steepened - we have seen value shares have started to outperform growth
- the lowering of interest rates may not be possible from here, and yields on the RF may continue to rise further – so can value do better?
- To look at this – there are a few primary factors that are coming together which could help to provide continued momentum towards value companies once the initial "sugar rush" stimulus wears off.
Those factors are as follows:
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Households have paid down considerable levels of debt in 2020, have higher savings, and have a greater capacity to spend
- US credit card balances are down US$120 billion from their peak at the end of 2019 – potentially frees up borrowing capacity which can be tapped into to drive further consumption growth – but also frees up cashflow that goes towards debt instead of consumption
- looking at households and consumers - in most countries savings rates have gone up significantly – natural response
- In the UK - Q2’s household savings ratio was 26.5% - almost twice its highest peak in the past 50 years – next quarter it had dropped but still around 16.5% - estimated that the extra cash in their bank accounts is around 7.7% of GDP
- In the US - equivalent figure is approx. $2.3 trillion or around 11% of GDP – more than doubled in 2020
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In Australia – jumped to 22% by July 2020 but has declined to 12% approximately last quarter
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This technically means that there is less spending going on – if savings rates are up – but as confidence comes back to consumers, and job security increases, saving rates may decline further and help economic growth
- Especially if interest/cash rates remain low – no incentive to save beyond the concerns of losing an income
- So real economic growth may emerge, as more businesses are allowed to open and operate again
- As the economy’s confidence normalises – can be expect the Western consumer will resume their high marginal propensity to spend
- That effect, coupled with falling household savings ratios has the potential to provide a strong underpinning to consumption growth through a multiplier effect
- The trend of house price growth may remain strong – increasing equity and the wealth effect
- Housing markets have maintained prices and grown through 2020 – due to lowering supply – less houses being listed in conjunction with lowering interest rates, increasing borrowing capacities -
- After an initial one- to two-month wobble in house prices at the height of the lockdown - most countries’ prices resumed a strong upward trend for the remainder of 2020
- This price growth reflects monetary looseness, i.e. the lowering of interest rates, increased liquidity in debt markets and other demographic factors – being in lock down and wanting more space – spreading out as if you are working from home, you don’t want a roommate walking behind you in the nude on zoom
- Economists believe that the uptrend in house prices has been historically associated with the wealth effect – where the more people feel wealthy and have access to equity (through a withdrawal from what is in their houses) – this can support strong consumption growth – in 2020 home equity withdrawal has picked up sharply – but it depends on where this money is spent
- Also as another note – there are mixed theories on the Wealth effect – in theory it should work, but it doesn’t show any causal relationship
- Either way – the underpinning of an increasing yield curve, repayment of debts, ability for additional spending and a strong housing market these can point towards some better growth in the markets – plus, global monetary policy should remain loose for a while yet – forward guidance that cash rates will essentially be 0% for the next 3 years
- The major concerns for markets at the moment are the removal of monetary accommodation later this year – the CBs will be walking on eggs shells when it comes to removing monetary measures
Looking at the end effects on markets -
- If all of these factors play out – there is likely going to be a structural shift into value and cyclical shares
- This expectation can be backed up by the relative valuation between the growth and value indexes – showing the relative valuation premium of growth over value stocks
- Going back to 1970s – the premium in price that you are paying for a growth company is at the highest it has been by a narrow margin – the next two were the dot com bubble and the nifty-fifty bubble – that has a lot of similarities – probably do an episode on this
- DotCom bubble – paying about a 45% premium for growth, about that in 1975 but close to 58% today – looking at the forward PEs – sitting at about 47% today, which matches the dot com bubble – but not quite as high as the nifty-fifty bubble
Risks and downsides -
- Naturally – there will always be multiple risks investing on shares and betting on one outcome over another
- The major risks to the market at this stage are downgrades in Central Banks intervention in markets – especially the Fes given the high valuations in many sectors of the equity markets
- The S&P500 is on a 12m forward PE ratio of approximately 23x – only been surpassed during the Dot com bubble
- not just the US market which is expensive – around 30 indexes across the globe that are in their top quartile valuation range - Brazil, India and the Australian markets
- At this stage – liquidity with QE has been a key driver of high valuations – but this may also lead into additional inflation which could require CBs to act – but regardless – if markets crash, being in the value companies may be the place to be
- The major risks to the market at this stage are downgrades in Central Banks intervention in markets – especially the Fes given the high valuations in many sectors of the equity markets
Summary
- At this stage of the market cycle - investors probably shouldn’t be paying as much of a premium for growth because it could be likely that the valuation gap between growth and value shares is on the move to close -
- I always have growth and value – in different segments across different markets – but if you are concerned about market downturns – value is the way to go – opportunity to buy into the undervalued companies
- Plus – can help to limit downside risks – look at the nifty fifty bubble from the 70s to see why
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. In the last episode I went through the bond market and how inflation expectations being on the rise are having their effects, yield curves starting to steepen. So what will happen to other asset classes?
In this episode we will look at this question. If the trend of nominal yields continues, what will be the effects on different asset classes, cash, shares and gold?
- Before we get into that – quick recap that when talking about yields, it is the returns on bonds expressed as a percentage
- bond yields are inversely related to the bond prices. The lower the price, the higher the yield, and vice versa
- Bond yields have been declining since 1982 in a long-term trend – as they were nearing zero, could continue into the negative long term or reverse course – 10-year Treasury yields have fallen from 15.8% 40 years ago
- There are fears that due to the economic recovery plans for every nation being printing money for stimulus measures – that this could lead to an inflation outbreak – hence, this recently led to a rise in bond yields
- Happened in most countries – in the US the yield on 10-year bonds were 0.91% at the start of the year – in a matter of a two months they went to 1.49% then 1.61% before declining to 1.42%
- The Australian 10-year rate jumped to 1.93% and this spooked the share markets
- Also, important to understand the nature of money flows – and that is that different asset classes compete for your money, as well as institutional money
- That is where the yields on bonds (i.e. the returns) can affect other investments prices by competing for investors money – supply and demand – if more money flows into one asset class in the expectation of additional returns over another – that is additional demand – so if the supply stays the same, prices should naturally go up
- Bonds can be seen as a safe harbour – but if bond have a negative yield, people may hold cash for 0% interest rates or Gold instead – so currencies can move or the price of gold also move if people are selling bonds and reinvesting in another safe harbour
- When making an investment decision – there is always an opportunity cost – i.e. what you forego in not choosing the next best alternative - the opportunity cost of an asset is what you give up by owning it – so the OC for investing in shares could be the yield on a bond – which may be dependent on the risk or return profiles of an investor
- However – there has been an increase in the amount of money supply – increasing the amount of money that can flow – the increase in the money supply has been flowing into bonds initially through QE – this can then be used for the reinvestment into other assets – where the money flows could be based around incentives of returns
- This is part of the theory as to why QE can lift share prices as well – super funds or other institutional investors selling their bonds in the secondary market to CBs and then using their new found cash to repurchase other asset classes
- policymakers have distorted traditional free markets – the efficient allocation of scarce resources
To start looking at asset classes - Quickly go through the dollar, or cash in general
- No surprise to anyone that the real value of cash is generally declining – the additional supply of money naturally devalues cash in each domestic country depending on what is happening to the supply
- Between countries - There are a million things that can affect currency exchange rates – interest rates, net exports, but the big thing for the value of money that is relevant to this episode is specifically inflation –
- Cash is used as a Medium of exchange – exchange for goods, services, but also as savings or an investment – holding cash has an opportunity cost – it is actually rather costly to hold cash in real terms if inflation does materialise – imagine getting an interest return of 0.5% if inflation is 3% - negative yield on the money of -2.5% p.a.
- Central banks have essentially put a cap on interest rates for a number of years – in most countries they say that interest rates wont rise for 3 years - at the same time as rising inflation expectations means that there is an asymmetric risk to the downside in real interest returns
- All the new stimulus and associated dollar printing by the Fed and other CBs does not bode well for the cash’s future - The major thing with dollars is that they will lose their real value – this then in turn incentivises the disposal of this cash into alternative holding vehicles – why save money if you know it is going to lose value – better to buy something with it
Relationship between yields and gold
- The historical data does not confirm that there is any positive relationship between gold and the bond market – over some time periods there is a strong correlation in price movements, some other times there isn’t
- 1970s - the price of gold was rising and bond prices were falling while rates were increasing rapidily
- 1980s onwards - there has been a long upward trend in bond prices – with declining yields – through this period there was no relation to the changes in the price of the gold market – gold had a bear market in the 1980s and some of the 90s, then went through a bull market in the 2000s
- There have been times that a negative correlation between nominal bond yields and Gold can be measured in the short term – seen some measurements that it is currently -0.80% - fairly minimal
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This is all on the nominal level – however there is a stronger relationship between bonds and gold – that is on the real yields
- what really matters for gold are the real yield rates - not nominal yields – this is because high and accelerating inflation rates affect gold and bonds differently – this relationship can be seen over the past 20 years – where the price of gold moves in relation to the real yield on a 10 year bond
- From early 2000s – gold prices were rising, as real yields started to decline as inflation picked up
- By Jan 2013 – real yields had hit their bottom at -1% and hold had topped out at around $1,800 USD an ounce
- what really matters for gold are the real yield rates - not nominal yields – this is because high and accelerating inflation rates affect gold and bonds differently – this relationship can be seen over the past 20 years – where the price of gold moves in relation to the real yield on a 10 year bond
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Between then and Jan 2019, real yields started to rise and gold prices went down – until the start of Jan when real yields started to drop – going down to -1% again and gold topping $1,800 USD an ounce
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So there is a negative relationship with real yield rates on bonds – the nominal rates minus inflation
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From an understanding point of view – there is likely no one cause for this – but if both bonds and gold are seen as a safe harbour and inflation is materialising and the real yields on bonds are going down or are negative – then investors may simply be buying gold instead of bonds
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If inflation expectations continue to rise and nominal yields on bonds remain controlled by QE policy - Gold miners and gold may do well – especially if additional stimulus on steroids makes matters worse with real yields – or if nominal rates don’t go up due to QE keeping them low by buying – keeping prices artificially high compared to a market outcome – whilst at the same time seeing run away inflation
- In this scenario – real yields will drop and gold would likely go up – and miners lag behind in prices but also increase
Shares – effect of on the risk free assets (done in past episode)
- Historically – shares have done well when the economy is booming
- Logic behind this - When people are spending money and making more purchases within the economy, the companies selling the goods and services will receive higher earnings thanks to higher demand – this then increases their balance sheets and investors feel confident – they invest either off positive results or the expectation of these – then the price of the shares go up as more money flows into the market
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But how did risk assets such as shares do when rates are rising along with inflation expectations?
- That is where with a booming economy, inflation can also materialise
- But one of the best ways to beat inflation over the long term is to buy share
- If an investor owns bonds – they would ideally want to sell these and buy shares when the economy is doing well and inflation is present and rising
- With bonds – if they are non-inflationary linked – say you have a 10y bond issued at $100, but in 10 years you get $100 back in nominal terms, if inflation was 2.5% p.a. then the real value of that bond is around $78
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So, if the real yield has been close to 0% over this time period as well – you have effectively lost money
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This is where the opportunity cost comes in – would you prefer to participate in the share market for positive returns or hold a safe harbour asset which may lose funds in real terms?
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However – if the economy were to slow with consumers purchasing less and corporate profits falling – this can turn into a declining share market – investors may try and time the market and prefer to now purchase bonds – seen as the safe asset and get the regular interest payments guaranteed by bonds
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This safety of an asset class can also affect valuation due to bonds being the RF asset
- When valuing equities – in the CAPM calculations - investors add the equity risk premium they seek to a risk-free rate to compute the expected rate of return
- In this calculation – the RFR is the 10-year bond yield – this is why long-term bond yields can matter to equities
- As theoretically - given that a bond yield is the risk-free rate, a higher bond yield can be bad for equities and vice versa – as the excess returns may not justify the excess returns
- As the 10y bond yields also reflect the growth and inflation mix in the economy – if these are on the rise it generally means the economy is growing
- Looking historically - There have been many occurrences real yields on bonds rising as well as returns on the share market – happened during 1997-99, 2004-06 and 2016-18
- However – what happened in 2000, 2008, end of 2018 – the markets went through corrections
- Look at the average weekly returns for the MSCI index since 2000
- If inflation is rising and real yields on bonds are rising – then the MSCI average weekly return is 1.2%
- If inflation is falling and the real yields are also falling – then returns have been negative 1.3%
- If they are neutral – with inflation not moving and real yields staying the sale – the returns have been 0.2%
- The important thing about this relationship – is that when inflation is rising – the share markets performance is positive across the board – however the degree of the positive returns seems related to the real yields on bonds
- If real yields are falling – then the positive returns are 0.7% - compared to 1.2% if real yields are either neutral or rising
- Also – if inflation is falling, then shares also perform negatively
- What can be inferred from this – is that rising inflation expectations can lead people to invest more into the market
- Everyone would have a different reason to invest – so to pinpoint one cause for a rising market is hard – could be due to not wanting to lose value of your cash in real terms, or to participate in an already rising market
- However - historical equity and bond performance has been better when yields are rising rather than falling, but especially when this occurs along with rising inflation expectations – which is what is occurring now
- when risk assets such as shares fall sharply – these have been mostly around fears of policy tightening or late in the economic cycle – both of which aren’t on the table at the moment based around what wall street are betting on
- Where could we be wrong - Higher real yields with declining inflation expectations would likely create lower performances in shares - so would an increase in real yields if it is driven by fears about the removal Central banking policies that are keeping rates low - but this outcome is not likely at this stage
So in summary
- If inflation continues to rise – then the worse asset class to be in would be cash
- Both gold and the share market can do well when inflation is rising and real yields are staying the same
- Remember that real yields on bonds are rising – but they didn’t rise at the same pace at nominal rates
- But it doesn’t matter – historically, if real yields rise by any rate whilst inflation is also rising – both bonds and shares have a positive performance – shares by a greater rate
- However these metrics point towards a rising market – but what goes up can come down – this is where rising yields – if it spreads through corporate debts can lead to additional funding pressures on companies in the share market – many companies in the tech basket that aren’t profitable at this stage
- So investing in gold or shares can go well in this environment – but there are corrections on the way – so it is important to be invested appropriately in quality companies and diversified within and across asset classes
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. This episode we will be looking at what is happening in the bond market, how the RBA is struggling to maintain their targets on bond yields for 3y and 10 year - as well as some of its implications on the debt markets and government.
What is going on?
- over the last few weeks there has been a surprise to the markets – the emergence of a higher 10-year rates on government bonds – the rates went up about 0.45% in Feb and 0.55% since the start of the year
- This was pretty surprising but it actually does make sense in a way – why?
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To start with – all we have to do is look what has occurred over the past year –
- Looking back on 2020 there was an unprecedented level of stimulus policies - both fiscal and monetary – QE, corporate bond purchases, ZIRP, stimulus payments
- The RBA announced on Feb 1 that they were doing an extension to its QE program that they started last year by a further A$100 billion -
- They have also said it doesn’t expect to increase interest rates until 2024
- Both of these are in pursuit of the central bank's yield curve control – as the RBA is trying to target the three-year yield rate at 0.10%
- The same day as the QE extension announcement, the RBA purchased A$3BN in three-year government bonds
- This was done in the secondary market and completed on Thursday last week - $3bn might not sound like a lot in the modern era of trillion-dollar stimulus measures - triple the normal amount –
- the yield on the April 2024 bonds (maturity of the 3-year bonds) declined slightly from 0.13% to 0.125% - decline of about 4% - but then yields soon jumped up to 0.14% before reverting back to their original yield of 0.13% - but remember they are trying to target a yield of 0.1%
- The RBA is in scramble mode to try and control the yields – through their methods of the Yield Curve Control target of 0.10% on the 3Y
- Why are they trying to keep rates low? Government funding costs – if you are deficit spending on billions of dollars, the difference between 0.1% and 0.2% is huge
- The RBAs success and their credibility are starting to fall short on their target - A$3BN of additional QE proved insufficient to get the yield down to the target – as the 3Y Australian bond rate is still at 0.13% - 3bps above
- It is starting to appear that the RBA's Yield Curve Control is failing as the market is pressuring the central bank's commitment to the point of failure – Free market of bonds – not huge selling of local government bonds in recent days, but there was not a lot of buying. When there is less demand for bonds, bond prices fall and yields rise.
- So to try and keep yields low – there needs to be more demand which can artificially be created by extensions on QE – or central banks buying back bonds on the secondary market
- To date though - RBA had been unsuccessful in lowering yields to the levels they want – they have certainly lowered bond yields – but these are still above what they are hoping at the short and long end of the curve – i.e. the 3y and 10y bonds
- There is naturally an upward pressure on market interest rates – so unless the RBA can get this under control – this will flow through into making it more expensive for Government to borrow – as well as companies to borrow over a 3-to-10-year timeframe
- This probably won’t affect you or I with mortgage rates – these are not priced off the long-term, 10-year bond yields – the rba cash rate is what matters more to mortgage rates
- But the Aus governments 10-year borrowing cost has jumped to 1.72% – a doubling of the yield since the RBA officially unveiled its QE program last November
- This upwards yield is ideal for investors, but not for the government – could threatened to unravel the local bond market – issue with compounding debts at higher yields is that at maturity, more bonds need to be issued to cover the payment, think of a balance transfer but every time the interest rates outside of the grace period starts to increase – compounding the risks
- that is why the RBA took emergency steps to show markets who's boss with the increase in bond purchases – beyond the 3 year bonds, they will take aim at the longer-term debt
- the RBA said it is buying A$4BN of longer-dated bonds which is twice the usual amount
- There is naturally an upward pressure on market interest rates – so unless the RBA can get this under control – this will flow through into making it more expensive for Government to borrow – as well as companies to borrow over a 3-to-10-year timeframe
- However – similar to the 3y yields, the RBA may sit back and watch as their policy has less and less impact in controlling the yields of government debts, as they purchase more and more
- the RBA now owns $18.5 billion of the $33 billion April 2024 bond – 3y bonds issued
- As previously mentioned, The RBA have said they don’t expect the cash rate to rise until at least 2024 – but the bond markets are challenging this idea as well - The market is pricing in a jump in rates - with the yield on the November 2024 bond blowing out to 0.36%
- This has lifted Aus bond rates quite a bit higher than US yields and that means that there will be probably more demand and more buying of Australian bonds - pushing up the Australian dollar
- The rising AUD also puts pressure on the local economy, and stability of exports in a recovering economy – which puts pressure on the RBA as well to further control interest rate expectations
- What can the RBA do? They might need to intervene at the longer-end of bond maturity - with more QE because otherwise over focusing on the short term can have spill over effects in the currency market and start to impact other financial markets – like the share market
- At the end of the day, the RBA have just one solution - to step in and buy more and more bonds with further QE
- Why is all of this occurring? Why can’t the RBA simply click their fingers and hit their desired targets?
- Has to do with something else the RBA targets as their primary purpose on monetary policy – inflation targets – something else that central banks are having trouble in achieving as well
- Due to the monetary and fiscal policy measures - inflation expectations are beginning to rise – gradually initially – but with front-end interest rates almost guaranteed to be zero by the Fed and other central banks – the nominal yield curve started to steepen and assets that attract risk, such as shares entered into a strong rally
- bond traders are beginning to observe higher levels of inflation across the board – therefore, they think it is only a matter of time before Australia yields go up – why yields are trading above targets
- To continue looking at this further – to understand why yields are rising requires looking at the relationship of nominal yields, inflation expectations and real yields.
- Because higher real yields along with rising inflation expectations can clearly create an environment where nominal yields are rising for good reasons
- But the real yields remained depressed through 2020 – real returns are nominal minus inflation – this was at the same time that there were deflationary pressures – the tides are turning at the start of this year – and inflation trades can be seen everywhere
- Looking at the real rates - the composition of the nominal 0.55% increase in the 10-year yields since the beginning of 2021, about 0.20% is from higher inflation expectations and 0.35% is from higher real yields – this has been reflected in the equity markets as well
- Yields – nominal versus real. Real yields = nominal bond yields minus inflation – these have soared recently
- The 10-Year real yield has risen 40BP – gone from -1.06% two weeks ago to -0.67% last week – this negative real yield is the highest it has been in 8 months
- So is this due to inflation moving or nominal rates? Both - inflation expectations have risen, but nominal bond yields have tripled – gone from 0.50% in August last year to around 1.50%
- Because higher real yields along with rising inflation expectations can clearly create an environment where nominal yields are rising for good reasons
- Has to do with something else the RBA targets as their primary purpose on monetary policy – inflation targets – something else that central banks are having trouble in achieving as well
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At this stage – this rise in nominal rates is the major reason for why real yields are soaring
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But inflation expectations are beginning to rise at a greater rate – looking at supply shocks coupled with fiscal stimulus plans in the US and worldwide – in the figures of trillions of dollars that are being financed by the government issuing bonds – inflation is expected to follow – whether it does or not, time will tell
- But if inflation does materialise – CBs have another policy response – increase interest rates – this is what is being priced into yields for bonds longer term – where there is an upwards pressure on yields
- Interest rate relationship to bond prices – rates go up, then the price of bonds goes down, pushing yields up
- So the expectation of inflation and the response by CBs is putting pressure on the nominal rates
- But without constant central bank intervention - the huge increase in bond issuance to finance more and more stimulus spending would naturally push yields even higher – prices go down so yields go up – supply and demand 101
- So to avoid governments going insolvent based on the annual interest cost alone, CBs have no choice but to constantly increase their QE programs – either that or collapse the debt markets
- Also, in basic economics - real yields and inflation expectations rise together when investors expect a stronger, sustained economic recovery –
- From what economists expect in regards to economic recovery through looking at the data - this process has already begun and an improvement in economic data would then encourage real yields to make nominal yields go up
- One bit of supporting evidence in this is the increase in commodity prices: iron ore prices have gone beyond $US175 a tonne - the highest level in a decade – this has also contributed to upward pressure on the local exchange rate over the past few months, but is also a big reason for the higher yields in bonds
- So how high could bond yields go – helps to look long term – looking at the 30-year bonds
- There is a monthly chart for the 30-Year Treasury Yield that shows that every time the yields exceeded its 100-Month Moving Average, the yields reverted back – this relationship is incredibly reliable -
- The yields are currently heading back up – the 100-month moving average is currently around 2.75% - current yields are at 2.32% - so if history repeats itself, the yield may go to 2.75-3.00% and then down again
- This relationship may be due to two reasons – self-fulfilling prophecy where traders can take adventive of this, as well as central banks implementing a Yield Curve Control policy – as they can drive down yields by buying treasury bonds across different maturities
- No surprise that to implement this means that CBs would need to print more money to buy back bonds from the secondary market
Summary –
- Yields are on the rise in government debt – as the 10-year bonds are the risk free assets in financial markets, this could have spill over effects into financial markets – shares could soar in relation to the central bank panic and if QE ramps up further
- But for the next few years, if not longer, CBs will be doing everything in their power to try and target low yields for debt
- Inflation expectations and in response, interest rate increases are being prices in and also pushing up bond yields
- Help to avoid governments being in financial stress
- Next episode – look at the flow on effects to sectors of financial markets, the dollar, shares, and commodities
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. Are sectors of the share market in a bubble, one in particular that comes to mind would be the US tech sector.
There have been many bubbles in financial markets throughout history – if enough excitement is generated around some new asset, or commodity that is seen as the next big thing and everyone starts buying – bubbles can emerge in prices
- covered some of them, south sea bubble, tulip mania – one that may be the most similar is the dotcom bubble –
- But how exactly is a bubble designed? And what metrics can be used to measure this
- The traditional definition of an economic bubble – “An economic bubble or asset bubble is a situation in which asset prices appear to be based on implausible or inconsistent views about the future. It could also be described as trade in an asset at a price or price range that strongly exceeds the asset's intrinsic value.”
- However – the intrinsic value – or fair value of an asset can be fairly subjective – especially for new or emerging companies or assets
- As an example – think about CBA for a minute – the fair value should be one of the easiest to calculate as far as shares go – underlying earnings are well known – forecasts also pretty easy based on the business model and the availability of their financials and stability in their results meeting market expectations
- Many analysists cover it – the price tends to be around what the fair value is estimated to be – the fair value between brokers ranges from $78 to $90 – and so the price ranges between these – currently trading at $82
- There isn’t much growth estimated in CBA – what about tech companies – or emerging businesses that are forecasted to have massive growth?
- This is when bubbles can emerge – nobody wants to miss out on the potential growth in the future – so everyone jumps in today – pushing up the price to what may be fair value in 10 to 20 years
- But some companies can get to the point where they are still losing money – have many competitors – don’t have market share – but yet they are trading as the next big thing – which they well may be – but it is speculation –
- One company in a whole market doing this isn’t a bubble – this happens all the time – you get some companies go up 1,000% - before crashing back down to earth
- But when a whole sector of the market – or the whole market in general is trading at a massive forward PE – this could be starting to look like a bubble territory
- I was reading an article that ray dalio published – about how he has a “bubble indicator” that helps to give perspective on each market
What is the bubble indicator - What I mean by a bubble is an unsustainably high price, and how I measure it is with the following six measures.
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How high are prices relative to traditional measures? - The current read on this price gauge for US equities is around the 82nd percentile, shy of what we saw in the 1929 and 2000 bubbles. Traditional measures are estimates like PE, yields and future earnings.
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Are prices discounting unsustainable conditions? - This measure calculates the earnings growth rate that is required to produce equity returns in excess of bond returns – this looks at the fundamentals of a company based around the discounting rates – i.e. a 10y gov bond. Currently this indicator is around the 77th percentile for the aggregate market. This indicator shows that while stock prices in aggregate are high in relation to the absolute returns they are to provide, they are not extremely high in relation to their bond market competitors. In both 1929 and 2000 this measure was at the 100 percentile- interesting about this is that the real returns on bonds change with inflation expectations as well
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How many new buyers (i.e., those who weren’t previously in the market) have entered the market? - A rush of new entrants attracted by rising prices is often indicative of a bubble. That is because they are typically entering the market because it is hot and don’t want to miss out. Many new buyers don’t have any experience with markets (hence new buyers) – so the warning signs of a company being overpriced can be missed. This was the case in both the 1929 and 2000 equity bubbles. This gauge has reached the 95th percentile recently due to the flood of new retail investors into the most popular stocks, which by other measures also appear to be in a bubble.
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How broadly bullish is sentiment? - The more bullish the sentiment, the more people have already invested, so the less likely they will invest more and the more likely that they will sell. The aggregate market sentiment gauge is sitting at around the 85th percentile. Once again, it is heavily concentrated in the “bubble stocks” rather than most stocks.
Also - IPOs have been exceptionally hot—the hottest since the 2000 bubble.
The current IPO pace has been brought about by the sentiment previously mentioned, as well as the SPAC boom - special purpose acquisition company (SPAC) is a corporation formed for the sole purpose of raising investment capital through an initial public offering (IPO). these acquisition companies have lower regulatory hurdles and greater flexibility to bring more speculative companies into the public markets.
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Are purchases being financed by high leverage? - Leveraged purchases make the underpinnings of the buying weaker and more vulnerable to forced selling in a downturn. The leverage gauge in the US market, which looks at the leverage dynamics across all the key players and treats option positions as a form of leverage, is now showing a read just shy of the 80th percentile. So there is high level of leverage being deployed by the retail segment (using options) in “bubble stocks,” while there is much less leveraging by other investors and in non-bubble stocks. Volume in single-stock call options is at record highs. Retail purchases of options have been the big contributor to this surge. Outside the retail sector we aren’t seeing excessive leveraged buying.
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Have buyers made exceptionally extended forward purchases (e.g., built inventory, contracted forward purchases, etc.) to speculate or protect themselves against future price gains? - One perspective on whether expectations have become overly optimistic comes from looking at forward purchases. We apply this gauge to all markets and find it particularly helpful in commodity and real estate markets where forward purchases are most clear. In the equity markets we look at indicators like capital expenditure—whether businesses (and, to a lesser extent, the government) are investing a lot or a little in infrastructure, factories, etc. It reflects whether businesses are extrapolating current demand into strong demand growth going forward. This gauge is the weakest across all our bubble gauges, pulling down the aggregate read. Today aggregate corporate capex has fallen in line with the virus-driven hit to demand, while certain digital economy players have managed to maintain their levels of investment.
What to take away from this -
- Each of these six indicators influences is measured using a number of stats that are combined into gauges – these indicators are simply estimates as well - they are combined into aggregate indices by security and then for the market as a whole. Ray has put similar data into the market since 1910 – how does the market stack up?
- 1920s
- Dotcom
- 2007
- US market today
- US market - tech
- Comparing the share of US companies that these measures indicate being in a bubble - It is about 5% of the top 1,000 companies in the US, which is about half of what was seen at the peak of the tech bubble. The number is smaller for the S&P 500 as several of the most bubbly companies are not part of that index.
- However – these bubble shares – or the 50 companies in the US – have had good performance – especially when compared to the rest of the top 500 companies.
- 50 in bubble – 350% returns over past year
- Rest 25% returns
Conclusion –
- What to take away from all of this – firstly, these gauges are not perfectly accurate - Even if you were timing tops and bottoms based on what neighbourhood share are in - there is nothing precise about this.
- it is tough to pick the levels and timing of tops and bottoms based on it.
- May seem like some things point towards bubble – but doesn’t mean it can’t continue up – that is the problem with anything in a bubble – the ride can continue – Or prices can falter out
- Whilst many tech companies do seem overvalued and in a bubble territory due to traditional pricing metrics – there can be some fundamental reasons why
- Quest for yields and real returns –
- Store of value if cash is being devalued - so with new entrants and many market participants having familiarity with certain companies – such as big tech businesses – they invest into them
- If you are worried about a crash in prices – then either invest a small amount into an index or avoid companies that appear overvalued – well beyond normal growth share metrics – like PEs in the 50s -
- Next week – look at the risks of rising yields – many tech companies are non-profitable – what happens when yields on their corporate debt starts to rise?
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
https://www.bridgewater.com/research-and-insights/ray-dalio-stock-market-bubble
Welcome to Finance and Fury. This episode will looking at infrastructure as an asset class, to see if it can help to provide some diversification for portfolios and decent moving forward.
- Infrastructure – physical assets that provide services that are essential for us to live our lives. The aim is to invest in assets that if the market booms or busts, it provides some diversification to traditional asset classes.
- Traditional Asset classes –
- Defensive – Cash, Fixed interest (gov, corporate bonds, credit)
- Growth – Property, Shares – Australian or international
- Where does infrastructure sit – still in the growth category - In my view – can help to provide a real asset can play a role in an investment portfolio – two component for reasons to invest in infrastructure
- Diversification – infrastructure allows an investment in lower correlation to other asset classes – however, depending on the type on investment purchased, some may have “higher beta and therefore less diversifying”
- Real use – value – investment in areas that we generally interact with these essential services every single day, gas, water, electricity, transport
- Traditional infrastructure
- Transport – seaports, airports, major roads, bridges, tunnels
- Utilities – Power generation, energy distribution and storage, water, sewage
- Renewable energy – big asset class moving forward
- Communication – network towers, satellites, phone networks
- Infrastructure at the moment is potentially undervalued due to not seeing the same rebound as many other growth investments over the past 6 months – oil prices also went down – the year returns haven’t been great –
- effects are cyclical - there may be an opportunity today from a pricing perspective - the market has marked down real assets and infrastructure at the moment -
- Lot of money being spent on infrastructure – there is a major need in developed economies for revamping of aging infrastructure, and for new infrastructure projects
- In addition - emerging markets which have their economies growing as well as their population’s wealth increasing, the demand for more and better infrastructure continues to rise
- But government budget pressures have been affecting their ability and willingness to fund infrastructure projects, creating more opportunities for private capital in the asset class – however, with the invention of green bonds as well as cash rates for funding being close to zero, this could increase the amount of money available to fund projects
Benefits –
- Predictability of cashflow - Infrastructure assets usually have a pretty high level of visibility and security when it comes to their future cash flows.
- When talking to fund managers, they say that they look for projects that almost have guaranteed revenues – those that are underpinned by regulation or long-term contracts with highly creditworthy counterparties - such as governments – compare this to other companies where their cashflows are not as secure – the valuations can be hard
- However – most infrastructure could be considered to be a Public Private Partnerships - where the public sector partners with a private sector company - The private sector company develops, constructs, finances, operates and maintains the infrastructure, and the public sector pays for those services -the concessions for the assets are often granted over lengthy contractual periods, which can be over 30 years – so the cashflows can be relatively secure
- Also – they have Inflation-linked revenues - The revenues that infrastructure assets earn are often linked to inflation - rates of return set by regulators frequently linked to future inflation expectations in in a long-term contract.
- A competitive advantage – A lot of the time, infrastructure assets have a form of a monopoly in the services that they provide – or in other cases, they operate in markets with high barriers to entry
- Therefore, the assets cannot be easily replicated and often remain free of the competitive pressures confronting more traditional organisations – so again, the risks that an established project all of a sudden has a new up coming competition are very low – helping to reduce uncertainty risks
- The Essential nature of infrastructure and correlation –
- People tend to use these essential services on a daily basis and that utilisation (and returns) can often depend less on the economic climate at a point in time than other investments - Because of that essential character, economic factors often have less of an influence on infrastructure assets than on numerous other businesses, which can assist in delivering stable returns through market cycles
- infrastructure as an asset class, particularly unlisted infrastructure, has historically demonstrated low levels of correlation with other growth asset classes – can help to reduce volatility of a portfolio
The risks of infrastructure
- Too much leverage and interest rates
- Debt and the cost of that debt can be a big factor in the future performance of a project –
- Technically – with interest low or falling – the cost of debt declines – this means the costs of capital also decline in the valuation of projects –
- This means that the values of the project increase – but the opposite is true, if interest rates rise, then the valuations can also decline
- on average, most infrastructure stocks have higher debt to equity or gearing levels than the average stock and therefore are more vulnerable to interest rate rises.
- Debt and the cost of that debt can be a big factor in the future performance of a project –
- Greenfield risk – this is a major risk for new projects – where the estimates don’t stack up to reality – an example of this would be a toll road at the beginning of its life, when it has the most uncertainty - what traffic levels of the road will really be like remains to be seen. Tolls may have been set, but again, sufficient usage of the new road is essential – there can be too much uncertainty which can be dangerous
- You can also have Construction risks, delay risks and cost blowouts - Example – The Queensland Government contracted BrisConnections to run its Airportlink Project, which opened to the public in 2012. Initial forecasts were for the 6.7km tunnel, linking Brisbane Airport with the CBD, to carry 170,000 vehicles per day. Six months after opening, there were only 50,000 vehicles using the road and BrisConnections went into receivership. The roadway was eventually sold for $2 billion to Transurban, despite having cost $4.8 billion to construct. Many retail investors who invested in the initial public offer at $1.00 lost most of their money when the shares plunged to $0.001 within months. Further, the shares were structured as instalment warrants carrying a further two instalments of $1 each. People who thought they were being canny traders, picking up a bargain, suddenly found that for each $1,000 they invested, they incurred a $2 million liability.
- Lesson – investing in early infrastructure projects is very risky – especially if there aren’t government guarantees on the returns
- Management and ESG factors - while real assets like infrastructure can be fairly low risk, this can be negated by the people that run them – the same with any company
- When looking at infrastructure businesses - It might be the case that too much risk is taken on, a white elephant is built, or the capital structure is not right and there is too much leverage. The human element is very important to assess as the humans are the ones making the decisions on what to build based around assumptions – if enough mis management occurs, a company can lose its licence to operate an infrastructure asset if the asset is not well managed.
- In Italy – Autostrade is a company that controls the roads forming the Italian system of motorways - currently at risk of having its motorway concessions revoked because of the collapse of a 200-metre section of a bridge in the city of Genoa in August 2018
- Currency risk - When investing in global infrastructure assets, currency risk is introduced into the equation and
- This can affect the returns of an investment due to changes in currency exchange rates
Infrastructure performance - infrastructure has done well over the years depending on the sectors invested in
- Pretty strong returns have been achieved by a blended allocation of property and infrastructure
- International infrastructure fund – 10.32% over 10 years – invested for 7 years with a return of about 9% - off the back of a 1-year return of -16.41%
- Over the same timeframe – ASX index – 7.66% return for 10 years, but the 1 year returns are only negative 2.6%
- Obviously past performance isn’t an indicator of future performance
- Looking forward for returns – Comes from demand factors – who is going to use the assets? And will they actually be used. With this in mind:
- should concentrate on owning infrastructure in high population growth areas - does not make sense to add infrastructure in regions where there are less customers each year because populations are going backwards – an example would be Japan - a toll road project where there is no pricing power because it is difficult to raise tolls in this situation.
- The best infrastructure plays are those where there is exposure to high population areas and urbanisation – happening in many developing countries
- Important to research the investments if you are considering it – as some managers do have big weightings to Europe, with regions with less population growth – but some of them have the cash cow of governments funding these projects
Investing in infrastructure - Accessing infrastructure – your options – this is not advice but the general methods to access it
- Listed – This is purchasing shares that are listed that deal in infrastructure – an example would be Transurban or Sydney Airport
- Another option is to purchase managed funds that deal with infrastructure – I have a mix of both – international I do through managed funds
- Unlisted – this is a little harder to get
- The risks here are similar to property trusts – illiquid nature
- The correlation question – listed infrastructure can be heavily correlated to the equity market – makes sense as it is listed on the equity market
- However – it does provide some measure of diversification – different shares in different sectors –
- But when the market falls – all shares take a ride down
Conclusion –
- Infrastructure investment offers the opportunity to invest funds into assets that play an integral role in daily life – when looking at investments for the long term – confidence is important – what are people still going to be using and demanding as a product in 10 to 15 years? Then, what companies are in a position to be providing these above competitors
- The benefits of infrastructure investments are predictability of cash flows, the longevity of assets, and comparatively less volatility of a portfolio overall than going purely into Australian shares
- There are also risks associated with infrastructure investments however - might involve higher debt to equity or gearing levels compared to other assets, ESG factors and with global infrastructure, currency risk that needs to be considered. Additionally, greenfield risks might deter some investors from investing in infrastructure projects at the start of their lives.
- As is true for all investments and strategies – you need to take careful consideration of if infrastructure is appropriate for you.
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. What is stakeholder theory and what does it mean for capital markets and investments? World Economic Forum annual agenda occurred a few weeks ago. One year ago, the World Economic Forum launched a new ‘Davos Manifesto’ in support of stakeholder capitalism – this year – stakeholder capitalism, or stakeholder theory was at the forefront of many of the agenda’s
What is stakeholder theory – like many things, the definition has changed over time –
- Originally - Stakeholder Theory is a concept from R. Edward Freeman (American Philosopher and Professor) when he introduced it in 1984 – it was a theory of organisational management and business ethics – aimed to address morals and values in managing an organisation - The theory argues that a firm should create value for all stakeholders, not just shareholders
- Since the 1980s - there has been a massive rise in the theory – as well as an expansion on what is defined within the term value and who is considered a stakeholder
- From R. Edward Freeman - “The 21st Century is one of “Managing for Stakeholders.” The task of executives is to create as much value as possible for stakeholders without resorting to tradeoffs. Great companies endure because they manage to get stakeholder interests aligned in the same direction.”
- The issue with this is the concept of providing value without resorting to tradeoffs – is this actually possible? Individuals and companies have to make decisions every day – with every decision there is an opportunity cost – and likely a tradeoff
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Today - Stakeholder theory is closer to a version of corporate social justice – or in other words, the concept of equity in the world and a merging of company’s responsibility for communities (who are technically non-stake holders)
- To explain this further – Equity (in the non-financial sense) is about outcomes – the fairness of an outcome - is not equality of opportunity – but equality of outcomes
- unlike equality of opportunity – equity actually requires the different treatment of individuals and different distribution of resources to get to an equitable outcome – if you have $10,000 in shares but your friend doesn’t, that isn’t equitable, you should technically both have $5,000 – if you earn $100,000 but your neighbour only earns $50,000 – that isn’t equitable
- This is one of the big changes in stakeholder theory – that is the growing support in calls for equity –
- Under this theory business firms should entertain all kinds of noneconomic goals and outcomes. No longer may owners simply concern themselves with profit or loss, but instead must consider the broader societal implications of everything their business does.
- Social media has really helped to accelerate this – when looking at the online presence of massive companies – it is all about cultivating an image of social responsibility – PR teams working around the clock to support any cause that is in vogue –
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Whether corporate leaders concern themselves with social justice out of genuine desire or merely to avoid backlash is an open question – to find an answer it helps to look at what a company does versus what picture they have on
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Under the original conception of stakeholder theory - businesses have four primary elements when it comes to stakeholders - namely owners, managers, employees (or suppliers), and customers
- All four have skin in the game – they either have invested money in the company, are employed by the company, require the company to buy their goods/services or in turn, buy this companies goods and services – at every stage each of these elements has their own money or income is involved in the decision-making process –
- Each of these individuals are making tradeoffs – making decisions based around what they believe will provide them the greatest value
- Owners/Investors – tradeoff in that they could have invested money elsewhere – but do so as they see value in investing in the company
- Managers/employees – trading their time/effort for an income – the income needs to provide a value – i.e. enough to compensate for time
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Customers – have to see a value in what they are buying to exchange money
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Value itself – think about the value that a company can provide – even a small one – provides wealth to the owners – but based on the value it can provide to the other key stake holders
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Today - stakeholder theory argues that there are other parties involved, including governmental bodies, political groups, trade unions, communities, financiers, suppliers, employees, and customers – extension to include governmental bodies, political groups, trade associations and unions and communities – which means every person on earth
- WEF agenda this year: “It is also a system where companies, government, civil society and international organizations are recognized as equal partners, and where they all pursue a common goal: the well-being of people and the planet. It would prevent economic inequality to get out of hand in the way that it did.”
- The difference is that those who are not stakeholders – or have no skin the in game now have power over companies’ business practices
- This notion of stakeholders actually inverts the original concept - grants a new degree of power over private businesses to those who take no risks and provide no benefit – no trade offs and provide no value
- Going back to value – if someone who has no skin in the game starts to determine company decisions – is this good for the value that this company provides? To employees, who require a company turn a profit to remain employed, to shareholders, who require a company to perform well long term, also generating profits to make money?
- To suggest that the general public or society at large ought to be a de factopartner in any business, based on the interconnected nature of any economy, actually starts to undermine the very concept of private ownership – which is the bedrock of any functional economy
- This new wave of stakeholder capitalism starts to imply collectivism as insists everyone in society has the right to an interest in what companies do - and not only with respect to their profits, but even their business practices and mission
- remember, this concept is being pushed from the same organisation that produces works that state: “Welcome to the year 2030. I Own Nothing, Have No Privacy And Life Has Never Been Better. Welcome to my city - or should I say, "our city". I don't own anything. I don't own a car. I don't own a house. I don't own any appliances or any clothes. It might seem odd to you, but it makes perfect sense for us in this city. Everything you considered a product, has now become a service.”
- If this is sounding slightly familiar - Societal ownership of business firms have traditionally taken a few prominent forms – socialism and communism
- Similar to R. Edward Freeman, another philosopher came up with an economic theory on value and tradeoffs in Das Kapital in 1867 – over the years it morphed and changed and then with its implementation – about 40-50 years later once it had gained traction in society – we know how well that turned out for the economies that implemented it
- Socialism is increasingly popular – using the terms of equity and stakeholders seems to be blurring the distinction between private companies, property ownership and state (governments) – this is the merging of economic means and the political means
- However - equity and stakeholder movements do not represent outright socialism or communism – there will still be a share market where we can purchase companies that still have profits and losses – but it is an evolution in the system – where the uneconomic decisions can be further made from non-stake holders – like Governmental organisations like the UN – which further distort the nature of a free market
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Economic decisions require the concepts of trade-offs – however – there are some entities that seem to be unfamiliar with this concept
- Calls for stakeholder theory are coming from Government entities – like the UN and EU – Government entities aren’t known for economic trade-offs – lack of consequences when compared to a free market – when it isn’t your money or you have no skin in the game – i.e. your decisions don’t affect your outcome, just that of others – UN is pushing stakeholder theory as part of the great reset
- The European Commission (executive branch of the European Union, responsible for proposing legislation, implementing decisions) recently released a sustainable corporate governance report claiming to find a problem with publicly listed companies due to the investor-driven behaviours of these companies – they are proposing that power be shifted in EU-listed firms to other stakeholders – so stakeholder theory isn’t just some fringe thought anymore
- Harvard Business review went through this and found that the EUs reports were deeply flawed. And its proposed policies would actually reduce businesses sustainability in the EU
- What the EU claims is that there is a rising level in gross shareholder payouts, dividends and repurchases and declining levels of investment – in other words, firms are increasingly showering cash on shareholders, stripping the company of assets that could be used for long-term value creation – investment in green projects
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Without going through all the numbers – this report relied on a cherry-picked sample of public firms. An analysis of all EU-listed firms reveals that both capital expenditures (CAPEX) and research and development (R&D) increased during the period covered by the report
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However - The EU report implies that investment might be higher had shareholder payouts been lower. But cash balances grew by nearly 40% over the last decade, from €712 to €973 billion
- This could actually suggest that investments by EU public firms is limited by the lack of additional opportunity, not by a lack of available cash
- With board decisions – profits have two primary purposes – to be retained – for R&D and other CAPEX, or to be paid out to shareholders – the decision on how much should be paid out comes back to the expect rate of return (IRR) of a project versus the benefit to shareholders – i.e. if a company invests $1bn that may boost share price by 3%, versus paying out shareholders where this payout represents a return of 4%, better to go with the 4%
- Not only does the report fail to show that EU businesses are misgoverned, it also makes proposals that would actually put these businesses at risk
- As part of the stakeholder theme – the report recommends an EU-wide reformulation of directors’ duties to include a broad and ill-defined range of considerations – i.e. representing the interests of the “global environment” and “society at large.” These duties would be enforced by non-investor stakeholders bringing suits in court.
- The effect of implementing such proposals would be corporate destruction - any board decision could be legally challenged by some entity with no skin in the game claiming a violation of directors’ almost boundary-less duties – board members and directors will freeze any decision making without having consent from entities like the EU or the courts that they would need to defend themselves through – bad PR can destroy profits as well a legal payout – however – I believe the report makes the directors personally
- Ask yourself - How will these firms compete with Chinese firms? Conducting business through an EU-listed firm will simply no longer be sustainable. Firms will go private, or seek to avoid these rules by domiciling and listing elsewhere - Decreases the investment opportunities for us, as more and more companies will de-list
- The primary reason of being a listed company – i.e. to raise capital – would be gone, why would investors make the decision, or trade off to invest their funds in a company with an EU mandated fiduciary duty – that requires them to only deploy funds to benefit the global environment or society at large
- Remember – the definitions of what this benefit or value is would be defined by governments – we tend to have different definitions on what is valuable of us – which is why choice in a free market is important
- In addition – returns could decline – could force directors to cut back on dividends and invest more internally – even if this isn’t the best investment decision and the money is mis-spent – just to avoid being called a short-term focused director
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In Summary - stakeholder theory means that companies would have a duty to make uneconomic decisions as opposed to trying to maximise value to those who are real stakeholders – or those with skin in the game
- Under stakeholder theory - broader societal interests, not real value to shareholders, employees or customers must be considered - these societal interests can be real or imagined based around public perception – leading to further uneconomic consequences
- So, companies would need to invest in supposedly green but inevitably less efficient technology or others causes that have the most current attention, which may not be the optimal economic decision - These actions may in fact provide long-term benefits from a positive public image to a company, but they do not directly increase share prices or dividends
- It also undermines the purpose of capital markets – raising capital as well as price discovery
- Markers help investors and businesses to allocate capital to its best and highest uses - however this is imperfect and has hazards – which do get criticised – but if you get in the ring, you might get punched
- But if a company does not wish to subject itself to director mandates for stakeholder value or public campaigns – they will start to take themselves private
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Markets and companies as they stand are imperfect because humans are imperfect – there is no perfect system to get the perfect outcomes - But the alternative is nothing less than creeping socialism by another name
- The ideal economy of the EU/UN is outlined in their SDGs - Does increase the equitable nature of the mega-corporations – where you have a handful of companies that provides the world their needs – one specialises in each sector of the market – to a point they can force equity and not have to listen to the real stakeholders anymore – but the non-stake holders
- This in turn, then reduces the outcomes to the individuals that make up the real economy – companies making non-economic decisions – hurts economic output at optimal levels –
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All companies are not built alike – I am critical of mega-companies – those that act in anti-competitive behaviours – but I have the feeling that these companies will do just fine under any stakeholder theory – it would be smaller companies and those people working for them, or using their goods that suffer
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I’m not saying that companies should destroy the environment and shouldn’t care about their contribution to society – most companies indirectly do benefit society and us in our day to day lives – they provide value to us in goods and services, they employ people, they can make people wealthy through investments – you simply need to participate to reap the rewards
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But to completely revamp the concept of companies could lead to a much worse economic outcome for us – but not the people pushing this
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. In this episode, we are going to look at some of the potential fallouts from the GameStop saga – looking at market disruptions, market integrity and the ongoing implications of potential regulation changes
If you want an overview of this – check out last Mondays episode.
- But in short - Gamers are good at playing games – when they know the rules
- The rules of the financial game are starting to be more understood by people online - Some people on reddit were paying attention to the Form 13F filings in the US for hedge funds – have to be lodged each quarter– saw that GME was heavily shorted by a few funds, The one firm that received the most attention, Melvin Capital had heavy short positions
- The price of GME has come back down a fair bit from its high point last week, was sitting at around $60 on Friday last week – but there was a gradual increase from around $18 at the start of Jan to around the last week of Jan – when the price started to sky rocket – went up over $400 – triggered a short squeeze where funds were trying to get out of their short positions by buying back the shares – but there either went enough shares, pushing prices up further or you had to accept a massive loss
- Even buying the shares back at $60 would still result in a big loss – most got into the short positions between $4 and $10
- There are some estimates – hard to get a total for all the funds that lost money – but Losses total losses were estimated to be around $70bn from short positions within the hedge fund community – Melvin Capital lost around $13bn of their capital – loss of around 53% in the fund
- So in this episode – I want to go through the nature of this market disruption, and the greater implications of this – from the market integrity point of view as well as potential regulatory responses
To start with – discuss the nature of Market disruptions – through innovations
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One view that I have about this whole saga is that the disruptions are due to innovations – both human and technological
- It is a bit of a paradigm shift – humans are adaptive creatures – if a group of online investors managed to push up the price of a company, where some made some decent money, while causing massive losses to institutions, what is to stop this from happening again?
- When looking at the evolution of humans and technology, it can help to paint a picture of what may happen next in financial markets – the basic trend occurs as follows:
- Disruptive companies or trends start- normally start small or at the low end of a market – these start out with a focused/niche group
- Existing powers that be (companies or groups in the social dynamic) ignore this new competition – mainly because it is small – so either poses no threat to the loss of customers or there aren’t enough people to affect change
- Over time successful trends or disruptor climb the value chain – with companies, they offering better products and services, with social groups, it also provides value – community or prestige
- Disruptive companies or trends start- normally start small or at the low end of a market – these start out with a focused/niche group
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Eventually – these disruptors grow to a point of being legitimate competition - the existing powers that be either fail or adopt the disruptor’s models, and the whole cycle starts over again
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Much more to this cycle – but when viewing the recent rise in retail trading through this model – it is following a pretty classic disruption model
- The emerging disruptive trend in markets – coming from retail investors in combination with technology – have access to low/no cost trading platforms as well as chat sites/social media that binds them together – so they can move trades as one
- They have been overlooked by the powers that be – relatively small -but when taken at the aggregate level, especially now with stimulus checks coming in – they each have an additional $2k ($1,400 more coming on top of the initial $600)
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As a group – the common knowledge of gambling and gaming is relatively strong
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Therefore, it is pretty easy to assume that this style of behaviour will grow and have further influence on financial markets
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The big lesson about disruption – is that once the ball gets going, it rarely stops – unless diverted – which is where ‘market integrity’ will come into this -
If this does continue – what are the risks of short squeeze
- a large credit shock can traverse through the market - how can last few weeks squeeze activity affects the rest of the (institutional) market? It all comes down to the leveraged nature of trades
- Aside from a broker/hedge fund not being able to meet margins calls or close out a position - most of the hedge fund industry is financed – in doing so, its beta is close to 1 from their net exposure x leverage
- In other works - if your (long-short) exposure is just 10% of gross values but you are levered 10x then your ultimate NAV beta is still about 1
- Trouble is - even the largest brokers will only allocate so much 'regulatory capital' towards Prime Brokerage; after which they will raise the cost of financing
- Morgan Stanley and Goldman (the two largest shops in the space) are in a much, much better position than in 2008 - but when more stocks get squeezed, they will raise financing costs to allocate precious capital - they will cap risk to the hedge fund and new trades will become impossible to put on if gross positions exposure exceeds risk adjusted limit
- If this were to cascade – hedge funds need to cover their position – through selling up long positions to cover the short ones - the first thing sold is the highest P/E (likely highest beta / momentum factor risk) exposure
- Now – Melvin was a pretty small fund in the scheme of things – but if a fund 10x the size of Melvin was to find themselves in this position – things could become worse – losing 53% of their capital in one trade, then follows the redemptions from existing investors - If these were to cascade, then the Fed will have to step in, and call the prime brokers and relax regulatory standards
- Things are heating up - the most heavily-shorted stocks have risen by 98% in the past three months, outstripping major short squeezes in 2000 and 2009
- US equity long/short fund returned -7% this week and has returned -6% YTD.
- Over the past few decades there have been a number of short squeezes in the US equity market – what is different this time is that it has been an extreme case in a few specific companies
- In the last three months – when looking at a basket of top 50 shares with market caps above $1 billion and the largest short interest as a share of float in the Russell 3000 index – these companies have rallied by 98% - This week the basket’s trailing 5-, 10-, and 21-day returns registered as the largest on record.
- most shorted stocks took place even though aggregate short interest was near a record low – this is different as well because historically, "major short squeezes have typically taken place as aggregate short interest declined from elevated levels
- In contrast, the recent short squeeze has been driven by concentrated short positions in smaller companies, many of which had lagged dramatically and were perceived by most investors to be in secular decline"
- Bankers at Goldman sacs believe this could be an issue – one stated "this week demonstrated that unsustainable excess in one small part of the market has the potential to tip a row of dominoes and create broader turmoil." They went on to say "the retail trading boom can continue" as "an abundance of US household cash should continue to fuel the trading boom" with more than 50% of the $5 trillion in money market mutual funds owned by households and is $1 trillion greater than before the pandemic, what happens in the coming week - i.e., if the short squeeze persists - could have profound implications for the future of capital markets
- US equity long/short fund returned -7% this week and has returned -6% YTD.
This is where we come back to the concept of market integrity and systemic risks– which regulators are meant to be responsible for
- What is market integrity? Well, it is one of the main objectives of securities regulators – in the US, the SEC, in Australia, ASIC - a rough definition it to protect the integrity or fairness of the markets
- This, together with protecting investors, improving the efficiency of markets, and protecting the markets from systemic risk, form the four fundamental goals of securities regulation
- Such narrow definitions of market integrity conceptually link it to market efficiency - in that a market of high integrity should also be efficient because prices will reflect their fundamental value – there are a few definitions
- Michael Aitken has defined market integrity, in part, as “the extent to which market participants engage in prohibited trading behaviours.”
- Hersh Shefrin and Meir Statman (1) freedom from coercion (people enter transactions voluntarily and are not coerced into or prevented from entering transactions); (2) freedom from misrepresentation (people are entitled to rely on information which is disclosed); (3) information (people are entitled to equal access to a particular set of information); (5) freedom from impulse (people are protected from possible imperfect decisions); (6) efficient prices (people are entitled to prices that they perceive to be efficient in that intervention is permitted to correct imbalances); and (7) equal bargaining power (people have equal power in negotiations leading to transactions).
- Here is where things can get murky – who defines what fair/efficient prices should be? What is an efficient price? Sure, GME at over $400 isn’t an efficient price, but are Afterpay or Tesla trading at their efficient price?
- What about freedom from impulse? To implement this, this could be what Robinhood did, limit/restrict buys – not letting people buy companies based around what is determined impulse
- The next element is regulators protecting the market from Systemic risk is the possibility that an event at the company level could trigger severe instability or collapse an entire industry or economy
- These definitions, or rules are contradictory – regulators have four major functions - protecting market integrity, protecting investors, improving the efficiency of markets, and protecting the markets from systemic risk
- Based around protecting investors, this could mean the limitation of investors rights
- – the banning of the trades in a company should be something that the SEC should look into – reduces the integrity and efficiency and competitiveness of a market – stacks everything on one side
- The issue with the regulations is that it is based on projections from one side – the financial systems – i.e. hedge funds and politicians – to help protect from this happening again, they may restrict the free market
- When looking at the options for Regulations – it may be as simple as tech censorship – discord banned WSB for a short time – may see the pressure of the Government on either trading firms or social media sites to reduce the coordination of traders
- One of the more likely outcomes will be that there will be some Scapegoats to scare the public from doing this again – already found one or two – similar to what happened in the US back in 2010 – what can get them is that some of these people on reddit trading have securities licences in the US
- they will once again find a small-time trader to scapegoat, regardless of whether their actions actually had a major impact on the market volatility in question
- Still an ongoing issue – but time will tell how this plays out – it may turn out that nothing may come from this – at the very least, the US/SEC/Regulators and committee members like Maxine Walters may just get a few scape goats from this movement fined/banned from trading or jailed –
- But if the trend continues of retail traders buying shares and shorting – further action may be deemed necessary by governments/regulators – to protect market integrity as they see it
Whatever the governmental response is – it will take a while to legislate – maybe a few years – but if a market crash occurs out of this – the blame will be placed on redditors – not the short sellers or the people betting against a share with other peoples money – just those going long with their own money
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. In this episode, we're going to cover the GameStop saga. It's still ongoing at the time of recording this, so new information may be out by the time you listen.
- I wasn’t going to cover this topic – I saw this first pop up either Monday or Tuesday last week – looked like a funny story – retail traders sticking it to hedge funds – but has evolved over the last week to something much more – and has been making headlines everywhere –
- in this episode – want to give a quick recap about what is going on, between the initial rise of the GME shares, the market interference by Robinhood, why this went on and the greater market implications, looking at short selling and hedge funds in general – so lots to covers
To start with – what is the GME story -
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GameStop – GME – brick and mortar game retailer – owns EB games
- GME price history – Over the years brick and mortar retails have lagged behind – Steam, amazon, many online gaming services –
- Back in 2013 the price was around $50 USD – by the end of 2015 – trended down to $35, 2017 was in the $20s, then by the start of 2020, was around $4 – then with the lockdowns – many people thought this would be the final nail in the coffin – go the way of blockbuster –
- Many things have happened since them that are positive for the company – new billionaire investors/board members who have come aboard with expertise in e-commerce – which is where gamestop needs to head to survive – then new PS5 and Xbox came out – prices started to go up – but funds stared to double down on shorting positions –
- GME price history – Over the years brick and mortar retails have lagged behind – Steam, amazon, many online gaming services –
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So by the start of 2021 – there were around 71 million short positions taken – to put this into perspective – GME only has around 70 million shares – but around 20% of these shares are owned by insiders (CEOs, board members, etc.) – on top of this – managed funds and indexes own a large chunk as well – this takes the number of available for trade down to around maybe 30 – 40 million
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Short selling – if you think the price of a company is too high or is going to go down – or is already trending downwards – you profit off this through ‘shorting the share’
- You borrow the share off a broker or market maker – you then sell that share – taking the cash – you then wait – and if the price goes down – you buy the share back at a lower price, return that share from the lender and make a profit in the difference –
- As an example – Share A is trading at $2, I think it will go down – so I log into my brokerage account and apply for a shorting position – some fund which wants to hold this company for a while will then lend me this share, I sell it – then a few weeks later the price goes to $1 – I buy this share, return it to the fund and make a profit of $1
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However – the net profit will technically be minus the borrowing costs – this is what can make this trade very risky – the fee to do this may normally be a few percentage points to the lower end of 1% - for some large companies is about 0.5% - so off this trade I will pay $0.1 so have made a $0.9 profit – still not bad
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But - Say you short a share – and the price goes up – well, why not just hold on for a long time and wait, hope and pray that the price comes back down at some point? Well – because you have to pay an ongoing fee for this – the fee is dependent on a number of factors and will change over time – but lets just say, that if the prices goes up – this fee gets larger
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This makes shorting closer to gambling in the short term that you are correct on your position -
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That is what shorting is in a nutshell – So as a quick recap - hedge funds were shorting GME – price started to go up – the hedge funds doubled down to the point there were around twice the number of shorted positions to available for purchase shares –
- People on Wallstreetbets realised this – companies like Melvin capital management was going to short on GME –
- Wallsteetbets – subreddit – has about 2 million members – but has a wider reach in the investor community
- People in these forums investors online on reddit decided to put a squeeze onto these firms –
- These investors banded together and started to buy these shares
- Market cap at around $4 per share is $280m – went to around $1.4bn at $20 per share - so if you get 2 million people are they each buy a few shares, say $200 worth each on a nil brokerage platform like Robinhood – then that is $400 million flowing into this share –
- If they then buy all the available shares – so 25-30m in total and hold onto these – pushing the price went up massively in a short space of time and limiting the supply of shares to buy back to exit the short positions – this triggered a short squeeze –
- Short squeeze is where people with a short position desperately try to buy the shares back to exit the position – they will still lose money but hope to cut their losses
- But when there aren’t enough shares to go around – the price goes up massively –
- This is what happened – price had a gradual increase – from Aug when the good news was coming out – price went from $4 to about $19 at the start of the year – then from the 20th of Jan – about a week and a half ago – started to sky rocket – hit $470 at the peak a week later on the 27th/28th of Jan –
- Over this time though - The process is borrowing the shares – hence the fees went up on the share – so if you find yourself in this position, you have to cover the costs in the differential – funds lost billions – ended up in
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This is where the story takes another turn – some of the trading platforms that investors were using to purchase GME, and a few of the other shorted positions restricted the trading of these shares on the 28th –
- Robinhood – restricted people from trading GameStop – well, not selling, only buying were restricted
- Not just Robinhood – E*Trade and WeBull, and a few other platforms restricted trades as well
- Not just on game stop – AMC, blackberry – and 10 other companies that were also heavily shorted
- They lifted this ban pretty quickly - On January 28 – same day as the banning - a class-action lawsuit against Robinhood for alleged market manipulation was filed in the Southern District of New York.
- The lawsuit alleges that the app “purposefully, willfully, and knowingly removing the stock ‘GME’ from its trading platform in the midst of an unprecedented stock rise [...] deprived retail investors of the ability to invest in the open-market and manipulating the open-market.” Later that day, the company announced that it would reallow limited buys of the stocks on January 29
- However - limited number of purchases available - Limited it where if you already owned shares in GME you couldn’t buy any more, but if you were a new purchaser – limited to 5 shares – this then got updated to 2 shares –
- So you could own 2 shares in total as a new purchaser – but then this got updated again - Robinhood’s list has grown, with 50 stocks now considered volatile and thus with limits. Most of the stocks are now limited to holdings of one single share – GME and AMC included
- Who is Robinhood and why would they do this?
- Robinhood is a brokerage platform – they don’t execute the trades for buying and selling – Robinhood is meant to be for the everyday retail trader – the same people who were doing the buying of GME – so making this decision could sink their clientele – and they have received some very bad press –
- But there is more to the story – First - they don’t charge any commissions on this – market themselves as the anti-wall street – not charging commissions – so if you don’t pay them, are you really the customer?
- Robinhood – technically works for larger brokerage firms and market makers – Robinhood doesn’t actually execute the trades – they take it to a market maker – another large brokerage firm – who then in turn are the ones executing the trades –
- this practice can be called front running – where the market makers can get into a share and then sell it back to you for a slightly higher price if you are looking to buy
- Robinhood gets paid for this – as they are essentially selling your data to hedge funds – then wall street can use this data to trade – if lots of buys are coming in, they know the price is going up, put positions on – plug into algorithm – the price differences will be so small that it isn’t that noticeable – but if a company can make $0.1 per share and sell millions in a day, that is a decent profit for almost nothing
- Robinhood – technically works for larger brokerage firms and market makers – Robinhood doesn’t actually execute the trades – they take it to a market maker – another large brokerage firm – who then in turn are the ones executing the trades –
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Going back to September 2020 - Robinhood was under SEC investigation for failing to fully disclose selling clients' orders to high-speed trading firms - Robinhood paid $65 million to settle the SEC investigation on December 2020
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Think of FB – you aren’t the customer if it is a free product – you technically are the product
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Why would Robinhood restrict the trades on so many companies? We don’t know for sure – but following the links
- Likely some major pressure from wall street – who robinhood needs to work with and is who pays it – remember the retail trader pays nothing in commissions– market makers (the ones losing from short trade positions) are the ones who pays Robinhood – Their largest hedge fund that purchases buy order flows from robinhood is Citadel group – which is a hedge fund that buys the order flows from Robinhood – makes up around 60% of their purchases – so either pressure was placed on them, or these major hedge funds refused to take any buy order flows from the trades at robinhood –
- However – citadel is an investor in Melvin capital – which is the hedge fund losing the most money – at least publicly - on the short positions – was one of the two first that provided $2.75 billion USD after Melvin’s loss on the short squeeze position – the other is point72
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This leads to some speculation that this is the reason as to why robinhood ceased trade – both Melvin and Robinhood have denied these claims – so who knows –
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Other explanation – is the leveraged nature of trades possible on Robinhood’s platform – as an investor – you can borrow funds to invest – RH have LOCs from large investment banks – like JP Morgan –
- Robinhood faced backlash in June 2020 after a 20 year old student committed suicide after seeing a negative cash balance of U.S. $730,000 in his Robinhood margin trading account – you can also trade options on leverage – this has been restricted heavily from the early days
- So the other explanation is that due to GME prices going up massively –Robinhood could have been trying to protect people – or themselves from lots of leveraged losses – if the price of GME goes back from around $325 to $20 – which would be a 94% loss
What are the implications of this
- The banning of trades – what happened to the price? what happens? Prices drop
- They resumed limited buys a day or two later – but the price dipped – either profit taking or the intended outcome – then went back up a bit – went from the peak at the market open on the 28th of $470 to $197 by market close – the next day when limited trades were available price went up to $380 – but is back to $325 as of the Friday close -
- Either way – this has really shown a lot of the public that Wallstreet hates outsiders –
- It is okay for them to affect market prices, gambling and lose funds, then get bailed out – but if the public does it and makes them look stupid – then look out – they have massive companies, billions of funds and government officials to help –
- The media for the most part is spinning this as some autists online are manipulating the market – destroying market integrity – hence the need for additional regulations to help protect unwearying investors for stumbling into these shares of GME at $325 -
Shorting shares and market manipulations – does it have a point in the markets? it isn’t unheard of for some investors to spread some doom and gloom information on a share they have a short position in –
- What is the point of short selling – profiting from a market decline – or a decline in the price of a share
- Beyond this – does it have a point - in theory – to create an efficient market – but that is where standard selling come into it – demand and supply of shares through buying and selling –
- Shorting shares is a method of profit maximisation -
- Has been banned in the past – post GFC – speculated to have increased the downturn –
- Self fulfilling prophecies of creating additional downside
- It is easier to make people afraid than hopeful about a company – this is where Hedge funds – seem to market manipulate in their own ways –
- Example – in march of 2020 – markets were going into panic mode – Bill Ackman – hedge fund billionaire went on CNBC
- ‘our economy may be done, dead and not coming back’ – “Hell is coming – America will end as we know it” – this was on March 18th
- Predicted that many companies were going to $0 – Hilton hotels as well as the majority of other hotel companies
- Got out of his short positions a few weeks later from spreading this message and then bought into the companies he was saying were going to $0 using the profits from his short positions - So why then did you buy it a few weeks later if he actually believed what he was saying?
- What is different – hedge funds have a lot of power – over the media, over politicians and regulators
Regulators won’t fight against it if it is done from the financial institutions – but may against retail traders
- Head of Treasury – Janet Yellen – was head of Fed for years – used to market manipulation from working at the biggest manipulator in history – the Fed
- She received $800k from Citadel group in speaking fees in 2019 and 2020 – plus many other fees over the years
- The point is, these speaking fees probably aren’t due to her being a talented public speaker – but it may be for some inside information
- In 1988 Executive Order 12631 established the President's Working Group on Financial Markets. The Working Group is chaired by the Secretary of the Treasury and includes the Chairman of the SEC, the Chairman of the Federal Reserve and the Chairman of the Commodity Futures Trading Commission. The goal of the Working Group is to enhance the integrity, efficiency, orderliness, and competitiveness of the financial markets while maintaining investor confidence
- Based around their own charter – the banning of the trades in a company should be something that the SEC should look into – reduces the integrity and efficiency and competitiveness of a market – stacks everything on one side
- But when it comes to this – we will likely hear crickets –
- If anything – over the years this practice of restricting trades may become more prevalent – especially if more brokerage accounts adopt the robinhood method
- Still an ongoing issue – but time will tell how this plays out – but there may be an ongoing issue moving forward –
- This movement of shorting the markets – silver may be the next target of a short squeeze – may cover this in the next episode – market integrity
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury.
This episode on about how to invest in Asian markets and how to avoid some of the biggest pitfalls in these markets – I have covered the Aus market, and the US market in detail, but haven’t covered much on a giant portion of investments that are available – that is Asian markets
- Why would you want to invest?
- Number of people in this region is around 4 to 4.5 billion people – or over 50% of the world population
- Along with this – comes the companies that provides goods and services to these individuals
- Has the potential for market returns – how? Companies performances are based off supply and demand -
- Diversification – considered emerging markets –
- has growth potential that isn’t as correlated to issues in the west
- Number of people in this region is around 4 to 4.5 billion people – or over 50% of the world population
Countries – and their respective markets – go through the list – some of the market caps may be a little old - hard to get up to the minute data on these
- Tokyo Stock Exchange – Japan - June 2020, the exchange had over 3,700 listed companies, with a combined market capitalization of greater than $5.6 trillion
- Shanghai Stock Exchange – China – around $6.72 trillion – maybe around 1,200 companies (hard to get estimates)
- Shenzhen Stock Exchange – China - $3 trillion market cap - maybe around 1,700 companies (hard to get estimates)
Other nations close to China – HK, Taiwan
- Hong Kong Stock Exchange – Hongkong - Market capitalisation was $6.5 trillion at the end of December 2020 – 2,600 shares
- Makes sense that this is around the same size as the Chinese markets – go through why in a minute
- Taiwan Exchange – Taiwan – $1.5 trillion, 900 listed companies
- Singapore Exchange – Singapore - $650 billion – 700 listed companies
- Bombay Stock Exchange – India - $2.5 trillion market cap, with 5,500 listed companies
- National Stock Exchange – India - $2.5 trillion, 2,000 listed companies
- Korea Exchange - South Korea - $2.1 trillion market cap, with 2,400 listed companies
- The Stock Exchange of Thailand – Thailand - $500 billion, 600 listed companies
- Indonesia Stock Exchange – Indonesia, Jakarta - $600 billion, 700 listed companies
These have been some of the bigger ones – there are plenty more – but in the interest of time – move on
- But in total – out of these markets – there is a market cap of just under $32 trillion and 22,000 listed companies available for purchase –
- As comparison - Australia’s market cap is around $1.6 trillion USD, with around 2,400 listed companies – so these Asian markets have a market cap around 20 times larger and 9 times the number of companies
- Some of the growth potentials over the past few decades may look huge as well - China – probably one of the biggest rises in economic growth and wealth in human history – opening up their free markets – anyone would be crazy to not invest in the Chinese market, right?
However – it isn’t all rosy – Within the Asian markets – there can be many pitfalls – to start with – China is a good example – and how companies that surround China can also be filled with landmines of companies – to start with – a simple explanation of the problem would be to say that China’s listing process on the exchange is over regulated and then beyond this, it is not regulated enough – that is where out of all the markets mentioned above – china stands out for one major reason
- Stock exchanges around the world are mostly non-government companies – they are a market place provider – exchange in shares –
- Think of these companies as a service providing company – allowing you to buy and sell shares through an exchange – brokerage accounts allow for the transactions to take place – but the exchange itself allows for market pricing – where all brokers, i.e. buyers and sellers can come together
- As an example – the New York stock exchange, or the ASX – all regular companies – all ironically listed on their respective exchanges that they provide these services for – you can buy ASX shares on the ASX
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In china however – the Shanghai stock exchange is a government agency – the government sees this as a public service which they wish to handle – in theory they are a communist country – in my view, this is only in name – closer to some form of authoritarian country that is not as far left as communism on the economic scale –
- In relation to their share market – this does creates a few issues –
- The CCP has control over what companies get listed and those that don’t – these companies can earn profits – which is why I don’t think that China is communist in anything but name
- There are high levels for barriers to entry to markets in general – there are requirements on listing in every country –
- If you want to list on any market in the world – each exchange – i.e. the company that is providing the exchange service as well as the regulator, say for instance the ASX and ASIC – they have their set rules that you need to follow to be eligible to be listed – meet a certain market cap, conduct an audit service –
- Have a third party – normally an investment banks do book builds to work out the price of listing and the number of shares – for which they get compensated
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However – if the numbers don’t stack up, the ASX or this investment bank are liable – both financially through a failed issue (where nobody buys all of the shares available) or legally from ASIC
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In China – the government makes the rules – they determine which companies are eligible to list or not -
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However – their control goes beyond the listing process, if you as an individual want to buy shares in China – you have to meet the Governments rules –
- Not like buying shares on the ASX of in the US or most other markets – I can jump online right now and buy some ASX shares, or shares in the UK, or any other market – but the criteria in China is as follows:
- Foreigners with a permanent china residence card or work in china
- Foreign employees of a listed A-Share company who currently lives in China or abroad, as long as participating in the companies equity incentives
- Not like buying shares on the ASX of in the US or most other markets – I can jump online right now and buy some ASX shares, or shares in the UK, or any other market – but the criteria in China is as follows:
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Or be the owner of a corporation that does business globally or in china
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Lets just say – the vast majority of people listening won’t meet these requirements – plus Have to go through background checks and no voting powers – don’t want foreign influence – smart in one way – they are familiar with subversion tactics, having engaged in them for decades on other nations – so don’t want the same things to occur against them – but this is limiting the markets capability – of its primary function – rising capital from a wide pool of investors – for this – china probably doesn’t care though
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Many of the largest companies listed on the market are state owned for the majority – in other words, the majority of shares i.e. more than 51% are owned by some arm or department of the CCP
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So you are limited from actually investing in China – but this being said – would you even want to invest in China?
- This market isn’t great as raising capital as previously mentioned – when thinking about supply and demand – if there is a limited capacity of demand – then the price growth potential can be limited – and it is a wild ride
- Reached its peak 2008, at about 6,000 points, then crashed down to below 2,000, went through another rise in 2015 to 4,600 points before crashing, today is about 3,600 points
- Can see many large companies in china listing overseas – like Jack Ma with Alibaba – wider access to funding -
- If you look at the market – most of the companies are state owned companies that have a small portion of equity i.e. shares that an individual can hold
- Because their main point is state owned and to provide a service, the performance can be lacking
- Especially when comparing the GDP growth compared to the share market growth
- Issues with the markets in China and by extension, some other parts of Asia, you don’t know what you are getting
- Example – looking at the number one company on the shanghai market – it is number one in market cap by a long way - $2.2 trillion RMB/Yuan ($340 million USD) - In comparison – the Industrial and Commercial Bank of China $1.3 trillion RMB ($200m USD)
- Probably going to butcher the pronunciation – but this number one company is called Kweichow Moutai Co., Ltd. is a partial publicly traded, partial state-owned enterprise in China – state owns around 65% of the company
- specializing in the production and sales of the liquor Maotai baijiu, together with the production and sale of beverage, food and packaging material, development of anti-counterfeiting technology, and research and development of relevant information technology products
- This market isn’t great as raising capital as previously mentioned – when thinking about supply and demand – if there is a limited capacity of demand – then the price growth potential can be limited – and it is a wild ride
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The revenues of the company were around $85 billion – but there isn’t a verification process – they are Audited by some Chinese public accountants – the numbers may be accurate – and likely are
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But there is an issue with the under regulation of existing investments – especially those down the pecking order but also those listen in other markets around Asia that also don’t require a big 4 accounting firm to do public audits – like we do in Aus
- Spoken to a few fund managers who have funds investing in china – they tell some great stories
- Some companies have completely fake operations – not
- How does this happen – mergers – technically called a reverse merger –
- If a company is listed on a market – say in Taiwan – which is considered a freer market – someone in china could set up a false company, with fictitious numbers – nobody is going to check – complete a merger, or buy out 51% of the existing company on another market – you avoid the auditing rules and now you can sell any of the assets held by the company that you bought out
- Names of the company can change, then the investment can be pumped and dumped – a boiler room –
- This being said – there are plenty of good quality companies with lots of growth potential in other nations outside of China – but how to avoid the trap of buying a remerged company – and how do you access quality investments in Asia -
- Depends on how you want to access these investment – now this isnt advice – have to take into account if these investments are in your own best interest
- But you can access Asian markets through – ETF or managed funds –
- The question remains - Index versus Active – the index of some of these countries does have some issues
- Korean market – over 25% of the index is in one company – Samsung
- Wouldn’t purchase the Chinese market indexes
- Active – depending on nation – many managed funds out there – ones that focus on emerging markets
- Advantages of active – can do the research – go into the companies and verify the ownership and the services being provided are real and aren’t just on paper
- Can be selective in the shares – as well as markets – can be filled with dud companies
- The option to avoid government controlled markets – most of these are also ex Japan (or exclude Japan) – the BOJ owns around $450 billion of shares on the Japanese market -
- I have a decent chunk of funds invested in Asian markets – mainly in active managed funds –
- For those looking to invest – avoid some of the pitfalls – active managers – finding the right active manager can be hard
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. Positive wealth mindset, or a growth mindset for your finances
To start with – lets imagine that you’ve hit the lotto jackpot!
- Say you win $20m – it is a lot of money – enough for any person to reasonably retire on
- So, now that you may be able to be considered FI - what are you doing with your time? Where are you living? And how are you living your life?
- This might be pretty hard to actually think about for some people - it depends on much time you’ve actually spent thinking about it before
- If you had $20m of financial resources at your disposal - how would you spend your time? and what would you do? and would all your problems be solved?
- For a lot of people – these aren’t the focus when it comes to fantasising about winning the lotto – it is on how this $20m would be spent
- The same goes for FI in general – the focus can be solely on the target of what we need to retire – and not on the rest of the picture – what we will be doing –
- This is where having a mindset not only to focus on personal growth but also financial growth is very important
- Going back to the lotto winner - With $20m – if you invested the full balance – you could reasonably generate around $1m of passive income p.a. (assuming 5%) – after taxes – may be closer to $524k of income (not assuming any trust structures are implemented)
- Does this now mean that this individual is now financially independent? FI is a two-sided problem to tackle
- First - it doesn’t really matter how much money you have, it more so matters how you much you need to have - what would you do with your independence? And how much would that cost?
- This first focus is about defining what independence actually is. And that’s an issue to really tackle because if you are just aiming for that million-dollars-a-year of income, and it’s only going to cost you $80,000 then financial independence is almost something that may never be achieved - if you think it’s a million dollars a year
- This brings in the second part - how much you actually have – or believe that you can have – back to the economic problem – finite resources for the potential of unlimited wants
- These unlimited wants can get in our way – and cloud our mindset when it comes to FI and wealth
- Very easy these days with social media and the internet – can see how the top 1% of the 1% live
- Money provides ability to have independence but creating a picture of what your independence looks like is the best place to start – which is all about having the right mindset in place
- A trap that a lot of people can fall into when winning the lotto is not being in a wealth mindset when they win the money – think of it as a money maturity – if you have been able to accumulate $3m over time, then getting another $3m lump sum likely means you have the right mindset and knowledge to deal with these additional funds
- Examples of people who win the lotto - you get a lot of money meeting all your goals for financial independence – if you win $20m you’ve likely got all the FI - but that’s a lot of responsibility in your hands in one day.
- unless you’ve got the habits formed around money and really fully prepared for receiving that level of responsibility, it can actually go pretty wrong without a plan. It’s actually almost impossible to prepare for - so last minute - to get such a large level of funds and to actually change your mindset and be ready to reach that financial independence
- If you are going from being broke to now having $20m at your disposal – this can create a very uncomfortable feeling – we are hedonic and revert back to our normal state of being – for someone without money – and if this is their mindset – then their subconscious thoughts can turn into actions to try and get rid of this money as soon as possible
- First - it doesn’t really matter how much money you have, it more so matters how you much you need to have - what would you do with your independence? And how much would that cost?
Our mindset can be our best friend - or our worst enemy
- I’m sure many people out there are familiar with the potential for our own self-limiting beliefs – we can be our own worst enemies
- Our tendencies for obsession or Rumination can get in the way of focusing on the positives or what we can achieve –
- Rumination is from our brains focusing on one bad factor and repeating this to ourselves - Has your head ever been filled with one single thought that just keep repeating?
- These tend not to be good things - tend to be sad or dark – regrets that we have – rumination is a cycle where we focus on the bad more than we do the good
- If this becomes engrained, this habit can be dangerous – the more we focus on the bad the more we continue to focus on the bad
- Our tendencies for obsession or Rumination can get in the way of focusing on the positives or what we can achieve –
- The issue is that we can’t just turn it off – and tell ourselves to stop thinking about the bad side of things – or what we might fail at or have failed at financially
- Ironic process theory - White bear or pink elephant - Trying to avoid thinking about it makes you want to think about it more.
- If you are constantly thinking about the bad financial decisions you have made – can lead to further self limiting beliefs – which translate into actions that turn our lives into a self fulfilling prophecy
- We think we cant do something, then we don’t do it, so we never achieve the thing that we thought we couldn’t do
However – our mindsets can be our best friend –
- There’s lots of research out there on an individual’s attitude and mindset to their achievements –
- Sports stars – spend time visualising about what they will achieve in their respective sports
- Carol Dweck coined the terms fixed mindset and growth mindset
- Came from studying students' attitudes about failure - some students rebounded while other students seemed devastated by even the smallest setbacks
- When students believe they can get smarter, they understand that effort makes them stronger. Therefore they put in extra time and effort, and that leads to higher achievement.
- Looking at the wiring in the brain and studies in neuroscience – they show us that the brain very malleable
- The process of this malleability could probably be best called brain plasticity – that is, how the connectivity between neurons in our brains can change with experience and thoughts
- With practice - neural networks can grow new connections, strengthen existing ones, and build insulation that speeds transmission of impulses – think of walking – you probably don’t have to even think about walking, your brain just does it – but when you were an infant you needed to learn from scratch – people with spinal cord or brain injuries need to relearn this – comes from the repeated practice of walking – over time you don’t need to think about it
- There is a link between mindsets and achievement - if you believe your brain can grow - you behave differently – the same is for anything in your own life –
- If you don’t believe that you can lose weight – what actions will you take to lose weight?
- If you don’t believe that you can accumulate wealth and retire FI – then what actions will you take?
Begs the question – how can we change our mindsets?
- One way is to identify where you may have fixed mindset tendencies so that you can work to become more growth minded.
- Visualisation – having something to focus towards –
- Goals form part of this – but knowing exactly what you want your life to look like – and focusing on this – either with physical pictures or mental picture – regularly focusing on this – helps to cement an idea about what you are working towards –
- But you need to believe that it is achievable
- Affirmations – repeating to yourself – make it a daily habit –
- How to make yourself believe that you can be FI and accumulate wealth – which in turn can change your actions –
- Tell yourself this very thing – affirmations are powerful – opposite to ruminations – as opposed to focusing on negative – train yourself to focus on the positive – and what you want to achieve – if you are down – keep repeating to yourself you are happy and positive and believe it -
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need to regain control over your mindset which will determine your behaviours in responses to the event. The first question should be “what can be done to get the best outcome?”.
- Equation: Event + Response = Outcome
- It is important to change your responses if your current ones aren’t getting you the outcomes you are after. If you continue the same behaviour (responses) then you get the same results.
- This is the process of learning through failure
- You can’t control the event, but you can control your response which leads to a better outcome.
- taking 100% responsibility makes life simpler. If you accept that you have 100% responsibility, therefore control you can become the master of your own success - the world doesn’t owe you anything, you have to create it!
- Give up complaining! We are all guilty of complaining, either voicing complaints to others or mumbling them to ourselves.
- The truth is that we complain about events that we know can yield a better outcome than our current situation. We don’t complain about things that just exist. For instance, we don’t complain about gravity being gravity. To give up complaining, change is needed in your response.
- We normally don’t though as changing a response can be uncomfortable. People may judge you but who cares? It will take effort but it is worth it!
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Complaining is pointless in most situations as we normally complain to the wrong people anyway. You will complain about your partner to your friends, about your boss to other employees. We never talk to the person we have the issues with – also is similar to rumination – focusing on the negative
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Instead of complaining – focus on a positive affirmation
- The main thing is to first – believe that you can do it – does sound corny, but it is the cornerstone to building a positive wealth mindset –
In summary –
- You can be your own best friend or worst enemy – what you think about and focus on can become a reality
- So why not focus on what you want to achieve and tell yourself you can achieve it
- Then let your actions do the talking through forming positive actions and habits to get you towards your goals
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, I hope you are all going well. Today we will be going through how to avoid financial distractions.
This episode is a little bit of a follow up from the previous - as one of the comments I made was a little oversimplified – that was that if you simply spending less and invest these funds – you can achieve more in your financial future –
- It is not as easy as it sounds – it is very easy to say to someone spend less and invest more – but to actually achieve this as part of a goal can be almost impossible without the right tools to reduce discretionary or non-essential spending
- So in this episode – we will outline some of the core reasons behind spending habits and some ways to hopefully hack these in your own lives to help reduce needless spending and instead redirect these funds into towards your financial futures
- When I talk about spending - Not talking about needed or essential spending- but those additional spending items that can be made on impulse rather than as part of a plan
- This whole episode comes back to the economic question – of having finite recourses – but yet unlimited wants – but the real issue is the wants that we don’t know we want until we want them – bit of a mouthful – however: the age of the internet and social media marketing has really redefined wants
- Think about the availability to promotions that we have to put up with – advertising everywhere and the temptation to purchase at out fingertips
- Facebook, instragram, amazon, ebay – all have massive market places – has increased our access to the offers put on place on an exponential scale –
- Before the internet – you would need to go into a local store and be tempted to buy something
- Concept of window shopping – looking through the window which provided a trigger and temptation – but now that window is right in your own home or wherever you are with your phone – that black mirror of a smart phone has become the new window shopping and with this – the temptation to buy has increased at an incredible rate – as now – rather than you needing to be in front of a specifics shops window – which you would physically have to travel to and be limited in choice to what that window contained – now any store across the globe is in your hands at any time of the day, on any day of the week
- access to technology is a great thing – when used correctly – however – marketers and social media companies know how to manipulate people very well through cues and reward triggers we are pre-disposed towards that fuel addictive purchasing habits
- Hence - In the modern era – our wants can definitely outweigh our resources – creating additional problems or barriers to the economic question
- But at the same time – we have been the wealthiest any societies have ever known on average – but our resources can be sapped by up in some pretty tricky ways – leaving us no better off long term -
So in this episode – want to lay out a game plan and strategy to help curb some spending habits and instead redirect spending to your long term self-prosperity
- The first step is understanding Distractions and temptations
- Story of Tantalus – ancient Greek story - most famous for his eternal punishment - he was made to stand in a pool of water beneath a fruit tree with low branches, with the fruit ever eluding his grasp
- The catch was that if he reached for the fruit – it would rise out of his reach – but at the same time - the water he was standing in would always receding before he could take a drink – so he was condemned to the afterlife – to be always hungry and always thirsty – hence – his economic problems were never being met
- But we are different from tantalus – we are not dead – someone who is dead technically doesn’t need food – unless they are a zombie searching for brains
- But we can learn from Tantalus and his temptations – is very similar to our modern situation – for the vast majority of the population – we may not need the things we crave – but yet still crave them – for tantalus – it was food and water – but he was dead – hence he didn’t need these things – but still was triggered to yearn for these items – for us it may be a new TV or computer, or a new piece of clothing or any item that technically we can go without – due to social conditioning through social programming from advertising or other impulse triggers – we can crave these items and trick ourselves into thinking we need them
- Story of Tantalus – ancient Greek story - most famous for his eternal punishment - he was made to stand in a pool of water beneath a fruit tree with low branches, with the fruit ever eluding his grasp
- If you care about your financial future – you need to become less distracted or tempted from the temptation of purchases
- Easier said than done - We all have temptations - mine are computer games
- For me – I love strategy games – either RTS or grand strategy games –Games are addictive for me – but why? Well - get to progress in an online world gives same feeling as doing it in real life - Also competition – beating others – I can build an empire and thrive online
- I think I have a special kind of autism that helps with repetitive tasks – but I got good at these games – gave a feeling of accomplishment and at the same time – provided a strong distraction from doing other things that I needed to do
- Buying things does this as well. Not about the item we are buying most of the time – or what that thing physically gives us - but the escape – to distract and help to meet the feeling of achieving something
- Easier said than done - We all have temptations - mine are computer games
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This comes back to greater aspect of distraction and temptation – is that for me – games provide something that is rather easy for me to control and at the same time – relatively easy to succeed at – especially when compared to things in the real world
- Something we can control and succeed at can provide a powerful distraction to our own lives – why bother work at something hard in our own lives when we can turn this time and energy into something online – or to purchase something to provide the same feelings
- If a goal is too great a goal – and you don’t think you can reach goal then why not play some games or buy some items on amazon and succeed at something else – provides the same sort of reward pattern without providing the long term actual reward that would benefit us the most
- As an example – when I was at uni – I could easily play 10 hours a day on an MMORPG – imagine that I continued this to this day – instead of ceasing this activity and instead using this time to start a business and build this to help people with financial advice – I may be living at home still – still playing games – I might be great at online games but I may be a total wreck in my own personal life – but if I was committed to games instead, would this really matter if I was just chasing the feeling of achieving something?
- This all comes back to Escapism – escaping the harder tasks of life – at uni – instead of studying – why not play games? Uni was relatively easy to get 5s and 6s in a lot of courses – so why devote any time into getting 7s?
- But this habit of playing games instead of studying (outside of the hours that I was working) was the path of least resistance – help me fill a role and feel like I was achieving something else – in other words – escapism –
- Spending habits can also be escapism – if you feel like you want to be financially independent and rich – well why not spend some coin now and act like you are FI and rich – even though it might be on a CC – you still get that same escapism feeling now – without actually having to work towards – the temptation of spending itself can provide the very feeling or outcome that our long-term goal does
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This can be a dangerous form of escapism if you don’t fully understand it – I was luck enough to realise I was wasting my life on games during the uni days and kick that habit before getting into my full time working career
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But if a spending habit lingers with you through your working life – this can be a massive drain on your financial recourse – which back ‘to the economic problem – means you have less to achieve your long term wants – as you are meeting a short term outcome which is draining your longer term financial future
Understanding the root causes of spending habits – being discontent
- If something stops discomfort or the feeling of being discontent – and instead allows you to feel a small amount of control in your own life, it can control you. Being discontent is good. We are hardwired for this. It provides motivation to do more. But with more options to satiate the feeling of being discontent – can create a habit to spend to avoid this – one of the major factors that we need to be aware of that is driving spending habits – that is the need to feel satisfied and to not feel discomfort
- But We should feel uncomfortable with ourselves – Being uncomfortable is actually a good thing – many people like to avoid boredom – or the feeling of lacking in themselves – understandable – nobody wants to feel uncomfortable – but at the same time – we are hard wired to do this – it is what drives us forward as a specie to improve –
- We are also hardwired in habits through the cue – action – reward sequence – so the aim of a strategy to change behaviours is to track the cue, or trigger, change the action and receive a reward that benefits you long term
Strategies – no one right way to go about this – the first major step is understanding why behaviours and habits form– from there, there are some options:
- Step 1. What is the cue or trigger. Is it a diversion from difficult work. Or a feeling of not being satisfied? Something generally triggers spending behaviours – the first major step is looking around and where you are and what you are doing?
- Is it scrolling online, or at work, or being bored and feeling unsatisfied? Is it at some shops?
- This can be hard to do initially – most of this occurs subconsciously – have to make it a mental focus to pay attention as opposed to letting the part of our lizard brains take over
- Step 2. Write down the trigger. Track the sensations – start a journal – this helps people to become more aware
- Being aware of what is a trigger for spending habits is the key – as you can be aware of your surroundings and how they affect your focus and thought patterns – knowing what, when and where then allows you to actively change your behaviours and actions
- Step 3. Change the action – your actions are what you can control – hard to turn off the triggers – but once you know the triggers – and one pops up – if you are aware of this – you can then aim to change an action
- These actions will depend on what the situation calls for – if it is making a spending decision – wait a day or so
- If it is scrolling through amazon or an online shopping platform – hold off for 10mins or an hour before instantly clicking – take some time to reflect - If you think about spending or buying – it can be hard to distract yourself – ironic process theory - explain this more in another episode about a positive wealth mindset
- Step 4. Change your reward – this is personalised to the individual but at the core can be avoiding the feeling of discomfort
- Options - Put 5 into a savings account if you have done well and held out from spending – or put the equivalent value of the item off on a credit card -
- Could be as easy as positive self-talk – or tracking goals and ticking off a goal of spending less
In summary -
- A lot of needless spending habits come from a subconscious root – either wanting to feel in control, as a distraction from being uncomfortable –
- If you then use purchasing more things to satiate these feelings – and that you might think that you need these items – then that’s fine – but it will come at the expense of diverting resources towards items that have diminishing marginal returns – due to hedonic adaption -
- As opposed to those with compounding returns if you harness these feelings and put it towards achieving something positive long term – like saving additional funds, investing or paying off debt – once your brain is rewired – can still avoid that feeling of discomfort as you are moving towards achieving goals
- If it is part of your spending plans – then spend it – but if it is spontaneous – you can aim to minimise these spending patterns by changing the cue, action reward sequences by tracking the cues and being aware of the triggers, changing the action and then providing yourself a positive reward towards achieving goals
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to the Finance and Fury and the new year, 2021.
- Hope the start to the year has been good for you all – as in this episode we will be looking at how to work on your financial goals through the year through turning these into daily habits
- Last episode - Stared off with a question; looking back on the year, are you in a better or worse financial position?
- We also went through some foundations on setting goals – but importantly – narrowing these down to 3 major goals that are of your top priority
- The reason for narrowing this down is due to the topic of todays episode – that is actioning them
- You can set all the goals in the world – but to be in a better financial position this time next year – you need to be able to implement these – through taking some action based around the plans that you set – to make sure you’re always moving forward.
Time can be broken down into the following:
- Past – What has gone on – All of your life events to this point
- Dictates a few things – Behaviours and habits
- We all have habits creep in over time – Positive feedbacks
- Positive feedbacks can be a negative outcome for us long term – if you take heroin – that is a positive feedback based on your neurochemistry – but the more you do the more your life may not end up in a positive place
- But like any addiction – you can form good habits as well – through doing a few small positive things that form feedbacks as a reward system over time
- Dictates a few things – Behaviours and habits
- Present – The now – What are you doing?
- Most people financial security comes from income from employment
- What happens if this was to go today? Is there enough to survive?
- This is where setting goals and having actions are what you do in the present –
- But undoing some bad habits may be needed in the now
- All in an effort to get a better future
- Future – This is where you want to be – which is why you need goals to know want to achieve, as this needs to be defined
- Plans and Goals
- Start With the one goal – breaking it down
- SMART – or What, How and why?
- Implement it and adjust along the way – Over time (30 – 90 days depending) it will become a habit
- Then implement the next goal on the list
- Your future is determined by your actions from now up until that point
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All three time phases are important – understanding your past behaviours – as these determine your current position – then planning for the future and taking action now
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The long term can be negotiated with
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But if you hit the future are aren’t where you want to be, where does that leave you?
- That is where further self doubt kicks in – Unrealised expectations
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Not many people stick to new year goals – Why?
- there can be too many, normally people thing this is good, to have a lot of goals
- But if these are similar to last year and you didn’t make it, why might that be?
- Hard to go from 0 to 100 overnight – Inertia – something continues in its existing state (rest or in motion) unless it is changed by external force
- Hard to start a train and get it to top speed – takes a while
- Same for us – once we get set in our ways – very hard to change them
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If you have been in an investing mindset – or a mindset to
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So from your top 3 goals – select just one – the most important to you now and set a timeline to be on the road to achieving this over the next 30-90 days –
- Be it cutting back on spending, monthly saving or investing, etc.
- Then once the habits for this goal are in place – move on to the next
But if you are Looking to start – even with the first goal – Finding Motivation is not a good concept to look towards -
- What people search for is a moment of inspiration to get the ball rolling
- It rarely if ever comes – Why?
- Motivation comes from a positive feedback loop – do something good, dopamine is released in the brain, you then want to do this again
- We are creatures of habit – and we form habits from feedback loops of receiving dopamine – every addict has this feedback loop – heroin, alcohol – but you can use this to harness motivation as well
- Think about it, you don’t need to find motivation to indulge in anything – Because your brain is wired to give positive feedback when you do these things you already like.
- If someone is an alcoholic then they may go out of their way to get a drink – there can be justifications made behind actions – but at the end of the day they will beg, scape or steal to get a drink -
- Part of the problem - bad things compound as well
- Motivation comes from a positive feedback loop – do something good, dopamine is released in the brain, you then want to do this again
- So as how do you motivate yourself to invest or achieve a goal, be it financial or not? Finding a spark of motivation probably wont work
- If you wait for moment of inspiration to get the ball rolling you may be waiting a long time.
- It’s because motivation comes from a positive feedback loop – you work towards something that is meaningful to you – then dopamine is released in the brain, you then want to do this again
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Small action = dopamine = want to do larger actions
- All about starting small – if your goal is to save $2k per month, but you are currently spending more than you earn and are in CC debt from buying lots of things or going out all the time –
- The first step would be to look at this behaviour pattern – why are you spending? A lot of the time it has come from that same habitual behaviour to get a good feeling –
- You have to examine this and then turn it around – aim to save $100 per week at first – set up a new account and start the process of rewiring your brain – an addict has a very hard time going cold turkey – you need to wire your brain to get good feelings of hitting your goals consistently
- All about starting small – if your goal is to save $2k per month, but you are currently spending more than you earn and are in CC debt from buying lots of things or going out all the time –
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Keep a list – or a journal to track your progress – each month – tick off accomplishments in the right direction
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Motivation to just say you will save $2k p.m. from the get go could be lying to yourself, as in the here and now there will always be something better to spend your money on than your future security and financial independence. Like things that achieve instant gratification
- This comes back to goals – having each of the goals set in stone – allows you to break these down into achievable chunks
- If you have a goal to save $100k for a home deposit in 4 years’ time – that is great – but start breaking each goal down into achievable bit size pieces - $100k in 4 years seems a lot bigger than $480 per week for 208 weeks
- Saying you want to have $100k of passive income by the time you are 60 seems like a big goal – but if it just takes an additional $200 per week to be SS into super to get you these (on top of your existing super funds) – then these things start to become more achievable –
- Which is the whole point of reaching any goal – making it seem achievable to you
What you can do to get ahead now - How to start?
- Sometimes there can be too many things to change at once
- Start small – Pick one thing
- What is one financial behaviour you would change?
Small action = dopamine = larger actions.
- The best way to get over Slumps – little momentum to start and it takes off.
- Once you get enough of a craving for the feeling of saving/investing, it is hard to stop
- Remember: Almost impossible to go from 0 to 100 - Train – Starts off slowly, but then don’t get in its way once going.
- Implement it and adjust along the way. Over time (30 – 90 days depending on the goal) it will become a habit. Then implement the next goal on the list
That is the process to improvement – one small things at a time.
- Financial habits are built through the positive feedback of cue, action, reward.
- These decisions years ago have improved my position now.
- That is the relationship with good habits – Keep improving slowly over time
- Pareto distribution – 80/20 rule.
- 20% who have 80%, they have been able to grow good habits, compounding effects
- It is as simple as investing and waiting - $20k today would be $80k in 14 years at 10% p.a.
What is one thing that you can do to better the future self?
Starting sooner rather than later – There wont be much joy in starting initially – starting is the hardest part – but know that it gets easier as your goals turn into habits that give you a positive feedback over time -
‘all good things comes to those who wait’ – means that if you wait it out and just start at one thing, keep at it, you will start getting the motivation to keep going, and increase speed.
Thanks for listening everyone! I hope you all can make a small change.
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. I hope you all had a good Christmas – if you are like me might be a few kg heavier.
This episode – be looking at making new year plans – new years is upon us – many people have new years resolutions.
To start with - looking back on the year, are you in a better or worse financial position – been a tough year for a lot of people
- But in todays episode - how to be in a better financial position this time next year
- Going to look at how you can always be ahead on finances compared to last – through planning and then next episode is about how to act on those decisions
- Because - like compounding of investment returns over the years, the little things you do in your own personal life compound over time as well
- This can occur in both directions – both backwards and forwards
What are your financial goals for this year? Or new year resolutions?
- Maybe you haven’t thought about them yet – the new year may be a few days away – or already occurred by the time you listen to this – either way - By the end of this episode you should hopefully be able to think of at least 3 and something to put in place to help improve your financial life
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Now - Financial goals are related to ‘what you need money for’.
- Many goals may relate to your personal life - Most people have goals that related to other goals outside of their finances
- When looking at financial goals – these will also vary between individual to individual – broken down between short and long term
- Short term goals, this could be saving for a deposit on a home, getting out of debt, or saving for a holiday
- Long term goals, I find that these are mainly around financial independence, or things that take a long time to achieve like a passive income.
- I meet a lot of people with goals – but most of the time these are conceptions about what they would like to achieve – not technically a concrete goal
- There is a difference between saying that you want to retire financially independently – versus saying that you will retire at the age of 60 with $100,000 of after tax income derived from a portfolio of shares, superannuation and an investment property
- Even this can be broken down further – with an allocation to each – where the IP will generate $20k after costs, the shares $15k with FC to offset the tax and the remaining $65k coming from super
- To achieve this though – you need to get down into the nitty gritty details
- But like most things – this doesn’t happen overnight – can’t just click your fingers and be in this position out of hopes and wishes – some work needs to be put into it
- But the first stage is planning – planning on what you want and how you are going to get it –
- The first stage of planning is clarifying what you want – which comes back to goals
- Looking in the short term – and relating to this episode – it may all be about being in a better position in 12 months’ time compared to where you are today – but What does this look like?
- What you can do – In general terms – there are categories which most fall
- Reduce tax, save money, build wealth – start investing, Increase income – Salary, investments
- Hard to generalise these things – but at the same time – each of these are simply a wish list – not actual goals – hence why setting goals around these is important
- If you wish to reduce your tax – by how much – and is it possible – then how will you achieve this?
- What you can do – In general terms – there are categories which most fall
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Of if you wish to build additional wealth – by what mechanism will you achieve this by?
So - What are your financial goals?
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Not many people stick to new year’s goals. There can be too many, normally people think this is good to have a lot of goals
- But it can be a determinate – too many goals can create information overload, decision fatigue and many other psychological conditions where the easiest solution it to just do nothing different
- We are creature of habit – hard to implement 20 different changes to our behaviours overnight
- Hence – why every year, or every month – it is a building process – to create a better you – someone who every month is more on track to achieving financial goals
- But it can be a determinate – too many goals can create information overload, decision fatigue and many other psychological conditions where the easiest solution it to just do nothing different
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Our wants – in other words – out idea about the wish list of goals that we may have – can be infinite – but this is simply a wish list – not actual goals
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Goals need to be things that you actually want to achieve and are willing to sacrifice to get there
- Hence why limiting these at the initial stage to a few key goals is important -
- The real issue is the follow through
- It’s hard to go from 0 to 100 overnight, it’s a lack of inertia. Something continues in its existing state (rest or in motion) unless it is changed by an external force
- So as an Example: say you have 10 goals down now, and they are all new things that you wish to implement in the new year
- Invest in shares, reduce your tax, buy your first house property, generate $50k of income of passive income in 15 years from investments, provide for your kid’s education, buy an investment property, then buy another investment property, protect your wealth with insurances
- Well – Where do you start? And how? Most of these will be using resources at the sacrifice of another – the economic problem is satisfying the potentially unlimited wants with finite resources
- After spending hours trying to figure the solutions for each of these wish lists items - Information overload sets in and you go back to your old ways pretty quickly – kick back to old habits doing what you are currently doing – as it is safe, familiar and easy – we are creatures of habit
- If you are just starting out pick 3 items from this wish list for the year at maximum.
- To do so – you need to prioritise – to help with this – identify if they are short term or part of longer-term goal?
- What is the most important to you in the here and now?
- Then comes the time to clarify on these wish list items – and turn them into actual goals –
- To do so – you need to prioritise – to help with this – identify if they are short term or part of longer-term goal?
How to start?
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It is all about starting small, and picking one thing at a time – such as what is one financial behaviour you would change? Or what is the most important goal that you have?
- To help clarify this – think about your Future self – what could you do today – or what is one thing that you could implement to be able to help you be in a better financial position next year?
- This is where goals come back in to it. What you want to achieve needs to be defined. Plus, is the goal going to help achieve this?
- With the one goal, breaking it down in the simple SMART terms – this is a bit of a cliché with it comes to setting goals – but it does really help: SMART –
- Specific – do you have an actual number in mind – and how you will achieve this? (simple, sensible, significant)
- Measurable – what is the number and how much will you need to direct towards this goal – also is it meaningful and motivating
- To help clarify this – think about your Future self – what could you do today – or what is one thing that you could implement to be able to help you be in a better financial position next year?
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Achievable – is everyone on the same page - agreed, attainable
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Relevant – but also realistic and resourced
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Time bound – when do you want to achieve this goal by – beyond measurable and specific – this is very important – as it set limits to when you need to achieve the goal by – hence – determines the amount and how this can be achieved – either through lump sum investments as well as monthly contributions
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g. Example: If you wish to have a passive income of $100k in 30 years – and you need to put away $2k p.a. to get there but don’t have the spare income - How will you first save enough already - cut spending/increase income? But then what will you invest in – once this is determined – relatively easy
- Plus consider if this will this hurt another goal? – like short term goals – if you wanted to buy a house
- But it is important to determine how much do you need? By when? How are you going to do it?
- Put it down for each goal that you have, the answers to those 3 questions – but remember to prioritise to each of these goals
My process
- For me a financial goal isn’t set unless it has a yes answer to the following:
- Will it put me in a better financial position? What does ‘better’ look like? It varies depending on the goals
- Better can be a very subjective term – better by $1? Or better by actually meeting the financial goal
- Simple measurements depending on your goal
- Will it move you closer to your individual goals? And will it do so to meet your timeframe?
- If you are new to all of this, and haven’t a listen to previous episodes on how to work this out – members section on the podcast – free to join and there are tools in there to help work this out
- But ongoing work is needed – you can set your goals – make them a habit – but this needs to continue until you reach your goal
- Hence – a good question to ask is - Will it close the gap (every year)? There are categories which most goals fall into which are either:
- Building wealth: Investments or in a business
- Increasing income: Salary, investments and business
- Break down further, like reducing taxes, reducing debts, etc. to increase income
- To help work out goals – there are workbooks on the financeandfury website. www.financeandfury.com.au
- Will it move you closer to your individual goals? And will it do so to meet your timeframe?
Got your goal: Looking to implementing it – go more into this next week -
- Such as how do you motivate yourself to invest? Finding motivation is a rubbish concept as a place to start
So in summary –
- To help determine you goals – ask yourself - What is one thing that you can do to better the future self?
- Starting sooner rather than later allows you to do a negotiation with your future. Think of it as time travelling.
- What are your three financial goals? How much, by when, and how will you get it done?
- Will your actions help achieve the goal? What strategies do you need to implement?
Thanks for listening everyone! I hope this episode helped break down some steps. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. This episode is about what is momentum investing and can this be the best investment strategy in a world where fundamentals mean nothing?
- Over the past few years – value managers – or those that try to estimate the fair value of a company and base their purchasing decisions around this have struggled to provide alpha –
- Alpha is the returns above the benchmark – or the index – and those active managers trying to provide value through buying undervalued companies – or those that have had short term losses – so their prices are below their fair valuations – have failed to see the rebound in prices expected from following this strategy
- So returns have been minimal
- One alternative strategy which has provided better returns over the past few year on average has seemed to be buy those companies not based around fundamentals but with momentum – i.e. what others are buying and hold these for a while to ride the wave up
- Alpha is the returns above the benchmark – or the index – and those active managers trying to provide value through buying undervalued companies – or those that have had short term losses – so their prices are below their fair valuations – have failed to see the rebound in prices expected from following this strategy
What is momentum investing - is a system of buying shares that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same period –
- Seems antithetical to the age old saying of buy low and sell high – as here you are looking at a strategy that is selling low or buying high – based around the returns over a 3 – 12-month time frame –
- Now – there is no single consensus that exists about the validity of this strategy – but recently it has been a viable strategy for a handful of shares –
- At large - economists have trouble reconciling this phenomenon – I am someone in this same boat –
- For standard market theory - when using something like the efficient-market hypothesis – momentum strategies shouldn’t be able to provide much in the way of alpha – however there are two main hypotheses have been used to explain this effect in terms of an efficient market -
- The first - it is assumed that momentum investors bear significant risk for assuming this strategy, and, therefore, the high returns are a compensation for the risk – in other words – more risk, more reward
- However – at the same time - Momentum strategies often involve disproportionately trading in shares that have a high bid-ask spreads – everyone is trying to get into them so the buyers have to buy above a price what they may otherwise wish
- so it is important to take transactions costs into account when evaluating momentum profitability
- The second theory assumes that momentum investors are exploiting behavioural shortcomings in other investors, such as investor herding, investor overreaction and confirmation bias -
- The first - it is assumed that momentum investors bear significant risk for assuming this strategy, and, therefore, the high returns are a compensation for the risk – in other words – more risk, more reward
- Hence – from this theory – there is a greater downside – that through buying into a share that has risen significantly over the past 3-12 months may result in greater long-term losses –
- Reminder – that there are plenty examples of this – A2M is one – others in the market – but those companies that seem to be having a massive rise in prices (which does result in returns) off speculation – what can eventually fall apart
- Looking back in time – the history - Richard Driehaus is sometimes considered the father of momentum investing – similar to how Benjamin graham is considered the grandfather of value investing
- but the strategy can be traced back before Driehaus – and in the previous market participants view - this strategy takes exception with the old stock market adage of buying low and selling high. According to Driehaus, "far more money is made buying high and selling at even higher prices."
- There are some reasons as to why momentum may become more of a viable strategy to trade moving forward
- Over the years though – technology has improved – so has the availability to trade –
- In the past – going back 30 years, especially before the internet – only professional investors, or those with access to brokers or other professional investors guiding the way could generally buy shares – and back then – with these gate keepers leading the way - buying a company with a negative -100X PE may be considered crazy -
- But from the late 2000s - computer and networking speeds increase each year, there were many sub-variants of momentum investing being deployed in the markets by computer driven models – not only from within broker models but from without – as access to trading became available to everyone
- Some of these operate on a very small-time scale, such as high-frequency trading, which often execute dozens or even hundreds of trades per second
- So not only is it that more people can now buy shares – but computers and algorithmic trading can occur – for an AI – they may not care about fundamentals at all – if the price growth is there through momentum – they will jump in as well – pushing up prices further
- So this increase in access and technology may have given a rise to momentum investing – essentially every one has access to jumping on any bandwagon of shares
- Although this is a re-emergence of an investing style that was prevalent in the 1990s – just a side note - that ETFs for this style of momentum investing began trading in 2015
- So a lot of shares that are in the top of an index – or in a index in general – have a ride up as people are buying the index – if you buy the VAS – you are buying 10% of CSL – so if 10,000 people buy VAS – all putting down a few thousand – at an average of $5k – that is an easy $5m to the market cap
- But on top of this – momentum specific ETFs are now available
- But there are some studies conducted on the specific advantage of following a trend - Looking back at the historical precedence that point towards to value of momentum investing – few studies looking at this strategy give average returns of 1% per month for the following 3–12 months when back testing data
- This finding has been confirmed by many other academic studies, some even going back to the 19th century
- But it is important to note – that turnover tends to be high for momentum strategies – or in other worlds high levels of buying and selling the investing – so it isn’t a buy and hold strategy if it is to work out well as these studies have anticipated
- So this high level of turnover has the potential to reduce the net returns of a momentum strategy
- This can go even further – as if you account for transaction costs as well as capital gains taxes – these can wipe out momentum profits
- There is another empirical study of this strategy covering over a century of data showed just how consistently well it performs – this was done by London Business School researchers Dimson, Marshand Staunton – looked back at market performance since 1900 -
- They constructed investment portfolios by selecting 20 top performing shares in the previous 12 months from among UK’s 100 largest publicly trading firms, and compared their performance to portfolios of 20 worst performers, re-calculating the portfolios every month. They found that lowest-performing stocks would have turned £1 invested in 1900 into £49 by 2009. By contrast, the top performers would have turned £1 into £2.3 million, a 10.3% difference in compound annual rate of return
- This is all well and good when back testing data – as you know what the best performing shares have been
- In a 2014 study called 'fact, fiction, and momentum investing' - 10 issues with regards to momentum investing, including transaction costs were identified – don’t have time to cover this fully -if you are interested would suggest going and checking this out -
- Does point out some downsides – such as the performance of momentum shares – epically that occur with occasional as large market crashes
- One example of this is in 2009, momentum style shares experienced a crash of -73.42% in three months from the initial crash –
- This downside risk of momentum can be reduced with a so called 'residual momentum' strategy in which only the stock specific part of momentum is used – where you buy a specific share that has momentum whilst allocating the rest of your portfolio based around fundamentals
- Although this is a re-emergence of an investing style that was prevalent in the 1990s – just a side note - that ETFs for this style of momentum investing began trading in 2015
- For standard market theory - when using something like the efficient-market hypothesis – momentum strategies shouldn’t be able to provide much in the way of alpha – however there are two main hypotheses have been used to explain this effect in terms of an efficient market -
A momentum strategy can also be applied across industries and across markets to individual specific shares -
- Lets look at one example of this – and maybe the best example of the past few years – Tesla – I have been sceptical of TSLAs price rise over the years – that is because there has been little in term of fundamentals to give rise to these price increases
- They get positive cashflows from selling government credits – there is also a lot of speculation that they will make up a decent chunk of the car market share in the future -
- But - tsla and the power of momentum investing have proven to be a great investment – requiring no actual thought but simply following a trend – the more you think about it – the more TSLA looks like a sell – or a short sell when framing this decision based around fundamentals – but simply buying into this trend as part of a momentum strategy wouldn’t have provided a dependent return – but again – the fundamentals aren’t there to justify their current prices -
- In comparison - Last week Tesla’s market cap was siting at around $606 billion USD – this now has surpassed that of Toyota, General Motors, Daimler, VolksWagen, BMW, Honda and Ford combined – which are sitting at around $578.2 billion
- Obviously – TSLA should produce more cars and revenues than all of the above – but - Where does Tesla rank compared to other auto companies – VW, Toyota, Daimler – top 3 – top two around 10.5m cars each year – TLS made 380k cars a year
- This yet again underscores the power of market trends and the momentum investing strategy
- Comparing the returns over the past 10 years – the S&P500 has had a cumulative return of around 300%
- Overall though – car manufacturers have lagged this return
- If you invested $1 in Toyota – you would have $2 today – Ford – investment would be $0.5 – the others are about even –
- Investing in TSLA would have given you $120 – which is a huge return in comparison
- But when comparing a purchase into TSLA versus Toyota - Tesla’s valuation would be hard to justify these returns based around any rational basis – however - the undeniable reality is that Tesla has massively outperformed it peers – a trend that’s held throughout the past decade
Looking at the power of momentum investing – which is the power of a trend
- There is a recurring theme within markets – in particular with some companies and their performances - that markets move in trends
- When trends get going - they can blow out any notions about rational valuation
- So Momentum investing, a variant of trend following, seeks to systematically pick such ascendant stocks and hold them for as long as they outperform.
- The benefit of a trend follower and momentum investor is that you don’t need exert yourself to determine the right valuations at which to buy or sell assets
- the market through the trend communicate to us which assets are in favour and which are not
- It may seem very simplistic - but with CBs having injecting liquidity and cash rates being so low – there is evidence supporting this approach
- Momentum investing can work – but it – requires some specific selection - if you systematically picked the best performing shares and invested in them regardless of what you thought about the companies in question, their valuation, products or management teams – that is momentum investing
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury – Vanguard bringing in some disruption to Australian markets -
- If you haven’t heard of them – Vanguard are the world's second biggest asset manager – dealing in index funds and ETFs Vanguard – have almost $9 trillion of funds under management world wide
- company's incredible rise since being founded in 1974 by investor Jack Bogle – providing low cost access to indexes – originally with managed funds but recently been branching out into ETFs
- But they have recently been branching out into platform services on top of asset management – little while ago - came out with the Vanguard personal investor platform
- Low cost account to access Vanguard investments - an Account Fee of 0.20% per annum, based on the total portfolio value of your account, including any cash held, capped at $600 per annum, per account
- A lot of the wholesale funds have high minimum buy ins – about $500k in some cases – so going through a platform gets around this – was third party platforms but Van have come out with their own
- Now they are is gearing up to disrupt Australia’s superannuation industry – this is a pretty big play from such a behemoth as Vanguard
- It all started when they announced that they will return tens of billions of dollars it now invests on behalf of super funds
- They are ceasing managing bespoke investments for Australia's superannuation funds – trustees outsource the investment management of the underlying assets – especially for index fund investments
- All as Van prepares for a disruptive second push into superannuation – first was taking over management of funds – not be direct super providers
- seeks to manage super accounts directly with potentially lower admin and investment fees
- Low cost account to access Vanguard investments - an Account Fee of 0.20% per annum, based on the total portfolio value of your account, including any cash held, capped at $600 per annum, per account
- This is big for vanguard – it is a lot of sacrifice initially to make what they likely estimate to be better fees long term
- Vanguard abandon up to $100 billion in investment mandates from third-party fund managers – this has been a core part of its Australian strategy since entering the market 20 years ago – manage the investments of super funds
- Now they want to enter the market directly and similar to the VPI platform, offer super as well
- Van is the second largest holder of mandates from not-for-profit funds in Aus – pretty much the industry superannuation sector
- The fact they have given this up – good indication of how seriously they are taking this push into the Australian super market
- One of the main reasons to do this and abandon their management of other super funds investments is to avoid any conflict of interest - if Vanguard to push ahead with its plans to launch an APRA retail super fund while managing the money of competitors
- Whilst they likely wouldn’t do it on purpose – but if their competitors underperformed on the money that they were managing compared to their in house assets – raise some questions
- They have some history with super – It previously launched a super fund shortly after entering the Australian market, but transferred the management of it to National Australia Bank's MLC Wealth business in 2012.
- Some additional competition is needed – the trend over the years and what will occur in the future is a consolidation of super funds – so less competition – has its benefits – covered this in an episode a little while back -
- But the Aus super sector is sitting at about $3 trillion of FUM – and this is likely to continue to climb massively –
- Not likely to be any time soon that they come into super – may take them a year or two – if not more –
- It is a rather comprehensive process of applying for a superannuation licence and entering the market
- At last publication – Van said it was "tracking well" - with an intended launch date of mid-2021 for its retail superannuation product – but this could be delayed slightly – but still within the next year to two – but it still is a lengthy process – few reasons:
- Firstly – they cant easily abandon the super industry - Vanguard Australia managing director said - would not be "abrupt", giving clients up to 24 months to find another manager or bring investment functions in-house
- So super funds and other investment managers have 2 years to try and replace Vanguard – they have a fiduciary duty – cant just walk away
- Secondly – lots of due diligence and compliance that needs to be accounted for – government agencies like APRA don’t work that quickly – so this may take a bit of time
- Firstly – they cant easily abandon the super industry - Vanguard Australia managing director said - would not be "abrupt", giving clients up to 24 months to find another manager or bring investment functions in-house
- However – they will try and ramp up their direct service offerings –
- The managing director said - "We will push hard into the strategy of improving outcomes for individual investors, whether that is through a direct relationship or a financial intermediary, typically a like-minded adviser,"
- It plans to stop providing portfolio services to third-party institutional investors, but continue to offer off-the-shelf pooled investments like Van managed funds or ETFs to investors
- Again – this is a big initial sacrifice for them to make - Institutional mandates and the fees they make from this have formed a large part of Vanguard's Australian revenue over the two decades
- Estimates show that these mandates account for $50 billion of Vanguard's total $160 billion in domestic assets under management
- But while a significant part of the strategy until now, the local boss said the business of customising and running bespoke portfolios for institutional clients was a global outlier.
- It’s going to give the industry funds some well-deserved and true to label competition
- They are the second biggest manager in the world – low cost, economies of scale – access to research and the infrastructure
- They have are a commercial heavy hitter – have a big brand name to attract attention and lots of market research - They understand customer lifecycle management and could pretty easily provide a MySuper alternative
- plus they are cheaper – likely have a lot admin and low ongoing MER/IRC – Van multi index is around 0.29% - compared to the MERs for a lot of industry funds – 0.6-0.8% for similar allocations
- They spokesperson said that this shift was strategic – I am excited about it – they have been moving in the right direction for a while – and working with advisers and not against them
- Vanguard's Australian direct-to-consumer push is also escalating – as an example - the Personal Investor portal that was launched in April - now has around 10k investors signed up to it, with growth of about 2000 since late August - The low-cost investment platform provides free trades on in-house Vanguard ETFs – and access to their wholesale managed funds without having to meet the minimum investments
- One of the most successful strategies that they have is support from advisers - Vanguard's retreat from institutional client work is also an indication of the lucrative rapport it has developed with Australia's financial advisers over its 20 years operating in the country.
- according to managing director - It now counts 12,500 Australian financial advisers as clients which represents an incredible 57 per cent penetration rate in the industry.
- Given their fractured relationship with the industry super lobby, which has criticised independent financial advisers for decades and warned consumers against using their services, some advisers welcomed the retreat
- Vanguard developed the term "adviser alpha", which has become an influential concept in practice management for financial advisers. It refers to the value of financial advice being in client relationships rather than investment management and returns.
Just something to watch out for – may be a trend – Aus super industry could have distribution in the future – Google super, Amazon super, Apple super – etc. – larger brands are thinking of branching out – many years off – and time will tell – but we know that Van is coming out with their own super soon which depending on the fees – may be an option.
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. Today we’ll look at how to get the right investments in super.
Because super funds take care of it for people – a lot of people don’t pay attention – so in this episode want to explain what to look for and how to help determine if your investments in super are appropriate –
Not advice – seek advice if you are unsure
What is super?
- Most people think of superannuation as just something your employer pay in to so that when you turn 60 you can access it.
- Even though your employer pays into super, that is your money! 9.5% on average
- don’t care and why would you right? out of sight, out of mind and decades away from becoming relevant.
- Technically – superannuation is just a vehicle for investments that are held in a concessionally taxed environment
- Like having an investment account that pays only a 15% tax rate on income when compared to your marginal tax rate
- The only downside – is the preservation rules – where you can access it if you desperately need the funds
There are different types of accounts that allow access to different investment options
- Super is a vehicle to invest funds for retirement – A car is a vehicle
- You can get a Mazda, or Mercedes but the aim is to get you from point a to b!
- Like cars there are different types of super accounts with different features
- What are your options:
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Retail –
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A Master Trust is a superannuation fund in which a large number of members deposit their money.
- The trustee of the Master Trust pools the money together and purchases interests in the underlying investments, typically managed funds.
- The value of the investments of each member incorporates the fees, franking credits and some taxes from the underlying investments.
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WRAP account – External super trustee but you have control over investment decisions
- You get a cash account
- Then you select third party investments – Managed funds, Direct Shares, LICs, ETFs
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Industry
- Industry super funds are multi-employer funds (employer associations and unions).
- Investments - limited to around 10 multi-sector investment options (eg. Growth, Conservative, Balanced) – as well as single sector investments – in an asset class
- Regardless of the type of account that you have - The real cost of super is opportunity cost – doing nothing now will hurt long term -
- Any problem ignored long enough will grow – until it is too late
- Pay attention and make it work – don’t regret the future
- That is why setting up the correct investments and paying at least some attention is very important
- Again – the core concept for investments in super is that it is a Tax effective investment account – if you are investing for the long term, why not use?
- Comparison - Same investment of 10% p.a.: Compounding returns of 8.5% p.a. vs 6.1% p.a.
- $20,000 over 30 years = $231k vs $118k – or almost double the money
Superannuation investments-
- Will be looking at the industry fund sector – what most people have and have covered WRAP accounts in another episodes: “What types of superannuation accounts allow you to control your investments?”
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Industry super funds –
- Not a lot of transparency but it is getting better – so it can be hard to actually know where the funds are invested –
- For shares – there is transparency – other investments like property, infrastructure, alternatives – harder to know
- Investments - Depends on account.
- Mostly - Premix – Conservative to high growth –
- Based around the asset classes that are invested in – cash, FI, property, infrastructure, shares, alternatives
- How much to each asset class will determine the classification – 100-90% to growth – probably the most growth pre-mixed option the super funds have
- The default used to be Balanced – but for someone who has 30+ years of investments ahead = might not be correct.
- normally a lifecycle strategy – as per your age and account balance
- Below the age of 40 – you might be in a higher growth investment – then after 40 they start to scale you back –
- This might not be appropriate – you might be in your 40s and still want to be a higher growth investor
- Also – most have single asset class investment options – shares, bonds, property, etc.
- These can be used to help beef up or reduce the allocation to asset classes
- Example – if the pre-mixed options don’t have enough growth – then you can select some additional share allocations – say 80% to their growth option and then 20% split between Aus and Int shares
- Considerations when determining the right investments for super -
- Time horizons and goals based investing – investing is a long-term game – super can be even longer – due to the preservation rules –
- The longer the time frame – the longer you have to recover from any volatility losses
- Hence - Time in the market becomes a thing– the longer you have the funds invested, the greater your long term returns could be –
- Trying to guess markets and switch from high growth to cash and back again can result in lower long term returns – so keeping your super appropriately invested based around your goals in important -
- Super contributions - Higher levels of volatility can be good for regular conts
- If your super isn’t getting any contributions – may be better to have slightly less volatility –
- Regular investments with high level of volatility can help you buy additional investments when funds prices are low
- Combining all factors makes for a strong performance – the bedrock is the returns from the investment
- Time horizons and goals based investing – investing is a long-term game – super can be even longer – due to the preservation rules –
- How to make the decision –
- Compare how industry funds invest money now –
- But checking on the growth to defensive ratios is the first step
- Would help to go onto your funds website and see how they have invested your funds – double check that you are in an option that might be appropriate for you
- Can see how much the investment ranges on the asset classes – the funds normally have their investment objectives and risk metrics
- Investment objectives - + a percentage above the cash rate or inflation
- Risk – volatility levels and time frames to be invested for
- Remember – your goals and objectives could be different – you might have a Long term focus –
- Compare how industry funds invest money now –
- Allocations can likely changes over time – if you are in your 50s to 60s – probably better to have less volatility approaching retirement
- Mostly - Premix – Conservative to high growth –
- Not a lot of transparency but it is getting better – so it can be hard to actually know where the funds are invested –
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Other considerations - Check your costs – Some accounts are higher than others – but it depends on what you get for what you pay
- Admin fees: Flat fees and percentage fees – For flat fees – some accounts have $0 and some have a Standard is about $78 which is good for lower balances
- One I am with is $175, but worth it. Any managed fund I want, any direct share (Aus or Int)
- You can have no flat fee – but % admin fees – these do range as well 0.1% to 0.16% -
- Admin fees: Flat fees and percentage fees – For flat fees – some accounts have $0 and some have a Standard is about $78 which is good for lower balances
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These are for industry funds – pretty standard -
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Where these is a variation - Investment fees (MER/ICR) – these can be hidden
- The higher the MER – the lower the net returns depending on investment strategy
- But the higher the MER – the greater the potential returns –
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Higher growth have higher MERs in general – looking at a few options – you can have MERs of 0.35% or 0.8% - but this is the difference between a conservative option that has mostly cash (which has a low to no IRC/MER fee) – So whilst the MER is much lower for conservative – the long term returns can be a few percentage points lower even at the lower costs
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Where it can matter is between platforms - if two funds invest identically – but one has a 0.5% versus a 1% ICR/MER – then that is what can lower your returns potentials - Don’t get caught out
- Focus shouldn’t just be on the percentage costs but what you get for your money
What to do to make sure you make the most out of it?
- Pay attention – get the right investments
- Cars: You can have a Ferrari but if the driver (investments inside the account) is awful, the car may crash! Not getting to point B!
- Make sure your contributions are going in there
- Treat it like your own, cause it is – If you think you don’t have any investments, well you do in your super
- Check out the websites for super funds – look at the investment options
- Check out that you have a good investment compared to what your goals are
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Hi and welcome to Finance and Fury.
Just a quick announcement today.
Only going to be doing Finance and Fury Monday episodes for the rest of the year. There is a lot going on with work and life in general and I just need to cut back a bit on the episodes.
Had to make a decision on which episodes to cut out, so will still be doing the Monday episodes focusing on personal finance.
If you send a question through – might not be answered for a little while
Just wanted to let you know
Speak to you next week for the Monday episode.
Welcome to Finance and Fury.
This episode will be about using your own home as part of a wealth accumulation strategy
- Some strategies that I plan to do
First – what is a home – a lifestyle asset – is still technically an asset as it has a value – as long as someone else is willing to buy it off you
- I personally have never really seen a home as a financial asset - it technically losses you cashflow when it has a mortgage – and even when it doesn’t from a mortgage if this has been repaid – with rates, body corporate, ongoing maintenance costs for upkeep on the property
- Classification – Can you live off it? anything that doesn’t make you a passive income but instead loses you cashflow cant be used for financial independence
- Property ownership is expensive – mortgage is normally the biggest expense –
- PI loans eat a lot of cashflow – but the P component can be treated as forced savings that you can’t use
- But does decrease your I payments over the long term
- However – whilst your own home is a lifestyle asset – it still has wealth/equity in it - What is home equity?
- Wealth inside of your property - Most homeowners build this over time with debt repayment as well as property price growth - which is calculated as the total value of your home minus your home loan. The equity in your home increases as you continue to pay down your loan. And if your property’s value increases, your equity also increases.
- Not advice but a strategy – Create a separate loan facility as an investment loan to release this equity for investment purposes –
- PI loans eat a lot of cashflow – but the P component can be treated as forced savings that you can’t use
Debt – Leverage – Borrowing money to invest –
- Agree or not - $100k is more than $50k? – it is –
- Borrowing to invest allows you to Increase value of what is invested
- Technically your net wealth hasn’t increased initially – but over time this ideally can change
- Returns come in percentages – the greater the level invested - greater nominal returns at same percentages
- We are locked into same percentages for ASX – Different values
- Rich getting richer – more to increase at same percentages
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Does debt go up with inflation in value?
- No, you pay interest instead
- Why you borrow to invest in something that grows, not keep in bank account.
- Time goes on, your investment increases, debt doesn’t.
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Borrowing funds to invest is a strategy known as leveraging.
- Good Debt – If you borrow to produce an income, normally deductible interest. Plus if you invest in something that grows, you should have a higher total return over the long term than what
- Bad Debt – this is the PPR loan -
- principle of increasing the size of an investment expected to get long term capital growth.
Leverage works better from growth and not cash flow.
Having it is neutral cashflow position to slightly positive is the aim to maximise leverage – especially for property
- Pay back loan - Lower LVR = Lower multiple of growth, but lower repayments for cashflow.
- Increase loan with value = Increasing multiple of growth, but higher repayments.
How it works when investing outside of property
- Options
- Home equity - Borrowing equity to buy shares, or managed funds
- Debt recycling – borrowing more each year and using the income from investments to pay down bad debt
How to start
Example: Property – Initial purchase and building equity
- Utilise equity of $100,000 to purchase a property for $500,000
Borrowed funds – LVR 80%. - Three years - 8% growth return = $40,000.
- Growth return on the equity of 80% - $32,000 in available equity
- In addition – you will have repaid some of the loan - $375k in value by this stage as well with standard monthly PI repayments – ($25k) - so in total there would be $57k of equity available
Next step – deciding on how much to utilise of this and how to invest it -
- May not be worth it to borrow the full amount again –
- Taking the property back up to 80% loan may just cost you additional cashflow –
- Interest payments – Have to repay interest on the borrowings.
- The borrowing of funds against a property for investment purposes. The process involves having the home revalued – so the valuation may not have additional equity
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How to invest and where to invest –
- How to invest the funds – lump sum, DCA, or monthly investments – example of these options
- Lump sum – putting the $57k into the market at one time
- DCA – breaking up the investments for 5 months - $11,400 p.m.
- How to invest the funds – lump sum, DCA, or monthly investments – example of these options
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Doing monthly investments moving forward from the account - $2k p.m. for just under 2.5 years
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Aim is to try to minimise risks and maximise possible return – as the funds are borrowed, want to take some additional conservative approaches – such as DCA -
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Where to invest the funds – want to be diversified
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This is just a home equity investment strategy – taking it to the next level – it would be a debt recycling strategy
- Debt recycling works similar to the home equity release for investments – but you do this every year
- Involves refinancing and increasing the size of the investment loan each year and investing the funds
- In the previous example – PPR loan would be $365k – so a further $10k of debt repaid – this could then be released in the second loan and investing the funds
Example – Your property of 500 has grown to 700, your mortgage at 450k.
- If the value is $700,000 and the current loan is $450,000,
- $110,000 can be borrowed to a LVR of 80%.
- Initially $30,000 is invested with monthly investments of $3,000 established.
Worth it to leverage?
- Hurdle rate - the minimum rate that you expect to earn when investing.
When borrowing to invest, your hurdle rate will be the cost of borrowing the funds (interest payments).
Downsizing risks - Where it goes wrong
- Wrong investments Shares or managed funds?
- No liquidity, or not reducing investment time risk - DCA
- Disposable cash flows low – job security
- Panic selling or being forced to sell
- Buffer account – lower LVR or surplus cash
My plan – spend the next 12 months paying down additional debt – borrow – then invest those funds in a portfolio of managed funds over a 3-5 month period – do this again for 5 years – ideally – in 10 years time there will be no bad debt – only investment debt – depending on interest rates – either redirect investment income to pay down loan – or reinvest still -
Summary
- Leverage for growth
- Risks can be worth it if done correctly.
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition. In this episode we will look at the concept of a one world currency and if one single currency could actually work for the world?
- There has been an increased level of discussion around this topic over the past few years – especially with central banks looking to adopt digital forms of currencies over the next few years
- However – these are based on the individual country’s central banks - There are about 195 countries – depends on who you ask – but working off the UN numbers – there are 195
- At the same time - There are 180 currenciesrecognized as legal tender in United Nations (UN) member states
- Abut 15 of these UN recognised nations use some other nations currency already as their legal tender – like the USD as the global reserve currency
- However - excluding the pegged (fixed exchange rate) currencies of the 180 – which there are about 50 – which also peg themselves to the USD - there are only 130 currencies which are independent or pegged to a currency basket
- In other words, there are free-floating exchanges – with exchange rates between different currencies –
- If you want to learn more about this – if you haven’t listened did an episode called: Looking at the factors behind the AUD/USD exchange rate movements.
- However – In the current financial system - these currencies are a digital form of fiat currency –
- This doesn’t include alternative medium of exchanges that have been used and are currently used – like gold – or crypto –
- Technically – a medium of exchange is anything that can be used in an economic transaction as long as someone will take it – it can technically be treated as a medium of exchange
- But the major forms of what is referred to as Currency is meant to be the legal tender that makes trade possible – in other words – what governments allow us to use within our domestic boarders
- These forms of currencies are meant to make transactions easier within the economy – and for everyone within the economy – which is us
- If you are in Australia – you will use AUD to buy goods or services – if you are in the US – USD, if you are in Germany, you will use the EUR
- But is having 180 currencies of which 130 are floating exchanges complicating matters?
- If you wanted to travel to Europe – you can’t use AUD to buy goods or services – have to transfer AUD to EUR – vice versa
- this begs the question - Wouldn’t a one world currency be best?
- 180 different currencies with foreign exchange rates for each can and does increase the complexity of an already complex international economy
- So, wouldn’t replacing all of these currencies with just one global currency be the optimal solution?
- This line of thinking was the whole point behind the implantation of having a Euro in the first place –
- A single currency zone to make it easier to travel and do cross boarder trade
- it isn’t just about ease or simplicity for travel or trade – but was about minimising transaction costs –
- Banks charge costs and services – there are also risks involved with currency exchange risks which we will come back to in a minute
- So why not expand this concept further – beyond simply just being implemented in the EU – why not do it worldwide?
- Some at central banking communities as well as think tanks think so – Mark Carney, Bank of England governor, has proposed the creation of a global digital currency as a way of stabilising global financial systems and protecting international economies from trade and currency wars
- He has made these viewpoints widely known - Speaking at a US Federal Reserve conference - Carney said that a “Synthetic Hegemonic Currency” (SHC) governed by the public sector (governments) and backed by a number of central bank digital currencies could replace the US dollar as the global reserve currency, and that this would be preferable to the alternatives, such as the Chinese Yuan/Renminbi
- World already has a reserve currency = USD – maybe not for long – SDR (special drawing right) is essentially a SHC
- A global currency wouldn’t just be implemented overnight – it would have stages and steps – have to get a cashless society – then have digital central bank currencies – then use these as a basket of currencies to replace the global reserve – like the SDR – then eventually – unlike currently where an SDR can only be used by monetary officials – it may be implemented and used by the public at large
This sounds very nice in theory – I mean - Why not have one currency that everyone in the world works off?
- First – lets have a look at money actually is - In The Wealth of Nations, Adam Smith defines money by the roles it plays in society – there are three primary roles that it plays
- A store of value with which to transfer purchasing power from today to some future time – it retains its value -
- A medium of exchange with which to make payments for goods and services – i.e. people will accept it for providing physical goods or services
- A unit of account with which to measure the value of a particular good, service, saving or loan – i.e. it is divisible – or in other words- we all know the value of a $50 bill
- But these functions of money operate in a hierarchy
- There are many assets that people view as stores of value – like an investment, or property like a family home — that are not used as media of exchange
- At the same time – you can have an asset that can only act as a medium of exchange if at least two people are prepared to treat it as a store of value
- And for an asset to be considered a unit of account, it must be able to be used as a medium of exchange across a variety of transactions over time between several people – 1 house is not worth 1 other house – they will likely be different
- These levels of hierarchy really just point to the reality that money is a social convention that is enforced by the monetary officials by fiat – or government decree
- History of money – Humanity has evolved over time – from a very basic barter system to gold coins, to gold backed currency, to fiat currency to the modern era – where the majority of transactions are done digitally, or electronically –
- But these evolutions in monetary systems have undoubtably increased the ease of trade – as well as the possible amount of trade that can occur
- Image that we were back in bartering times – and you wanted to buy a pack of gum from the super market – should be less than $1 – if you have an apple – might be okay to do – but what if you only have a cow – that cow is worth much more
- Now imagine that you wanted to buy some goods that only another nation could produce – trying to send a cow across the world may actually cost more than the good you are purchasing itself – like some clothes off amazon
- But in addition – this barter or exchange of physical goods system created a situation where it was hard to store wealth in physical commodities – as many of these were perishable – be it apples, or cows or goats – created problems – perishable – may not lost a trip and have limited lifespans – you can’t save a bushel of apples for retirement
- This system did work okay in small communities – but on a global scale – there is a natural increase in the difficulties in carrying out an economic transaction – these difficulties are normally referred to as frictions in an economic sense
- Hence – global currencies are being looked at by monetary officials - And technically – global currencies aren’t a new thing – think about gold – it was universally accepted as a medium of exchange
- But this also had its complexities – or frictions – you had to transport the gold – which can be heavy and can be stolen
- there may be some pros to a global digital currency – ease of transactions – not having to worry about transaction costs for one - One of the best ways is to look at the previously and currently used systems –
- Examples of the EU – the single currency arrangements were established formally in 1999 – risks of dealing with foreign currency can be significant – due to currency spreads –
- Let’s look at a situation before this – Germany and France – say that Germany wants to produce some car parts and France is going to be exporting power to the German car plans – lets say that the deutschmark is the same as a franc – 1 to 1 – so the costs of power for the plant are the cost base for the production of the car parts – but now Germany goes through some economic shock – drops the deutschmark to be 1 to 0.75 franc - now – it is more expensive to produce car parts – then have to sell to France or other nations at a greater price – pushing up the costs for other nations but also making German cars less competitive – so someone might buy Italian cars instead
- The EU created a situation where this additional concern was removed – this was pretty nig as foreign exchange risks are a part of an international economy
So – beyond these eases of transactions and travel – what may be some downsides to these policies – as there are some major issues with a one world currency system – many of these can be seen with the EU as well
- Monetary control – and monetary policy - If you have a one world currency – who is in charge of this? Who determines the money supply, and what the interest rates should be?
- Looking at the economies of Greece compared to Germany is an example – Germany is a very stable county economically – Greece is not so much –
- Greece has gone through some debt issues – technically – nobody wants to lend to them as they are at a massive risk of defaulting – so if you are a Greek company or the government – looking to finance projects – you may normally be in trouble – however – the economic functions of bonds and FI have a solution to this – you get compensated more through higher yields on debts
- So if someone is going to be looking for investment – say the German government – and they are looking for lenders – they are economically secure – but the money is gong to be lent in euro – regardless of – the risk – the only return is now in coupon payments of debt
- So nations like Greece – which aren’t as secure – as Germany – all the debts are being issued in EUR – what happens then if Greece defaults? Creates a massive shock in the EU – saw this in the post GFC era – the EUR and global economy went through a massive shock – for a country that made up 2% of the EU economy
- So this form of monetary system – having every nations interconnected creates an increased fragility for the globe – rather than having individual floating currencies – where the collapse can be semi-contained to that one nation – all nations on earth have to soak up the losses – however – you may not know it is going on if everything I priced in the one world currency – it may just be represented in inflationary pressures
- Looking at the economies of Greece compared to Germany is an example – Germany is a very stable county economically – Greece is not so much –
- Trade – may create a beggar thy neighbour situation without even manipulating the currency
- If a country is struggling economically – then its currency should depreciate – this in turn makes it more competitive - This means it is cheaper to travel to or to purchase goods from – this is what should have happened to many EU nations – like Greece – where they could set their own interest rates and have their currency depreciate to attract investment or trade – however under the EUR – they couldn’t – so the road for economic recovery is very limited for them - Floating currencies tend to stabilise over time
- Imagine that the whole world is on this system – it would eventually create economic ruin for most of the world – with a few winners – like in the EU – Germany and France are doing okay out of the system – Greece, Slovakia, Czechia and Hungary as just a few – not so much
- Biggest question – who would control it? BIS or IMF?
- In most countries the currency is controlled by the central banks and the government – one controls the supply and the cost and the over enforces its use
- This wouldn’t be allowed under an international system – there would need to be a one world system of control of the currency and enforcement
- Why? Well what stops every country on earth printing trillions of dollars if this isn’t in place?
- With individual currencies this punishes the nation – devaluation of their currency – if it can’t keep up with the demand for their currency
- But if the currency is the only one that can be demanded – then what is to stop each nation – especially the poorer nations from printing all the money – it becomes a race to the bottom for everyone – the whole world may become a hyperinflated mess
- This leaves the other option – that one central power – like the BIS controls the printing of money – or the growth of credit –
- However – this has major downsides – What happened under the gold standard? Well nations would hoard wealth - System of mercantilism – countries hoard the money as a store of power –
- The idea that countries could achieve additional wealth through exporting more than it imports – in other words – current accounts of a country would increase and that nations wealth – in an economic sense would also increase
- So a country trying to game the system may be incentivised to limit imports and maximise exports - be it natural recourses – or food
- However – the real-world implications of this may be dire for the population
- Sure – economists and the politicians may be able to point to budget numbers –
- But it may create shortages of goods and services for the nation – especially in a world that is so reliant on other nations for goods and services
- The end result may be a restriction of trade – would hurt the world economy – which at the end of the day is us
- However – this has major downsides – What happened under the gold standard? Well nations would hoard wealth - System of mercantilism – countries hoard the money as a store of power –
- Also – what about the other rules and regulations that may come along with this
- Monetary policy - In the EU – the ECB controls the currency’s interest rate
- The other issue is who is in control of the policies – think about nation to nation interests
- If the head of the currency was someone who was Aus – would they do things that may be unfair to someone in south America
- Fiscal or trade policy – trying control the economic activity of each nation to avoid a situation like currency hoarding
- Monetary policy - In the EU – the ECB controls the currency’s interest rate
- Where we stand at the moment - many nations are moving towards a cashless society or a pure digital currency style monetary of system –
- I personally think this is bad –
- a one world currency is a long way off at this stage – but it doesn’t mean that many monetary officials don’t have there eyes set on this down the road in the next 10+ years
- At this stage it is not possible to do – in 10 years once the SDR is likely to be the reserve currency and most nations currencies are purely cashless – it becomes more possible - but it may not provide much in the ways of benefits – To have any benefit - The assumptions are that it is administered responsibly – that is a huge assumption – one that is almost laughable when looking at how a single nations currency is administered – between the cost of the cash rate and the amount of the money supply – now expand this by an order of magnitude of 195 – not just timing it by 195 – but to the power of 195 – as the complexity of the world economic system is enormous
- But in short – I think this would be a bad idea to implement – just my two cents – as greater controls over the economy often don’t lead to the intended outcomes
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition, every week answering your questions. This week we answer Stephen’s question:
“Hi Louis,
I saw an article about purchasing a home inside of a family trust for asset protection. I’m just wondering if you have seen this done before and if you think it is a good idea?”
Thanks for the question – this episode – look at purchasing your own personal place of residence inside of a family trust – and what the pros and cons of this strategy are - because in short – it is definitely possible to do, but if not done correctly – it can put you in a worse position
Quick note – I’m not a legal expert – if you are considering this – important to get expert advice on this – this episode will just be discussing the general gist of the concept – and potential ways to avoid some of the major cons
Firstly - What is a family trust – or discretionary trust –
- family trust refers to a discretionary trust set up to hold a family's assets – set up as a different owner of assets than someone individually owning an asset –
- On a family trust – you have the trustee which is the person that owns or controls the asset
- Corporate or individual
- the beneficiaries of the trust are the person(s) for whom the asset (e.g. a property) is owned –
- Have other entities like the appointer – power to add and remove the trustees -
- On a family trust – you have the trustee which is the person that owns or controls the asset
- A family discretionary trust is probably the most common type of trust if someone was wanting to invest in a property
- The trustee can use their discretion to distribute the trust’s income and assets to the beneficiaries, allowing the family members to take advantage of tax benefits
- It also provides asset protection – if you are a director of the corporate trustee – technically you don’t own the assets inside of the trust
- So you can own lifestyle assets like you own home inside of a family trust -
- Quick note -this doesn’t work for a SMSF – it is inside the superannuation environment and to hold any asset here – it needs to meet the sole purpose test –
- This is that any assets are for your retirement solely – so buying a property to live in inside of this structure breaches this and you cant live in it
However – there are some Issues and considerations that need to be made for owning a property inside of a family trust –
owning property in a trust for asset protection purposes will usually mean that you lose its tax-free capital gains status as well as creating land tax implications
- Not normally an issue for investment properties – as CGT is payable anyway as it is an investment given it gets an income
- However – losing this on a PPR could be a major deal – buying a home for $600k and then a decade later selling it for $1m may result in $200k of additional assessable income being taxed at marginal tax rates (getting the 50% CGT discount) – may result in around $94k of tax payable at the highest MTR
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Looking at the CGT exemptions - Can a family trust claim a CGT exemption for the principal place of residence?
- Technically – the answer is no - as the trust is not a natural person it fails to meet the PPR CGT exemptions – so normally if someone wanted to claim a CGT exemption for a principal place – this would fail and CGT would be payable upon the sale of the property –
- Even the ATO on their website have the following: Generally speaking, the main residence exemption does not apply to the sale of assets held by trusts, as a transfer of a CGT asset to or from a trust will create a CGT event. Therefore, transferring the title of the property from a trust to personal names will also create a CGT event
- ATO rules - Generally, if you are an individual (not a company or trust) you can ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence (also referred to as ‘your home’). To get the full exemption from CGT:
- the dwelling must have been your home for the whole period you owned it
- you must not have used the dwelling to produce assessable income
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any land on which the dwelling is situated must be two hectares or less, and
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you must not be an excluded foreign resident at the time the CGT event occurs.
- However – in the income tax assessment act - Paragraph 160 ZZQ12(a) requires that a dwelling be owned by a natural person
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And a family company or family trust is not a natural person for these purposes.
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However, where a beneficiary of a trust is absolutely entitled as against the trustee to the dwelling, an exemption may be available to the beneficiary if the dwelling is the principal residence of the beneficiary.
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So this means there is a way around this – but it can be complex and costly to achieve
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A Main Residence Trust can be created – it is like a discretionary form of trust, under which an individual is given a limited form of interest sufficient to attract the CGT Main Residence Exemption – in other words – the beneficiaries of the trust who reside in the property are given absolute entitlement
- To do this – in the trust deed – has to set out an equitable right of residence that is granted from the trust to a beneficiary
- But this needs to be sufficient to give an interest in the land that will attract the main residence exemption. Hence the term absolute entitlement
- Therefore - If the property is sold in the future, the sale can be structured so that the CGT exemption can be applied.
- Does this then fail the asset protection – i.e. the whole point of owning a property in the trust? Why give absolute entitlement if it can be taken away –
- Well – as a discretionary form of trust - provided that the trust deed is appropriately worded - no beneficiary can be said to have any interest in the assets of that trust – whilst they may have an absolute entitlement on paper – this doesn’t mean they have any financial interest in the property – or claim to the assets value – so this means that if any of the persons who are simply beneficiaries suffer financial calamity or are sued personally - the trust assets will not be available to satisfy the debts of that beneficiary – so if you get sued then the property can’t be used as collateral
- There is another way around this – if the trust deed hasn’t been set out correctly – and if the trust already owns the individuals main residences – to get the CGT exemption - a long term lease may be needed
- Some people see this as a suitable option to formalise the living arrangements and ensure access to the main residence CGT exemption if a sale occurs in the future
- Under a long term lease arrangement, the tenant obtains an “ownership interest” in the residence
- Have to specify this as ownership interest is the term is used in the capital gains tax ‘main residence’ exemption legislation
- To do this – in the trust deed – has to set out an equitable right of residence that is granted from the trust to a beneficiary
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Upon the sale of the property - the tenant (i.e. you) would be entitled to a surrender payment in return for the actual surrender of the tenancy
- This surrender payment would be assessable income in the hands of the tenant and provided that the arrangement has been properly structured and administered, would attract the main residence exemption.
- However - The value of the land upon sale would be reduced by the value of the long term lease
- So the total market value of the interests in the property would be divided between the land value and the lease value – and rent would be nominal so that the long term value of the lease to the tenant would be substantial enough to offset the assessable surrender payments – so no tax should be payable
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These forms of main residence Trusts and Long Term Leases can be difficult and complex to setup from a legal and tax perspective – may cost a few thousand dollars to set up and maintain each year
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The other issue is land tax – however – there are some ways around this – does vary state by state – so gain to get advice on this –
- But generally – If the land value inside of a trust is more than $350k in QLD, or in NSW it is a flat 1.6% of the land value inside of trusts – can get expensive
- So similar to the CGT exemptions - Trustees eligible for the principal place of residence exemption also include the beneficiaries who also reside in the property – QLD is pretty cut and dry
- Technically - The exemption is not available for land owned by a trustee of a discretionary trust, a unit trust scheme or a liquidator - However, concessionary tax treatment is available for land held by a trustee of a discretionary trust or a unit trust scheme which is occupied by a beneficiary as their principal place of residence – however the trustee needs to nominates that person as the principal place of residence beneficiary
- You have to nominate this with the government in each state however
- So as an example – if you have additional investments inside of the trust – and you list your children as beneficiaries for tax purposes – distributions
- If they move out – but are still beneficiaries – can run afoul of these rules
- Hence it may be better to set up a trust, call it the main residency trust – for the sole purpose of owning your PPR
So, in short – it is possible to overcome these two major downsides of ownership of property inside of a family trust – I have seen this done before – but there wasn’t much point to it
Questions to consider –
- How badly do you need asset protection –
- The asset protection that most family trusts provide is for external litigators of issues – outside of family
- It doesn’t provide protection against divorces or in the family courts -
- Is the cost versus benefits worth it – the upfront and ongoing costs can be, well, costly
- Have to look at the pros and cons for this – over a 20 year period it may cost you $40-60k to maintain the trust structure depending on legal and accounting fees – this is just an estimate – may be much more
- But these funds may be better spent paying off the debts
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. This episode is about a bit of personal story “Why I finally bought another property and if is this a good financial decision?”
- So – if the episode title didn’t give this away - I have recently bought a property – well - technically not true – we purchased land – and are building on this for a home to live in – so I wanted to share my story and thinking on this decision – hope it can help others who are in a similar position or thinking to myself
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To start – if you have been listening for a while – you may know I have been fairly bearish on property for the past few years –
- I have been talking about property over the past few years – based around the metrics – the financial aspects of property didn’t make much sense to me personally –
- Property in Australia is some of the most expensive in the world – when compared to household incomes
- Not the most expensive in the world -
- But when comparing Australia to other nations that also have very high property prices on average – one major difference is the amount of available land that we have compared to them
- It does change from region to region – city to city – for instance – Hong Kong and Singapore
- Both of these nations have very high populations – and very limited availability of land supply
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Most housing is high density apartments – if anyone has been to these places you would know what it is like
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Interestingly - China has started to emerge with a number of cities being in the top 10 list – but they have a massive population – and people have been moving into cities over the past few decades to look for work
- Process of urbanisation that most developing nations go through – Australia has certainly gone through our own form of this – where over the past 100 years we have gone from a situation where around 60% of the population didn’t live in cities – to now around 85% of the population living in cities
- But the interesting thing with Australia is that we don’t have that many major cities – especially when compared to our land size
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This comes back to our history – settlement style living only really started here over the past 200 years – unlike parts of Europe – or the US which was over 150 years before us
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So, this has left us with a situation of limited cities and with this – high demand for housing in one of these – especially Melbourne and Sydney – with limited supply of available land and high demand in a few major cities – prices go up
- We also have a high population growth rate – especially through immigration – so prices go up further – to the point there are affordability problems for many younger Australians
- I sold my last place in 2017 and have been renting since
- It just made financial sense – so I made the decision – invested the proceeds of the sale – moved close to the city and rented an apartment
- Didn’t keep much in the way of cash – except for some emergency funds -I don’t like cash –
- Especially at the moment
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I have been concerned about a property correction in Australia for a few years now
- There are more risks in the housing market and economy than there have been for many years.
- Household debt is extremely high and even a small rise in interest rates will put a lot of people under pressure, forcing many to sell and others to dramatically cut back their spending.
- This could lead to forced sales will see even more properties on the market – with the increase of supply – could see prices fall further
- You don't have to be an expert to see the clear risk of a downward spiral that could occur from a property slump –
- where increased interest rates could lead to lower spending, reduced spending leads to job losses, which leads to mortgage defaults, which lowers home prices, leading to even more spending restraint and defaults – becomes a quick downwards spiral – like what happened to Japan in the 90s or Ireland after the GFC
- Given that in Australia we have had an extreme run-up in household debt – and household debt to GDP at the same time – this has been reflected in increasing home prices – given that it comes from debt – and not real economic growth – increased the fragility of prices so there is certainly a high risk that Australia will experience a home price fall at some point – but when? Who knows – and there is no guarantee it will happen
- However – whilst some cities may be in a bit of a property bubble – but it doesn’t mean the whole country is
- And it seems like the Government and monetary policy officials are trying everything in their power to keep property prices high – so at the very worst – we may see a decline in property prices – but this mainly would occur within the over demanded regions
- Beyond this – there may be a stagnation in property price growth for a while – depending on the area
- So buying a home may be a surprising decision – was a hard decision to come to terms with
- May not have been the optimal financial decision – explain why soon – but was it the better overall decision? – well it was – as not everything comes down to financial decisions – there is more to life
- For the past few years – my wife and myself have wanted to become more self-sufficient –
- This is mainly a lifestyle goal – growing our own food – have some space - well that requires land –
- So we set some goals – to have at least an acre of land – around 5,000 square meters – if not more – so that required land a little outside of the city
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However – ideally it would be somewhere within around 30 minutes travel to the city –
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So we made the decision about 12 – 14 months ago – to look at buying a place that met this criteria – plus a few others – like having sewerage, NBN, power – etc
- Trouble was – at the time – we didn’t have much or really any home deposit – I don’t like holding cash – and everything was invested – but I didn’t want to sell investments for the purchase of a PPR – would set back my other financial goals – for passive incomes long term
- For the past 12 months – made a major goal to save enough for a home deposit –
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We set some goals – one was that I wouldn’t use investment funds to sell to cover the property purchase – but at the same time – it meant I had to cease investing for a while
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2 months ago – we found the perfect bit of land – met all of our criteria – good spot – river views and access – so we purchased a block of land – and are about to start building in the next few months
So is this the best or worst financial decision I have made?
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Doesn’t come down to financial – whilst the financial side does play a part –the primary focus has been on lifestyle with this decision – self-sufficient and space to start a family
- Come back to why this can actually help financially long term in a second – but for a personal place of residence – the major consideration is does it meet your lifestyle goals?
- No point buying a place to live in long term if you don’t like living there
- You may as well buy an investment property and have someone else live in it –
- Come back to why this can actually help financially long term in a second – but for a personal place of residence – the major consideration is does it meet your lifestyle goals?
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But then comes other considerations if the aim is for the property to be for investment purposes
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It did take me a little while to come to terms with the journey of purchasing another property
- One of the major considerations was not being able to invest cash over the past 9 months - has been really hard to do – seeing the markets go down and having a lot of cash lying around too some discipline to not deploy the funds into the markets
- The other thing that was playing on my mind – was if property prices will go down in the future –
- understanding how the property market works – having the growth being fuelled by interest rates and borrowing capacity – in other words, not real growth – it made me very apprehensive to buy property –
- However – when looking at the one saving grace for property – and how I view property prices – it is all about land – and not the property itself –
- It is important to distinguish between the two – when people talk about property – most of us take it as a package deal –
- You buy a home – or you buy property – most people don’t think about the separation of the land and the premises that sits on it – as each has a value component to it
- This line of thinking can be a little easier when looking at apartments versus house and land
- For an apartment – you are essentially just buying the property side of it – with technically no land
- So coming back to the question – of if buying land to build a house was a bad financial decision –
- What makes property prices go up? Demand and supply –
- Demand – comes from individuals’ capacity to buy property –
- Supply – this can be two-fold in property – where you can have high residential – and low residential – difference is the number of properties and the forms that they are in
- I guess technically it can be – Singapore or Dubai are two examples – but this is very expensive to do – so it doesn’t lead to a decline in prices – but apartments can be
- Think about the number of apartments that could be places on 5,000 square meters of land – a few hundred if it is 10 stories tall – so all of a sudden – you go from one home on the land, to maybe 300 – this creates a situation where the supply is greatly increased – reducing the prices –
- So if you are questioning buying a property – ask yourself the following
- Is it affordable - this means thinking carefully about how secure your employment is, and if your budget can maintain repayments not only at current rates – but if rates increase – may create affordability issues
- In addition – you have to think if you have the capacity to maintain repayments for several months if you did have to look for a new job
- How long you plan to live in it – if you are planning to live in the place you buy for the long term – and it is affordable – this helps to reduce the uncertainty of the decision
- If this is the case - then even though you may not get it for the cheapest price, you'll probably find it is worth at least as much as you paid for it in a decade's time – the whole point of buying a PPR is to live in it – but it doesn’t mean that you want to lose money
- On the other hand – if you plan to live in it for a few years in the hope that there is capital appreciation and sell in a few years – it may not work out financially
- Why? The entry and exit costs can eat away any returns – buying a property has stamp duty – selling a property has agent costs – plus the moving costs and additional costs that come along the way
- What is the land to house price ratio?
- For me this is a big one – land can’t be artificially increased
- But this is all on the home itself – the land is still as valuable –
- This is all about thinking long-term and planning cautiously
- Not the time for excessive risk-taking
- And this doesn't mean buying now is for everyone – because it never will be – however if it is part of your financial goals – you have the funds available and it is affordable – then the correct decision is to buy
- Plan to use a property to build wealth - Strategies – Use the property as a forced savings tool – Accumulate funds and then borrow on a second loan for investment purposes –
- Have a goal set out – putting away funds each month
- I’m excited to get back to investing – but have a goal and a strategy in mind
- Spend the next 12 months to continue to pay down the debt – knock down hopefully $100k - refinance – and introduce a debt recycling strategy
- For me this is a big one – land can’t be artificially increased
- Is it affordable - this means thinking carefully about how secure your employment is, and if your budget can maintain repayments not only at current rates – but if rates increase – may create affordability issues
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition.
In this episode – we will be going through the potential changes to the current Responsible lending laws that may occur next year – as these laws will either be watered down or completely removed -
- As it stands - The government has plans to reform responsible lending laws to reduce “the cost and time it takes consumers and businesses to access credit”
- These proposals are part of the Federal Government’s economic recovery plan - to allow people to borrow more money without having to meet the current eligibility requirements – like serviceability of loan repayments
- So there are likely going to be some pros and cons to this – both for the individual and the economy at large – so lets break this down further
To start with - what are the current responsible lending laws in Australia
- These are set out in the The National Consumer Credit Protection Act 2009 – these laws went into place after the GFC – to try and avoid a situation like what the US had with their lending environment – where people who couldn’t afford loans were still given them – it is a system of greater individual responsibility where it required individuals to assess their borrowing capacity – but ASIC stepped in as part of consumer protection
- It went into force at the start of 2010 – and it outlines and legislates how lenders (such as banks or credit unions) must act when they are assessing loan applications
- Essentially, it means a lender must only give a loan if it is suitable for the borrower. Importantly, the existing rules put the responsibility on the lender to ensure the credit product is suitable
- Whilst this was in legislation – it wasn’t really enforced well up until the start of 2017 – and things started ramping up in 2018 and 2019 – as Banks were forced to start Looking at actual expenses – forced by ASIC
- introduced changes to the National Consumer Credit Protection (NCCP)
- Regulatory Guide 209 ‘Credit licensing: Responsible lending conduct’ (RG 209)
- RG 209 does stipulate – basics - source of income, fixed living expenses (rent, repayment of existing debt) and variable living expenses (food and utilities),
- Also - “reasonable inquiries” into Entertainment, takeout, alcohol, gambling, tobacco, ATM withdrawals – however these reasonable inquiries In the past – Went off the HEM benchmark
- Looked at where you lived, single/couple/kids/etc, income and estimated expenses based on categories of lifestyle – Student, Basic, Moderate, Lavish – what would most people say is their expenses? Average – basic is the average right?
- Example – couple living in a major city with combined incomes of $160k p.a., assumed monthly expenses are $3,060 p.m. – Any annual earnings above $240k p.a. – Expenses capped at $4,040 p.m. assessment
- The new assessment that started around 2018 started to reduce borrowing capacity - ANZ economist estimated that household borrowing capacity has been reduced by about 30% due to increase in requirements on the banks in the past few years – but then the banks hurdle rates for assessing servicing got changed from the standard of 7.25% to 2% above the current variable rate – so at this stage around 5.5% or so – changes from bank to bank – helped to rectify things a bit
- So the banks still need to make reasonable inquiries and verify their financial situation
- the government has decided it’s time to amend regulations again in a bid to reduce red tape and increase the flow of credit –
- Some of the justification for this is to try and boost economic growth – but will it? Time will tell – but it probably will at least help property prices – come back to this
- So how exactly could the responsible lending laws be changing
- The proposed change to the law would see responsible lending obligations removed from the Act - if passed by Parliament – it would come into effect from March 2021
- Around the same time as the bank holidays would be ceasing on a lot of households – as well as the jobkeeper and seeker payments
- The plan, according to the government, is to remove the obligation on lenders to ensure that loans they issue are suitable for their customers
- This is primarily on the mortgage side of things – where there is collateral if the borrower defaults –
- This isn’t going to be updated for smaller amounts of credit or consumer leases – so things like credit cards, personal or pay day loans
- Ironically - the government actually plans to strengthen the legislation to protect consumers from what they call predatory lending practices of debt management companies around the same time – so personal loan or pay day lending companies
- However - for those borrowing money on property – these changes would implement what could best be described as a “borrower responsibility principle” – as lenders would be able to rely on the information provided by their customers and lend based around this – rather than conducting their own reasonable investigation
- This is primarily on the mortgage side of things – where there is collateral if the borrower defaults –
- Whilst these laws may get watered down - the government has stressed that some of the other existing lending obligations on banks - such as APRAs lending standards are going to remain in place and actually expand to other types of lenders
- Most of these APRA standards relate back to the Basel regulation – particularly Basel III – which has the capital adequacy requirements – actually went through this a few months ago in an episode called “Why do banks seem to have the ability to lend never ending amounts of money?”
- This could have an implication for some ADI and non-ADI lenders – the big 4 can easily raise their capital adequacy requirements – issue more shares, or capital notes, or keep more reserve requirements and lend less to businesses to reduce the portion of their RWA – while increase their tier 1 capital – but other non-listed lenders may struggle to keep up with these requirements
- But the major changes of removing the responsible lending laws is a big one – so what does this mean for home loan applications?
- Creates a new environment on how Australian borrowers are assessed – due to the potential relaxation of these laws – the responsibility for lending is in the individual’s hands
- Technically it always has been – if you default – you are still responsible – however the bank used to try and avoid a situation where you would default – by assessing your ability to repay your debts
- These laws in practicality could be a shift back to more of a HEM style system – rather than banks going through your CC or bank statements line by line – it could go back to a rough estimation based around what the borrower tells the bank they spend
- If this is the case – the individual will need to be responsible for getting this right – you could always under estimate what your expenses are – but this may just hurt the borrower – if you can’t afford the loan repayments
- Whilst the banks won’t entirely cease their responsible lending obligation – they ideally wish to lend money
- There are some pros and cons to this –
- The pro is that individuals can now borrow more without jumping through the banks red tape – the con is that now individuals can borrow more without jumping through the banks red tape – this could be a double-edged sword -
- This could have major ramifications on the individual but the property market and the economy at large
- There has been a fair amount of backlash over this change – especially from some consumer advocacy groups – saying it “will cause harm to people and the economy”
- There was a joint statement you can go and read released by CHOICE, Consumer Action Law Centre, Financial Counselling Australia and Financial Rights Legal Centre – in this they said that these changes would open up “new opportunities for banks to aggressively sell debt” – so the concern is that banks will push people into borrowing money
- But there needs to be buyers out there for someone to sell to – this is the major issue of these changes – if there is no individual responsibility, then this could lead to ruin for many families – and set off
- If people lived within their means – then it will just be easier to get the correct level of finance
- It can be temping – property prices are high – so more debts are needed
- But consumer protection is twofold – the government can try and protect you – but at the same time – the end responsibility does lie with the individual as they are the ones that suffer the consequences – consumer advocates say that weaker lending standard will mean people will be loaded up with as much debt as possible – but this implies that banks will be forcing people to borrow this money – sure, banks will lend as much as possible – it is how they make money – but they need willing people to take on this debt
- At the moment where we stand as a nation – and the world at large – is that the major problems most economies face is too much debt – so this police has the potential to further this problem – but again – only if individuals choose to do so – and take out additional borrowings
- More debt – especially if it gets to unsustainable levels can hurt the individual if they borrow too much – or if interest rates rise in 5-10 years’ time
- Banks unsurprisingly are loving these changes – less administration for them and they can also lend more funds
- CAR isnt really an issue for them –
- Bank share prices have responded well to these changes also – following the initial announcement
- The banks do say that they are still going to only lend to borrowers who can meet their financial obligations
- When looking at the mortgage broking industry – they have Best Interest Duties coming in next year – so they will need to conduct an investigation to assess if the loan is right for a consumer – where they can be legally liable if not based around ASICs determination – however – it will be good for banks which don’t have a best interest duty –
- The proposed change to the law would see responsible lending obligations removed from the Act - if passed by Parliament – it would come into effect from March 2021
Things to watch out for – just because the bank will lend you money – doesn’t mean you should take it
- There is little doubt that the removal of responsible lending obligations should make it easier to get a loan – if these changes come into effect in March 2021
- So you would think that it may be easier for first home buyers to buy a house – however – not if property prices continue to rise
- Whilst it may be easier to get a loan – the size of the loan may be a problem – as more people will be able to borrow more – and those borrowing will flow into property – pushing up prices
- For property prices – if people can borrow more – it creates additional borrowing capacity and with it – greater levels of property price growth – in the short term – unless people start to default
- So, more competition and larger loans leads to a situation of higher home prices – so even if you can get a property – the repayments due to the size of the debt may be larger –
- You may be able to borrow those funds – but will it help you long term?
- This comes back to the broader economic problems that Australia and most of the world currently face
- Australian households are already heavily indebted - the second most in the world after the Swiss and slightly ahead of Denmark
- This could yet be another method of kicking the can down the road – creating a further bubble in property and one that could lead to wide spread economic woes –
- If people borrow a lot more – and actually cant afford this – if interest rates do rise – then we may see our own form of defaults – like a mini-GFC-
- Banks may be in trouble then if property prices as collateral don’t recoup the losses on the defaults on the loans – as may be the case if prices drop 20% or more
- But with their CAR and the bail in laws – as well as the bail out laws – banks will survive – but the wide spread economic collapse and shock to confidence as well as a lack of consumer spending during this time could create a major economic downturn
- In an ideal world – it is nice to say that those who borrow will be responsible for their levels of debt – as if people borrow within their means then this wouldn’t be a problem – and it may never be if interest rates remain at near 0% for the foreseeable future – but some further economic shocks could create a situation of defaults on unaffordable debts
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition. This episode is all about answering the question – “What is going on with the US election?”
- You might think that there is a simple answer – that Biden is the president elect – hard to think he isn’t when we have the media calling him that so it must be true, right?
- Well he isn’t - to be clear – Biden has won nothing at this stage - whilst he has been called president elect by the MSM – and the associated press has called the election for Biden – this is rather deceitful – it isn’t up to them to call
- At this stage - unless a candidate concedes - the election remains in play until December 14th when states cast their electoral college votes and each secretary of state certifies that the vote is valid – all of this could end up at the Supreme court to decide – if this happens Trump has a decent chance of winning
- but until they weigh in – there should have been no official declaration of the election results –
- Again – whilst the media has called it – it is not up to them – but the media is trying to get it into people’s mind that biden is the president elect – even though he isn’t
- Biden even gave a press conference in front of a sign of the Office of the President elect – this office doesn’t exist – his PR team must have printed it out –
- So to recap - unless Trump concedes between now and mid-December – which isn’t likely - Biden hasn’t won anything, no matter what the media tells you
So with this in mind – lets take a step back and assess what has occurred with this election and how it may play out from here – based around the legal standings and not just the media’s spin
- Because based around the presidents that exists due to previous dodgy elections – and there have been many – regardless of what you might be told - it is highly possible that Trump will end up winning the 2020 Presidential election
- At the moment - the MSM is trying to get people to ignore the voting irregularities not only with this election but past elections in the US -
- There have been few times in the past where an election has swung in the opposite direction from where the media has officiated –
- election of Truman was one – in 1948 Chicago Tribune ran a headline that Dewey Defeats Truman – which turned out to be not the case once the election was decided –
- as well as the 2000 election between Bush and Gore – where votes in Florida were thrown out due to them not meeting the legal requirements – which flipped the state and Bush turned out to win – as well as many cases in the US gilded age
- So what is going on with the 2020 election – First it is important to know how the US election system works –
- It is based on the Electoral College – not a popular vote –
- The Electoral College is the group of presidential electors required by the Constitution to form every four years for the sole purpose of electing the president
- Each state appoints electors according to its legislature, equal in number to its congressional delegation – where each state has a different number of electoral votes – Georgia has 16 votes, PA has 20, Texas has 38, CA has 55 – in total there are 538 electors and to get an absolute majority - 270 or more electoral votes are needed
- Why does this matter? Well – Biden is 20 votes above the majority – but the results of 6 states are currently in question - Georgia, Pennsylvania, Nevada, Wisconsin, Michigan, and Arizona – where the margins are very close and some irregularities have occurred – this is 79 votes in total –
- What are the claims – that voter fraud occurred – but this doesn’t exist – but election fraud does – every election likely has some element of fraud to it or at the very least – glitch related
- The Heritage foundation has 1,298 proven cases of election fraud – with 1,121 individuals being criminally convicted, with the rest being convicted in civil court –
- There may have been fraud that occurred this election – but at the very least there are irregularities – despite what the media is saying – many have been proven
- Lets go back – on the night of the election – Trump was ahead by what appeared to be an insurmountable amount in Michigan and Pennsylvania – 8 points or hundreds of thousands of votes, was up by more than 600k votes in PA in a state with 6m total votes with 85% of the votes counted – he also had a massive position across Georgia, Wisconsin – again – what would be considered enough to be called – as many other states with that margin had been called for Biden – like WA, NY, CA ,etc.
- Then overnight – when the poll counting was meant to be closed – the gaps all of a sudden disappeared and by the end of the next day of counting – these states had flipped –
- This alone is a possibility – mail voting results did favour Biden – but in the states with the strictest vote counting requirements – especially when it comes to mail in ballots – like Florida – which had Biden slightly wining – ended up being off by 4 points of 400k votes
- So this turn in the results did raise some eyebrows -
- Election integrity is important – we will go through a summary of the claims soon – but I would think that if an election’s results are in question then this should be taken seriously –
- There are recounts and audits in states that account for 79 votes - to determine if votes that were received after the election deadline were counted as well as verify the results –
- underway in Georgia, Pennsylvania, Nevada, Wisconsin, Michigan, and Arizona - Any one of those states could see Biden end up losing – if he loses even 10,000 votes in some of these states due to some technicality – like the ballots arriving after the deadline - Trump could be declared the winner
- The BBC did a good article about “Vote Rigging: How to spot the tell-tale signs” back in 2016 –
- These include- there are too many votes, you have a high turnout in specific areas, large numbers of invalid votes, results that don’t match, delays in announcing results – keep these in mind as we go through the irregularities that exist -
- There are recounts and audits in states that account for 79 votes - to determine if votes that were received after the election deadline were counted as well as verify the results –
As there are many irregulates – too many to run through in detail but I will give the overview –
Many oddities – hundreds of signed affidavits across these states – republican poll watchers were turned away from viewing the electoral process – where each side and an independent is allowed to view the counting of ballots – however they were turned away once the next day counting of votes started across the country
- In Pennsylvania, Michigan and Georgia, poll workers were caught on videoexpelling poll watchers despite knowledge of a court order preventing them from doing so – this is part of the lawsuit filed – because this raises the obvious question — why don’t they want anyone watching them? They boarded up the windows from letting anyone see in – and even after the courts then ruled that this was illegal – they did let the poll watchers back in – but they were only allowed 6 feet from the poll tables positions – so they moved the voting back 10 feet – it does sound suspicious –
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There were also a number of dead people apparently voting – similar to what happened in the Nixon election – these were enough to change anything – but a lot of these dead people passed away weeks if not years before they would have received their ballot
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Dominion voting system – either through software glitches or through human interference - 6,000 votes were flipped from Trump to Biden in one county in Michigan – this is true and has been verified
- Under state laws – Michigan and the other states that flipped from Trump to Biden don’t have any regulations that forces individuals to look at the computer tabulations compared to the paper ballots that they came from for verification purposes –
- Now – 6,000 votes might not sound like a lot – and you are right – when compared to the popular vote – but this repeated in two or three counties could flip one state – adding 10-20 votes to one candidate – that is where there are razor thin margins in some of these states
- Also - in one county in Wisconsin - 19,500 votes were switched from Trump to Biden in another so-called glitch -Then there is another similar “glitch” in Georgiathat saw an unspecified number of votes go to Biden that were once again meant for Trump
- Can you see the pattern here? These could have all been mistakes or technical difficulties – however every glitch seems to be going towards the Biden camp – because as it stands – I haven’t been able to find one report of a glitch going in the opposite direction
- Votes counted and turnouts – This election saw the highest number of votes in US history – Biden got more votes than Obama – this is a little surprising – but it can be explained by the hate for Donald Trump when compared to the support for Biden – as that was hard to see anywhere
- However – there are some irregularities between historical turn outs in some certain swing states that ended up turning Biden - One example of this is 90% turnout in the State of Wisconsin – which would not only be the highest level of turnout in American history
- In comparison – this was close to the 92% average that we get in Australia where voting is mandatory
- The interesting thing is that voter turnout has historically been 60% in this state
- However – there are some irregularities between historical turn outs in some certain swing states that ended up turning Biden - One example of this is 90% turnout in the State of Wisconsin – which would not only be the highest level of turnout in American history
- Under state laws – Michigan and the other states that flipped from Trump to Biden don’t have any regulations that forces individuals to look at the computer tabulations compared to the paper ballots that they came from for verification purposes –
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Wisconsin isn’t alone -
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Compare this turnout to Cleveland in Ohio, a culturally comparable city but with much stricter rules in counting votes – this had a 51%
- This is an important city to draw a contrast with Milwaukee in Wisconsin – which saw an 84% voter turnout – because both are a Democratic stronghold, have similar demographics – the only major differences are the legislation and enforcement for counting votes –
- Ohio has historically been the king maker of the US – no president has won the election without Ohio in 14 elections, dating back to 1960 – where there was again a lot of irregularities between Nixon and JFK – however biden bucked this trend in 2020
- Because when you look at other swing states – like Ohio or Florida that are contested were in line with their historical voter turn outs around 45% and 77% respectively (2% more than in 2016, or 2008) - But not 30% more than the historical average in turnout that was seen in the states that flipped to Biden over the days following the election – which does seems statistically improbable
- In addition - A broad study conducted by Judicial Watchfound that 353 counties across 29 states had turnout exceeding 100 percent of registered voters. Eight of these had turnout exceeding 100 percent across the entire state: Colorado, Maine, Maryland, Michigan, New Jersey, Rhode Island, and Vermont – all blue – this can be explained by people moving and not updating their addresses – however it is still a large gap to make up
- This study was limited to 37 states publishing their voter registration data. This means that, of the 37 states that Judicial Watch had access to, 78 percent of them had turnout exceeding 100 percent.
- Discrepancies between votes for the senate, house and the president –
- Normally about the same – however – there is some suspicion based around the number of comparative Biden-only ballots – Unlike here – in the US they vote for all levels of Government in the election – house, senate and the president
- In this election - Tens or hundreds of thousands of voters marked their ballots onlyfor Joe Biden – not it is not unusual for people to take an outsized interest in the Presidential election – this occurs in most elections across all states – where the president gets more votes than say a senate cantate – however – what is unusual is the magnitude and in which states this applied - 450,000 people only voted for Biden with no other votes to other party members in a handful of swing states
- Let’s look at Georgia - In Georgia, there was only a difference of 818 votes between Trump and down ticket Senate races – historically in line with the margins – however – Biden received over 95,000 more votes than the Dems Senate candidate on the ballot
- deep red states like Wyoming did not see a massive number of Biden-only ballots - were a mere 725 more votes for Biden than the Democratic Senate candidate in the state
- In total – there are five states with very abnormal levels of Biden-only voting - Pennsylvania at 98,000, Georgia with 95,000, Arizona with 43,000, Michigan with 115,000 and Wisconsin 63,000
- Where this gets even more interesting is when comparing this to the Senate and House results - It just seems weird that republicans won seats off the Dems in the house and likely kept a majority in the senate – but yet lost the presidency
- Republicans won 28 out of 29 competitive House races and flipped three state legislatures, but were somehow unable to win the presidency –
- To put this into context – apparently Joe Biden receive more votes than Barack Obama - who had a clean sweep of both house and senate in 2008 – but Biden was unable to flip a single state legislature and the Dems lost seats in the house and failed to get the predicted majority in the Senate
- Late Mail in ballots being counted (technically illegally against state laws) – after the deadline of 8pm on November 3rd
- Claims and witnesses and as well videos of late mail in being received – whistle blowers from USPS saying they were order to take all ballot in – even if they were received the next day – this goes against what is allowed
- This is all here say – so to be taken with a grain of salt – but it could confirm the vote count irregularities
- However - the US Supreme Court’s Justice Alito passed an order that the State of Pennsylvania to segregate any ballots that arrived after 8PM on election night – of which there were 10s of thousands – so this could easily flip the state back to Trump – as it did with Bush in 2000 – if it does – Biden has a bare minimum of 270 – so if one more state flips back – then Trump wins
- Claims and witnesses and as well videos of late mail in being received – whistle blowers from USPS saying they were order to take all ballot in – even if they were received the next day – this goes against what is allowed
- Lets go back to the BBC article about the tell tale signs of a rigged election - there are too many votes (check), you have a high turnout in specific areas (check), large numbers of invalid votes (based on the computer glitches), results that don’t match (check – based around the senate, house and legislative results), delays in announcing results (check – didn’t call the states trump was ahead in for days) – so based around the BBC in 2016 – there are some signs that the election was rigged – but I guess this only relates to African nations – as now they turn a blind eye
- I bet that you probably haven’t head of any of this – there has been some massive suppression of claims of election fraud –
- Go back to 2016 – claims were made openly that Trump stole the election – he was a Russian asset – and that the Russians were somehow voting in the election – this was fine to report on at length
- But this time around – even though there are some irregularities which should be questioned – be it just computer glitches – or electoral fraud – this time around you cannot question it – if you do you are a conspiracy theorist and you get blocked on Twitter – even though Trump being a Putin puppet was a massive conspiracy the media perpetuated on the people of the world for over 3 years – where a lot of people still believe this
- Normally about the same – however – there is some suspicion based around the number of comparative Biden-only ballots – Unlike here – in the US they vote for all levels of Government in the election – house, senate and the president
In summary - Trumps still has a chance to win – It is a possibility – might be small now – but the media is setting up the narrative – that if he wins it will be a coup
- Regardless – things are going to get messy – Either Biden wins – or trump wins – but either way 50% of the US population won’t accept the results –
- This is bad – as it is the breaking of the country further – it was already divided – people may blame trump for this – but who gives him the image that he has? He doesn’t do a great job himself – but remember – he isn’t a life long politician – he has been a businessman in the services industry his whole life – from hotels, apartments, golf courses, restaurants – all about providing a service and selling these services – he is a braggart – and speaks in platitudes – which is where his lies come from
- But since when did personality matter for the outcome of the people? As long as a leader creates a good outcome – does it matter he hits twitter at 2am spouting off some misspelt tweets – the MSM would make you believe it does
- He may be hated as a person – and this is understandable - but he has provided a good result for the American people – whilst at the same time being the focus point of the MSM and powerful tech monopolies to divide the population through pointing out his personality flaws
- But back to the election - I personally think this result may come down to the Supreme Court’s justices – which are currently 6-3 Republican to Democrat - Roberts may absolve herself – but the conservatives still hold the 5-4 majority – especially with how Joe Biden stood against Clarence Thomas – the second African American to ever be nominated to the court
- the ultimate arbiter in court rulings on elections favours Trump – doesn’t mean he is certainly going to win – but provided he doesn’t concede - the odds do favour him for winning a second term – will find out come December 14thwhen states cast their electoral college votes and the supreme court makes a ruling
I hope this helped to clarify things.
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Resources –
https://www.heritage.org/voterfraud/#choose-a-state
https://www.bbc.com/news/world-africa-37243190
Welcome to Finance and Fury. In this episode I want to discuss and clarify the concept of needs versus wants – especially in relation to spending habits
- Needs and wants - Each of these terms can be very subjective – as what is a need for one person may be a distant dream, or simply a want for another – where they have no means of actually achieving the essentials of another person
- So in this episode – we will go through how to discover and clarify the differences between what your wants and needs are
- The aim of this is to help quantify spending habits – helping to explain the differences between essential and discretionary spending habits
- Again – what is someone’s essential spending habit may be a distant want, or what would be considered incredible discretionary expense for another person in a different situation – or with different goals or life focuses
First – lets look at some different ways on how to then define these terms – of wants and needs
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When talking about wants versus needs – this could often be discussed as essentials versus discretionary spending –
- However - Here is where things get murky – One person’s essentials could technically be another person’s discretionary spending
- Not everyone will be the same – whist the general classifications for these types of expenditures may be similar – we are not
- Essential expenses are expenses that are required for living – In addition, essential expenses may be broken down into fixed expenses and variable expenses
- Fixed Expenses - are expenses that are the same each month. Examples include rent or mortgage, car payments, car insurance, property taxes, home insurance, and school costs.
- Variable Expenses - are expenses that vary each month. Examples include car maintenance, gasoline, food, electricity, heating gas, phone, etc.
- Non-essential expenses, or discretionary expenses are the extra things you spend your money on
- Non-essential expenses include most of the things we technically don’t need, and most often includes many items where we can waste money the most
- But these definitions are so vague that it is hard to quantify exactly what should be essential and what is non-essential –
- Or said in another way – what is an essential for your cashflow expenses and what is discretionary on top of this – and what could be better spent elsewhere – such as paying down debt, or investing to build towards financial independence
- This is important to clarify as soon as you can – it can help to reduce your discretionary spending habits through life –
- There is a thing known as the hedonic treadmill – this is where if you derive happiness from spending habits – which is very easy to do – you may be stuck on a treadmill that is constantly increasing in speed – which eventually – regardless of your fitness you may struggle to keep up with the speed at which you are running
- To look at this further – if you start out your career and are earning $50k p.a. – you might be going from earning nothing – now all of a sudden – you can afford somewhere to rent – might be with some room mates – as well as buy some new clothes – go out and have dinners and some nights on the town – by the end of the year – your $50k after tax, which is about $43.6k p.a. may be all gone – so no savings left
- Essential expenses are expenses that are required for living – In addition, essential expenses may be broken down into fixed expenses and variable expenses
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Then next year – you get a pay rise – to $60k – which is $50k post tax – you realise you have more money – so you move out into a place with no roommates so you are covering the full rent – you go out to fancier dinners which cost some more money – now at the end of the year – still no savings –
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Repeat these habits for a while – say 6 years in the future you have done well in your career – and you are on $120k gross income – or about $88k net of tax – you all of a sudden are living in a much nicer place – eating the best foods, having a nice place to live, going on holidays regularly
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The question is – are you any happier? The answer is normally not – you do have a better quality of life when measured by a consumeristic point of view – but after a certain point – does spending $200k on a dinner benefit you more than spending $30?
- From a point of perception, it may – that is where we do attach a higher value things that have a greater cost to them – our brains ways out of feeling cheated from spending hundreds of dollars on food and a few drinks when we could have achieved the end result – i.e. being full and a little drunk for $40
- Think about it – someone might think that they need an income of $200k p.a. to cover essential expenses – or in other words – to meet their needs – as this is their accustomed lifestyle – as opposed to other individuals who only require $30k to meet their needs
So – how to get off this hedonic treadmill and help clarify and cement what your essentials and non-essentials are – to help you move forward in financial independence – as if you constantly spend what you receive in income – you may have a much harder time of this -
Typically – essential spending is broken down into the following
- Essential elements to your life – and the spending that goes along with this would be considered essential spending
- Housing – the cost of maintaining your residence – this could be either in the form of your PPR – through mortgage costs and other expenses – or alternatively rental expenses – but everyone needs somewhere to live
- Food – the cost for you to feed yourself and your family
- Clothing – what are your expenses for maintaining yourself to be clothed
- Transportation – car costs, insurances, fuel, insurances, etc. – or public transport – most people need to be able to get around
- Covering bills – internet, phone bills, power, water, etc.
- Education costs for children – pretty simple one – the tuition costs as well as the additional costs like books, extracurricular activities – and the like
- However – getting into the philosophical side of this concept – are each of these things truly essential to you? And how much would you consider is needed to be spent on this?
- For housing - everyone considers different levels of housing to meet their needs – hence everyone has a different concept of what is considered an essential cost in housing
- If you were choosing to be homeless – then your essential expenses on housing would be pretty much zero
- Or if you think that a 10 bedroom home is essential – then your expenses would be much greater than someone who lives in a one bedroom apartment
- For food – the essential cost for this can vary significantly as well
- Technically – you could live off a bag of rice and a few vegies each week – maybe not so well – but many people around the world sustain themselves in this way – when compared to buying $30 steaks and gourmet meals for each night of the week
- Super market expenses versus dining out – I personally would quantify dining out as discretionary – but other individuals consider food costs essential – regardless of where the cost is accrued
- For clothing – here the lines get blurred between essential and discretionary further –
- Most people cant go around naked – but what is the difference between a $3 shirt at kmart versus a $90 shirt from a brand store? Again – one person would consider the $90 tshirt as essential
- Here the lines get blurred further for work attire – in society there is the need to look professional in a lot of roles – I know that I need to in mine – but there isn’t much of a difference between a $400 suit and a $4,000 suit – except when you look on the inside at the label
- For transportation – Some people consider cars as essential – which for most people they would be – however what type of car?
- A porche or a mazda? Both form the same sort of function – getting from point a to point b – but there is a massive cost difference in getting there depending on the type of car that you occupy – as well as ongoing costs through insurances and running costs, like maintenance
- For housing - everyone considers different levels of housing to meet their needs – hence everyone has a different concept of what is considered an essential cost in housing
In addition – the discretionary expenses can vary for people –
- Non-essential expenses – such as entertainment, holidays, gifts, general spending – some might consider these as essential expenses whilst other consider them to be non-essential -
By now – I hope the point has come through that everyone is different – and hence – so are there perceptions of essential and non-essential/discretionary expenses – so how do you narrow this down for yourself?
- But a better question to ask – may be What is essential for you?
- This will be based around your financial and lifestyle goals – if you don’t know what your goals are – especially financial goals – then your spending habits can get lost in the here and now pleasures –
- If you have no end goal of needing to save money, or invest disposable incomes or direct this to pay down debt – then there are technically no negative consequences in there here and now to go out and spend $200 on a night out – what else would this money be used for? Sitting in a 0% interest account? Well why not spend it now in this case? It helps to maximise your utility or satisfaction in the short term – so it may rationally be the best decision to make
- However – if you have better use of these funds in your mind – such as your long term financial independence – or helping to pay off additional debt – or something that has a greater opportunity cost attached to it when compared to simply spending it now on a good time – well then you can help to quantify spending habits better for your own best interest –
- How to help achieve this – you need to have your goals –knowing how much you need to put away each month towards debt repayment or towards financial independence – either SS to super or placing into a monthly investment
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Outside of this – you will have money left over – for these funds – how do you decide where they should be spent?
- Come up with a list – for each of these major expenditure categories - housing, food, transportation, etc – what would you be happy with spending based around where you are at now?
- Is this meeting your long-term lifestyle goals?
- If you are starting out on your career – you might aspire for more than living in a share house with 4 other people and driving a $4k car – which is perfectly fine and reasonable – however – what would you be happy with?
- Come up with a list – for each of these major expenditure categories - housing, food, transportation, etc – what would you be happy with spending based around where you are at now?
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Setting benchmarks helps to avoid a situation where you end up confusing essentials to non-essentials – or mixing up your needs versus wants –
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Go through each category – how much do you need to spend on housing to meet your lifestyle goals?
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Another question to ask - Is if these needs are achievable? You have to work within reality
- We could all say that we need a Winston Churchill gold toilet – but this would be a little delusional – so it is important to work within reality
- Having a clear idea as soon as possible on what is an essential expense versus what is non-essential is really important
The major point of this is to avoid a spending creep as your incomes increase – this is the first step = through defining what is essential to you and how much should you be spending on this
- Helps to avoid the hedonic treadmill – or the adjustment back to a baseline of satisfaction gained from additional spending
- The only wait to avoid wasting money is to do this as soon as possible – before the spending creed kicks in –
- Once this does – and your spending habits increase – it can be much harder to take away from these habits than it is to avoid increasing these habits
- Once a habit is formed – almost impossible to get rid of it – the best way is to rewire it –
- So it is better to get into the habit of spending money on your future self – through working towards financial independence than it is to spend money on a fleeting moment –
- The way I think about it is the more that I put towards my future self now – the more that I can afford to have greater essential and non-essential lifestyle costs later in life
So in summary – it is important to have your goals in place to work out what your financial independence targets look like – then work back from there
- Set aside what you need each month to pay off debts, or invest in your future
- Then out of your remaining cashflow – figure out what is essential in expenditures and what level of lifestyle you would be comfortable with
- As you might wish to have a $10m house – and who wouldn’t? but the ongoing costs for this may eat into everything to the point you end up with nothing – no house, no financial future
- So have your expenditure goals and stick to these – regardless of what your income is – if your income goes up – then direct additional discretionary funds towards your future –
- As long as you are happy – and there are no debt collectors at your door – and you can maintain yourself – and you are on track with your goals of placing funds towards debt repayment and financial independence - then you have likely met your balance between your needs and wants
- IF you don’t feel like you are on track for this – it is probably important to sit down and go through these factors and sort it out as soon as possible
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition.
In this episode, I want to look at a core concept of economics – the need for monetisation/value of objects for them to exist – that is – that profits are a factor that help to maximise most outcomes in society
This comes back to the very concept of a free market versus socialism –
- Profits or placing value on things is often pointed to as an evil of the free market – there are some merits to this – especially when looking specifically how the modern financial system is structured
- The financial systems quest for never ending profits has created a lot of risk – leading to economic ruin when bubbles pop
- This can often be conflated to include the profit drive of a sole trader, or someone who owns a small business – hence all drives for profit can be painted as selfish or evil
- However - in this episode I want to argue the opposite point – that profits or monetization is the very key to a functioning society – and often leads to the best and most ethical outcome – when compared to those taking equality of outcome as an ethical standing in modern society
- This focus will be mainly on the free market side – not the centrally planned side to the economy – such as banking/lending – or BIS economic policies
- But it will be focused on incentives – as profits or earning an income provide an incentive to humanity to strive for more
To start with – we will look at the recent PETA protests at the Melbourne Cup
- For those outside of Australia – we have a major race every year – called the race that stops a nation – Happens on the first Tuesday of November every year – so this happened last week by the time this comes out
- At this event – there were protestors – advocating against the horse racing industry – saying that it was cruel
- You might think that it is cruel – racing horses – if a horse breaks a leg – it often has to be put down
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But in relation to horses - Think about how far we have come as a society –
- What did horses used to be used for? – they were an essential part of most every day activities -
- Transportation – they were used to get around – either for wealthy individuals – or for merchants for transportation of goods from village to village – could carry carts and many times the number of goods a person could
- Force multiplier in production/agriculture – they could be used to lift heavy items – in construction through pully systems or for ploughing a field – at a much quicker pace than what we are able to
- What did horses used to be used for? – they were an essential part of most every day activities -
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War – one of the major forgotten points in history – horses were a major tool in warfare – where if you didn’t have cavalry – and your opponent did – you were at a massive disadvantage
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Horses were essential – they helped to maximise utility – in other words – they helped the value maximisation that could occur – both at the individual or industry level – which increased economic output and the utility of society
- For transportation – they could get your around quicker than walking – hence they save time – maximising utility
- When used in industry or in agriculture – they could help to lift heavy items, work ploughs on the field – much better than what humans could do
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In war – they were a force multiplier – much better to have mobility on calvary for flanking, or charging to break an enemy, as well as inflicting casualties on the route – so they maximised the utility of the rulers in their probabilities of winning a battle in the medieval periods – the Mongols were the best example of this – able to conquer all the way into modern day Europe – around Prague on the back of a horse – didn’t matter if they were outnumbered – horses certainly maximised their utility – ironically provided one of the sources for their demise as well with the fermented (i.e. alcoholic) horse milk – but even in WW1 cavalry was still used
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but what happened? Industrialisation happened – by industrialists in the quest for profits – previously – being a horse breeder – or horse merchant was quite a profitable trade – demand and supply – there was often a massive demand for horses – whilst their supply was in limited supply – so they were often well cared for – a farmer could only normally afford one horse – hence they took great care of the animal
- However - Individuals over time came up with innovations to make horses obsolete from the activities that they used to provide additional value to the owner
- Transportation – James Watt help to industrialise the stream engine – used in trains for mass cross country transportation, Samuel Brown in 1823 helped to invent the first internal combustion engine, later redesigned by many – then provided on mass by Henry Fords Model T by the early 1900s.
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For industry – there have been many individuals and companies that have come up along the way – all enterprising individuals – in search for profits - to get us to where we are today
- No different to the horse breeders or merchants of the past – where they would increase the stock of horses in an effort to profit – hence they help to increase the supply of horses – helping the growth of economic output to occur – not just to them through profits – but those that could buy a horse to help them in their own efforts – transportation, farming, in industry, or even war – as conquest by rulers used to be a useful means of wealth accumulation
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But at every stage of innovation – horses got left behind – something more profitable came along
- Riding a horse into a row of soldiers, or riding on horseback to go from city to city might sound antiquated when compared to today’s standards – but it was for profit and through innovation that horses were no longer needed for these tasks
- So in a way – if you view it from PETAs point of view – innovation and the aims of profit maximisation helped to save many horses from dying in war - or going lame in the fields
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But what happened to the horse population over the years – well it declined
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So out of all of these innovations that have replaced horses – what did this lead to? Less horses –
- They are now used mainly in recreation – i.e. riding them for leisure or for sporting events – like the Melbourne cup
- The question is - what happens if racing events cease? – say protestors get their way – that horse racing events cease world wide – what happens to horses?
- Their populations go down – those horses that are now currently prized – in other words – valued to the tune of tens of thousands of dollars to many millions of dollars – no longer have this value attached to them
- If this value gets removed - then again, what happens to these animals? They are not likely to be cared for as well as they currently are -
- The real world is not black and white – there are pros and cons to everything –
- This is where only focusing on a pro can often lead to major cons – if the aim is to save the lives of horses – and the method is to ban horse racing – then are these PETA protestors going to buy these horses once they can no longer race? or at the very least take care of them on an ongoing basis?
- Adopting a greyhound is much easier than adopting a horse
- Would they have the resources to do so? And would this lead to a better or worse life of these horses?
- In addition – would the worlds population of horses continue to decline
- It is sad when a horse is put down – but again – life is not black and white – we see one horse put down each year in a row at the Melbourne cup – but would any of these horses have a life unless they were there to race?
- These horses have a pretty good life – and are well taken care of - here the argument can come in that humans are forcing horses to race – against their will – this is a point I have no idea on –
- We cannot communicate with a horse – to ask it what it would like to do – from my personal experiences with horses – they get a little antsy when they are confined and like to get out for a run – whether this is the same as being raced professionally – I have no idea – I cannot talk to horses – but they do get well cared for
- This is where due to horses having a monetary value attached to them for the most part – especially for racing horses – these racing horses sell for millions of dollars – the most expensive horse sold for around $100m AUD – or about $70m USD – is a little different for domestic horses – kept for pleasure
- These horses have a pretty good life – and are well taken care of - here the argument can come in that humans are forcing horses to race – against their will – this is a point I have no idea on –
- This is where only focusing on a pro can often lead to major cons – if the aim is to save the lives of horses – and the method is to ban horse racing – then are these PETA protestors going to buy these horses once they can no longer race? or at the very least take care of them on an ongoing basis?
Thinking about another example – what has been the most successful strategy for the conservation of rare/endangered species?
- The answer is - Hunting in game reserves – through the monetisation of these animals – creates incentives – and at the core concept of economics – it is all about incentives – humans do little without incentives
- Through the monetisation of protecting these animals – for others to hunt – it actually allows the reinvestment of funds – where the Profits go into the conservation
- Due to a monetary value being placed on these animals – people are incentivised to take care of them – protect them from illegal poachers – and help to increase their numbers
- This system helps with population management as well –
- There was the case with Cecil the lion – through the anthropomorphism – putting human traits into animals through Disney movies – people feel sorry for the lion being shot – but this lion in question was past breeding age – and was killing younger males – so if the question is to help maximise the population – is it not best that this animal that is nearing the end of its life – that killed two male cubs that would go on and help to increase the population – be removed from the population?
- It might sound harsh – but the meat from the lion went to feed the local African population – the money went back into the preservation of these animals -
- Again - It might sound callus or harsh – but it is reality – for policy to work – or for any decision to be made- it needs to be based around reality – just not hopeful or wishful thinking
- We could all come up with how we want the world to work – in wishful thinking – but reality is harsh –
- Hence – the free market often does come up with optimal solution – these are by no means perfect – but optimal is far from perfect – it is simply the best solution to hard problems
- If the government was to legislate that these animals are protected – by law – they are protected from being killed – does this mean that their populations would increase and that nobody would kill them? From observations – it doesn’t – poachers are operating outside of the law – hence they don’t care what the government says – their incentives are to kill the animal regardless – it is the same for anything that is made illegal by governments – if people want it – they can often get it through black markets
- Under this situation - The only way to protect these animals is have the government try to enforce these laws – however they often lack the flexibility and ability to do this – especially in a lot of African nations – so the poachers run rife and the policy is not enforceable
- But all of a sudden – if individuals or companies can monetize these animals – through having them on game reserves – for tourists to come and see and once these animals get too old to breed and become a danger to the other population of animals – they can sell a ticket for hunters – then the populations of these animals actually increase – through the incentives of those in charge of the game reserves to protect these animals as well as take care of the population management – i.e. taking out the non-breeding males who kill younger cubs due to territorial issues
- Is this moral – well many people will say that it isn’t – but does it work? As far as maximising the populations – well it technically does
- Might not like it – but the economics and incentives of these policies creates a situation where the free market can often provide the optimal solution – through incentives
- Trying to legislate these issues through a lens of morality can lead to a much worse outcome – say you ban horse racing, or you ban hunting – it leads to unintended outcomes
- There are always Orders of consequences – the first might sound great – that you ban horse racing – or hunting lions – mission accomplished – but the second order of consequences let alone the 10th may see the populations decline massively – so if the intent is to save these animals – well these bits of legislation would fail massively – as it would result in a declining population – but at least those who forced the issue could feel good about themselves, right?
- In my view - the Outcome surrounding a lot of these issues is more important than the positions of morality that a lot of these groups propose – as by making a policy based around a moral argument – this can lead to an immoral outcome – in other words less horses or animals – when compared to their positions of having these animals be set free – where they may actually face a worse death and their populations decline
- Decisions not based on morality can often lead to bad results – especially around equality – you have too look at outcomes from a lens of incentives – otherwise the intent can lead to worse outcomes –
- Don’t get me wrong - Being ethical should be applauded – but a lot of these polices should stop at home –
- You shouldn’t try and force morality on society – this is what dictators do – as everyone’s morality is different
- We are all different – what is moral for one person is immoral to another –
- The WEFs morality is to control all economic interactions – the UNs morality it to help reduce CO2 emissions – but the most effective method of this would be to reduce the worlds population
- They have the policy of global immigration from third would nations to first would nations – but under this the CO2 emissions PP would increase by 10 times per person – so they technically hold contradictory policies
- Increasing immigration whilst at the some time they want to reduce the CO2 emissions per person
So in summary -
- who’s morality do we work with? Yours, mine, PETA’s?
- Following each will have an effect – and maybe not the best effect on society – or on the horse population
- The answer is to follow incentives – which can often lead to optimal solutions
- Or alternatively – if you are trying to enforce morality – try leading with incentives – this is not the same as disincentives – the government gets this confused – punishing people doesn’t work as well as allowing people to help maximise their own utility
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition. This week’s question is from Ruby.
“I was speaking to my husband and we want to help financially prepare our children and I am just wondering if you have any strategies to help with this?”
Thanks for the great question - Depends what you mean by preparing for your kids financially –
- Two ways to view this –
- the monetary side - i.e. them having access to funds or having expenses covered for
- how they value money – which comes back to the financial education side of the equation
- In my view – giving kids all the money in the world without the educational side can set up children for a worse outcome in life – without understanding value of money it can create –
- Talked about how to do this in a previous episode - Why is talking to your kids and family members about money so important? – where it was mainly about misconceptions – and using monopoly as a good tool as opposed to the zero-sum game it instils
How to educate children financially – As a parent, you have the power to shape your child's relationship with money – many things that can be done to help improve their financial education
Why –nobody else will help to confer this information and thus Teach them about value of money – Kids don’t understand value of not just money as a medium of exchange – but that their time has valued attached to it – I don’t think some adults know that either
- Financial education for younger children is all about Instilling the value of money– one of the best ways to secure their financial futures – slightly different to a form of financial education that an adult would have – teaching asset pricing models, etc.
- In a way – if you can cover the basics - this education is better than a gift of money –
- You could give a 15-year-old $50k – but if they don’t understand money – then this can be gone very quickly – however – if they understand money – this could be a great step in the right direction
- One of the best gifts that I received was this form of informal financial education
- Can be hard for kids – they are essentially socialists – thinking that everything should be free at younger ages –
- Everything is technically free to them – the younger they are – everything is normally provided for them
How to do it
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First major step is just talking to your kids about money - You don't need to be an expert to teach kids about money
- There is a taboo surrounding talking to kids or anyone about money – some people think that it is rude
- Depends on the intent – if someone comes up to you and asks how much you earn or have just to brag that they have more – that would be rude
- But talking to family – or even friends about money – if the intent is right – then that shouldn’t be shunned
- Just start a conversation about money when the opportunity comes up at home or when you're out
- These chances will come up all the time -
- Your kids will naturally ask you for the things they want. It's hard when you have to say no. Talk about how we all have limited money and we need to carefully decide what we spend it on
- There is a taboo surrounding talking to kids or anyone about money – some people think that it is rude
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One client had a good strategy for this – her daughter really wanted to go to uni – so we were setting up education funds
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If her daughter asks for something at the shops – then she lays out the opportunity cost – that the money would otherwise be going towards university costs for her -
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This can help kids to understand that money can be finite compared to wants –
- Wants versus needs – the economic problem – how to maximise utility with finite resources
- Whilst income and wealth can grow – it is technically finite compared to the potential for unlimited wants that people can have
- This conversation can expand to the concept of how you earn money – the exchange of your time at work for money
- The concept of priorities can come in here – where you have to spend time working to provide
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Reinforcing needs versus wants – all about priorities –
- Break down goods into essentials – housing, food, bills, clothes – there is always a choice –
- Have your kids make some choices – discussing the differences between needs and wants –
- If you ask your kids once they can comprehend the differences – should be spend money on keeping the house (through mortgage repayments) or on new toys?
- Gets them to think about money –
- To reinforce the concept of essentials versus wants – can help through explaining where money gets spent –
- Going through the weekly budget - Use everyday situations to teach your kids about money, including where it comes from and where it goes
- When out shopping - can teach your kids how much things cost by showing them
- different prices for similar items, how to compare deals, how to work out which items are better value, how to work out price differences and discounts
- If you have the time – which if this is important – there should be time – ask them which item is better to buy?
- For the essential expenses – talk to your kids about bills and expenses –
- Relate this back to the concept of exchanging time for the money – how many hours did you need to work to pay for these expenses?
- Helps to further reinforce the concept of value of money – that it isn’t free and that spending decisions have consequences –
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For example – if you worked 5 hours to cover the quarterly electricity bill – and decided to use that money on some grown up toys instead – then the lights wouldn’t be on – that wouldn’t be a very responsible decision
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This is all about getting your kids involved in making money decision
- Can extend to other things around the house – but as your kids get older, get them involved in budgeting, saving and spending
- Have them do a budget for themselves – or sit down whilst you do yours
- Help them put a budget together – especially if they are at an age where they are either earning their own money or earning pocket money
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Brings up the concept of pocket money – shouldn’t be just giving kids pocket money – but them earning this – to reinforce the time value of money
- Child labour is only illegal if it isn’t your own children – bit of a loophole here – but all jokes aside -
- Having your children help around the house in return for pocket money can help them to understand the value of money – as well as understand the concept of time and effort in exchange for a monetary rewards – i.e. an income –
- You can choose to pay them for certain tasks around the home – plenty of chores to choose from
- As an example –
- mowing the lawn, vacuuming the house, washing the car, taking the rubbish out, cooking dinner or making school lunches, hanging out and bringing in the washing, packing and unpacking the dishwasher, walking the dog – place a monetary value to each – and they get pocket money for completing each
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here I might suggest against doing this for doing homework – up to you
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Either way - make sure you withhold or reduce their pocket money if the tasks are not done or not done properly
- teach kids that they only get paid when work has been done to a certain standard – value – exchange of money for services rendered
- At this stage – you can bring in the reinforcements of encouraging kids to save – once they are earning their own incomes – either through pocket money or if they have their own jobs
- Learning to save is a vital money lesson.
- Piggy banks and bank accounts - Piggy banks are great for younger kids. They can see the money they’re putting away and watch it grow as they save. Opening a savings account is a good way to introduce kids to banking, saving and interest.
- Set money goals - Help your kids avoid impulsive purchases by teaching them to set goals and to prioritise what they spend their money on. When your child wants to spend money on an impulse purchase, remind them about the goal they are saving for. Work out how much longer they'll have to wait to reach their goal if they decide to spend today. Get your kids to work out how long it will take them to reach their savings goal or to save up for something special.
- This is a time where the basic concepts of supply and demand can be taught as well
- On top of this – if you have set up investment structures for your children – covered this in another episode – called How to best invest for Children or Grandchildren?
You can break this information education down into different stages
- Start introducing some concept to children around the ages of 5-8: Needs and wants - Kids consider the difference between needs and wants.
- Start giving some chores at the ages of ages 8-10 – have savings accounts set up for them and all them to set budgets - decide between needs and wants, create a simple budget and learn about making wise financial decisions.
- By around 14-16 – they can start making their own spending decisions – would likely have some funds saved up by this stage – so if they want something bought for them – they always have the option of purchasing this for themselves
- From 15-18 – they should have a good base – getting their first jobs outside of chores in the house
- Having to look into things like incomes, taxes, super accounts, etc
- Help prepare them to move out of home as well –
- When older kids get their first job, they're often tempted to spend all their money at once. Show them how to track their spending to see where all their money is going.
- Also – a good time to start talking to them about what they would want to do to earn an income – what they would be happy to do – exchanging their time in return for money for
In summary – no correct one way to do this – these have just been some tips –
- The most important thing that you can do is provide kids with a financial education – they aren’t likely to get a better one than what you can provide
- Help them understand the value of money – not just as a concept but by living it – working for pocket money and allowing them to make their own spending decisions
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. This episode will be explaining the dollar cost averaging strategy.
It seems to be a pretty simple strategy – but one hard to get right – so want to run through it and when to use it in further detail
What is a dollar cost averaging strategy – DCA for short
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It is breaking up investment timing - Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount that they wish to invest across periodic purchases
- The aims of this is to reduce the impact of volatility on the overall purchase of investments in the short term
- It is the concept of taking out the short-term probability of market volatility from investment decisions
- It is a hard question – when to purchase an investment – today, tomorrow, or wait a few weeks and hope the price goes down
- The concept of DCA is to take this short-term guessing game out of the equation – if the market does down next month then great – through doing DCA you are picking up more investments at a lower price
- That is where nobody knows when the correct time to purchase investments will be – market volatility in the short term is anyone’s guess –
- In the long term – you can have a degree of certainty that investments values will be above where they are today – but in the short term – the truth is that it is anyone’s guess
- Due to the nature of the share market – demand and supply in the shorter term is outside of any fundamentals – you might have a great company based around fundamentals- but it lags behind in price – hence has a lower return
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But this strategy is meant to expand upon the single investment into a share holding into a greater range of investments
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In dollar cost averaging – you need to decide on two parameters
- the fixed amount of money to invest each cycle and the time horizon over which all of the investments are made
- For example – do you invest $100k over 10 months, at $10k a month or 5 months, at $20k p.m.
- The shorter a time horizon - the strategy behaves more like lump sum investing
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What is a DCA strategy in practice – the dividing up of a lump sum investment into incremental investments
- As an example – say you have $100k of cash or funds available for investment purposes - By dividing the total sum to be invested in the market - that $100k into equal amounts that you then put into the market at regular intervals - a DCA strategy seeks to reduce the risk of incurring a substantial loss resulting from investing the entire lump sum just before a fall in the market
- The amount to invest in the monthly increments can vary widely – you could invest $25k for 4 months, $10k for 12 months or $1k for 100 months
- There is massive variance in the number of monthly investments which can be implemented – can do anything from 2 to 1,000 months
- However - Dollar cost averaging is not always the most profitable way to invest a large sum
- If you are investing $100 each month for 1,000 month – you might be worse off then if you investment the $100k in month 1
- This is due to the investment returns of the market versus the opportunity cost of holding these funds in cash
- As an example – say you have $100k of cash or funds available for investment purposes - By dividing the total sum to be invested in the market - that $100k into equal amounts that you then put into the market at regular intervals - a DCA strategy seeks to reduce the risk of incurring a substantial loss resulting from investing the entire lump sum just before a fall in the market
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If you think about it – what is the longer term expected returns of the share market – maybe between 8%-10% - so if you are holding the majority of these funds in cash this whole time period – you are missing out on returns
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This doesn’t mean you have lost money thought participating in a DCA strategy – it is simply that your returns wouldn’t have been if you invested all the money on day one –
- If you were investing $100 p.m. for 1,000 months – that is a little over 83 years – so you can see that this form of DCA will miss out on a lot of the potential returns
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As the concept comes back to minimising the risks of short-term volatility – whilst still trying to maximise on long term investment potentials
- The DCA strategy is all about minimising the potential downside risks of making investment from cash
- Cash is seen as a defensive asset class – no volatility in investment returns –
- Hence taking additional risks on from defensive funds does have additional risks – of which- the DCA strategy can help to minimise these
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The DCA strategy best works when the markets undergoing temporary declines because it exposes only part of the total sum to the decline – but that is where this become a guessing game – is the market going through a short term decline – or a structural decline?
- That is where the DCA strategy can shine – if the DCA is for 12 months- then most of the decline would have been purchased into
- So this technique is so called because of its potential for reducing the average cost of shares bought.
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But this strategy depends on the type of investments purchased
- As the number of shares that can be bought for a fixed amount of money varies inversely with their price, DCA effectively leads to more shares being purchased when their price is low and fewer when they are expensive. As a result, DCA possibly can lower the total average cost per shareof the investment, giving the investor a lower overall cost for the shares purchased over time
- The optimal DCA strategy is almost impossible to achieve – again there is no way to guess what the market will do in the short term –
- IF the market goes down – and you are going a DCA strategy – then great – you have made a good decision
- If the market only goes up – well then there are losses in investment potentials –
- If the market goes up, then down, then up – as is normally the case over a 6 month period – then there isn’t much of a benefit or a gain
- However – you have minimised the potential risks to the portfolio – that is where there is no guaranteed way to get positive returns
- But your probability of getting negative returns through losses is reduced through a DCA –
- Your probability of getting lower than market returns may be lower however – if the market is going through a bull market trend
- The pros – Volatility losses int the short term can be minimised –
- reduces exposure to certain forms of financial risk associated with making a single large purchase
- Can help to get you into the market – more behavioural – helps to get people into markets without delaying further due to worries of investing a large lump sum
- The cons - there is also evidence against DCA - there is an article published called "The superior long-term returns of lump sum investing [over DCA] have been acknowledged for more than 30 years."
- The weakness of DCA investing applies when considering the investment of a large lump sum as DCA would postpone investing most of that sum until later dates - Given that the historical market values tend to increase over time, starting today tends to be better than waiting until tomorrow
- DCA works best when investing into high growth portfolios – no point doing a DCA strategy into bonds
- The returns of DCA strategies can be sub-optimality – however it can be used as a behavioural tool that makes it easier for investors to start investing a lump sum
- allows investors to make a trade-off between the regret caused by not making the most of a rising market and that caused by investing into a falling market, which are known to be asymmetric
- helps people get used to investing as well – dipping toes into the water rather than taking a dive headfirst in – depends on the person
- Returns – One study found that the best time horizon when investing in the stock market in terms of balancing return and risk is 6 or 12 months
| Months | Returns | Invest day 1 | DCA 5 months | | 1 | -2% | $49,000.00 | $9,800.00 | | 2 | -2% | $48,020.00 | $19,404.00 | | 3 | 0% | $48,020.00 | $29,404.00 | | 4 | 2% | $48,980.40 | $40,192.08 | | 5 | -4% | $47,021.18 | $48,184.40 | | 6 | 3% | $48,431.82 | $49,629.93 | | 7 | 3% | $49,884.77 | $51,118.83 | | 8 | 2% | $50,882.47 | $52,141.20 | | 9 | 1% | $51,391.29 | $52,662.62 | | 10 | 2% | $52,419.12 | $53,715.87 | | 11 | 1% | $52,943.31 | $54,253.03 | | 12 | 2% | $54,002.18 | $55,338.09 | | Total returns | 8.00% | 10.68% |
- Assuming that the same amount of money is invested each time, the return from dollar cost averaging on the total money invested is dependent on if the market is moving upwards or downwards over the DCA period of time
- I normally look at timeframes of 3-9 months depending on the amount of funds being invested
- Look at a few examples – if you have $50k to invest – DCA returns –
- However – if investments continue to go up - you have a lower investment – however not a loss of investment
- One key component of maximizing profits is to include the strategy of buying during a downtrending market, using a scaled formula to buy more as the price falls; then, as the trend shifts to a higher-priced market, to use a scaled plan to sell.
- Best ways I have seen this implemented – as well as what I recommend for clients – DCA strategy into a range of managed funds or ETFs to help reduce the market volatility and avoid any specific risks – instead you are DCA’ing into market specific risks
- Generally do it for risk adverse clients who don’t already own much in the way of investments – as well as doing it in time periods when there is a greater level of market uncertainty
- Misconceptions -
- {\displaystyle r={\frac {p_{F}}{{\tilde {p}}_{P}}}-1,}DCA is not the same thing as continuous, automatic investing. This confusion of terms is perpetuated by some articles and specifically noted by others
- Continuous automatic investment is more like lump-sum investing in that the investor invests the funds as soon as they are available, in contrast to DCA where the investor withholds available fund from the market.
- The pros and cons of DCA have long been a subject for debate
- Types of investments this works with – forms of index funds or managed funds – high growth investments that do have volatility
- Can be useful to use – to help reduce downside risks – can also be helpful to get into the market and gain experience and reduce delay from not investing funds
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition. Two weeks ago on Furious Friday, we went through an intro to the great reset. This episode we will look further into this topic, at some of the proposals and break these down further. I managed to talk to someone involved with the WEF in the interim which provided some good insights
If you haven’t heard - The great reset is all about resetting the economy and society – resetting in the way that a handful of individuals at the top of entities like the WEF, UN deem to be in the world’s populations interest
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To start with – we need to get to the bottom of the best way to actually think about the economy - it is useful to think of an economy in real terms versus the purely financial terms
- I have said it many times in this podcast that the real economy is what is important – and that is you and I – our economic interactions, where we work, what we buy or how we consume or save, every one of our interactions at the aggregate level is the total sum of economic output –
- The economy when left to its own devices for economic growth can create a situation where the whole is greater than the sum of its parts
- Through specialisation and effects of real economic growth leading to a greater output overall – all about an equilibrium being reached over time through having free economic interactions
- Everything that is a final product tends to have a greater value when compared to the sum of its parts – we process martials and they are transported and transformed into other physical goods, which are transported from point A to point B and consumed–
- Think about a pencil – there is a good essay called I, Pencil – by Leonard Read – talks about the complexity in making this – where no one person can actually produce a pencil – the gathering of the components and the trying to turn these components into one item as simple as a pencil – quote from it – “The absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me (the pencil) into being. No trace of such a person can be found. Instead, we find the invisible hand at work.”
- This is very much akin to the metabolism that maintains a living body – which is a very complex system
- The economy when left to its own devices for economic growth can create a situation where the whole is greater than the sum of its parts
- I have said it many times in this podcast that the real economy is what is important – and that is you and I – our economic interactions, where we work, what we buy or how we consume or save, every one of our interactions at the aggregate level is the total sum of economic output –
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So when we are thinking about the economy – important to think of the economy as total system which encompasses the total body of humanity - all cultures, nations and families of the world and how they function on a day to day basis –
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Where economists and elites then step in – this can be very dangerous – their first step is that our economic interactions then gets measured – analysed and statistical representations are created – based around the models that are chosen by them – and what they choose to include or exclude in these models – hence we are relying on their interpretation of data and statistical measurements to get these aggregate economic indicators
- then – a handful of people analyse these data sets – then they believe that they know how to best maximise outputs based around a statistical representation – even though they had nothing to do with the output in the first place – However - they have studied for years and have come up with theories and therefore know better
- This brings into question the concept of economic specialised knowledge versus common knowledge – no handful of individuals can know what is best when compared to the common knowledge (each of whom have their own forms of specialised knowledge, which may not be economic)
- However - Even though economists or policy makers haven’t lived the same life as you – they still think they know what is best for you - they have different priorities and different personal economic situation – most of the people coming up with these plans are very connected and affluent individuals – on very good salaries that are not going to be affected by their proposals – if anything they will get more income
- then – a handful of people analyse these data sets – then they believe that they know how to best maximise outputs based around a statistical representation – even though they had nothing to do with the output in the first place – However - they have studied for years and have come up with theories and therefore know better
- Disappointing to see economists and policy makers believing that humans are stagnate representations of the outputs of these measurements
- They forget that humans are dynamic – we adapt – and tend to try and maximise for our own situation – there are lagged time periods depending on those who adapt first and those that actually never adapt
- They very nature of adaption comes back to creative destruction through a technological progress – however – those with the most power often don’t want this – their products are at the top currently – they are in power – in addition – for policies to work as intended there needs to be as little adaption as possible – the assumptions are based around individuals being stagnant after all
- so creative destructions that are population driven through the supply of new goods and services get stifled –
- And a greater focus is on demand – if no new supply beyond monopolies can exist – then you have to work with the existing supply and the only path to economic growth is seen through demand side
- That creates a situation that actually fails to meet the optimised results for the growing needs of humanity – hence the population concerns are ignored when looking at the actual outcome –
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This brings up back to the core concept of the great reset is that the WEF and their strategic partners – where they want to remake the economy and systems as they see are in our best interest – covid is used as an excuse push polices changes through whilst the population is malleable to change
- This isn’t some out there theory – they are literally telling us - Simple manner of reading what they write – many people don’t – they are busy which is understandable – and many of these concepts do sound utopian on paper – but I am more focused on the likely outcome – not the proposals
- From the previous episode covering this – went through the strategic partners – on top of this – the great reset is also favoured by the OECD (Organisation for Economic Co-operation and Development) - an intergovernmental economic organisation with 37 member countries which we are a member of – as well as the UN Secretary-General Antonio Guterres who is the former president of the Socialist International organisation
- You also have influential induvial like Prince Charles and the IMFs chief economist Gina Gopinath as well as having the backing from corporations including Microsoft, Google, Facebook and, many of the biggest banks and MasterCard backing these plans
- But Prince Charles stated that “We have a golden opportunity to seize something good from this crisis. Its unprecedented shockwaves may well make people more receptive to big visions of change,”
- His Father Prince Philip said in 1988 when speaking to German news agency “In the event that I am reincarnated, I would like to return as a deadly virus, to contribute something to solving overpopulation.”
- A lot of this reset has to go with the alignment of the economy to the emission-reduction goals, including net-zero greenhouse gas emissions. It recommends stimulus measures to ensure “social development … is fully integrated with environmental objectives such as those in UN Sustainable Development Goals that form part of Agenda 2030 – but this is another topic for another day – that has already been covered in length on the podcast in the past – there is a series about 15 episodes long – on the website under the series called by any other name – united nations, socialism, fascism
- But Prince Charles stated that “We have a golden opportunity to seize something good from this crisis. Its unprecedented shockwaves may well make people more receptive to big visions of change,”
- There is a disturbing trend through history – and that is leaders who think they possess the power to change the course of history through reshaping the economy and the social contracts that we would otherwise try to optimise
- The more that they have undemocratic control – the worse things tended to get -
- These individuals who believe they control the destiny of the population are not only deluded – but to enforce their plans things invariably become violent when human nature gets in the way – the more they wish to mould human nature to their utopian world – the greater the control is needed – and the greater control the state has over people – the worse the persons life tends to get – not only economically but at the very basis of freedom of choice
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I know that a lot of people can switch off here – as the thinking goes – this could never happen to us – you will probably be right – but what about future generations? Remember – in the world today – North Korea exists, Venezuela exists – looking back not that far – going back to the 90s the USSR existed, as well as Vietnam, Cambodia, China under Mao, Cuba under Castro –
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many countries have gone through the removals of freedoms of choice in economic interactions – never works well – and all of these previously mentioned countries - before this they were relatedly free countries when compared to what they turned into – but the turning point was once the population gave enough power to governments that the enforcement could be implemented – in the west I see it as more so a will of the government and not the ability – they have the ability in most western nations to enforce anything they want in population centres – seen it in the recent lock down enforcements
Getting to the core of the proposal - The Great Reset agenda would have three main focuses – with 6 components to achieve this and 52 sub components -
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For the top-level focuses that the WEF have –
- The first would steer the market toward fairer outcomes – the core of this focus is to create global governance to improve policy coordination on policies for taxation and at the regulatory level, as well as fiscal policy
- This includes upgrading trade arrangements, and create the conditions for a “stakeholder economy.” It is a fancy way of saying a centrally planned socialist economy – where profits should no longer be the focus but these should be given back to the people
- In the current environment they are – if you own a state in the company – but under this model – it sounds like what Marx was proposing back to factory workers – even though he never worked in a factory
- The WEF states that these proposals need governments to implement long-overdue reforms that promote more equitable outcomes.
- Depending on the country, these may include changes to wealth taxes, the withdrawal of fossil-fuel subsidies, and new rules governing intellectual property, trade, and competition
- The second component of a Great Reset agenda would ensure that investments advance shared goals, such as equality and sustainability
- This one confuses me a bit – it calls for large-scale Government spending programs – they say that “rather than using these funds, as well as investments from private entities and pension funds, to fill cracks in the old system, we should use them to create a new one that is more resilient, equitable, and sustainable in the long run. This means, for example, building “green” urban infrastructure and creating incentives for industries to improve their track record on environmental, social, and governance (ESG) metrics”
- This last part has something to do with sustainability – but the equality component may have something to do with UBI proposals – but there is too little information to know at this stage
- The third and final priority of a Great Reset agenda is to harness the innovations of the Fourth Industrial Revolution to support the public good
- A lot of these align with the SDGs – the more I read about the proposals – the more I see the exact same vague proposals that the UN came out with
- For the six components to help achieve this – you have a lot of sub-components – and these normally relate to 2 or 3 of each
- Shaping the economic recovery – Taxation, gender parity, inclusive economic designs
- Redesigning social contracts, skills and jobs – LGBTI inclusion, human rights, future of mobility (immigration)
- Restoring the Health of the Environment – focus on climate change, the circular economy
- Developing sustainable business models – focused on climate change as well, employment in the workplace
- Harnessing the Fourth Industrial revolution – internet governance, digital identities, AI, digital economy and identities
- Strengthening regional development
- Revitalizing global cooperation – focused on global governance, globalisation trade, global financial and monetary systems
- When looking at these - Again – they have some detail of what their proposals are but not how they are gong to achieve this – especially around the equality elements
- The only system which can eliminate inequality is one where every citizen lives equally in tragedy – you have to reduce society to the lowest common denominator – obviously those who are proposing these changes from Davos – very nice area in Switzerland will be unaffected – as well as political leaders – you are paying their exorbitant salaries after all – no risk of the free market coming in the way of this
- But every time political leaders with the backing of the enforcement side of a Government wish to enforce equality – it doesn’t work well for us - Those living in Ukraine discovered this in the early 1930s when the Holodomor occurred - between 3 million and 12 million people starved to death after the Soviets convinced people to turn on their village’s farmers and the government confiscated all of the food – as they were apparently hoarding it – they went through their own form of lock downs – as they weren’t allowed to leave
- In the process – the breadbasket of the Soviet union no longer could provide food – so a lot of the USSR starved to death
- Looking at the top level proposals – a lot of this reeks of Marxist ideology -
- Marxist logic dictates that if someone profits from a sale of a good, or if the individual who has taken all the risk and put up their own capital to create a company to employer others – they are robbing people
- As there is an inequality due to them getting more out of the economic truncations – hence – if there is inequality, a crime has been committed and the population (or the government) has the right to commit a crime back in the form of violent enforcement
- This includes upgrading trade arrangements, and create the conditions for a “stakeholder economy.” It is a fancy way of saying a centrally planned socialist economy – where profits should no longer be the focus but these should be given back to the people
- The first would steer the market toward fairer outcomes – the core of this focus is to create global governance to improve policy coordination on policies for taxation and at the regulatory level, as well as fiscal policy
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This notion in the hands of Governments has prompted the most horror ever seen by humanity – even both of the world wars death tolls are less than communist death tolls –
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A free market does create inequality – but at the same time the living standards and wealth of those left behind are still vastly better than under a purely equal system - this is because wealth creation is not a zero-sum game
- There is not a finite amount of money or wealth - Money can be created, jobs can be created and people can be pulled out of tragedy and despair by a free market – might not be as easy as getting free money – but this is a ceiling trap – or welfare trap – where people can be trapped in poverty
- But individuals at the WEF are set to try and repeat the mistakes of the pass – if you view it as a mistake from a population level – for those at the top – these styles of governments are not a mistake – their lifestyles get better, whilst those under them get worse
- as Karl Marx would say: “History repeats itself, first as tragedy, second as farce”.
Important thing – don’t buy into the rhetoric around these proposals – they all sound good – but so did communism to those at the centre of the political spectrum -
- Nobody can know what you goals are but you – giving in control is sacrificing to those who don’t know you – don’t care about you – do not have the same shared goals –
- They say they want better for the world – but this is in their own vision –
- The best thing for their world may be to reduce the population to 500m and have a serf class with full automation – but that is not the best thing for us -
Maybe next ep – might focus on some of the economic resets – especially the currency side of things towards a digital currency – but have covered this topic in the past – like the monetary resets to digital currencies – so let me know if you want to hear more and can do another episode -
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday. This week the Question is from Emma.
“Hi Louis – Would like to get your opinion on if it is a good time to buy a property to live in or if it is better to continue renting? We have saved up for enough of a deposit to buy a property for around $600,000 and have been planning to buy for a while. But do you think that property prices are set to decline? Love to hear your thoughts.”
Great question – one I have been battling with personally for the past 18 months or so –
in this episode – we will be looking at renting versus buying – Pros and cons to each – to what degree Depends on a number of factors –
- Costs of owning the property – versus renting
- Ongoing costs – BC, rates, etc.
- Mortgage repayments – Size of the loan and Interest rates
- Price of property – obviously the higher the price the more it will cost in loan repayment – as well as more deposit that needs to be put down
- In looking at these factors – also need to consider the Opportunity cost – what is the best next use of the funds – relevant to the deposit amount and the ongoing cashflow that either owning a property or renting use
- But also – lifestyle goals and if you actually would prefer to own your own home versus renting
- So we will go through these in details
First – looking at the current state of the property market –
- It has been hot – the prices are up in a lot of regions – especially properties that have some land
- Large demand in a lot of areas – lower than average supply –
- Creates a more competitive environment for property
- So for those looking to get into the property market for the first time – makes it hard
- Another reason – interest rates are down – so prices go up
- Demographic trends – apartments in city centres may be on the down
- People are flocking out of cities – harder to get locked down
- So getting into the market is at a high water mark – depending on the type of property
- Brings another point in – will prices go down? Hard to say – originally they would have – but there have been plenty of government run initiatives to help boost prices –
- In addition – the affordability of the loans has been helped with bank holidays and interest rates going down –
- For anyone who bought a property before this helps –
- The bank holidays are coming due – have been staggered out so there may not be a major impact on prices
- Prices may go down in the short term – but if you find the right property – and plan to live in it for years to come – may not matter as much – still don’t want to overpay -
State of the rental market –
- There has been a shock to the rental housing market – there has been a reducing demand for rental properties at the same time as supply has increased
- People moving out of apartments
- There has also been an economic impact on the renters themselves – based around the RBA stats - Job losses have been much more pronounced for younger workers, who are more likely to rent homes
- Due to border closures – which have reduced international arrivals - The number of vacant rental properties has increased as new dwellings have been completed and some landlords have offered short-term rentals on the long-term market, particularly in inner Sydney and Melbourne. Government policies have supported renters and landlords. Rents have declined, partly because of discounts on existing rental agreements and it is likely that rent growth in many areas will remain subdued over coming years.
- But longer term – The RBA see net overseas migration is expected to slow considerably, further reducing demand for housing over the coming year. Treasury forecasts that Australia's population will be 1.5% lower by June 2021 compared with pre-COVID-19 projections, equivalent to around 400,000 fewer residents
- A decline in population growth of this magnitude would result in a decline in rents of around 3 per cent nationally over the next few years, compared to pre-COVID-19 expectations, based on a model that uses historical experience
- So there is an expected reduction in rents – so for these continuing to rent for a while there may be a benefit for rents being lower
- However – the RBA projections around this show that the number of apartment completions is expected to lower – is on a down trend in most major cities – so over time the market will equalise to reduce the oversupply – and rents may once again have an upwards trend
Looking at the numbers –
- The numbers for renting is pretty simple – what is your weekly rent – some other expenses – like water (depending on the agreement) and electricity –
- But the weekly rent is the major cost of renting –
- Scenario – if someone is renting for $500 p.w. – what is this the equivalent to in a mortgage?
- Depends on the interest rate – but assuming 2.8% - A mortgage the size of $528k – with a 30 year term you would be making PI repayments of $500
- Assuming there is a 20% deposit – means that the property value would be around $660k (deposit of $132k)
- Bit of a rule of thumb when looking at property to consider what the rent should be – especially from the investment side of things – if you can get a rent of $100 p.w. per $100k on the property value – consider a good rent – rental yield of 5.2% - but this has become harder with prices increasing at a greater rate than what rents have been able to increase by
- Rental increases more correlated to wage growth than credit growth
- But in this scenario – the gross rental yield is closer to 4% - which is pretty much in line with a lot of the market at the moment
- So a PI repayment of $500 p.w. may be very similar to what the rent for a $660k place would cost – obviously there are going to be differences – between apartments and houses –
- But the difference here is that there are opportunities costs in both scenarios – renting is considered dead money – but so is the interest component of the PI repayment –
- In this scenario - $284 of the $500 repayment is going to be interest – this changes up the comparison quite a bit – as just under $216 is going back to the principal repayment of the loan
- These principal repayments can be looked at like forced savings – come back to this in a minute
- But with owning a property does come additional expenses – when Comparing renting to the cost of owning a property it can be broken down into two factors – home with land versus an apartment – have similar costs – electricity, rates – but may be lower in some cases for apartments
- Home – has some ongoing costs – maintenance – looking after a yard, or pool, etc.
- Apartments – has different costs – also apply to some townhouses – like BC
- Total costs can vary – but with rates alone – these may be $2k, then ongoing costs may be $6k on top – another rule of thumb is that the costs to a property in ongoing expenses – outside of the bills for water, electricity, etc range around 0.5% to 1% of the property value each year – so maybe around $3.3k to $6.6k for a $660k property
- Total ongoing costs may be around $8k
- Comparing rental costs to the ownership of this property – varies depending on your situation – so you would need to work this out based around the equivalent of what you are looking to buy versus where you are renting – but looking at the previous scenario -
- Renting – in the rental cost might set you back $26,000 – with water (maybe) and electricity and other bills like internet on top – but these expenses are paid regardless in a lot of cases
- Owning a property – Mortgage repayments of $26,000 on a $528k mortgage – as well as ongoing costs of maybe around $8k p.a.
- Total of around - $34k versus $26k – but if the property costs more or the rent is less – numbers will be different
- But in this scenario - The overall costs will be higher for owning a property in a lot of cases – even though rates are low – if rates go higher then owning a property will definitely be lower
- However – the ongoing costs when taking out principal repayments are lower – interest and ongoing expenses would be $22,784 – so if you consider principal repayments as forced savings then renting is actually more expensive
Advantages of renting really comes down to simplicity as well as an ease on the overall cashflow – when considering principal repayments
Advantages of owning a property –
- Getting capital growth – even though if it isn’t an investment – can be used as a form of equity builder
- But it does have the potential to increase wealth – not investment wealth – but could be used as a piggy bank to buy another property
- One of the major reasons Australians are some of the wealthiest per capita is due to PPR properties being included
- PI Repayments – P components are more or less forced savings – whilst you cant access it directly – have to get an additional loan
- Capital value example – If you buy a property and have the loan of $528k – making the minimum repayments of $500 p.w. with the interest of 2.8% - then in 10 years time the mortgage would be $397k – paid off $131k
- If the property grows at 3.5% p.a. – initial price of $660k – then would be worth $930k – so the net equity in the property would be $533k
- Can use it to do debt recycling to build additional wealth – refinance for a second loan for investment purposes –
- Capital value example – If you buy a property and have the loan of $528k – making the minimum repayments of $500 p.w. with the interest of 2.8% - then in 10 years time the mortgage would be $397k – paid off $131k
- Beyond the financial - lifestyle factors
- This has been a major one for myself – when I was younger than I am now and single – renting was easy – busy with work and other extra-curricular activities – didn’t want to have to deal with a property
- But with a wife and first child on the way – re-entered the property market – for land and lifestyle
- But it does have the potential to increase wealth – not investment wealth – but could be used as a piggy bank to buy another property
In summary – sometimes the right answer isnt purely financial – if you find the right house and it fits your personal lifestyle goals – then it can be the correct decision to buy
- But it is important to consider if the options are practical – and are affordable –
- Not just now but long term – take into account changes in your own personal situation – like starting a family with maternity leave
- Also – is the loan affordable at higher interest rates – probably not a concern for a number of years – can be a good time to pay off a mortgage
- So it is important to do the numbers – if the costs and repayments are in line with what you can afford – as well as having funds left over for flexibility – and the lifestyle factors are important – then it is the right time to buy a property to live in
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury.
Things seem to be calming down – markets have recovered somewhat – the US election volatility has been minimal – may see some short-term movements this week
This episode – How to overcome investment uncertainty and start investing!
The truth is that if now is a good time to invest comes back to time scale –
- Nobody can tell you if it is a good time to invest today compared to tomorrow – probability is almost like flipping a coin
- As you expand the timeframe out – probabilities of being up increase –
- One month – probability goes up slightly – 60/40
- One year – 75/25
- 10 years - 100/0
- That is why investing is for the long term – when looking at if now is a good time to invest – the question should be is now a good time to invest compared to 10 years in the future
Given that if done well – investing today can likely put you in a better position in 10 years time - What stops people from investing?
- The common reasons I see -
- Fears and misconceptions – investing is dangerous, get rich quick
- These are some driving factors for uncertainty
- Not knowing what to invest in
- Not knowing how to invest in it
- Not knowing the benefit of it
- Not having enough to invest
- Fears and misconceptions – investing is dangerous, get rich quick
- The last one is a self-determinant from the previous 4 – And a form of financial procrastination creeps in through having uncertainty – then over time – if you never invest or save funds – you wont likely ever have enough to invest
- If you fear, don’t know, what, how or why, then you won’t allocate any resources (money) to it
- If you don’t know what to do, or how to do it, then you aren’t likely to bother
- If you don’t know the benefit – of realising that at some point – you will need to give up working
- There can also be uncertainty about how much you will need to have and when you need it by –
- Look at retirement - if you are uncertain – and then get certainty – that can be daunting
- if you think something is a long time period off, or if it is too large a value, you may procrastinate as well –
- Why invest for retirement in 30 years? What is the point of trying to save a $110k deposit for a home?
- Most things that become larger – also become harder for us to achieve - $110k seems like a lot – but $70 per day for 4 years – at cash rates
- Uncertainty is a part of life – there is always going to be uncertainty – not just when it comes to investing –
- Those little questions that leak into our self talk – should be take a new job? Should we buy a particular house?
- This level of uncertainty – and not working through it can lead to procrastination
- Procrastinating is a part of humans and creeps into our lives without really consciously thinking about it. One of the worst parts about procrastinating is that we justify this behaviour as well using some very clever tricks:
- Avoidance and distractions – Looking for other tasks to do instead of taking action on what we need to.
- Blaming – We external events as the cause of why we delayed in doing a task.
- Denial – We can tell ourselves that what we are doing is more important now, or that we will do what we need to do tomorrow.
- Comparisons – Other people haven’t gotten round to do this, so why should we?
Uncertainty can lead to procrastination – and it can provide a good self excuse – if we are uncertain we can convince ourselves that not doing anything is the best option – which it sometimes can be – but if then the decision is delayed or the uncertainty is not turned into certainty – excuses can come in - while these may make us feel better in the short term, all that they do is delay the inevitable pain we will feel
- Beating ourselves up mentally – not getting to where we wanted
- Retiring with very limited options in income
Achieving any tasks comes in a few phases - The first is having a goal, then uncertainty will come into it – then a plan can be put into place – but procrastinating can get in the way of taking action at any stage
Acting first – saves pain – why an action plan is important - Make an action plan – Members section of the website – have a lot of workbooks, calculators to help
The longer we delay, the greater the pain we feel from procrastinating – in addition – the more we over think a situation – the greater the levels of uncertainty can be – information overload and decision fatigue –
However, the longer the time is away until we absolutely must take action, the less pain we feel delaying. It is funny however, as generally as soon as you go over the breakeven point you will see that taking action isn’t that painful at all.
Have you ever had a small task to complete, delay it for a few weeks then when you get around to doing it, it only takes you 10 minutes? So the act of delaying causes more mental pain in most cases than just taking action.
How to get over any hurdle for investing?
- Is it the first one – Fear and misconceptions = making a bad investment – should be afraid of – I would be – a double or nothing investment – but that is gambling and not investing
- If you have been listening enough and understand how investing works – hopefully not an issue
- Last one – not seeing the benefits – pretty easy to overcome
- Not knowing how to invest, or what to invest in – have someone help – or ask someone who has done it, or resources on FF (what to invest in) - youtube
- These all can help reduce uncertainty and know that what you are doing is correct
Not having enough to invest – and due to having a large target to hit, or it being too far off
What to do – Follow your action plan without thinking or delaying – plus reward of action immediate through temptation bundling.
- sounds fairly easy to just ‘follow the plan’ however it takes some habits to form around this
- Give self instant reward – something to build a habit loop = The concept behind this option is to only do what you love while doing what you are procrastinating about. The reason this has been proven to be so effective is that you are rewarding your present self for taking action to benefit your future self.
- This reward can also be something more tangible, such as giving yourself a treat for completing a task –
- Opportunity cost – what would have you done with the money saved? Bought clothing? Gone out ? Reward self with one once target met
- Once you get into a plan – follow it until it no longer works for you
- Have an accountability buddy
How to make this stick?
Make an action plan – Members section of the website – have a lot of workbooks, calculators to help –
Once you have your action plan in place, see what works for yourself between implementing rewards or consequences.
From there, habits need to be formed around this as part of your daily routine. Habits are formed as your brain has a lot to think about, so if we do an activity for a little while, our brain wires it to become a habit so we don’t think about it anymore. However bad things creep in, like procrastination over time.
When it comes to if now is a good time to invest – compared to next month – maybe not – compared to 10 years – very likely so –
If you have a lot of cash saved up and want to invest – can DCA instead –
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition.
In this episode we will not be looking at the great reset further, that will be next week, but instead we will be having a look at how financial markets compare to the betting markets – in relation to the upcoming US election
- Decided to cover this topic pretty last minute – bit we will be finishing up the great reset next week – it is just that this topic is very topical at the moment -with the US election in just a few days –
- I find this to be an interesting topic – covers so many elements – from behavioural science to supply and demand – especially in the context of how the US population will vote versus how individuals - both inside and outside of the country are betting
- To clear one thing up - I don’t gamble – some of my friends love it – personally I don’t – don’t like the odds normally gambled twice in my life – one year when I was at the Melbourne Cup and another time in Macau – beyond that I don’t gamble
- However – have been intrigued by the US election due to the discrepancy between the betting markets and the predicted odds of the election results
- There is a lot going on with this topic – which we will break down in this episode -
Quickly – have to do a PSA – in not endorsing gambling in this episode- there is a difference between investing and gambling
- Gambling has absolute loss levels that I don’t like – if you put a bet on one person to win and they don’t – well you lose everything
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Investing – when done well this isn’t gambling – it is taking calculated risks but isn’t the same as taking an absolute risk
- Example – If I put $1k onto team A to win and they don’t – I lose my money – if I put that $1k into an investment fund – if it loses it may lose by a market decline – but it isn’t an absolute loss unless the companies that are invested in lose everything – i.e. go bankrupt
- The probability between the scenarios is vastly different – not only does investing in one company carry a small absolute loss risk – depending on the type of company invested in
- For example – the Absolute loss of investing into a start up with a bad track record is higher than investing into a blue-chip company like WOW
- But if you are investing your $1k between 40-50 companies through a managed fund – which screens for these forms of absolute loss scenarios – your probability of losing your $1k are very close to 0%
-
Sure, you can lose in volatility risks through investing in managed funds – but this can then rebound as you still have money in the game – unlike in gambling
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This is due to that the returns in Financial markets is due to the combination of the income returns plus the price movements of assets (volatility) – and this second factor works off demand and supply
- If a share is highly in demand – above its supply – the price will rise – has little to do with the fare value
- However – the payoff for investing versus gambling is different due to the larger absolute loss potential for gambling
- Think about the following scenario – if you put $100 down on a scenario that gives you a 50% chance to win $200 – but a 50% chance to walk away with $0 – your expected return or payoff is $100 – or no real return
- If now – if you be $100 and you have a 34% chance to win $300 and a 64% chance to walk away with $0 – your payoff is $102 – or about 2% return
- The payoff – it is the expected return that you will receive from a scenario – between winning and losing
-
For investing – your payoff is the expected return over a longer-term forecast – i.e. a 8% return p.a. -gambling is different as it is based around a single event that has the event based payoff – it is not a long term strategy
-
When looking at the Betting markets – work off similar dynamics in one way – but they are based around the probability of an outcome – in conjunction with the level of betting on the market
- Explaining this further- the payouts are based around the amount of money on one side versus the other – and then discounted to the market probability of an outcome - this is a market force in one way
- But the market is heavily influenced by the odds given – which changes the behaviour of the individual when betting –
- If you can bet $100 and only stand to make $105 – what is the point? As the saying goes – most people like to have a punt – hence the long odds still setting bets on them even though the probability may seem low
- You can have one person put a bet on team A to win with $1m and then 1m people all put a $1 on team b –
- In this case it is likely that the odds point towards team B to win
- well either way the bookies lose – they have to pay a certain amount depending on the odds – if it is $4 for team A or $1.50 for team B – they are still losing money – either $3m or $500k – bad outcome –
- So the bookies have an incentive to offer odds that are attractive but will hopefully make them money –
- But What does this have to do with the US election
- That is where I think the bookies have it wrong in this upcoming election – and have the potential to lose a decent chunk of money due to the odds – which are based around the forecasted results based on polls
- Could also offer an opportunity for punters out there – now this isn’t financial advice – or a recommendation to bet on anyone – but is an analysis from the odds versus the probability of a candidate winning
- The Odds of the winning don’t really line up with what the polls are predicting –
- This being said – in the Polls – has Biden to win by a substantial margin, then also in the Betting odds – has Biden to win by a decent margin – Changes across sites – but on average Biden is around the $1.45 mark payout and trump is sitting at $2.80 for a payout
- Both of these things are in tandem – but where they diverge is to the degree to which they predict the win – which may show a flaw in the methodology
- Hence – this could be an arbitrage opportunity – for those punters out there
Looking deeper at the numbers behind the betting payouts –
- The amount of money that has been bet on this US election is huge – it is about $260m - As a result, more money has now been placed on this election than last year’s Super Bowl, the Mayweather vs McGregor fight, the Kentucky Derby and the NBA Finals all combined – there is a massive amount of money that has been placed on this
- set to be the biggest-ever betting event with wagers worth close to $400m expected by November 3rd
- Due to the polling and predictions - Trump trails in the odds market - with his odds at time of writing listed at -188, or 15/8, which carries an implied chance of 34.78% - Biden has odds of -190, or 10/19, which puts him in the driving seat with a 65.53% chance to win – that is where I think these odds are off
- Looking at the Leading U.K. bookmaker Betfair – have to look outside of the US – as it is technically illegal for US companies to hold bets on the US election – so punters go to non-US sites – well Betfair are reporting that the odds on both candidates give Biden a 66% implied probability of winning and Trump a 34% chance of winning
- But regardless of the odds – the money is on Trump = the more the odds predict that Biden will win – the money is flowing into trump –
- in fact more money has been bet on Trump in this race – With Betfair alone there is a split between £91m compared to £84m on Biden – being a UK company things are in pounds – but this means the money is 52% to trump and 48% to Biden
- So are people betting on Trump just going for the better payout odds?
- Biden pays out around the $1.45 mark payout and trump is sitting at $2.80 for a payout
- To break this down – important to remember the previous US election predictions – both in 2016 and the 2018 US state elections – all of which went into the Republicans favour over what the pollsters predicted
- This was a massive turn around compared to what the odds market saw on election night in 2016 – remember that Hillary Clinton went in the big odds-on favorite. And we all know how that turned out."
- In 2018 – there was a blue wave predicted -but the Republicans picked up seats in the senate – not the blue wave that was predicted
- Interestingly – other bookmakers – have seen an observation that the amount of money being bet on Biden has increased significantly over the past few days – but overall Trump is still more popular
- in terms of the number of bets placed in the last seven days, 80% have been on Trump compared to 20% for Biden – this is the number of bets being made – not the amount of money bet – aggregates betting data from dozens of bookmakers, said that over the past weekend, twice as many bets were placed on Trump to win than Biden, in an intriguing trend that has gathered momentum over the past month
- This is an important distinction – could mean that people are chasing the better payout figure –
- Looking at the payouts – if there is a 34% chance that trump wins at $2.90 – that is a payout of $98.6 – but with Biden at 66% chance to win at a payout of $1.44 – that is a payout probability of $95.04
- Remember - Like Biden, Hillary Clinton was the bookmakers' favourite heading into the 2016 election.
- Even though the odds were stacked against him back in 2016 – 61% of wagers on the 2016 election were placed on Donald Trump – even at worse odds
- Back in 2016 - Trump's election odds implied he had only a 16.7% chance of winning in late October but 47.6% of wagers were placed on Trump in the same month
- The betting favourite is still Biden – even since the markets opened in May 2020 – back then he had a 13% chance due to the Democratic Primaries – however thanks to Bernie and a few others tapping out due to some favourable deals as well as the inner party SuperPAC corruption – Biden emerged as the candidate – he is the big money doner
- Speculation is rife – the odds predict that biden has double the chance over trump –
- But these may be based off the popular vote – which means nothing in the US – they are a republic system – where the electoral college matters –
- The same runs with gambling – whilst more money has been bet on Donald Trump – a telling factor is that the ten biggest stakes made are all on Joe Biden – and these were made early on – which affected the original voting offs
- Multiple bets worth more than $100,000 have been placed on Biden winning the presidency, with the largest single bet of the campaign being more than $350,000 on the 27th of September
The election itself – Biden will probably win the popular vote – but the US election is built around the electoral college votes –
- This is the way the founding fathers set up the election process – to avoid the over populated areas deciding elections
- That is where I think that the US election race is going to be far closer than many analysts and other respected predictive models – many predict that Biden will get well over the magic number of 270 electoral votes that he needs to win – I personally think that trump may get close to 300 -
- Looking at the evidence - Biden continues to hold an average lead in national polls of 8-10 points – now this is well ahead of Hillary Clinton’s final average national lead over Trump in the 2016 race, and well more than the 4-5 point lead he needs to overcome Trump’s advantage in the Electoral College
- But polls are misleading – they have to do with the way the questions are asked as well as who you are asking – the voter turn out will be the deciding factor
- This is the most intriguing aspects of this race to me – that is the disconnect between prediction markets and respected statistical models/forecasts of the outcomes – it is a remarkable distinction not just from a betting perspective, but from an academic and financial perspective as well
- Main stream respected sites such as The Economist as well as FiveThirtyEight both show Biden with a projected 92% and 87% chance to win, respectively
- If anyone is mathematically challenged out there - it means that Biden is projected to win in a landslide - Yet prediction markets around the world continue to price the race around just 60/40 in favour of Biden
- Hence - many bookmakers have priced the race even closer than this probability – otherwise – the race would be McGregor Mayweather odds – with Mayweather $1.20, McGregor $5 – at least in this scenario there is a punchers chance of a win
- The debate will always continue over whether markets are more accurate forecasters of election results than polls, but they aren’t usually this disconnected – which is why I think the odds are good in Trumps favour
- We will find out in under a week – either I am going to be massively wrong and Biden is going to win – or Trump is going to win
- Either way – Politics in the US isn’t getting better - There are some pretty crazy optics outside of this – Biden is probably the most corrupt president candidate in US history – and that is saying a lot when compared to Hillary and Bill with their white-water scandal, and many others over the years
- The optics – which decide a lot when it comes to public perception and political outcomes haven’t been good for Biden over the past few weeks –
- You have Biden’s laptop– which shows some pretty revealing photos and videos if Hunter smoking meth/crack whilst engaging in inappropriate acts – not judging him on this – but where this comes back to his Joe biden – his major bill that he past in a 47 year career was the hard on crime act – or the 1994 crime act which would make a situation where his own son would be sent to prison for at least a decade under the mandatory minimum sentences that he set in this bill –
- In addition – the pay for play situations with Hunter between Burisma and the Chinese companies where the big guy or the chairman – which has been verified to be Joe Biden
- Had Tony Bobulinski who was involved with these deals verify this
- The fact that Twitter and FB were blocking this story and banning members who spread it is the very nature of campaign influence
- The difference between searching Biden’s laptop between google and duckduckgo – gives two different worlds
- Another major factor of optics - Who built the cages? With the immigration tactics of trump building cages for illegal immigrants -when this was what was done under Obama – ad It was literally Jim Biden's (Joe's brother) construction company contracted by the Obama Administration
- There is a lot of propaganda about Trump – but the amount of suppression with Biden is incredible – don’t think that active people in the US could be unaware of this – hence the outcome to the election may be surprising turn of events
- I personally think that trump will win – may be completely wrong – but there seems to be a disparity between the numbers when it comes to the odds markets and that of what I think the outcome is
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. The Say What Wednesday edition. This week we’re continuing the Question from Phuong -
Part of the question from last week that wasn’t covered.
“I heard about the Government’s plan to build some gas station? do you think this is green energy and does it help with economic growth?”
Last Say What Edition episode – went through the future energy plans that Governments have – a lot of this has to do with CO2 emission reductions
In this episode – be focusing on the Australian Government’s plans – looking at one section of the budget for economic growth and that is the focuses on the Gas industry
- the Government wants to reset the east coast gas market and create a more competitive and transparent Australian Gas Hub – aim to do this by “unlocking gas supply, delivering an efficient pipeline and transportation market, and empowering gas customers”
- Goals are to make energy affordable for families and businesses and supporting jobs as part of Australia’s recovery from the COVID-19 recession – so we will break these down
First step – answering the question on is this green energy?
- If defining green energy as not renewable – but lower CO2 emissions – depends on the benchmark – if more Australians start using gas as rather than coal electricity power – than yes
- When looking at the Green energy – focus is on Co2 Emissions – however not pollution – but the measurement of CO2 emissions – side note – in an ideal world – we would all live in a pollutant free world – however this can never be whilst humans exist – especially if people are measuring CO2 as a pollutant – because you are polluting every day by just breathing – the world population is just under 3 billion tonnes of CO2 every year in breathing
- However- coal has come a long way in getting pollutants like mercury and other toxins out of the coal – but still produces CO2
- So lets compare natural gas co2 emissions per kwh to the other sources of power –
- The carbon intensity of electricity varies greatly depending on fuel source – but as a rough guide: coal has a carbon intensity of about 1,000g CO2/kWh, oil/petroleum is 800g CO2/kWh, natural gas is around 500g CO2/kWh, while nuclear, hydro, wind and solar are all less than 50 g CO2/kWh –
- So if the plan is to replace more of the coal industry with gas – then yes – it is a step towards a ‘greener’ form of energy
- In Australia - Coal accounts for about 75% of our electricity generation – this is then followed by gas at 16%, then hydro at 5% and wind around 2%
- This doesn’t include households use of Solar – but what is commercially provided
- However – if coal accounts for 75% and is emitting 1,000g CO2/kWh – by replacing this with natural gas – would reduce our CO2 emissions by about 37%
- Out of these industries – the one at the greatest level of risk is the coal industry if the policies continue to focus on low CO2 emissions industries for the electricity industry – also important to point out there is a difference in the electricity industry and the transportation/car industries with electric vehicles -
- However - The oil/petroleum industry overall isn’t in that much of a risk at this stage - Just to clear one thing up – whilst the energy industry is moving towards solar and wind – and other forms of renewable energy - the petroleum industry isn’t going anywhere –
- Petroleumis the main source of energy for transportation – accounts for about 92-95% (depending on the country) in transportation power – will take decades for the majority of cars to be EV – takes time and not everyone can afford an EV at the moment -
- However - Even if every car in the world goes to EV – and there is no need for petrol in fuelling cars, trucks or boats in transportation – not going anywhere – part of plastics – if you look around the room – it has been part of the majority of products that are produced – so maybe the petroleum industry adapts -
- Even the road that these EV cars will drive on has petroleum in them – asphalt uses about 350k barrels of oil a day – or just under 128m barrels p.a.
- So to answer the question on if Natural Gas is green energy –as a measurement of CO2 emissions - compared to coal it is – but compared to nuclear, solar, hydro or wind – it isn’t
Moving on to the Australian Government’s plans for a Gas Hub – and if this can provide economic growth
- Model is similar to what the US has – the aim is to create a transparent and liquid financial gas market –
- This is based on the Henry Hub that is based in Louisiana – at the end of the pipelines that flow all the way up to Alberta in Canada
- Under these hubs - Gas is available at any time, at a clearly visible price for transfer anywhere around the country. With hedging on offer on futures markets, buyers can take decisions on long-term investments in their own operations knowing that a key fuel will be available and what it will cost.
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Now the federal government is taking steps towards delivering an open and competitive hub model like Henry Hub in Wallumbilla near Roma in Queensland, a key point in the east coast gas grid – however pipelines need to be in place for the effective/timely/low cost transportation of natural gas
- That is where we have a very long way to go – we lack a lot of the infrastructure – so the governments plans may be able to improve this –
- On the pricing side - in Australia- the financial market for natural gas is far less liquid than what exists in the US – give it to Obama on this one – for all his green energy talks – he sure did step back and let the energy/gas industry just do their own thing – in a matter of years they became the energy dominant power on earth
- In Australia - industrial customers currently have to deal with opaque pricing models – this is due to the bilateral deals that are made between gas providers and the companies demanding it – there isn’t a market involved – has to do with thelimited choice of supply as well as the difficult negotiations on transportation terms on the sparse pipeline grid
- To help conceptualise this – image a share market where you had to go to the company you are wanting to buy shares in and negotiate a price for the share – go to CBA and offer $60 per share – but they want $80 – you negotiate and reach a price in the end – however -under the share market – the supply and demand of these shares gives the market price – at around $69
- Also – rather than the shares turning up on a clearing house system – you had to get the certificates delivered to you or go and pick them up from the post office
- For Australia – and the Government to implement these plans - the challenge is how this version of a market hub for gas can be created
- First – need massive infrastructure in the pipelines as well as increasing the suppliers in the market
- Looking at the US - the success of the Henry Hub is largely due to the extensive network of infrastructure that surrounds it – it offers access to both the suppliers and those who demand it across the US as well as Canada and Mexico
- Looking at the grid – it has interconnections into nine intrastate and four interstate pipelines that provide the supply to the rest of the country – it also has three storage caverns that allow the storage of additional gas – allows for flexibility in the market – for supply to build up and incentivise the providers to lower prices – as well as providing the gas at short term notice when it is demanded
- The US has built a pretty good system – now comparing this to Australia – firstly we have less demand and supply – a lot of this has to do with population sizes – however looking at the infrastructure that is in place –
- In Australia – we have about 30 pipelines on the eastern seaboard – which covers around 20,000 km
- The US has about 210 pipelines – that are all interconnected – covering about 500,000 km
- On top of this – in Australia – for this program to work as intended – need additional sources of gas supplies – as well as on the consumer side – you need a strong buyer base
- This can include power plans, commercial consumers as well as individuals in households
- How does the Government plan to rectify this – through focusing on three major areas – unlocking supply, making gas transportation more efficient and giving consumers more power in pricing negotiations
- Unlocking supply - The Government aims to get more gas into the market by –
- Setting new gas supply targets with states and territories and enforce potential “use-it or lose-it” requirements on gas licenses – so if a company has rights to a gas basins – can’t limit the supply artificially – would have to use is – may help to increase supply
- Unlocking five key gas basins starting with the Beetaloo Basin in the NT and the North Bowen and Galilee Basin in Queensland, at a cost of $28.3 million for the plans – depends on the regulatory plans – and what the gas levels in these basins are – but still need to the supplies here
- Unlocking supply - The Government aims to get more gas into the market by –
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Avoiding any supply shortfall in the gas market with new agreements with the three east coast LNG exporters that will also strengthen price commitments
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Supporting CSIRO’s Gas Industry Social and Environmental Research Alliance with $13.7 million and Exploring options for a prospective gas reservation scheme to ensure Australian gas users get the energy they need at a reasonable price
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boost the gas transport network –
- Identifying priority pipelines and critical infrastructure as part of an inaugural National Gas Infrastructure Plan (NGIP) worth $10.9 million that will also highlight where the government will step in if the private sector doesn’t invest - Government would also work with state governments through a program worth up to $250 million to accelerate three critical projects – the Marinus Link, Project Energy Connect and VNI West interconnectors
- Reforming the regulations on pipeline infrastructure to promote competition and transparency and Improving pipeline access and competition by kick-starting work on a dynamic secondary pipeline capacity market
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To better empower gas consumers
- Establish an Australian Gas Hub at our most strategically located and connected gas trading hub at Wallumbilla in Queensland (near Roma) to deliver an open, transparent and liquid gas trading system
- Level the negotiating playing field for gas producers and consumers through a voluntary industry-led code of conduct, to be delivered by February 2021 – have to wait to see what this looks like
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Ensure Australians are paying the right price for their gas by working with the ACCC to review the calculation of the LNG netback price which provides a guide on the export parity prices – this does take the free market out of it a little bit – letting the ACCC get involved
So that is the plan – and it may work – Australia does have a competitive advantage when it comes to natural gas – Last year - Australia was the largest exporter of LNG - with an export value of $49 billion – so it has been a core part of our export markets
- To build upon this competitive advantage isn’t a bad thing – especially if it does as what is intended – through letting producers and consumers get a better market price through the Gas Hub trading system
- We have a massive resource of gas – so helping boost this will help to boost the economy if done well –
- We are competitive – so our exports should go up – and if the industry grows – through an increased supply – then this should provide more jobs and well as lowing the cost of electricity to consumers
- At the moment – the estimates show that the Gas industry supports the manufacturing sector quote a bit – and in total these industries employ over 850,000 Australians – the government estimates that a further 4,000 jobs can be created in the gas industry between working on the infrastructure grid or directly in the gas industry
- Flow on industries form this – like petroleum – gas is an essential input in the production of plastics for PPE and fertiliser for food production
When looking at the plan – if it replaces coal – it may be robbing Peter to pay Paul – if we focus on Coal exports still and no jobs are lost in the mining/export industry of coal – may still see some job losses in the coal energy industries – but it is hard to say
- As far as economic growth goes – direct affects – if it created more jobs – long term – not just a short term plan to build a pipeline – but through expanding this industry – think this can help
- Indirect affects for individuals and companies –
- Supply side – lower cost of production of goods – could translate to lower costs of goods/services over time
- Demand side – lower power bill price – assuming the prices of electricity actually does go down – will benefit Australian households and businesses – lowering bills means more left-over income – following demand side economics – this could be spent in the economy
- Overall – I do like the plan when compared to other proposals or just regulating power prices directly – there is no perfect plan – or solutions to economic problems – there are only compromises – think it is a good compromise to balance the agreed upon CO2 emission reductions whilst not destroying the economy and jobs that go within it – through taking CO2 emissions and increasing electricity prices
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. In this episode we will be looking at where to invest in the current economic environments for yields, or passive incomes in the current environment.
Best place to invest for yields changes, a lot of this has to do with market environments:
- Major market changes have to do with a few factors – interest rates, property prices, and dividend policies
- When looking at the financial markets in general – there are many different places that you can normally get an income – but the fundamentals of these changes with economic conditions – so we will do a deep dive into these and look at what the better places are likely to be to invest over the next few years for a yield return on your money
- General disclaimer – not intended to be personal advice
- Before we get into it – have to define what a yield is – it a representation of the income that you receive from your investment – measured as a percentage
- All you do is take the income that you get each year and divide this by the value of the investment -
- If you invest $1,000 – and get $0 of income from this – your income yield is 0%
- If you invest $1,000 and get $50 of income from this – your income yield is 5%
- If you invest $1,000 and get $100 of income from this – your income yield is 10%
Now that that is out of the way - Looking back over time at the yields from markets – through breaking this down from asset class to asset class
- Asset classes – An asset class is a grouping of investments that exhibit similar characteristics and are typically subject to the same market dynamics – easy way to categorise different investments
- You can have asset classes like cash, fixed interest or bonds, property or real estate, shares or equities, as well as alternatives like commodities, futures
- Cash - it wasn’t that long ago that keeping money in the bank account or having a term deposit would yield you 5% p.a. – that is a decent income – when looking at yields in a safe asset – one that doesn’t lose capital value in the short term – 5% p.a. looking back is a pretty good income
- But today – 0.35% to 0.70% p.a. depending on the timeframe of a term deposit is the best that people can hope for – most savings accounts don’t pay anything in interest incomes – so cash is not the best place to hold money at the moment if you do need an income – it is still a good place to hold funds if you need funds for expenditures – or emergency reserves – being a few months of total expenses for emergencies- but there are better places to look
- Fixed interest – newly issues fixed interest and the income that is paid from these assets is highly correlated to the current cash rate (or interest rate)
- When government bonds are issued to the market – they tend to pay a coupon yield that is very close to the cash rate – so if you buy a government bond for $100 – you are likely to get
- For a corporate bond – you are likely to get a slightly higher coupon rate from the corporate bond – due to a risk premium – risk premium is where you get an additional return due to the additional risk that is carried with the investment
- The additional risk here is a default risk – Governments are considered safe from default when compared to a company – so companies typically have higher coupon payments than the cash rates due to this
- Either way – the coupon payments on these bonds is correlated to the cash rate – hence at the moment – if you are buying newly issued bonds – your income yield is likely to be low
- You could also buy existing bonds that were issued a few years ago when interest rates were higher -bonds have the fixed coupon payments at the time that they are issued to the market
- If you were to buy a bond that was issued 10 years ago – you might be getting a coupon payment of 5% -7% - which is a good income based around the face value of that bond
- But due to market dynamics – the price of that bond is going to be higher than the face value – to the point that the annual yield on that bond until maturity is going to be very close to the current yield on a bond – for instance – for a bond issued 10 years ago at $100 and paying a $5 coupon payment – which is a 5% yield – today you might be paying $120 for that to the point that where it matures in 5 years’ time – the net yield on holding that investment is likely going to be close to 0.25% p.a. in real terms
- So both cash and fixed interest are not providing much of a yield at the moment – looking at the future markets – not likely to be providing one over the next few years either –
- This has created a situation where people looking for yield need to move up the risk curve – initially – investing in growth assets to look for incomes that aren’t as tied into the interest rate cycle as defensive assets like cash or fixed interest are – there asset classes are traditionally property or the share market
- Bit of a side note – most of the alternative asset class markets don’t provide incomes – commodities work off growth returns – so no yields there – like buying gold –
- Other alternatives like the futures markets or derivative markets only pay yields if you are the seller of the contract – but I will not be including these – so looking at share and the property market
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Property market – the yield that you get off property can be categorised in two ways – gross yield and net yields
- Gross yield is simple to calculate – you take the annual rental income and divide this by the estimated price of the property
- If a property is worth $650,000 and you are getting $550 of rent per week form this – or $28,600 p.a. in rent – this is a gross rental yield of about 4.4% p.a.
- The net yield is the income that you receive after all costs – depending on the property type, if agents are used or if there is a loan attached to that property, the net yields can change –
- I did say previously that the yields for cash and FI and directly related to the cash rate – it is not exactly true as in a way – property yields are indirectly related to the cash rate –
- First – you have the prices of the property itself – as interest rates drop – property prices go up – depending on the measurement – 1% drop in the cash rate translates into an increase on average in property prices growth by 14-17% - based around how much people can borrow due to the affordability of the loan increasing – hence banks will lend more
- If prices go up – and rents stay the same – the yield will drop – to illustrate this – if the property is renting at $550 p.w. and the price of the $650k property increases by 17% - the yields drop from 4.4% to about 3.8%
- Secondly – you have the take into account the interest costs if a loan is attached to the property – as interest rates drop – the repayments on the property also decline – which increases your net yields
- First – you have the prices of the property itself – as interest rates drop – property prices go up – depending on the measurement – 1% drop in the cash rate translates into an increase on average in property prices growth by 14-17% - based around how much people can borrow due to the affordability of the loan increasing – hence banks will lend more
- Gross yield is simple to calculate – you take the annual rental income and divide this by the estimated price of the property
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The two cancel each other out somewhat – but there is still a relationship there
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Looking at the net yields – you might have agent costs of 8% of the gross rent, rates, water costs, and general maintenance – not to mention body corporate –
- Lets say that rates are $2k p.a. and that water is $1k and that general maintenance is $2k p.a. – you have outgoings of about $5k – this would work out to be a net yield on the property of 3.3% p.a. without a loan
- If you have a loan – let’s say it is on an interest only loan – at 80% of the value of the property at a 4% interest only investment rate – means there is an outgoing of $20,800 p.a. in interest costs – with no principal repayments – the net yield in this situation is 0.1% p.a. of the total price – however this is about 0.4% of the equity is invested in the property – equity of $130k with a net income of about $512 p.a.
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So it is positively geared – just slightly – but if it was an PI loan at 3.5% for an investor rate – the outgoings each month in repayments would be $2,336 – which results in a net yield of -0.68% p.a.
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Yields on property have a lot to do with the outgoings as well as the price growth of the property – which for property – is the major consideration as an investment – people should remember that investing in property has more to do with yields than it does to yields –
- If the loan is fully paid off – and depending on the property type – like a duel living situation – you can get a decent yield – and when looking at just the equity component – say there is a loan on the property – in the previous example with a 0.1% net yield – this is actually closer to 0.4% p.a. based around the equity of $130,000 in the property when accounting for the loan – but remember if the loan is paid off- the net yield would be about 3.8%
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Shares – in the current market – shares can pay a higher level of yield – but similar to property – this has to do with what type of shares people are buying
- The cash cows of the market – being banks – are currently out of favour – they aren’t paying dividends at their normal rates at the moment due to APRAs requirement that they shore up tier 1 capital –
- But that doesn’t mean there aren’t opportunities withing the markets – also – banks are likely to increase their dividends once things within the housing market calms down
- Before we go into these – important to point out the differences in the Australian to International Markets –
- The Australian market typically pays higher dividends overall when compared to say the US market – or other international markets –
- This is looking at the aggregate level of indexes – ASX300 has a yield of around 4-4.5% compared to the US market of about 1.5-1.8% - so the Aus market pays more in dividends overall –
- The cash cows of the market – being banks – are currently out of favour – they aren’t paying dividends at their normal rates at the moment due to APRAs requirement that they shore up tier 1 capital –
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Important destination has it has to do with the corporate board level of dividend policies – if you are on a board of a company – your sole responsibility should be about shareholder value maximisation – in other words – should you pay shareholders the retained profits of the business or reinvest these within the business? In countries without franking credits – it is often the case that companies decide to reinvest the retained earnings or profits within the business for capital growth – as without franking credits this income gets double taxed – the company pays the tax on the net incomes and then pays out the profits which also get taxed at the individuals marginal tax rate – creates a disincentive for boards to pay more in the way of dividends
- Also has something to do with the types of companies that make up the index – large companies in tech that have lots of R&D costs and not much in the way of profits also cannot afford to make large dividend payments – even on the ASX – number 1 company of CSL pays a 1% dividend yield
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However – if you are a yield hunter – there are better finds within the ASX market due to the higher dividend paying policies as well as franking credits – especially when accounting for the after tax yields
- Incomes with franking credits – can have gross and net yields as well
- Going back to property for a minute- that net yield – if is it a positive cash flow – will still be taxed – if your net yield is 0.4% on the $130k of equity in the property (but 0.1% yield on the gross value of the property) - that is still a positive income (assuming no depreciation on the property) – so you will pay your marginal tax rate on that yield –
- If you are earning $80,000 p.a. – that takes your after tax yield down to 0.25% (at a tax rate of 34.5% p.a.)
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Say you invested that $130k into the share market – or a managed fund or index fund that only invests within equities that pay above a threshold of 5% p.a. in dividends – and say the dividend payment is 5% p.a. being fully franked – The gross dividends would be about $6,500 p.a. plus the franking credits of $2,786 – now both would be assessed as income – total assessable income of $9,286 p.a. – if you are in the 34.5% tax bracket (inc. Medicare levy) – you will pay $3,204 of tax on this – but then get the franking credits back to offset this –
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Net income – after tax – is $6,082 p.a. – from the gross dividend of $6,500 – which is a net yield after tax of about 4.7% p.a.
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So when looking for yields – it is hard to pass up fully franked Australian shares – it has been my strategy for a while – to utilise the FF dividends to either reinvest into assets that are undervalued – or to help to build a deposit to buy property
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Now – the downside to chasing yields through shares – is the additional risks – the volatility – you have to move up the risk curve to chase yields – not too much of a concern if you are younger
- This can be a double-edged sword – as technically if the income payments or dividends stay the same – the yields actually go up –
- If the dividends remain at the same level but the price of shares goes down – then you can buy more shares at the lower price – long term this can pay off – some of the companies I have purchased over the years have payed dividends (pun intended)
- Bought companies back in the GFC – like the banks and TLS – where they were paying about 10-12% yields up until recently – they are more back in line with average market returns of 5% now –that are still paying yields of between 30-50% p.a. based around the prices they were purchased at
In summary –
- At the moment – looking at each asset class – property or shares are likely to provide better yields due to the cash rate of the economic environment –
- Then with Property and Share – looking within each asset class – you can get low or negative returns in yields
- But overall – Aus Shares due to franking credits can provide the best net after tax yields – but it comes back to the types of shares –
- However – to get these better yields – have to move up the risk curves which comes with some Downside risks – volatility – can provide an opportunity for additional investments to be made
- Long term – anything can change – looking at the cash rate – this could rise over the next decade and make cash the better yielding assert – but under the current market environment – low interest rates – cash and FI may not pay much in the way of yield
- So people are forced to move up the risk curve and assess the investment types that can best achieve their goals
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition. I hope you are all going well.
This episode is all about “the great reset”.
It sounds like some weird, out there agenda, but it is carried out by some of the most influential organisations on earth. I want to look at this further and explain what the plan for the great reset is.
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Now - The Great Rest is the theme of the upcoming World Economic Forums 50th Annual event in January 2021
- From reading the initial proposals – it seems like a pretty radical plan to completely re-work the mechanics of the entire global economy
- It is such an extensive agenda – it would have taken years to actually put together – a lot of this ties into the SGD with the UNS agenda 2030 – covered these in length in the past -
- but the great resets proposals surprisingly tie into the economic shutdowns of 2020 due to Covid
- Not the overall plan – the plan really has little to do with COVID19 – but it is being used as the justification as why it is urgently needed
- Klaus Schwab the founder and executive chairman of the WEF – “The pandemic represents a rare narrow window of opportunity to reflect, reimagine, and reset our world” – come back to this point in a minute
- The WEF is not alone in wanting to reset the global economy – they are working with the UN, International banks and partners of the WEF – being the global industrial and technology giants
- The World Economic Forum’s ‘Strategic Partners’ are its top-tier group of 100 global organisations - This group includes major global banks such as Barclays, Bank of America, Credit Suisse, Deutsche Bank, Morgan Stanley and Standard Chartered Bank – goes without say that this group yields immense financial power
- Their partners also include major technology and communications companies such as Huawei, Publicis – the oldest and one of the largest marketing and communications companies in the world, Omnicom – another massive global marketing, public relations and communications companies – then you have other players such as Microsoft, Google, Facebook
- This is an important point to ponder on – why would the WEF have strategic partners involved in the flow of information and spinning information through public relations/advertising?
- Between Google (and YouTube) and Facebook – this is how 85% of the world’s population get their information/news
- Then they are enlisting the help of the biggest communications and marketing companies in the world (Publicis and Omnicom) – to help provide the spin on the information about the agenda. Why?
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It seems like the teams are in place – with their strategic partners to help with the financial side as well as the PR/information dissemination
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How do they actually want to reset the economy? This is where things get a little murky – they have no defined plans about how - but simply what – this is always a concerning point –
- How is the most important factor – what is simple – you can have the what to be that there is greater equality – but if the how is to make every equal in having nothing – then this isn’t a good outcome
- But it seems like their aims are to band together to create the new normal that we are hearing about – a world that works as they plan it to work
- Statement from the WEF - the world must act jointly and swiftly to revamp all aspects of our societies and economies, from education to social contracts and working conditions. Every country, from the United States to China, must participate, and every industry, from oil and gas to tech, must be transformed. In short, we need a “Great Reset” of capitalism.
- So it is a movement to reform capitalism and as previously mentioned - These are not the ramblings of teenagers – but some of the most powerful and influential think tanks on earth – with companies that control almost all of the information flow of earth
- And in essence – they are calling for what could be best described as a form of new corporate Marxist principles – having governments and entities like the UN to team up with already powerful companies to enact the change that they think we need – based around centrally planned ideologies
- They are claiming that capitalism has empirically failed – due to inequalities - but in my opinion – it technically has but due to the evolvement in the market by these very entities – through over regulating and creating barries to entry and an environment where to get to the top as a company – you need politicians and corporate welfare
- That is where there is a distinction between a free market and capitalism – capitalism in its current form has failed – but that is not at the feet of the free market – but a subverted market that turned into a form of crony capitalism
- But their ideas to reform capitalism by returning towards a planned economy is likely to exacerbate the current problems the world economy faces –
- A planned economy is a type of economic system where investment, production and the allocation of capital goods take place according to economy-wide economic plans and production plans
- This form of economy uses centralized, or Soviet-type forms of economic planning – very similar to how the monetary system works with central banks – but the idea is to expand this further throughout the economy
- Klaus Schwab – the chairman of the WEF – has been called “indisputably the most powerful connector in the world” by Forbes - it is true – he is an influential man and writes a lot of books – one of which was published this year at the start of July - titled Covid-19: The Great Reset – so he is pushing this agenda hard
- It is a 282 page book – that was published 3-4 months after it became apparent that Governments were going to shut the world down – remember that March was when lock downs around most of the western world were enforced and the economic woes started to set in
- For anyone familiar with the process – takes between 9 months to 2 years to go through publishers to get a book published in the traditional sense –
- Self-publishing – assuming the book is ready to go with all the writing completed – takes about 3 months – so I guess he is just a really quick writer –
- On top of this - he has dedicated a large portion of the official WEF website to such articles such as - “Does capitalism need some Marxism to survive the Fourth Industrial Revolution?”
- This is an incredibly surprising revelation from someone like Schwab – who is the head of what is called “the greatest independent economic organisation” to push for a return of the deadliest social experiments of the 20th century – implementing Marxist ideologies
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Klaus said – “There are many reasons to pursue a Great Reset, but the most urgent is COVID-19” They have also said: “the current conditions will exacerbate the climate and social crises that were already underway. Left unaddressed, these crises, together with COVID-19, will deepen and leave the world even less sustainable, less equal, and more fragile. Incremental measures and ad hocfixes will not suffice to prevent this scenario. We must build entirely new foundations for our economic and social systems. The level of cooperation and ambition this implies is unprecedented. But it is not some impossible dream. In fact, one silver lining of the pandemic is that it has shown how quickly we can make radical changes to our lifestyles. Almost instantly, the crisis forced businesses and individuals to abandon practices long claimed to be essential, from frequent air travel to working in an office. Likewise, populations have overwhelmingly shown a willingness to make sacrifices for the sake of health. Clearly, the will to build a better society does exist. We must use it to secure the Great Reset that we so badly need. That will require stronger and more effective governments, though this does not imply an ideological push for bigger ones. And it will demand private-sector engagement every step of the way.”
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So this seems like the opportunistic time to push through any agenda whilst the population is malleable
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But it is in your best interest – like the lock downs – because Schwab promises a new world. A better world. A fairer world.
- And what evidence does Schwab present to support his new world order? As Klaus has said - “Capitalism as we know it needs to be reformed. The growing discontent at the ideology that has created so much wealth and progress on the one hand, and yet so much inequality and instability on the other hand, and is causing increasingly frequent social disruptions across the world. The COVID-19 crisis has laid bare most of these dysfunctions, ranging from uneven access to healthcare, education, economic opportunities, and social progress, to growing inequality among and within nations and racial and ethnic groups. At the centre of these multiple crises lies the tension between privilege and meritocracy.”
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There’s a lot to unpack with this statement – but it seems truly tone-deaf to the average individual’s plight - but the underlying theme to most of his writings on the subject relates to the existence of inequality being evidence that capitalism has failed – and that the government imposed shutdowns for sectors of the economy are just are further evidence of this
- It is of course true to that a free market will create inequality due to the concept of freedom – free to choose what jobs people pursue, how they spend or save their money, what they invest in – with this comes inequality
- But to the extent the current form of corporate capitalism creates inequality – is that you can do very well for yourself – but to become part of the 0.0001% or the elite billionaire class – you need help from the government – but that isn’t the focus of the great reset – It is to further reform the free market to be more capitalistic in the sense that we know it – more government controls as well as corporate control
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Even calling capitalism an ideology shows the true intent – if he were referring to free markets – that isn’t an ideology – that is a natural economic function – the most natural without interventions – referring to economic systems as ideologies reminds me of the ideologically possessed individuals in favour of Command Economic Systems – or planned economies – as they only work as an ideology in theory – and comes back to the argument that true communism or Marxism has never been tried – the ideology is still there as the practical implementation can be ignored
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You see – Mao and Stalin, they were not true Marxists. Hitler was not a true socialist – Whilst people today can say that these individuals didn’t have the best intentions – in their own minds they probably thought that they did – reading some of their own translated works – their own first-hand accounts of their ideologies – they thought that they were doing what was best for their own countries – and for the greater good – two of them wanted to reform the greedy capitalist systems as they saw them – the other wanted to create a clean pure world
- They all had a plan in their own minds that they could centrally plan millions of individuals lives for a better world for the greater good – and that their own forms of utopia is possible – so they set out to create this – with an iron rod in all cases – and we know that their intentions created a hell on earth for those under them
- But this time – with the brilliant minds of modern-day academics - Utopia is indeed possible
- I still don’t know why these global “leaders” are so in favour of implementing failed economic policies –
- It may be that they know these policies they suggest won’t touch them but in fact benefit them – similar to the episodes on why billionaires like socialism – these policies solidify these individuals into further power – over the economy and you and I – with our daily interaction – and with this – they can increase their influence, power and wealth
- That is the major concerning factor for someone like myself – is that it appears that these organisations, between global semi-governmental bodies, global companies that control the flow of inflation and the PR that goes along with this – they intend to impose their agendas on us – without any democratic consent – and without any system of accountability in place to ensure that it actually serves the interest of the people it is meant to help – sounds very similar to the authoritarian dictators of the centrally planned regimes that went so poorly for the population
- It is a disturbing trend that is always present in any unaccountable entity – if something goes wrong – typically doesn’t affect the individuals at the top of the political hierarchy but it sure does affect everyone else lower down in the pyramid – and when things go wrong for the general population - the blame is focused elsewhere – it is capitalisms fault, or some section of the populations fault – like the bourgeoise’s fault – which in Russia ended up being the land owning farmers
- Whenever politicians or officials outside of the democratic process stuff up – what is done? Blame is passed down the chain - where nobody knows who made the decision – such as with the Victorian government – where nobody seems to know why made the decision to use private security firms for hotel quarantines
- Or – take monetary officials or economists who come up with these ideas for politicians to enforce
- It is a disturbing trend that is always present in any unaccountable entity – if something goes wrong – typically doesn’t affect the individuals at the top of the political hierarchy but it sure does affect everyone else lower down in the pyramid – and when things go wrong for the general population - the blame is focused elsewhere – it is capitalisms fault, or some section of the populations fault – like the bourgeoise’s fault – which in Russia ended up being the land owning farmers
- Lets call them the intellectual class - thomas sowell booked - intellectuals and society – does a great breakdown of this – would recommend it – but goes through that the people who comes up with policy ideas – are never held to account
- When they get things wrong – they are actually often rewarded by lush academic careers – so they benefit from bad ideas whilst the general population suffers
- So us plebeians will bear the brunt of these policies – which at my initial assessment are not in our best interests – but rather they serve the interests of the already wealthy and politically powerful – where they have the most to gain
- How? Well the power is gained by them – and the economic policies of re-distributions also disproportionately affect them
- How do governments benefit your own life? They want to the population to give them the power to better your lives – it sounds good – but it is a pipe dream
- Governments cant build wealth for you – they can only redistribute or get into debt to try and stimulate an economy – but it isn’t real wealth building
- But the WEF seems set on this idea – and with the combination of enormous financial power, skilled persuasion capabilities and control of the communications infrastructure at their disposal - WEF has huge power to mould, influence and control events – while shaping public opinion
- Next FF – we will look at the three main pillars for the great reset – and break these down as well as their implications
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say what Wednesday edition. This week is another great Question from Phuong.
“What do you think about the future energy plans for Australia and the world in general?
I heard about the Government’s plan to build some gas station? do you think this is green energy and does it help with economic growth? I know we have some share in Uranium and lithium. do you think Australian Gov will ever consider nuclear energy?”
Thanks for the great question – pretty big topic – a lot of governmental energy policies are focused on climate change and CO2 emissions - Covered a lot of the background to this topic in previous episodes over the years – some of these were titled:
- What is the real danger behind Climate Change? – went through the history of the climate change narrative – from back with global cooling in the 60s and the organisations behind constructing the narrative and who benefits
- Climate Agreements – An effective CO2 reduction strategy, or a money-making scheme? – looking at the financial incentives and economics of climate policies for big business
- Pay more in taxes, electricity prices and costs of goods, or the climate will change! - focusing on why CO2 is presented as the culprit and what this leads to in your everyday life – in this I did look at the better already available solutions that are being ignored
- Global Infrastructure plans in the name of climate change - Why then are the recommendations focused on changing Government accounting practices and risk-measures, along with opening the floodgates for redistribution spending?
- So if you want some more context – recommend going back and searching for those titles -
However - In this episode – look at what is green energy, and what the future of the energy market in Australia may look like and why – versus what I think is the optimal outcome – next SWW episode – look at if the Aus Government plans, called the Gas-fired recovery can help with economic growth and the green energy plans
What is Green energy – it is considered renewable energy –
- Renewable energy is energy that is collected from renewable resources - which are naturally replenished on a human timescale – these include under the definition energy sources such as sunlight, wind, rain, tides, waves, and geothermal heat – but why not gas and oil?
- A lot of people think that these are finite – lingering fallacy from the peak oil theory initially from 1956 – but the geologist who came up with this worked for Shell and was probably trying to create artificial demand for oil – which worked –
- However – there is a lot of information that actually backs up the idea that Earth is actually an oil-producing machine – the idea of oil being a fossil fuel – getting its name based around the assumption that oil and gas comes from decomposing dinosaurs and organic material now seems ridiculous – this the label is a misnomer – all the research from the last decade found that hydrocarbons are synthesized abiotically
- In other words all the data implies that hydrocarbons that make up oil and gas are produced chemically from carbon found in Earth's mantle – that is self-reproducing
- Science magazine and Nature magazine have released studies on this - calls the product of this process an "unexpected bounty " of "natural gas and the building blocks of oil products." – which the earthy naturally produces on an ongoing basis – oil and gas reservoirs replenish themselves
- The definition of human timescale is where the definition of renewable is narrowed down - Oil and Gas actually renews the reservoirs over time – we aren’t running out of oil and gas – they are technically renewable energies by the definition if you take human to be a generation or more –
- Engineering and Technology magazine says "with the use of the innovative technologies, available fossil fuel resources could increase from the current 2.9 trillion barrels of oil equivalent to 4.8 trillion by 2050, which is almost twice as much as the projected global demand."
- But that number could even reach 7.5 trillion barrels if technology and exploration techniques advance beyond the current projections – so oil and gas are naturally renewable
- this nomenclature aside – there is the argument of environmental damage and CO2 emissions
When it comes to the future of energy – what is considered green energy in the form of renewables with solar and wind is a major the key policy focus from the unelected global entities like the UN, world bank, WEF and their likes – but the focus is on the reduction of CO2 emissions
- In the UNs Agenda 2030 – Started in 2015 – a part of this is the Paris Agreement – tool used for countries to meet the sustainable development goals through reducing carbon emissions
- you have Sustainable Development Goals 7, 9 and 13 which focus on this topic of what they consider green energy–
- SDG 13: Climate action - "Take urgent action to combat climate change and its impacts by regulating emissions and promoting developments in renewable energy."
- SDG 7 - Affordable and Clean Energy - "Ensure access to affordable, reliable, sustainable and modern energy for all”
- SDG 9 - Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation
- Solutions provided – Continue developing Solar/Wind as the way forward, and tax CO2 emissions to price it out of competition - Australia Target under the Paris agreement – Emission reduction of 50% p.p. – May as well be a tax on the population to achieve this in this timeframe to disincentivise the use of energy that produces CO2
- Main intention is to not just deal with heavy polluters (that is a policy that is working) – we already have heavy environmental protections
- This target is completely different - outcomes here is the target - 45% emission reduction target – not policy of how – but what – Governments are demanding almost half the emissions to go – this is going to cost a lot – indirect through taxes and pass on costs to make green energy more cost competitive
- independent modelling – shows that there will be impact of $9,000 a year for the average Australian worker, at the cost of 360,000 jobs or more
- Climate is the most misunderstood topic – listen to honest scientist – they say they don’t know what is happening – the climate changes naturally – nothing new here – been happening for 4.5 billion years – times in the past CO2 was going down but temps were going up – nobody knows why – but listen to UN – they guarantee that if you are reducing CO2 emissions by the target this will reduce the rise in temperature by 1.5 degree - so give all the energy regulation and money to them – but this is the way energy policies are progressing
- The future of energy is all about focusing on reducing CO2 - but why is co2 used?
- All for Energy and resource control – helps as well to siphon trillions of dollars out of people into the UNs pockets as well – Control of money, control over our lives –
- CO2 can be monetized on both ends – you can tax the CO2 producers – you can also give carbon credits to green energy providing companies – there is a massive financial incentive –
- CO2 is a financial market – the carbon trading turnover was at $214 billion last year – which was a growth of 34% from the previous year
- The average price of a carbon credit rose by $10 over the past year – from $18 to $28 per tonne
- This is a relatively new scheme – was only implemented 15 years ago – but as these policies grow – this market will grow to be as large as any share market
- Finances – Paris Agreement - Article 9 – Deals with the Finance Transfer – projects towards low greenhouse gas emissions and development
- P1- Developed countries shall provide financial resources to assist developing countries
- P3 - mobilizing climate finance from a wide variety of sources, instruments and channels, noting the significant role of public funds
- The agreement builds on the financial commitments of the 2009 Copenhagen Accord, which aimed to scale up public and private climate finance for developing nations to $100 billion a year by 2020
- The Copenhagen pact also created the Green Climate Fund to help mobilize finance using targeted public dollars.
- The Paris Agreement established the expectation for a higher annual goal by 2025 - put mechanisms in place to achieve that scaling up from $100bn.
- Green Climate Fund – Collects money (Country taxes) – Give it to accredited entitles – they spend on projects
- Entities – HSBC Holdings, Africa Finance Corp, European Central Bank, mainly gov or private banks
- Energy is a big business – you have massive oil companies – but these may have seen their best days as behind them – as the new energy industry is all about carbon credits – which the banks backing these carbon policies are going to benefit massively from –
- Does come back to some form of corporate welfare – as companies are given carbon credits if they show that they are renewable companies
- So the future of energy is all about monetising a carbon market – having businesses that can subsidise themselves through being given carbon credits to turn around and sell – to entities like the EU emissions trading system
- In addition – solar and wind turbines will be implemented – but this will take a long time to achieve – cant occur overnight – and probably no way to get rid of carbon emissions fully as our energy needs are increasing
- There is massive levels of divestment from coal and gas – i.e. super funds and other investment managers not investing in these industries – creates a lack of equity funding
- On top of this – it means that the amount of capex and expansion that these companies can conduct is limited
- The focus and future of energy seems to be focused on ignoring these industries and then finding other sources such as solar
- In a perfect world – everything would be solar and at no cost to the person – but we don’t live in a perfect world
What I think it the optimal solution -
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For me – the Solution shouldn’t be to put financial strain on the population (tax and removal of cheaper energy sources),
- Simple solution – Divert all the funding to Nuclear or Thorium reactor technology and roll those out
- We need more energy for the future- solar and wind can’t keep up – even spending billions won’t help
- Thorium is a radioactive element that can be used in a new generation of nuclear reactors as an alternative source of fuel for the generation of electricity - Safer than conventional uranium-based reactors – does not contain enough fissile material to initiate a nuclear chain reaction. As a result, it must first be bombarded with neutrons to produce the highly radioactive isotope uranium-233
- Thorium is more abundant in nature than uranium. It is fertile rather than fissile, and can only be used as a fuel in conjunction with a fissile material such as recycled plutonium. Thorium fuels can breed fissile uranium-233 to be used in various kinds of nuclear reactors.
- still a degree of risk – you can get burnt – if you watched Galen Windsor – see him holding radioactive materials and only issue was burning his hand if he were to hold it too long – but no contamination
- Simple solution – Divert all the funding to Nuclear or Thorium reactor technology and roll those out
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people are worried about nuclear energy due to things like Chernobyl or Fukushima – the Nuclear Chemist Galen Windsor goes through this in online lectures – recommend that you go and search his name – has a hour and 30 minute lecture online from back in 1985 – explains a lot
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Thorium is abundant in Australia 18% of world supply
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Environmentalism in the name of climate change is stopping this - environmental concerns with the mining, handling and storage of radioactive materials
- But Nuclear or thorium power is a CO2-free energy source at point of generation produced. This is two orders of magnitude less than coal, oil and natural gas, and is comparable to emissions from wind and solar power
- most power production outside of solar is simply turbines moving – most like coal or nuclear is done through using boiling water – wind and hydro is through moving the turbines from both wind and naturally moving water
- What I would hope our energy market turns into is a nuclear thorium-based energy system – but many countries like France are reducing their nuclear power plants – for some reason
- So there isn't a move towards nuclear energy -
Next week – look at the gas fired plans – if this is green energy as well as if this can help the Australian economy
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. In this episode – want to look at the proposals for the superannuation industry overhaul – released in the latest budget – as there are some pretty big changes –
- In the budget – the super system is likely to be in for a shake up due to the reforms proposed
- But this time – unlike previous proposals – these changes are going to be affecting Industry funds/my super accounts – unlike WRAP or SMSF accounts which have been a major focus of a lot of legislation over the years
- Unlike the things such as Stronger Super reforms proposed by Labour – which were in favour of industry funds – these bit of legislation from what I can see are not in favour of the MySuper industry reforms previously implemented – called the Your Future, Your Super package
- The Australian super industry is massive - $3 trillion superannuation system and it is the fourth largest in the world –it manages the retirement savings of 16 million Australians
- The aims of superannuation is to help Australians fund their retirements in a tax effective manner – after the age of 60 and fully retire – tax free incomes from allocated pension accounts
- We have grown to be a large super industry when compared to our population due to the legislated employer contributions – other countries like the US have a matching system – but it isn’t legislated for individuals to actually contribute to a 401K plan
- A lack of real oversight and guaranteed inflows has created a pretty docile industry superannuation environment – it wasn’t until 3 years ago that if you worked with some government departments that you could actually choose a different super fund to their default provider
- Created a situation where Australians superannuation funds can take advantage of them and not the other way around
- At the same time – the super systems complexity and the major onus on the individual to pretty much be an expert to understand the inner workings of the funds means that most people put it out of sight and out of mind - the lack of simple and clear information is holding back more members from finding the best product for them – so it is put into the to hard basket and most members end up in the default fund selected by their employer – as that is the path of least resistance
A review of superannuation was conducted – and the following are some of the major structural flaws –
- Funds with underperforming products are not held to account – goes without say that small differences in fees and returns translate into large differences in retirement outcomes – for better or worse – because they accumulate and compound over time – super is a working lifetime timeframe for most people – 35+ years on average
- Treasury analysis of APRA data shows that many superannuation funds are consistently poor performers – I see it in reviewing clients industry accounts all the time – especially since the MySuper products have been implemented - 21 out of 77 MySuper products underperformed their own performance benchmark – which are sometimes 3-4% above the cash rate – so all they need to do is get 4.5% and they meet their goals
- These underperforming accounts hold around $100 billion in assets across 3 million accounts and charge $1.2 billion in fees – or roughly 1.2% in costs
- A lack of competition, disengaged members and embedded inefficiency means Australians pay higher fees
- Many Australians are disengaged from the superannuation system - many Australians find superannuation complex and are disengaged from decisions about their retirement savings – following the path of least resistance – due tot is being compulsory have carrying different taxation rules to what the individual normally experiences – it is seem as foreign and treated as such – creates a lack of competition – if you don’t know the difference between super A and B – then employer choice super is the major driver for the choice of the individual – a lot of people do pay attention – but this comes back to low fees – but the fees that are directly charged as small in most cases – as the indirect fees are higher - Without strong competition, all members end up paying more in fees and accumulating less retirement savings
- The Productivity Commission found that two-thirds of members do not actively select a superannuation product when starting a new job – the majority of people do not make active decisions about their superannuation until they are close to retirement.
- The Productivity Commission found that fees in Australia are high by international standards - in part reflecting the absence of member-driven competition – but I would add that the fact that super contributions are compulsory –
- Since the Stronger Super reforms under labour – that introduced MySuper in 2014 - the average annual fee of MySuper products has increased – by approximately 13.6% since June 2014 – at the same time MySuper products have increased in scale from $362 billion in June 2014 to $731 billion by June 2020
- The average MySuper product in 2014 was 0.89% - went to 0.93% in 2017 - and 1.01% in 2020
- The industry charges substantial fees for its services. Right now, Australian households pay $30 billion per year in superannuation fees (excluding insurance premiums - more than the $27 billion Australian households pay on their energy bills or the $12 billion they spend on water bills - As the system grows, the amount Australians pay in fees will continue to rise. The total assets in the superannuation system are projected to reach $5 trillion by 2034. Under the current system, the amount of fees that will be paid by members in 2034 would reach $45 billion.
- Importantly, Australians are required to contribute 9.5 per cent of their salary towards their retirement - Every year, through a combination of compulsory and voluntary contributions, about $121 billion in superannuation contributions is paid into the system
- Multiple Account - Unintended multiple accounts are created when you change jobs and do not nominate a superannuation fund – where 27% of Australians have more than one super account
- Under our compulsory superannuation system - your employer is obligated to nominate a superannuation fund on your behalf – called a ‘default’ fund
- If you change jobs multiple times over your working life and do not nominate a superannuation fund, you could end up with multiple superannuation accounts with different funds, all charging separate fees and insurance premiums - these unintended multiple accounts erode members’ balances via multiple sets of fees and insurance premiums
- Some superannuation trustees are not acting in the best interests of their members
- While members are saving for their retirement, superannuation trustees have one job: to maximise their members’ retirement savings - The current law attempts to make this obligation clear by requiring trustees to act in their members’ best interests – but unlike with Adviser such as myself – which have extensive legislation between the Corp Act – FASEA – BID legislation – this is a little different with industry funds – as the Productivity Commission found that “funds clearly do not always act in their members’ best interests.”
- In the Financial Services Royal Commission: “Trustees are surrounded by temptation — to preference the interests of their sponsoring organisations, to act in the interests of other parts of their corporate group, to choose profit over the interests of members, to establish structures that consign to others the responsibility for the fund and thereby relieve the trustee of visibility of anything that might be troubling. It is opaque, with members finding it difficult to understand how their super fund stacks up against others.” This opaqueness and lack of transparency means members are effectively unable to hold their fund to account for the returns they deliver and the expenditure they undertake.
Hence – there has been a major overhaul of the superannuation sector proposed - Your Future, Your Super makes the superannuation system better for members in four key ways
- Your superannuation follows you - prevent the creation of unintended multiple superannuation accounts.
- Empowering members - making it easier for you to choose a well-performing product that meets your needs.
- Holding funds to account for underperformance, protecting you from poor outcomes and encouraging funds to lower costs and fees to boost Australians’ retirement incomes.
- Increasing transparency and accountability for how superannuation funds use members’ savings.
Breaking down these changes -
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Your superannuation follows you - New super accounts will no longer be automatically created every time a worker starts a new job - Instead, your superannuation account will 'follow you' when you change jobs, preventing multiple super accounts from being created
- This could be good – as your retirement savings should not be eaten away by duplicate fees and insurance premiums on multiple unintended accounts.
- Stopping the creation of millions of unintended multiple accounts will boost balances in super by about $2.8 billion by avoiding duplicate fees and lost returns over the next decade
- I’m sure I wouldn’t be alone as someone who has multiple super accounts – before I started working in the industry – I had 3 different accounts from jobs that I worked through school and Uni
- Due to the way the previous legislation works – but created unintended multiple accounts as under our compulsory superannuation system, your employer is obligated to nominate a superannuation fund on your behalf – as each employer is required legally have a ‘default’ fund that they pay your compulsory contributions into – however this is if you don’t choose your own fund – which many younger people don’t – I know I was one – so you end up with multiple admin costs and insurance premiums
- End up with eroded accounts or lost super
- The latest data from the ATO shows there are around 6 million multiple accounts held by 4.4 million people - these multiple accounts charge $450 million in fees a year
- This could be good – as your retirement savings should not be eaten away by duplicate fees and insurance premiums on multiple unintended accounts.
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There was the previously legislated Protecting Your Super reforms - where inactive low balance accounts are automatically consolidated into a member’s active account by the ATO – but doesn’t prevent the creation of new unintended multiple accounts and takes 2+ years for the consolidation to occur
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So it appears that employers may still have their own default funds – but only if their employees don’t have their own super account
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Empowering members – through providing more information through an online YouSuper comparison tool
- The YourSuper comparison tool will aim make the performance of MySuper products clear as well as the fees
- Going to be interesting to see how this actually works –
- May be easier for people to check on super accounts with fees but it depends on how deep the fees go (just admin and MER or other operating costs which are indirectly charged)
- At this stage - the tool will only include the MySuper funds (default super products)
- more information is needed about this tool and how it will actually work – weather the performance is going to be updated per year, quarter, or month – a lot of mysuper funds don’t provide monthly reports – most do – but it will be interesting
- The YourSuper comparison tool will aim make the performance of MySuper products clear as well as the fees
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Holding funds to account for underperformance
- The Government will better protect you from poor superannuation outcomes by requiring superannuation products to meet an annual performance test
- APRA will identify the poor performers through a new annual benchmarking test
- This test might be a performance above a benchmark – normally on a rolling period – example – a 4% return above the cash rate over an 18 month period
- The Government will better protect you from poor superannuation outcomes by requiring superannuation products to meet an annual performance test
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So it will depend on what the test is measured against – whether it be against the ASX, or a cash+ target
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If a mysuper account fails the test it will be required to tell you and refer you to the new YourSuper comparison tool that can help you select a better performing fund if you choose to do so
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However - Persistently underperforming products will be prevented from taking on new members if they fail the benchmark 2 years in a row
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These changes may come with some unintended consequences – puts more onus onto the employer/employee –
- What if the fund shuts down new contributions – but through Super Stream – the funds still get paid to the ATO but they never get allocated to the super fund?
- Increasing transparency and accountability
- For most people – super can be confusing with the way fees are charged and what is actually occurring with investments – there is a lack of transparency when it comes to some of the investment options – some funds have 18% invested in alternatives – with no real indication on what these investments are
- In addition – there isn’t much of a breakdown of fees on where these are paid – a lot of the time there is an ICR/MER which is the cost of the underlying investment – but then there are transaction fees, operating costs, management fees, borrowing fees – which are now listed which is only a new requirement over the past few years (previously not) – but they still don’t say what these funds are actually going towards
- The Governments wants Superannuation funds to be held to the highest standards of accountability and transparency in how they spend your retirement savings.
- The Government will increase trustee accountability by strengthening their obligations to ensure superannuation fund actions are only undertaken in your financial interests. The Government will also ensure that your superannuation fund is more transparent in providing information about its operations ahead of its Annual Members’ Meeting
- For most people – super can be confusing with the way fees are charged and what is actually occurring with investments – there is a lack of transparency when it comes to some of the investment options – some funds have 18% invested in alternatives – with no real indication on what these investments are
Summary –
- These changes are hopefully going to help members get a better idea about their super accounts –
- Avoid doubling up on accounts – as well as saving members costs if transparency is increased and more pressure is put on these default products
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact
Welcome to Finance and Fury, the Furious Friday edition. In today’s episode I want to explore the effect of monetary inflation (in other words the increase in the money supply) on GDP growth
- Covered GO compared to GDP in Wednesdays episode this week -
- To go one step deeper – want to look at the fact that nominal GDP looks to be directly inflated by additional money introduced into an economy – essentially in the form of credit – therefore - GDP growth is simply a reflection of additional money introduced into the economy
And if this is the case - GDP is really not a good macroeconomic tool to use to make policy decisions – as it gives no real indication as to the underlying health or real growth of an economy – as it can just be artificially inflated whilst having debt elsewhere that offset the real growth
This may come as a bit of a surprise – it did to me when looking at some of the figures –
- as it is rare to find any economists covering the relationship between monetary expansion and GDP
- Yet – there is a pretty strong relationship between the money supply growth (measured by M2) and GDP growth over the past few decades since Fiat currencies were implemented worldwide –
- Especially when Government spending (both as a component of GDP) is now funded through an increase in the monetary supply by fiscal deficits – which are funded through the issuance of bond and in turn these are now funded through CB programs like QE
- The corporate side isn’t too much better – you have massive zombie companies that have funded investment through the issue of debts
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Under normal circumstances - how should the economy grow based around classical economic theories?
- If you have listened to this podcast for a while – it shouldn’t come as any surprise that I fall into the supply side of economic thinking – and as part of classical economics thinking – there is a thing known as Say's law – also known as the lawof markets
- That is that creation of a product creates demand for another product by providing something of value - which can then be exchanged for that other products – it relies on production being the source of demand
- in a market economy, goods and services are produced for exchange with other goods and services – this is known as "employment multipliers" – these arise from the production of goods and services and do not come from the exchange of these goods alone
- If you have listened to this podcast for a while – it shouldn’t come as any surprise that I fall into the supply side of economic thinking – and as part of classical economics thinking – there is a thing known as Say's law – also known as the lawof markets
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This goes back to the concept of GO versus GDP – many businesses in the economy exist to be business to business services – that form parts/components that go into the final output that GDP gets measured
- So there are many economic interactions that don’t get measured
- So through the market – with additional companies being in demand to produce additional components for other companies that provide goods and services – additional employment growth can occur – with this comes additional incomes and the cycles of consumption can go on
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So through the process of creating many different types of economic activity - a sufficient level of real income is created to purchase the economy's entire output, due to the truism that the means of consumption are limited by the level of production
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with regard to the exchange of products within a division of labour of different employees working in different businesses - the total supply of goods and services in a market economy will equal the total demand derived from consumption during any given time period
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However - For this type of economic functioning to be present – there are some assumptions that need to be present -
- flexible prices—that is, all prices can rapidly adjust upwards or downwards – this is the price of the exchange medium as well – which is money
- Goes into both interest rates as well as wages in economic activity – both of which are set with floors
- no government intervention – which doesn’t exist
- flexible prices—that is, all prices can rapidly adjust upwards or downwards – this is the price of the exchange medium as well – which is money
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So this theory quickly falls apart – but it is important – as it can only holds true as long as governments don’t regulate the function of businesses and the consumers exchange – as well as monetary officials – such as central banks messing around with the medium of exchange - the money
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Now comes an important question – why does an economy need to grow? Especially when measured by GDP?
- Does it matter that GDP goes up for you? Compare the economies of Japan and Qatar – looking at GDP per capita – Qatar has had a rise in GDP – very oil rich nations - has $69k USD per capita – however - Japan $41k USD per capita – but Japan’s average net worth is double that of the average Qatari – and living standards are higher in Japan – in a relative economic sense – so who is better off?
- But total level of GDP – Japan has a GDP of $5trillion USD – Qatar has a GDP of $190 billion USD – the per capita GDP figures are different due to the population levels
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In classical economic terms - A healthy economy is not one that “grows”, but one that does not have its production and consumption interfered with.
- If the money is sound and its quantity unchanged there might not be any change in GDP year after year – but at the same time – there would be no inflation – or devaluation of the medium of exchange as well as increasing living standards through additional technology and supply of goods and services
- This is creative destruction – which is a process of any healthy economy which can satisfying the demand of consumers
- In the modern economy - the state has carved out a major role for itself – and they have turned human and by extension economic activity into a representation of statics and averages
- If the money is sound and its quantity unchanged there might not be any change in GDP year after year – but at the same time – there would be no inflation – or devaluation of the medium of exchange as well as increasing living standards through additional technology and supply of goods and services
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Hence- any policy that gets the desired outcome of increasing these statistics is deemed appropriate – even though it might not be the case for the individual –
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There is a good article on goldmoney that shows some graphs in the US between the relationship of nominal GDP and the broad money supply – measured by M2 - compares the increase in GDP from its base level in 1980 to end-2019 with the increase in broad money – then shows the difference between them
- These two lines go out at the same sort of rate – and the difference in them is essentially zero
- The small variations in GDP less the increase in M2 are wholly due to the fact that GDP does not capture all economic activities, only those that are decreed eligible by the statisticians
- Starts to show that nominal GDP may actually not be measuring economic growth at all – just the amount of money in the economy that forms part of transactions
- Where this gets interesting is when looking at the recent slumps in GDP around the world – at the same time there has been an increase in the money supply – likely due to a few reasons
- The money supply increase has not gone into productive areas – for instance – buying up debts that already existed
- For those funds going to consumers - Not being spent and is instead being saved –
- People are probably worried about financial security and are saving instead
- Plus lockdowns and people not being able to travel may have dampened spending
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The GDP data is lagging - timing differences between the deployment of extra fiat money and its full reflection in GDP
- there is always a lag between the increase of money supply and its wider circulation in the economy
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The true affects are worse than what the GDP figures resent –
- effect of yet higher rates of money supply growth will only serve to further conceal the seriousness of the true position
- It has been fairly evident that monetary planners simply think that extra money should stimulate GDP
- Created a policy where the solution is always to increase the quantity of the money supply – when economic growth is low – you need to increase the money supply by more and as a secondary effect decrease interest rates –
- These types of policies all works around the assumption that they can control inflation statistics through these policies – and with lowering interest rates- debt goes up
- So the end result of additional money in circulation can help to add to the GDP number – but can have the result of destroying the personal wealth upon which an economy thrives through reducing the PP of the individual - and getting nations into more and more debt – the debt level growth isn’t reflected in GDP – otherwise GDP might actually be negative
- As an example – take Australia – Mortgage debt of about $2.5 trillion, Gov debt at all levels is about $1 trillion – corporate debts about $4.5trillion– some estimated range total Australian debt between $6.5-$7.5 trillion – our GDP is about $2 trillion
- We are not alone – most developed nations with very large GDP figures also carry very large levels of money supply and with it – large levels of debts – greater than the economic output of nations
- It is almost like if you borrow $100k with one bank and transfer the balance to another bank account – has your wealth gone up? Well if you only look at the bank balance that shows the positive $100k and ignore the negative balance in the other bank it has
- Trying to get the economy out of this debt is impossible – as in most cases what is debt measured against? – you have debt to GDP figures – resented as a percentage – but you don’t really see broad money to GDP – and when taken in isolation they tend to not look so bad – you have Gov debt to gdp, household debt to gdp – but looking at the whole picture – debt is many times larger than the economic outputs – wouldn’t be bad if GDP grew quicker than debt – but it is the other way around – with the growth being many time greater each year for debt (being in double digits) when compared to GDP – being in the single digits
- however the relationship between changes in M2 and GDP are present – and this relationship also extends to GO - includes the intermediate consumption of production that make up the final products bought by consumers
- This raises the question as to whether these forms of monetary policies can continue without a substantial increase in interest rates – as at some point it may need to be slowed down – but that is a catch 22 – raising interest rates with this much debt would destroy both the ability to increase the money supply and the bills on the existing debts would be unaffordable – creating a true economic crash through massive levels of defaults at all levels
- Created a policy where the solution is always to increase the quantity of the money supply – when economic growth is low – you need to increase the money supply by more and as a secondary effect decrease interest rates –
Summary -
- It is important to understand the need for an ever-increasing money supply – to help provide the facade of economic growth when measured by nominal GDP
- Helps to make sense of what might seem like irrational policies – however – when statistics and numbers such as GDP are used as the measure of how well a country is doing – rather than the individuals economic situation – starts to make sense
- Helps to understand why we are on the inevitable road towards the continued debasement and devaluation of fiat currencies world wide – through the continuation of inflationary policies only serves to bolster the statistic while the underlying economic condition worsens considerably
- But knowing this won’t stop monetary authorities from pursuing these types of policies – but being aware that you need to utilise your own resources to help offset this – through investing in assets that can benefit from these policies is key as to not be left behind
- Central banks and especially the Fed have committed themselves to supporting all economic and financial activities with the only tools they have - newly issued money, lowering rates and buying assets back off the market to help asset prices
- In turn – they give the ability for Governments and for individuals to get into further levels of debt and ensure financial markets (particularly for government debt) remain in demand and with it – don’t collapse in prices
- So whether the monetary planners know it or not, targeting GDP growth with monetary expansion is a key policy in economic planning due to fact this can be done via fiat currencies –
- But in the end they have the effect of covering up a deeper recession through kicking the can down the road for future devaluation of currencies and declines in the consumers purchasing power
- But it allows for future GDP numbers to be artificially increased allowing policy makers to claim some success
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition.
This week the question comes from Todd.
“Hi Louis, I just saw Steve Forbes talking about how Gross Output (GO) is going to replace Gross Domestic Product (GDP) as a measure of how well the economy is going? I was wondering if you agree with Steve on GO?
I had heard in the past that GDP was not perfect, but had been used because it was the best option available. Are there problems with GO that will also cause problems when trying to use this measurement to judge the health of an economy? Love to hear your thoughts?"
Thanks for the question Todd – is an important question – So in this episode – we will look at if the replacement of GDP with GO is a step in the right direction – to be upfront - its replacement isn’t a perfect solution as an economic measurements – but there is nothing that is perfect when talking about economics –as Economist Thomas Sowell says - “There are no solutions, there are only trade-offs; and you try to get the best trade-off you can get, that's all you can hope for.” As we cannot achieve a perfect outcome – we will look at if GO a better trade off to measure economic output when compared to GDP
First – go through the basics of GO and compare this to GDP
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In economics, gross output (GO) is the measure of total economic activity in the production of new goods and services
- It is a much broader measure of the economy than gross domestic product (GDP)
- GDP is limited mainly to final output (finished goods and services) that are consumed in the economy – not total output
- Most people are familiar with GDP – or at least have probably heard it mentioned – even though it might not have much bearing to their own lives –
- But indirectly it does – as it is the standard for what economists and policy makers focus on when looking at economic growth and deciding what policy responses to make – there is an increasing focus on it – especially now as it is the measurement of a recession
- Looking back – Following the Bretton Woods conferencein 1944 - Both GDP and GNP became the standard measure of economic growth that was implemented -
- But it has its limitations – and this comes back to the reason why it is used - simplicity – relatively easy to measure – at it takes the net results of economic output – but because it is simple – it is a flawed way to look at economic output
- Covered the issue with Government stats earlier in the year – episode was called “How accurate are economic statistics and do they really matter in our daily lives?”
- If a computer is sold – then the end result is what is measured – minus all the components that went into making it – so those companies that produce processors or RAM for a computer aren’t included – as these are component parts of the final product – the final product and the component parts can often blur between one another –
- If your CPU breaks down and you buy a new component – then this isn’t added to GDP – even though it is technically an increase in economic output
- If this computer is then resold later by a business such as cash converters – it isn’t counted as part of GDP as it is not new output – even though it is an economic transaction
- GDP ignores other sections of economic output – these areas are known as the informal economy – making up about 60% of economic activity as an estimate – they aren’t included as it is hard to track down and these activities are normally not included in GDP figures
- GNP is a little more complete than GDP figures – adds the component of Z of net foreign income – so if you have a company that operates internationally – it counts the net balance of foreign income from operating internationally – while it might seem more complete – it is even more flawed – as it is influenced by the exchange rates and the health of other nations – performance of other nations may not be indicative of the performance of the domestic country that GNP is accounting for
- But GO is equal to the value of an economy’s net output – which is the measure of GDP plus that of intermediate consumption
- Conceptually - intermediate consumption is equal to the amount of the difference between gross output– normally measured by the total sales value in an economy and net output (which is GDP)
- So in other words – rather than taking the net output of the economy – you can take the total sales revenue of companies as the Gross Output – very simplistic way to think about it – but that is the general gist of the concept
- As an example – take the US economy - total intermediate consumption represents about 43% of the gross output of an economy – so this means that if GDP was $1 – GO would be $1.76
- Conceptually - intermediate consumption is equal to the amount of the difference between gross output– normally measured by the total sales value in an economy and net output (which is GDP)
- It is a much broader measure of the economy than gross domestic product (GDP)
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When looking at the actual figures – gross output in the United States is estimated to be $37.2 trillion, compared to $21.1 trillion for GDP
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The Australia economy generates an estimated $3.8 trillion in output – GDP is estimated to be about $2 trillion dollars – so this means the intermediate consumption is about 47% of Gross output
- intermediate consumption is essentially an expand on the accounting flowwhich consists of the total monetary value of goods and services consumed or used up as inputs in production by companies that are the input components that get the GDP figure – but are ignored by GDP –
- This can include all forms of raw materials, services and various other operating expenses that go towards the outputs of the final products – in essence – the CPU, RAM and components that go towards the final product of the computer are counted by GO
- Due to this - GDP ignores the business to business sales – as it measures the value add of the final product – doesn’t include the component consumption from business to business transaction – but measures the final output
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So GDP ignores in most cases and depending on the nation – almost half of economic activity which is business to business
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But some economists go further when looking at GO – whilst they emphasize that GO can be used as an important macroeconomic tool – they also focus on gross output-by-industry - can be better when understanding about the economic workings of a nation – as well as the inner-workings between industries and not just the aggregate GO
- Helps to explore which industries within a nation provide the better economic activity
- It is starting to emerge that economists regard GO and GDP as complementary aggregate measures of the economy. Many analysts view GO as a more comprehensive way to analyse the economy and the business cycle.
- As Gross output [GO] is the natural measure of the production sector, while GDP measure the final output of the economy
- But the issue is still that GDP (which is still the gold standard) ignores most of the business to business economic output – so it makes it look like consumer spending makes up the majority of the economy –
- Hence – there is a secondary focus on both Business investment and Government spending
- Now – Government spending is pretty much the same in both GO and GDP in a nominal dollar figure – however GDP does under represent the important of business economic activity
- The intermediate goods or services used in production within an economy when accounted for really show that businesses play a vital role in economic activity – through focusing on GDP – it ignores this and hence policy is made with consumers at the forefront – demand side economics -
- Through focusing on GO - we can see that business investment and entrepreneurship and not consumer spending are a more important catalysts for economic growth
- As Steve Forbes says – the consumer spending is the effect, not the cause, of prosperity
- But what good will focusing more on GO rather than GDP do?
- First it will allow economists to better see how the economy ticks – that businesses and entrepreneurship are as important as consumer spending – however - but to what end will this actually affect economic policy?
- It is far easier to give hand outs than it is to unwind 60+ years of economic thinking and policy – to skew the economy to a business friendly environment – a lot of policy makers and government economists think that the same demand side policies that they think work on consumers will also work on businesses – handouts – corporate welfare or things like cash boosters – or write offs on assets purchases – but this requires more legislation and now less
- I wouldn’t want government or economists to get more involved into this side of the economy than they already have been – less is more when it comes to trying to boost the economy –
- However – over time the focus on GO could help to refocus economic thinking – in that the business sector is more important than the government or consumer spending when it comes to the real health of the economy –
- As the focus on GDP puts an overweight focus on consumption – resulted in demand side economics – theory that majority of economic growth comes from consumer spending – so the focus of the economic models has been to boost the spending by consumers-
- Why not – the aim is to get the best statistical outcome – however – the same approach could be employed with GO – to get the best statistical outcome through still focusing on demand side thinking but applying this to the business sector
- But what matters to the individuals – is a better standard of living – the creation of new businesses – which comes from supply side thinking – this is what helps the individual
- Lower costs of goods and services due to higher levels of supply – with more businesses to compete – this helps to drive economic growth
- The supply is ignored due to the way GDP is reflected in the statistical interpretation
- However – using the same economic thinking for GO can result in more corporate welfare which disproportionately benefits the largest companies – which has the potential to further monopolises the markets
- As Todd said - GDP is not perfect – and has been used because it was the easiest option available.
- When looking at GO as a replacement – It is probably a step in the right direction when understanding how economic functions truly occur – and refocusing more on business activity as a vital sector of the economy and not just consumer spending – whether it will be a replacement for GPD – I think it will be used as a supplementary tool – only been measured since the 90s – takes time for economists to switch thinking
- But my view on this – economists and especially policy makers should butt out of the economy – their theories do little good when put into practice – the economy is a complex creature – and the best ways to affect it go beyond what statistics can represent – as stats show a picture but not the optimal policy
- Economists can measure it if they want – and they can measure it in any way they want – but similar to GDP – measuring GO is still going to likely result in imperfect policy (or another improper trade-off) due to the way the data is collected
- Think about anu Government stat - So many people and transactions to keep track of – relies on data collection –
- Relies on surveys and naturally has sampling errors –
- Inflation– survey of respondents in their purchases in the basket of goods – non-response and sampling 8,000 households out of the 8.5m households in Australia – 0.094%
- This is how it is done though - and state there is a 95% confidence interval – the issue is there is not a great way of measuring these statistics – too many people – too much variation – but monetary and fiscal policy makers need this data to make their decisions –
- But the specialised knowledge of a roomful of specialists is always going to be wrong –
- Humans are the best at deciding what is right – millions of people involved in voluntary interactions to maximise their own financial situation is better than a handful of policy makers trying to decide what is on their behalf – trying to jam a square peg through a circular hole – even toddlers can get this right – but the economy is not a circular hole
- example of a highway – adams story – the construction of the bridge adds to GDP = but living standards probably not maximised- people still running across the highway
- There may be good that comes from a new focus on GO – and that is that the perception that demand side economics is the way to go in the future may shift towards a more supply style of thinking – but I don’t think that Governments and policy makers want to reduce their power over the economy – so it may just lead to additional policies on top of demand side – where governments get more involved in trying to force economic growth through additional policies on businesses - so there may be some bad outcomes for this –
- Additional corporate welfare at the top end – economists and policy makers may look at GO and say that most of the growth comes from Amazon – so Amazon should get tax cuts or additional corporate welfare – which could further monopolise the market –
- This is only speculation – but the very focus on GDP has lead to the need an ever expanding money supply to help boost aggregate demand - Probably do a follow up episode to this – read a interesting study done in relation to GDP focus and the almost perfect correlation to the money supply in the nominal GDP growth – come back to this in a future episode
- In summary – as Steve Forbes said - Consumer spending can be the affect – not the cause of prosperity –
- You can give people money – but if there is no supply – then they have nothing to spend it on and hence no economic output
- And GO is probably a step in the right direction when it comes to understanding the economy – but if it is used as a stat to form policy – it could lead to some orders of consequence that hurt and not help the economy
- Think about anu Government stat - So many people and transactions to keep track of – relies on data collection –
- Lower costs of goods and services due to higher levels of supply – with more businesses to compete – this helps to drive economic growth
- First it will allow economists to better see how the economy ticks – that businesses and entrepreneurship are as important as consumer spending – however - but to what end will this actually affect economic policy?
- Hence – there is a secondary focus on both Business investment and Government spending
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury
You might have seen the budget that came out last week – in this episode we will be looking at the bringing forward of the tax cut – but also using this as an opportunity and what to do with it
The budget and the tax cuts –
- The Government passed its Budget tax cuts last Friday, after bringing forward major cuts slated for July 2022 to July 2020
- So this tax cut will be back dated –people will get a refund at tax time or the PAYG will be adjusted for lower taxes for the rest of the FY
- Around 11.6 million Australians are set to get some benefit
- There are about 12.6m employed people in Australia – so this affect the majority of the working aged population
- Obviously if you earn less than the $18,200 threshold – you don’t pay any taxes so when taxes are cut – cause you don’t pay any taxes you don’t get a reduction in what you pay – if you pay nothing then it is hard to reduce this beyond zero
Who will be affected – based around the taxable income thresholds
- Earning up to $37k – tax relief of up to $510 – for 2.4m income earners
- Earning between $37k and $48,000 – get tax relief between $510 to $2,160 – for 1.8m individuals
- Earning between $48k to $90k - get tax relief between $2,160 to $2,295 – for 4.6m
- Earning between $90k to $126k - get tax relief between $2,295 to $2,745 – for 1.5m
- Earning above $126k – get $2,565 in reduced tax
- So with the tax cuts - You will likely have more money due to the tax cuts –
Why the Government has done this –
- Treasury estimates that reducing the personal income tax burden on Australians through this measure will boost GDP by around $3.5 billion in 2020–21 and $9 billion in 2021–22 and will create an additional 50,000 jobs by the end of 2021–22 – based around big assumptions
- Demand side economics – that people will spend –
- two ways to achieve – give people money directly or indirectly allow them to keep more of their money through tax cuts – so tax cuts are in
- Hence why they are giving out cash payments to pensioners - got some economists saying that vouchers should be employed instead – spending forced rather than people saving
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This tax cut pretty predicably been slammed though – canned a ‘Perverse outcome’ of tax cuts
- Analysis by The Australia Institute found that the top 20 per cent of earners will receive more than 40 per cent of the benefit of the tax cuts – reading some of the comments from The Australia Institute senior economist Matt Grudnoff
- “It is clear that most of this tax cut will go to those who are far more likely to save it. Saving the tax cut is made worse during an economic crisis,” “People who are worried about losing their job are not keen to spend. Any additional money they get is likely to be used to pay down debt and increase savings in order to create a buffer against the growing uncertainty that they are feeling.”
- Grudnoff also noted that a large amount of the tax cut flowing through to low- and middle-income earners is temporary, in the form of the low- and middle-income tax offset. However, the tax cuts for high-income earners are baked in.
- “This leads to a situation where low- and middle-income earners will pay more tax next financial year than they pay this year. Effectively they face a tax increase next year when compared to this year.”
- Technically not true – the LITO is increasing to $700 from $445
- It is the Low and Middle Income Tax offset that is in place for the next 4 financial years -
- A duel income household of two individuals earning $60,000 each will benefit by a tax savings of $4,320 annually when compared to the 2018 brackets , while another childless household where one is a low-income earner and the other is unemployed would see a benefit of $500. And a household with no children where both adults are unemployed would see no benefit from those policy measures.
- “Meanwhile, high income households gain the most from tax cuts.” – however – not proportionately –
- Someone earning $40,000 p.a. will get a 21.4% reduction in their taxes
- Someone earning $80,000 p.a. will get an 11.3% reduction in their taxes
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At $140k p.a. they will get a reduction of 6.1% in their taxes paid
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Someone earning $200k will get a reduction of 3.8% in taxes
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The tax cuts cap out – the most someone will save is $2,745 – at earning $120k –
- Someone earning $200k will save less – at $2,565 p.a.
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But comparing $40k earnings to $200k - tax savings of $1,060 to $2,565 respectively –
- So someone earning $200k will get around 2.5x more tax savings than someone earning $40k
- But after the tax savings - $40k will pay $4,467 in taxes – or about 11% of their income in tax
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Someone earning $200k will pay $67,097 in taxes – or 33.5% of their gross income is paid in taxes
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The narrative can be spun anyway - Looking at the tax cuts
What to do with this new money? – many options – you could spend it – that is the hope of economists – But there are other options – doing what Mr Grundoff doesn’t want you to do – that is use it to build additional equity through paying down debt – or investing – technically both forms of savings
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Paying off additional Debt – priority would be in the form of interest rates and deductibility
- At this stage – Interest rates are low – but additional debts can be repaid
- Opportunity to pay off debt at accelerated rates –
- If you are in a household that will get a combined $4,600 p.a. of surplus income due to the tax cuts – this could be placed into debt repayment
- Personal debt versus mortgage debt –
- Personal loans or car loans – if they have higher interest rates – may be better –
- Mortgage – rates are likely to be low for a while – but could be used to make repayments
- Interest rates of 2.99% - $500k mortgage – making an additional $380 p.m.
- Saves around $63,120 in interest – loan would be paid off 6 years sooner
- Saves 24.5% of the total interest that would be charged and knocks off 20% of the live of the loan
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Mortgage rates – longer term – if rates go back up – say to 5% - this becomes much better
- With a mortgage of $500k – making the additional repayments of $380 p.m. would save $127k and knock off 7 years of the loan
- Would work out to be about 27% of the interest charged saved
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Making additional Investments – opportunity to build wealth
- Even investment apps – micro transactions –
- But if you can put away $380 p.m. at the household level – into an investment that allows diversification and has low transaction costs – can really build additional wealth – examples earning 8% p.a.
- 10 years – or 120 months making an investment of $380 p.m. – Value of just under $70k in invested assets
- 20 years – or 240 months making an investment of $380 p.m. – Value of just under $224k in invested assets
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30 years – or 360 months making an investment of $380 p.m. – Value of $566k in invested assets
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Some of these funds have been contributed by the investment - but the growth comes into it the longer it is invested and the longer the compounding can occur –
- 10 years – Value of just under $70k in invested assets – but $24k of this is growth – with $45,600 being invested from the tax savings
- 20 years – Value of just under $224k in invested assets – but $132,500 of this is growth – with $91,200 being invested from the tax savings
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30 years – Value of $566k in invested assets – but $430k of this is growth – with $136,800 being invested from the tax savings
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Another bonus – unlike debt – which saves cashflow long term through paying it back – investments can build additional passive incomes – assuming a yield of 4.5%
- 10 years – Value of just under $70k in invested assets can generate an additional $3,128 p.a. in income
- 20 years – Value of just under $224k in invested assets can generate an additional $10,072 p.a. in income
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30 years – Value of $566k in invested assets can generate an additional $25,485 p.a. in income
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Superannuation – salary sacrifice contributions – another option – but with the lowering of tax – gives a leeway to contribute more into superannuation
- This can further reduce tax – If you are getting an income of $60k p.a. – you will receive a reduction in tax by $2,160 p.a. – you can gross this up to contribute more based around your marginal tax rate of 34.5% (including the Medicare levy)
- This works out to be about $3,298 p.a. pre-tax income – so this can be contributed to super and save a further $1,138 in tax –
- A net amount of $2,803 p.a. would go into superannuation after the 15% tax is deducted – about $495 of tax p.a. – over the years, if you contribute this into superannuation you can get additional wealth than what investing personally may get you
- Get additional funds into superannuation due to being able to gross this up –
- Have a lower ongoing tax rate for any investments
- Strategy outcome over time –
- 20 years - $137,600 in super – passive income of $6,192 in retirement p.a.
- 30 years - $348k in super – passive income of $15,668 in retirement p.a.
- Might not do this if you need access to the money
These tax cuts are likely to be putting more money into your pocket every single pay cycle – so it is an opportunity to use it to create further financial independence
Use this to help build additional wealth or pay off debts – you can spend it if you want – but this could be an additional opportunity
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition.
- Last week – went through the rise in billionaires in favour of additional socialist policies – went through why I think this is the case - I think that most of the billionaire class are in favour of calling for socialism due to it giving governments more control over the economy – and hence increases their political influence over the economy to benefit themselves
- Not true socialism – but a socialism lite version to help create additional barries to entry and to help monopolies the markets further
- More political power – greater ability for lobbyist to influence policy at the state and federal levels – hence additional benefits for the companies that they control through gaining additional corporate welfare
- Plus – the policies that will be recommended in the form of what those on the left want – like additional taxes will unlikely affect them – at least proportionately when compared to others –
- Taxes – they can move their wealth (or move away themselves) or employ tax minimisation strategies – like charities that their own relatives are the leaders of – to amas tax free wealth that gives out the minimum 1% requirement – so they appear to be philanthropic and get to save tax – win win – even paying out 10% is better than the standard company tax rate
- In todays episode – want to look at another potential benefit for the billionaires who are pushing for socialism and have the power the flow of democracy into this way of thinking – whether it be political or informational influence – through the owners of the platforms like Amazon, FB, Google (youtube)
- And why they are in favour of concepts like UBI as this will also benefit their companies
The first step – killing the competition –
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Through having additional taxes and regulations on businesses you can kill the competition
- You can see many billionaires talking about how they think companies and the wealthy should pay more tax
- But they never put their hand up to actually pay it – they could if they wanted to – but why don’t they? It is rhetoric – to get good PR at the least and at the most – have a greater burden on those these taxes will actually hit – the millionaire class and or the upper middle class
- That is where these regulations normally land – in the business world this is on the SME disproportionately when compared to massive multi-billion or companies worth over a trillion dollars
- The greater the level of state control – the harder it is for new up and coming businesses to be competition to those already established
- Plus – those that do pose a threat can be bought up – even though it might go against any anti-trust regulations – as a massive conglomerate company you can buy up any companies that are competition
- Can provide the political funding to have bling eye turned away from these laws and the effects
- But killing the competition starts to deteriorate the economy over time –
- With this – comes lowering employment opportunities – due to less companies – and people have less income – to spend on businesses
- Comes greater rates of poverty and the blame for economic woes gets placed at the feet of the free market – not the regulations that create the issues –
- The greater the power centralised entities have over any economy - in other words the more control they have – the worse the economic conditions for the population – this can come from Governments or companies –
- So the economy gets messed up – the younger generations get born into an economy that blames capitalism – they see economic inequality as the cause and not as a symptom – even through our economies are some of the more free economically in the world and with it higher level of living standards – so they look for policies that have been implemented in some countries and that have resulted in the deterioration of economies to be become some of the worst in the world
- The pipe dreams that this time it will be different never lose their appeal
- Younger people who use products of billionaires – they can also ironically like socialism – even though they consume like capitalists – just because people are telling them they can consume more through getting free money from the Government
- So you have this weird sort of bedfellows – younger people and billionaires together – both loving the concept of UBI
- there are any number of reasons for this – covered on Weds the concept of technological unemployment – this has been a big driver for things like UBI – particularly by the CEOs/owners of some companies that are those responsible for getting on the bandwagon of automation –
- look at any massive company – Amazon, Apple, Microsoft, Google – all on the forefront of removing humans from the working force - Amazon with drones to deliver, apple with robots for automation, google with self driving cars or their subsidiaries like Boston dynamics working on humanoid robotics – list goes on –
- as I went through on Weds – this is a natural cycle of creative destruction in any economy – but I am not in favour of is the thought that humans should be then delegated to a couch and given a UBI
- Of course, people would love free money – if someone says they are going to pay you $1k p.m. with no strings attached it is hard to say no – unless you can see the potential for ruin that may bring to society
- But why would billionaires want UBI - $12k to them is the equivalent of a nice dinner
- Well – I think they are pushing for things like Universal Basic Income – and for concepts like MMT to fund it – for their own benefit – as some of that money that is given to the population is likely to end up in their own pockets – in the form of additional revenues to their companies that provide the goods or services that people will buy
- The whole concept of UBI for economic growth relies on demand side economics – the basis of this is that the population will use the money that is given to them and turn around and purchase goods within the economy
- Who will be providing the lion share of these goods and services? At an aggregate level especially – the local corner store – or Apple with new iphone sales or Amazon with people spending their UBI funds on things that around going to be delivered to their doors?
- Well – I think they are pushing for things like Universal Basic Income – and for concepts like MMT to fund it – for their own benefit – as some of that money that is given to the population is likely to end up in their own pockets – in the form of additional revenues to their companies that provide the goods or services that people will buy
- You can see many billionaires talking about how they think companies and the wealthy should pay more tax
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The notion of demand side economics does actually increase economic growth – in the form of wealth for these companies – at a disproportionate rate
- It may materialise into economic growth – but over time it technically wont be growth – the concept of growth is that $1 turns into $2 through economic interactions – the concept of demand side economics through government models is you borrow $1 and you hope to get more out of it – but this is very hard to observe and with the level of debt around at the moment – theorised to be a diminishing marginal return – where $1 borrowed is about $0.9 of economic growth
- But this doesn’t matter to the billionaires - $1 borrowed by a government – or created under a world with MMT then does create economic growth to their own pockets
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This is due to if individuals do have more money – in the form of helicopter money – where may they spend it? With these large companies – if all smaller business are shut down or go out of business – then all that is left is Amazon, or apple – where people will spend their incomes from UBI – so this benefits their wealth long term as well
- But on top of this – it means they can get away with paying people less in wages –
- Companies like Walmart and Amazon have around 10% of their employees still on Federal assistance – like food stamps – so you could pay your workers $12k less p.a. if the Government is covering the bill
- It isn’t like you are going to be paying much in the way of tax – with corporate welfare – and tax minimisation strategies
- Once the governments has the legislative power to fund the population in their spending – and that spending is disproportionately spent with the people who support UBI – this is a major benefit to these companies
- There is also another potential side benefit - What happens if there is runaway inflation?
- Well - tangible assets soar –land and property, resources/commodities and shares
- What do the billionaire class own? Lots of physical assets - Land, gold, art, resources like timber and mining companies or transportation like railroads – as well as shares - all the tangible assets that will maintain or increase their value in runaway inflation
- So, their wealth can increase further – if interest rates need to increase to combat this – many billionaires personally don’t have the need for a lot of debt – unlike the average person now to buy the average home
- That is where the form of Socialism being called for is equally beneficial to the billionaires – they won’t lose their companies as the means of production like in real socialism – but instead benefit from it massively – to live parasitically off the government – which is actually fairly socialist – but the issue with this for us long term is that it gives rise for a form of neo feudalism
- Billionaires already live a form of neo feudalism – they live separately – in their own form of private communities with private services and security
- Examples of living standards - Dichotomy between areas that billionaires live – In the USA – the concentration is in very left leaning districts – but at the same time have the greatest level of inequality due to policies
- A lot are tech billionaires live in the San Francisco Bay Area - contains four of the ten most expensive counties in the United States – the decriminalisation of may crimes – last year saw Prop 47 - theft under $950 is a misdemeanour – non-arrestable offence that police no longer respond to – I watched a docu-series where they went around interviewing local business owners – some areas shop owners would have 2-3 thefts a day – losing thousands of dollars each day – again small businesses - even a police officer had their phone stolen from their car – didn’t bother reporting it –
- However – some certain post codes – those with the politically powerful and ultra-wealthy have hired their own private police forces and sanitation workers and anything that the government used to provide
- Economic policies that lean on the ideals of socialism will increase the speed at which neo feudalism can manifest –
- As the state borrows endless trillions to send every household $1,000 a month - if this borrow to spend – demand side policy pushes inflation higher – this means that it will strip away the purchasing power of the individual and with it how far a household's income can stretch
- As has been seen - a $1,000 in UBI free money could turn into only buying $800 worth of goods and services in a few years, then $500, then in a decade that $1,000 may only be worth $300 in real terms – Then due to the cost of living going up – people and billionaires alike will cry for more money – and the UBI will need to go to $3,300
- With this – will be the cries for additional taxes as well – to help fund the UBI policy – whether it gets implemented is one thing – but even if it does - good PR and medias lack of reporting of real issues will lay the blame elsewhere will create a situation where things like a wealth tax can be implemented – but again – this won’t touch the intended victims – the billionaires – they will avoid the tax and instead – it will end up hitting professionals and entrepreneurs, not the billionaires
- As the state borrows endless trillions to send every household $1,000 a month - if this borrow to spend – demand side policy pushes inflation higher – this means that it will strip away the purchasing power of the individual and with it how far a household's income can stretch
The issue with this style of policy – and billionaire support for socialism -
- Eventually the entire house of cards collapses– the economy crumbles and the reliance on governments intensifies – as the opportunities for jobs are destroyed around the way – except for the monopolistic companies which now have greater control over the economy through their market share and political influence –
- With this – they can continue to replace the structure that actually changes the way wealth was created for them and the pathways to ownership of capital – through the free market –
- the system that is ideal for them to create is a form of neo feudalism that will increase any existing inequality
- The concepts of MMT and socialism lite are just what billionaires really want – it will provide trillions to corrupt insiders through corporate welfare – in the form of industry giveaways with subsidies and carbon credits, etc. – provide additional incomes to the consumers of their products – and the negative effects of additional taxes will be escaped
Summary
- Moral of the story – don’t fall for the trap of listening to billionaires when it comes to thinking socialism and policies like UBI are needed in the economy
- Keep working and building your own forms of wealth – don’t get tricked by the PR campaigns
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition. This week’s question is from Phuong.
“Hi Louis - With strikes happening at Sydney’s port recently and worker asking for pay rises, do you think that Robot will eventually replace human workers? And what are future job for younger generation, do you think?”
Thanks for the question – brings up a great point – in todays episode – look at the rise of the robots – does it pose a danger to the employment sector and what the future of employment may look like
To start with – look at the rise of robotic workers – in automation
- study from Oxford Economics - Robots could take over 20 million manufacturing jobs around the world by 2030 – over the next decade – about 14 million of those were estimated to be in China alone
- Perspective – 7.8bn population – about 5.15bn aged from 15-65 – working age – 20m is about 0.4% of this working population – or about 0.04% of the population each year
- China has an economically active population – or in other words – employed individuals of 776m – so 14m being replaced over 10 years is about 1.8% - or 0.18% p.a.
- To give a comparison – say this was happening in Australia – which it isn’t at the same rate – due to the roles that robots will be replacing in the next decade – Oxford Economics also found the more repetitive the job, the greater the risk of its being wiped out – so these jobs are very limited in Aus – but lets say that we will have the same replacement rate of positions
- but in Aus it would be the equivalent of 22,700 jobs being lost each year – lots of jobs – but we have just had much larger job losses – ABS said that 594,300 people lost their jobs in April this year due to the shut downs - ABS estimated another 227,700 jobs were lost in May – people have gone back to work – but many jobs are still lost – greater number than would be replaced over the next decade by robots in two months still out of work
- so over the next 10 years – does sound like a lot of people but perspective is important – wont be massively disruptive as this transition will be gradual –
- I don’t think this will be as large as disruption as people think – that is because we know about it as a likely possibility – when people are saying something will happen people can adapt – we are very adaptive –
- Technology changes and the resultant unemployment are a part of creative destruction within an economy – which is a part of the cycle – it is the unknown and massively disruptive technological shifts that create turmoil – even in employment – like a lockdown that puts people out of work
- People may think that robots replacing jobs is going to be a huge issue – and it may be – I may be way off the mark – but I think it will have less of an impact in the long term – as people can truly adapt
- Technological change is an economic concept that includes the introduction of labour-saving "mechanical-muscle" machines or technology – automation that replaces the human’s role in production within the economy
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That technological change can cause short-term job losses is widely accepted – but the view that it can lead to lasting increases in unemployment – structurally – the views are mixed - Participants in the technological unemployment debates can be broadly divided into two camps - the optimists and the pessimists
- Optimistsagree that innovation may be disruptive to jobs in the short term, yet hold that various compensation effects ensure there is never a long-term negative impact on jobs – with new technology there comes new employment
- pessimistscontend that at least in some circumstances, new technologies can lead to a lasting decline in the total number of workers in employment. The phrase "technological unemployment" was popularised by John Maynard Keynes in the 1930s
- Should be noted that the Oxford Study comes from the pessimists of the group – some of the economics here think that half of human jobs will no longer exist in the future – which may be true – but they neglect that new jobs come up along the way
- Yet the issue of technology and machines displacing human labour has been discussed since at least Aristotle's time – he lived around 350BC – so this has been a long running concern – that is because there have been many technological shifts through our history – examples of changes to working conditions –
- Just as horses were gradually made obsolete by the automobile, humans' jobs have also been affected throughout modern history
- Historical examples include artisan weavers being replaced by the introduction of mechanized looms – but these jobs were replaced over time – and clothing over time because cheap and available – people only used to have one or two sets of clothing
- Before electricity - cities and streets were lit by gas and oil - in the early 19th century, gas lamps were first installed in the dark foggy streets of London and other cities and spread throughout the world – and someone had to light these gas lamps at night, then extinguish them in the morning - Thus the job of lamplighter was born – which was an increase in employment
- To give you some sense of the scope of the job, there were tens of thousands of these lamps in London alone. The largest gas lighting network in the world is that of Berlin - with about 37,000 lamps
- Each lamplighters were paid about $2 per day to care for 70 to 80 lamps – so in Berlin there were likely 500 – throughout the world – 10s of thousands of lamplighters – at this time the world population was about 1.2bn
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In the late-19th and 20th centuries, most cities with gas streetlights replaced them with new electric streetlights
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On top of this – was the industry that supplied the lamplighter's equipment included whale blubber (for use as lamp oil), wick trimmers and a ladder
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Similar story over the years in Farming – agriculture – back in the 1400s – between 60-75% of a countries population was involved in the production of food – ranges from 1-10% now – western countries being in the lower 1-4% ranges – most of the job losses occurred since the 1800s – so over a little over 200 years seen the number of people employed in the production of food drop massively –
- Assuming that in 1800 – 1.2bn population – at 55% - 660m – assuming everyone is working – lets assume that 66% are working – so 435m
- In 2020 – population of 7.8bn – 66% working and 4% in agriculture – a little over 200m people working in this area – so means there have been around a 1m p.a. reduction in employment in agriculture each year for 200 years – so is there a long-term unemployment issue here?
- During World War II, Alan Turing's machine compressed and decoded thousands of man-years worth of encrypted data in a matter of hours. Then with the rise of computers – economists were worried about many jobs being replaced
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A contemporary example of technological unemployment is the displacement of retail cashiers by self-service tills
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That is where there has always been a split of views between the optimism party and the pessimism party –
- Prior to the 18th century both the elite and a lot of the common people would generally take the pessimistic view on technological unemployment, at least in cases where the issue arose.
- the 18th century fears over the impact of machinery on jobs intensified with the growth of mass unemployment, especially in Great Britain which was then at the forefront of the Industrial Revolution.
- Carl Marx – who was a pessimist – would organise the workers in factories to destroy machines as they were worried the machines would replace them – even though they were employed to operate the machines
- Prior to the 18th century both the elite and a lot of the common people would generally take the pessimistic view on technological unemployment, at least in cases where the issue arose.
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Yet some economic thinkers began to argue against these fears, claiming that overall innovation would not have negative effects on jobs. These arguments were formalised in the early 19th century by the classical economists- because it became increasingly apparent that technological progress was benefiting all sections of society, including the working class
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Concerns over the negative impact of innovation diminished and the term "Luddite fallacy" was coined to describe the thinking that innovation would have lasting harmful effects on employment.
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The view that technology is unlikely to lead to long term unemployment has been repeatedly challenged by a minority of economists. In the early 1800s these included Ricardo himself. There were dozens of economists warning about technological unemployment during brief intensifications of the debate that spiked in the 1930s and 1960s.
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During the 20th century and the first decade of the 21st century, the dominant view among economists has been that belief in long term technological unemployment was indeed a fallacy. More recently, there has been increased support for the view that the benefits of automation are not equally distributed
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However – now the views are changing in the main stream – back to that technology will be massively disruptive to the employment markets
- The actual evidence - Robots have come a long way already – but only about 1.7 million manufacturing jobs have already been replaced by robots since 2000 - including 400,000 in Europe, 260,000 in the US, and 550,000 in China – so in the past 20 years only 1.7m jobs have been replaced – but robots are getting better – so this may accelerate
- What is going to expediate this replacement?
- As mentioned in the question – strikes and union action may incentivise employers to replace workers – strike that was referred to was organised by the Maritime Union of Australia (MUA) - caused an 11-day cargo backlog at the port, with a knock-on effect of container supply chain congestion spreading to Melbourne and Brisbane as vessels are diverted.
- Patrick said this week the action had seen terminal production cut by 40%, shipping schedules had slipped dramatically by nine days and delays were worsening by a half-day for every day the action continued.
- The terminal operator said MUA was demanding 6% annual pay rises for the next four years, and Patrick estimates the full list of claims will cost it around A$40m (US$29.2m) a year.
- Patrick CEO Michael Jovicic said: “I’m bewildered that the MUA would try this on during a pandemic, particularly when the average permanent employee is currently paid approximately A$155,000 a year, with top earners receiving more than $200,000.” – not sure if this is accurate – but
- As mentioned in the question – strikes and union action may incentivise employers to replace workers – strike that was referred to was organised by the Maritime Union of Australia (MUA) - caused an 11-day cargo backlog at the port, with a knock-on effect of container supply chain congestion spreading to Melbourne and Brisbane as vessels are diverted.
What is the next generation of employment – will people be fully replaced by robots? This may be what some economists are worried about – but they may be in a similar line to Carl Marx – who was a pessimist and his followers would go around destroying machinery
- short term – there will be a displacement of workers – but as I said earlier – this is already known – and the replacement of jobs will be gradual – not in one go - anyone not currently in a job – younger generations – may escape the fate of losing jobs – as there will be new jobs that come out of this –
- Like machine operators – rather than doing the automated job – working with the robots
- That is where while automation displaces workers, technological innovation creates more new industries and jobs on balance
- if robots are taking over jobs – there will be additional jobs for Mechanics, those who construct, build and install the machinery, or even additional software and IT employment opportunities
- Outside of this - jobs that require creativity or social intelligence are very unlikely to be replaced – so there are plenty of industries that wont be likely to be replaced for decades
- But longer term – who knows – AI may replace workers – but again additional employment opportunities can come out of this – ones that people haven’t even dreamed of – it will come out of the additional supply of goods or services produced by AI and hence there will be a demand for additional employment opportunities – can speculate – but what employment will look like in 100 years is really anyone’s guess –
- But do I think that things like UBI will be needed to help give people incomes because robots/AI have replaced all employment opportunities? I don’t – as history has shown – more job opportunities comes out of additional technology – not less – we went from 55% to 2-4% in western nations working in Agriculture over 200 years – so a likely trend may occur with additional technology being implemented – but with this change – jobs will come
- Who would have though that that people would be driving a car in the form of a taxi or uber 200 years ago - would have thought that an electrician would be a job or that IT would be an industry – or anyone working with software – or that oil and gas would be an industry – this is less than 200 years old on a mass scale
- Or even the steel industry – which used to be very labor intensive and expensive – now it is everywhere
- As more automation occurs – there is likely to be more output of production which goes into other forms of employment
- What would be a concern –if Governments get involved and regulate industries and innovation gets stifled – may see the job losses with no rebound
- For example - job creating effect of product innovation could only be observed in the United States, not as much in countries with massive levels of regulation and limited innovation like Italy
- My hope is that this allows additional economic growth and people to grow with this
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
https://ourworldindata.org/employment-in-agriculture
Welcome to Finance and Fury.
- This episode – be looking at one of the simplest ways to potentially generate alpha and outperform the broader market
- It’s been a decade since financial markets have become increasingly centrally-planned by central banks and with this - disconnected from fundamentals
- Hence – traditional analysis of shares based around their fundamentals may not provide outperformance – however – I think it is still important to understand which are good companies to buy into
- Looking at fundamentals and understanding these and their implications in the broader sense can be hard – takes many years to learn
- But what if there is an even simpler strategy to beat the market and generate alpha?
- That is where there is one interesting strategy from some quants – released an article called "Can quants make money by tracking the Fed books?"
- Runs through trading alongside the Fed's balance sheet – as this seems to be the dominant price setter in markets
- Been talking about this emergence in a few episodes recently – but interesting that some quant traders are now implementing this
- Looking at the influence the Fed has had on share prices -
- Monetary policy has the ability to influence asset prices – a lot of evidence that low interest rates and accompanying expansionary in monetary supply creates rallies in assets with risk - monetary contractions can create market retreats
- been more obvious since the GFC - market reactions appear to have become increasingly aligned and dependent on central bank actions – especially that of the Fed
- This is in part due to policies such as QE – as well as forward guidance from CBs – with statements like to the effect of supporting markets by any means necessary – increasing speculation and the dive head first into those assets that will be supported
- In 2008 – the total assets on the Fed balance sheet have expanded from $2.3tn to about $7tn today – this is a growth rate of over 200%
- Over the same time - S&P 500 rose from 900 to about 3,300 -growth of about 270%
- Over the shorter term – this year specifically – From March the Fed was sitting on about $4.7tn and this has grown to the previously mentioned $7tn figure – a growth of about 48%
- the S&P 500 over the same period has returned about 42%
- There is definitely a correlation here – but there is likely a causal relationship as well due to the flow of money into the markets that comes with the Feds balance sheet expanding – injecting liquidity as they would call it
- Monetary policy has the ability to influence asset prices – a lot of evidence that low interest rates and accompanying expansionary in monetary supply creates rallies in assets with risk - monetary contractions can create market retreats
- But how predictable are asset returns based on prior Fed action and can this be used as a tool to outperform the market?
- Technically – Fed policies have to be transparent – hence they can be market-moving – if traders are paying attention – so there is likely a first mover advantage here –
- Looking at what the quants wrote as their trading strategy – or what they are looking at - simply following the Fed
- They first go through the observation of the correlated movements between markets and the balance sheet of the Fed – have many charts showing the relationship between the growth of the Fed balance sheet and a variety of risk assets
- They note that the sheer scale of unconventional monetary policy does seem to have also made asset returns more predictable, and performance appears increasingly contingent on central bank actions. This provides a potential opportunity for investors.
- Fed has committed to maintain its asset purchase programmes “at least at the current pace to sustain smooth market functioning”, and with ultra-low rates expected to at least until 2023, according to the Fed, it is clear these unconventional monetary policies are going to remain a key driver of markets for some time.
- The quants note introduces a simple tactical alpha strategy that uses the growth of the Fed balance sheet to measure the degree to which monetary expansion is supporting risk-asset rallies
- The strategy - implemented in the context of the classic long-only equity/cash decision (buying and selling shares) – “provides supportive evidence of market predictability and the potential to utilize measures of unconventional monetary policies in designing systematic strategies”
- This means that to outperform the market – you can follow the growth of the feds balance sheet – as they note based around their simulations – doing so “generates a sizable outperformance with a reasonable success rate"
- Important to point out that this model is illustrative - provides a framework to extend to analogous risk -on/-off
- They did run some observations on if the relationship between the Fed causal beyond what is correlated –
- presented the correlation of weekly growth in total Fed balance sheet assets with lagged and subsequent returns of the S&P 500 index – what they found:
- “The negative correlation between lagged stock market performance and current growth in Fed assets (left-hand chart) means that stock market declines increase the likelihood of Fed action in the form of balance sheet expansion. On the other hand, the positive correlation between subsequent stock market performance and current Fed asset growth means that Fed balance sheet expansion leads to positive stock market performance. The impact of Fed asset growth on equity markets lasts, on average, for the subsequent four weeks.”
- “Consistent with economic priors, balance sheet expansion leads to stronger positive market returns, and our analysis shows that this lasts for up to four weeks, following the policy change, with a peak observed at three weeks. On the other hand, and contrary to expectations, Fed balance sheet contractions are also followed, on average, by market rebounds, although the strength of these correlations were much weaker in the initial three weeks, with a stronger bounce on the four-week mark.”
- So there appears to be a small announcement effect initially – but then the market reaction appears gradual – peaking at the 4 week mark
- Could be for a number of reasons – information delay – through to it taking 4 weeks for the liquidity to hit equities – through the purchases being in the Fixed Interest markets and for those on the secondary market to turn around and use the funds to buy shares – or it could be the impact on the lowering costs of capital for companies pushing up the valuations – whatever the reason – there is a lag
- Can these observations be traded – this isn’t advice – but general in nature – based around what the evidence shows
- The Quants design of investment strategy considers the distinctive lead-lag correlations between Fed expansion and Fed contraction – so they designed a weekly tactical alpha strategy based on Fed asset growth that aims to boost investment returns by selectively overweighting riskier assets during Fed monetary expansion regimes. To that end, the quants used weekly Fed balance sheet data over the period of 2009 and Sep. 2020 – a period of intensive use of unconventional monetary policy tools
- The strategy consists of using a classic equity-cash allocation with the goal of generating excess returns by systematically tilting towards risk opportunistically following expansionary monetary policy
- In the illustration – they used a long-only portfolio with a strategic allocation of 75/25 between equity and cash – their evidence showed that the impact of Fed asset growth lasts on average for four weeks with the lead-lag correlation to cumulative S&P returns peaking at around the fourth week. The input to the strategy is the weekly growth rate in the Fed total assets, and the strategy seeks to allocate more to equities (from safe asset holdings) during periods of monetary easing as reflected in the growth in Fed assets.
- the performance of this simple tactical tilting strategy shows that they would have been able to provide annualized excess returns of 2.5%
- So based around these models – it appears to work – can it continue working?
- If it is implemented correctly – and assuming that the causal relationship is due to the spill over effects from programs like QE or corporate bond purchases
- But there is no denying that the Feds movements do now move markets –
- the quant strategy implemented in the context of a long-only equity/cash portfolio provides some evidence of the potential to utilize the Fed as a partner in generating returns – if they are going to expand the money supply and this is going to flow into risk assets – like shares – why not follow?
- The Quant simulation generates a sizable outperformance with a reasonable success rate
- What else should we expect in the financial world where trillions of additional dollars from the expands of the Fed balance sheet have the ability to flow into shares once they are loosed into financial markets
- This being said - the Fed balance sheet-tracking strategy probably shouldn’t be the sole investment strategy that people use –
- Important to remember goals and look at your own risk tolerances and the point of investing
- But it could be useful as an overlay - given the massive numbers of other factors that affect markets and their performances - the Fed balance sheet strategy could also be blended with other trading decisions
- presented the correlation of weekly growth in total Fed balance sheet assets with lagged and subsequent returns of the S&P 500 index – what they found:
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition.
This episode – be looking at the weird combination between socialism and billionaires that is emerging – especially focusing on why billionaires are increasingly becoming in favour of socialism? Or additional government controls over economic function
- Interesting development - Wouldn’t think that these two worlds would collide – the only time I could think of socialism being used in the same sentence is to take away the billionaires money – which is has been – but why would some billionaires be in favour of this? technically – if a country was truly socialist – they wouldn’t have any wealth – or would they?
In this episode – try to puzzle this out further to make sense of it and to see why they might be in favour of it -
To start with – look at the concept of Socialism for the rich and capitalism for the poor
- This is a classical political-economic argument which states that in advanced capitalist societies – the more advanced the country the more there is wealth – the more governments can exist – and with larger governments comes the ability of additional policies –
- Hence – these state policies can assure that more resources flow to certain sectors of the economy - in the form of transfer payments
- One of the most commonly raised forms of criticism are build around the fact that the more political the economy becomes – the more it allows for the flow of resources to go towards certain large corporations
- This allows for the process of privatize profits and socialize losses - The argument has been raised and cited on many occasions.
- May have heard this from mostly individuals on the left – those
- But they take their anger out on the ‘rich’ – which is such a generic term – what is rich? We are all rich compared to someone living in the 3rd world – that is where movements like the occupy wall street movement was misdirected in their energy and efforts – they were pointed in the wrong direction – as their solutions would have caused more of the same – giving the government additional power over the economy – wanting redistribution to take from the top to give to the bottom
- The concept of socialism goes on large spectrums –
- All the way – Government controls all means of production – which has never worked well
- Part of the way – what most people might think of – is social policies – like social security
- In either case – governments need more authority – either to control all of the means of production – or to have the ability to tax or raise funds through deficits to fund their policies
- There are lots of criticisms of free market principles – but with Governments acting the way they do now – there is no free market – so calling a county capitalist when it has a socialist style monetary policy – where a semi-state or even private company in the case of the Fed control all of the money – isn’t truly a free market –
- I have plenty of criticisms of the current economic system – but I don’t blame the free market – I see that the free market got hijacked by the one entity that have greater control over it than the sum of individual choices in optimisation – that is Government – they create the rules in which the market has to operate – and the more rules – the less free
- But that is where people can use free-market rhetoric to go one of two ways – what is happening in a lot of politics is that it is being used to justify imposing greater economic risk upon the non-billionaire class – SME – through additional regulations – however – billionaires and large companies considered TBTF are being insulated from the rigours of the market by the political and economic advantages that such wealth affords
- These two things are not the same – and neither is technically free market
- This form of free market is socialism for the rich – where they have levels of state protection – that is part of why I believe that some of the billionaire class and politically powerful want to have a nanny state –
- But for the end result of when one is in trouble the taxpayer will bail them out – this is where the too big to fail scenarios of the past decade plus are a good example – seeing more of that now with the Fed buying back corporate debt off the market to further bail out the largest companies on earth – and over this time period whilst most individuals wealth and incomes have declines – select billionaires who have been the recipients of this have seen their wealth skyrocket
A lot of this comes back to the concept of Corporate welfare
- The term corporate welfare is widely used to describe the bestowal of favourable treatment to big business by the government
- The definition of corporate welfare is sometimes restricted to direct government subsidies of major corporations – this doesn’t include tax loopholes and other forms of regulatory trade decisions - which in practice could be worth much more than any direct subsidies – but are indirect due to policy decisions
- Subsidies considered excessive, unwarranted, wasteful, unfair, inefficient, or bought by lobbying are often called corporate welfare. The label of corporate welfare is often used to decry projects advertised as benefiting the general welfare that spend a disproportionate amount of funds on large corporations, and often in uncompetitive, or anti-competitive ways.
- For instance agricultural subsidies are usually portrayed as helping independent farmers stay afloat - However, the majority of income gained from commodity support programs actually goes to large agribusiness corporations - as they own a considerably larger percentage of production – the same thing happens in the EU with quotas of production for things like the fishing industry where one large company can get 90% of the quota where the remaining independents having to fight over the scraps
- In the US – estimates are that state and local governments provide $40–50 billion annually in economic development incentives to large companies which could be categorised as corporate welfare
- the Cato Institute estimated that the US Federal government allocated approximately US$92 billion in the 2006 federal budget toward programs that the authors considered to be corporate welfare - estimated that number to be US$100 billion in the 2012 federal budget – who knows that it is now
- Comparison – that $770 billion on social security – which is still a large amount of money – but I’m guess a lot of people didn’t realise that well over $150bn was provided as a form of social security to multi-billion-dollar companies
Brings up important question – how did a lot of the largest companies get there? They provide good product yes – but along their climbs they have received a lot of government assistance – Examples – there are plenty – and too many to go through
- Tesla – Tesla Motors Inc., SolarCity Corp. and SpaceX together have benefited from an estimated $4.9 billion in government support - data compiled by The Times as at 2015
- underscores a common theme running through these emerging empires: a public-private financing model underpinning long-shot start-ups – that investors and the market used to finance
- From subsidies at the national and state level, to federal tax credits for consumers buying electric cars and solar panels, to fuel efficiency standards that help bring millions in revenue for Tesla – selling carbon credits given to Tesla has helped them turn a small profit last quarter
- Amazon - growing rapidly in part to its aggressive strategy for getting subsidies and tax breaks - been getting about 20 subsidy packages a year since 2012 for its warehouses and data centres - $2.8 billion and countingas of December 2019
- Amazon created an entire team just to seek out these subsidies, in a continuation of its strategy to work the tax code to its advantage—first by not collecting sales tax and offering an effective discount on every product, and more recently to lower the cost of building new shipping facilities
- I understand the benefit of trying to get economic development through additional employment by attracting Amazon to move to your city - If a city or state shells out millions of dollars to attract Amazon, the least it can do is ensure that the resulting jobs lift people out of poverty – average salary for the warehouse workers is about $30,000 per worker, barely above the $26,208 poverty line – 10% of employees are on food stamps
- This is another result from this form of socialism – if amazon is the only employer and not much competition – they don’t need to pay much in salaries
- But they also take up state resources with other tax payers need to covers - Bloomberg reported last year that emergency responders visit the Amazon warehouse in one County at least once a day for the month to attend to an injured worker
- The largesse bestowed on Amazon in Ohio is incredible. A deal for three Amazon data centres netted Amazon a 15-year exemption on property and sales taxes worth $77 million, a $4 million offset to payroll costs, and $1.4 million in cash
- I’m for not regulating over regulating companies – but I am also not for then making the playing field unfair through providing hand outs to the companies that you choose –
- But Billionaires who have benefited from this – as their companies at the top are the recipients of these hand outs – so the individuals who own these companies wealth also grows– they don’t directly get the money in the form of welfare – but they indirectly get wealthier from it
- An extreme example of billionaires benefiting from Governments assisting them in creating monopolies is Carlos Slim– billionaire in Mexico – failed business ventures in US – didn’t have the right politicians to help his ventures along unlike what he had in Mexico
Important to point out that here I am not talking about rich – which could be the middle and upper middle class – not even against billionaires – but those that are wanting governments to have more power to help protect their monopolies and provide them corporate welfare – a lot of back scratching going on through lobbying – which is all part of a socialist state – people are still wealthy in socialism – those with political connections – as well as politicians themselves – it is you and I that get the poor end of the deal
- We don’t have the same political connections to game the system – and when the system is set up to a point large companies need big governments to grow to the point they have – they want to continue that - So they push for bigger governments – like socialism does
- Plus – even if the government plans to tax all of their wealth away – good luck – billionaires have access to many things that you and I don’t – such as mobility of ourselves and our money – look at the flight from NYC – if you are a billionaire – move your money elsewhere or live elsewhere – and have the best international accounting teams to help avoid paying any taxes – so billionaires can support all the tax payments in the world – cause they know they wont have to pay them – but the upper middle class will –
- Same with company taxes – large corporates get tax credits and can use complex accounting practices – through IP laws and R&D costs to conduct a tax shifting scheme through conduit and sink countries
- But again – the smaller or medium sized companies can’t operate in this way – even some larger companies can’t – but the new age of billionaires have different companies – especially in technology – which is borderless
- But there is more to this I think -
- Where I think this is all heading – with billionaires pushing for socialism and have the political power to direct changes – on top of informational influence – through platforms like Amazon, FB, Google – they are also in favour of concepts like UBI – so we will look at how if a more socialist state or things like MMT come to be – this will also benefit these large companies
- But in summary for this episode – I think that most of the billionaire class are in favour of calling for socialism due to it giving governments more control over the economy – and hence
- Not true socialism – but a socialism lite version to help create additional barriers to entry and help monopolies the markets further
- More political power – greater ability for lobbyist to influence policy at the state and federal levels – hence additional benefits for the company
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition.
This week’s question continuing on the from Raj in last two weeks episodes – interesting topic on how factors affect the real economy – which is us –
- so this episode will to continue on a similar line –will focus on the remaining factors that can affect the real economy - fiscal deficits more and then the real inputs to the economy, like forex, oil prices and trade imbalances
- All previous factors – like interest rates can affect our lives and hence affects the real economy – influencing the decisions we make – similar – the yield curve – whilst not directly affecting our lives - can indirectly affect it by decisions that banks make – such as what interest rates to charge or pay on fixed rate loans or term deposits respectively
Before we go on – important to remember that the real economy is the combination of our economic interactions – so it is almost impossible to forecast the degree to which one factor is affected by the other – but you can get an idea about in what direction they are affected -
Fiscal deficit – what does it mean – The government is spending more than it earns and gets into debt –
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The actual effect on our lives - All depends where the money is spent –
- For the individual – public debt in the fiat economy is progressively becoming less relevant to our day to day lives –
- Back before fiat currencies – a public (Government) debt may have been a concern – as taxing the population was one of the only recourses to dig themselves out of that hole
- Today – every country is in debt – and they can just keep issuing more debt as all money is debt – so just have a CB create more money and use it to buy the debt of a government – hence lending them the money
- For the individual – public debt in the fiat economy is progressively becoming less relevant to our day to day lives –
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When the money comes due – then simply issue more debt to repay the principal – almost like a balance transfer for the individual on credit cards – but on a much larger scale and can be done essentially indefinitely – until confidence and CBs ability to print money ceases
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So the major determinate on how deficits can affect the individuals in the economy and hence the real economy depends on where the money is spent – major spending areas:
- Infrastructure – can improve our lives and daily functions – helps to improve the economic function as well
- But the degree to which this has an affect is hard to measure – covered episodes on infrastructure – called “Can public infrastructure spending help to boost a depressed economy?” – mixed bag – and comes back to the same question on how well the funds are spent – white elephant projects – or dig a whole to fill a hole –
- Even at the moment – lots of talk that shovel ready projects need to be implemented to help the economy through additional employment – but how? Those out of work are predominately in the hospitality and service industry – everyone I talk to in engineering an infrastructure are already busy – so are people who work in hospo going to go out and all of a sudden go and start working on fixing roads?
- Infrastructure – can improve our lives and daily functions – helps to improve the economic function as well
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In theory it might sound good – but in reality, the transaction of the economy doesn’t function this way
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Fiscal stimulus – additional welfare/social security payments -
- This comes back to demand side economics – the individual has additional money to spend in the economy – so growth is meant to materialise
- Also falls into MMT – that government should monopolise currency and control the flow of a lot of the capital to maximise economic conditions – but this is theoretical -
Other economic factors - some specific ones mentioned in Raj’s question - forex rates, oil prices and trade imbalances – which either directly or indirectly are determinates of the real economy -
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Oil prices – this is an interesting one – for the individual it might not seem like there is much impact beyond what it costs to fill up the car each week – so look at this first
- Petrol bills are a component of a weekly spend for most households – but how much depends on how far you drive – but also the cost of the petrol
- The Australian Automobile Association's (AAA) March 2019 Transport Affordability Index reported the average two-car Australian household (two adults, two children) pays $68.99 for fuel every week – this is equal to about $3,500 per year for a family in fuel costs
- This is back when fuel was averaging between $1.3 to $1.4 per litre – equal to about 51 litres each week for the family
- so if petrol prices goes down to $1 – then at the same usage of 51 litres – this means the family is spending $51 on fuel for the week – or about an $18 savings per week (26% reduction) – or a savings of $935 p.a.
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So this in theory can go towards other spending within the economy – however – it could also go towards debt repayment
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Especially when debt levels are very high – so people may consider that additional savings should go into debt repayment – which doesn’t boost the economic output –
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Also – in the measurement of inflation – this lowering of price is deflationary – if it is persistent – and doesn’t increase – as well as individuals not spending the saved funds on other areas of products or services – then CBs may lower rates out of this – but it is unlikely – as fuel is a smaller part of the CPI basket
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Beyond fuel for the individual – the costs of lowering fuel prices are passed on in the form of lowering costs of supply –
- This is part of economic theory – when think about how goods are transported – does make up a minor cost overall – so isn’t that impactful at the single good level – but as an aggregate it could help – in theory – how the theory goes:
- If your country is a major importer - the shipping costs for lots of goods are cheaper when fuel and hence transportation costs are lower – so the goods that you buy are now cheaper – which is good for the individual – is also deflationary
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At the top level – oil companies and fuel producers are affected based around prices that they can charge for fuel versus their costs
- Incentives and profits – the costs for most producers are stagnant when compared to the volatility of prices
- The Middle East and North Africa are very low-cost producers – at around $20 per barrel down. Worldwide, conventional oil production typically costs between $30 to $40 a barrel
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So if the price of oil is $100 – there are large profits to be made – hence these companies can expand their search for oil and upgrade existing infrastructure – however – if oil prices are $10 – producers lose money – so they have to shut down supply – but this then raises supply – and the lower cost producers survive –
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Where this impacts the individual in the economy is employment – when prices were high the oil industry worldwide was booming – good salaries and lots of employment opportunities
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Next comes the currency exchange - Forex – which is a dichotomy between the individual and companies within a country – that is because what is good for one might not be good for the other
- For the individual - The costs of buying products from overseas may be better or worse – depending on where the exchange rate lies –
- for countries that are heavy importers
- For countries that are exporters –
- For the individual - The costs of buying products from overseas may be better or worse – depending on where the exchange rate lies –
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But the goods that are imported/consumed is really what matters for the individual – example with Australia –
- We do have a big export market – resources, tourism and education - a lot of what we purchase from a day to day was likely produced overseas – things like clothing –
- Say we are buying goods from China – and the Chinese Yuan (renminbi) goes from 7 to 5 to one AUD – assuming the cost of production don’t change in China (big assumption) – almost a 30% drop in purchasing power for Australia – so like for like – now goods would be 30% more expensive for us to purchase
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In a similar way – travel costs change – Australians are big travellers – so when our currency is high compared to others – cheaper to travel – I remember going to America in 2011 – was great – things were dollar for dollar – going over to the states at the start of this year – was technically more expensive – whilst the costs of goods in USD hadn’t changed by as much – 30% more expensive –
- But if travel is incentivised outside of your country – technically less spent domestically – so there is a feedback loop here – where if it is too expensive to travel for currency reasons – then people may go on holidays domestically which boosts the economy
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When your currency is high when compared to others – is good for the individual but not for companies if you are exporters – as the reverse is true where the goods are now more expensive
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For a company – selling a good at $1 AUD is the same regardless of if you do it domestically – or that is your prices to sell to overseas purchases – that price is generally based around the domestic cost to produce – if you sell 1,000 widgets, you have made $1,000 in revenue
- But if overseas buyers can now buy two of your goods versus one – well your demand will increase – and with it your total revenue – take the reverse example of the previously mentioned individual scenarios –
- Say an Australian company is selling widgets to consumers in the US – or even US companies – and our exchange goes from $1 USD to $1 AUD to $1 USD to $1.43 AUD – or $1 AUD to $0.7 USD – then that is an increase of 30% in what can be purchased by an overseas buyer in the US –
- All else being equal – they can now buy 30% more and hence – the Australian company’s revenues will increase by 30% at the same time – this is a simple example – but illustrated that the demand for goods with a global economy changes with exchange rates – this is good for export nations – but the reverse is true for import nations – now it is more expensive for the nation as a whole – and those companies that make up the nation may have less impact on the overall economy
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so unlike the individual – for a company (and technically individuals through those who own the business or are employed by it) – the lower your currency relative to the countries buying your goods and services – the better
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This is where there is pressure on major exporter nations to keep their currencies low – whether it be artificially like china through a peg – or through monetary policy or other economic factors – the lower the relative currency the better for companies
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Coming back to the individual in the form of investors – the unhedged position of investments can help or hurt
- Smaller follow on point – but if you own apple or amazon shares – they have to be in USD – so if the AUD depreciates then your investment values actually increase – but the reverse is also true – whilst is doesn’t have a massive impact on the economy – does affect the individuals investment values and returns
- Finally - Trade imbalances – more or less a summary of the previous activity – how much the country is importing versus exporting
- It can signify certain realities though – such as what country is an importer or exporter – as well as the direction of currency (forex markets) are likely to move
- If you are a major exporter country – you might be considered productive – lots of goods or services provided by your country – hence you have low levels of unemployment – but also potentially cheap labour such as countries like China – hence why you have low unemployment and are a major exporter – but it depends on what you export
- Whether it be a service or capital-intensive industry – versus a labour intensive one
- Not a consumption nation – unless the production levels can keep up with consumption levels and more
- Major importer – you might be less focused on the production of goods – but may be more focused more on domestic services –
- Countries like the US have a huge negative balance of trade – but they are still doing pretty well as an economy
- When it comes to trades imbalances – don’t have much of an effect on the economy – they are a representation on what type of economy a nation has – and how well the country performs economically comes back to how productive a country is more so than the imbalance in trade
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. This episode we’ll take a deeper look into the RBA property market models and how different inputs affect prices.
Potential models that give the ability forecast future growth of the market based around assumptions – from a study by the RBA - A Model of the Australian Housing Market
- Not set in stone – it is a best guess model – the accuracy is built around the assumptions – But the RBA built an empirical model of the Australian housing market that quantifies interrelationships between the factors that drive property price growth
- Looking back over the past 30 years - the Australian housing prices have increased on average by 7¼ per cent per year – since the inflation-targeting period since the mid-90s - by around 7 per cent per year - However, these averages mask three distinct phases:
- During the 1980s, annual housing price inflation was high, at nearly 10 per cent on average, but so too was general price inflation. In real terms, housing price inflation during the 1980s was relatively low, at 4 per cent per annum compared with 4.5 per cent during the period from 1990 to the mid 2000s,
- The 1990s until the mid 2000s were marked by quite high housing price inflation, of 7.2 per cent per annum, on average, in nominal terms – but 4.5% in real terms
- Since 2010 - Annual nominal housing price inflation over the past decade was lower than either of these periods, at a little over 5 per cent on average - and 2.5 per cent over the past decade in real terms
- So what are the major factors and how much do they have an effect on price
Wont go through the whole document or all the RBA papers – but give a summary
In this RBA model – the findings
- They find that low interest rates (partly reflecting lower world long-term rates) explain much of the rapid growth in housing prices and construction over the past few years.
- Another demand factor, high immigration, also helps explain the tight housing market and rapid growth in rents in the late 2000s. A large part of the effect of interest rates on dwelling investment, and hence GDP, works through housing prices.
- The Australian housing market shows strong relationships between interest rates, investment, rents and prices.
- The RBA paper combines these relationships in one – hopefully realistic – model. The model provides internally consistent projections for housing construction, prices and rents. It estimates responses to interest rates, allowing for feedback between quantities and prices.
- It helps explain historical developments and some of the key relationships that they found include:
- Interest rates, income and housing prices have strong and clear effects on residential construction.
- Dwelling completions and changes in population explain the rental vacancy rate.
- The vacancy rate has a strong and clear effect on rents.
- Interest rates, rents and momentum have large effects on housing prices.
- Housing prices and construction are mutually determined, so examining bivariate relationships in isolation can be misleading.
- Some of these observations are not new – but this paper examines these relationships
What are the model outcomes – responses to variables - bring the equations together
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Responses to Interest Rates – Shows that a cash rate change that is expected to be long-lasting feeds one-for-one into long-term interest rates and the user cost of housing - but the temporary change having much less effect.
- As interest rates drop – so does user costs - Changes in the user cost give rise to similar, but lagged, changes in the rental yield (lower the cost the higher the net income from property) - which involves substantial increases in housing prices
- The combination of lower interest rates, higher housing prices and higher income boost dwelling investments – which increases the number of dwelling stock as well as rental vacancy rate
- Rents initially rise due to the income boost from lower interest rates, but as extra supply builds, they begin to fall.
- The signs of the effects on vacancies and rents both vary with time and with the expected duration of the shock.
- Since 2011 - the cash rate has fallen from 4.75% to 1.5% (3.25% drop) – at the time of the report last year – since then obviously lower to 0.25% - the user cost has fallen from almost 5 per cent to around 3½ per cent (1.5%)
- The decline in the user cost reflects a fall in long-term real interest rates (only be half), which in turn reflects falls in global rates and expectations that the decline in rates will be persistent.
- The model estimates that the reduction in real interest rates accounts for most of the subsequent boom in dwelling prices and a large part of the boom in dwelling investment – increasing the supply of property
- The increase in housing supply boosts the vacancy rate and reduces rents. However, these effects are offset by the effect of higher income, with neither the vacancy rate (bottom left) nor rents (bottom right) being much changed on net.
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Responses to Population Growth - Reflecting a surge in immigration, year-ended growth in the adult population (15 years and older) rose from 1.5 per cent in 2005 to 2.4 per cent in 2008.
- To assess the effects of this surge, RBA ran a simulation in which adult population growth continues to grow at its 2005 rate of 1.5 per cent.
- With per capita income unchanged by assumption- dwelling investment also increase by about 3.3 per cent. This raises housing supply slightly. However, the short-run boost to housing demand is much larger, leading to a fall in the rental vacancy rate to a near-record low of 1½ per cent in 2008 (3rd row, left).
- Rents, which were already growing quickly, accelerate to grow 4 percentage points faster than the overall rate of inflation. Without the extra population, our simulation suggests that real rents would have only grown by 2 per cent a year, as shown by the 3rd row, right panel. The cumulative result was that real rents were 9 per cent higher in 2018 than they would have been otherwise. The increase in rents gradually flows on to a similar increase in dwelling prices, although this effect is small relative to the effect of interest rates, discussed in the previous section.
- To assess the effects of this surge, RBA ran a simulation in which adult population growth continues to grow at its 2005 rate of 1.5 per cent.
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Responses to Completions - increase in construction as a deviation from baseline - assume that building approvals increases by 10 per cent for one year - represents about 21,400 extra approvals for new dwellings
- The extra ‘supply’ (as it is commonly termed) would increase the vacancy rate and hence lower rents and housing prices. The proportionate response of rents and prices (0.4 per cent) is 2.5 times as large as the increase in the number of dwellings (0.16 per cent). This ratio (2.5) represents the inverse of the elasticity of housing demand. It also applies to larger and more sustained shocks. As a rule of thumb, every 1 per cent increase in the number of dwellings (when driven by an increase in supply) lowers the cost of housing by 2½ per cent. Our estimate of the elasticity of housing demand lies well within the range of other estimates. Abelson et al (2005) estimate that a 1 per cent increase in the Australian housing stock per capita leads to an estimated decrease in real housing prices of 3.6 per cent in the long run. Girouard et al (2006) summarise ten international studies, which have an average estimate of 3.1. Two recent and arguably more thorough studies point to smaller effects. Albouy, Ehrlich and Liu (2016, Table 3) find that a 1 per cent increase in real housing expenditure in the United States is associated with less than a 2 percentage point reduction in price. Oxford Economics (2016) find that a 1 per cent increase in the number of houses in the United Kingdom would reduce house prices by 1.8 per cent and cite (their Figure 20) several other elasticities that range between 1.1 and 2.2.
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Responses to Changed Price Expectations and the User Cost - Our measure of the user cost assumes that home buyers expect real constant-quality housing prices to continue rising at their post-1955 average rate of 2½ per cent a year.
- This is a simple assumption that is consistent with some of the main features of the data. However, forecasts from RBA model imply that real housing prices (measured with a different quality adjustment) will grow at an annual average rate of 0.2 per cent over the next ten years.
- This scenario can also be interpreted as capturing the effect of an exogenous fall in housing prices if the model to be extended to include taxes on housing, this is an important channel through which they would operate. As shown in the top left panel, expected capital appreciation declines 2½ percentage points. The user cost (not shown) rises by the same amount. Housing prices (top right and middle left) then take a long time to adjust, falling gradually, but substantially, to be one-third lower after five years.
- housing bubbles do not ‘burst’, they gradually deflate. This scenario is extremely unlikely: nothing like it has happened in Australia before. However, in scale and duration, it resembles the largest housing collapses seen during the global financial crisis (Ireland, Spain, United States), so is relevant as a worst-case scenario to be guarded against. Falling house prices result in large falls in investment (middle right), which reduce vacancies (bottom left), boosting rents (bottom right).
- This is a simple assumption that is consistent with some of the main features of the data. However, forecasts from RBA model imply that real housing prices (measured with a different quality adjustment) will grow at an annual average rate of 0.2 per cent over the next ten years.
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The decline in construction dampens the fall in prices. The limitations of this partial equilibrium exercise should be emphasised. In a more complicated model, falling house prices would reduce household wealth and hence consumption. The net worth of financial intermediaries would fall. Offsetting this, interest rates would fall, moderating the macroeconomic impact. That said, the housing market response would be an important part of the overall effect.
Their model quantifies some important developments:
- The model suggests that much of the strength in housing prices and construction over the past few years can be explained by the fall in interest rates – some of this fall reflects lower world real interest rates and some is cyclical.
- A large part of the effect of interest rates on dwelling investment (and hence real GDP) occurs through the channel of housing prices.
- The model suggests that an increase in population growth will reduce rental vacancies, boost rents and housing prices, and increase construction. This helps to explain developments following the immigration surge of the mid 2000s.
- The model is consistent with some important longer-run trends. Construction activity is approximately cointegrated (trends together) with income, although the housing stock is not. The rental yield is cointegrated with the user cost of housing. Rents tend to grow slightly faster than inflation but slower than income per capita
Conclusions –
- Looking ahead, it seems unlikely that there will be a return to the rather extreme conditions of the past few decades when significant increases in household debt supported high housing price growth. Nonetheless, protracted periods of changes in population growth that are not met by adjustments in dwelling supply could lead to periods of sizeable changes in housing price growth. One important factor for housing price growth is the ability of the supply of new dwellings to respond to changes in demand. The significance of this is made clear by the recent increases in higher-density housing and lower growth of those prices relative to prices of detached houses, whose supply has been less responsive.
- Varied bag – and before the recent economic downturn – But the major factors have been
- Interest rates declining – rates would need to continue to decline
- But not looking as good as the past 20 years worth of growth as a percentage – may become lower with either
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
https://www.rba.gov.au/publications/bulletin/2015/sep/3.html
https://www.rba.gov.au/publications/rdp/2019/pdf/rdp2019-01.pdf
Welcome to Finance and Fury, the Furious Friday edition.
This episode is a little different – it is some of my commentary about the political division that is starting to emerge – especially in America – but also how to avoid it in your own lives and also prosper through it
- Populations being divided It is a natural part of any cycle – and in a pretty natural occurrence in the world at large – there is nothing new to people thinking differently – but to what degree and the degree to which this gets played out in society in a physical manifestation does differ
- Covered cycles in the Fourth Turning episode as well as the K-wave theory episodes – and the political spectrum of society works in similar cycles – its almost like it is interwoven between the seems of each generational turning – going back to the 1920-30 – things were pretty crazy – then calmed down – before picking back up
- Started to see the emergence of everything in modern society being politicised - from race, sex, economics – even a virus
- Very useful from a politician’s point of view as it is a natural progression for them to pander to a base – as the population becomes more divided – you shore up more of your voting base – picking sides if you will
- So politicians have nothing to actually incentivise them to focus on a reduction in the escalation of the tensions in the population – if anything – many would prefer to increase tensions – especially in the US where voting is not mandatory – you need to energize your base to get out and vote for you – nothing will energize someone like an us versus them mentality –
- But we see a lot of what happens in the US - so this mentality spreads here as well
- Look at the basic psychology of any cult – or cult like group – the first major step is painting a picture of an enemy – whether it be real or imagined – a group soon falls apart without this core aspect – hence division is important – for a cult it means that people will remain within the group and be afraid of those outside the group
- So politicians have nothing to actually incentivise them to focus on a reduction in the escalation of the tensions in the population – if anything – many would prefer to increase tensions – especially in the US where voting is not mandatory – you need to energize your base to get out and vote for you – nothing will energize someone like an us versus them mentality –
- But does it actually help us as a population?
- If anything – and what is fairly evident – it polarises us – divided us – and pits neighbour against neighbour – so in sort it doesn’t
- When everything that people pay attention to is politicised – or everything reported on in the media is politicised – is it any wonder that there is political division and hence division in the population – whether it is by design or just an acceleration of a political cycle doesn’t matter – it has the same outcome – that groups of the population are at one another’s throats
- Yuri Bezmenov – talks about subversion – KGB defector – the easiest way to destroy a country is not through military force – you let the country destroy itself – political subversion takes a generation or two – but through making people divided in a nation – through removing any long-term goals and focusing on one social issue after another – can easily have a country implode
- Hence someone’s political leanings and with – their outlook on life can create a further division - especially in a society which is meant to pride itself on differences – such as multi-culturalism which would naturally bring with it differences
- I don’t know how many people have seen the irony here – the fact that we can all look different - but don’t you dare think anything different from one another otherwise you are the enemy – complete inversion
- The idea that if someone has a different idea about how something should be done is an enemy to the point that violence is the best response is ludicrous
- But all of this stems from a deeper root – if there is anything emotional running through society which can be used for political gain – it will be
- Emotions are a very strong tool to control people – as you don’t need to actually do anything to control them on an ongoing basis
- You just instil an emotion and then train the response – pavlovian style – in a classical conditioning sense
- We are visual creatures – monkey see monkey do – if we see others acting in one way – we are influenced by this behaviour – especially in mobs – or what we see on a screen
I view politics today as the wings of a bird – whether it be the left or right wing – they are still part of the same bird –
- This analogy flows through to the entity known as the Government – think of the government as the bird
- And it either uses its wings to flap one direction or the other – this is a major issue of the two party system – create an us versus them mentality – without realising that no matter which wing we flock to – the bird is still flying higher – whilst our car windows get their splatter
- Further divides in goals and outcomes that society can agree upon –
- Especially when everything being focused on is in the short term
- One thing that China has going for it at the Government level – 100 year plans – can afford to do this as they know that the same party is likely to still be in power – hence why they have been able to economically beat most nations –
- Not saying this is a good thing – as any government that has absolute control is an awful system
- But when western Governments and societies are become more totalitarian in nature – if you have one with a plan compared to one without – well the one without will likely fall behind the former
- But a government with a plan can be a dangerous thing – depending on how much power it has –
- If the people have the power and a plan for betterment – and the government helps the people form their own goals and plans at the individual level and follow through on these through allowing the equality of opportunity – society can flourish and grow
- But in the name of being progressive – people are tearing down communities at the moment – rioting and destroying the communities that they live in – based upon the perception that there is a lack of opportunity
- But when society is divided by the politicians that are meant to rule – we end up eating ourselves - like the ouroboros – snake eating its own tail
- But like the ouroboros - it represents the cyclical nature of the environment – and over time – like any cycle - the division between society occurs in trends –
- Think about todays compared to the 1930s in most parts of the world – politically – things were pretty similar –
- Political ideologies stemming into violence on the streets
- In Australia we have been fairly immune to most of the political violence when compared to what those in the US are facing
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But the danger is being so wound up in politics that affects your outlook on society – that is your perception in reality can be changed – when compared to any fact or dialectic discourse – if individuals are based on the emotional representation on what the media is portraying – it can warp perceptions –
- The danger is treating perception as reality – which is what actually occurs for most people - to the point where reality is warped in order to make it comply with their pseudo-reality that they see through a TV or phone screen – rather than their own two eyes in their daily lives
- That is where our brains have the impossible task of distinguishing between what we see in person or on a screen – and with the ability to either manipulate what is seen through a screen – or show every occurrence of an event so our availability heuristics kick in and we think it is much more likely to occur in our daily lives – the perception takes over
- Hence this partisanship untethers the mind from objective reality – partisanship enslaves the rational mind, forcing it to create an alternative reality to justify one’s actions – be it shouting down someone as to not hear an opposing view or knocking them out to avoid those uncomfortable truths
- The danger is treating perception as reality – which is what actually occurs for most people - to the point where reality is warped in order to make it comply with their pseudo-reality that they see through a TV or phone screen – rather than their own two eyes in their daily lives
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This partisan reality is so powerful it blocks out anything that contradicts or disconfirms the alternative reality.
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Seeing the emergence of political murder – wont see the media reporting on this – but in the US there have been occurrences where a disagreement quickly moves to murder – or even someone wearing a trump hat - because in the individuals mind – they have created a reality in which anyone showing a sign of the triggers to their perception of reality – if they have their own firm convictions – killing someone else is acting in self-defence and in fact, they have to kill their opponents for the good of society – as they must be a Nazi – even with no evidence
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The emotional level of drive – the division between groups – nothing can be achieved in this manner –
- And as the saying goes – when words fail – the only recourse left is violence
- This is a shame – in a civil society – words and the freedom of speech is the most important facets –
- However when words are now seen as hate – when a logical argument or individual opinion can be quickly shot down with cries of sexist, racist, misogynist, or any platitude – the logical debate no longer exists –
- Sunlight is the best disinfectant – in society to be able to say anything and then be corrected based around the dialectic in a public forum of debate – that has been how society as a whole has been able to progress through its thinking
- But when the minority has the strongest voice and the silent majority just wants to avoid the ire of the vocal minority – the public discourse of what is seen starts to close – hence perceptions change
- And as overtons window starts to close – the very topic of discussing police brutality is too much – it has to exist and if you don’t think it does – you need to be brutalised in return -
- At the moment – in Aus – plenty of videos going around especially from Melbourne that depict police brutality – they are doing their jobs – financial incentives are in play – they don’t wont to be fired and lose their incomes from not carrying these tasks out – so this cycle continues -
- But that is another trap – further division – as it is fear on both sides –
- Either fear that the stasi will come and kick your door down
- Fear by those carrying this out – that the population will turn on them – such as enforcement agencies such as the police
- Fear – it is a powerful tool – especially the fear of death – but people forget that beyond self inflicted deaths such as obesity – governments have been responsible for hundreds of millions of deaths in the past 100 years – but yet the cries for governments to take additional controls to solve our mortality issues grows even more
I try to look at the facts and evidence of the situation – I’m not perfect – can easily get things wrong – but I try to not base anything on a partisan or emotional response – through an us versus them mentality
- But once fear has a grip on someone’s mind – any amount of evidence is hard to get them to change their minds
- Hence – if emotion is the root of the argument – and emotional arguments is no way to base a decision for the whole of society –
- Mainly due to emotions being a very powerful way to persuade – hence they can easily be manipulated and controlled – Especially without people knowing it
- fear and with it anger can be used as a major tool in politics – I have been swept up into it in the past – fearing another party will come into power drives a motivation to vote – or being angry at events playing out – hence why the majority of political ads are negative to the opposition – we all know the type – ‘this party wants to do this, they must be stopped’
- Why I no longer support an induvial party – to avoid getting wrapped up into this –
- Sure I have a preference – but that is based around policy – but this being said – it is taking the best of the worst – most policies I don’t agree with – but it is a sum of the good versus the bad – more or less a pros and cons list
- You need to put yourself in a position outside of fear or anger - Doesn’t mean I don’t vote – vote for who I think is best suited – but I no longer put my hopes in politics – I put my hopes in my community, my family and myself
- the emotional division created by the modern political environment and energy this drain – not good – we only have so much time and energy that can be given
- This doesn’t mean to not pay attention – being informed is important – but this can be a trap – as if your political information is coming from the media – this is a warping of perception
- Just not to get wrapped up in either fear or anger – paying attention to those emotions is important – know that you are experiencing them is the first step to controlling them
- but at the same time – some peoples lives are completely devoted to one political ideology
- to move above this – I try to aim my life in a direction where it doesn’t matter – to become self-sufficient – to be financially independent as well as independent in life – with sources of power, food and water
- If I was on welfare and needed the Government – would matter more – I would be out there in the streets shouting the government needs more power to fight the wealthy and provide additional welfare to myself
- Aim to have your life outside of politics – I view politics as reality TV now – about as scripted and as trashy
- The way the media covers it now seems the exact same as any episode of any trash TV – very little facts and cherry picked/edited to the point of purveying the point of view that they want – not the actual information
- But this creates a situation with limited real information to base reality upon – and most of what people consume on TV is not reality – but our brains have a very hard time distinguishing this – so even a false reality becomes real in our subconscious
- TV – Social media and the news – compare what you see here to your day to day lives –
- Pay more attention to the day to day – not what you see on a screen – if you are feeling overwhelmed – switch the screens off
- The major question we face in this current turning of the cycle is whether it is possible to maintain a civil society with an abundance of political division and the increased number of people embracing an alternative reality – based around the perception being fed to them through a screen –
- We’re being overrun by simulacrum - image or representation of something
- But once you realise this – you can start moving above it – and moving back to what is important in your own lives – focusing energy on your own community – helping your family, friends, neighbours and walking away from the system itself – as your build towards your own independence – building financial independence and being above the political division
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition. This week’s question is continuing on the from Raj in last week’s episode.
“I would love to have an overview of how certain economic factors are interlinked and impact economies”
This episode look at Yield curves and bond prices and touch on fiscal deficits
Last week – looked at the other factors – mainly CB policies including interest rates, inflation and the monetary supply – but can’t talk about these without the flow on effects that they have on what is known as the yield curve
- The yield curve for government bonds is an important indicator in financial markets - helps to determine how actual and expected changes in the policy interest rate (the cash rate), along with changes in other monetary policy tools, feed through to a broad range of interest rates in the economy – hence can have affects on the entities that comprise an economy
The basics for bonds -
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A bond is a loan made by an investor to a borrower for a set period of time in return for regular interest payments
- Known as a debt instrument –
- The time from when the bond is issued to when the borrower has agreed to pay the loan back is called its ‘term to maturity’.
- When the Government is the borrower – it is a Gov bond
- The main difference between a bond and a regular loan is that, once issued, a bond can be traded with other investors in a financial market directly – in the secondary market - As a result - a bond has a market price.
- True that mortgages can be traded as well – but it is after they are packed up by a financial institution and traded in a product like a MBS – however – bonds don’t need this securitisation step
- Bond yields - is the return an investor expects to receive each year over the bonds term until it reaches the maturity date
- For the investor (who has purchased the bond) - the bond yield is a summary of the overall return that accounts for the remaining interest payments and principal they will receive, relative to the price of the bond
- Say that the bond is paying a coupon of 1% over a year – and the bond is maturing in 1 years time – the investor will get $100 back and the current price of the bond is $99 – the total yield will be close to 2%
- For the borrower (entity that issued the bond) - the bond yield reflects the annual cost of borrowing funds through issuing a new bond
- For example, if the yield on three-year Australian government bonds is 1% - means that it would cost the Australian government 1% each year for the next three years to borrow in the bond market
- So there is a difference when talking about the bond yields for the investor or borrower
- For the investor (who has purchased the bond) - the bond yield is a summary of the overall return that accounts for the remaining interest payments and principal they will receive, relative to the price of the bond
- Relationship between a bond and its yield - The prices at which investors buy and sell bonds in the secondary market move in the opposite direction to the yields they expect to receive
- Once a bond is issued - it offers fixed interest payments to its owner over its term to maturity – say the coupon payments are going to be 1% p.a. and it is a 10-year bond – get 1% p.a. for 10 years
- However - interest rates change all the time = as a result, new bonds that are issued will offer different coupon payments to investors when compared existing bonds that were issued 5 or 10 years ago
- In the current economic environment – created a situation where as interest rates are falling – older bonds have become more valuable to investors due to the higher coupon payments – hence the price of existing bonds will rise when compared to newly issued bonds
- However, if a bond's price increases it is now more expensive for a potential new investor to buy – so the bond's yield will then fall because the return an investor expects from purchasing this bond is now lower –
- Example - consider a government bond issued in mid-2019 with a 10 year term - The principal of the bond is $100 – so on 30 June 2029 the government must repay $100 dollars to the bond's owner
- The bond has an annual coupon payment of 2% of the principal (i.e. $2 each year).
- Imagine that the cash rate falls – and so does the coupon on newly issued bonds – Governments are similar to households – if the cash rates go down – we want to be able to borrow at lower rates – only major difference is one does it from banks and the other from investors – however investors have little choice as cash returns also fall –
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If new bonds now pay coupon payments of 1% (or $1 p.a.) – However – the older bond still offers a $2 annual income – with basic maths this is $1 in excess of what new bonds will pay - As a result – investors will be willing to pay more than $100 to purchase the older bond – hence the price pay increase above the Face Value of $100 – with a 10 year maturity (now just under 9 years until maturity) - The price of the bond will actually be close to $109
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But you can see in this example – that if you are paying more than the bond is worth – get back $100 in just under 9 years – but you are paying $109 for it – your yield is actually close to 1% - the additional $9 you get from the income will be negated by the additional $9 that you pay for the bond – so in essence – the price of the bond forms part of the yield curve
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The yield curve - shows the yield on bonds over different terms to maturity – it is a way of plotting the expected return of a bond over the life of the bond in a visual way – in graph form with the yield on the y (or vertical) axis and the date (maturity) on the x-axis – or horizontally
- To graph the yield curve - the yield is calculated for all government bonds at each term to maturity remaining
- For example, the yield on all government bonds with one year remaining until maturity is calculated - this value is then plotted on the y-axis against the one-year term on the x-axis – then you do this for the yield on all bonds for two years, then 3 years, all the way up to 30 years or 50 years
- Now – the cash rate forms the beginning of the government yield curve – due to this interest rate having the shortest term in the economy (as it is overnight)
- To graph the yield curve - the yield is calculated for all government bonds at each term to maturity remaining
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So normally – the yield curve is upwards sloping – goes from a low cash rate to the longer term maturities
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However – there can be different shapes to the curve based around the level and the slope of the curve
- The level refers to the cash rate – the higher the cash rate – as the first point on the curve – the higher the level of the yield curve will be – think of values along the y-axis of a chart – 0.25% compared to 5% - hence the cash rate is the anchor of the yield curve
- Due to being the anchor – changes in the cash rate affect the whole yield curve upwards and downwards due to the future influences on the starting point for yields
- The slope - reflects the difference between yields on short-term bonds (e.g. 1 year) and long-term bonds (e.g. 30 year) – however this slope reflects the expectations on the fact that the cash rates might differ between now and the future - which are uncertain – However these expectation by the market translate into actual outcomes based around the pricing on debt in the markets – Types:
- Normal yield curve - where short-term yields are lower than long-term yields - so the yield curve slopes upward - considered a normal shape for the yield curve because bonds that have a longer term are more exposed to the uncertainty that interest rates or inflation could rise at some point in the future (if this occurs, the price of a long-term bond will fall); this means investors usually demand a higher yield to own longer-term bonds – A normal yield curve is often observed in times of economic expansion, when economic growth and inflation are increasing. In an expansion there is a greater likelihood that future interest rates will be higher than current interest rates, because investors will expect the central bank to raise its policy interest rate in response to higher inflation
- Inverted yield curve - An ‘inverted’ shape for the yield curve is where short-term yields are higher than long-term yields - so the yield curve slopes downward – likely to be present when investors think it is more likely that the future policy interest rate will be lower than the current policy interest rate - an inverted yield curve has historically been associated with an anticipated economic contraction – mainly because the anticipated response of central banks reducing interest rates in response to lower economic growth and inflation, which investors may correctly anticipate will happen
- Flat yield curve - A ‘flat’ shape for the yield curve occurs when short-term yields are similar to long-term yields. A flat curve is often observed when the yield curve is transitioning between a normal and inverted shape, or vice versa. A flat yield curve has also been observed at low levels of interest rates or as a result of some types of unconventional monetary policy.
- The level refers to the cash rate – the higher the cash rate – as the first point on the curve – the higher the level of the yield curve will be – think of values along the y-axis of a chart – 0.25% compared to 5% - hence the cash rate is the anchor of the yield curve
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Hence – the slope of the curve is use to help anticipate the health of an economy – if up – things are likely to improve due to rates likely increasing – if it is downwards sloping (inverted) – rates are expected to drop due to CB policy to help boost the economy
Why is the yield curve important – can it actually have an effect on the economy?
The yield curve receives a lot of attention from those who analyse the economy and financial markets. The yield curve is an important economic indicator because does provide information to participants in the market:
- The yield curve for government bonds is also called the ‘risk free yield curve’ - The expression ‘risk free’ is used because governments are not expected to fail to pay back the borrowing, they have done by issuing bonds in their own currency – this is an important part of financial markets – pricing assets using the RF rate as a discount – so it can affect asset prices – not the curve itself – but the information it contains
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YC is central to the transmission of monetary policy – in the form of interest rate movements in the economy
- When households, firms or governments borrow from a bank or from the market (by issuing a bond), their cost of borrowing will depend on the level and slope of the yield curve
- A bank would calculate the interest rate on their fixed rate mortgages by taking the relevant term on the risk-free yield curve – if they are offering 3-year fixed rates – they would look at the three-year term on the yield curve when calculating how much to charge
- So the yield curve influences the interest rate fixed rate loans but also on savings products with a fixed term, such as term deposits.
- Outside of individuals - Different terms of the yield curve are important for different sectors of the economy
- In the previous example – individuals may only be able to lock in their interest rate for 2–3 years, so this part of the yield curve is important for fixed mortgage rates.
- However - Many Australian households have mortgages with variable interest rates, so the cash rate is important for them today
- When households, firms or governments borrow from a bank or from the market (by issuing a bond), their cost of borrowing will depend on the level and slope of the yield curve
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On the other hand, companies as well as the government often wish to borrow for a much longer term, say 5 or 10 years at a fixed rate - so this part of the yield curve is important for them
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So the yield curve provides a source of information about investors' expectations for future interest rates, as well as economic growth and inflation
- In financial markets, the slope of the yield curve (e.g. normal, inverted, flat) provides an important signal of investors' expectations for future interest rates, and by extension their expectations for future economic growth and inflation – hence the slope of the yield curve is considered to be a ‘leading indicator’ of future economic growth and inflation – this is due to financial markets being a forward-looking environment – markets try to price in future data today to make profits
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The curve can be a determinant of the profitability of banks – through both the level and slope of the yield curve
- In an ideal world - banks support the growth of credit (lent money) in the economy - which is an important factor for economic growth when used appropriately for investment (especially business)
- Think it is obvious that banks earn profits from lending funds at a higher interest rate than they pay cover the costs of funding their lending (tier 1 capital or paying depositors) – However - Banks usually lend for longer terms in the form of 30 year mortgages than what they are covering in the costs of the tier 1 capital - so part of this profit comes from the difference between long-term and short-term interest rates (i.e. the slope of the yield curve)
- If the yield curve is normal, all else equal, a steeper slope will mean a larger margin and higher profits for the banking system – this is a major consideration in countries like the US with long term fixed rates
- In an ideal world - banks support the growth of credit (lent money) in the economy - which is an important factor for economic growth when used appropriately for investment (especially business)
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However - In Australia, the interest rate on many loans is based on the shorter-term end of the yield curve – due to variable rate mortgages - so the slope of the yield curve has less of an effect on bank profitability – hence why our banking system does better in the current economic environments
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Fiscal deficits – do play a part – as these are funded through bonds – so if yield curve is inverted – means Govs can easily fund long term deficits and may prefer to wait before issuing bonds –
- However – who would want to buy bonds in this world when the curve starts to become inverted – well – welcome to the necessity of QE – have CBs buy back bonds off the markets – if you can create the money out of thin air and it is part of your monetary policy – doesn’t matter to them
In summary – whilst the yield curve doesn’t directly affect the economy – it is used as an indicator to base economic decisions around – so indirectly affects the economy based around the actions that individuals take due to the information portrayed
- Comes in the form of valuation for assets using it as the risk free rate
- Also shows the expectations of the markets on what the future has in store for economic growth and inflation – hence investors will make decision today based around what is expected in the future
- Also shows the potential impact of the banking systems profitability as well as the incentives to raise funds now or later for governments through issuing bonds.
In next episode – finish up – focusing a bit on fiscal deficits more and then the real inputs to the economy, like forex, oil prices and trade imbalances
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. In this episode be looking at one piece of information in the share market – insider trading
There is a lot of information in the markets that can be looked at – can look at the fundamentals of an individual company – can also look at systematic information – economic indicators
In this episode – look at one specific bit of information which markets provide and that is the behaviours of insiders of the share markets – specifically directors or people working in management in companies (what are considered insiders) buying and selling shares and if this is a good indicator of the share price performance
- When talking about insider trading in this episode – won’t be talking about the insider trader that most people might know – what you might see in a TV show or in media headlines about one trader being arrested - insider trading is actually a legal practice that despite the common misconception –
- does exist and is perfectly legal as it is in a governed way – such as say Elon Musk, or Bezos or Buffet buying or selling their holdings in Tesla, Amazon or Berkshire – this is what we will be focusing on in this episode
To start – looking at the behaviour of investors in the market –
- There is a theorised relationship on how information affects markets – it is either 100% responsible for market movements or at least contributes to the price movements somewhat –
- either way – information can be one of the key reasons buyers and sellers are willing to buy a share at a given price
- investors try to make perfect decisions with imperfect information all the time – but the overall demand for a share based around information can lead to the price movements
- Sometimes – people buy a share with no more information than that they know the company and have seen the price go up – so they get on the bandwagon
- But what about someone who has almost as near to perfect information as is possible? Such as an insider for a listed company – compared to you and I they would be much closer to having perfect information - so surely their decision making on purchasing shares would be better informed – the outcome of their performance on the shares should improve when compared to the average joe
- This is one major reason that when insiders are either buying or selling their shares – it is information for us –
- It might be encouraging for the market when insiders are buying more of their shares – as this may mean the price is lower than expected
- Or if an insider is selling – it might show that they think a company is overvalued
- However – it might just mean they have additional cash lying around or they are going through a divorce or buying a multimillion-dollar house and need some surplus cash
- But you can know this information – on a register – and can use sites like - Market Index
- can’t verify the accuracy or completeness of the information contained on their website - it does appear to offer a decent insight into the owners of shares on the ASX as well as the movements of share buys or sells by those individuals/trusts/companies
What can information can be gained from looking at insider trading
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The concept comes down to these insides being the owners of these businesses, as well as having inside information but also – they also have some say in the companies direction -
- If someone is an owner of shares in the business they are running – they will probably have much stronger alignment with the interests of other shareholders – that is to make a positive return in the share price – why else buy a share?
- Compare this to non-owners – in the forms of executives without significant stakes in the company – if they are on the board
- On the other hand – some CEOs might run a pump and dump of a share in their tenure without actually making the company a good long term performer – that is where the incentives do need to be monitored closely – hence why with most share schemes for management they have a period in which they cant sell the shares for years after leaving the company – unlike in the past when this was more of a problem
- Another somewhat obvious point is that the smaller the company is - the more likely it is for founders and owners of the shares to exert more influence over the direction and success of the company
- Not only are they emotionally invested being the founders – but heavily financially invested - hence it further aligns the interest of the CEO to the shareholders
- This has been an interesting point when talking to fund managers – they pay close attention to small cap shares that have the founders/CEOs with large ownerships in the business
- If someone is an owner of shares in the business they are running – they will probably have much stronger alignment with the interests of other shareholders – that is to make a positive return in the share price – why else buy a share?
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However – the smaller the company – no matter how passionate a founder/CEO might be – their company may underperform
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So, is there any evidence that following the insiders actually works?
- Thankfully – others have done the work for this – there are plenty of studies over the years – both in the US markets and in Australia that have attempted to quantify the impact of returns out of following the flow of shares from insider dealings
- This topic does draw debate form both sides around its application when actually making a decision on buying or selling a share – but based around some studies – there is some evidence to support the notion of following insiders can lead to outperformance of the market
- US markets
- Special information and insider trading – released in 1974 – so rather old and only looks at the years between 1962-1968 – it does show that there is an outperformance in the market of around 7% p.a. over those 6 years from either buying shares when the insiders are buying, or selling when they are selling
- Estimating the returns to insider trading: a performance-evaluation perspective – released in 2003 – went through the years of 1976-1996 – showed that there was a return of around 6% p.a. outperformance from following the insiders
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Aus Markets
- Information trading by corporate insiders based on accounting accruals – study from 2006 – followed the years between 1996 to 2003 – showed a 4.3% outperformance level as an average
- Insiders profits in the Australian Equities Market – shows that outsiders incur loss if they follow insider’s purchase in all firms
- However - for large stocks - earn on average 1.02% 2 weeks, then up to 1.88% and 2.32 % (t-statistics=1.82) 3 and 6 months, respectively, after they purchase stocks.
- On the downside - The results for sale transactions across all stocks and size groups show that outsiders make profit over all window periods after they sell following public announcement of insider’s sale. However, the abnormal return after a year for small and medium size stocks is statistically insignificant.
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The results over all transactions (buy and sell) for small stocks show that there is a loss for outsiders after 3 and 12 months if they follow insider’s transactions in small firms. However, outsiders who follow insiders in large stocks earn an increasing abnormal return from 0.29% after a week up to 5.3% after one year following the insider report date.
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In summary, outsiders can make profitable trades by following insider’s trades in large firms, but the abnormal returns of doing transactions following insiders in small and medium size firms are limited to insider’s sale trades.
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This is not an exhaustive list of studies and it doesn’t include those that argue against following insider trading
- The issue with most of the studies for insider trading is they only follow a relatively short timeframe – the average is about 6 years’ worth of data and the older ones that do follow say 20 years of data were working under different market conditions
- Points to look out for – Following an insider’s lead may work in some cases – or they might work at all –
- It is almost impossible to know the motives behind the buying and selling decisions of an insider – however – lets look at some recent movements on the ASX and in global markets
- A2M – there were material share disposals in August 2020 by the Chairman, interim CEO, AsiaPac CEO and other Executives in the company
- Price was around $19 at this time – since then has declined to just above $16 – so either others in the market are paying attention or the outlook for the company might not be so great
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In the technology space – there have been recent accounts of many directors selling in a number of technology companies – this is one area of the market that is speculated to be in a bubble
- Even family members – like Kimbal Musk (Elon’s brother) sold36,375 Tesla shares at a weighted average price of about $482.59 around the 31st of Aug – netting $8m – this was right before the price drop – that had a bit of a rebound recently – but is still over 10% lower
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Few key takeaway points -
- Directors buying might be better information than if a director is selling
- An insider might sell their shares for any number of reasons - but they are probably only going to buy them for one reason – they think it is undervalued and the price will go up
- This being said those - buying can sometimes be an action an insider may take to game the market – this would especially be the case in small cap markets where investors pay closer attention to this – smaller amounts of capital can raise the price by more than what it would in a CSL – could be in an effort to raise some additional capital from the markets
- The more involved the insider is the better - often act well in advance of any news
- A CEO buying and selling is a better signal than a non-executive director
- Pretty obvious point – but the higher the individual in the day to day management is – the better understanding they should have on the operations
- Directors buying might be better information than if a director is selling
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There are papers that have gone further – that the CFO trades are more profitable than CEO trades
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Another obvious point - but the more directors are trading the stronger the signal – if it is a large portion of market cap or the individuals holdings – then that is a better signal
- There can be many false flags
Summary
- You probably should be out there running screens identifying trades purely around what the insiders do - but still at least pay attention –
- If the company looks good – good fundamentals, good management and the price seems right – and insiders are buying – that might be a strong signal
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition.
Today – discuss the topic of banking policy changes and how this opened the gates for the potential of never-ending money supply in the modern banking system
To start with – look at How does money get lent out in Australia?
- Well – by a bank of course – you go to a bank to borrow money
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but what are they allowed to lend around? Well in basic economics – banks are treated as a financial intermediary – their role in a traditional sense is to connect savers to borrowers – they act as the middleman
- So a saver with surplus cash will put it into the bank – the bank will then use this as a reserve and lend out based around this
- Under this situation – a banks ability to lend is limited by how much they have of their customers savings – which act as the deposits
- Because in order to lend more money – they need more depositors – no depositors – no loans
- However – this theory is based around what is known as fractional reserve banking – where a commercial bank has a set reserve requirement and will lend out at a multiple of those reserves
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The classification of reserves was expanded upon over time – in addition to depositors funds - had treasury bonds and deposits at the RBA – but depending on monetary policy – lending could be limited
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As an example – say the reserve requirement is 10% - then the multiplier is 10 times – if the bank has $1m of deposits they can lend out $10m deposits -
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But this concept is rather misleading in the modern era of banking – I mentioned in Weds episode that Australia does not have an official fractional reserve banking system
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This was abolished when we brought in the Basel standards – ‘Basel I’ – which was implemented in 1988
- Central to the design of the Basel capital standards is the idea that a bank should hold capital in relation to its likelihood of incurring losses
- In the modern era - A bank's capital simply represents its ability to withstand losses without becoming insolvent
- Hence – a capital adequacy requirement is set – monitored and regulated by APRA based around guidelines set by the BIS using the Basel standards
- I do see one reason why there was a need for this movement away from the reserve requirements – In the modern economy where deposit accounts are insured by governments – it is likely that banks would have found it tempting to take undue risks in their lending operations since the government insures deposit accounts
- So these regulatory capital requirements have at least removed this moral hazard
- But it has opened up the floodgates for lending – and skewed the traditional incentives of lending – so let’s look at it further
How does the Capital adequacy requirements work?
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First – look at the capital that has replaced depositors’ funds as the reserve requirement – these are broken down into Tier 1 and Tier 2 capital – where the sum of these two make up the reserve requirements - net of any deductions on the banks balance sheets
- Tier 1 – Tier 1 capital consists of the funding sources to which a bank can most freely allocate losses without triggering bankruptcy – essentially - assets that can be liquidated (sold), written down or converted to cover losses quicky – hence it avoids a bankruptcy – includes:
- ordinary shares in the bank and retained earnings that the bank has on its balance sheet - makes up most of the Tier 1 capital held by Australian banks –
- But tier 1 capital also includes specific types of preference shares and convertible securities – such as capital notes –
- Tier 1 – Tier 1 capital consists of the funding sources to which a bank can most freely allocate losses without triggering bankruptcy – essentially - assets that can be liquidated (sold), written down or converted to cover losses quicky – hence it avoids a bankruptcy – includes:
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Convertible securities, for example, were included in the Basel II definition of Tier 1 capital on the premise that banks would exercise their option to convert them into common equity whenever additional capital was needed.
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however - since it is more difficult for banks to allocate losses to these instruments - APRA set a limit of 25% of Tier 1 capital being allowed in this form
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The APRA requirements set are 10.5% for the capital adequacy requirement – or 10.5% of its risk-weighted credit exposures – the loans that may not be able to be repaid
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Tier 2 – considered to be less liquid or convertible than tier 1 - in many some cases they may only be effective at absorbing losses when a bank is being wound up
- provides depositors with an additional layer of loss protection after a bank's Tier 1 capital is exhausted - primarily consists of subordinated debt - though it also comes in other varieties
- Both Tier 1 and Tier 2 capital are measured net of deductions
- This is an adjustments due to the way accounting measures are treated – sometimes the banks will have forms of equity used to balance their holdings of intangible assets – things like goodwill – so if a bank is going to go bankrupt – this loses all of its value
- Secondly – have to measure the risks that this capital requirement is set against - For capital adequacy purposes, Australian banks are required to quantify their credit, market and operational risks
- most significant of these risks is credit default risk – or bad loans emerging from people defaulting on their loans – which is part of a banks traditional lending activities
- This credit risk is measured as the risk-weighted sum of a bank's individual credit exposures, which gives rise to a metric called ‘risk-weighted assets’
- Standardised approach for these risk weights are prescribed by APRA for smaller banks - based on the risks of default and other characteristics of each loan the bank is exposed to
- For example – take one residential mortgage – if it has a loan-to-valuation ratio of 70%, no mortgage insurance and the borrowers are managing to make repayments - APRA specifies a risk weight of 35% - so for every $100 of outstanding debt – the risk-weighted asset would be $35
- However –the risk weight for corporate (business) loans is 100% -
- For the big 4 – they use an alternative Internal Ratings-based approach whereby risk weights are derived from their own estimates of each exposure's probability of default – so the bank can set the limits for the risk weight against each loan
Where does the market currently stand –
- Banks have been busy – the amount of capital held by the Australian banking system has been increasing – rather rapidly since 2014 – went from a capital adequacy ratio of 12% to 16.3% in June – this is a combination of Tier 1 and Tier 2 capital
- The rise in the banking system's Tier 1 capital mostly reflects a large amount of new equity in the form of share issuances as well as capital notes that have been issued to the market
- Covered this as part of the bail in topic a while back – but the banking system has been preparing for some downturn in loans for some time
- Over time – it was also through dividend reinvestment plans occurring over the years the banks Tier 1 capital has been growing – up until recently
- Also – with a lot of banks cutting back on dividends – their retained earnings have also boosted the Tier 1 capital more than the reinvestment of dividends normally would
- Another major trend over the years – thanks to recommendations from the Basel Standard – lend more to households over businesses – that way your risk
- There has been a large shift in the composition of banks' loan portfolios towards housing lending - attracts much lower risk weights than business and personal lending
- Reversal in lending trends – Busines loans used to make up the lion share – in 1990s – Housing accounted for about 25% business loans about 65% - today these are reversing –
- It makes sense from a risk weighted asset point of view -
- As an example - The RBA released a paper back in 2010 - $3.9 trillion of lending by the banks with all kinds of loans – based around these risk weighted methodologies – there was $1.2 trillion in credit risk-weighted assets – then $2.7 trillion was unweighted assets
- Within the risk-weighted total, corporate exposures account for $370 billion, while residential mortgage exposures are lower at around $300 billion, reflecting their relatively lower risk weights
- To expand this example further – on the $1.2 trillion in RWA – banks would need about $126bn by todays standards in Tier 1 capital
- Bit of a side note – but was interesting reading a paper from the RBA back in 2010 – was talking about the forthcoming regulatory developments that are now in place –
- Increase the quality, international consistency and transparency of the capital base - This includes enhancing a bank's capacity to absorb losses on a going concern basis, such that more of its Tier 1 capital is in the form of common shares and retained earnings – which has occurred with massive capital raisings in shares of the banks over the years
- Ensure that even if a failed or failing bank is rescued through a public-sector capital injection, all of its capital instruments are capable of absorbing losses. This includes a requirement that the contractual terms of capital instruments allow them to be written off or converted into common equity if a bank is unable to support itself in the private market – which has been achieved by the capital notes which are convertible and form part of the bail in legislation
So what really affects banks’ ability to lend?
- if bank lending is not restricted by the reserve requirement then do banks face any constraint at all?
- As we have seen – it isn’t the reserve requirements – looking at the household debt to GDP over the years – back when it was constrained by deposits and central bank reserves – struggled to get over 40% of household debt to GDP – after these requirements were removed – started to rise by quite a bit – by 2008 was about 110% - today is about 120% - so it has slowed over the past 10 years – but still second highest in the world
- But – they have to keep their capital adequacy in line with the minimum requirements – however this is rather subjective – in essence – banks are only constrained by three factors
- First – you have the demand for loans - banks base their lending decisions on their perception of the risk-return trade-offs – so as long as there are consumers out there with the deposit requirements (or existing equity in property) and the incomes needed to service the loans based around their lending standards- then the banks will lend
- There has been no shortage of demand – property markets have been a competitive environment – and with lowering interest rates – the amount people can afford by the borrower in the banks eyes (especially since the benchmark for the serving got dropped over a year ago) has goes up dramatically
- Second – the amount of Tier 1 capital they can raise –
- the sequence of how this works in practice is that it works in opposite direction of what most people would think – in reality - banks first make their lending decisions (lend the money out) and then go looking for the necessary capital through issuing it to the market to make sure they remain within the requirements
- Finally – the measurements of the risk weighted assets – which is a nominal establishment of how much per loan is consider risky – for example – 35% of a home loan
- And since the capital requirements are specified as a ratio whose denominator consists of risk-weighted assets (RWAs) – the level of capital that needs to be retained is dependent on how the risk is measured
- in turn – this level – say the 35% is dependent on the subjective nature of human judgment – and any subjective judgment from coming from regulators with close ties to those who work for the banks that they regulate – sometimes comes with the ever-increasing profit desire - which may lead the financial system down the road of underestimating the riskiness of their assets – especially in situation with bubbles in asset prices
- First – you have the demand for loans - banks base their lending decisions on their perception of the risk-return trade-offs – so as long as there are consumers out there with the deposit requirements (or existing equity in property) and the incomes needed to service the loans based around their lending standards- then the banks will lend
In summary –
- If bank lending is constrained by anything at all, it is how much tier 1 capital they can raise as well as how much the population can afford to borrow
- But the changes from 1988 has created a situation where banks were adapting to the changes in the monetary systems around the world – lending in a fiat world
- In reality – why wouldn’t the banking system do this? The reserve requirements were the foundation to banking under the gold standard – but under the fiat system where money can be created out of thin air – as long as there is somewhere to soak it up – such as the property market through additional mortgages – why wouldn’t the bank continue to lend as much as possible? Loans to them are assets – so the more they can lend – the more money they can make
- But I hope this episode helps to explain how the modern banking system works
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition. This week’s question is from Raj.
“I would love to have an overview of how certain economic factors are interlinked and impact economies: Inflation, Forex rates, Oil prices, Trade imbalances, Fiscal deficit, Money supply, Repo rates, Yield curves and bond prices, Lending rates and Central Bank monetary policy”
Big topic – every one of these factors is related in one way or another – both to the economy and to one another
- The economy is complex – incredibly interconnected and unfortunately for any economist or policy maker – incredibly hard to accurately predict – or accurately theorise about
- You can have theories about if one factors moves in one direction – it will affect others in another matter
- But a lot of this is theoretical – purely to it making logical sense based around models that were conducted in an isolated environment –
- The world and economy isn’t an isolated environment – change one input and down the road it is anyone’s guess what the 10th order of effect may be
- That is the core issue of this sort of topic – any individual with specialised knowledge about the economy – whilst they will have more specialised knowledge than the average person – when compared to the economic decisions based around the individual’s self-interest – the expert will always fall short
- For example – I might know more economic knowledge than the next 1,000 people, but if the economy is made up of millions of people – well then their combined specialist knowledge in their own fields and the actions that they will take in turn due to this will result in any number of potential outcomes – ones that an expert cannot predict
- And like with any complex system – which the economy is – it isn’t linear – so for one expert to say that adding $100bn into the economy through increasing the money supply will result in inflation of 1% might be what the theory says – technically isn’t possible to accurately predict – so it is anyone’s guess
- For these episodes – we will take a different way of looking at this topic – when most people talk about the economy, they are talking about numbers and statistical measures – for example, how certain metrics affect GDP, or employment, or any range of numbers on a screen –
- But this isn’t the real economy – it is a statistical measurement which is cherry picked – did an episode on this three months ago – called “How accurate are economic statistics and do they really matter in our daily lives?”
- we are the economy – so to answer the question – will be focusing on the relation to these economic factors and the effect that they have to the individual in the economy
- Could go through the theory in relation to the economy – for example - that lower interest rates are meant to lead to GDP growth and inflation – but it is proving to not be the case – so looking at the individual level may be a better place to start
- Now – this is still going to be a generalisation – not every individual will act in the same way – but how they will be affected will be similar – depending on their situation
- For example - Think it goes without say that if interest rates go down and someone has debt – like a mortgage – their interest repayments will go down
- But what about someone without debt? That is either looking to get into the property market or has already retired and doesn’t have debt? Well – the outcome on them is worse – their savings aren’t earning anything and it is likely that the property market just got more expensive if they are trying to get into the market
- At the aggregate level – taking the sum of all individual decisions- you get the economic output – but each group of individuals will take different actions depending on their financial situation and what is best for them
- But this isn’t the real economy – it is a statistical measurement which is cherry picked – did an episode on this three months ago – called “How accurate are economic statistics and do they really matter in our daily lives?”
This topic can be broken up into a few chunks –
- Monetary and Fiscal side – how do things like inflation, money supply, lending rates – which are central banking monetary policy affect the individual in the economy which will be covered today -
- Then next week - how do things like the Yield curves and bond prices – then government spending as fiscal deficit affect the individual?
- Real economy side – forex rates, oil prices and trade imbalances – made up of the daily economic interactions within the economy
To start with – on the monetary side
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Inflation – this is one of the factors that affect individual choice – and in turn the economy
- How does the individual respond to inflation – generally – if it is low – not much of a concern
- In your own life, do you really notice if inflation of 1-2% is present each year? As long as your income growth or investment/asset growth goes up by more each year – do you really care?
- Inflation is one of those factors that if it is out of sight – it is out of mind – especially when it is in small increments that aren’t noticeable in the short term – obviously when you compare the prices of goods and services today to the 50s there is a massive erosion in the purchasing power of your money
- Inflation is like the concept of boiling a frog – someone times you don’t notice until it is too late
- Where inflation to the individual really matters is when hyperinflation – or at least higher levels of inflation materialise – as this starts to impact the individual’s behaviour
- We may start seeing inflation materialise in western nations – potentially on food – ill potentially cover this in another episode – as there are some interesting developments on the supply side – with food areas like rice and meats – need to do some more research on this
- If inflation kicks into the country – it may not be from the increase in the money supply to individuals solely – but a lack of supply
- When inflation of goods and services starts to rise – it creates further shortages – if you know that by the end of the week things may cost 10% more – you buy now – and stockpile
- This leads to a further shortage – and it starts to create a breakdown in the economy – as the nations medium of exchange is likely to lose its value – and when this happens – your economy’s function starts to slow or cease
- A barter system starts to emerge and there is a chronic shortage of goods – that creates black markets
- For instance – toilet paper – some have recently seen this be a rare commodity – well in countries with hyperinflation like Venezuela – it is an extreme luxury – better to use cash instead - roll of toilet paper costs 2,600,000 bolivars – which converted is about $1 Aud after the resent reset of the currency – as they keep knocking zeros off the denomination – first was 3 and then 5
- Thankfully we aren’t at this level of inflation - However – in western nations that are facing the opposite problem of potential deflation – inflation the statistic does affect our lives – due to the way monetary policy is conducted – through interest rate movements in response to inflation targeting
- How does a central bank control interest rates – money supply – this is what can reduce our purchasing power
- How does the creation of money occur - central bank creates central bank reserves for use by a commercial bank –
- The bank – and its shareholders have put up their own money which has been invested in government bonds – then the bank informs the CB that they would like some of the central banks reserves – it exchanges the collateral of the bonds for the cash – then it can lend based around a capital requirement ratio-
- Then additional cash is introduced into the economy through fractional reserve banking systems - involves banks accepting deposits from customers (on top of the injection of cash from CBs) and making loans to borrowers while holding in reserve an amount equal to only a fraction of the bank's deposit liabilities – technically Australia doesn’t even have this – we have a capital adequacy requirement – so we technically have no reserve requirements – Statutory reserve deposits abolished in 1988 - and in theory our banks can lend endlessly – in practice – APRA regulate them to have about 10.5% as capital – but this capital can be debt that these banks issue – so they issue more debt in capital notes then lend based around this
- Money supply – creation of money is also conducted through open market operations – the Central banks determine how much money is required in the economy for interest rates to be set at a determined level
- Interest rates are indirectly affected by open market operations (OMOs), the buying and selling of government securities in the public financial exchanges
- OMOs are tools in monetary policy that allow a central bank to control the money supply in an economy
- Under a contractionary policy, a central bank sells securities on the open market, which reduces the amount of money in circulation.
- Expansionary monetary policy entails the purchase of securities and an increase in the money supply. Changes to the money supply affect the rates at which banks lend to one another, a reflection of the basic law of supply and demand.
- But how does a central bank – and by extension commercial banks create inflation in the economy – two ways – as remember – the definition of inflation is the price increase – I view it more as the devaluation in real terms of the purchasing power – but be that as it may – increasing newly created money to an economy has to flow somewhere – and when it does – it can have the effect of increasing prices -
- Price growth of assets – through CB policies like QE or OMO through banks’ lending money – the inflation of prices materialises in the growth of property and shares – what is considered hard assets
- These asset classes can increase in prices outside of these monetary policies – however – they are accelerated when CBs get involved
- Then - Price growth in goods and services – this is what most people would be familiar with –
- But IMO - these two prices increases – between property and goods and services can be counter initiatives
- Price growth of assets – through CB policies like QE or OMO through banks’ lending money – the inflation of prices materialises in the growth of property and shares – what is considered hard assets
- How does the creation of money occur - central bank creates central bank reserves for use by a commercial bank –
- We may start seeing inflation materialise in western nations – potentially on food – ill potentially cover this in another episode – as there are some interesting developments on the supply side – with food areas like rice and meats – need to do some more research on this
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You have a thing called thew wealth affect – the concept that if property or asset prices go up – people will spend more – as they feel wealthier –
- However – what about new entrants over time – they are just left with more debt – so might not feel that wealthy if they have $600k of debt
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That is the difference in the intergenerational effects of these policies – my parents’ generation is probably very happy with these polices – buy a place back in 1990s to 2000s for $300k to $400k - now worth about $1.5m to $2m - that is a good return –these policies have helped them massively –
- This is part of the Australian economy – and why we are some of the wealthiest population on earth –
- But it has the potential to hamstring our economy moving forward – when the new generations have to take out $600k of debt to buy a standard house – that is a lot of debt that needs to be paid back
- Give me 15% interest rates when the average loan was about $80k in the early 90s compared to $600k of debt at 2.5% interest rates – 6 times less interest but more principal
- With $80k – repayments of $1,012 p.m. – total repaid of $365,160 – pay back the $80k with $284,160 of interest
- With $600k – repayments of $2,371 p.m. – Total repaid $853,461 – pay back $600k with interest of $253,461
- But the catch here – and important to remember – the high interest rates of 15% or 17% lasted about 2-3 years – dropped down to 10%, then 7% within a few years – so a drop of 10% in a matter of 5 years –
- But even if interest rates had stayed the same at 15% - I would take that over todays economic situation
- In real terms – with inflation compared to the 1990s to today - $1,012pm is $2,027 to today – or about $350 less p.m. than what you would have had to pay in the 90s
- This means less money in real terms to put towards the economy in spending
- Inflation itself isn’t a great measure – talked about it plenty in the past – however it is what is used as the measure on which monetary policy is conducted
- Looking at the flow on effects of this – on A yield curve - which is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity
- Look more at this in the next SWW episode – as bonds and yield curves as a pretty complex topic and takes a while to unpack – as it incorporates interest rates as well
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury.
This episode is about the story of Dave Portnoy and a warning to any new traders of overleveraging – or even using leverage if you are relatively inexperienced
- There are Millions of new investors are getting into the market- which is great – but being a new investor will come with growing pains
- I had plenty of growing pains for the first 5-10 years of investing – from 16 to 26 – learn a lot from mistakes
- But thankfully – all of those mistakes were isolated losses that were contained
- Investing is important – but what is more important is to still be an investor in a decade and not end up losing all your investable assets or alternatively, being scarred for life when it comes to investing – and never re-entering the market
- There are a lot of Online trading brokers that allow leverage – for any new investor that joins there platforms
- It depends on the market and the trading platform – but the amount of leverage a retail (which is what is considered amateur trader) can obtain is between a 2 to 1 leverage rate to 5 to 1
- Means that for every $1,000 that you have, you can get $2,000 of leverage to $5,000
- Leverage itself – when done properly – can work very well – if it is done securely and when you do it in a way where you wont be forced to sell the assets
- But when not – can leave you in a deep hole of debt – where you are left owing more than you might be able to afford
- An important aspect in using leverage is understanding how to calculate the ratio of a loan to value ratio – or LVR – this is used to understand how exposed you are to downwards movements in the price of the assets when compared to how much you have invested
- The formula for leverage is: LVR = L/V - where L is leverage or loan size and V is the total value of the asset
- Very relevant for online trading accounts – as these are an effective margin loan
- multiplying the margin amount by the leverage ratio will give the asset size of a trader’s position
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Risk and leverage trading - The most important thing to understand when talking about leverage is the risk involved – where it magnifies the risks
- Risk is inherent to any type of trading – if you buy a single share or even a basket of shares or index – you are exposed to downside risks or volatility risks
- Have both specific risk or systematic (market) risks – specific relates to the company (management, profits, etc.) – systematic is what we have recently seen – or in the GFC – when the whole market goes down
- That is where leverage will magnify these risks –leverage can cause both magnified profits and losses however – the risk of these potential losses are magnified depending on the assets that are purchased
- It is very important for any new investors to try to minimise how much risk they may face – and one way to do this is to try and minimise the amount of leverage they will use
- Don’t get me wrong – say you do take on a leveraged position – double your equity through taking a margin loan of $10,000 on your $10,000 equity – on a one-off basis you could massively benefit if it happen that this one-off trade goes your way
- But get it wrong and you could end up facing a massive loss – potentially more than you own in the share
- At this LVR – of 50% with a value of $20k and a loan of $10k – would take a 25% drop in the value of this asset before a margin call may be triggered
- Risk is inherent to any type of trading – if you buy a single share or even a basket of shares or index – you are exposed to downside risks or volatility risks
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If a margin call is triggered – you are either forced to pay down the loan, put more money into the share or if you don’t have any cash lying around – sell and cut your losses
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The best way to reduce this risk is to distribute it across different investments and different markets – it is the concept of diversification - meaning you don’t put all of your eggs in the one basket
- If you are going to leverage on a portfolio like this - there is the need to calculate what your potential downside risks may be and to determine things like net asset value that the portfolio may drop to ensure that a margin call isn’t likely
- However - With most margin lending – it is on one security and has one loan attached to it – especially with online brokers – looking at the Leverage on online trading –
- For some markets – especially for Forex - retail leverage rates can start at around 30:1 - compared to around 5:1 for shares
- However - leverage rates can also vary depending what type of trader you are, either retail of professional
- retail leverage rates for forex are around 30:1, they are around 500:1 for professional clients - professional clients must meet criteria in order to be eligible – however – in my experience – this is based around legally mitigating factors for the platform – not the individual – do a quiz, do enough trades, say you are a professional – then you are to them – even though you might not be – you have told the platform you are so the legal onus is on you
- I think it goes without say that the higher the level of leverage you can access – the greater risk you are at
- As an example - let’s say a trader has a maximum leverage of 10:1 and opens a position with that leverage on a $10,000 account – LVR of 90%
- The trader now has a position size with an asset value of $100,000. This means a price movement of 10% will wipe out your equity completely
This brings in the story of Dave Portnoy – You may or may not have heard of him – goes by el pres – founder of Barstool Sports
- Bit of an internet celebrity – personally think he is pretty funny – his rivalry with Roger Goodell – the commissioner for the NFL is pretty funny
- But Portnoy is not exactly an investor - In fact, prior to the quarantine, he had bought just one share in his life
- Not to say he isn’t a good business man – sold a large stake of 36% in Barstool Sports to Penn National Gaming for $450m
- El Pres loves a punt – a pretty big gambler – putting hundreds of thousands on the line in bets on the NFL, boxing, the NHL, really any sport
- But with the country shut down in recent months, meaning no sports and no betting, Portnoy was bored. So, he turned to the stock market, saying “with the volatility, it is kind of like watching a sports game.”
- He started trading – but using large amounts of leverage – so he now day trades, live-streaming his account as “Davey Day Trader Global.”
- Portnoy is also a tad less-than-humble about his alleged success. A week ago or so – he made a pretty interesting tweet: I’m sure Warren Buffett is a great guy but when it comes to stocks he’s washed up. I’m the captain now.
- The irony here is that Buffett’s rules for investing goes as follows - Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1. – seems like good advice – protecting your downside is very important –
- However - Portnoy has just two rules: 1. Stocks only go up. 2. When in doubt whether to buy or sell, see rule 1 – interesting juxtaposition on Buffett’s rules
- Portnoy has a large following – around 1.8m followers – and many of them were following his advice – even though he claims he isn’t an investment adviser – he is sure giving a lot of advice on what to invest in and that if anyone loses money in the markets – they are idiots or loser –
- At the moment – with so many online brokerage accounts – this creates a situation where market infrastructure could be amplifying feedback loops. Most of the brokers popular with retail investors earn fees from selling order flows. Cheap or free retail trades are possible in part because transactions are routed through securities groups like Citadel Securities – so they don’t need to charge brokerage
- And in the US – with many stimulus check or PPP loan going into the market – as has been recently discovered by the Treasury – there are a lot of other people in the markets – mostly new investors further fuelling the feedback loop
- El pres was doing well – however - The US stock market started to lose ground - especially as technology shares started to lose steam
- A lot of Robinhood traders tried to buy the initial dip in the market but were hammered over the next few days – especially those who were leveraged
- The short-lived rally before the further decline trapped a lot of newer investors into believing a "V" shaped rebound was imminent – especially on shares like tesla
- With the E mini Nasdaq down nearly 2% at around 11,181 level (at the end of the day) – Portnoy told thousands of his viewers on his live Twitter stream he's "over-leveraged again" and that, if he doesn't sell by the close, his broker will force him to "write checks"- his exact words were "I'm overleveraged, so something's gotta be sold,"
- About 5 minutes to the U.S. cash close, Portnoy told viewers that he lost "$150,000"
- However – in total – he lost around $4m in total value – about $700k of it was his own money
- For him – not a massive deal – he has a lot of spare cash – but it shows the power of leverage to either be your best friend – or worst enemy when misused
- Leverage that is done smart can work –
- Leverage that you can afford – LVR has to be within reason – and sell diverse
- Look for portfolios of shares and diversified across
- Leverage that doesn’t use your shares as collateral – such as what margin loans do
- Through taking out other forms of equity like on a home can help to reduce the risks of being forced to sell a position – but again – relates to the portfolio itself – you could take out $200k against your home a put it into a speculative microcap share – but the chance you will just be left with a huge debt is high – when compares to taking a DCA approach for a diversified portfolio of assets of thousands of shares across different asset classes
- However - Leverage out of greed can undo you – take too much risk in debt – and invest out of hope – your wealth accumulation strategy can be massively set back
- Leverage that you can afford – LVR has to be within reason – and sell diverse
- So - And maybe stocks don't "always go up" as Portnoy suggested - Especially in the short term – volatility in the markets are real –
- Dave is right in general with the market overall – when looking over long timeframes – those of the decade – markets will historically be up over a decades timeframe – but in the short term – it is anyone’s guess if they will be up today or tomorrow
- The position you need to be in is one that can survive this
- A few factors could be taken into consideration when determining what amount of leverage to apply to a portfolio
- how much risk you are willing to take on – by examining this via percentages – if you look at this through a maximum loss potential – or how much a declining market would be required to wipe out your capital – the higher the probably that this doesn’t happen the better
- What your investment timeframe is – if you are investing for the short term – leverage may not be appropriate
- Leveraging should be seen as a long term strategy – not a short term gamble on the market
- Where the leverage is coming from – margin loans which has additional risks or from investment loans from a properties equity
- What the investment is in – one single share or a portfolio of assets – in managed funds or ETFs
- Try to reduce the risk involved with single asset volatility
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday editon.
Last week – looked at laissez-faire economic system
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What laissez-faire should provide – a system of let it be – at the core – a system of relative freedom for the individual – doesn’t mean freedom for everything
- There are still laws in place in society which a government needs to enforce – those of negative rights – where someone doesn’t have the right to infringe on you – unless what you are going is against the law – for instance murdering someone
- Talked in past episodes about the need for governments to have some role – that is to enforce freedom for the individual
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When talking about the free market – the role of governments would be to not let companies subvert the individual’s freedom – or for the financial system to take this over – once a system is taken over – it removes individual inclusion –
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So in todays episode – we will be looking at what works elements work with a let it be system – that is economic inclusion versus exclusion –
- What inclusion IMO means is FREEDOM! – the freedom to speak one’s mind and try at ventures that are in public demand – as well as economic freedoms
- Why is it important? Allows improvement, and people to dream of betterment –
- The idea of inclusion being that everyone gets along and thinks the exact same thing is the antithesis of this principal
Language has been changed over time – the concept of a free markets is now seen as extractive – whilst economic policies for social justice legislated by governments is seen as inclusive – but it is an inversion
- The free market that we have isn’t inclusive by its nature – it is exclusive as it isn’t truly a free market –
- You have to get approval in a lot of cases for governments to approve what you are trying to achieve
- As well as governments having control as to whether you operate or not – this is pretty evident at the moment
The political System - Inclusive Vs Extractive systems
- Needs to be Inclusive - Equality of opportunity – everyone has the same rights
- Inclusive - Opportunity providing
- Lack of interference – restrictions (regulations)
- Barriers to entry, freedoms/opportunity - laws
- Non-exploitive (Extractive) – shouldn’t take from some to give to others
- Lack of interference – restrictions (regulations)
- Inclusive - Opportunity providing
What inclusive systems have– what incentivises should be available and what basic tenets does it need to exist? The basic pillars for any system and economy to function properly
- Property rights – keep what you own
- Ownership of what you own and purchase,
- Patents and an incentive to be able to keep what you produce
- The right to operate and provide a service -
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Legal system - protect what you have, know deals are honoured
- Contracts and Borrowing capabilities = TRUST in the system – Economy is confidence
- Think about the economy – would you trade or transact with anyone without trust?
- Trust that when you purchase something that you will get it? Be it a service or a good? Trust is two fold -
- Contracts and Borrowing capabilities = TRUST in the system – Economy is confidence
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That when you employ someone that they will do their job? Or that as an employee – that when you do your job that you will get paid to do it
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If there is no confidence that the system is there to protect your rights – rather than infringe upon them – you get into another inversion of the meaning of the legal system
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Under the modern governmental systems – what is legal is at the states discretion
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Public services – Well functioning state – but well functioning means that it needs to let us as the population operate
- Infrastructure – Roads, transport, water, power, etc
- Goes without say that without power and clean water – society would fall apart pretty quickly –
- This is where the argument for who provides this can come in – major topic for another day –
- Infrastructure – Roads, transport, water, power, etc
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Whether it be private or public – depends on your POV and mostly political leanings
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Legal system enforced – but this comes back to the legal system that is in place
- If the legal system is abusive – or draconian – it all falls apart –
- It is the difference between a free state and a police state
All are needed at once
What doesn’t work – Extractive systems – Socialism – or very heavily legislated system – it goes on a spectrum
- Extraction from the productive is a race to the bottom – history repeatedly shows this
- The more people have to give up of their own time and resources – the less incentives that they have
- Extractive – the more it is, more people will fight over it. Dictatorships and democracy are both fought over
- Dictatorships – violent overthrows, for power state has. At least they are public about it, as there is little the public can do to get them out beyond another violent overthrow – rinse and repeat
- Democracy – politicians rage political wars in a way – the very nature of a lot of promises is extractive – taxation and legislation
- incentives – They are the thing that makes you want to do things.
- Example – state run systems – ‘they pretend to pay us, so we pretend to work’
- Property rights – providing people of china with property rights
If profits are the purpose of the free market, as the incentive is self interest - is this immoral?
- Free markets is painted as heartless, but nobody wants to see the poor suffer.
- Those that want to provide for the poor through taking what the wealthy have, stand on a moral position of wishes….and theft
- Ask yourself – What is greedier – Keeping what you have earned, or demanding someone else provide for you with what they earn?
- But more importantly, what has been proven to reduce poverty? Free markets – freedom for individuals to produce, keep what they own and exchange with others – those systems that are inclusive
- The more free markets produces = more things, the more things we have, the lower prices are and easier they are to get!
- China is a good example – looking at the change from collectivised farming with quotas to a system still with quotas however – they people got to keep the excess of what they created
- At the economic level – the more this behaviour is incentivised – the more companies will exist – hence the more things being made, the more people need to be employed, so lower unemployment
- But also the greater the supply of goods that we have and the greater the competition within the market –
- So we get goods at a fair or market value price
- These two together – having free markets and a system that protects them is what reduces poverty in the long term – but takes time – not an overnight fix – and there will be hiccups along the way
- Not as easy as the Venezuela model of reducing poverty by 50% - by stealing the wealth of the private sector and redistribution – worked well for a few years – until the money runs out – as the state does not produce – they can only redistribute -
- But there is only so much redistribution that can occur until all the incentives are gone and with it – all the wealth production – so you end up with a society with nothing further to redistribute – as all the wealth is gone
- But when you have a government with complete control – that has promised everything – the failures of the policy can never be their fault – hence you need a scape goat – this has inevitably been the wealthy initially – then once they have had everything taken away – it becomes the middle class – then it eventually becomes someone’s neighbour because they have a slightly nicer car then the person that dobbed them in – this has been human nature – petty revenge
What is better? A society that provides lower costs for things and greater employment opportunities through freedom of opportunity? Or one that promised more welfare (as more tax to redistribute) even though it relies on other to achieve this?
- Society is a sum of all the individuals in it – if everyone is doing better, then so does society!
- But this isn’t up to the government to create – it is up to society to create – which is at the individual level
- The need for each person to better their own lives – as long as the infrastructure is in place – is what progresses society
- When this desire ceases – say you have 51% of the population happy to take opioids, sit on the couch watching Netflix and taking welfare checks – this in when society is likely to start taking a back turn
- Then what happens – the perceived need for the government is increase – as now you have a lot of needy people who need additional income through income support payments
- Society is the sum of all individuals and the incentives that they face –
- If we are incentivised – individuals based around their own desire to better their own lives creates a situation where society as a sum grows
- But not linearly – the whole is greater than the sum of the parts – people working together in economic interactions creates economic growth
- If we have disincentives – like additional taxes or barries to entry – then this process works in the opposite
- Especially when these disincentives are legally enforced – if you don’t pay tax – you go to jail
- If we are incentivised – individuals based around their own desire to better their own lives creates a situation where society as a sum grows
- Good quote from - Ludwig Von Mises (1990). “Economic freedom and interventionism: an anthology of articles and essays”
- “It is important to remember that government interference always means either violent action or the threat of such action.Government is in the last resort the employment of armed men, of policemen, soldiers, prison guards, and hangmen. The essential feature of government is the enforcement of its decrees by inevitably beating, killing, and imprisoning. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom.”
- Play any situation out – don’t pay a parking ticket – eventually – can be arrested – if you don’t pay – go to jail
What you can do – is become laissez-faire in your own life – self-organise your own life –
- Governments will tend to reduce freedom – it is the nature of any system – the point is to grow – like an organism or bacteria – the natural state of any organism is to grow for survival
- As an individual – important to learn from this behaviour – but not try to fight it but grow around it
- You also have the capacity to grow – grow in your own wealth – in your family – in your community –
- This is a freedom that you are allowed – the ideal situation – what I work towards – is to be outside or above the system – self sufficiency through financial independence
Summary
Important to ignore the rhetoric - hopefully by now – can see that the more involved an authority is in the operation of the day to day of the economy is – the worse it becomes –
Just take the shut downs at the moment – created the most severe economic conditions Australia and most of the world has faced – and it has come at the hands of government or centrally planned policies
An economy needs to be inclusive – Thankfully we have one of the best economies in the world – but it is fragile – as has been shown at the moment – has some extractive elements –
- System that allows for individual choice, and incentives to the individual to increase their wealth.
- Inclusive - Equality of opportunity – everyone has access, same rights, no preferences - Property rights – Legal system - Public services
- No point trying to fight the Fed or Governments – even trying to organise protests against government measures can get your arrested these days – but to learn from them and become your own person
Thanks for listening
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition. This week’s question comes from Cameron.
“Do you think that negative interest rates will come to Australia?”
Today – look at what would trigger a negative interest rate policy (NIRP) – exchange rates, economic conditions like employment or inflation, then debt levels – at the household level
- The cash rate was cut to a record-low 0.25% in March and has remained there since.
- The Reserve Bank board insists it will not increase the cash rate until progress is being made towards full employment and it is confident that inflation will be sustainably within the two per cent to three per cent target band.
- Negative interest rates are a pretty dramatic financial measure to take –
- But lots of drastic measures have been taken recently – those by governments and central banks to help boost the Australian economy
- In a quarterly statement on monetary policy the RBA says negative interest rates would be an “extraordinary unlikely” course of action
- At this stage - the RBA has again signalled it won’t be moving to negative interest rates – so for now they are ruling it out – but will they still have this same position moving into the future
Current look at the outlook for rates in the short term
- ASX 30-day interbank cash rate – future implied yield curve - The indicatorcalculates a percentage probability of an RBA interest rate change based on the market determined prices in the ASX 30 Day Interbank Cash Rate Futures – form of financial betting on interest rate movements
- 25% is the current - RBA decrease would go to 0%
- Up until Feb 2022 – about 50/50 is what the market expects –
- In the short term – over the next week – no change – 36% - decrease to 0% is 64%
- So the market is expecting a decline in the short term- not 100% accurate – it is a best guess based around all the current information – but this information can change
- Next RBA meeting is the 6th of October – may be a chance that the rates are cut then depending on
- But the indicators don’t point to anything negative at this stage – so what are the probabilities of it going negative
Exchange rates
- The Reserve Bank concedes negative interest rates would be a stimulatory benefit by putting downward pressure on the Australian dollar
- Covered the exchange rate basics over the last few FF episodes -
- The RBA believes the Australian dollar is “broadly in line with its fundamentals”
- This means that they think that there is no need to intervene through moving the interest rates to help the exchange rates
- However – if the AUD becomes above what they consider to be fair value – they might be more comfortable to move interest rates down to help reduce the exchange rates
- So at this stage - Under the current circumstances – the current RBA policy approach is probably not going to be reconsidered – so the exchange rate isn’t going to be what creates a situation for a NIRP
Economic indicators – inflation and employment
- Employment - It forecasts – in what the RBA calls its baseline case – the unemployment rate will hit a peak of 10 per cent in December, rather than the nine per cent rate predicted three months ago.
- Stimulus measures at this stage has kept the unemployment figures lower than originally anticipated – the job keeper payments
- The RBA then expects a gradual easing to seven per cent by December 2022
- Employment is one contributor to inflation through – and other factors like GDP
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GDP growth - RBA also expects economic growth will contract by 6% this year
- Also expects that the recovery will be slower than previously thought – so GDP growth is slightly lower than the forecasts
- Expect that Australia’s economic growth will take several years to return to the trend path expected before the economic downturn
- However – this was before the situation in Victoria with the lockdowns – this creates a situation of further reduced growth in the September quarter delay the recovery beyond what was originally forecasted
- The government expects as much as well - Finance Minister Mathias Cormann said the situation in Victoria was clearly “having a very bad impact on the economy nationally”.
- Outside of Government or RBA forecasts – other economic figures showed the pace of contraction in Australia’s services sector and business was slowing in July - but that was before the situation in Victoria emerged – which will lower the forecasts further
- Looking at other indicators - The Australian Industry Group’s Australian performance of services index rose 12.5 points in July
- This index with a number of above 50 shows economy expanding – currently sitting at an index of 44.0 points - shows that contraction is at play
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These was some evidence the national economy was stabilising before the Victorian shutdown – but with this occurring – it may slow down the pace of recovery –
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If it does – and employment doesn’t return by as much – RBA may drop rates – but this alone wouldn’t be justification to go into the negative territory
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Inflation - The RBA has released its latest forecasts - expects underlying rate of inflation will remain below 2% until at least December 2022 – so for more than 2 years
- Current inflation – gone into the slightly negative territory
- Inflation over the past 10 years – has been below the band range – a little below 2% p.a.
- Inflation is probably going to be the biggest thing that the RBA is looking at for interest rate policy
- Petrified of the deflation materialising
Looking at one of the other biggest indicators IMO for negative interest rates – Household debt levels
- Looking at the countries with negative interest rates at the moment have two major things in common – 1 and 3 on the list of Household debt to GDP levels – as well as persistently low levels of inflation
- Switzerland and Denmark – Household Debt to GDP - 132% and 112% respectively – but Australia is number 2 on the list at 120%
- The next down is Norway and Canada with 105% and 102% respectively
- Switzerland has a negative cash rate of negative 0.75% - GDP growth forecasts of 1.5% to 2%
- Denmark – current cash rate is negative 0.6%
- In Denmark - the banks have launched the world's first negative interest rate mortgage
- This means they are handing out loans to homeowners where the charge is minus 5%a year Negative interest rates effectively mean that a bank pays a borrower to take money off their hands, so they pay back less than they have been loaned
- There is one other country with negative rates – at negative 0.1% - That is Japan – they have relatively low household debt levels though – about 59% - Their level of Government debt is at 237%
- Debt levels – with negative rates it helps to pay it off
- However – the end result of getting inflation is the most important factor here –
- Looking at countries with negative interest rates – Household debt to GDP is typically high and inflation is very low – but this has to be so for some time for the RBA or central banks to take the extreme measures
- Would expect that Australia may see negative interest rates – if out household debt to GDP stays at an elevated rate – and if our inflation rate stays below the 1% level for some time
- Would have to be a number of years – 2-3more as an estimate for negative rates
- When looking at the fixed loan rates for the major banks – like the big 4 - are one pointing factor that an interest rate drop is likely –
- The household debt to GDP is another – basket of countries with highest household debt
- Even though it isn’t a solution – it is seen as the tool that monetary officials have at their disposal to try and get inflation to materialise –
- This is done through their Desire to help boost GDP growth at the same time through reducing the cash people spend on mortgage – and instead can spend more in the economy
- More money can spend – the more GDP growth should return and the more inflation should come back – but this ignores the supply side to the equation – another story for another day
- With increasing levels of debt on new loans due to lowering interest rates – even though interest rates are low – means that there is additional household cashflow going to pay back debt –
- So less towards economy – less inflation based around the measurements
- Comparing other countries with negative rates –
- Inflation in Denmark – been between1-0% since 2014 – been low for some time
- Inflation in Switzerland – been between -1% and 1% since 2010 – so been also low for some time
- Inflation in Australia – Has been present – up until recently – the big question will be if this returns as to if we go into the negative rate territory over time
- If inflation in Australia starts to lag and our household debt to GDP remains high – on the road towards negative interest rates
- But plenty of other countries have low to negative inflation rates at the moment – the thing to look out for is persistent low inflation rates – for many years
- But negative rates come with costs too. They can cause stresses in the financial system that are harmful to the supply of credit and they can encourage people to save rather than spend
- Hurts savers as well – individuals with cash in the bank would start having to pay the bank to store money - With offset accounts
- Whilst the RBA has said they are ruling out negative interest rates – the current measures may have little long term impact in boosting the economy – due to the high levels of household debt levels
- Therefore – end result may be that the NIRP may be coming to Australia
- The RBA would never say this until it was likely to occur – Forward guidance can freak the market out –
- At this stage – not likely – but if things don’t improve or deteriorate – especially inflation – then will likely come to Australia
- It Wont be exchange rates that cause this – will be lower GDP and Inflation rates not being in line with the RBA economic wishes – so they will take measures to make this happen
- The only tool in their arsenal is to keep lowering rates
Thanks for the question
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury.
Today’s episode – look at the potential kinds of money what are the best kinds of money are the best for the population
In the modern economy - The unprecedented expansion of money supply – created some economic and political consequences is only possible with certain kinds of money
Different forms of money –
- One world currency – digital backed, Fiat currency, Different gold standards
Then rate these - Look at their stability, degree of central control and how open they are to abuse -
Types of currency –
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One world digital currency – still technically hypothetical in its implementation
- Nothing new here – the concept has been around for a while - John Maynard Keynes proposed this – back in 1944 at the Bretton Woods conference – this single world currency was named the “Bancor”
- At the same time this conference created the International Monetary Fund (IMF)
- The IMF already has a super-national currency called “Special Drawing Rights” (SDR) made up of a composite of fiat currencies – covered this in past episodes along with the potential for what is being proposed in some circles as the solution to current financial situation - reset of currencies in a digital form
- Nothing new here – the concept has been around for a while - John Maynard Keynes proposed this – back in 1944 at the Bretton Woods conference – this single world currency was named the “Bancor”
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If the SDR is the backing – could be a global currency would be digital and controlled by a group like the IMF
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This would be a cashless society - money would be represented by digits on a screen – more so than what it already is
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Fiat – money control by government decree
- Under fiat money – most are on a floating exchange rate – since the peg to gold was removed in 1971 - monetary policy removed a lot of the limits that were imposed on central banks and government spending
- No longer had to adjust the supply of money in order to maintain the currency’s peg to the value of gold
- money could be printed in order to meet any number of social goods – through Government deficits
- such as full employment, stimulation of the economy and government spendingBottom of Form
- Result has been for fiat currencies to be inflated – so in real terms they are worth a fraction of their purchasing power in 1971
- Since 1971 was also the year workers’ wages in real terms have been growing slowly – especially in countries like the US and EU
- GDP growth has been sluggish compared to the prosperity enjoyed during the 19thand early 20th century classical gold standard era
- Under fiat money – most are on a floating exchange rate – since the peg to gold was removed in 1971 - monetary policy removed a lot of the limits that were imposed on central banks and government spending
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Result has been for hard asset prices like property to also be inflated
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A lot of this came from the inflation targets – where there has been a justifiable reason – especially currently need for central banks to inject new money supply
- ever increasing amounts simply to prevent default on unsustainable debt levels can be seen as the logical outcome of the fiat money experiment.
- Historically governments have seldom been able to resist the temptation to print more fiat money
Types of gold standards - Historically it was used as a means of exchange – in form of coinage for several thousand years – but physical gold as money had two major downsides –
- it is heavy and hard to carry around – also have to try and store it and puts you at risk of having it robbed
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also - the demand for money through most of history was many times greater than the amount of gold available
- Using physical gold would cap capacity for economies if it were the sole means of exchange - Hence the invention of money backed by gold -
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Government gold standard
- During the classical gold standard eras – depending on the nation it did differ – but through most of the 18th, 19thand early 20th centuries the way governments pegged their currencies to gold was through the control of supply – if your currency was in demand – can produce more of it – and if not – cease creating new money until the amount of money came back to be in line with the gold reserves of the nation
- This stability is not perfect but it is better than any other option that humans have come up with to date – due to the fact that gold can keeps a stable value (due to limited supply and it doesn’t rot away)
- So money pegged to the value of gold also takes on this stability - This is what is meant by a gold standard – money whose value is pegged to the value of gold.
- It also had a built-in way for a currency to maintain the peg to the price of gold – through the conversion of gold to money and money to gold
- Say that a nations currency was weakening relative to the official peg to gold - for example in the US the peg was first set at $20.67 up until 1934 at $35 an ounce – people would go to the bank to buy gold with their dollars as they would make a small profit. The bank would sell the gold and retire the dollars from circulation. This reduction in supply would continue until the demand for dollars would again raise their value to the official peg with gold.
- If the opposite was the case and the dollar became overvalued relative to gold then people would take their gold to the bank and exchange it for dollars in order to make the small profit. The bank would buy the gold with newly created dollars. This would increase the supply of dollars until the value of the dollar fell back to its official peg price with gold. At this point people would no longer come to the bank to exchange gold for dollars because the profit on the trade had disappeared.
- Before 1971 maintaining this peg to gold through the control of money supply was the primary function of a country’s central bank.
- Apart from the stability that the peg with gold provided, the other great advantage of the gold standard is that is provided monetary discipline. Governments could not print as much money as they wanted. The supply of money could only be used to maintain the peg with gold. When governments wanted to print more money, for example to finance a war, they would abandon the gold standard as this is the only way they could do it.
- During the classical gold standard eras – depending on the nation it did differ – but through most of the 18th, 19thand early 20th centuries the way governments pegged their currencies to gold was through the control of supply – if your currency was in demand – can produce more of it – and if not – cease creating new money until the amount of money came back to be in line with the gold reserves of the nation
- Distributed Gold Standard – prior to the previously mentioned government gold standard – this type was at the individual bank level rather than at the Central bank level
- In countries that didn’t have a Government run peg - individual banks issued their own notes
- In the US for example – back before 1913 - seven thousand US banks issued their own notes on average
- This type of system had its peak between the period of 1837 – 1864 – seen as the “Free Banking” era when banks had practically no federal regulation but were instead managed at the state level
- Each of these banks maintained the peg of its notes to the value of gold through the control of supply – but at the individual bank level
- This system demonstrated that a gold-pegged currency does not need government mandate to operate
- It does have relevance for today as it is some proof that that non-government organisations could initiate their own gold-pegged currency – however – would need government approval to do so
- Another benefit of the free banking model over central bank gold-pegged currencies is the inherent competition it creates
- In an economy – competition is good – this can extend to a currency as well – as this can be good for the customer
- A secondary market for the notes of various banks during the free banking era meant that banks had every incentive to minimize risk in the loans they made
- Any fall in the traded value of their notes would be bad for business and could lead to a run on the bank
- Banks with poor risk management would lose out to those firms that where better able to maintain their currency’s peg with gold.
- There was little moral hazard due to the banks not being too big to fail
- This free banking era did have some downsides due to this – and has been criticised for the number of bank defaults that occurred in some states - was used as an argument in favour of currency issue by central banks – making it centralised
- However research has shown that the cause of a spate of bank closures, especially in Indiana in January 1855 was not due to the size of the bank or the banks fault at all – was likely to be due to the failure from the state governments ability to manage their own finances
- Back with this system - For a bank to operate it was required to purchase state bonds as these bonds were collateral for the issue of notes
- Looking at 1854 Indiana state bond prices fell about 26% - this loss of collateral value meant banks could no longer repurchase their notes from customers for gold as they no longer had sufficient collateral to do so.
- It is interesting to wonder how much longer the free banking era would have continued without the state government obligation to buy their bonds. What if the banks could simply keep physical gold (specie) as collateral?
- In countries that didn’t have a Government run peg - individual banks issued their own notes
Rating the forms of money –
- A way of rating the forms of currency comes down to individual self-responsibility
- With a One World digital currency every aspect of the money is done for the individual.
- Government gold-pegged money imposes monetary discipline on the government.
- Competition between currencies during a free banking scenario enables people to maintain the integrity of money by choosing which currency to use.
- Because monetary value is ultimately created by confidence – this can either come from people from use due to it being the best or from the state control leaving no other choice –
- Centralised control diminishes and general prosperity increases proportionally
- Friedrich Hayek put in his paper Choice in Currency – A Way to Stop Inflation. Hayek suggested that if people were given a choice in the currency they used they would naturally choose those that held their value.
- The use of stable money owned by people is also the best form of money for the real economy.
- Comes back to the core of the Cantillon Effect
- states that when there is new money those closest to the issue of it benefit most. This is one reason way the current monetary expansion by the Federal Reserve increases government debt and valuations in the share and property market but does not stimulate the real economy. Banks, large corporates and government are all closer to the Federal Reserve than people.
- Rating the each types of money
- Stability - Can it inflate - Digital currency and Fiat – yes - Forms of gold standard – no
- degree of central control - Competition in the price and return of money - Digital currency and Fiat – none – even Government gold standard has none - Distributed gold standard – yes – between banks across state lines and nations
- how open they are to abuse by governments - through control and Supply - Digital currency and Fiat – technically unlimited - Forms of gold standard – dependent on demand – which depends on the productivity of a nation
Digital currency would probably be the worst – then the current system – with a form of gold backed system being better – but still has problems
- It all comes back to control - The one-world currency option increases the centralisation of authority seen with fiat money. Rather than being a solution to current financial issues it is likely to increase them with the consequent social and economic effects - Look at another interesting concept of a people gold standard
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition.
Today, we are going to go through the concept of Planning versus chaos within an economic system
Before we get into it - Which one would you prefer – purely based around the description – an economic system that is fully planned or one that is based around chaos – albeit self-organising chaos?
- That is where Fully planned does sound better – in theory – you should have lower uncertainty – through have some entity creating all the rules of commerce, from the amounts of goods to produce and at what price, how many people should be employed and at what wage – creates the perception of safety - but in reality – is this what actually occurs?
- On the other hand – when looking at Chaos - could this actually lead to a better result for you and I?
- Well – based around what has been observable throughout history – it is – as chaos when left to its own devises becomes self-organised
- It does sound weird – letting an economic system fall into complete chaos
- But chaos here isn’t what the end result is – the end result is closer to an optimal solution for everyone
- This is due to the complex systems of the economy –
- The very nature of planning in chaos makes planning obsolete - the property of a complex system is one where the behaviour is so unpredictable as to appear random – and this system has a great sensitivity to small changes in conditions –trying to control the whole system ends up on true chaos as the outcome
- So in this episode – we will look at how planning of the economy is what creates true chaos – of complete disorder and confusion – whilst a system of chaos that is allowed to self organise can result in the best outcome for all of us
- This is the concept of a free market – the self-organisation of the population without intervention
To start with – important to cover the concept of laissez faire – French for let it be –
- This is an economic theory in which transactions between private parties are absent of any form of economic interventionism such as regulation and subsidies
- laissez-faire is a theory that rests on the concept that the individual is the basic unit in society and has a natural right to freedom and that the physical order of nature is a harmonious and self-regulating system
- This theory was a product of the Enlightenment period – and was conceived as the way to unleash human potential through the restoration of a natural system, a system unhindered by the restrictions of government".
- Remember – prior to this time – 1700s – the rule of the economy was done by a Monarchy in most nations –
- Quotas were set, taxation was required – it was a very controlled economic system where the state would provide monopoly contracts to companies and allow them to facilitate trade without competition – as it benefited the state (i.e. the royals in control)
- The by-product was the rise of mega-companies like the Dutch East India Company, French East India Company, the East India Company and their likes – if someone wanted to create a company – needed a government (essentially a royal) charter to do so – this system wasn’t natural – heavily monopolies and controlled by the monarchs of the time – however it made those within a system of nepotism incredibly rich – both the royals from receiving direct tribune from these companies and the heads of these companies (or shareholders)
- Then the world saw a rise in the de-monopolisation of the economic system – over time – smaller entrepreneurs started to appear
- Remember – prior to this time – 1700s – the rule of the economy was done by a Monarchy in most nations –
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Laissez-faire as a concept in markets started being practiced in the mid-18th century and was further popularized by Adam Smith's book The Wealth of Nations – concept of the invisible hand
- Adam Smith’s viewed the economy was more of that of a natural system - where the market was an organic part of that system – which at the core is human interaction
- By extension - Smith saw laissez-faire as a form of a moral program and the markets as an instrument to ensure people the rights of natural law - the positive rights or law of any given political order, society or nation-state – to not be infringed upon
- Therefore - free markets became a reflection of the natural system of liberty and freedom for the population to conduct their lives and earn a living as they saw fit - For Smith, laissez-faire was "a program for the abolition of laws constraining the market, a program for the restoration of order and for the activation of potential growth"
- Adam Smith’s viewed the economy was more of that of a natural system - where the market was an organic part of that system – which at the core is human interaction
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Through millions of people interacting through voluntary transactions – the prices and supply of goods and services will form an equilibrium close to optimal over time
- If all of a sudden everyone is demanding tea – people will start producing or importing tea – eventually there will be competition and due to oversupply – the price will drop to allow additional demand of tea – eventually – the market will be flooded with tea – as opposed to the early day of mercantilism where only the wealthy could afford to drink tea – as was the case in England – tea prices saw a 91% drop after opening up the free market of trade from 1700 to 1850
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Ironically – Karl Marx and Fredrich Engels – and Adam Smith – had similar views on the business man or entrepreneur in one way – but they viewed the outcomes as different – they both agreed that the whole point to get into business is self-interest – not for the betterment or morality of society – but where they differed – in the outcome
- Smith understood whilst the business man didn’t get into business for the good of the nation – it did still benefit it –
- Hence a belief in a 'natural order' or liberty under which individuals were allowed to follow their selfish interests contributed to the general good. Since, in their view, this natural order functioned successfully without the aid of government, they advised the state to restrict itself to upholding the rights of private property and individual liberty, to removing all artificial barriers to trade, and to abolishing all useless laws"
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That is again where Marx with communism differed – thought that the business man or the upper middle class and above (the businessman or owner of capital) was the problem as their greed was responsible for the workers – or lower class – being improvised – hence – wanted a stronger state on the road to full communism (socialism being a step) where the government controlled all means of production
- Thought that this would solve all economic problems
- however the opposite is true – without the people starting companies to work – those people don’t have jobs –
- that is where the selfish interest when Government or a body with power over man tends to corrupt an economy
- when corporations become creatures of the state – such as they did under mercantilism – and are slowing becoming again today - the individual can tend to lose their propensity due to the disruption to the Smithian spontaneous order
- To be clear – even the US which is meant to be one of the most capitalist countries – is not laissez-faire –
- Nor is any country in the world - The very cost of money is planned – Central banks control the cash rates – and this negates any potential for a laissez-faire system
- In addition – subsidies for companies that make up the market distort the outcomes –
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Examples - Tesla’s revenue - $6.04 billion for the last quarter - but 7% of that, or $428 million, coming from sales of carbon credits that were essentially gifted to them by the Government – Their net profit was $104m for the quarter – however – they would have still had over a $300m loss without selling off these credits
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Also – much has changed even in the employment conditions since then – the government used to not be a major employer – over 2m Australians are employed by Government – 17% of the working population
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Shows how distorted the markets have truly become -
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To be clear – a laissez-faire economic system at the surface has nothing to do with morality – but leads to morality by a by-product – saying that everyone should be left to their own selfish desires to maximise their own position in life – whilst having the ability to do so isn’t seen as moral by modern eyes – why should one person have more than another? Even though the choices of those individuals have been different?
- This is where equality as a form of morality has been hijacked – as laissez-faire does lead to inequality – the freer the market the freer the ability for the individual to choose – hence due to choices – for a large part – we are not all equal
- Obviously – goes without say – some people are born into better situations than others – on average everyone in Aus is in a better position than someone in India or Africa – but what about someone born into the Brahmin class in India versus someone born into an impoverished family in Australia?
- humans are a sum of our choices – even the riches people can go to poverty if they make incorrect choices
- Unfortunately – this is never brought up – mobility of wealth is a thing – however – the ideology of the Government or those more extreme cant have this – you need to believe that free markets as sexist, racist, or any other platitude you can think of
- The role of the government should be to protect the free market – not to impede it by creating laws that make barriers to entry – through trying to enforce equality – which is impossible unless you remove all options of choice from the individual –
- Also – the financial system shouldn’t be allowed hijack the free market – hence governments role should be to avoid the monopolisation and enforce anticompetitive behaviours
- A lot of social or moral movements can and have been hijacked – from the Resistance, Rebellion, and Death – essays by Albert Camus in the 1940s - “The welfare of the people in particular has always been the alibi of tyrants.”
- is what has happened in every revolution - Albert Camus also said – “The slave begins by demanding justice and ends by wanting to wear a crown. He must dominate in his turn.”
- This is the power that a centrally planned economy provides – the opportunity to overthrow and control a system
- I think a lot of people complaints involved with the economic system has to do with the power structures involved in that which has control over the economy – the Governments - People who want a revolution of the economy tend to just want to take it over – using Government powers – society tends to get worse whenever this occurs
- Now – look at centrally planned economies – ones with complete government or authoritarian control – the more control they have – the more they are fought over – as they are seen as a power epicentre – if the government had little to no power – then there wouldn’t be modern day Marxists trying to overthrow the governments and put themselves in a position of power distribution
- There have always been those elements in society – and its not like laissez-faire systems are perfect – can have plenty of creative destruction and economic downturns – it is a natural state
- Herbert Spencer was opposed to the application of laissez faire: "Along with that miserable laissez-faire which calmly looks on while men ruin themselves in trying to enforce by law their equitable claims, there goes activity in supplying them, at other men's cost, with gratis novel-reading!"
- It is true – based around choices – a free market has the appearance of looking on and letting someone fail – but that should be seen as a learning opportunity
- It isn’t someone’s fault if they make an incorrect choice and fail – however – if they keep making it – the onus starts to be pushed back onto them – from today – I could take up the hobby of injecting heroine – and keep making that choice daily – when I lose my businesses, investments and wife and family, is the free markets fault that I lost everything? It did allow me to fail after all?
- This is where equality as a form of morality has been hijacked – as laissez-faire does lead to inequality – the freer the market the freer the ability for the individual to choose – hence due to choices – for a large part – we are not all equal
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It might sound harsh – but that is reality – thankfully – being human is much more forgiving than any other species on the planet – if you were a zebra and made the wrong choice to run in another direction of the herd – you are going to get got
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Important to note – no system in the world is completely free – Australia is one of the better ones – however – with the very cost of money around the world being centrally planned – the whole world economy is stuck to never be truly free
- Most important thing is to use your eyes and logic – not to get wrapped up in platitudes about what could be in a perfect world – but what has been and what is observable based around those same policies –
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For example – where would you want to grow up – North or South Korea? Imagine you are a child in North Korea -
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Kids in north – after school (which is mostly propaganda to solidify ruler), 10 years military
- No option to accumulate anything, No way to start business, No way to buy your home, Never Own a car, telephone, travel overseas
- South – you have economic freedom to all of these things and more – hence the south out produces the north GDP by 37 times - $33400, v 1800 GDP per capita (Per person) - Live 10 years longer in south, infant mortality is almost 7 times lower
- What makes them so different? Why does one work? One has a freer the market – one is purely centrally planned – but the free market is what leads to incentives – which are at the core of all economic models - laissez-faire provides a system that create incentives
- What are incentives? – Rewards for your effort – the economy is not a zero sum game – earn more, keep it, and use it as you want- however - If someone can take your stuff, why bother?
- What laissez-faire should provide – an Inclusive system – probably not the inclusive system that most people are familiar with
Next week – look at the systems that breed incentives – inclusive systems or extractive systems and how to work this into your own lives
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition.
This week’s question is from Martin.
Paraphrasing the question – but the crux of it is - What is happening in the property market and will property prices decline from here or were the original bank forecasts overestimated?
Great question – Today What is going on in the property market – Did an episode a few months back covering the economic forecasts – went through worst and best cases – said that it wouldn’t be the worst – probably some where in the middle – so where does the market currently stand
To start with – looking back on the Aus house price index – was growing strongly since the late 90s – had ups and downs along the way – but on average – the prices have mostly moved sideways over the past 3 years - rising or falling by around 10% per year across major cities like Syd and Melb
- Back in 2018 when prices started to fall – not much to be concerned about - affordability remained strong, unemployment was low and interest rates had room to fall
- Today’s landscape is different - Unemployment is now at a 20-year high, immigration is non-existent and interest rates have hit the lower bound
- However - current housing figures have been resilient given the circumstances –
- On average - house prices have fallen by about 1% over the past three months – all occurring through some of the worst economic conditions Australia has seen in the past 70 years
Short Term indicators – showing forwards price estimates
- Auction clearance rates - indicator of sentiment – if it is high – people are snapping up property in a competitive market
- When the Australian economy was in total lockdown during April 2020 - clearance rates dropped heavily but since have recovered into the mid-60% range – Victoria being the outlier – being much lower
- Mortgage finance - The level of mortgage finance going through the economy reflects the volume of borrowing – this has been historically a major driver of property price movements –
- the most recent data point is from May – so lagging behind – however – this was highly impacted by the lockdowns showed some of the largest declines in finance of the past 20 years – due to banks lending around uncertainty of individuals and their employment
- Price estimates - pointing to be slightly negative year-on-year for 2020 - potentially in the 5 to 10% per cent range over the next 12 months
- Building permits for new homes – the new supply of properties - indicator typically moves in the same manner as house prices
- recent figures for building permits show there’s been a quick decline in the intention to build – might show expectations that sales will be lower in the near future
- Properties listed for sale – supply of existing properties –
- Even though buyers are returning to the market, overall the number of properties listed for sale is down between 22% to 16% on average over the last 12 months
- The lack of good properties for sale at a time when there are still many interested buyers, is one of the reasons our property prices have, in general, held up in the current economic conditions -
- Around major cities – there still exists buyers – especially if people have been able to get $40k out of super and get the first home owner grants – lots of new available funds
- In total for the forward indicators - In the short term – if the number of sales returns to normal - house prices may decline on average by a further 5 to 10%
Longer term – looking at the big picture of property price drivers
- On average - Australian has done well for a few reasons – and people can still justify it even though it is the some of the most expensive in the world
- we have strong migration, good affordability due to lowering interest rates and constricted supply based around desired places to live – 1 of 5 major cities – so how does this hold up in the current climate
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Unemployment – one of the larger risks to the property market at this stage – due to Australia faces a historic level of job losses
- Gone through unemployment stats in the past and how they are calculated – however - 3.5% to 4% of the working-age population lost their jobs since March – 700,000 jobs and is two times larger than that seen in the early 1990s recession and four times larger than the 2008 recession
- this stat does not include those who are currently on the JobKeeper program which is around 3 million people
- All of this has brought about economic hardship for many households – which created a situation where banks brought in loan deferrals – or bank holidays - almost 500,000 borrowers have been granted loan deferrals
- About 1 in 5 of these – or 100,000 are considered to be in deep stress
- APRA states that deferrals across home loans account for about 10% of all loans
- These bank holidays were originally given for 6 months – but each application will be renewed in September – with the ability to continual the deferral process for another 6 months – until March 2021
- But this can only be applied – APRA stated “Where the ADI has undertaken an appropriate credit assessment of the borrower and is satisfied that they have a reasonable prospect of being able to repay the loan…when the repayment deferral period ends”
- APRA also stated that “in some cases, banks will need to recognise that loans are permanently impaired”.
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So those in most financial stress- some 100,000 households will likely be forced to foreclose in September if things don’t turn around
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Compared to the average stats – around 30k to 40k properties sell each month – so there might be a spike in the market after this date – but banks may be unlikely to do this – a lot of bad PR involved
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Flow on effect – as 700k people have lost their jobs, and 3m are facing some uncertainty with JobKeeper running out next year fully – if unemployment persists – lower demand going forward over the next number of years
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Changes to employment – if people are working from home or online – could increase the sprawl of property and reduce demand for properties around cities
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Population growth – lack of immigration at the moment
- Population growth – coupled with the limited supply or viable options for the working age population to live has been one factor to create property price growth – through additional housing demand
- Over the past 5 years - the Australian population has been increasing by approximately 350,000 people per year - 220,000 or 63% of that is coming from overseas
- With immigration being put on pause for not – the short term growth of population for the year may be reduced by around 100,000 to 150,000 people – so a decent reduction when compared to the past 5 years
- Population growth is one major driving factor for new builds however – on average the number of new dwellings increasing by around 2% - between 170k and 200k –
- With the population immigration capped for the short term – new builds may slow down as well – buy a factor of 80,000
- But on the other side – looking at investment properties and rent – lack of immigration should manifest itself here on a larger scale – most people who immigrate rent – until they become residents – so rental markets may become weaker – even with no international tourism or students – rental markets may have an oversupply situation which creates either lowering rents – or a sell off of properties that are costing the owners too much to cover if no rents are coming in
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Interest rates – affordability of debt due to lower interest costs
- IMO - Interest rates have been one of the biggest factors of property price growth – as they are correlated to borrowing capacity – which in turn is correlated to the average price of property –
- Interest rates have consistently fallen for more than a decade – creating a situation where the amount people can borrow increases
- Historically – the RBA response when property price may go into the negative growth territory has been to cut rates –
- 2008, 2011, 2015 and 2019, the house price declines were slowed or reversed as the cash rate fell
- Occurred again over the past few months – even before – October – saw a cut to 0.75% - then Feb and March saw two more cuts by 0.5% in total – where the cash rate is now 0.25%
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Now - the RBA is at a lower bound with not much room to move down from here – unless they consider moving into negative territory
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So the strategy of cutting rates to keep prices rising as has been the norm over the past decade plus may be coming to an end
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To explain how much rate cuts go towards benefiting prices of property – lets look at some examples
- First – the magnitude of rate cuts on house prices was explained by RBA research in early 2019 - they equated the price of a house as “the rental benefit divided by the cost of owning the property (includes the average real variable mortgage rate, running costs, transactions costs and depreciation)”
- Ironically - this is similar to pricing an annuity: the rent is your income stream and the user cost the discount rate
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Example in the RBA paper – If the user cost is 6% a 1% drop in interest rates would have the potential to boost housing prices by 17% - assuming everything else remains equal
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So with the RBA cutting rates by 0.50% over the past few months – would work out to around 8.5% lift in prices – with everything being equal
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But not everything has been equal – as rents have the potential and in some cases have fallen – so not the best economic model to work with at this stage
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Other way to look at the effects of interest rates on house prices is by looking at how the average borrowing size is affected by falling mortgage rates – and how repayments in turn are affected
- If there is a 1% reduction in interest rates - would potentially to about a 14% increase in borrowing capacity - not dissimilar to the estimate made by the RBA above – due to the rate being cut by 0.5% - average household could take on at least $30,000 more debt – assuming employment is the same
- However – mortgage rates in some cases have fallen by more – especially over 12 months - by about 1.50% over the past year – or about $90k in affordability – all else being equal – but not everything is equal – but limited room to continue this strategy of dropping rates to boost prices
In Summary – there are some good, bad and uncertain factors for property price
- good – has been interest rates falling a little over 1% in the past 12 months – and lower supply of properties for sale - keeping properties higher in price
- bad - high unemployment and a lack of immigration – creates weaker demand
- Uncertain – related to fiscal support like jobkeeper and loan deferrals – in addition - unemployment benefits are two to three times higher normal – so the fact that Gov benefits and loan deferrals have been extended means some of the downsides may be been avoided or delayed
- When we come back to Martin’s question of how worried should we be about prices going down –
- There is the potential for prices to continue to decline in the next 12 months – limited additional government supports or ability for RBA to continue to lower rates without getting us into a liquidity trap
- If I were a betting man - good reason to believe that the number of negatives may start to overshadow the positives over the next 12 months as the support polices are slowly unwound - would mean that house prices could fall further than the forecast 5 to 15% in most major cities over the medium term
Thanks for the question martin
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury.
Last Monday – talked about exchange rate basics
Summary - There are a number of factors that go into analysis of the fundamental health of economies and the implications for currency movements – and in turn these can affect the exchange rates –
- Went through indicators that show the flows and trends of supply and demand - like the balance of payments (capital and current accounts) and the level of foreign reserves a country has – including economic indicators like inflation, interest rates, GPD – all go towards affecting the exchange rate movements –
- but these are only at a cross currency level when looking at say the AUD to USD
- Today – Look at some of the reasons behind movements of AUD to USD
- Major things to look at:
- Central bank policy – interest rates, inflation expectations – influence trading behaviours
- Trading positions – what professionals are betting on
- The trade markets – current account and capital accounts – historical data
- No way to accurately predict the movements minute to minute – reading tea leaves – so what do the leaves say
Starting with central bank policy - The AUD/USD exchange rate has been retracing some of its decline -
- However – a small Reversal of this trend started following the Federal Open Market Committee (FOMC) Minutes being published -
- The Federal Open Market Committee- group within the Federal Reserve System responsible for overseeing the nation's open market operations - makes key decisions about interest rates and the growth of the United States money supply
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Shows the power of central bankers over currency – even based around their statements (not actions) currency exchange rates can move -
- AUD/USD pulled back from a fresh 2020 high of 0.7276 – this was due to that in the FOMC Minutes – the Fed foreshadowed a change in the monetary policy outlook- said they would employ an outcome-based approach versus a calendar-based forward guidance
- Under ‘calendar-based guidance’, the central bank makes an explicit commitment not to increase interest rates until a certain point in time.
- Under ‘state-based guidance’ or outcome-based approach the central bank says that it will not increase interest rates until specific economic conditions are met.
- AUD/USD pulled back from a fresh 2020 high of 0.7276 – this was due to that in the FOMC Minutes – the Fed foreshadowed a change in the monetary policy outlook- said they would employ an outcome-based approach versus a calendar-based forward guidance
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Feds reasoning - “a number of participants noted that providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point.” – but not at this stage
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Forward guidance is what markets respond to here – what central banks are pointing at for the decisions
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So the current market conditions may keep the exchange rate afloat as the crowding behaviour in the US Dollar looks poised to persist over the remainder of the month
- However, it seems as though the FOMC is in no rush to alter the course for monetary policy
- the committee vows to “increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace,”
- Chairman Jerome Powell said that they will stick to the status quo at the next interest rate decision on September 16 as the central bank extends its lending facilities through the end of the year
- Back with Australia - At the same time, the Reserve Bank of Australia (RBA) Minutes suggest Governor Philip Lowe will also retain the current policy at the next meeting on September 1 as “the downturn in the first half of the year had been smaller than predicted,” and the central bank may carry out a wait-and-see approach throughout the remainder of the year – so they have a outcome/state based approach as well
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The RBA is waiting for the likely effects now that the government’s fiscal stimulus programs like the Jobkeeper Payment have been extended for a further six-months.
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Looking at the interest rates - the RBA may continue to rule out a negative interest rate policy (NIRP) for Australia as “members agreed that the Bank's policy package was continuing to work broadly as expected,”
- the limited scope for additional monetary stimulus may provide a backstop for AUD/USD as the FOMC shows little intentions of scaling back its non-standard measures in 2020.
- As a result, the Australian Dollar may continue to outperform its US counterpart as AUD/USD approaches the 2019 high (0.7295) – now the currency is above this – gone to 0.7366
- and current market conditions may keep the exchange rate afloat as the crowding behaviour in the Greenback looks poised to persist for a little while yet –
- Everyone was jumping into safe investments – either USD or USD backed securities like treasuries – look at this late with the capital account
- RBA Governor Phillipe Lowe stated that “The Australian economy is going through a very difficult period and is experiencing the biggest contraction since the 1930’s. As difficult as this is, the downturn is not as severe as earlier expected and a recovery is now underway in most of Australia”.
- When looking at the Aus interest rates - At the last RBA rate decision on August 4, officials chose to hold the overnight cash rate at 0.25 percent
- Also - maintained that same yield target for 3-year bonds – a few weeks ago, officials said they are prepared to adjust the stimulus package if the circumstances warranted it
- So policymakers believe that additional fiscal and monetary support may be necessary for some time
- However - if economic improvement continues better than expected – the need to introduce additional stimulus will reduce
- This may then push AUD higher if investors focus on swift recovery expectations
- But many things could upheave this – such as heightened geopolitical tensions between Australia and China – which could cap the currency’s gains
- The other thing that is being looked at - Economic Stabilization efforts
- As the statement by RBA Governor Phillipe Lowe states: “The outlook remains highly uncertain. The recovery is expected to be only gradual”.
- However – if the Governments re-imposes more aggressive lockdown measures – may create additional negative sentiment – affect things like current account
- This being said - may be offset may renewed risk appetite and signs of global stabilization.
- For a country like Australia – that has a cycle-sensitive currency based around trade and that is tied to an outward-facing or export economy - early signs of improvement in global trade is re-assuring
- The data to watch here are trading reports– such as PMI reports (Purchasing Managers' Index - shows prevailing direction of economic trends in the manufacturing and service sectors) – so if this is increasing and is coming out of developed and emerging markets – reinforces the notion of improvement, the Australian Dollar may rise
- However – if it is lower than anticipated or starts to decline – then the AUD may decline
- Major thing about economic stabilization – effect on currency movements will be to the magnitude of aggressive support by central banks
- But this come from flow on effect – such as how this affects business confidence and risk appetite – if this goes up - adds another upwards pressure on the AUD.
- Looking at Deutsche Bank’s Australian Dollar currency index compared to an AUD inflation swap zero coupon (10Y) shows price growth expectations rising in tandem
- As the statement by RBA Governor Phillipe Lowe states: “The outlook remains highly uncertain. The recovery is expected to be only gradual”.
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Shows at the moment there is an underlying expectation that future economic activity will rise, and with it, price growth in the form of inflation – not hugely – back to around 2%
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So a change of tone in the RBA’s sense of urgency may magnify AUD’s gains - particularly if economic data domestically and in China – Australia’s largest trading partner – shows a brighter outlook and geopolitical tensions simmer down
Traders – what is happening in currency markets between AUD/USD
- Sentiment reports - shows retail traders have been net-short AUD/USD since April –
- latest update showing 44.00% of traders are net-long the pair – which went up slightly – as there was a small decline in the net-short positions
- The recent rise in net-long position comes as AUD/USD bounces back from the previous low - while the decline in net-short interest could be indicative of stop-loss orders being triggered as the exchange rate trades to a fresh yearly highs – now at 0.7366
- However - Overall – 26% of traders are bullish whilst 74% are bearish – but these traders are short termed focused – looking at the day/week price more so than a longer term trend
- Looking at the technical data - but the Relative Strength Index (RSI) – indicates if an asset is overbought or oversold – showing currency is slightly in the overbought territory.
- Keep in mind, the advance from the 2020 low (0.5506) gathered pace as AUD/USD broke out of the April range, with the exchange rate clearing the January high (0.7016) in June as the Relative Strength Index (RSI) pushed into overbought territory.
- AUD/USD managed to clear the June high (0.7064) during the previous month even though the RSI failed to retain the upward trend from earlier this year, with the oscillator pushing into overbought territory for the fourth time in late-July.
- The RSI started to indicate that there was an establishment of a bullish trend in July as AUD/USD traded to fresh yearly highs, but the indicator continues to deviate with price as it snaps trendline support after failing to push into overbought territory.
The trade markets – current account and capital accounts – historical data
- Balance of payments
- Current account – was positive for Aus – large exports being around $8.5bn worth next minus imports
- US – no shocker is still a mass importer – negative $50bn – so this is in Aus favour
- Capital Account – capital flows - negative $11.5bn for AUS – so some capital flight has been occurring
- AUs not going on holidays – more money being spent here – less overseas – may be a factor for exchange rates
- US saw a massive capital inflight in March – was close to $350bn in a month – since then has been on the decline as well
- Current account – was positive for Aus – large exports being around $8.5bn worth next minus imports
- Foreign reserves – AUD has declined – since March gone down from $90bn to $60bn
- USA – has risen – Went from $128bn in March to just under $140bn last month
- But still the major contributing factor seems to be the central banking policies at this stage
So in summary – Expect the currency to be volatile –
- Likely to go through periods of movements upwards above over time – but will have reversals along the way
- Central banks are playing a wait and see game – But this can be in Australia’s favour - with the Federal Reserve doing absolutely nothing to save the US dollar anytime soon, the AUD rising relative may be a trend that should continue to have legs going forward for the near future – obviously – if the US all of a sudden wish to raise their currency on the floating markets – they have deeper pockets –
- Alternatively – if conditions change – which they will – currency could go anywhere
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition, where we will continue to look at some derivative disasters.
Last week – went through some of the basics – and a few Australian specific examples -
In todays episode – want to look at the Long Term Capital Management crash in the late 1990s
Similar to some of the cases last week – wouldn’t be surprised if you haven’t heard of this – but it had the potential to spark a larger crisis –
The story is very similar to the GFC- almost like a mini-or pre GFC – and an event that likely created the moral hazard that lead to the GFC - so what happened
- Long Term Capital Management (LTCM) – they were a major US hedge fund – used absolute return trading strategies
- Now - hedge funds are normally defined as absolute returns funds – as the name sort of indicates – they aim to get absolute (or positive) returns over a rolling period regardless of market conditions –
- So a traditional asset managers or long only fund tried to outperform a benchmark or index year on year – which can result in a loss – but if the ASX or S&P500 are down by 20% and the traditional manager is down by 15% - done their job
- However – an absolute return manager would want to get a positive return in this year
- Hence- hedge fund managers employ different strategies in order to produce a positive return regardless of the direction of asset markets.
- To do this – they can use a range of strategies - like short selling, or using leverage and high turnover in their portfolios – but also – using derivatives to hedge their positions – but also – to trade traditionally boring (low loss potential assets) like bonds using derivatives
- Long Term Capital Management was run by some pretty big players –
- Launched in 1994 by former Salomon Brothers bond trader John Meriwether
- Salomon brothers was famous from the early days – if anyone has seen and remembers the big short movie – the individual who pioneered MBS was from Salomon Brothers – Lewis Ranieri
- John Meriwether headed Salomon Brothers' bond arbitrage desk until he resigned in 1991 amid a trading scandal. According to Chi-fu Huang, later a Principal at LTCM, the bond arbitrage group was responsible for 80–100% of Salomon's global total earnings from the late 1980s until the early 1990s
- LTCM was also run by PhD holders, two Nobel Prize winners on their works in option pricing models and a plethora of finance veterans
- One of the PhDs was Myron Scholes – the Black Scholes pricing model is the gold standard used when pricing especially European option – that’s contract that limits execution to its expiration date – as opposed to American which can be executed at any time prior to maturity
- trades were conducted through a partnership with Bear Stearns and client relations were handled by Merrill Lynch – so it had very little overhead
- They launched a bond trading hedge fund using option pricing – and they did very well initially – from their launch they had $1.25 billion under management
- This quickly grew to $100bn in just under 3 years – they were attracting massive inflows due to their annual returns - return of over 21% (after fees) in its first year, 43% in the second year and 41% in the third year
- Given the strategy was promoted as being absolute return – low risk/high reward form using bonds of all things – gained a lot of attention
- Launched in 1994 by former Salomon Brothers bond trader John Meriwether
The trading strategy – put simply – it was to buy or sell bonds when prices deviated from the norm using borrowed funds and additional leverage - often in the form of derivatives - then wait for prices to converge again to make a profit
- known as involving convergence trading – official definition is to “use quantitative models to exploit deviations from fair value in the relationships between liquid securities across nations and asset classes”
- The type of investments were on US Treasuries, Japanese, UK and Italian Government Bonds, and Latin American debt, although their activities were not confined to these markets or to government bonds – which we will come back to
-
At the core – this strategy is known as fixed income arbitrage – How this works - Fixed income securities pay a set of coupons at specified dates in the future –a bond can pay semi-annual or annual coupons to the debt holders – they also have a defined redemption payment at maturity – normally the Face value of a bond
- Since bonds of similar maturities and credit quality (or risk of default) can be seen as close substitutes to one another – there tends to be a close relationship between their prices (and yields)
- Think about Australian bonds issued – all with FVs of $100 – if the coupons on these are the same at $3 p.a. – so they should all be priced in similar manners – assuming their maturity dates are the same – however – if their maturities are different or they pay different coupons – relative to the interest rate their prices will be different
- But – depending on the liquidity of the market – or how easily you can sell the bond – these same or similar bonds can have different prices – as well as having slightly different maturities – therefore you can make an additional premium returns for little to no risk –
- Example - LTCM strategies was to purchase the old benchmark – now a 29.75-year bond, and which no longer had a significant premium – and to sell short the newly issued benchmark 30-year, which traded at a premium - Over time the valuations of the two bonds would tend to converge as the richness of the benchmark faded once a new benchmark was issued
- Sounds smart – but due to the size in the difference in prices (which was tiny) – not much profit to be made –
- But that is where leverage and derivative positions came into the picture – to amplify the returns - LTCM used leverage to create a portfolio that was a significant multiple (varying over time depending on their portfolio composition) of investors' equity in the fund
- also necessary to access the financing market in order to borrow the securities that they had sold short – makes them dependent on the willingness of its counterparties in the government bond (repo) market to continue to finance their portfolio
- Using this strategy - if the company was unable to extend its financing agreements, then it would be forced to sell the securities it owned and to buy back the securities it was short on at market prices, regardless of whether these were favourable from a valuation perspective
- Since bonds of similar maturities and credit quality (or risk of default) can be seen as close substitutes to one another – there tends to be a close relationship between their prices (and yields)
-
This is the next part of the strategy that that was highly risky in hindsight – wouldn’t think so trading bonds – but when you had counter party risks on bonds – it can be if a shock to debt markets occurs
-
By 1996 – started to branch out into riskier asset classes – like Latin American markets –
- Was due to limited trading opportunities – as they already had massive positions on the assets and others started to copy their trading strategies - as the magnitude of anomalies in market pricing diminished over time
- This was also due to LTCM growing to be a large portion of illiquid markets that there was no diversity in the buyers in them – only had a few large investment banks and managers who joined in on this trading strategy – so some crowding out was going on – started to reduce the functionality of the markets and it was impossible to determine a price for its assets – which was the whole point of their trading strategies – to fund arbitrate in mispriced assets based around their liquidity and maturity
- In 1997 – a year in which it earned 27%, LTCM returned capital to investors – about $2.7bn
- By 1998 - the firm had equity of $4.7 billion and had borrowed over $124.5 billion - debt-to-equity ratio of over 25 to 1 – put them in a risky position – as it wouldn’t take much in the way of a loss for them to wipe out all of the equity they had
- However – in addition to this leverage position - It had off-balance sheet derivative positions with a notional value of approximately $1.25 trillion - most of which were in interest rate derivatives such as interest rate swaps to hedge against their arbitrage trading going wrong
- Derivatives like interest rate swaps were originally developed for the purpose of allowing firms to manage risks on exchange rates and interest rate movements – similar to what we saw last Friday – they also allowed speculation on a massive scale
-
The downfall – in 1997 - Asian crisis was playing out – which spread out into most asset markets by 1998
- Although this crisis had originated in Asia, its effects were not confined to that region – created a rise in risk aversion and raised concerns amongst investors regarding all markets heavily dependent on international capital flows – such as bond markets –
- LTCM started to lose some money - In May and June 1998 returns from the fund were -6.42% and -10.14% respectively, reducing LTCM's capital by $461 million
- Then these losses started to snowball by August 1998 - when Russia defaulted on its domestic rouble-based debt - leading global markets to panic and causing LTCM to lose US$553 million, or 15% of its capital in a day
- In one month, it lost almost US$2 billion in capital - to maintain the magnitude of its existing portfolio, LTCM was forced to liquidate a number of its positions at a highly unfavourable moment and suffer further losses
- LTCM only had $400 million of equity by September 1998 – but with liabilities still over $100 billion, this translated to an effective leverage ratio of more than 250-to-1
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However, the bigger problem occurred from a systematic risk point of view, as unfortunately for the markets and the US banking system, LTCM had such large positions in its trading books that it was impossible to sell out. In only a few weeks, LTCM was facing over US$1 trillion in notional derivative default risks.
- Takes time to unwind derivative positions – time they didn’t have
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This was now a problem of the global economy – due to the other banks that were the counter parties to these derivative swaps
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LTCM did business with nearly every important person on Wall Street – beyond their own funds being lost - Wall Street feared that LTCMs failure could cause a chain reaction in numerous markets, causing catastrophic losses throughout the financial system – Central banks had two responses as events moved quickly –
- First - with the Chair of the Federal Reserve moving to aggressively to use monetary policy by cutting US interest rates – where previously they were going to raise them –
- followed by over 60 national central banks which also cut rates in short order to avoid LTCM’s crisis turning into a global financial crisis and pushing the world economy into depression
- Second - LTCM had to be bailed out to the tune of $3.625 billion after it lost staggering sums through its bad bets in global bond markets
- The contributions from the reserves were facilitated from various major banks - Most major banks put in $300 million: Bankers Trust, Barclays, Chase, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, J.P. Morgan, Morgan Stanley, UBS
- Few others with smaller amount of $125 and $100 million
- First - with the Chair of the Federal Reserve moving to aggressively to use monetary policy by cutting US interest rates – where previously they were going to raise them –
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Interestingly – two of the 3 banks – who declined were US banks – those were Bear Stearns, Lehman Brothers – we all saw how the banks and the Fed reciprocated this in 2008 – only banks to not get the generous arm of the Fed – the other bank was a French bank
Summary
LTCM’s demise was an example of the failure of a hedge fund and a classic example of the failure of ‘genius’ – having very smart people (Nobel Prize winners) in theory behind the wheel can still go horribly wrong in practicality
- The borrowing level of leverage allowed – 250 to 1 is bad enough – but the $1.25 trillion in notional derivative values when the company had $400m in equity should point to why something like the GFC could have happened
- Which by this point was a decade away – but these very banks that needed to provide some of the funds are myopic or – they saw that a bail out would happen if they got it wrong and instead – only saw the massive potential for profits –
- The vital lesson is that no single institution (and certainly no private sector investor such as a hedge fund) should be so important as to be not ‘allowed’ to fail and require bailouts from taxpayers or depositors
- These sorts of situations indirectly leads to the additional dangers in the financial markets through the moral hazard encouraged – where these companies are now assuming that they are implicitly ‘insured’ by Reserve Banks or the public – hence they have become ‘too big to fail’
- So a global financial crisis was averted in 1998, but arguably it was only postponed for a later date
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition.
This episode is a bit of a special episode –looking at some legislation in Australia that is currently underway –
Has to do with the Government stepping in for the Monetisation of the news – which could ultimately mean the consolidation and control by legacy media of the information that you receive
Might have, or may not have heard about this new bill that is going through parliament - likely to pass in Australia in the next week – called the News Media Bargaining Code
- On the 20 April 2020 - the Australian Government announced that it had directed the ACCC to develop a mandatory code of conduct to address bargaining power imbalances between Australian news media businesses and digital platforms – like Google (youtube) and Facebook
- What the ACCC says – “the production and dissemination of news provides broad benefits to society beyond those individuals who consume it. The proposed bargaining code is intended to address bargaining power imbalances between Australian news media businesses and digital platforms in order to ensure that commercial arrangements between these parties do not undermine the ability and incentives for news media businesses to produce news for Australians.”
- But is this what is really going on? If it were just about monetary arrangement in bargaining powers – why does this bill propose that the media outlets should also get backdoors into the algorithmic curation of news on these platforms and advance notification of algorithm changes – as well as potential access to users data
- This bargaining code is being developed by the Australian Competition and Consumer Commission (ACCC) in close consultation with the Department of the Treasury (Treasury), and the Department of Infrastructure, Transport, Regional Development and Communications (DITRDC)
- Digital platform services to be covered – major ones being Facebook and Google (including YouTube) – where most people get their news – but the code suggest that these platforms have become unavoidable trading partners with Australian news media businesses
- Hence – they see that there is an imbalance in bargaining power – Channel 9 or the ABC creates the news and it gets viewed through youtube or FB –
- However, the ACCC intends for the code to include mechanisms to allow the addition of other digital platform services – anywhere that news is viewed –
- Accelerated Mobile Pages (AMPs), Android TV, Instagram and WhatsApp (owned by Facebook)
I want to be clear – when talking about these mega companies – like Google (Youtube) or Facebook – I’m not a massive fan – is a private company that already promotes what they want – they have monopoly and act as such -
- This bill on the surface would start playing the Smallest violin in response to googles outcries – but is there more to the story
- At the surface – Google and FB should be legislated for the anti-competitive behaviours – but they are the biggest donors to both sides of the political isle in the USA – so nothing will happen –
- They also have platform rules whilst taking publisher rights – to oversimplify these laws -
- Platforms – are immune for being sued as they simply
- Publishers – curate the content – through editors –
- However
- Don’t get me wrong – Youtube can be a great tool – waste hours watching cat videos or watching lectures on economics or history – choice is up to the individual
- However – they have been taking advantage of a weird grey area – which isn’t a level playing field to media companies in the first place – however media businesses have been the beneficiaries to these practices
- That is where the next section of the legislation states – “Value of news to digital platforms” – where the availability of news on each of Google and Facebook (as extracts of, hyperlinks to, and/or full reproductions of, news content) provides value to these platforms in the form of:
- direct value: revenues from advertising displayed within or adjacent to the news content on the digital platform’s services (direct revenue), and
- indirect value: the value of the increased use of the digital platform’s services by users attracted or retained by the availability of news content, which may include:
- increased advertising revenue generated by the digital platform’s services collection of additional user data that can be used to improve the digital platform’s ad targeting across all of its advertiser-facing services
- collection of additional user data that can be used to improve the user experience across all of the digital platform’s consumer-facing services.
- I would say that media and these digital platforms have been helping to fuel one another – not to act like the media is slumming it from youtube or from google which sends people to news article sites –
- On both media generates ad revenue – from Youtube alone they generated $10m last year in ad revenue
- But now in Aus – the media could potentially do so as well
The major parts of the bill – 3 – additional revenues, the algorithm and the data
- Revenue - Looking at the ACCC draft legislation – called on internet companies such as Facebook and Google to pay for content that was published that media companies produced –
- would allow news companies to negotiate as a bloc with tech giants for content which appears in their news feeds and search results
- adopts a model based on negotiation, mediation, and arbitration to what they quote as to "best facilitate genuine commercial bargaining between parties, allowing commercially negotiated outcomes suited to different business models used by Australian news media businesses”
- Important to note that the terms of negotiation, mediation and arbitration all refer to the courts – legal fights for settlements – which the ACCC will likely take free of charge at the cost to these digital platforms
- However - ACCC believes the code is necessary to address the fundamental bargaining power imbalances between Australian news media businesses and major digital platforms
- Estimates show that media companies are asking for 6 times their estimated value in ad revenue – or at the early stage of this negotiation - $60m up from the $10m in their worth of ad revenue –
- Would be like an independent content creator going to youtube and asking for a pay rise – what would youtube say? Well nothing – but that is because the independent individuals don’t have the courts at their back
- Algorithm access – The code states that “the algorithms used by Google and Facebook are the intellectual property of the companies that own them, and each company maintains the right to change its algorithms as it sees fit.
- However – “This gives Google and Facebook a significant amount of control over the content likely to be accessed by consumers, and consequently on businesses’ ability to monetise their content through Google and Facebook services.
- So the ACCC seeks to rectify this imbalance through the bargaining code through having the provision of advance notice of significant algorithm changes to news media businesses, the prioritisation of original news content, and special treatment of paywalled news content.
- Report considered that the lack of algorithmic transparency (including the absence of notice of changes to their algorithms) is likely a manifestation of the bargaining power imbalance between the digital platforms and news media businesses – so the Code requires digital platform to give all news media businesses advance notice of algorithm changes and explain how they can minimise the effects – giving the ins and outs of the algorithmic code
- This legislation as it is currently drafted, requires digital platforms to give news media businesses 28 days' notice of algorithm changes that as they put “are likely to materially affect referral traffic to news”
- remember that these algorithms and their changes are designed to affect ranking articles
- So media companies will know what the substantial changes to the algorithms will be and can alter their copy to the display their content above others
- Google said that this 28-day advance notice is really a 28-day waiting period before they can implement the changes in their systems – this in turn affects the whole world – remember that these algorithms are world wide – but Australian media businesses will get the jump on the rest of the world – and the rest of the worlds media
- Begs the question – how long until this is implemented else where for media to equal the playing field?
- Data sharing – as part of this – tech companies have added in its statement that the code requires it to tell news media businesses what user data it collected, what data is supplied to them and how they can access the information that is not supplied to them
- Google has said that this goes beyond the current level of data sharing between Google and news publishers – but the ACCC said that these tech companies will not be required to share any additional user data with Australian news businesses unless it chose to
- However - the code requires digital platforms to tell a registered news business how it can gain access to data – so apparently companies like Google would not be required to share any additional user data with Australian news businesses unless it chooses to do so – but on the other side you have digital platforms saying that the legislation would in fact require them to do that – dare say it would be one of those situations where they technically might not have to – but it is in their best interest – like paying protection money to the mafia – but who knows – only the draft legislation is out at the moment and it is very opaque
- So if it is the case – and digital platforms are required to hand that user data over to news organisations – firstly - there's no way to know what controls they have in place nor how your data will be protected – and secondly - how it might be used by news businesses – as it is very valuable –
- This being said – don’t trust google or FB with that data either – as their major revenue streams do come from the data collection and sharing
- Either way - All of legislative changes gives legacy media an unfair advantage over everyone else who has a website, YouTube channel or small business
- Also allows the legacy media to make enormous and unreasonable demands on other companies that provide a competitive source of information – like independent news and individuals who provide this
- These large media businesses would be given information that would help them artificially inflate their ranking over everyone else – help to bury the competition and help to reclaim their monopoly position on providing information
- What I think brought this all about -
- This is only speculation – but Media large companies – they have massive costs – and not many people turn in – so can’t compete when compared to small independent channels –
- For instance – if I started only covering news topics – my only costs are hosting for the podcast – compared to the rent, salaries, ongoing bills of media companies – they wouldn’t be able to complete
- It isn’t like most news channels do investigative journalism these days – they write articles from their homes or offices – no different to myself
- So they want two thing –
- Get additional revenues from digital platforms to compensate them for their poor jobs of providing information to the public – beyond the same narrative that is on every channel
- Be able to get additional views by gaming the system – reducing the search functionality to independent media
- So these media companies lobbied the government – complained that they lost the narrative and wish for daddy government to solve the problem – and sent the right political donations to the right people
- Whilst at the corporate level, google, YT and FBs practices aren’t fair – quite unfair – they were already promoting late night talk shows over actual independent media – already had pay for plays
- This is a legislative way for legacy media to try and forced their own rise after their decline of the past decade
- The real consequences – Algorithmic curation as well as access to data – so the control of information and the monopoly held by legacy media Is trying to be legislated back into reality -
- Personally – I am only against this bill due to the unfair advantage it provides to the legacy media – it really shows their hand – If their sole responsibility was to provide news – information to you – would be happy that it is on youtube, FB, wherever – but remember that I have always had the view that their prime directive is for profit – hence the curation of news that they have – not to inform but to make profit – hence they have become a semi-factual outlet to drive views – that is all that they aim for – what can we tell people to get them to watch –
- Just like reality TV shows – you want sensation to get views – however Australia has proven to be the testing ground or a lot of legislation – wouldn’t be surprised if this same legislation is introduced in the US in the next few years –
- Also likely to expand on the EUs copyright directives that were passed in part last year
- This sets a dangerous precedent – and it is not the right legislation to reign in the large tech companies – simply transfers the balance of power between one large untruthful organisation – to a legacy company which has proved to be just as untrustworthy
- Just my two cents – do with it what you will – there are petitions – but given the current trend – may be too late to do anything as this is another rushed bit of legislation in the midst of a distracted news cycle – and regardless of public opinion – rarely gets paid attention to –
- Just bookmark or subscribe to your favourite independent media sources on youtube or google – and have to actively search.
- This is only speculation – but Media large companies – they have massive costs – and not many people turn in – so can’t compete when compared to small independent channels –
Hope you liked the episode.
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. I’ve seen news about the AUD being at a 15-month high
- Today – wanted to do an episode on exchange rates and look at some of the fundamental driving factors in the price movements – next week put this together and look at the current trend and factors behind it
- In the modern financial world – most exchanges are floating exchange rates (excluding some nations – like china that have a semi pegged currency to the USD – or others that just use it outright)
- What are floating exchange rates - A floating exchange rate refers to a currency where the price is determined by supply and demand factors relative to other currencies
- These are traded on foreign exchange markets – or called forex for short - allow for 24/7 trading in currency pairs – actually the world's largest and most liquid asset market
- But it is the largest traded market in the world – only a relatively small number of currency pairs are responsible for the majority of volume and activity – essentially 20 –
- As of 2019 numbers with countries ranked in volume – US no 1 with 44%, EU no 2 with 16%, Yen – 8.5%, Pound with 6.5%, AUD number 5 with 3.5% - top 5 close to 80%
- In this market - Currencies are traded against one another as pairs – for example – when people talk about the AUD being at its 15 month high - against what? Well the reserve currency -USD – but what about other currencies
- Can have the USD/EUR, YEN/Frank - each pair is typically quoted in what is called pips (percentage in points) out to four decimal places
- While AUS to USD has gone to its 15 month high - return over the past 12 months has been 6% - against other currencies we are at a lower point – example – compared to the pound – down by about 0.71% over 12 months – Euro – about the same – 0.12% up over 12 months
- What does this say? Is it that the AUD is becoming more in demand, or the USD less –
- That is where it gets more complicated – as the movement of these pares is relevant to the factors that affect the price of each currency
How are the prices of these cross pairs affected – supply and demand of each currency
- The AUD might have more supply, or less demand compared to the USD – so the cross-currency pair gets pushed down in price
- Or when the world demands more US dollars - the value of the dollar increases and when there are too many dollars circulating without the demand to soak it up - the price drops
- It sounds relatively simple -
But What affects supply and demand – A whole range of factors - Currency prices can fluctuate based on the economic situation of each individual country involved in the pair – including things like geopolitical risk and instability, trade & financial flows, among other factors –
These are some major indicators of the state of supply and demand that can be looked at -
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Balance of payments – flows of foreign exchange –
- The balance of payments is a country's record of currency transactions across national borders – essentially payment data that comes out on a monthly or quarterly basis by a country's central bank
- The data is customarily divided into two main components: the current account, and the capital and financial account
- Current account – The current account balance measures the commercial transactions of goods and services
- It also includes any net foreign investment earnings and net international transfers of cash
- It is a representation of a national foreign trade balance showing total imports and exports- which is the net exchange of cross-border services
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Can include any import/export market – goods purchased, travel & tourism, payments for international shipments and transportation
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in a general - the flow of foreign trade is considered a key component of the current account balance - a country that is importing more than it exports from month-to-month will have a widening deficit on their current account
- The trend toward a current account deficit is considered an indication that foreign money is flowing out of a country and that a currency will likely weaken over time
-
So if a country is a major importer from another nation – with everything else being equal (supply of money and no other trade partners) – then their currency will likely decline
-
Capital Account – which is the other major component of the balance of payments
- basically a register of investments flowing in and out of a country - include direct investments and portfolio investments
- Direct investments - investments made in physical capital – can be real estate and property – natural resources - production facilities like factories, and machines and equipment
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Portfolio investment - investment in financial assets - like shares and government or corporate debt
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falls into categories of short- and long-term investment – referred to as "hot-money"
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This can increase the volatility of a currency – especially liquid investments like shares – imagine if the majority of the balance of payments was in shares – then foreign investors dump these shares – that is a lot of AUD converted back to other currencies and the demand for AUD drops -
-
For both of these and why it affects demand – if you are going to be buying goods or services in AUD – you need to exchange your currency for AUD – similar to buying property or shares here – therefore you need to exchange your currency for AUD to make the purchase – which results in an increased demand for AUD
- Think about this in reverse – say you wanted to buy Apple or Amazon shares directly – you would need USD to buy these – so on an online exchange your AUD would be converted into USD – this would count towards the Capital account of the US
-
These are all mostly on the demand side – sentiment and the amount of demand of currency changing hands
-
Foreign reserves - balance of foreign money that has accumulated within a country because of goods and services transactions – is a good measure of if a countries currency is in demand or not
- If there is a large accumulated balance in foreign reserve - there is a positive sum of the current account and capital account balances
- These reserves can then be invested in bonds or other assets – such as with China – accumulated $3trn USD in reserves over the years – and turns around and uses this to buy US bonds –
- However – an accumulating reserve means you are normally receiving incoming foreign money – hence your currency will likely be on a strengthening trend – like china – but they can use this balance of reserves to defend against volatility and speculative attacks against their currencies by selling portions of the reserves – and help them to maintain their peg
- If there is a large accumulated balance in foreign reserve - there is a positive sum of the current account and capital account balances
Other major factors – these are more of economic indicators – which affect the demand and supply of a currency
- Inflation - is technically defined as an increase in the price of goods and services in an economy- however a high domestic inflation is generally considered to be a factor that prompts a weakening of currency over time against its peers - because of the economic principle of purchasing power parity is declining – so once you make for adjustments in an exchange rate – the real value of your currency relative to its international purchasing power of a currency is declining -
- Therefore - currencies in countries with higher than its peers inflation rates are considered to be good candidates to depreciate - Inflation in most developed economies that are considered "stable" is generally between 1 and 3% - however the exchange rates for currencies with much higher inflation will likely depreciate heavily
- Interest rates –this can be an indicator that influences currency trends –
- First – can affect the capital account – either increases or reduces the demand for investing in other nations capital markets -such as government and corporate debt securities – where the returns are determined by interest rates
- So if a central banks was to raise interest rates – they are likely going to be attracting incoming foreign money from investors who are seeking higher returns – this puts upwards pressure on the local currency
- The reverse is also true - when central banks lower interest rates, money may flow out of their economies and currencies may undergo weakening
- International fisher effect -
- Think about AUD to USD back between 2011 and 2013 – in 2011 was almost 5% - by 2013 – dropped to 3% - since then has kept declining – But in 2011 – to 2016 it was 0.25% in US – hence there was a higher demand for AUD
- Also – interest rate policy affects the supply of a currency – by the nature of central bank policies – OMO and even now QE – the amount of money introduced into the financial system and economy to keep rates low increases the supply of a currency – if it is tied up – not a problem – but if it is in either trade (current account) – or in investments (capital account) – and flows out of the country – can put a downwards pressure on the local currency
- Economic Activity - GDP Growth – the metrics that reflect an individual economy and the output – which is ultimately determined by the productivity of a country's private sector
- Looking at the GDP growth – can see an indicator of the level of economic activity in an economy – if the economy is growing – can attract investment and is a potential sign of currency strength
- But there isn’t much correlation here – can a weak currency can help to promote investment or exports as it is now cheaper -
This is just a few of the major factors – But when you add them all up – you can get an idea about likely trends –
- but there is no magic number working really forecasting a currency trend
- Can take the weight of all these factors together to show a path
- Hence why this data mentioned is constantly under review by analysts who trade these markets – and these large financial institutions do have the capacity to influence trends
- As they affect demand through buying or selling a particular currency
- Currency conditions and the demand/supply factors can change quickly – currency is very volatile – it is open 24/7 and the
- Other intangible factors – like currency wars – that is where this is outside of any pure economic indicator
Summary - There are a number of factors that go into analysis of the fundamental health of economies and the implications for currency movements – and in turn these can affect the exchange rates –
- Indicators like the balance of payments (capital and current accounts) and the level of foreign reserves a country has – including economic indicators like inflation, interest rates, GPD – all go towards affecting the exchange rate movements – but these are only at a cross currency level when looking at say the AUD to USD
Next episode on Monday – look at some numbers and factors that are in play with the AUD at the moment.
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact
Welcome to Finance and Fury, the Furious Friday edition.
This episode – will be looking at derivative disasters through in the history – looking at specific crashes of near financial disasters – that were contained
Specifically – Look at a few examples in Australia –ones that most people wouldn’t have heard about – been studying derivatives and the legislative side to them over the past few weeks – came across cases that I had never heard of – wanted to share this and help to demonstrate how these instruments when misused can create a fragile financial system
To start with - Financial derivatives are powerful instruments
- Mainly because of their capacity to operate with a high degree of leverage -Therefore a small change in underlying prices of the assets that they are written on can lead to dramatic profits – but also losses
- Due to counter party risks – i.e. the other person that you enter these contracts into with – ones gains can be another loss – and when the loss comes due – the counter party can come knocking – but this is a simple bilateral arrangement – gets more complicated when these are millions of contracts spread between just a few providers
- I’m sure that a lot of people listening would have heard of Warren opinion of financial derivatives – that they are financial weapons of mass destruction
- However – the irony is that in the BH annual report to shareholders the same year that this statement was uttered - the firm disclosed that they used derivatives to execute some investment strategies – these actions illustrate the usefulness of derivatives to hedging and arbitrage operations
- The spread of these instruments means that they will continue to be accepted and used both by financial experts and consumers – no getting rid of them
- Have been around for a while - Derivative history – first created in In September 1987 – there was a collapse in most major share indices
- Within hours of this crash, international emergency meetings had been convened by Alan Greenspan introducing a “solution” - The creation of a new instrument – this was called a “Creative financial instruments” but otherwise known as “derivatives” today - Came up with the derivative instruments as a concept and further increased the risk to the financial system
Looking at these Derivative disasters in context – what similar elements they have
- Important to run through – as before we discuss specific derivatives disasters – need to recognise that each of these issues in the context of a broader range of financial disasters do have similar elements
- No shortage in financial disasters – they have a long history – many different causes linked to a wide range of stemming issues – for instance - changes in financial climates – downfalls of empires – systemic banking crises fuelled by overleverage - as well as human error, negligence and fraud
- Now - derivatives do not the pure cause of financial disasters - but their characteristics of leverage and structural opaqueness in pricing, means that they add an element to a normal financial crash – in that they accelerate and eventuate the existing risks that are inherent in the fragility of any economy and financial markets
- That is the common element of derivatives disaster – they increase the risks of downturns happening and amplify the level of those downturns
- The profile of derivatives disasters cuts across all types of users, including banks, public companies and even government agencies
- Most of these stem from banking institutions - they are the champions (and sellers) of derivatives – and are therefore not immune to error - or negligence and fraud in selling and managing these derivative products –some of these downturns were purely due to one rouge trader – shows the power of these instruments when misused – however – things become far more risky when the whole industry is swept up in the perception of easy gains and everyone jumps on the same bandwagon – fuelled by competition and greed
- Disasters occur when there are failed attempts at the three major area that derivatives are used – Hedging, Arbitrage and Speculating – most obvious for risk taking
- The other common element of derivatives disasters – the Major issue that predicting financial downturns face is due to the range and breadth of these instruments – hence - disasters are not restricted to any one asset class or commodity
- there is a wide cross-section of asset class derivatives - including foreign exchange, interest rates, commodities, bonds, housing, mortgage and equity derivatives
- There are no cultural or geographical biases in derivatives disasters. They can combust anywhere and at any time when not treated with care
- This creates a stem of counter party risks – the spread of risks through the whole system
- Think about shares – bubbles are contained to shares – easier to spot – but the derivative markets are all encompassing on all assets
Looking at one of the first cases in history of derivatives loses –
- Occurred in Australia in 1987 - This comes from a company called AWA and their foreign exchange losses – not long after the invention of these instruments
- Backstory – in the early 1980s – Australia went through with the deregulation of the banking and financial system –
- Then – by December 1983 - the floating of the Australian dollar was introduced
- These two factors opened the door for an explosion in the use of speculation – specifically – the introduction of derivative products – originally these were used for risk management purposes
- However - the euphoria of these new entrants to the market created a situation where companies would speculate on their hedges for risk management purposes – ironically kind of defeated the purposes – but the financial industry’s exhilaration saw derivative use expand into what was referred to as out-and-out speculation – also called ‘hedgulation’ - the act of speculating with one’s hedges)
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One of the very first examples of this going wrong was with AWA Limited (AWA) - this is an Electronics company that began operations in Australia in 1913
- In March 1987 – hit the headlines as their financial results showed that a third of its earnings came from the foreign exchange spot and derivatives dealings
- Remember – this is an electronics business – But these profits came from their 24-year-old treasurer - named Andy Koval.
- Obviously - at the time Andy was seen a whiz-kid – a market genius – but this was short-lived
- Four months later - AWA determined that these forex earnings might have been overstated – as now the positions had gone bad and it was facing a $30 million loss – once the positions were closed up this was later revised to a $50 million loss
- Andy Koval was then dubbed a 'rogue trader’ – and the company dismissed him and all the layers of management above him but no directors were fired
- The case went to court with the damages suit filed by AWA against its auditor, Deloitte – this was also important as it became a landmark case, essentially a precedent for the differing duties of auditors, senior management and non-executive directors to prevent such debacles – even though in practice it did little
- In the court case –Justice Andrew Rogers found AWA had no internal controls over foreign exchange dealings and the books and records were as he quotes “a shambles”
- But AWA claimed that Deloitte as its external auditor - was responsible for $50 million in losses incurred by their treasurer – Andy Koval
- In March 1987 – hit the headlines as their financial results showed that a third of its earnings came from the foreign exchange spot and derivatives dealings
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The end result of the case was that the damages were reduced down to $6 million - where AWA's liability was at 33.33% ($2m) and Deloitte's was 66.66% ($4m)
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Concerning the use of derivatives in Australia, this was one of first high-profile cases dealing with mishandling of risk exposure hedging – but not the last
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This loss revealed some core components the issues with derivatives
- a lack of internal controls over delegation and competent management oversight – few people understand these instruments – and fewer still know how to manage them appropriately – and even those that do can lose big if the position turns against them
- excessive hedging of exposures – essentially the large leveraging potentials -with open hedges in this case equal to 400% of yearly US$ payables – or over 4 times the maximum that was needed
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that the accounting standards were insufficient to inform and protect investors – and nothing has really changed here – the reporting standards still tend to use value at risk (net positions) rather than the notional values – which are magnitudes higher
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Currency exposure management when using derivatives can be as risky as the underlying risks they are meant to handle – technically if done incorrectly, even more so
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But this loss of $50m seems miniscule compared to where the market would head over the next 20 years to 2007 – in todays value – around $126m – still a large loss for one company to make
- However – important to remember – this was simply off mishandling a currency hedge
The next financial mishap with derivatives was with National Australia Bank in 2003/04
- This came from option trading losses – again on currency positions – and similar to AWA – came from a ‘star’ trading team – they were generating large returns – so no need to look any closes – they were making profits on paper do don’t ask any questions on how
- However – they were in reality - concealing mounting losses on a short AU$–US$ option position
- They started in 2003 by entering false transactions into the bank trading system
- They used various methods that exploited operational and technological gaps in controls – falsifying records – turns out it was relatively easy to do -
- They would either incorrectly record genuine transactions or simply enter false transactions or use incorrect exchange rates.
- By the time this was discovered – they had accumulated losses at around AU$180 million the following year
- Now came the clean-up process – as you have to exist your positions – and to do so you need to sell them off to other financial intuitions (at a lower rate than what you purchased them for) or pay out the losses on the contracts
- By the time this was all said and done – there was a total loss of around AU$360 million
- Again - the use of foreign exchange derivatives took central stage in the scandal
- This however was purely due to operational risk - rather than being caused by an incidence of market collapse or a funding or credit risk – it was purely due to no real oversight on the trading team – hence a massive failure known as operational risk
- All of this showed that NAB had a massive lack of financial controls and had significant gaps in their procedures – with a failure to manager their systems to supervise FX teams –
- Not to just single out NAB – they simply had the last element of a lack of integrity in the people involved – could have happened at any bank or financial institution – it was just the people at NAB were the bad eggs
Summary -
- Each of these examples were relatively small in comparison – what they were trading on was the exchange rate – the movements – the underlying assets didn’t go to worthless –
- Also highlights the need for the managers of these companies to understand the intricacies of proprietary trading before it is undertaken
- I covered the concept of proprietary trading in an episode on this a few weeks ago – concept of a firm trading their own assets for profit – or in this case writing derivatives on them – was banned after GFC in US but was recently repealed – so game on again
- These two examples show that on a smaller scale – derivatives do have a practical use – however – as they are powerful instruments – their financial and operational risks are also potentially huge if mismanaged -
- most of the derivatives courses I did at uni were about hedging risks – what contracts that BHP should take with their Chinese supplies to offset any currency risks – do provide businesses with a hedging tool – but also allows speculation and greed to be implemented in a massive way
- now that some of the smaller cases are out of the way - Next week - examine some derivative disasters during and after and GFC – follow the story of a depressing repetition demonstrating an industry-wide amnesia about the risks of derivative use – but one that everyone should be aware of
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition.
This week’s question comes from Douglas:
“Long time listener of your Podcast and it has great insights and thought-provoking ideas.
Can you dive deeper in to who are the beneficiaries of the Future Fund from and what the unfunded superannuation liabilities means and list who besides politicians this fund does benefit?”
Douglas brought up a good point – that the commonwealth unfunded liabilities don’t just go towards politicians which was the main focus of the episode two weeks ago – has requested deeper dive into who gets paid from the Future Fund - Commonwealth Super Liabilities
Today’s episode – look at the Commonwealth unfunded liabilities – and the beneficiary funds
- Unfunded liabilities - Related to the gross debt that the Australian Government holds on behalf of unfunded superannuation liabilities –
- Essentially – how much money is owed but isn’t there ready to be made available for payment
- This comes form a special type of account called Defined Benefits
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To start with – you have the Funding types of superannuation accounts –
- Fully funded – what most people would be familiar with - a superannuation scheme in which the employer contribution to the fund (or the employees contribution) is the same as their entitlement –
- Essentially – what is being contributed into the fund is sufficient to ensure that the assets of the fund cover the actual value of what the members are entitled to – this type of account is typically referred to as an accumulation scheme – where you have contributions that are accruing values
- Unfunded — a superannuation scheme in which the employer makes no contribution to the fund – nothing is sitting there but yet people are entitled to an allocation of funds
- Occurs for government works or defence workers
- Funding is provided only as required for payments to retiring employees – this is how defined benefit schemes with the government operate
- Defined benefit schemes — a superannuation scheme in which the retirement benefit to employees is specifically defined – set based around a notional calculation – or formula –
- usually based on a formula in terms of years of service with the employer (or years of membership of the fund) and average salary level over the few years before retirement
- a defined benefit super scheme - meaning your Super benefit is defined in advance by a set formula. This formula is based on:
- Your contribution rate, Your final average salary (FAS), Your length of PSS membership
- Calculated on a notional formula – each year the balance is calculated to increase while you remain employed
- Technically - (for defined benefit schemes) can be fully funded – but I believe QSuper (which closed down their DB accounts to new members – and many Unisuper as well – are funded – or partially funded defined benefit schemes – as they have a duty of being fiscally responsible as trustees
- Many different types of defined benefit accounts that the tax payer was on the hook for with these unfunded liabilities – These are managed by the Commonwealth Superannuation Corporation (CSC) now – CSC was established on 1 July 2011 as trustee of government related superannuation entitles - Types of DB schemes – or unfunded liabilities
- the Public Sector Superannuation Scheme (PSS) and the Commonwealth Superannuation Scheme (CSS)
- However - the Commonwealth Superannuation Scheme and Public Sector Superannuation Scheme closed to new members in 1990 and 2005 respectively
- Then you have the Military Superannuation and Benefits Scheme (MSBS) - MilitarySuper closed to new ADF entrants on 30 June 2016
- Both have transferred to accumulation type accounts since then
- Beyond this - CSC administers five other ‘unfunded’ superannuation schemes:
- the Defence Forces Retirement Benefits Scheme (DFRB) - closed to new members on 30 September 1972
- the Defence Force Retirement and Death Benefits Scheme (DFRDB) - closed to new members on 30 September 1991
- the Public Sector Superannuation Scheme (PSS) and the Commonwealth Superannuation Scheme (CSS)
- Fully funded – what most people would be familiar with - a superannuation scheme in which the employer contribution to the fund (or the employees contribution) is the same as their entitlement –
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the Defence Force (Superannuation) (Productivity Benefit) Scheme (DFSPB),
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the 1922 Scheme – closed but replaced by CSS and PSS on 1 July 1976
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the Papua New Guinea Scheme (PNG) - closed public sector scheme with no contributing members
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Essentially – these have all been closed for a while - the number of members should fall over time – all closed and replaced with accumulation (or fully funded accounts)
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Over the past few decades – this unfunded liability has become one of the largest government debts held are the unfunded public-sector superannuation liabilities.
- All arising from legacy defined benefit superannuation funds where the government holds back on making contributions and only meets the liability when the benefits are paid. Effectively, the bill is passed onto future generations to be paid and future governments to deal with
- most of these funds were closed in the last 25 years (some quite recently) so the number of people with defined benefit entitlements reduces every year. However, the value of liabilities has continued to grow
What is the size of the bill?
- Even though these types of accounts have been largely closed to new entrants – the liabilities are growing –
- Rice Warner’s research shows that the total net value of current unfunded super liabilities was $143 billion at June 2015 - This is after allowing for the Future Fund’s assets of $117.2 billion, which cover about 70% of the Federal Government’s accrued defined benefit liability
- However – in 2020, the Commonwealth’s gross unfunded liability (excluding the Future Fund) is expected to reach expected to be $224 billion
- Again – this relates to defined benefits pensions accrued under historical superannuation schemes
- So the Future Fund assets will offset part of this unfunded liability - However, nominal superannuation interest reflects the imputed value of interest on the unfunded liability and this expense is increasing over time, by 16.9 per cent in real terms between 2018-19 and 2022-23 - reflecting the increasing trajectory of the unfunded superannuation liability – why the gov wants to let the Future fund sit there for some time
- A sharp drop in interest rates that has blown out the federal government's unfunded superannuation liability by $50 billion – creates a situation where the government will need to wait additional years – more than anticipated to spend returns from the Future Fund to cover these unfunded liabilities
- In the interim – while these liabilities continue to be unfunded - taxpayers (or Gov through issuing more debt) will have to finance the payment of superannuation lump sums and indexed pensions to retiring public-sector (including defence) employees
- Hence the need for the future fund – But thanks to the performance of the Future Fund has meant that the Commonwealth’s unfunded liability has remained relatively stable over the last few years
- However, the projected earnings of the Future Fund in this low-interest environment means that the Commonwealth’s net unfunded liability may keep growing
- Based in part on Federal Budget papers - the shortfall between the Commonwealth’s unfunded liability and the Future Fund’s projected earnings is projected rise unless the future fund earns a return of at least 4.8% p.a.
- Comes back to how these unfunded liabilities are valued - A simple definition of an unfunded liability is a debt that cannot be repaid with the assets and earnings of assets allocated to that debt
- Lower investment returns on the available assets mean that Australia’s unfunded superannuation debt will grow unless government contributions to the future fund are increased and/or investment returns are stronger than anticipated
- All defined benefit funds must be valued by an actuary – and by the formula we mentioned before –
- Anyone who got into them before they closed has a good deal
- The future liabilities must be discounted to present values using a discount rate – similar to equities for future cash flows
- Historically - the rate on ten-year government bonds has been used as the discount rate
- However, in this low interest era, this has led to a large increase in the liabilities due to the lowering of the discount rate – make the denominator (or the value below the line) smaller – the value of the calculation increases – estimates that the States defined-benefit funds shows that the discount rate is lowering – increasing the unfunded liabilities
- In addition - The liabilities also allow for a future rate of salary growth – part of the formula – so if public servants get pay rises larger than expected – AWOTE - the liabilities will also rise.
- As these DBs can pay indexed pensions to retiring public servants - The values of these will grow if longevity improves more rapidly than currently expected – for instance – people living longer than expected based around the ALE actuary tables
Essentially - The future fund was the solution to these liabilities coming due – additional response was to close down these types of accounts and to new entrants – go towards politicians, public servants (including defence workers) –
But again – the Future Fund is designed to fund the future of a select group of Australians
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury.
Today’s episode – how to build a framework for decision making – for investments or wealth building strategies
Not one set way to make a decision – everyone is different – everyone has different situations – people make decisions in different ways –
- Emotional decision making – some people just go with their gut –
- Logic/formula-based decision making – following a framework on what to do
- both have their pros and cons – the first one enables you to take actions quicker in some cases – very useful for decisions using heuristics -
- If we make too many decisions in a day – eventually get decision fatigue
- Which is the deteriorating quality of decisions made by an individual after a long session of decision making
- Not all decisions are made equal - what to have for dinner is different to decisions like which investment strategy to follow – or which investments are correct
- So when making smaller or non-important decisions – normally go with heuristics – not getting too bogged down in logic and researching every option can lead to information overload – and decision fatigue
- However – if you are making more important decisions – helps to have a framework –
- This is how I go about it – not one right way – but if you don’t have a framework – can use this as a base to build your own to help take actions and make decisions
First step – goals – knowing what you want to have is the first step in on how to make the decisions to get it
- Setting financial goals is important – have to know what you want to make a decision on it
- For finances – need to have what you want to achieve –
- Example – what passive income you want – when you want it by – why you want it –
- Or – buying your first home – how much you will need to spend based on where you want to live – allows you to narrow your decisions down and make one that will serve your interests
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In setting the goals –
- Have a workbook on the website in the free members section
- But you need to define your goals SMART
- S – specific – what, why, who
- M – measurable – how much
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A – achievable - needs to be realistic and attainable to be successful
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R – relevant – has to align to what you really want -
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T – Time – when you want it by and the timeline that you have
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Time is also important as it helps in deciding how much time to make available for the decision-making process
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Also allows you to help to consider other factors, like:
- How much time is available to spend on this decision?
- Is there a deadline for making a decision and what are the consequences of missing this deadline?
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Is there an advantage in making a quick decision?
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How important is it to make a decision? How important is it that the decision is right?
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Will spending more time improve the quality of the decision?
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All of these are important factors to consider for each goal – but important not to get too bogged down here as this stage can delay decision making – you might have 6 months to make a decision but why wait? Like procrastinating and doing an assignment last minute
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Time is also important in planning - when you want to achieve you goals by is almost as important as what you want – allows you to narrow down decisions
- Financial decisions differ in time horizons – likely to make decisions every day with finances
- Every purchase and transaction made is technically a financial decision – but longer timeframes do allows for some error in decisions
Second step – getting a list of your goals together – prioritise and decide who is responsible for making the decision
- If you are working as a family or couple – important to understand if it is a joint decision – or if one person is to take the lead
- This idea of responsibility allows for someone to take charge with the other steps -
- Responsibility for decision - Before proceeding any further you need to be clear who is going to take responsibility for it
- Also – need to decide on when the decision needs to be made for each goal here – based around priorities
- For some situations - sometimes a quick decision is more important than ‘the right’ decision, and that at other times, the reverse is true – actions are more important than theory or knowledge on a subject
- For what to have for dinner – or what clothes to wear that day – quick decisions are probably best – otherwise may go hungry or be late –
- For others – like setting an investment strategy – can be a very important decision –
- Another factor – there may be more than one goal that you have – with finite resources
- Setting a list with the top priority allows for one decision to be made over the other
- Better to make a decision on a relevant goal that you want to achieve now versus one that wont be achieved for 20+ years?
Third step – for each financial goal - get a list of possible options and relevant factors together
- I like lists – but they help me in making large decisions –
- In most cases – you will have more than one possibility – but there are almost endless possibilities at the same time
- Need to start to narrow these down – the first part of this is getting as many down on paper as possible
- Then the next part of this step is about narrowing down your potential options – important in decision making
- If you have a limited number of viable choices – easier to make a decision
- Need to know what is right to do to achieve your goals –
- Good news is that you don’t need to reinvent the wheel – many people have likely achieved what you wish to – so can get a list of options together
- Involves doing research – getting the relevant information
- There are plenty of resources available to gather information -
- However – if you cant find the information needed - it is more likely that a wrong decision might be made
- Also – if you spend too much time looking at irrelevant information - the decision will be difficult to make –
- Also – likely to become distracted by unnecessary factors and get bogged down with information overload
- Why refining the options allows for you to refine your research criteria
- Good news – once you narrow it down and have options – becomes easier to make the correct decision
- the amount of time spent on information-gathering has to be weighed against how much you are willing to risk making the wrong decision
- it may be appropriate for different people to research different aspects of the information required
- But if you can skip some research and do what others have successfully done - can help reduce the time and information overload potential to this step – but these strategies or investments need to be based on if it is relevant to your own situation
- No good using a warren buffet strategy for buying up whole companies if you don’t have the means to do so
- On the list of options – look at if these align with your investment values – and is realistic to your situation
- Everybody has their own unique set of values and go back and check if these options are plausible based on your financial situation –
- The decisions that you make will, ultimately, be based on your goals and what you want to achieve
Fourth step - Look at the pros and cons of each – and what the risks are
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It is possible to compare different solutions and options by considering the possible advantages and disadvantages of each.
- One key question is how much risk should be taken in making the decision? Generally, the amount of risk an individual is willing to take depends on:
- The seriousness of the consequences of taking the wrong decision
- The benefits of making the right decision
- One key question is how much risk should be taken in making the decision? Generally, the amount of risk an individual is willing to take depends on:
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Not only how bad the worst outcome might be, but also how likely that outcome is to happen
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Your timeframe
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This is why diversification with investment strategies or not taking on too much volatility or absolute risks is important
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One good way to do this is to use your list of goals and next to each option under the goals - weigh up the pros and cons (benefits and costs/risks) associated with each solution
- For example, start with cons – the risks and the costs to the strategy – looking for any downsides
- Then – look at the pros – if the strategy goes well – will it actually put you at achieving your goals
- Having listed the pros and cons makes it possible to decide which option is best
- Can score these on a points scale – putting a positive for a pro and negative for a con -
Last step – making the decision
- By this stage – you should have an idea about which decision for each goal is likely to be a winner
- You should have your goals written down – how much you will need, when you will need it by
- You should have the potential solutions narrowed down – with information gathered on these – who is responsible and the pros and cons of each
- However by this stage - if have a clear winner you might still feel uncomfortable - if so -it may be worthwhile to revisit the process
- For important decisions – keep a record of your decision-making process – helps in strengthening your understanding of how it works, which can make future decisions easier to manage.
- Once you have made the decision – if it is a long-term strategy – can become easier to make the same decision over and over – like setting up a monthly or regular investment strategy
- Small stuff – like saving money – becomes a habitual behaviour
- Larger stuff – buying an investment property – after the first time it would also become easier
- The last step is that once you have made a decision - don’t waste your time thinking about ‘what ifs’ – need to take actions –
- If something does go wrong along the way - need to revisit the decision – adjust and adapt –
- But important to make a decision, take action and then move on
Summary
- These steps are my decision-making techniques that you may like to use – no one right way to do things
- Steps were to set goals, prioritise and decide who is responsible, gather a list of options and research, do a pros and cons list – then decide
- However – regardless of your process – there is no substitute for good judgement and clear thinking – knowing what your options are and the pros and cons of each – and making sure that your options align with achieving your goals is the most crucial factor – no point spending time on this process if your options are never going to achieve your goals
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury.
Quick announcement – only episode this week – have my FASEA exam coming up so need to spend spare time studying for that – back to normal next week – sorry for any delays getting back to any of you
In this episode – I walk to talk about different forms of capital –
What is the first thing that you think of when you hear capital – outside of finance, might be capital letters or a capital city – but capital as an economic definition - consists of assets that can enhance one's power to perform economically useful work – and this can range from many different forms beyond the financial
- Going off of pure financial topic today – I find these topics incredibly interesting –
- Came across this concept of additional forms of capitals that builds upon Bill Mollison’s original conception - Bill was an Australian researcher, author, scientist, teacher and biologist – passed away a few years ago but his works were massive in developing and promoting the theory and practice of permaculture – which I have been studying for the past few months
- Permacultureis a set of design principles centred on whole systems – mainly focusing on simulating the patterns and resilient features observed in natural ecosystems - It uses these principles in a growing number of fields from regenerative agriculture, rewilding, and community resilience
- in Permaculture – there are many valuable assets to an ecosystem which categorized non-monetary forms of wealth by their potential – interesting on a conceptual level - but not easily applied to the real world as value and capital are fairly engrained into society to mean monetary wealth
- However – brings up a number of points on what isnon-monetary capital
- Example – might be a stone or an arrow is capital for a hunter-gatherer who can use it as a hunting instrument – or might be the knowledge to combing the two and know how to shoot the completed material
- Capital is anything that is useful that can be brought to society that is of some worth – doesn’t necessarily need to be have a monetised value
- Concept of give someone a fish, they are fed for a day – or you could sell someone fish or be the purchaser of the fish – go to Coles and buy 1kg of Barramundi for $32 -
- But granted for the resources around them - tech someone to fish – they are fed for a lifetime – but the need forms of capital to achieve this – the capital in the form of tools, capital in form of knowledge
By viewing the financial system through the lens of all forms of capital - there can be unique forms of currencies - Financial, material, living, social, intellectual and experiential
- Financial Capital - This is the one that we are all familiar with – one that I talk about most on this podcast –
- It is a core component of the modern financial system – so hard not to – it is the means by which pretty much all exchange goods and services occurs within society –
- If you need to buy anything – you use money as a medium of exchange to do so – the more money that you have at your disposal the more you can purchase
- When the world is viewed solely in financial capital terms – you have the pure materialistic – but it ignores all other forms of capital
- Not saying that it isn’t important – but if you could purely have money and nothing else – doesn’t put you in a well rounded position – so what other forms of capital are there
- It is a core component of the modern financial system – so hard not to – it is the means by which pretty much all exchange goods and services occurs within society –
- Material Capital - Beyond money, it is easy for us to conceptualize physical goods and objects that we own as being their own sort of capital
- When this is brought up – most people will think of materialistic concepts – like cars, possessions, etc.
- But the real concept of this goes far beyond – it can be extended to the raw materials extracted from the Earth and are developed into more complex forms such as houses, cars, consumer goods, etc.
- In a society where financial capital falls through – material capital becomes one of the more important factors – for instance bater economies – the stories of trading a wheelbarrow for bread in hyper inflated Germany
- In parts of the world right now – those that have fallen due to centralise power of governments with price controls – like Venezuela - have black markets of material capital for food and other resources
- Living (Natural) Capital - This form of capital is closely related to material capital - but involves both the living organisms upon which we depend and necessities of life which sustain us
- For example – things like plants, animals (foods), water – this form of capital comes back the abundance or quality of these resources that you have
- Here – Land, water and power is the best example – do you have the ability to produce something that can be traded for financial capital
- Are these things being provided by yourself or something else – where you exchange financial capital in return
- Also goes into food produce – especially land and water in combination – if you produce some of your own food or resources – can reduce the financial capital you need
- Social Capital – What is your friends and family network like?
- Specialisation of services is a key component of modern society –
- If you were to be viewed as having large social capital – or be wealthy in social capital - would be described as being well connected within social standings – where within your network of friends and family and neighbours – you have a strong support network –
- individuals in a community can help to provide support to one another
- people can trade in gifts and favours – IOUs with friends or family – where you help someone to move, then you should be able to ask them to help you move down the road in return – save on financial capital
- The more interpersonal connections are the currency of this form of capital -
- Intellectual Capital - This is the knowledge that you possess, acquire, and exchange with others
- In the education system – we are taught specialist knowledge - that intellectual capital is a factor for generating financial capital – if you have a specialist job – that is where this can be traded for many things
- Experiential Capital – this goes hand in hand with intellectual capital – it is the practical side to it –
- I can know in theory how to build a house – but the practical application to this comes with experience –
- Comes in the form of skilled trades – where individuals who have acquired experiential capital can become very valuable – especially if they choose to trade this in the form of financial capital –
- Lots of jobs have this component to them - this form of capital goes hand-in-hand with intellectual capital
- I know I learn best when theory is combined with practical
All of these are interrelated – and everyone has some value of each of these aspects – and without everyone having their primary form of capital – society wouldn’t function so well – need a good spread of it – like a good ecosystem for society to function well
- Example of these working together in society – I go to markets each Sunday – there I spend some money (financial capital) to buy food - exchanging financial capital for natural capital
- One of the stalls –become friendly with the guy who runs the stall (social capital) - has rhubarb – wife was talking to him about what to make out of it and started talking about jam and how to make it (intellectual capital) – now she knows how the make the jam and when she made it (experiential capital) – but he mentioned that he love that type of jam and said he would give us the rhubarb for free each week if we brough him back some jam every now and then
- So end result – win win – get free rhubarb to bring him some jam (material capital)
- This is how society functions – off the back of all forms of capital – however the driving factor is seen as financial capital –
- Makes us very reliant to this one form of the capital forms in the system
- But like investing in financial capital – have to invest in all forms of capital – learning, social, experiences
Why It Matters
- Humans are pretty complicated social animals – and having an understanding of all forms of capital reduces the reliance of money being the sole acceptable medium for exchanging value
- Financial independence – Someone might need $100,000 in income to be financially independent – or $10,000 if they produce all their own food, can trade their intellectual or experiential services in a bater economy and have a good social capital – there is no one right path to FI
- wealth can be measured as a form of total wealth – rather than just pure financial – it is just easier to count dollars than try to put a monetary value on your friends and family – probably should do
- Example – someone who lives completely off the grid – what do they care if the dollar collapses?
- I find this fascinating –think about if we were to experience an extinction event – where a solar flare knocks out all electricity overnight – in cities – means financial capital is gone, material may shut down as well – even natural is supply chains get massively disrupted - what cultures would survive – people living in the amazon –
- The more that you can build all forms of capital – the more resilient you will be – might sound weird for me to day – but the more you can strengthen the other forms of capital – the more you can minimize your reliance and need for financial capital – plus helps to build more well-rounded individuals and society
- Technically – someone might be below the poverty line but could be immensely wealthy in other forms of capital
- Having other forms of capital can help to reduce financial stress or worry about collapses within the financial system
- Also happiness - For instance – how do you monetize happiness – a lot of people try – ends up on the hedonic treadmill – but meets the phrase that money cant buy happiness –
- Money can provide security – but a greater purpose is needed – many studies and real world examples illustrate that once someone has enough annual income to meet all of their needs – additional income starts to not be factor in levels of happiness –
- Example – Someone earning $10,000 to $75,000 – someone on the $75k may be likelier to be happy – due to being less financially stressed – as essential things are covered
- But the difference in happiness that $75k to $750k p.a. yields is mixed – especially when it comes to the nature of getting the additional income -
- Yet – people remain unhappy in many jobs for the pursuit of money due to many outside factors
- What about a capital pursuit of happiness - What would that something else look like, and how would it function?
- Money can provide security – but a greater purpose is needed – many studies and real world examples illustrate that once someone has enough annual income to meet all of their needs – additional income starts to not be factor in levels of happiness –
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition.
Last week we went through the Fed Theory and disconnect theories. Today I want to look at an overlapping theory to this on what is happening in society as well. I just finished an interesting book called the fourth turning and I wanted to share some insights into this.
- So much of what is happening in the world is built around politics – politics and the economy – but it is nothing new - the economy is us and our interactions with one another in commerce – and is a complex system – but at the moment there is a lot of conflict – and the tendency to try and control a complex system
- Politics – whilst most people vote – especially in Australia where it is compulsory – we have little to no say in the policies being implemented –
- But even less so when it comes to Central banks and the monetary system – none of us get a say in how Monetary policy is conducted – get some say as far as voting for people who promise some fiscal policy – but when they are in anything goes
- However – the entire central banking community is a controlled financial system by bureaucrats who are unelected and unaccountable – when they make poor decisions – no consequences
- I would say that they have more power over our daily lives than politicians – they aim to control and direct individuals’ consumption and production behaviours – all done normally from meeting 11 times a year
- When you stop to think about it – this system doesn’t seem that natural – unlike a cycle of growing old
- Are things unravelling or just unfolding on a normal cycle? And how do central banks and Governments fit in?
Brings in the concept of the Fourth turning – by authors Strauss and Howe - Similar to K Wave theory – there are Cycles – and turnings within a cycle -
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each turning as lasting about 20–22 years – and four turnings make up a full cycle of about 80 to 90 years – essentially the average life expectancy
- Generational change drives the cycle of turnings and determines its periodicity – or the tendency for patterns to recur at intervals – so every 20 or so years you have one turning – like the four seasons – then like a year – you have a full cycles – but in this case every 80-90 years
- As each generation ages into the next life phase and with it comes a new social role that they fill –
- Go from children, to young adults, to mature adults, to retirees – within the economy and society each will likely serve different functions – even in planning that I do for clients – see different stages of life and individuals have different goals – buying first home to retiring and drawing upon accumulated assets
- With this - society's mood and behaviour fundamentally changes – which gives rise to a new turning and inevitably – a new cycle
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In this book – they point out that there has been symbiotic relationship between historical events and generational personas - Historical events shape generations in childhood or young adulthood - then, as parents and leaders in midlife and old age - these generations in turn affect history
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Different generations have different lives – have different lessons from different environments - But these differences follow patterns – different generations followed by other kinds of generations
- Each of which is Shaped by location and their time and place in history and what is happening around them – implies a pattern through history – Does play out in different forms in each turning – as the time and place in history has always looked different – the 30s looked different today from population size, technology and economic factors - but they have similar patterns – as these patterns date back to the 1500s – which looked vastly different to the 1900s where electricity – probably a bigger technology shift compared to the internet occurred – but the relative changes of the ups and downs within society and the economy – i.e. each turning follow similar patterns – then there tend to be regime changes for dominance – rise and collapse periods moving in 80-year cycles
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Each generational Mood is important – at one extreme is the Awakening and at the other is the Crisis
- The Awakening – this is compared to summer and Crisis compared to winter
- The other two turnings in between are transitional seasons – where you have the High and the Unravelling
- High is similar to spring and the unravelling is similar to autumn
- In this book they went through 26 theorized turnings over 7 cycles - from the year 1435 through today
- To go into further detail on each of these –
- High - the First Turning - occurs right after a Crisis
- During this period - Society is confident about where it wants to go – there is high confidence in the future and most people are on the same page – in the book - the most recent First Turning was the post–World War II around 1946 and ending around the early 1960’s -in the US coincided with the assassination of John F. Kennedy
- Awakening - Second Turning - era when institutions are attacked in the name of personal and spiritual autonomy – this is normally around the same time as when society is just reaching its high tide of public progress
- people suddenly tire of social discipline and want to recapture a sense of "self-awareness", "rise of activism"
- most recent Awakening was the “Consciousness Revolution,” which spanned from the campus and inner-city revolts of the mid-1960s to the tax revolts of the early 1980s – the Anti-war movements and the rise of the hippie/lsd culture
- Unravelling - Third Turning - mood of this era in many ways the opposite of a High: Institutions are weak and distrusted, while individualism is strong and flourishing - when society wants to come together and build and avoid the destruction of the previous crisis – this period comes after Awakenings as society wants to atomize and enjoy the continued high
- most recent Unravelling began in the 1980s and includes the Long Boom and Culture Wars – In Aus saw this back in 1996-2007 as a focal point – elements of the unravelling does still lap into the crisis period – such as the cancel culture now present
- Crisis - Fourth Turning - era of destruction - often involving war, revolution or a financial collapse
- institutional life is destroyed and rebuilt over time in response to a perceived threat to the nation's survival
- After the crisis, civic authority revives, cultural expression redirects towards community purpose, and people begin to locate themselves as members of a larger group
- High - the First Turning - occurs right after a Crisis
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Last Fourth Turning began with the Wall Street Crash of 1929 and climaxed with the end of World War II
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But at the core - At the heart of Strauss & Howe's ideas is a basic alternation between two different types of eras, Crises and Awakenings
- Have the Awakening and unravelling in-between – but through each cycle – there are defining eras in which people observe that historic events are radically altering their social environment
- Crises are periods marked by major secular upheaval, when society focuses on reorganizing the outer world of institutions and public behaviour – like today with the bottom up social enforcement we are seeing going on – where people at the bottom are begging for fines and prison sentences to be enforced on those not following the governments rules – where you have social conformity through social shame - they say the last Crisis period was spanning from the Great Depression and WW2 – saw similar events play out – thankfully not as extreme back then –
- However – with each turning and cycle - we are left with is greater institutional controls - During Crises, great peril provokes a societal consensus, where an ethic of individuality gets destroyed to confirm with the social norms and strong institutional order – what the Government says you will do – and then the people police themselves – bottom up – been seen through history many times
- Time is the differential as to why this isn’t an obvious point – if you take a year with seasons – we have all lives through a year worth of seasons – but doubt anyone listening to this would have lived through a full turning – why I like talking to grand parents –
- When you look at history – things rise and fall – but some things stay around – over the past number of turnings – what has stayed around and enshrined themselves have been central banks – used each turning to cement more control
- These entities Want of control cycles – shows a massive level of hubris – this is evident at the moment – The idea that Governments and Central banks can control cycles is emerging – even the utopian theories of MMT are coming into the main stream – however the more they squeeze the worst it can often make it – you cant fight the tide
- They are Trying to control a naturally occurring cycle that is build on the hopes and dreams of those in the business cycle and the economy
- The nature of hubris – means that your very overconfidence in doing an act will lead to something else going wrong – why I have the position that legislation that intends to do good ends up going bad – too many orders of effects
- 2008 may have been the start of the fourth turning – but it went largely unrecognised due to Central Banking and Governmental interventions –
- Between 2008 and now and when compared to the 1930s – seeing the emergence of similar scenarios – Fears of deflation – haven’t seen since the 30s – the emergence of new threats – such as competitive devaluation – beggar thy neighbour policies – destruction in global trade – rising gap between rich and poor and the fears of future living standards
- 2020 might be the year that the transition starts to become obvious - The combination of financial and economic crisis – the breaking up of civil society through the fragmentation of individual ideology – even a de facto major power play between the US and China
- This being said – we are the richest society ever known – even with a major collapse – still be the richest – even compared to 1930 standards – if The fourth turning started around the GFC – each lasts 20-30 years – so likely until 2030 that things are rocky for
- However - Central banks do extenuate cycles– inserting a body into the natural cycle to try and manage that to soften downturns – Started really involving themselves in the early 1900s - but we have been through many downturns since then – every time – even with intervention – through the overarching structure there was this idea cemented that this body is needed – even though they can’t prevent downturns – they have been there to try to soak up the mess – however given what they have done and the damage that they have created to the economy – they technically have forced their will on a world that wasn’t ready – happens in cycles – as the unravelling starts to occur – institutions want to gain more power and become more draconian
- We Never had a cleansing process after the GFC – or even now – what goes up must come down – and similar to seasons – downturns are actually needed - like winter – winters kills a lot of vegetation off so new things can grow and give the environment a break – just as forests need fires, rivers need floods – society and the economy needs events that clean out the debris – or sclerotic parts of the economy – those entities that no longer functions – a changing of the guard if you will from the old to the young – it is the price that must be paid for a new golden age – however – the political and monetary powers who are in current control are fighting against this – but it doesn’t mean that they will succeed in avoiding a downturn – it is the nature of hubris that they can delay but not avoid – as one so called solution can create 100 other potential problems –
- This being said – the 4th turnings are not meant to be apocalyptic – They shouldn’t be seen in this way – they are actually necessary – but the longer that they are delayed or artificially propped up – the worse the downfall is
- From a peak to bottom sense – there is naturally a bottom to a decline – but say markets dropped form 6,000 points to 4,000 points – large drop – but not as large as a drop from 8,000 to 4,000 – end up in the same place – but one was artificially created and hence the drop is larger
- But if you have all your wealth in the system you don’t want this to occur - Hence why markets are being propped up – the old guard (older generations) are in power are in investments like shares and property and don’t want it going down – politicians have investment properties – have large allocation to shares – have their own interests but have massive levels of pull to try to avoid downturns – they are on the shore lines with buckets trying to keep from the tide from going out
- All of the individual social events going on act as great distractions – cant beat the fact that society and Markets move in cycles – due to us being humans
- Markets are driven by humans – no humans, no markets – so markets can change in relation to society and humanity as well – as I said earlier – most people listening including myself would never have lived through a full turning
- You have New wave of investors coming into the market – changing how markets operate – you have central banks getting additional access and scope to markets – also changing how they operate
- A sign of this is when tracking this to the economy – take the confidence indicators – for individuals and business
- Take the confidence intervals today minus 6 months ago – If you think that today is better than the future – tends to indicate end of the cycle before another turning
- If you think that tomorrow will be better than today – the new cycle has generally started and things are likely to improve
- Important point to remember - Things will get better – in time – we are just in a cycle of time – I wouldn’t say that this is all perfectly predicted – but it is observations on what has happened through time – what must go up must come down, what is young must grow old – boiling water comes back to room temp when not heated - it is the nature of things
- Cycle of human nature – more confidence and more spending – more positive feedbacks –
- Use this as an opportunity – to Learn from it and grow from it
- However – remember the factor overarching cycles of institutional powers – the more power they have the longer they can delay the downturn of market cycles –
- But not forever – eventually society catches back up – so time will tell what the ultimate outcome will be
- The fed theory may prevail for the foreseeable future – or – something else in the turning to a new cycle may replace it – either way – we are still going to be one of the richest societies ever known – it is all about choices that you make –
- If you are reliant on the powers that be – may be a different story – but the more self sufficient that you become – the more you move above the cycle and out of it – next week ill talk about the 8 forms of capital to help expand on this concept
- Markets are driven by humans – no humans, no markets – so markets can change in relation to society and humanity as well – as I said earlier – most people listening including myself would never have lived through a full turning
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition.
This week the question comes from Justin.
“Hi Louis - I have been listening to your podcast for the last few months. I love all your work. I was just listening to Mondays episode of your review of the budget. And I had a question for you that maybe you could use on the podcast. The question is about the governments Future Fund and whether they could access this is a potential option as like a bail out for the current economic problems we are facing and into the future.
Seeing as some of the fund is for medical research they now need it seems. For emergency help with fire, floods and a health pandemic. Also considering in the whole fund there is $212 billion in the fund. I would love to hear your thoughts on this."
That’s from Justin – Brings up some great points – why wouldn’t the Government use the Future Fund to help boost the economy – one major reason for this – which we will run through today –
- Look at the future fund, what it is made up of, and what the true intention is -
What is the future fund –
The Future Fund – called Australia’s Sovereign Wealth Fund - is an independently managed sovereign wealth fund established in 2006
- The statement is that it is to strengthen the Australian Government's long-term financial position – this is what they say anyway – but will come back to this later –
- The board of the Future Fund also manages another five public asset funds, giving it responsibility for investing A$205 billion on behalf of the Australian Government
- As at 31 December 2019 – The Future Fund component was valued at A$163 billion – a large chunk of the $290bn added to the budget could have been funded by this
- Purpose – The legislation establishing the Future Fund describes its main object as being 'to strengthen the Commonwealth's long-term financial position'
- This is why I don’t like politician or legislative speak – most people would think that this statement means to help Australia – it is the Australian Sovereign Wealth Fund after all – but the commonwealth is not you or me – it is the Government – and those officials within it as we will see shortly -
- While legislation permits withdrawals from the fund from 1 July 2020, the government indicated in 2017 it intends to allow the fund to continue to accumulate until at least 2026/27 before making withdrawals. The Investment Mandate for the Future Fund is to target a benchmark return of at least the Consumer Price Index + 4 to 5 per cent per annum over the long term, while taking an acceptable but not excessive level of risk
History – In 2004 – it was announced at the time by Treasurer, Peter Costello
- It is an Interesting concept – Governments invest funds -
- economists questioned whether the government could save money this way and likened it to saving one's own IOUs.
- The Future Fund Act 2006(Cth) received Royal Assent on 23 March 2006 – received original capital
- A$18 billion, derived from government surpluses as well as income from the sale of a third of Telstra in its ongoing privatisation, was deposited into the fund.
- 2007, the government transferred the Commonwealth's remaining 17% stake in Telstra, valued at A$8.9 billion, into the Fund.
- These contributions and transfers increased the Fund to over A$50 billion by the end of the 2006-2007 financial year.
- 2007 - it was revealed that the Chicago-based Northern Trust Corporation had won the tender process to manage the Fund.
- Rick Waddell, President and Chief Operating Officer of Northern Trust, indicated that Australian companies did not have the expertise to manage the Future Fund
- Northern Trust stood to collect A$30 million in annual fees – but more now - Controversy arose when it was realised that the Fund will be managed by a foreign bank with no base in Australia.
- How is the money managed –
- Investment decisions - The Board of Guardians is responsible for deciding how to invest the assets of each fund, in line with the legislation and the investment mandates and independently of the Australian Government. The Board of Guardians receives recommendations and advice from the management team and reviews, approves and oversees the investment strategy.
- There are a range of factors that contribute to our investment strategies, including the investment mandates, the purpose of the funds and the level of risk -
- “Our investment approach is based on one investment team working together for the benefit of the portfolio as a whole. We call this our ‘one team, one portfolio’ strategy.”
- Have the normal players involved in managing the money – lots on the list – State Street, Macquarie, BlockRock, etc.
- Asset allocation –
So you have the Future Fund and then 5 other funds underneath this
- Originally it was just the future fund – but 5 additional funds now are managed by the board of the future fund – history:
- 2008 – it was announced that three new "Nation-Building Funds" would be created - also to be managed by the Future Fund Board.
- These included a $20 billion Building Australia Fund to invest in roads, rail, ports and broadband;
- $11 billion Education Investment Fund, which absorbed the $6 billion Higher Education Endowment Fund set up by the previous government;
- $10 billion Health and Hospital Fund. In that budget and the following 2009 federal budget, the Labor Rudd Government promised A$41 billion to create these new funds.
- 2013 - a DisabilityCare Australia Fund was established by the DisabilityCare Australia Fund Act 2013. The Fund will fund the National Disability Insurance Scheme and is also to be managed by the Future Fund Board. The Fund is to receive contributions from the increase in the medicare levy by 0.5% to a total of 2% from 1 July 2014.
- 2014 - announced its intention to establish the Medical Research Future Fund and the Asset Recycling Fund and to discontinue the Building Australia Fund, Education Investment Fund and Health and Hospitals Fund
- The Senate approved the establishment of the Medical Research Future Fund in August 2015, to be managed by the Future Fund, with interest generated going to medical research, beginning with $10 million in 2015, growing to $390m over the following three years
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A fair amount has changed over the years – but how it currently looks - six different public asset funds - where the Future Fund Board of Guardians is now investing over $212bn for the benefit of future generations of Australians – again – or so they say -
- You have the future fund itself – then The Future Fund Board is currently also responsible for five other Australian sovereign wealth funds
- Future Drought fund (was the Building Australia Fund) – which was an infrastructure fund to provide investment in infrastructure projects (including road, rail, ports and broadband) – created at 1 September using the $4bn that was in the Building Australia Fund
- Purpose - to support initiatives that enhance the drought resilience of Australian farms and communities
- The Future Drought Fund is in an initial transition phase while the Board develops a long-term investment strategy.
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From the conclusion of the transition period, the Investment Mandate for the Future Drought Fund requires the Board to target an average return, net of costs, of at least the Consumer Price Index plus 2.0% to 3.0% pa over the long term while taking an acceptable but not excessive level of risk.
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Emergency response Fund – Created in December 2019 with the $4bn of capital that was in the Education Investment Fund – this was a fund to provide capital investment in higher education and vocational education and training
- The government will issue the Board with the Emergency Response Fund’s investment mandate in due course. The Future Fund Board of Guardians will develop a long-term investment strategy for the Fund in line with its investment mandate – have to wait and see what they do now
- DisabilityCare Australia Fund – Stile around - A fund to contribute to the cost of the National Disability Insurance Scheme - valued at A$16.5 billion.
- Aboriginal and Torres Strait Islander Land and Sea Future Fund (ATSILS Fund) – A fund to enhance the Commonwealth's ability to make payments to the Indigenous Land and Sea Corporation. Established in February 2019 with a capital contribution of A$2 billion transferred from the Aboriginal and Torres Strait Islander Land Account.
- Medical Research Future Fund – A fund to disperse interest generated to medical research. At 31 December 2019, it was valued at $17.85 billion
- Paid out about $300m in grants to Unis and researchers – So for these funds they could pay some researchers I guess –
- Level of funds and Accessibility - could access this is a potential option as like a bail out for the current economic problems we are facing and into the future.?
- Technically Yes – as of 1 July 2020 – but Not the point of the fund – While legislation permits withdrawalsfrom the fund from 1 July 2020, the government indicated in 2017 it intends to allow the fund to continue to accumulate until at least 2026/27 before making withdrawals
- Back in March 2007 - the opposition Labor Party announced it would withdraw A$2.7 billion from the Future Fund to finance the NBN if it won the 2007 election - this proposal prompted government ministers to proclaim that Labor intended to "raid" the Future Fund for their own means – oh the irony in this statement -
- Labor later indicated that the use of any funds from the Future Fund towards a national high speed broadband network will have to comply and meet all requirements of any commercial investment.
- This included producing a commercial rate of return on the invested funds, with all profits being returned into the Future Fund allowing further investment.
- So the superficial reasoning – that withdrawing funds for bailing out the economy isn’t the intended purpose
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But there are 5 funds with pretty specific purposes – But the major fund – the Future Fund has a pretty vague purpose – to help the commonwealth – but as Justin said – using this to help the budget at the moment might provide justification –
- Apply this to your own personal situation – Have an investment account – the point of it is to grow over time and fund expenditure for specific things over time – like your retirement - In your own life – you might want to dip into it – but you normally cant – as it is meant to go to your retirement funds – right now if you are in financial stress – you might have dipped into your superannuation –
- But now – would you do this if it was to pay for someone else and their spending? This is where the future fund is relevant – Its true purpose is the funding of Commonwealth superannuation liabilities
- From the Future Funds Website – “The assets of the Future Fund are owned by the Australian Government and exist to make provision for unfunded Commonwealth superannuation liabilities. By helping to meet these liabilities, the Future Fund will ease pressure on the Commonwealth budget. These liabilities are currently being paid out of consolidated revenue.”
- They have guaranteed their own Defined benefit pension payments – From 2020 the Australian Government can commence withdrawing money from the Future Fund to meet its unfunded superannuation liabilities.
- For the government - But when you can just borrow to be seen as helping the economy – then not much public backlash – but if you borrow to fund your own retirement accounts – may have some PR problems
- Apply this to your own personal situation – Have an investment account – the point of it is to grow over time and fund expenditure for specific things over time – like your retirement - In your own life – you might want to dip into it – but you normally cant – as it is meant to go to your retirement funds – right now if you are in financial stress – you might have dipped into your superannuation –
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Funding of politicians superannuation and retirements from tax payers may put the public against them –But they can say that The future fund is helping Australians out and not be lying – just a very specific group of Australians who had their incomes guaranteed anyway
So in Summary -
- The use of the Future Fund needs to meet a specific purpose – and also needs to get a return - Government doesn’t get any returns from covid policies – They do have around $44bn of the total $210bn allocated towards certain projects
- The Medical research fund of around $18bn and its income can be used– grant money to medical companies and researchers – which I guess is helping –
- But the lion share – over $162bn is there to keep growing to help fund commonwealth government retirement accounts when the budget runs into a deficit
- Government can simply run a deficit in the budget to achieve the spending for the stimulus package and the public doesn’t care as much – and if this is for Australia – then it can be justified –
- But what may be on the nose in the future – especially if retirees funds get depleted by market shocks created by Government policies – so a safe guard for politicians as a Sovereign Wealth fund – but don’t expect it to help bail the economy out
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
https://www.health.gov.au/resources/publications/medical-research-future-fund-mrff-grant-recipients
https://www.futurefund.gov.au/investment/how-we-invest
Welcome to Finance and Fury.
This episode – want to continue looking at theory versus reality – Focus on the theory of Value versus Growth investing in an inflationary world – and which one does better
- Looked at if inflation will return – but if it does - maybe Value shares start to outperform growth shares again
Inflation is a major focus in the current economic world – especially since the 90s –
- Everyone pays attention to it - Investors, businesses and especially Central banks - continuously monitor and worry about the level of inflation
- Some just have to worry about it – whilst one tries to control it through interest rate policy
- Inflation—the rise in the price of goods and services—reduces the purchasing power each unit of currency can buy.
- Rising inflation has an insidious effect: input prices are higher, consumers can purchase fewer goods, revenues, and profits decline, and the economy slows for a time until a measure of economic equilibrium is reached
- This occurs when there is inflation without the economy booming
- Don’t like to generalize about inflation's impact on equities and markets - different groups of stocks seem to perform differently
- But Historically – some studies on data have shown in general - Value stocks perform better in high inflation periods and growth stocks perform better during low inflation – but these timeframes were over a decade period
- However - When inflation is on the upswing, income-oriented or high-dividend-paying stock prices generally decline – which seems counter intuitive – as these types of companies are a core component of value investing portfolios
- Overall – shares – both growth and value types do seem to be more volatile during highly inflationary periods.
- Investing for me is a long-term strategy – have to try and look at long term
- You have to be thinking into possibilities for the future – have to potentially plan for higher inflation at some point but there are likely some areas of the market that would benefit more from an inflationary spike than others.
- In a low rate, low inflation world, growth stocks tend to perform better while value stocks tend to do better when inflation is higher – what has been seen over the past decade or more now
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However – what does the theory say
- The general theory goes along the lines of the following - The same thing is true of promised future growth in revenue or profits for growth stocks. Value stocks likely already have cash flows now that will likely decrease into the future. Thus, higher interest rates should hurt value stocks less than growth stocks since the higher hurdle rate makes future growth not worth as much.
- This theory is thinking about growth stocks like they are a bond but based around the assumption that the reason inflation is such a big risk for bondholders is because the purchasing power of your fixed rate income payments is eroded over time by inflation.
- However – I think that there is a different explanation to this – interest rates and debt financing costs
- More so that the bond is worth less in real terms when it matures than the ongoing income –
- If there is inflation then the company should be able to sell its good at a greater rate –
- Original theory - The original Fama-French paper covered a period of very high inflation, the years 1963-1990, and consequently showed a robust value effect
- Fama and French were professors at the University of Chicago Booth School of Business – lots of works
- Towards the start of the 90s, interest rates and inflation commenced a long and powerful decline - continues to this day—just the sort of environment expected to favour growth stocks
- Back with the gold standard and there is zero inflation - growth and value stocks have equal returns
- Looking at the data – have a measurement of High Minus Low (HML) is a value premium - value stocks over growth stocks
- From back in the 30s – I/O - -2% and -4.5%
- 40s: 5% and 10%, 50s and 60s: 2% and 4%
- 70s – 7% and 10%, 80s: 5% and 6%, 90s and 2000 – 2.5% and 4-6%, 2010s – 2% and -4%
- Mapping this out - the slope of HmL on inflation is 1.1, so each one percent of inflation adds about one percent of HmL. Thus, if inflation stays at 2% to 3%, we can expect an HmL [value premium] of similar size. And not coincidentally, the HmL for the full 74 years from July 1926 to June 2000 was 3.36%, while inflation was 3.12%
- But the most recent decades have been mixed – since the 90s – with inflation same rate as the 50s and 60s – underperformed by 10% -
- Looking at how this works - the data that the HmL uses is dependent on the absolute level of inflation – not its rate of change
- in an efficient market – should a high (or low) rate of inflation produce high (or low) HmL?
- Based around the theory – it can be assumed that a static high or low inflation rate would be discounted into prices
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Going back to the theory – at the heart of the value premium – if markets were efficient and always followed theory - any premium can only be compensation for some sort of risk
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But as we know - markets are not always efficient - investors overestimate earnings increases for growth stocks and do over price them and can under-price value shares
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You can see from the chart that the middle ground of 2-4% inflation has lead to mixed results in the value vs. growth leadership so this relationship isn’t foolproof. But inflation isn’t the only factor necessary for value to outperform
- The theory of this - As long as there is fiat currency, it is expected that there will be inflation; in the long-run, the value premium seems assured – so there should be out performance of value shares with inflation
These theories aren’t all-encompassing to explain what’s going on in the markets because you can never narrow these things down to a single variable - There are simply too many moving parts when it comes to reasons markets do what they do.
But I find it helpful to keep an open mind when it comes to market moves that sometimes make no sense. Markets don’t always have to make sense
And when looking at smaller or different timeframes – is there more to the story
Based around some of the data backing this – so you might think that at higher or lower levels of inflation can mean that value investing underperforms growth investing in periods of low/negative inflation and that value outperforms in periods of high inflation – just not between the 2-4% band
- Looking at cycles of value vs. growth outperformance - is it inflation that causes this or something else...?
- Going back to the data first - limited number of data points when using the decade-long timeframes that have been used -
- Also the context of “normal inflation” between 2% and 4 has been a wide range of outcomes with regard to value vs. growth investments
- But looking at shorter periods of time – have many more data points
- So this brings up a question of does the relationship between inflation and value investing change as the time horizon grows from a short period (1 year) to a long period (10 years)?
- From these results - there is no relationship between inflation and value outperformance at the 1 year timeframe – then there is a relationship that has a correlation of 0.7 – a number that is considered a moderate but not strong correlation
- can you use the correlation that emerges over longer time horizons to make good investment decisions?
- So - if inflation is high (low) for some reasonable period of time, can we use that information to say that it is likely to be a good (bad) time to invest in value stocks going forward?
- Looking at the lagged correlation between inflation and value for increasing time horizons – see a different picture
- Some people have done more studies on this - split the last 90 years into sequential two-year periods - for 4-, 6-, 8-, and 10-year periods- then calculate the correlation between the inflation in the first half of each period and value’s performance in the second half of each period.
- when we look at the data in this way, there is no correlation between current period inflation and how value performs in the subsequent period
- Another time period – taking this with a the lagged relationship for nine 10-year periods from 1926 to 2015 – similar result
- My View - the primary driver of why value investing works over some time periods and not others is not the level inflation - markets are made up of investors – which are human -people search for a signal in the noise that surrounds the stock market
- Mistakes can be made – such as attribute too much meaning and overreact to information that proves to have little to do with the long-term value of their investments
- I like value investing – paying decent to undervalued prices for a good company – but in times where fundamentals matter little and there is a frenzy of purchasing shares regardless of prices – value can underperform – as was seen in the 90s before the dotcom bubble burst – or in the 2000s before the crash of 2008/2009
- Markets do always have responses to external developments - causes prices to fluctuate widely around companies’ fundamental values and presents opportunities to buy good companies at favourable prices
- But over the past 30 years - investors can become both excessively optimistic and pessimistic at similar levels of inflation due to external factors at play
- These theories aren’t all-encompassing to explain what’s going on in the markets because you can never narrow these things down to a single variable - There are simply too many moving parts when it comes to reasons markets do what they do - Good to have both growth and value – diversification
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition.
Today – want to look at market theory versus reality – because a lot of market theory doesn’t hold up – so are the markets truly changing? Is this just a short term divergence prior to markets going back to match traditional investment theory?
- Or are markets transitioning to an entirely new systemic paradigm – If so - Metrics of the past will not be able to predict how markets behave according to expectations
- In this episode – have a look at some theories of market changing – later in probably another episode - want to focus on something else I haven’t covered – Want to look at an alternative view – such as looking at social dynamics shifting in society –
- Summary Strauss–Howe generational theory – similar to the K Wave theory – but apply this to markets next episode
To start – let’s look at Theories versus reality – essentially, what should happen versus what is happening
- Most existing theories of economics and the financial system cannot match successfully with current conditions –
- Technically – in the short term they haven’t be able to for a while – but over the long term they could at least have some validity to them
- Buying companies undervalued and holding them long term – Value investing used to do well – was the bedrock of a lot of investment strategies – however now it has been significantly underperforming
- The strategy of following metrics and long-term data on corporate earnings, Treasury yields versus dividend yield strongly suggest a fundamental break with the past is in progress
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Current theories – on PE, things like CAPM – don’t hold up –
- "Fundamentalist Theory" – based around that the action in the Financial System’s and markets is reflected by something fundamental
- That "something" is defined by an economic performance or metrics
- e. there is low interest rate – there should be higher inflation and be seeing real GDP growth and lowering employment
- "Fundamentalist Theory" – based around that the action in the Financial System’s and markets is reflected by something fundamental
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corporate profits are low and P/E ratios are high – so the markets shouldn’t be charging ahead
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The market should be lower based around fundamentals – but they aren’t – so what are some theories on why this is
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If markets are changing - past economic and financial system models, analytical tools and metrics will have to be entirely reconsidered and reconstructed
- That is the issue with a lot of the theory – for instance what I learn at Uni – gets adopted decades after the real-world changes occur
- How theories based on evidence work – need to have the evidence there to have it be applicable to a scenario – so theories are lagging – which can be an issue
- Following most economic or finance theory from today was based around fundamentals in the 80s or before –
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Over the past few months – all of the market and economic events associated with the COVID-19
- analysts have struggled to match the action in the Economy with that of the Financial System
- Existing disparities have been amplified through maldistribution in the financial system - dramatically exacerbated the financial indices but at the same time – increased disparities in the population around the world
- Those invested have high net wealth while those that weren’t haven’t seen this rise
- In no quarter is there found any real explanation for the utter failure of all existent theories to anticipate or explain our current experience.
- I’ll admit that I am annoyed by this – what should be happening in markets isn’t – makes it hard to predict anything – especially when market performance is being buoyed by Central banks as the last line of resort – creates an insider’s club
- As the general public – we are the last to know and insiders in the market have already had a chance to react –
- Look at the group of 30, or the club of Rome – where key central banking figures sit at the same table as the heads of the largest investment banks in the world as well as politicians
- They have private meetings – would have to be naive to believe that something every now and then doesn’t get mentioned as to what policy will be taken
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Its not like there people are friends beforehand – they are selected for these groups based around what they bring to the table
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At the moment – there seems like there is a Secular or Systemic Shift occurring – and if so - this creates a situation where prior investment theory can become obsolete – as the inputs that drive markets change – still based around supply and demand – but the factors that affect both change - implications would be so far-reaching and so all-encompassing for the share market
- But this isn’t the first time this has occurred – theories do change rather often due to the inputs to the financial system altering
- that it is probably similar to the shift occasioned by the Age of Enlightenment, the Scientific Revolution, the American Revolution and (later) the Industrial Revolution – markets were different – inputs were different – things evolve – cover more on this next FF ep
- Interesting thing at the moment - irrespective of viewpoint on economics – left versus right – each in their market analysts and what theories say should occur doesn’t hold true – both schools are trying to figure out why the emergent reality does not conform to their models
- Theories change - Let’s examine the current existing views on the mismatch between the economic crisis and the action in the financial system – go through two
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The Disconnect Theory – works based on the Austrian economic view point that has been around since Nixon first disconnected the dollar from the gold standard
- basically states that action in the Financial System is so far out of sync with the metrics of what are generally perceived to be “The Fundamentals” of the economy – that eventually a disparity will have to collapse in on itself
- Essentially markets aren’t tethered to any fundamentals anymore as there is nothing real in fundamental terms tying markets to them
- Imagine that somehow you could change gravity – normally if you jump from a 20 story building – you can guess what the outcome would be based around the reality – but now assume that you can control your mass and gravitational field where you can float – the assumed result is not the actual outcome
- When money is almost free and can be created out of thin air with no immediate consequences – you are floating and the outcome isn’t what is normally predictable or observable in reality – the reality that economic theory predicts anyway
- If money is backed by something – such as gold or if you have a limited demand for your money – you have a problem by flooding the market –
- But that is not what the Fed faces – a lot of Central banks also don’t face this – as through swaps the Fed can create demand for other currencies – like the AUD
- Therefore – under current conditions you can flood the market to create a new reality and makes a situation where theories no longer fit in
- The “Fed Theory” is an extension of the neo-Keynesian POV in “Don’t Fight the Fed” – this theory abandons any pretence of analysis and advocates to ignore the real world-view – where you don’t bother to make any sense of it at all…cuz Fed is the driving factor – whilst lobotomized in a way and requires no though process to invest – there is evidence that this is what is occurring in markets
- The fed has made a pledge to support markets and to provide low interest rates – which helps to fuel low borrowing costs for large companies indebted – and to boost the valuations of these companies
- Regardless of their promises to keep interest rates low – they may be preparing to pull the plug on the markets without notice – can be done quietly and with little notice to the average person - the Fed balance sheet has begun shrinking over the past month -
- Fed balance sheet peaked in June 2020 - It is not coincidence that the S&P 500 peaked around that date.
- Much of the prior contractions were due to the Fed reducing its currency swaps or lowering their balance sheet
- However – over the past few weeks the Fed actually drained liquidity from the system – but this is a fraction
- $4.17 trillion in Feb to $7.17 trillion by June – $3 Trillion in almost as many month – Now in July - $6.95 trillion– withdrawal of around $200 billion over the past month – market may depend then on which direction this continues on –
- Put this into perspective – back in June 2008 - $895 billion – increase by just under 8 times in size over 12 years – annualised growth rate of around 18% p.a. – and that money has to go somewhere –
- Back in Feb – balance of $4.17 trillion – from 2008 to 2020 – saw a growth in monetary base by around 13.6% p.a. – very close to the US share index growth over that time – then the index is dropping by 40% -
- To get the index back up after a 40% loss – need 67% increased return – from March to May – bottom to top – any guess what the balance sheet by the fed increased by? 69%
- Where has a lot of this money been going? - The Federal Reserve established the Secondary Market Corporate Credit Facility (SMCCF) on March 23, 2020 – Talked about this – this is the SPVs created with the Treasury to support credit to companies by providing liquidity to the market for outstanding corporate bonds.
- The SMCCF purchase corporate bonds in the secondary market – already issues – need to be by investment grade U.S. companies or certain U.S. companies that were investment grade as of March 22, 2020 – so large companies
- Also = purchasing U.S.-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for U.S. corporate bonds. The SMCCF's purchases of corporate bonds will create a portfolio that tracks a broad, diversified market index of U.S. corporate bonds. The Treasury, using funds appropriated to the ESF through the CARES Act, will make an equity investment in an SPV established by the Federal Reserve for the SMCCF and the Primary Market Corporate Credit Facility.
- $4.17 trillion in Feb to $7.17 trillion by June – $3 Trillion in almost as many month – Now in July - $6.95 trillion– withdrawal of around $200 billion over the past month – market may depend then on which direction this continues on –
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Since the SMCCF’s launch - the market has regained the lost value –the purchases have slowed in the pace though - purchases from about $300 million per day to a bit under $200 million a day
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Catch 22 – as if market conditions continue to improve - the Fed purchases could slow further, potentially reaching very low levels or stopping entirely – but this could create a situation where markets then drop massively as the safety net is gone –
- If the decline in the US balance sheet continues - This is a dig downside for stocks – depends on by how much is pulled form markets
- Also - the head of the NY Fed’s Markets Group - man who in charge of doing the actual buying involved in the Fed’s QE programs - made a speech said that they would consider reducing its QE programs soon if market conditions improve
- So the Fed is literally warning us that if the markets continue to rally, the Fed is going to “pull the plug” on QE and support – but at the same time they may be ready to jump back in – just after another 30% decline
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Given all of this and how markets are now responding to the Fed – it seems like fundamental theory has been put on pause – would come back if fed stops interventions – but too early to tell if they will – unlikely
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Self interest will rule the day – people within the Central banking community have collectively billions invested in markets – so they will keep the values high – until they don’t
- Next week – Look at the systemic shifts – based around societal theories – look at if the current period is a transition to a fundamentally new underlying economics – look at the Strauss/Howe "Fourth Turning" generational shift perspective
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition.
This week’s question is from Scott:
“Hi Louis,
I am currently in my 30s and have recently bought my first home. I would like to get your view if I should take advantage of low interest rates and start to put additional funds into my mortgage or if I should be thinking long term and investing instead. My mortgage is around $580,000 and I would like try to get this paid off as soon as possible but at the same time, know that investing could put me in a better position. Would love to get your thoughts on this.”
Great question - Invest or pay off debts –
This episode is general in nature - This isn’t personal advice – look at the pros and cons of paying off debt versus investing – look at the opportunity cost of each situation
- What is the right thing to do? Depends on your goals and financial position – one strategy isn’t right for everyone
- Someone in their 20s – may be better to invest – have long timeframe for funds to grow -
- Someone in their 50s – may be better to pay debt
- First step is to look at your overall levels of debt –
- Not talking investment debt here – but bad debts – the non-deductible debt – costs cashflow and has a negative compounding return from the interest
- Also depends on how much debt you have and your LVR – if you have no savings – better to save a little before investing
- Example – if you have bought your PPR for $600k – but have $550k of mortgage on this – might be worthwhile to focus on debt repayment for a little while –
- Put yourself back into an 80% LVR – protect from the bank coming for your house if values went through a massive decline
- Also – have the potential to refinance for a better rate – sometimes banks can give you a worse rate if you are seen as too much risk
- Say you are on a decent interest rate and have an LVR of below 80% - what is best to do
Concept of hurdle rate – this changes over time – based around interest rate movements versus long term return potentials
- Question - What is the minimum benchmark for opportunity costs?
- You want your money to work for you – so need to price it into the equation –
- Little point saving at the moment beyond having enough in emergency funds
- So what is your opportunity cost for your money? Say it is 5% p.a. – then mortgage repayment at the moment is below this level
- Interest costs versus return potentials
- Interest costs are to your income only – Debt levels don’t grow
- Investment returns also change – have an income level but also growth –
- Have to take into account the potential for inflation –
- Inflation is your friend if you have debt
- Inflation is not your friend if you have cash savings or an investment
- Both situations eats away the real returns
- Current situation – Low interest rates, low inflation, uncertainty in the markets –
- But any strategy is long term – but has to adjust over time –
- The long term outcomes focus here – given in your 30s – long term game – mortgage has a 30 year timeframe
Looking at the options -
- Investing – two options here - Personal or super through salary sacrifice
- Personal investing – would need to select funds that can be invested on a monthly basis
- Or alternatively – save up lump sums against your mortgage in an offset account and then invest once you reach a level
- Salary Sacrifice – put funds into super pre-tax – would gross up the level overall - depends on your own personal income
- Or if you are in a low income bracket – or a partner or spouse is – below the $38k p.a. level – can place in funds to super as a non-concessional - $1k gets the $500 bonus
- But super would only be an option if you are either getting closer to retirement or don’t mind going without the funds until preservation age – so would by 20+ years
- Extra Mortgage repayments – Offset accounts versus paying down the mortgage
- Lets say that you have an interest rate of 3.5% p.a. on the $580,000 – total repayments of $2,608 p.m.
- Interest costs of repayments would be $1,692 p.m. – total interest cost of $356,600 over 30 years
- Personal investing – would need to select funds that can be invested on a monthly basis
Examples – Say you have spare cashflow of $2k p.m. = $24k p.a.
- Mortgage repayment – put $2k p.m. onto the loan – reduce your mortgage down to about 13.5 years from 30 year period - you would save $212,805 in interest
- Investing in a fund – gets 8% p.a. on average – put in $2k p.m. – same time period of 13.5 years (162 months)
- Total investment value is $584,112 - however similar to the mortgage you have contributed funds –
- Contributed funds is $324,000 - The growth in assets is $260,112
- So the difference – interest saved versus the growth of the investments
- Interest of $212,805 versus growth of $260,112 = $47,307 in additional value
But what happens after this?
- 14 years’ time – you have a mortgage paid off – or around $400,000 left on the mortgage if you keep making the minimum repayments
- Now you have another choice – keep investing or make additional debt repayments
- Say from the 14 year mark – if you have your mortgage paid off – you can put $4,608 into an investment now that your mortgages are paid off – or the other scenario – you don’t have the mortgage paid off – keep making the $2k p.m.
- Investing in 14 years at greater level = $1,897,510 in 30 years
- Taking into account the interest saved of $212,805 – total value is $2,110,315
- Or keep on the original path by making $2k p.m. = $3m invested
- So almost a $900k difference over 30 years
- Investing in 14 years at greater level = $1,897,510 in 30 years
- Present value of situation – assuming inflation of 2.5%
- Repaying mortgage then investing = $897k
- Investing along the way = $1.42m
- Passive income point of view – assuming a 5% income yield off the investments
- Income of $150k versus $95k – both scenarios the mortgage is paid off and one has a higher income –
- Assuming no super here – which would boost the income on top of this
- Over 30% more income personally
So what is best? Based around the numbers – investing
- As long as you have enough in the offset or LVR is low enough – investing
- A lot of it comes down to individual situation and preferences
- If you have 30 years and time on your side – helps to get the most into investments now to grow over time
Hypothetical – say interest rates kick back in – goes up to 5% - obviously interest payments would go up
- Interest costs would go to $540k for the life of the loan – up from $356,600 – so making additional repayments – would save $332k as opposed to $212k
- Say interest rates go further – The break even for hurdle rate would be around the 7% to 8% p.a. mark -
Shouldn’t be set in stone – have to be flexible to the world around us – but at this stage – monthly investing based around some illustration examples would provide a better long-term outcome
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury
Budget came out last week – this episode – go through the fiscal overview and the policy measures in it
Fiscal overview – provided updates on the government budget position and economic updates
- Government – added $289 billion in fiscal spending and balance sheet measures - equivalent to around 14.6 per cent of 2019‑20 GDP
- At the same time - estimated large declines in taxation receipts has seen a major deterioration in the budget position, with estimated deficits of $85.8 billion in 2019‑20 and $184.5 billion in 2020‑21 – so the annual position is a loss
- Gross debt was $684.3 billion (34.4 per cent of GDP) at 30 June 2020 and is expected to be $851.9 billion (45.0 per cent of GDP) at 30 June 2021. Net debt is expected to be $488.2 billion (24.6 per cent of GDP) at 30 June 2020 and increase to $677.1 billion (35.7 per cent of GDP) at 30 June 2021 – gross going up by 24% and net debt going up by 39%
- Real GDP is forecast to have experienced its sharpest fall on record in the June quarter - expected to pick up in the September quarter and beyond, with the easing of restrictions in most parts of the country. Real GDP is forecast to fall by 0.25% in 2019‑20 and by 2.5% in 2020-21. In calendar-year terms, real GDP is forecast to fall by 3.75% in 2020, before increasing by 2½ per cent in 2021. The economy is forecast to recover faster than in past recessions due to the unwinding of restrictions, but it will be a long road back. The unemployment rate will remain elevated for some time.
The economic and fiscal outlook remains highly uncertain. The Government will provide forecasts and projections over the forward estimates period and medium term in the 2020‑21 Budget, to be delivered on 6 October 2020.
Table 1.2: Major economic parameters(a)
| Outcome | Forecasts | | 2018‑19 | 2019‑20 | 2020‑21 | | Real GDP | 2.0 | ‑ 1/4 | ‑2 1/2 | | Employment(b) | 2.5 | ‑4.4 | 1 | | Unemployment rate(b) | 5.2 | 7.0 | 8 3/4 | | Consumer price index | 1.6 | ‑ 1/4 | 1 1/4 | | Wage price index | 2.3 | 1 3/4 | 1 1/4 | | Nominal GDP | 5.3 | 2 | ‑4 3/4 |
Key policy measures – This is a delayed budget – not like a normal budget - A lot of it is specific to Covid – like health and stimulus to sectors of the economy
- Health – major focus - committed $9.4 billion for the health response - large‑scale purchases of Personal Protective Equipment (PPE), boosting Australia’s testing capacity and ensuring access to essential health services through expanded telehealth.
- also investing in finding a vaccine and treatments for COVID‑19, as well as better preparing for future pandemics.
- The Government has boosted Australia’s testing capacity to meet the challenge of the COVID‑19 pandemic, including by establishing dedicated Medicare‑funded pathology tests and dedicated respiratory clinics, with coverage of 97 per cent of the population. The Government is also providing $3.7 billion to build our hospital system capacity
- Government has enabled whole‑of‑population Medicare subsidised telehealth for medical, nursing and mental health services
- The Government is working with Community Pharmacy and the medicines supply chain to ensure ongoing access to essential medicines to ensure that Australians in home isolation can continue to access the medicines they rely on
- In addition to the National Partnership Agreement on COVID‑19, the Government is investing $131.4 billion in Commonwealth funding for Australia’s public hospitals, an increase of 30 per cent over the previous five years, through the 2020‑25 National Health Reform Agreement.
Reopening recovery
- JobKeeper payments – the payments to businesses significantly impacted by government restrictions to cover the costs of their employees’ wages
- over 960,000 organisations and over 3.5 million individuals covered - at 16 July, payments have totalled $30.6 billion over the six JobKeeper Payment fortnights to 21 June
- the Government announced the JobKeeper Payment will be extended to 28 March 2021 - Payment targeted to those businesses that continue to be most significantly affected by the economic downturn
- level of the JobKeeper Payment will be tapered in the December 2020 and March 2021 quarters to enable businesses to transition towards their long‑term recovery
- A two‑tiered payment will also be introduced from 28 September - better match the Payment with the incomes of employees before the onset of COVID‑19
- It is estimated that the total cost of the JobKeeper Payment will now be $85.7 billion over 2019‑20 and 2020‑21
- The review also found that the JobKeeper Payment has a number of features that may create some disincentives — for example, dampening incentives for some employees to work and for some businesses to consider their long‑term viability. While these are unlikely to be significant in the short term, the review considered that they are likely to become more pronounced the longer the program runs.
- Support for individuals and households –
- income support payments - $16.8 billion over five years from 2019‑20
- Coronavirus Supplement is $550 per fortnight from 27 April 2020 until 24 September 2020. From 25 September 2020 to 31 December 2020, the Supplement will be $250 per fortnight to reflect the gradually improving economic and labour market conditions. In addition, the personal income test for JobSeeker Payment and Youth Allowance (Other) will increase to a $300 per fortnight income free area and a 60 cent taper for income above the free area
- Government has provided $9.4 billion for two separate $750 Economic Support Payments to social security, veteran and other income support recipients and eligible concession card holders. The first payment, made from 31 March 2020, provided $5.6 billion to over 7 million Australians - second payment commenced on 13 July 2020 and will benefit around 5 million recipients.
- Superannuation - individuals affected by the adverse economic effects - Government has temporarily allowed eligible individuals to access their superannuation early and tax‑free - extending the application period to 31 December 2020
- The Government has also provided assistance by: temporarily halving superannuation minimum drawdown requirements for the 2019‑20 and 2020‑21 income years - lower social security deeming rates to 2.25 per cent and 0.25 per cent respectively from 1 May 2020, taking into account the low interest rate environment and its impact on income from savings.
- income support payments - $16.8 billion over five years from 2019‑20
Support for businesses and employers -
- Cashflow and write-offs - Eligible entities automatically receive payments of between $20,000 and $100,000 for the March to September 2020 reporting periods upon lodgement of relevant activity statements. As at 16 July 2020, over 750,000 entities have received over $16 billion in cash flow support – helps reduce GST
- includes deregulation measures to allow companies to hold meetings virtually and execute documents electronically, to modify continuous disclosure provisions to enable companies to more confidently provide guidance to the market, and to provide relief to directors from personal liability for insolvent trading.
- Government is backing businesses to invest by increasing the instant asset write‑off threshold to $150,000 (up from $30,000) and expanding access to include businesses with aggregated annual turnover of less than $500 million (up from $50 million)
- Supporting Australians build their skills and return to work
- Funding additional training - $2 billion JobTrainer Skills Package establishes a $1 billion JobTrainer Fund and extends the Supporting Apprentices and Trainees wage subsidy
- The Government is also helping businesses keep apprentices and trainees employed. The Government’s initial $1.3 billion Supporting Apprentices and Trainees wage subsidy provides employers with 50 per cent of the apprentice or trainee’s wages for 9 months, up to $7,000 per quarter to support the continuity of training.
- Supporting Job Seekers Package - investing $159.5 million to assist job seekers to improve their employability and search for work, including $115.1 million to ensure job seekers can be connected to employment services at the earliest opportunity.
- providing job seekers with earlier access to Employment Fund credits, providing the Coronavirus Supplement to eligible New Enterprise Incentive Scheme participants and enhancing IT systems to streamline registration and referral processes in order to simplify income support claims
- Job‑ready Graduates Package focuses the public investment in higher education on national priorities and ensures the system delivers for students, industry and the community. The reforms will create more places at Australian universities for domestic students, with an additional 39,000 by 2023 growing to 100,000 in ten years — meaning that more Australian students will be able to get a university degree.
- higher education - the Government has guaranteed $18 billion in funding for universities for 2020, and has provided greater flexibility in the use of this funding. In addition, the cost to study short, online courses through universities and private providers has been reduced to support Australians to upskill or reskill.
- Students studying courses in key growth areas will see significant reductions in their student contributions, including by around one‑fifth for science, engineering, health, and architecture, almost one‑half for education and nursing, and over one‑half for mathematics.
Infrastructure and housing sector spending -
- Infrastructure - The Government continues to deliver its $100 billion pipeline of investment in transport infrastructure. The Government will provide $2.0 billion over three years from 2020‑21 for priority regional and urban transport infrastructure across Australia to support local jobs and economic recovery post COVID‑19. This includes $1 billion for shovel‑ready projects and $500 million for targeted road safety works. It also includes $500 million to local governments for a new Local Roads and Community Infrastructure Program which will help local councils undertake priority projects focused on infrastructure upgrades and maintenance.
- The Government will also provide an additional $1.9 billion towards other infrastructure priorities, including $1.8 billion for the Sydney Metro‑Western Sydney Airport rail project.
- Housing - The Government will invest $680 million in 2020‑21 through the HomeBuilder program
- This is the $25k grant if eligible to build or renovate -
- Aim to support jobs and the residential construction market by encouraging the commencement of new home builds and substantial rebuilds this calendar year. HomeBuilder will help to support around 140,000 direct jobs and around another 1 million related jobs in the residential construction sector. It is being implemented via a National Partnership Agreement, and all states and territories have signed up to deliver the program.
Covid specific policies -
- The Government has established a $1 billion COVID‑19 Relief and Recovery Fund to provide direct support to the regions and communities most affected by the economic impacts of the pandemic, supporting a range of industries including the aviation, agriculture, fisheries, tourism, and arts sectors. Examples of support include:
- $110 million to reduce the cost of air freight, assisting Australian exporters to maintain markets and ensuring critical imports continue to be available
- $94.6 million for vital funding to exhibiting zoos and aquariums, including those in regional Australia
- $36.3 million in 2020‑21 to provide support to agricultural show societies to meet the costs incurred through shows cancelled at short notice.
- Childcare - provided $1.9 billion to support the viability of the early childhood education and care sector and to provide families free childcare during the earlier stages of the pandemic. On 13 July 2020, the Government re‑established the Child Care Subsidy arrangements to ensure sufficient childcare places are available to all families and parents who wish to work.
- Aviation - Government will provide $1.9 billion over four years from 2019‑20 - Australian Airline Financial Relief Package
- provides support for the sector through rebates and fee waivers for aviation fuel excise, airservices charges on commercial aircraft operators and domestic and regional aviation security charges
- The Government support is in addition to $428 million for the aviation sector that the Government will provide under the Relief and Recovery Fund
- Aged care - The Government is ensuring the aged care sector is able to continue to provide care -the Government has provided $1.2 billion of direct assistance to support Australians in aged care including the provision of additional home care packages and additional funding to protect senior Australians in residential facilities.
- Arts and entertainment - The Government has committed $250 million to support production and employment in the arts and entertainment sectors. The Government commitment is a targeted package to help restart the creative economy and get the entertainment, arts and screen sectors back to work, as they rebuild from the impacts of COVID‑19, which includes:
- The Government will also provide $400 million over seven years from 2020‑21 to attract overseas film and television production to Australia through the Location Incentive
Supporting the flow of credit
- The Government, Reserve Bank of Australia, APRA and ASIC have teamed up to support the flow of credit in the Australian economy, in particular for small and medium‑sized enterprises (SMEs)
- The Government has provided an exemption from responsible lending obligations for a period of six months in relation to the credit that banks and other lenders extend to their existing small business customers.
- SME Guarantee Scheme is supporting up to $40 billion of lending to help small and medium‑sized businesses get through -More than 15,600 small and medium‑sized businesses have accepted $1.5 billion in loans
- The Reserve Bank of Australia has implemented measures that have significantly reduced bank funding costs, including the Term Funding Facility which will provide at least $90 billion in funding at a fixed interest rate of 0.25 per cent
- The Government’s Structured Finance Support Fund is providing up to $15 billion to the Australian Office of Financial Management to support continued access to structured finance markets used by smaller lenders providing both consumer and business credit
This budget is more retrospective in a way – update on what has been happening and what will happen to existing payments or policies – not like a normal budget that focuses on forward plans over the next few years – contains spending over the next year –
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition.
Episode today about a trend over the past decade and moving forward – is water the new petroleum?
A few episodes ago – went through what is more valuable – a TV or water – depends on your perception and what is in demand versus supply – but if you think about it – what is the most valuable thing to us as humans –
- I would argue - Air – Water – food – our survival is predicated on these three things – rule of 3 here –
- 3 minutes, 3 days and 3 weeks – but due to supply – they are seen as having low values – if viewed in monetary terms – we don’t even really think about it most of the time – why would we?
- Air is in abundant supply – water seems to be everywhere – turn on a tap – even food – especially fast food – if you can call it food is very cheap – this is not so much a concern for most people in western nations
Hard to monetize air – food has already been monetized – but what about water? It has – but is seen as a public good – quite low cost -
- A trend has been occurring in the water sector which is accelerating worldwide- appearance of the new “water barons” – the investment of the Wall Street banks and multibillionaires - buying up water all over the world at unprecedented pace since the late 2000s.
- Banks such as Goldman Sachs, JP Morgan Chase, Citigroup, UBS, Deutsche Bank, Credit Suisse, Macquarie Bank, Barclays Bank, the Blackstone Group, Allianz, and HSBC Bank – plus many others are consolidating their control over water
- Goldman Sachs: Water Is Still the Next Petroleum
- Back in 2008 - Goldman Sachs called water “the petroleum for the next century”
- during its annual “Top Five Risks” conference – was reported that those investors who know how to play the infrastructure boom will reap huge rewards – said a calamitous water shortage could be a more serious threat to humanity in the 21st century than food and energy shortages
- Goldman Sachs has convened numerous conferences on future public issues - have published lengthy analyses on most commodities - water and other critical sectors like food and energy
- Goldman Sachs is positioning itself as a massive player in the water business – buying up water utilities, water engineering companies, and water resources worldwide - Since 2006 - Goldman Sachs has become one of the largest infrastructure investment fund managers and has amassed $10s of billion capital for infrastructure, including water.
- JPMorgan Chase – aims to Build Infrastructure War Chests to Buy Water, Utilities, and Public Infrastructure Worldwide
- JPMorgan Chase is one of the biggest banks in the world - has aggressively pursued water and infrastructure worldwide – sees this as a global phenomenon and is planning to cash in on water and infrastructure
- JPMorgan’s own analysts estimate that the emerging markets’ infrastructure is approximately U.S.$21.7 trillion over the next decade
- In a JP Morgan equity research document, it states clearly that “Wall Street appears well aware of the investment opportunities in water supply infrastructure, wastewater treatment, and demand management technologies.”
- Citigroup: The Water Market Will Soon Eclipse Oil, Agriculture, and Precious Metals
- UBS: Water Scarcity Is the Defining Crisis of the 21st Century
- UBS is Europe’s largest bank by assets – back in 2006 - UBS Investment Research had a 40-page research report titled “Q-Series: Water - Water scarcity: The defining crisis of the 21st century?” – looking at the future of water assets and how to cash in on this
- Credit Suisse: Water Is the “Paramount Megatrend of Our Time”
- 2008 - Credit Suisse published a report - urged investors that “One way to take advantage of this trend is to invest in companies geared to water generation, preservation, infrastructure treatment and desalination. Water is likely to become a scarce resource.”
- recognizes a water-supply crisis might cause “severe societal risk” in the next 10 years and that two-thirds of the world’s population are likely to live under water-stressed conditions – was already happening in South Africa -
- Allianz Group – has a very interesting take – that Water Is Under-priced and Undervalued
- They have a has the philosophy that water is under-priced – most of these banks have a Water Fund – Allianz is no different – the co-manager of the fund in Frankfurt - “A key issue of water is that the true value of water is not recognized. …Water tends to be undervalued around the world.”
- Allianz sees two key investment drivers in water: (1) upgrading the aging infrastructure in the developed world; and (2) new urbanization and industrialization in developing countries such as China and India
- Between Goldman Sachs, Morgan Stanley, Credit Suisse, and the Carlyle Group – estimated to have amassed $250 - $350 billion allocation to water infrastructure projects globally
- These investment banks have been preparing and waiting for a moment for years – the rise of water prices - starting to privatize water, municipal services, and utilities all over the world. It will be extremely difficult to reverse this privatization trend in water.
- Wealthy individuals as well - also buying thousands of acres of land with aquifers, lakes, water rights, water utilities, and shares in water engineering and technology companies all over the world.
- At this rate – it seems like the consolidation of Water is ramping up and non-opposed by officials at the governmental level
- The global water and infrastructure-privatization is a natural progression - many local and state governments are suffering from revenue shortfalls and are under financial and budgetary strains.
- In Australia - 10.4% of Australian water rights are owned by foreigners, says ATO
- Is this a problem? By itself – not so much -
- Bottle water versus tap water – in Australia – tap water is fine – but lots of areas around the world you can’t drink water out of the tap – you have to buy bottled water – China, India, parts of SEA – Africa – even parts of Europe – Italy south of Naples, Greek islands, Hungary
- Bottle water is cheaper over there than here – in areas where tap water is accessible and clean – soft drink is cheaper -
- On its own – privatisation is not so much of a problem – as long as the same rights are granted to individuals – to become water self-sufficient and not rely on state provided water – which is where things get even more interesting –
- As an individual - you can trade water rights – there are water exchanges where you can buy water -
- The Australian Government has put restrictions on how much can be traded and how much must be retained for the environment – with the Murray-Darling Basin – 65% of the water is off limits to water traders - but that still leaves plenty to trade with – valuations are at about A$15 billion of water rights
- About 8% of the Murray-Darling is reportedly owned by pure water investors
- And the price has been going up – in past five years - the value of water in the MDB has risen from about A$1000 a megalitre to close to A$2000
- You can then lease your entitlements to farmers or people who wish to use it – yields of about 8% p.a.
- These exchanges offer easy access for investors but the water products themselves – but not all water rights are equal - There are several hundred classes of investible water securities. There’s high- and low-security water, and price can vary drastically by type, demand and geography. Allocation allowances vary from river to river – but can you personally use it?
At the same time – there is a second trend is that is occurring – whilst banks or these trading exchanges allow for the buying up of water at accelerated paces - governments have policies in place that limit citizens’ ability to become water self-sufficient
- Where does Australia stand – First have to get the definition of water out of the way –
- “water” includes water rights - the right to tap groundwater, aquifers, and rivers, land with bodies of water on it or under it
- Many other things - desalination projects, water-purification and treatment technologies, utilities, water infrastructure maintenance and construction and retail water sector - those who produce and sell bottled water
- Australia’s National water policy is embodied in the National Water Initiative Agreement - Clause 2 of the Agreement says, “In Australia, water is vested in governments that allow other parties to access and use water for a variety of purposes”.
- Based around this - the Federal Government claims that rainwater falling on roofs and stored in tanks is vested in governments – however, thankfully this claim is not supported by three state governments- New South Wales, Victoria and Queensland – so the National Water Initiative Agreement may not be interpreted to mean that all water is vested in governments in these selective states
- However - state governments have abolished common law rights to “naturally occurring” water –
- Only when water is on or below the surface of the ground, may it be considered to be “naturally occurring”. The policy questions are:
- is water that falls on a person’s roof “naturally occurring” water - in other words, is a person’s roof the surface of the ground?
- does a person own the water that falls on their own roof?
- Vic Government’s position - water that falls on a person’s roof in Victoria is the property of that person
- has advised that the state’s right to the use, flow and control of water extends to all water in a waterway and groundwater - If water falls on a person's roof, it may, after it has left that roof, become water in a waterway or groundwater. For the period that the water remains on the roof, it is not water in a waterway or groundwater. In other words, a person’s roof is not the surface of the ground in Victoria
- NSW - Similar to Vic - a person’s roof is not the surface of the ground in New South Wales.
- But what about water tanks?
- In QLD - government has advised that, based on the meaning of water in the Water Act2000, water collected in rainwater tanks does not fall within the ownership of the state. Under section 19 of the Act, “All rights to the use flow and control of all water in Queensland are vested in the State”. Also under the Act, “water collected from roofs for rainwater tanks” is not included in the meaning of overland flow water. In other words, a person’s roof is not the surface of the ground in Queensland, and rights to water collected from roofs for rainwater tanks are not vested in the state – due to this QLD has some of the better water rights in Australia for the individual
- “water” includes water rights - the right to tap groundwater, aquifers, and rivers, land with bodies of water on it or under it
- However - South Australia, WA and Tasmania - government claims that a person’s roof is the same thing as “land”. Under section 124 of the Natural Resources Management Act 2004, water flowing over land is surface water, and rights to surface water are vested in the state. The State Government advises that surface water is not owned by anyone, including the state.
- 2007 – SA government released its “runoff policy” - A “water user” capturing rainwater in excess of 500 kilolitres requires a water licence, and then may be eligible to pay a water based levy if that water is used for commercial purposes - The policy applies to rainwater tanks, on the presumption that water collected from roofs for rainwater tanks in South Australia is “surface water”
- I have been looking at buying land with water on it and buying the water rights – but it is not that simple –
- All environmentally protected – the water from a stream on your own land is technically not your own water – or if you build a pond or dam on your land – technically the states – found this interesting
- It’s a strange world where banks or people with enough money can buy up massive allocations to water – but individuals across certain states are limited on what they can collect on their own private lands
- So water may be a growing investment sector - But due to the limited supply of water – since 2000s - 20 dams had been completed in Australia - 16 of them in Tasmania, two in New South Wales, one in Queensland and one in the ACT – based around reporting from the Minister for Agriculture, Drought and Emergency Management - states had failed to match water storage with population growth since 2003 - at the current rate, water storage per person will fall by more than 30 per cent by 2030
- So prices for water may be set to continue to rise in the future
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition. This week the question comes from Mina.
“I would love to get your view on Structured products like the ones being offered by sequoia. Is the risk worth the return?”
Great question – thanks Mina - this episode is not investment advice – general nature - Structured products –
- A structured product – can also be referred to as a market-linked investment – they are a pre-packaged structured finance investment strategy based on an underlying asset
- This can be built around a range of assets – from a single security, a basket of securities, options, indices, commodities, debt issuance or foreign currencies – complex structure
- They are an investment product that is put together by a financial institution - usually by a bank or investment firm –
- pre-packaged exposure to one or more underlying assets
- typically contain an embedded over-the-counter derivative contract, such as an option or swap, and they are often blended with a bank deposit or government bond to provide capital guarantees
- Structured products are a fixed-term investment that typically lasts between 3 and 10 years – most of sequoias are 3 years
- With these investments - as the value of the basket of assets rises over the 3–10 year period - the probability of the target return rate being met once the investment reaches full maturity increases
- Massive range of different types of structured products – as they are designed to provide investors with a range of different pay-offs –
- Like most structured products – like managed funds - the payoffs depend on the performance of the underlying asset
- But have additional elements – some structured products aim to provide investors with capital protection - others seek to generate enhanced levels of income or growth through leveraged exposure to the underlying assets that make up the product – so the risks can be very small – or large depending on the type
- Two major categories of structured products - Structured deposits and structured investments
- Structured Deposits – can be thought of as a mixture of a savings account and an investment
- With these – the invested funds are protected and even if the value of the underlying stock market index falls - considered a lower-medium risk
- Structured Investments – more of a capital-at-risk accounts – but aim to provide a higher return than a Structured Deposit
- With this type of structured product there is the risk of losing money if the underlying assets fails to perform
- A few types of structured products include:
- Capital-guaranteed structured investments – blend a bank deposit with an option or a leveraged investment in the underlying asset
- ratio between the deposit and the risky asset may either be fixed or flexible - at maturity investors either receive their capital back or their capital plus a return depending on the performance of the underlying asset
- As with any derivative transaction, investors need to ensure that they fully understand all the costs and risks as well as how the returns are to be calculated.
- Capital-guaranteed structured investments – blend a bank deposit with an option or a leveraged investment in the underlying asset
- Structured Deposits – can be thought of as a mixture of a savings account and an investment
Are they a good investment option?
- They are complex investments – so you need to fully understand what you are getting yourself into
- Structured Products were subject to mis-selling scandals due to the sellers not fully understanding the product- one case with Lloyds Bank where it was claimed to have mislead their consumers with an impression of a highly likely return through Structured Products
- However - there is a chance you may not make any return at all
- What are the benefits - Structured Products can be good if you don’t want to risk all of your capital –
- Due to the structure – you can get ones that have the majority of your money set aside for protection
- Structured Products can offer a medium risk method of investing
- Major risk is that you lose on this investment if the counterparty or deposit taker becomes solvent.
- This is only if you invested in a Structured Deposit as Structured Investments are not protected in the same way
- Returns - Issuers normally pay returns on structured products once it reaches maturity – but can pay coupons (income) along the way
- Can be called a payoff - or returns – but the performance outcomes are contingent
- For example - if the underlying assets return "x," then the structured product pays out "y."
- Creates a situation where a structured products performance is closely related to traditional models of options pricing- known as being in the money or out of the money - although they may also contain other derivative categories such as swaps, forwards, and futures, as well as embedded features that include leveraged upside participation or downside buffers
- Looking at an example -Consider that CBA issues structured products in the form of a capital notes—each with a notional face value of $1,000 – structured product is actually a package that consists of two components: A zero-coupon bond and a call option on an underlying equity investments – like CBA shares or ETF that mimics the ASX.
- Call option gives the right but not obligation to buy the share investment in the future at a current price – so you win if the price goes up - and The maturity is three years.
- Although the pricing mechanisms that drive these values are complex, the underlying principle is fairly simple
- On the issue date, you pay the face amount of $1,000 to buy this product - This note is fully principal-protected, meaning you will get your $1,000 back at maturity no matter what happens to the underlying asset. This is accomplished via the zero-coupon bond accreting from its original issue discount to face value.
- For the performance component - the underlying asset is priced as a call option – this will have an intrinsic value at maturity in 3 years time - if its value on that date is higher than its value when issued – then you get more back in returns - if not - the option expires worthlessly and you get nothing in excess of your $1,000 return of principal
- Can be called a payoff - or returns – but the performance outcomes are contingent
The risks - there is a chance that your Structured Product investment may provide no return – minus any fees
- They could even produce a loss when they mature - This could be due to inflation(negative real return) or unfortunate circumstances with your deposit taker.
- Your money is at the hands of your counterparty or deposit taker - if they become solvent, you lose your investment
- Counterparty risks with derivatives – can go bad – if this is with a firm that isn’t TBTF – i.e. a non-SIFI
- Also have higher costs – looking at some – sequoia – application fee of 1.1% to 2.2% and investment cost for the first 2 years of 8.6% for a lot of products
Look at some with sequoia - Many different types – go through some of these to look at how they work
- JB Global Booster Series 1 - been designed to offer flexibility by offering investors exposure the to the performance of the Australian share market as measured by the S&P/ASX 200 as well as a compulsory Loan under which Investors borrow 100% of the Investment Amount
- It is a three-year investment in a structured product that aims to provide investors with the potential to benefit from the growth of the S&P/ASX 200 Price Return Index – but also has a Capital Protection component on the scheduled Maturity Date
- It has a variable Participation Rate – so you can choose how much exposure you want - with the potential for a maximum of 150%
- Has Two Coupons of a minimum 3.60% and maximum 9% of the Issue Price of your Investment Amount paid at the end of the first 2 years, depending on the performance of the Reference Asset
- A final uncapped Coupon paid at the maturity of the investment, depending on the performance of the Reference Asset
- 100% borrowing at interest rates of 7.55% p.a -Interest is required to be prepaid each year annually in advance. At the end of Year 1 and Year 2, the amount of the Coupon will be set-off against the Prepaid Interest and you get paid the difference
- If the Coupon is greater than the Prepaid Interest, you will not be required to make a payment and will instead receive the net amount of the Coupon less the Prepaid Interest
- If not- some capital is taken out
- Downsides - Your return (including any Coupon) is affected by the performance of the Dispersion of Reference Basket and whether this is greater than the Hurdle at Maturity – this is with the option – if you finish out of the money - There is no guarantee that the Reference Basket will perform well.
- There will be no Performance Coupons payable if the Dispersion of the Reference Basket is below the Hurdle at Maturity.
- There is no guarantee that the Units will generate returns in excess of the Prepaid Interest and Fees, during the Investment Term. Additionally, in the event of an Investor requested Issuer Buy-Back or an Early Maturity Event you will not receive a refund of your Prepaid Interest or Fees.
- Gains (and losses) may be magnified by the use of a 100% Loan
- But this Loan is a limited recourse Loan, so you will never be required to pay more than the Prepaid Interest Amount and Fees at Commencement.
- Looking back – ASX200 investment – in the JB Global Income and Equity Booster Series 1 has matured on 30 June 2014
- Delivered total returns to investors of approximately 21.08% during the Investment Term - The minimum Participation Rate for both Series is 0% which means investors have no exposure to the relevant Reference Asset.
- What did the ASX200 do over this period – Accumulated index went from 32,841 to 48,015 – total return of 46% over that period
- If you take the price purely – it has done okay – but if you had invested into those assets and received the dividend – done better – of course the opposite could have been true – if the markets went down
Is the risk worth the return -
- Due to their structures – you can have smaller levels of risk – or larger levels –
- Due to most having a capital guarantee component – loss from volatility can be reduced – however – counter party risks are involved
- Aim would be to ensure you do not ‘put all your eggs in one basket’
- If you wanted to invest this way – select investments that are diversified over different providers – but also that use different counterparties and time horizons – maturities
- When it comes to investing – I like things that have higher levels of simplicity –
- The more complex the structure – the more you might be buying something that may have hidden elements that can go wrong
- Unlike other structures – here you have additional layers of counter party risks
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. A lot of people may be feeling regret right now - regret for not holding technology shares like Afterpay – it is up around 850% from the low in March
Was not buying tech shares a bad decision? And is there potential from here? Look at this in this episode –
Most people want to make the correct decision for investments – hard to know what is the correct decision -
- When looking at some sectors of the share markets - technology stocks in particular – might be having some regret for not investing
- But looking at these companies – the price may indicate that these are great companies
- Is it sensible or a bad idea to buy a company with a negative earning per share? Or a massive PE?
- There are plenty of shares in this basket -
- Afterpay – APT on a PE of minus 450x this year – technically doesn’t have a PE – but looking at the losses per share of $0.15 to $0.20 – looking at future projected earnings – in 2 years company would have a PE of 230x
- Xero - XRO on a PE of more than 1,000 times - 180x on 2022 forecasts
- Wisetech Global - WTC on 110x PE - and 50x on 2022 earnings forecasts
- NextDC - NXT on minus 305x PE and 231x 2022 forecasts – has a debt to equity of 100%
- List goes on – rate to find a company with a PE less than 70x in the tech basket
- In the US – The FAANG - Facebook (FB), Amazon (AMZN) 142PE, Apple (AAPL), Netflix (NFLX); and Google (GOOG) - stocks plus Microsoft account for 27% of the S&P 500 but only 8% of the revenue. The equity market in the US is valued at 152.2% of GDP - a record.
- Returns over the past 5 years – on the S&P500 – 78% of the gains have come from tech, telecommunication or e-commerce – around 50% comes from tech alone
-
Also have other companies – like Tesla
- Tesla is up +330% since March 18th, and over +760% since June 2019 – remember back then it was troubled by bankruptcy concerns
- Since March, Tesla has added just over 8 Ford Motor Companies, 27 Renaults, or more than the entire market cap of Toyota ($176bn USD)
- Tesla is over 3 times the size of the “S&P 500 Automobiles and Parts” sector,even though it’s not a member or in the S&P 500 (it would be the 15th largest)
- Tesla’s market cap ($287bn) has grown to over a third of the combined market cap of the US, EU and Japanese auto indices.
- Where does Tesla rank compared to other auto companies – VW, Toyota, Daimler – top 3 – top two around 10.5m cars each year – TLS made 380k cars a year
- Tesla is at $280bn market cap – Tesla EPS -$0.81 = PE of negative 1,852
- Toyota – has a EPS of $16.40 – PE of only around 7.5 times
-
Tesla’s overall share of the global autos market has grown from 0.1% in 2017 to an expected 0.8% in 2020 – which is impressive - but remains minuscule - VW is at 14% - has a market cap of $82bn USD and pe of under 7
What is going on?
- It has become fairly obvious – it has little to do with fundamentals - PE, the future projected earnings or intrinsic value
- Most of the price growth has been about not missing out on getting into the big winners and household names – i.e. making easy gains
- Comes back to extraordinary volatility and getting into the massive momentum – the rebound in the markers that has been behind the opportunity to buy these growth companies in a world where rates are near zero
- logic suggests the equity market should be down the drain right now due to a global economic downturn
- Growth versus value shares – Since the market downturn – value shares have started to underperform
- March 2019 – Jan 20 – was about even – sitting at 100 of neither growth or value outperforming the other – since then growth has started to outperform – gone up from 100 to 145 – meaning that there is an out performance of 45% on growth shares compared to value
- This isn’t just coming from individuals getting in on household names
- Professional managers – The monthly Fund Manager Survey from Bank of America is best known for the monthly chart showing what everyone on Wall Street thinks is the most crowded trade
- Crowded is what is thought to be the top trade – or largest holding positions
- What was it this month - not only did it confirm that the one trade - is the most popular sector on Wall Street – but also – that it is also the fact that this trade has been made with the biggest margin on record – i.e. the largest amount
- No surprise that this trade is Long US tech stockswhich is what 74% of BofA survey respondents said they thought was the most crowded trade on Wall Street
- The sentiment on Wall Street at the moment – is that they are convinced that others like them who are finance professionals are all in on tech – backed up by the percentage of agreement behind tech being the most crowded trade is the highest of any monthly response in polling history
- Outside of shares – looking at the bond market – which is three times the size of the equity market – painting a different story
- US bond yields are at record lows and discounting negative rates from mid-2021 to 2023 despite the Fed saying they will resist that.
- The equity market is not reflecting the bond market. Record low bond yields are not consistent with a V-Shaped recovery – sign that the economy isn’t fairing so well
- Which market is right? Time will tell – no way to predict what markets are going to do in the short term with this momentum behind the tech sector
- But there is a disconnect – when looking at what the companies are worth versus to performance – technically performance is all that matters – or all that people care about
- Value only based investors have missed out on large returns recently because they are long-term and want to see "value" before they buy
- But These tech stocks are being traded as a bloc by the herd - they are all going up massively because the US technology sector is flying
- Also - the alternative traditional slow and steady investments in Australia are not sexy - consumers, Healthcare, Resources - Slow going by comparison – not what is in fashion right now
- technology it is – the global position for a quick return – which generates the price movements when everyone jumps in
What to watch out for – but also are they overvalued?
- At this stage – who is happy with these price gains - the CEOs and shareholders of these companies are very happy – and also probably not going to openly admit that there is the chance that these companies are overvalued
- But can tell that they are rather happy – hence why they are raising capital (high prices per share) and why some of the insiders like the Afterpay guys are selling some shares
- All of this has the potential to fuel a further tech bubble - There are similarities to previous tech bubbles- but also differences
- Back in 2000 in the Tech Boom – there was a massive rise in prices and there was regrets about missed opportunity - but there are differences
- Compared to a lot of the companies in 2000 - This time there are some very substantial revenues in the tech sector – but the earnings and profits are mixed depending on the company
- Compared to back in 2000 – the profits were definitely lacking – but so were the revenues
- But now - when a company is real, and profitable, there is a price for everything – there is a growth potential, there are future profits and revenues – but there is still a price for everything
- For example – take Tesla – Tesla cars are great cars – come with teething issues – just like Tesla being a company with teething issues – but would you pay $2m for a Tesla car?
- This is how these shares currently are acting
- Compare this to property - You don't pay the eventual price for what a house price may be in a decade – prior to it even being built
- But the conditions of the market are different – the concept of the new normal
- Tech is seen as immune but also to benefit from Government shut downs
- The monetary system – tech growth companies do well with low interest rates -
What to do?
- Unfortunately for most compelling argument for an 'investment' in these stocks is momentum - This is a herd phenomenon – and a powerful one –
- There is little in the way of fundamental reasons to invest – like earnings
- But the easy money from the Fed and the flow of capital has started a massive momentum
- If you hold them – there is the chance that they go up further – wouldn’t rush out to sell – looks like the ride is not over – yet
- Course of action would be to try and trade this rally – which is almost impossible to time correctly –
- But don’t consider it a long term ‘investment’ at the current prices
- Full disclosure – I do own an allocation to a lot of these companies – im not rushing out to reduce this – but at the same time – there is little that shows that they are worth buying at their current prices
- This bubble will likely burst - watch it – when – who knows – may not be years - Don’t sell because these stocks have gone up a lot
- It takes time for the market to trust a company and its value
- The market overprices assets regularly - this is occurring now - is a extreme sentiment – so if you don’t own any of these shares – may not be the time to join in – as downside seems to be far greater than the upside
- The contrarian saying of buying when others are fearful and selling when others are greedy
- But being a contrarian for the sake of being a contrarian appears a losing position at this stage – seems like most of the market is indeed long tech stocks - A quick look at the hedge fund top 50 stocks shows that tech names account for 8 of the top 10 most popular stocks
- whatever works will continue to work until there is a reason for it not to work
- since the Fed is now effectively punishing growth stocks - the growth to value outperformance will continue until there are no more value investors left
- Something to watch out for – have the potential for much higher level of losses compared to other shares in the market
- But momentum can change – unlike other sectors – unlike that the momentum change will come from economic news – but rather mass profit taking in institutions
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition.
In the last two Furious Friday episodes, I’ve talked about the regulation and de-regulations on the monetary and fiscal sides.
- Covered the Banking Act of 1933 and the Glass-Stegall section of this – then the financial de-regulations that occurred in 1986 and 1999 – some interesting events have played out since then
- What I didn’t cover is that there was a step taken back after GFC – to help undo some of the de-regulation
- a rule in the US that was designed to prevent banks that receive federal and taxpayer backing in the form of deposit insurance and other support from engaging in risky trading activities – called the Volcker rule
- but recently got watered down 3 weeks ago – might have something to do with loan products that banks are now offering due to business shut downs – interesting timing and connections which we will run through today
The Volcker Rule
- is a federal regulation that aimed to prohibit banks from conducting certain investment activities with their own accounts – also aimed to limit their involvement with hedge funds and private equity funds - called covered funds
- The Volcker Rule aims to protect bank customers by preventing banks from making certain types of speculative investments that contributed to the 2008 financial crisis
- Named after former Fed Chairman Paul Volcker, the Volcker Rule is a section of the Dodd-Frank Wall Street Reform and Consumer Protection Act
- The Volcker Rule prohibits banks from using their own accounts for short-term proprietary trading –
- Proprietary trading occurs when a trader trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments with the firm's own money, aka the nostro account, contrary to depositors' money, in order to make a profit for itself – so using the banks own assets to trade was barred
- also bars banks, or insured depository institutions, from acquiring or retaining ownership interests in hedge funds or private equity funds beyond a cap of 3%
- the rule aims to discourage banks from taking too much risk by barring them from using their own funds to make these types of investments to increase profits
- The Volcker Rule relies on the premise that these speculative trading activities do not benefit banks’ customers
- Still allows banks to continue normal activities - market-making, underwriting, hedging, trading government securities, engaging in insurance company activities, offering hedge funds and private equity funds, and acting as agents, brokers or custodians – all of this is allowed to generate profits
- But banks aren’t meant to engage in these activities if doing so would create a material conflict of interest, expose the institution to high-risk assets or trading strategies, or generate instability within the bank or within the overall U.S. financial system
- For instance = securitising their own lending and betting on this – or using their own funds to take too much risk on – as the banks own funds are meant to be protected with the TBTF legislation – take all the risk but bear none of the responsibility if it goes wrong
- Depending on their size, banks must meet varying levels of reporting requirements to disclose details of their covered trading activities to the government. Larger institutions must implement a program to ensure compliance with the new rules, and their programs are subject to independent testing and analysis. Smaller institutions are subject to lesser compliance and reporting requirements.
- Think of it as a Glass-Stegall lite version – limits some activity but not all – there are always loopholes –
- Doesn’t say anything about using depositors’ funds – which are on ‘loan’ to the banks – so technically not their own money which wouldn’t be considered proprietary trading
- Also - where those who were proprietary traders or derivative traders left to set up their own shop – still had access to banks capital on loan – was still ongoing with the regulation’s implementation – kept having delays
- 2017 - the IMFs top risk official said that regulations to prevent speculative bets are hard to enforce due to the ways around the regulations
Background to this rule and what has occurred over the past few years up until the end of June this year
- Origins date back to 2009 - Volcker proposed a piece of regulation in response to the ongoing financial crisis - due to the largest banks having accumulated large losses from their proprietary trading arms that could have sunk the rest of the bank if not bailed out
- Proposal aimed to prohibit banks from speculating in the markets using capital reserves and own assets
- December 2013 - five federal agencies approved the final regulations that make up the Volcker Rule—the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Commodity Futures Trading Commission and the Securities and Exchange Commission (SEC)
- went into effect on April 1, 2014 - banks needed full compliance by July 21, 2015
- Since then – the Fed has set procedures for banks to request extended time to transition into full compliance for certain activities and investments.
- Skip forward to June 2017 - the Treasury – the Office of the Comptroller of the Currency - after conducting a review - said it recommends significant changes to the Volcker Rule
- said that it does not support its repeal and "supports the rule in principle" – i.e. the rule's limitations on proprietary trading - but recommended exempting banks from the Volcker Rule banks with less than $10 billion in assets
- Treasury also cited regulatory compliance burdens created by the rule and suggested simplifying and refining the definitions of proprietary trading and covered funds on top of softening the regulation to allow banks to more easily hedge their risks.
- Federal Reserve's Finance and Economics Discussion Series (FEDS) made a similar argument, saying that the Volcker Rule will reduce liquidity due to a reduction in banks' market-making activities
- Then - on May 30, 2018 - the Federal Reserve Board voted unanimously to push forward a proposal to loosen the restrictions around the Volcker Rule further – the goal according to Powell, is "...to replace overly complex and inefficient requirements with a more streamlined set of requirements”
- In August of 2019, the Office of the Comptroller of the Currency voted to amend the Volcker Rule in an attempt to clarify what securities trading was and was not allowed by banks – wanted to redefine some terms
- The change would require the five regulatory agencies to sign off before going into effect, but is generally seen as a relaxation of the rule's previous restriction on banks using their own funds to trade securities – allowing proprietary trading for some activities
- The proposal would eliminate a 3% cap on ownership of a venture capital fund. It would also allow banks to invest in debt-based funds among other changes.
- So it has been watered down for years and wasn’t fully in force anyway – but now final nail in coffin as of June 25, 2020
- the federal reserve relaxed part of the rules involving banks investing in venture capital and for derivative trading
- Federal Deposit Insurance Commission (FDIC) - loosened restrictions in the Volcker rule on bank capital requirements and the levels of investments that banks can make in private equity and similar funds
- the banks will not have to set aside as much cash for derivatives trades between different units of the same firm- remember that this requirement had been put in place in the original rule to make sure that if speculative derivative bets went wrong, banks wouldn't get wiped out.
- The loosening of those requirements could free up billions of dollars in capital for the industry to start betting again
- So after the past few years - the Fed, FDIC, OCC and other agencies eased the aspect of Volcker that restricts lenders from engaging in proprietary trading -- the practice of making market bets for themselves instead of on behalf of clients
- Under the existing rule, banks could make indirect investments into venture capital funds but faced restrictions on directly owning a fund - The rule change would also give banks more leeway to invest or sponsor credit funds that make loans, invest in debt securities, or extend credit.
- One implication of this rule change would be greater bank activity in the market for collateralized loan obligations (CLOs) - where banks were previously barred from involving themselves with CLO funds that included a debt component due to this being considered their own funds (or an asset)
- Federal Reserve Chairman Jerome Powell called the proposed change "a simpler, clearer approach to implementing the rule [which] makes it easier for both banks and regulators to carry out the intent of the rule". Federal Reserve Governor Lael Brainard voted against the proposal, arguing that "several of the proposed changes will weaken core protections in the Volcker rule and enable banking firms again to engage in high-risk activities related to covered funds”
Why do this now? Only my speculation – no proof that this is occurring – but it lines up with billions being given out by banks that are government guaranteed as part of the US stimulus efforts.
- Look at the GFC – with Synthetic CDOs – take thousands of loans – put them in a security – then take that security and others – and put it in other securities – then write contracts on them – betting about price movements - bets on bets analogy –
- Those loans back in GFC had government guarantees – from Fannnie Mae and Freddie Mac – gov lending
- So if banks wanted to bet on bad loans – with Volker it was hard – but what is happening in the economy right now in the US?
- The Paycheck Protection Program – part of the CARES act - designed to provide forgivable loans to businesses hurt by the coronavirus
- The Act authorizes the Treasury, working in large part through the Federal Reserve, to make loans and loan guarantees available to eligible businesses.
- Title I - $350 billion for small business loans.
- Title IV - appropriates another $500 billion to aid mid-sized and large businesses
- $850bn in total - creating another winner in banks – as banks are the ones who are lending these funds
- Quick side note - Banks that made the government-guaranteed PPP loans to small businesses are set to collect billions of dollars in fees directly from the Small Business Administration
- Through the end of June, more than $521 billion in PPP loans had been approved, according to the latest data from the SBA
- Not out of the kindness of banks hearts - The top 10 lenders will receive an estimated total of more than $3.8 billion in fees
- S&P Global Market Intelligence- JPMorgan Chase, which is the largest PPP lender after extending nearly $29 billion worth of the loans, is on track to make some $864 million in fees. Bank of America, the next biggest, will rake in an estimated $755 million in fees on its PPP loans
- Under Treasury Department rules, PPP lenders can charge processing fees between 1% and 5%, depending on the amount of the loan - 5% on loans of $350,000 or less - 1% on loans of $2 million and above
- Lenders are barred from collecting the fees from the small businesses applying for PPP loans; instead, the SBA will cover the costs
- But banks can't count the fees as revenue immediately—they have to wait until the loans are either forgiven or paid back by the company, which could take years – unless the company goes out of business
- While the revenue from PPP fees is a small portion of the overall revenue of big banks, the program does create new assets for them to securitise – again I don’t know that this is going on – but if profits can be made – and the legislation is now removed that limited banks doing this – why wouldn’t they? why not profit off these loans - through getting back into securitising and betting on these?
- PPP loans – banks are providing these – but know that a chunk of these are likely bad loans – and can be gambled on if securitized
- Estimates that 20% of small businesses in the US will cease to operate due to their lockdowns
- Know that the funds are guaranteed - Could be a large amount of companies that fail – but banks bets are covered
- What can go wrong? Involves similar hubris to the 2008 crash – as banks thought that mortgages are safe – nobody ever defaults on a mortgage and if they do, then it is only 1-2% - so the rest are safe
- So all of this could be nothing – but I wouldn’t be surprised if this creates another form of bubble over the next few years as these loans mature
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition.
This week’s question comes from Mario.
“Loving the podcast on the central banks. I have a question about purchasing gold as part of my investment strategy. My core investment strategy is to invest in high quality stocks that pay a consistent and growing dividend however recently I feel that gold and silver as a hard asset are important. I know Warren Buffet advocates against the purchase of gold given its an unproductive asset and doesn't generate income. I like the idea of having a hard asset that is tangible and acts in direct contrast to my equity portfolio however I know this may come at the opportunity costs of income and growth generated from equities.
Do you think holding physical gold or gold in an ETF is a good idea? Why or Why not? Would love to hear your views. “
Today – how gold works in a portfolio for capital preservation – methods of buying it and look at performances in portfolios
- Allocation as a hedge for a financial meltdown - should preserve capital, withstand market volatility, and provide diversification across a portfolio
- Gold and silver – an asset which is virtually permanent, with no significant erosion of quality over time, could arguably be considered a safe haven – good evidence that Gold has provided hedge again collapse – limited supply at about 1.5% p.a. increase
What is Gold true role – Capital preservation – but also Money – Base money for most of history - 1912 when J.P. Morgan was called to testify before Congress.
- Congressman - I want to ask you a few questions bearing on the subject that you have touched upon this morning, as to the control of money. The control of credit involves a control of money, does it not?
- JP - A control of credit? No. – Congressman: But the basis of banking is credit, is it not?
- JP - Not always. That [credit] is an evidence of banking, but it [credit] is not the money itself. Money is gold, and nothing else.
- This is very interesting – our money now is credit – Fiat – not backed by gold
This is Why people buy Gold – protect from these outcomes
- Also has many other uses including jewellery, electronics, dentistry, medical and other industrial use – and of course investment.
- Jewellery is the single-largest individual source of demand –
- 40% is investment purposes – bars, central bank reserves, ETFs
- Reasons for buying gold – Seen as safe haven when economy tanks
- fear of an economic crisis or inflation outbreak fuelling public demand;
- Gold has historically served as a hedge against a declining US dollar and rising inflation
- price of gold often moves in the opposite direction to the US dollar - reflecting the fact that many regard the yellow metal as an alternative currency
- a change in the sovereign wealth funds asset composition, such as demand from China, to diversify their holdings; and
- negative bond yields losing their appeal as an effective hedge against equities.
- If Aus starts QE – gold goes well
- Financial System - “Race to the bottom” fuels global demand for gold
- fear of an economic crisis or inflation outbreak fuelling public demand;
Why is gold and silver good?
- Limited supply – Paper money today has potentially unlimited supply – at the Central Banks discretion
- Government has debt in the trillions, Australia, the UK and most of Asia (other than China) are all up to their eyeballs in debt
- Came from getting the money printed by issuing a debt instrument (bond) for the cash – but they also have to pay the interest back as well
- Over printing creates pressure on the currency, increasing volatility.
- Demand – If people buy gold, the price goes up
- Supply is limited – you have to actually go and find the metals, and get them out of the ground, there are not many new sites being found. This is why they are considered ‘inflation proof’, retaining real value compared to fiat currency
- Government has debt in the trillions, Australia, the UK and most of Asia (other than China) are all up to their eyeballs in debt
How to gain exposure – 3 major ways
- Gold ETFs – Through ASX – Few to choose from
- Gain exposure to gold pricing – buy ETF share, then represents an ownership in gold -not same as direct
- This works to hedge a portfolio based around price movement – easiest way to gain exposure to gold/precious metals -
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Physical Gold – done through dealers or private companies
- Storage - Hiding it under the mattress or arrange for secure storage - comes with its own associated costs
- Bonus of this – hold an asset you can store outside of the banking system with a private company
- Best way to preserve wealth during times of financial turmoil.
- holding physical bullion risky—and it can be - stolen or even melt in a house fire - requires adequate insurance
- can purchase and store physical gold bullion using automated platforms
- Gold mining companies/ETFs
- Another way of getting exposure is to invest in listed companies with exposure to gold.
Australian-listed companies include large, long-life gold miner Newcrest Mining (ASX: NCM), and mid-size gold producer Regis Resources (ASX: RRL) – both of which currently screen as overvalued by Morningstar senior equity analyst Mathew Hodge. - Unlike other vehicles, stocks can provide a dividend income, but naturally introduce other variables, including the quality of the mine life, the cost of getting the metal out of the ground, company earnings and other balance sheet considerations.
- Another way of getting exposure is to invest in listed companies with exposure to gold.
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With one trade on ASX GDX (VanEck) gives investors instant access to 44 of the largest and most liquid global gold mining companies.
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GDX is the world’s largest gold miners ETF with around A$15 billion in assets under management.
Downsides – the opportunity costs to the portfolio -
- Gold itself as an asset class – not an income producing assets – but this is due to no counter party risk
- Cash – held in banks – pays interest –
- Income returns can pick up total returns on shares or property if the growth is low or negative
- Return solely based on demand
- Only Growth returns…which is hard to predict
- Too much diversification can hurt long term growth
- Physical gold downside - Costs for bullion storage
- ETFs downside – Counterparty risks at many levels – talked about this in previous ep – crisis assets
- Counterparty risk is present when another party in an agreement can default or fail to live up to their obligations
- Gold is meant to provide protection in collapse – but what if banks are collapsing – they are the counterparty
- Example – Buy ETF and gain exposure to the price of gold – Buying ETF through a large financial institution
- responsible for obtaining the underlying assets necessary to create ETF shares – Gold
- purchase gold as a trustee – then this trustee uses a custodian to source and store this – Custodian major counterparty – trustee is minor counter party
- If you buy gold as portfolio insurance against a systemic failure in the financial system – ETFs are intertwined with the world’s largest banks - doesn’t fit purpose well
- HSBC is the custodian for most ETFs in Gold - HSBC use sub-custodians, such as the Bank of England, to source and store gold. So, in addition to carrying custodian risk, investors also have sub-custodian risk.
- Technically – you are a shareholder of the Trust – access gold pricing – paper claim to gold
- The real irony is the price of gold could be skyrocketing and the ETFs could be going bankrupt at the same time.
- As such – if you are worried about a collapse of the financial system – direct gold better –
- If it’s in ETF form, good luck getting your gold! It’s all electronic through derivatives
How does it look in a portfolio
Van Aus, Van Int and Gold – returns ending 30 June – total returns
| Allocation | 6 Months | 1 Year | 3 Years | 5 Years | 7 Years | 10 Years | Volatility | | 40 40 20 | -1.69 | 4.80 | 10.06 | 8.73 | 10.60 | 9.53 | 15% | | 45 45 10 | -4.23 | 1.88 | 9.12 | 8.30 | 10.51 | 9.87 | 17.5% | | 50 50 0 | -6.78 | -1.04 | 8.13 | 7.82 | 10.38 | 10.16 | 20% |
Whilst they are very separate assets to each other, they work in a similar way. There has been increased volatility with shares in recent months, and this has led to an increase in gold and silver prices. They are considered an alternative growth investment; when other asset classes like shares, property and even bonds are doing badly, gold and silver are considered a “safer” way to invest.
Where it fits into a portfolio
- Growth allocation – Mainly as a capital hedge
- Constructing a portfolio, it might be suitable to allocate 5% - 15% or so into gold, but that doesn’t mean it’s right for everyone
In summary – It’s good as a long-term inflation hedge, and to diversify a portfolio out further, but can be volatile or non-performing (due to no income)
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury.
The future landscape of superannuation – the rise of megafunds through compelled mergers
Numerous bodies, including regulators and government, have been keen for superannuation funds to merge
- The merging of several larger superannuation funds are currently underway creating so-called mega funds. On the flipside, there are smaller superannuation funds, particularly niche funds who focus on areas such as ethical investments, that are holding out against the pressure to merge.
This episode – we will focus on the issue of mergers in superannuation, where it can bring benefits and where it cannot – implications for the future of superannuation
The consolidation of superannuation funds is primarily being driven by APRA and superannuation trustees - believe such moves can improve the super system and lead to better outcomes
- This belief is supported by findings from the Productivity Commission (2018) review of the efficiency and competitiveness of the Australian superannuation system. Three findings pertinent to mergers were:
- Compelling cost savings from realised scale have not been systematically passed on to members as lower fees or higher returns. Much scale remains elusive with too few mergers.
- Rivalry between funds in the default segment is superficial, and there are signs of unhealthy competition in the choice segment (including product proliferation). Many funds lack scale, with 93 APRA-regulated funds — half the total — having assets under $1 billion.
- The default segment outperforms the system on average, but the way members are allocated to default products has meant many (at least 1.6 million member accounts) have ended up in an underperforming product, eroding nearly half their balance by retirement.
- APRA – Academic study conducted - found that generally members benefited from being in larger superannuation funds for three reasons:
- Larger not-for-profit funds provide diversification benefits of investing in more asset classes including unlisted property and private equity.
- Larger funds avoid the scale diseconomies in investment returns documented in studies of equity mutual funds.
- Larger funds make substantial savings by spreading fixed operating costs (such as IT infrastructure) over a larger asset base
Projections – Major areas – APRA: Corporate, Industry, public sector and retail – the SMSF which is ATO
- The number of APRA-regulated super funds in Australia is set to shrink considerably. In its Super Insights Report (2019), KPMG estimates APRA-regulated funds will fall from 217 to just 85 in 2029.
- Corporate funds will fall from 24 to six; industry funds from 38 to 12; public sector funds from 37 to 15; and retail funds from 118 to 52.
- the number of SMSFs is projected to grow from 596,225 to 770,759 by 2029.
- Australia’s super assets have ballooned to $2.9 trillion as of September 2019, making it the world’s fourth-largest retirement savings pool. The nation’s super assets are forecast to more than triple to $10.2 trillion by 2038, according to Deloitte’s recent report - Dynamics of the Australian Superannuation System
- According to Rice Warner’s Superannuation Market Projection 2019report - within five years - the industry will be dominated by nine funds controlling $1.7 trillion
- includes a merged QSuper/Sunsuper with $350b of assets, AustralianSuper with $325b, AMP with $200b and UniSuper with $150b.
- Looking forward - When combined with the strong growth of super savings to $10.2 trillion by 2038, these megafunds will make super funds an increasingly powerful force in corporate Australia, particularly in listed markets.
- If funds continue to hold a similar allocation of assets to Australian shares as they currently do, Deloitte says they will “dominate the Australian Stock Exchange holdings” and estimates the proportion of the ASX owned by super funds will almost double to 60 per cent by 2038
Beyond what the productivity commission mentioned - Why merge?
- Outflows and sustainability –
- Net cash outflows The aging population is another reason that there is pressure to merge. As the demographic of a superannuation fund’s membership ages, there will be an increasing level of outflows from the fund. According to KPMG (2019), in 2018 one-third of funds were in an outflow position, while the median fund retained approximately 17 cents in every dollar received.
- Sustainability of superannuation funds Of course, outflows need to be at a sustainable level and APRA is concerned that this may not be the case for many superannuation funds.
- Liquidity issues – super funds with outflows may struggle
- Increasing the scale of the funds due to the size of the super - The benefits of scale can include:
- lower per member operating cost (for example, the cost of developing technology can be shared over a greater number of people)
- more influence to advocate on behalf of members – more powerful companies -
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Issues - Best interests duty of what is in the members actual interests or the superannuation funds interest
- trustees will also need to consider whether the transfer would breach the obligation to perform duties of acting in the best interests of their members
- has been lots of talk about why small or under-performing funds have not merged with large funds –
- Small vs large funds - If a small fund has high fees, high investment costs, high operating costs and it merges into a larger fund that has lower of all of these, all else being equal, it is a very clear case for the small fund
- However, while it may only be marginal impact to the large fund, it is difficult to prove how the merger is in the best interests of its members.
- Failed mergers – not all internal players of super funds her on - contention over job roles has been blamed for the failure of some mergers to occur
- proposed merger between Australian Catholic Super (ACS) and Australian Catholic Superannuation and Retirement Fund (ACSRF) to create an $18 billion fund in 2018 came unstuck when the former demanded that it be able to appoint the chair of the board
- failed merger came under scrutiny at the Royal Commission into Misconduct in Banking, Superannuation and Financial Services Industries, with Commissioner Hayne inquiring why it mattered who merged into who
- Efficiencies not guaranteed – especially the scale or operational efficiencies
- Where fee arrangements are tied to volume (either in value of assets or number of members), scale efficiencies might not be as easy to achieve as one might assume.
- However - increased bargaining power can see a renegotiation of terms with service providers to reduce the cost base for all members – look at the PDS for super – has management fees, ICRs, operating costs, borrowing and property costs -
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but require that trustees have an active strategy for managing outsourced functions – otherwise, there is no incentive to reduce these fees as the percentage scale just means more money
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One benefit which is promoted is that these super accounts will have access to direct investments into areas such as property and infrastructure – but this comes with a downside - need to be managed with liquidity risks
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Lack of membership diversification of choice of funds - impacts of the coronavirus on the superannuation system had revealed a structural weakness that had long been hiding in plain sight; the failure to diversify fund membership, which can be as dangerous as failure to diversify investments - we need to ask ourselves whether such proposals which essentially double down on the same set of risks are wise... Are such mergers – motivated more by super’s industrial relations legacy than by modern-day concepts of prudent risk management – to the benefit of their members?
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Is there going to be a role for smaller superannuation funds – reasons for mergers is that the majority of chronic underperformers are found in the smaller-end of the superannuation industry - not the whole story
- Smaller funds may not have scale - but they can have some advantages in some situations
- smaller superannuation funds are nimble and are able to take advantage of small but profitable investments that the larger funds overlook because it is not worth their time for the amount of money involved – or cannot take a position worthwhile into
- Managed funds have issued with this – move the price of assets when buying in or selling – reduces the returns
- Niche funds– a subset of smaller funds that cater to particular interests, such as ethical investing – may also struggle to play an important role in the superannuation ecosystem where mergers are being promoted by policy –
- These services could be lost if they were swallowed up by larger funds
- Would provide limited options or ability for members to line their superannuation up with their investment philosophy
- some of these funds are seeing rapid inflows of members and funds- been the fastest growing superannuation funds over both one and five year timeframes for inflows
- Smaller funds may not have scale - but they can have some advantages in some situations
Implications for the industry if consolidation continues
- Study by KPMG 2019 -consolidation is likely to see the rise of what has begun to be known as the ‘mega funds’ – that have ownership over most of the ASX – control companies –
- Super funds are expected to use their increasing clout – over the past 15-20 years - industry funds were largely passive shareholders – but this has been changing - becoming activist shareholders
- funds are starting to invest based around climate change and corporate governance - called environmental, social and governance (ESG) decisions
- Might have seen in the news about the divestment from Coal companies and other industries
- One of the most important implication is that the power of superannuation funds - particularly that of mega funds
- Some concerns – example - Australian Super and Westpac in the AUSTRAC scandal - AustralianSuper, Cbus and Hostplus did not support a spill of the Westpac board (other shareholders were pushing for) following the money-laundering scandal in 2019
- Best in class classifications - While slightly tangential to the discussion about mergers, the Productivity Commission recommendation are to have a top 10 ‘best in class’ default superannuation funds based around performance
- Has an overlap with mergers and what the industry will look like – though it is important to note that just because a superannuation fund is one of the largest funds does not necessarily mean it will be one of the top-10 ‘best in class’ funds
- For those outside of the top-10 ‘best in class’ default superannuation funds, inflows are going to become more of a problem as they will have to rely on people to make an active choice to join their superannuation fund
- But no guarantee that the best in class would be that next year or the year after
- This will likely cause further consolidation across the industry as many funds will no longer be able to rely on default members to prop up inflows – basically getting a stamp – further consolidating power into the top super with FUM
- Predictions are that over the next 15 years superannuation will increase from $2.7 trillion to $4.8 trillion, discounted to today’s dollars - There are two factors which have a range of implications: 1) Continued consolidation. 2) The increase in FUM which greatly surpasses GDP – where there may not be enough assets to invest in reducing the quality of investments
Applying this to your own situation –
- Pay attention to your accounts – the merging may have issues that impact you as well –
- May have to update things like Binding nominations –
- Also would want to double check contributions are updated
Summary - The superannuation industry looks set to go through a period of consolidation at the behest of APRA and the government
- The aim of this is to create better outcomes for members by driving underperforming funds out of the system.
- However – the practical issues around mergers is complex – such as what advantages this will bring, and whether it is in members’ best interests
- Regardless it is likely that we will see the rise of mega funds and a decrease in the number of smaller funds
- Mega funds are expected to have increasing power over corporate Australia and through that, the economy
- But like a lot of policy – it may not work out as intended and have large unintended consequences
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition.
Last Furious Friday episode – started on a thought experiment – looking at the reversal of the trends in Monetary policy - who knows if these would work and make for a better economy – these were:
- Separate commercial and investment banking
- Remove reliance on a debt fuelled economy – reforming central banks to remove inflation targeting as a monetary policy
All of these are at the monetary Level – solution isn’t the monetary policy solely – whilst I think that most monetary solutions are a major part of the problem - This week – we will be going through the fiscal side – or governmental or regulatory side –
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Focus will be on Supply Side Policies
- help encourage investment and spending at the business level
- because interest rate cuts are ineffective in boosting spending and investment alone – especially if firms are too reluctant to invest or consumers are stuck paying back higher levels of mortgages – instead they have been taking on more debt which hasn’t been fuelling economic growth as theorised – as debt hasn’t been used productively – due to low opportunity cost for interest rates
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Issues with the economy are structural areas – on the fiscal side in this episode – looking at:
- Reverse the trends in regulations and increase supply side thinking
- Enforce anti-competitive behaviours – i.e. monopolistic practices
To start with - Reverse the trends in regulations and increase supply side thinking
Supply side thinking and deregulation go hand in hand - provides another way of thinking about a solution to depressions or underperforming economy – rather than increasing the money supply even further in an aim to boost spending – which is demand side - Supply Side – all about boost domestic demand by cutting taxes and reducing regulations –
- Aim is increasing the supply (companies) and making the job market more competitive – allowing greater number of companies demanding workers – over time should help to increase wages and spending = economic growth –
- not trickledown economics – which doesn’t exist - covered this in an episode in the past - The Myth of trickle-down economics – originally a term used by journalists and Democrats to discredit these policies – but repeat something false enough and it becomes the truth
Summary of why this theory may work better than the demand side economic theories that have determined governmental policies – problems with demand
- Keynes -stimulus to boost aggregate demand is only really effective in relatively closed economies (why they tried tariffs back in 1930 – made the economic slump worse though)
- In the modern economy – with free capital flows, freedom spending and globalization = made most of the stimulus has been in fact relatively ineffective
- Money can flow off shore – or individuals may not spend domestically when given stimulus checks
- Created a situation where the multiplier effect has been small - indeed negligible - and the stimulus economic effects have been rather poor
- Especially when debt funded – so these policies can hardly be justified - I don't think the answer lies in yet more Keynesism, anymore than it necessarily lies in printing yet more money
- But yet Governments are getting more debts to stimulate the economy - old Economists still love this idea – But how is this money ever repaid? Not their problem – dead before bill is due
- Meant to boost business demand because people on average have more money – all it has done is fuel house prices – as lending is going towards this
- Screwed the younger generation – and is having diminishing marginal returns to economic output as debt levels grow
- What is a potential solution? To look at reversing the trend – looking at the supply side and removing the thought of reliance of governments for economic growth
- Doesn’t aim for artificial boost of demand – but create real GDP output growth that is sustainable (not just inflationary from increase in prices through expanding money supply)
Solutions to problem
- We need to look the structural causes of the underperformance of western economies right now
- And we have to bear in mind that the one reason the economic growth is sluggish is not just that there is a lack of aggregate demand, there are three other major problems.
- One is the problem of uncertainty and lack of confidence in the business community, which is stopping cash rich firms from investing within western nations – also with low interest rates – they get lots of debt and do share buy backs at the large corporate sector
- The other is the serious competition from the Asian end of the world and that competition makes it very hard to create jobs and increase wage growth – especially as regulations in each country is no equal – incentivised companies to more jobs offshore
- Massive companies turning free market competition into more monopolistic competition – this undermines the whole system of supply side
- And we have to bear in mind that the one reason the economic growth is sluggish is not just that there is a lack of aggregate demand, there are three other major problems.
- Solutions to these problems are structural rather than what most in the economics departments see as focusing on fiscal monetary policy (stimulus) – which requires more structural implementation (government departments or taxes) to hand money out
- Need to incentivise companies to come back to Australia and western nations – and incentivise supply rather than disincentivise through uncompetitive business environments
Rather than giving people money – aim is to Increase how much money people have – two sides to this – decreasing taxes and increasing wage growth and employment opportunity
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At the individual level - reduce taxes – or flat tax rates – Taxes are Government revenues $474bn p.a. estimated
- Income Taxes – how much disposable incomes are reduced by – Currently $218bn
- Pay average of 38% tax, then say you pay now pay 20%, earning $200k = $36k less tax
- Argument – they will save it all – true that they may save most, but spending still increases
- Income Taxes – how much disposable incomes are reduced by – Currently $218bn
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Is it better for governments to increase taxes to turn around and pay this out to people? Or is it better to just collect less tax?
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Increase PP - Consumption and transfers – also eat away at peoples disposable incomes
- Stamp Duty – property taxes $52bn
- GST (VAT other countries) - $132bn
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Excise/custom duties – Tobacco $12.5b, alcohol $5.7b, fuel $19.5b – Adds increased COL almost $38bn, $1800 per Adult
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Where do wages come from in the private sector? Companies revenues - Increase wages – just pay them more? Not if the money isn’t there to pay – either lower wages, or less staff
- Company tax rate – Currently $90bn
- Payroll tax – One hidden tax paid by companies who employ people once they meet a criteria
- Changes each state – 4-6% on average on taxable wages – if a company pays you more, they get taxed more
- Incentive for companies to not increase staff wages, and also if they cant then their costs increase
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Stats: $23.8bn was collected under this last year – but growth in tax slowing (6%-2%) Companies that might move through threshold are holding off (reduces growth rate of larger companies) – cant just start a second on either – related entities
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Demand for labour – need more companies in operation – competing for people to hire
- Cant work under high tax environment though – stifles businesses employing more people
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Specialised labour – if a low number of people who can do something = low supply
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Additional element - Increase diversity of supply - Increase PPP – Goods that cost less over time – Think about costs (and size) of TVs 15 years ago, to today
- What you do see an increase in costs with are things that we can make cheaper – Technology yes, houses no
- Here is where it all comes undone – these goods can be produced overseas – as these jobs can be outsourced OS –
- Where Deregulations to the business world is required - for the economy but not the financial system – one area that needs more regulation and separation
- More regulations – or the trend of ever increasing regulations doesn’t give much confidence to companies – or people who wish to start a company - Confidence and increased investment come hand in hand
- Strong political direction to be business friendly helps to attract companies – Israel is an example
- Politicians don’t have clear direction on anything – can barely explain the policies and outcomes
- No long-term plan beyond the next election cycle – issue with the political trend – they need to seem busy to justify their jobs – which means passing legislation – 90% approval rate = 180 new laws or changes to legislation every year – not to de-legislate – but more and more – when two of the leading industries growth in employment come from government workers or compliance workers – you have a problem in the economy – not productive in producing new goods or services
- Promising to have stability in legislation - Leavings things alone helps to build confidence– uncertainty is the worst thing for any market – but if politicians aren’t legislating – then it is hard to justify a $200k+ salary each year which you fund
- Boost Aggregate Demand - Create jobs - Improve business and consumer confidence.
- Irony is that the black market economy can still help to boost an economy – back in the 80s in Florida with cocaine – banks had negative interest rates – Everyone was spending more as the illegal cash was spent on their businesses – or investing more – personal investments form part of ‘savings’ in GDP – but allows for companies to have more capital to hire more people, pay them more, increase their long term productivity –
- Increase productivity – less regulation allows for competition internationally - Has a few components, but measures the ‘bang for your buck’ for how much gets done – Technology, labour, capital
- Labour - Jobs – either lose them through holding on (and subsidising) – or building new technologies that help to facilitate the work that will inevitably be lost – we are in a global economy – like it or not, have to be competitive with other nations
- Forcing regulation for labour laws hurts - collective bargaining is great, no problem – but not at the national level where it can be forced onto the economy about no feedback on to what is the affordable rate for a role
- Why a lot of places are closed on Sundays or operate limited hours on weekends – double time and a half
- Those who work in the company – speak out to the bosses – that is who can help your grievances –
- When whole industries get forced into the same regulations – it monopolises the employment into a few bigger places that can afford it – for a little while – eventually more policy is passed – help to subsidise them through tax payer funds (rather than just cutting their costs of regulations) – they go out of business
- In business/free market – if you require subsidies to survive – not a business providing increasing value (growth)
- All of the above fails if you have larger corporate powers – Large companies are almost socialist in nature – merging of state with companies – where companies have protection and barriers to entry
- This is where I have changed my thinking over the years – I used to be very much free market – to the libertarian side – but realised that under a fully de-regulated world leads to companies ruling us instead of governments – similar to what has happened in the financial systems or central banking sectors of the economy over the past 100 years
- The US has a good bit of legislation called the Sherman Antitrust Act – 1890 - broadly prohibits (1) anticompetitive agreements and (2) unilateral conduct that monopolizes or attempts to monopolize the relevant market
- Major cases back in the early days – Standard Oil was one of the biggest ones in 1911 – same year America tobacco and GE –
- Next major one was in 1999 with Microsoft - and that Microsoft had taken actions to crush threats to that monopoly, including Apple – acting like thugs forcing companies to either use versions of MSO and IE or have non-working computer and software’s for distribution – were found guilty – without this – Apple was likely going to go out of business – as they were in constant lawsuits with MS and had to use their MS
- But since then – the legislation hasn’t been well enforced- or doesn’t go far enough
- Large companies also reduce the competition for employment – you might have the same number of jobs in the market – but if they are all with Amazon – no competitions and they can pay what they want
The goldilocks zone of regulations – not too hot but not too cold –
Too hot – or too much – you get a situation where you do get monopolies anyway – companies are forced to merge together –
- But too much regulation is bad = Corporatocracy -term used to refer to an economic and political system controlled by corporations or corporate interests - It is a form of Plutocracy – and this has been increasing over the years – helping monopolise companies- and become a self-feeding echo chamber between large corporate interests/lobbyists and politicians – who solidify legislation that while hurt all businesses to a limited extent – those at the top are hurt less or have the budget to hire the lawyers to get into the loopholes –
- companies want to survive – so they merge together as the environment gets harsher – like in nature the largest animals tend to survive longer due to being at the top of the food chain – eats up everything else
- But then the environment gets harsher – the lions start cannibalising themselves – until one is left – then nothing left to eat but here some humans then have to feed it – which is the government
- Example – when tech giants are okay for a tax on AI or robotic workers – why? Would cost them more – but not as much as a start up or smaller business that cannot compete – so kill off the competition
- Too cold – or no regulation – similar situation happens but for different reasons – no protections and you get pricing rackets or forced buyouts – corporate form of Mexican cartel merger
- Solution – easing regulations to make it an even playing field – but enforcing anti-competitive behaviours -
Why I think these will work - You know what is better to spend your money on – companies need to be able to be flexible and be competitive
Individuals are the best judge for what activity will improve their lives – on average. Some people make poor choices – but learning form them lets people grow – it is part of life – similar to the corporate world – but when large company failures are rewarded with bailouts and government backing – creating zombie companies – not free market – just lets small companies fail and large companies artificially thrive
Why I don’t think these will work – too much money involved with large companies and donors to political parties – also de-regulation puts a lot of Government out of work – cant have that
Also – puts the economy outside of the governments hands
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition. This week’s question is from Shaf –
“I would like to get your opinion/analysis on Australia’s ageing population, and investment opportunities that are linked to this segment of the market. For example, companies like CGF or publicly listed aged care providers.”
Great question –
This style of investing is along the lines of Thematic investing
- Thematic investing involves creating a portfolio or investing in companies involved in certain areas that you think will generate above-market returns over the long term
- All based on Themes – which can be based on a concept such as ageing populations or a sub-sector such as leisure
- Thematic can be any theme – green energy, AI or technology
- Aging population has been a big one for a while – first saw it come into mainstream in late 2010
Because of Australian and western nations aging populations -
- many developed nations are facing an ageing population - While the issue might pose some economic challenges- it has been thought of as opportunities for companies and investments into those companies
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“demographic time bomb” – what does it look like
- 1950s - across the globe, there were on average 12 people in the workforce to support each dependent. By 2050, this ratio is predicted to contract to roughly 5:1
- Ageing populations are driven by increasing life expectancy and falling birth rates - typically seen in nations that have held ‘developed’ status for several decades
- In Australia – ABS data - currency 100 workers in the population for every 50 dependents
- By 2066 -Australia’s population estimated to be 50 million, there may be as many as 70 dependents for every 100 workers
- projected that the number of Australians aged 65 and over would more than double by 2055, compared with 2015
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by 2100, it’s estimated that there will be more people aged 100 or more years than babies born in that year
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This demographic shift will see the public purse put under increasing strain, as a greater share of the population exit the workforce and become reliant on the government for care, medication and housing
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But the question still remains – is there opportunity for investors to profit from this trend?
- Yes and no - Keeping an older generation fit and healthy requires significant investment in certain areas such as healthcare and technology – so having some exposure in your portfolio to stocks tapped into this sector and their healthcare counterparts, may make sense – but what areas can be invested in and how to do it?
- This isn’t advice – not taking personal situation into account –
- Major areas that may benefit – asset managers, healthcare, pharma, age care, biotech and leisure companies
- Side note – these predictions and forecasts on aging population demographics are long term – numbers by 2050 – and require steady growth – don’t think of this as a quick investment trade to make money - come back to this
- Health care - The health caresector is the most obvious beneficiary of the ageing population trend.
- greater population of older people, there is naturally an increased demand for health care services, equipment and supplies.
- Deloitte analysts predict spending on healthcare will grow around 4.1% p.a. – Growth rates forecasted above GDP growth – so if this continues the right company could beat the market
- also government health expenditure is expected to reach 13% of GDP by 2049-2050, up from its current levels of around 7%.
- demographic is likely to have implications and opportunities for investment markets
- Pharmaceuticals - the pharmaceuticals industry will see sizeable growth as the median age shifts towards later life
- Studies in the US showthat 75% of individuals aged between 50-64 use at least one prescription drug regularly – same study shows that this figure rises to 91% for 80+ age bracket.
- This is paralleled by the dramatic increase in the number of drugs consumed by older people
- the 50-64 bracket in the US held prescriptions for around 13 medicines, this number rises to around 22 for patients in the 80+ age category
- These figures, when put into the context of an ageing population show decent long term prospects for drug and medicine producers – especially with the thematic of medical industry in general – more profitable to treat symptoms than cure
- Side note – medicinal cannabis on the pharmaceuticals scene are the growing - a range of pain relief and alternative therapeutics
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Aged-care - Retirees' living arrangements can also change as they age - move into retirement villages, then shift into residential aged care when their ability to look after themselves diminishes
- If this trend continues = see an increase in demand for residential aged care – so the aged-care industry is also one that should benefit from the ageing population and rising spending – this sector it is well-represented on the stock exchange
- But has its problems – more recently suffered from recent negative publicity concerning care practices, culminating in the announcement in September 2018 of a Royal Commission into the sector – work off tight spreads now that pricing caps got introduced and sit on the capital –
- so are rather volatile
- Biotech – medical research and Modern medicine
- The other part of the profound demographic trend of an ageing population is that with advances in modern medicine – aims are in general to not just make Australians live longer, they are enjoying more years in good health
- Lots of smaller companies with new promising technologies
- However - Investing in Australian biotechnology companies may present a level of risk and is generally a longer-term investment proposition
- High level of R&D - because the treatments must pass a number of stages of clinical trials in order to reach federal approval
- So a lot of these companies fall into the category of investing out of hopes as many don’t have solid cashflows with many income streams – example ACR (Acrux) – where I invested out of hope in 2014-
- Price went from $4 to $1 – so I jumped in – price drops was off bad news – but then prices bounced back to $2.20 – thought I was a genius – then over time the technology never took off and price went to $0.15 – learnt from this
- The other part of the profound demographic trend of an ageing population is that with advances in modern medicine – aims are in general to not just make Australians live longer, they are enjoying more years in good health
- If this trend continues = see an increase in demand for residential aged care – so the aged-care industry is also one that should benefit from the ageing population and rising spending – this sector it is well-represented on the stock exchange
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Also faces legislation risks - Stem cell applications for treating osteoarthritis have already seen significant pickup in Japan - the nation currently experiencing the worstageing population crisis – but are open to ethical and legal risks
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Leisure - As Australia’s transition into retirement – there may be an increase in leisure, travel – but also general entertainment spending – going out and dining
- Travel spending, which is comparatively highly in Australia, increases year on year for adults until age 45, after which it plateaus – but if larger populations – then more people spending
- But after a certain age this spending declines – generally after 75s
- Asset managers - retirees are also expected to live longer - which does increase longevity risk - the risk retirees will outlive their savings - creates opportunities for financial services providers to come up with products to provide income streams to retirees -
- Here is where Challenger falls in - One of the major challenges facing Australia's retirees and ageing population is provision of retirement income streams where Challenger has lots of annuity products and guaranteed products -
- Older articles on this claims that Challenger's Life segment offers fixed-rate retirement and superannuation products, which are growing strongly and will continued to do so. In 2014 - annuity sales growth was 38 per cent to $1.5 billion - But was banking off the rush to lock in annuities prior to the changes in legislation to Centrelink treatment –
- Risk to challenger is that is focuses on the retiree markets – and products lack flexibility
- super has changed since then as well – competition from other asset managers – and at risks of market crashes as these companies make money off FUM – due to administration costs –
- Out of these options – asset managers outside of challenger wouldn’t be a thematic for aging population – as they draw down not accumulate – it would be better to focus on accumulators as a these if you want to look at this as an option
How to invest -
- Direct companies on the Australian Securities Exchange (ASX)
- ASX hosts Australia’s global healthcare shares including those developing medical devices for sleeping and hearing as well as plasma based therapies – also has access to private hospital operators in Australia, some of the biggest in the world.
- Other major domestic stocks include private hospital and medical centre operators as well as pathology, medical diagnostics, and pharmacy networks.
- Issues – themes can be wrong – but also Selecting individual winners amongst the heard
- Example - ASX – article back in 2014 to illustrate this –
- Japara Healthcare - Japara Healthcare owns and operates residential aged care facilities. It has 35 facilities and four retirement complexes throughout Victoria, South Australia, NSW and Tasmania. The company is highly dependent on government funding but the ageing population will continue to drive demand. At the moment there are just over 420,000 Australians aged 85 or over, or 2 per cent of the population. That is expected to more than double to 5 per cent by 2061. - Many investors would have seen the strong share market debut from residential aged care operator, Japara Healthcare, in mid-April 2014 – when it listed stock closed its first day at $2.70, some 35 per cent above its $2 listing price.
- Issued in 2014 – at around $2.70 – sitting at $0.5
- Another one was gateway lifestyle – listed – did well for a bit but then "GTY" delisted as of 26/11/2018
- Healthscope - Healthscope is Australia's second-largest private hospital operator, with 41 hospital. It also has a big pathology business with 578 collection centres, 69 laboratories and 46 medical centres. The company originally floated on ASX in 1994 but was bought and taken private by private equity players TPG and The Carlyle Group in 2010, and recently returned to the market in a $3.6-billion listing – then "HSO" delisted as of 11/06/2019
- Primary Health Care - Primary Health Care is another play on increasing demand for medical services from an older population. It operates medical centres as well as health technology, pathology and diagnostic imaging services - Now is HLS Healius Ltd - Was at about $4.50 – now at about $3 – was trending downwards for 6 years
- Invocare - Invocare is the largest funeral, cemetery and crematorium industry operator in Australia, New Zealand and Singapore. It operates national brands such as White Lady. The company says the growing ageing population will increase the annual death rate from 1 per cent a year, to 2.7 per cent per annum by 2033 - $10.50 – now about the same
- Japara Healthcare - Japara Healthcare owns and operates residential aged care facilities. It has 35 facilities and four retirement complexes throughout Victoria, South Australia, NSW and Tasmania. The company is highly dependent on government funding but the ageing population will continue to drive demand. At the moment there are just over 420,000 Australians aged 85 or over, or 2 per cent of the population. That is expected to more than double to 5 per cent by 2061. - Many investors would have seen the strong share market debut from residential aged care operator, Japara Healthcare, in mid-April 2014 – when it listed stock closed its first day at $2.70, some 35 per cent above its $2 listing price.
- Have been some good ones –
- Ramsay Health Care - Ramsay is the largest operator of private hospitals in Australia and one of the leading operators of private hospitals in the UK and France. The company is well placed to benefit from increasing private health insurance membership and an ageing population - Went through a meteoric rise from early 2000s till 2016 – stalled out since as PE and revenues have been catching up
- Sonic Healthcare - Sonic operates in three segments: pathology, radiology and corporate office functions/medical centre operations. The company provides medical diagnostics, laboratory and radiology services to medical practitioners, hospitals, community health services, and their collective patients. It also operates Australia's largest network of primary care medical centres - Independent Practitioner Network - as well as other healthcare businesses. – Have been a good growth prospect – pay out okay dividends –
- Other options - Global healthcare indexes - One way to gain exposure to the healthcare industry is via exchange-traded funds (ETFs).
- Several ETF issuers have created vehicles that track global healthcare indices – allows you to diversify and pick up Aus and International shares with access to these themes – purchase some of the world’s largest listed pharmaceutical companies, medical device makers and healthcare companies in one ETF
- There are some risks – currency risks and also the nature of ETFs with their structuring – but a more diversified way
- A lot of these ETFs look like they have had great returns over the past few years – a lot of that has been the devaluation of the AUD to USD – so just watch out for that – might look like companies have been doing well – but in reality major driving factor for returns has been currency
In Summary -
Australia’s ageing population will potentially provide tailwinds for decades to come to the economy – but can provide for additional sectors of returns – from boosting the demand for drugs, surgeries, medical devices, private hospitals, medical centres and aged-care facilities, as well as services such as nursing, pathology and radiology
- But Remember as well – all of this is priced into these shares – it was priced in and then they don’t perform as well – or competitors come in and they sink
- Industry saw massive booms back at the listing of a lot of these companies – for payoffs that may take decades – so many lost steam and values and delisted in the end
- Nothing wrong with investing in thematic – but not fully - All because something might sound good – might not be fundamental or it might already all be priced in based around forecasts
- buying stocks on the basis of a long-trend trend is a dangerous strategy if underlying value is ignored.
- Time will tell the full extent to which Australia’s ageing population will catalyse growth in the health care, biotechnology, pharmaceutical and leisure sectors.
- If you are looking at getting into the theme – probably better to select an ETF and to be patient – but know you are investing for the long term and that the growth of these industries is already priced into the shares
- Doesn’t mean that they still wont keep going up though
Thanks for the question – anyone else
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury
What is important when it comes to investing? Or which is the more important – what you know or what you do?
Sometimes the more you know – the harder it is to invest – information overload – can be a curse of knowledge – if you knew nothing but over the past 20 years just bought index funds – better off than if you knew everything (which nobody does) but never invested a single dollar –
In this episode – talk about Investing actions – over knowledge
- Obviously, knowledge helps – helps you plan and know which actions to take – but the actions that you take can make the difference between Financial Independence or Financial dependence
- Taking action versus theory – why? Well even sometimes fundamentals aren’t important – the knowledge of fundamentals
- Even at the moment - The current market gains – even against a backdrop of deteriorating economics and fundamental news and data – this is certainly a worry – but it does make sense with Central Banks furiously flooding the system with liquidity
- So the risk of using knowledge is essentially fighting the Fed – and that is a losing position
- Market has a pavlovian response to the Fed now – Something that I have learnt more during the past few months
- Even at the moment - The current market gains – even against a backdrop of deteriorating economics and fundamental news and data – this is certainly a worry – but it does make sense with Central Banks furiously flooding the system with liquidity
- This podcast – provides lots of theory and hope I am providing knowledge – important to not get bogged down in this solely – needs to be practically applied –
- However - On mass – I can tell everyone what to do – as that wouldn’t be right – one solution doesn’t meet everyone’s needs – would be irresponsible –
- but you can use strategies that you learn to practically apply
How to start taking actions – process of how to build you own Simple Rules to live by
- Life has to be an iterative process – Iteration is the repetition of a process in order to generate a sequence of outcomes. The sequence will approach some end point or end value. Each repetition of the process is a single iteration, and the outcome of each iteration is then the starting point of the next iteration
- Take actions and learn from them = what doesn’t work change – what does work keep doing – demonstrable actions is important
- Do more of what works and less of what doesn’t.
- Use your knowledge to build rules – over time You will build additional Rules – and these will help you make action – keep the process going – action after action
- Takes some time to get rules in place – then action can flow
Set goals and be actionable – it sounds very simple – but there are steps involved
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Always remember - You are investing in your future – have to put goals in place
- Need to know where you want to go to get there –
- Actions – if you were going to take a road trip – planning and actions
- You can know where you want to go but unless you get in the car and drive you aren’t going to get anywhere
- Need to know where you want to go to get there –
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Won’t run through goal setting – but there are workbooks and tools in the members section of the website if you haven’t got any or need help – financeandfury.com.au
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You can negotiate with your future self – and your future wealth - Be actionable about it – if you want it, you can get it - Start now and never stop – The future catches up on you – just have to adjust course
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Earlier you start the more you will have – the more actions you will take – the more you will learn – the more your future will thank you
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When looking at goals - Think long term and big picture - Think about what your future looks like
- What you want to do, and how much you need to do it
- Rule of 20 – Plan to get a 5% income off investments - E.G. - $100,000 = $2,000,000 asset base
- If you aren’t sure what this looks like – Work it out
- Need to have a plan in place as it is hard to work towards something that you don’t know
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Invest well and don’t lose money repeatedly - Taking appropriate actions – first step is to watch out for taking too much risk – but also not enough
- Normally the thought when it comes to investing and the risks associated are that you are going to lose money – normally the first thing that comes to mind
- But there is another major risk in investing – losing money by not investing – sounds weird but you miss a good future opportunity through sitting on the sidelines through your life – i.e. holding cash long term
- So you can eliminate either one, but you can’t eliminate both at the same time
- Need to take some risks for rewards – but how do you position yourself between the two – by taking the right actions -
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Caution is important – but taking actions over time will build investment maturity – but any investment discipline that you build over the years does not work if it is not followed
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Remember that losing some money is part of the investment process – I have lost plenty of money over the past 15 years of personally investing – but I have learnt a lot for them – they are expensive lessons
- It comes back to managing risk and volatility
- important to have a process that can mitigate the risk of loss in your portfolio- if done right - does this mean you will never lose money? Of course, not.
- The goal is not to lose so much money you can’t recover from it and set up a portfolio and investment actions that ensure that you take the right level of risk
- How – quality and diversification
- Quality - Don’t invest in hope of large instant gains - takes years to get good compounding gains, doesn’t happen overnight – investing out of hope = Losing funds will destroy your future
- Diversify – to start - At least 15 – 30 companies (or a few ETFs/LICs) across different asset classes and sectors
- REMEMBER: Invest in line with the big picture – i.e. Passive income of 5%
- Having 20 properties is no good if they are negatively geared – costing more than you earn
- The one action that can make things worse is giving in to your emotions –the desire of getting rich quick – or panic selling –
- Constant battle against the desire to get rich can lead to investing in bubbles or getting caught out in a fraud like Bernie Madoff or Storm Financial
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Ignore your emotions – Unemotionalism – important to not get trapped by making a bad decision based around fear or greed
- If you are too emotional – may have the tendency to buy at the top and sell at the bottom – why?
- Get trapped into the emotions of everybody in the market - euphoric when prices are high or sell when everyone is afraid
- Takes time to reduce your emotions when investing – practice and patience
- Therefore - unemotionalism is one of the most important criteria for taking successful actions in investing
- if you can’t be unemotional – and train yourself not to be - maybe you should not invest your own money
- Investment action of contrarianism – doing the contrary of what everybody else is doing – therefore not being emotional is one of the basic requirements for contrarianism
- Major emotions – fear and greed – these are what drive the market
- Invest out of greed - wanting returns – sell to avoid loss – makes markets crash – these two emotions are why being unemotional when it comes to your money is a very hard thing to do.
- Take for instance – times such as now - logic states that we must participate in the market long term – but the fear of the market going down may be holding people back –
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That is where these emotions – if they are felt strongly enough create a situation of taking extremes – not investing at all or investing everything hoping the market continues on a bull run
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Do emotions still seep into our decision-making process? Of course. Paying attention to greed and fear of others is important -
- Pay attention to your emotions – others are likely having them as well –
- But making Emotionally driven decisions void the investment process- When markets are trading at, or near, extremes do the opposite of the herd
- Be patient – Don’t rush in based on fundamentals like PE or Yield – as these may likely be changing soon - Don’t try to go for big wins quickly - Doing this is the only way I have lost money – investing out of hope
How do you improve? One small thing at a time. That is the process to improvement.
- Financial habits are built through the positive feedback of cue, action, and reward.
- These decisions years ago have improved my position now.
- That is the relationship with good habits. Keep improving you slowly over time.
- Taking actions put you into the Pareto distribution or 80/20 rule.
- 20% who have 80%, they have been able to grow good habits, that have compounding effects
- It is as simple as investing and waiting. $20k today would be $80k in 14 years at 10%
- Track your progress to get to your ideal future
- Be honest with yourself – somebody has to (or have your partner keep each other accountable)
Summary for Putting it in place and continue making actions
- Figure out what you want to do
- Hardest part for some people to answer
- Look at your expenses – What your ideal lifestyle costs
- Also, when do you want it by?
- Time matters thanks to inflation - $1 today is not $1 in 10 years
- Apply the rule of 20
- What asset base will you need?
- Apply inflation – 2.5% by the time
- Reverse engineer your targets
- Play around with online calculators with how much you need to save each money to get there
- Just do it – Action is more important than planning – not that planning isnt important – but doing both is even better
- You can know what to do – but if you don’t do anything then it will never happen
- Start taking actions – if you aren’t already - Don’t be a victim – don’t blame others
- Take control as nobody else will do it for you
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition.
- Does the Government need to solve economic problems? Do central banks solve economic problems?
- If so – how? These are honest question that do need to be thought about - there seems to be this growing thought through western societies that the answers to both are yes. That individuals are no longer capable of making their own decisions or choices in the economy – and it is up to a higher power
- But yet- if we are left to our own devices, would we solve the problems of the economy over time through our voluntary choices?
- Going to the extreme examples - If more money redistribution to the people from Governments, or increased government controls over the economy worked so well – then socialist states should rock
- People would be clamouring to get into these nations – not get out and go to nations with a freer market – which simply means greater freedom of choice when it comes to economic activity –
- The flight from socialist countries and the better quality of life in economically free counties has been the demonstrable trend over the past 100+ years – But whilst you can do a bit of digging and see this – socialist nations do sound great – having governments control the economy and provide everything to people does sound attractive to some people - might sound good but in reality when something goes wrong – there is no free economy left to solve it – no individuals to make voluntary transactions or start a business
- reliance on the government is all that is known or allowed – so to get out of any economic worries – more of the same is turned to – with increased gov spending or taking over control of more of the economy – which tends to compound the problem
- In western economies - Most economic problems as I see them stem from the trend of increasing regulation and additional controls over our lives that the Financial System plays – Even government regulation that is meant to do good can go wrong
- The very nature of the global financial system is moving down the trend of additional control over the economy
- No inflation? Drop interest rates. No GDP, increase government spending.
This episode will be a thought experiment – looking at the reversal of the trend – I’m just one man – who knows if these would work and make for a better economy –
These are just my thoughts on reversing trends which have resulted in a fragile and skewed economy – probably missing many problems with these solutions – due to the orders of effects from actions – There are four major structural areas of the economy that need fixing through reversing trends over the past 100 years – falling to the fallacy of the intelligentsia of only having no external feedback loops for ideas – but it is fun to think about so here we go
- Separate commercial and investment banking
- Remove reliance on a Central banks fuelling a debt based economy – reforming central banks to remove inflation targeting as a monetary policy
- Reverse the trends in regulations and increase supply side thinking
- Enforce anti-competitive behaviours – i.e. monopolistic practices
Big topic – so split this up into Monetary and Fiscal policy – first to points in this episode – last two next week
Separating commercial and investment banking – the interconnected nature of the financial system
- This used to be the way things worked – - where you have a bank you put money with and borrow from – and another that invests in speculative positions - talked about this in the episode “What has created a system where the share market can go down so quickly?” and a number of episodes in the past
- In summary – In the US – thing called the banking Act of 1933 – one part of this was the “Glass-Steagall” section of the act - forced the absolute separation of the productive banking from speculative banking
- Commercial banks were considered productive – Under this act in 1933 – introduced the Federal Deposit Insurance Corporation (FDIC) – only on those commercial banking assets associated with the productive economy
- Created a system where speculative losses arising from investment banking to be suffered by the gambler
- Worked well for a while – then there came the first mass wave of deregulation –
- While Australia has previously not enacted specific Glass-Steagall legislation – we had Commonwealth regulations which effectively imposed many similar restrictions in place until the deregulation of banks commenced in the 1970s and 1980s
- These were minor to the major onset in the areas of Deregulations – Two major financial centres of London (UK) and New York (USA)
- London - 1986, the City of London announced the beginning of a new era of economic policy – known as the “Big Bang” deregulation - swept aside the separation of commercial deposit taking and investment banking in the UK
- the “Big Bang” set a precedent for similar financial de-regulation into the “Universal Banking” model in other parts of the western world – allowing investment banking to snuggle back up to commercial banking – but now with guarantees
- USA – In September 1987 – massive ramp up in speculation resulted in a collapse in most major share indices
- Within hours of this crash, international emergency meetings had been convened by Alan Greenspan introducing a “solution” - The creation of a new instrument – this was called a “Creative financial instruments” but otherwise known as “derivatives” today - Came up with the derivative instruments as a concept and further increased the risk to the financial system
- The USA Still had the problem of separation of commercial and investment banks – but by 1999 - Clinton found himself signing into law a treaty authored by then Treasury Secretary Larry Summers known as the Gramm-Leach-Bliley Act – this removed the Glass-Steagall separation of commercial and investment banking in the US
- The new age of unregulated trading and creation of over-the-counter derivatives caused these strange financial instruments to grow from $60 trillion in 2000 to $600 trillion by 2008 – But around $1.2 quadrillion today at best guess
- The issue is that the deposit guarantee schemes were left in place – so if you an investment bank – you can team up with a commercial bank and take on an endless amount of risk – they are protected when the inevitable failures take place
- Beyond the obvious pitfalls – this Skewed the allocation of resources – more profitable to bet on derivatives and the financial markets than it is to lend under traditional means –
- So you can gamble – and if it fails – so what, you get bailed out – almost like covering the losses on your friend who has a gambling problem -
- So over the years – there has been an increase in the Interconnection of financial system and share markets – Deregulation of the Financial system – whilst regulation of every other business increased
- Seen the increase in speculative investments and products like synthetic CDOs or Derivatives
- Massively increased the risks – but under the TBTF legislation – the gains are privatised whilst the losses are socialised
- Solution – to reintroduce the separation of commercial and investment banks – aim to try to reduce the speculation using depositors funds and de-risk the financial system from collapsing in on itself
- separating deposits from all trading in securities and derivatives would remove the subsidy that deposits provide to such trading, which would also remove most, if not all, of the risks to deposits
- Under the Basel III regulations that are currently being put into place – they don’t actually do anything beyond providing more hybrids as Tier 2 capital for banks to bail in in the event of a collapse – and any derivate exposure of the banks is obligated to be repaid above the retention of deposits – as under these laws you are banks creditors – lending them money –
- Through De-risking means that Central Banks don’t need to control the economy as much through permanent QE or buying back defaulted assets from gambling - Moves onto the second point
Remove reliance on a Central banks fuelling a debt based economy – reforming central banks to remove inflation targeting as a monetary policy
- Some debt is needed – business loans – the commercial productive side to the economy - but when the very money is backed by debt – you get a problem – every dollar printed or introduced into a system is a debt – the US is pretty evident with this – look at any US bill and it has Federal Reserve Note on it
- Central banks roles used to be the bank of last resort – but boom busts made them position themselves as such
- Aim was to provide stability to banks in the case of bank runs – many historically occurred – but from the deposit insurance schemes and the end of the Benton woods system – no bank runs – why? No speculation within banks and depositors knew their funds were safe – even if a bank failed then they would be insured
- There is a fair amount of evidence that most boom bust cycles are due to unsustainable credit-driven booms followed by speculation that comes undone
- Going back before the banking act of 1933 – there was not much in the way of regulation on the financial industry – commercial and investment banks could be one in the same and there were massive levels of credit growth to fuel the speculation
- Austrian School and theory on debt deflation - Friedrich Hayekand Murray Rothbard - wrote America's Great Depression (1963) - their view - the key cause of the Depression was the expansion of the money supply in the 1920s, of which led to an unsustainable credit-driven boom
- Banks/Share traders – margin requirements were only 10% - Brokerage firms lend $9 for every $1 investor had deposited - When the market fell, brokers called in these loans, which could not be paid back.
- In the Austrian view it was this inflation of the money supply that led to an unsustainable boom in both asset prices (stocks and bonds) and capital goods –
- Prior to this - Hans Sennholz - argued that most boom and bustsin the American economy - were generated by creating a boom through easy money and credit, which was soon followed by the inevitable bust.
- like in 1819–20, 1839–43, 1857–60, 1873–78, 1893–97, and 1920–21,
- But this was all under a different monetary system – currency had a backing – Gold – technically didn’t have an endless supply – could but it would destroy the economy with hyperinflation and then debt defaults from rising interest rates to combat this
- looking today – under the fiat system we have inflation targeting policy– which gives an unlimited expanse on monetary supply – and guarantees on deposits – and the intertwined nature of commercial and investment banks – all being fuelled by Central Banks through easy monetary policy
- deflationary pressures from debt immerge - Inflation only at 1.5%? Quick – Lower interest rates so people borrow more to buy property – pushing up housing prices – which isn’t measured in the inflation statistics (only the costs of construction goods is)
- Become a exponentially self-generating monster for speculation – provided “market confidence” with an influx of easy money – under the Fiat system
- Look at CBs today – inflation targets driving credit expansion – allows creation of artificial credit for asset pricing controls
- But how does this help the real economy? Which is you and i? how does it help small to medium businesses – which make up the lion share of employment and GDP output compared to companies with 200+ employees
- Credit expansion cannot increase the supply of real goods or increase the productive nature of an economy - merely brings about a rearrangement - diverts capital investment away from the free market/market conditions – how economic wealth is created – instead incentivise things like share buybacks - upswing lacks a solid base - It is not a real prosperity. It is illusory prosperity
- Instead – incentivises the pursuit of paths which it would not follow under normal conditions
- Debt Growth is not an increase in economic wealth, i.e. the accumulation of savings made available for productive investment – it has increased the price we pay for things – like property
- A lot of the growth we have seen arose because the credit expansion created the illusion of such an increase
- Savings plummeted due to lower rates (no incentive to save – look at interest rates today) – growth started to stagnate
- The effects in increased money supply create higher prices – does it mean you are wealthy? Only relative to another nation that doesn’t have the same money supply increases
- Example – the real value of goods goes nowhere – just the prices of things increase but your PP stays the same or declines in real terms
- Property is an example – if the median is earning $65k p.a. but properties cost $600k, compared to earning $25,500 p.a. but properties cost $100k, which would you prefer? – 3.8 multiple versus 9.2 – variation of over 2.4 times
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Solution – Change to monetary policy mandate for CBS – also ceasing the inflation targets – also need removing the incentives for commercial banks to lend based on low risk high collateral and back to productive
- Some alternative proposals I have seen based around changing the targets from inflation to the economy’s nominal income - is the money value of what the economy produces each year, including both the volume of goods and services (or real GDP), and changes in the prices of these goods and services (or inflation).
- Due to issues with the measurement of both – think it would end up back where we started – constant need to increase money supply to fuel both GDP and inflation
- As unless structural policies are changed -no amount of money supply can help GDP growth unless they are thinking along the same lines as MMT which theorises this
- Money supply – If it needs an inflation target – be it the increase in money supply – or better yet - If there is a measurement to follow as an indicator – interest rate band might be a better idea
- In a world with Lots of savings – low interest rates paid as more money can be lent out on mass
- Less savings – over time you get higher interest rates – incentivises savings and people start accumulating more
- Some alternative proposals I have seen based around changing the targets from inflation to the economy’s nominal income - is the money value of what the economy produces each year, including both the volume of goods and services (or real GDP), and changes in the prices of these goods and services (or inflation).
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All about incentivising demand for your cash – and at a more localised level between banks – every bank pays essentially the same interest rates – based around a homogenous system
- Allow for the creation of new banks – no the oligopoly system we have now – where banking is more of a cartel
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Money supply should be based around market demand – not artificial supply to meet a statistic
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Allow Interest rate movements may swing wildly based on demand for money – if cost of money goes to 10% - introduce additional money supply to get it down
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Need to ponder this point a lot more – but there are different options between interest rate equilibriums
- May make for a more volatile market – as expectations would change – major reasoning behind inflation targets is guiding expectations in the economy – but that is a game that can be rigged – doesn’t benefit the average individual but those with the deepest pockets already
- But a move towards traditional roles of CBs is needed IMO– to be lenders of last resort and provide a monetary base for economy to work off
- The Creations of money still occurs through fractional banking – But based around creation of money at the moment - Too much unproductive debt out there -
These are just a few structural changes – reducing the top down interventions into the markets
Might just be wishful thinking – but the concept of more debt or more regulation to solve problems created by debt and regulation do sound crazy to me –but the issue is self interest – everyone has self interest – especially those in the current economic of central banking system –
Power – attractor for some individuals – once they have high levels of power – would they want to give it up? When you can control the economy with just your very words – that is a lot of power – similar to legislative powers – look at Next week –
- Reverse the trends in regulations and increase supply side thinking
- Enforce anti-competitive behaviours – i.e. monopolistic practices
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition.
Last part of a 3 part series from Ryan’s questions – looking at alternative future investment strategies
- Episode two weeks ago – went through debt jubilees – Last week went through policies and how these have affected asset prices
- This episode we will be focusing on alternative investment options – such as crypto – thinking outside traditional investments like shares or property when it comes to future investment strategies
Before we start - Hypothetical question – what has more value –
- A litre of water or a new 60” flat screen TV
- Depends on your situation – and perception of value
- Most people would say a new TV would be more valuable – as the monetary cost is maybe around $1,000 – water out of the tap is a fraction of a cent – based around that situation – monetary only – TV is better – but what if someone is dying of thirst – water is more valuable – what if in a hypothetical situation in the future – electricity is gone – TV would have no use then and have no value
- Price is not value - All assets can be propped up on prices – overdemand – hand sanitizer or toilet paper
- Why determining the value of an investment to you is important
Before looking at alternative investments – have to ask the question: What is your purpose of investing? That is where you can get value from
- Need to narrow it down – can’t just be something generic like to make money – or become wealthy
- Is it for passive income – if so, you need to invest in income paying assets
- Is it to accumulate wealth – if so, you need good long term growth and diversification to help protect from downside volatility –
- As if you are after something that gains wealth long term - then it Cant be extremely speculative – if goal is to accumulate wealth – and put it into something that only has value due to confidence – can create a situation where your goal is failed -loss of value – in addition – extreme political risks exist with some asset classes –
- Each traditional investment is Within the ‘system’ – this can work for people as this system protects its own - through laws – but depending on the type of asset you purchase - this can work in your favour or against you –
- For instance - can the investments that you are planning on purchasing be banned
- Will the law protect you if something illegal is done in the investments you hold?
- This relates to – Crypto – Done many episodes on this in the past – most were last year –older but still relevant - check out
- Is Bitcoin the future of money?
- If the future of money is crypto currency, why might Bitcoin be a trap?
- The BIS versus BTC – What are the plans to replace current crypto currency markets? – Central banks works on Crypto and legislation pieces
- Ryan’s made mention of this question – he said “From this point of view I am thinking that bitcoin or cryptocurrencies that can't be 'printed' as such out of thin air and gold to a certain extent will continually rise in the future until something occurs along the lines of the government contravenes and makes policies that forbid people to hold gold or cryptocurrencies”
- Two major points here – the supply of an asset and the political risk
- For supply - True that Gold cannot be printed out of thin air – but synthetic versions of it can based around futures contracts – also the price of gold can be set by monetary authorities –
- Example – to be a money base $10k as a price level is what some like Jim Rickards suggest
- Also – some risk of fake supply – few months ago 82t of gold was found to be fake – copper
- Each crypto can be capped in supply – but they are exactly printed out of thin air with 1s and 0s – through process of mining – which becomes harder as each token is completed
- According to crypto market capitalization aggregators, thereare more than 5,000 cryptocurrencies in existence today and over 20,000 different types of markets
Going deeper is bitcoin/crypto as an option?
- The valuation side to it is interesting - what do you value BTC in? Is it AUD? Or USD? Think about that –
- is it really a new form of money if it is still valued in current currency – not in relation to good themselves
- Fractal version of fiat currency – you need fiat money to start with to purchase under current economy
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Currencies need reserves to lower chance of going to zero – without something backing it (other currencies, gold, etc.) – no perceived floor in panic – beyond this – confidence is the most important factor now
- How do we value currencies? Subjective theory of value – what is the value? What we can use money for – and have confidence in –
- This confidence comes from the ability to use it as a medium of exchange – can go buy things with AUD – need to convert back from BTC to AUD in most cases for a purchase
- Perception of value is important – what creates this
- Reserves and Gov decree - provide lots of subjective value in Fiat – lots of confidence – until there isn’t
- Seen currencies suffer massively under this – even with safety measures
- Subjective value – when btc goes 11k, is seen as subjective value – speculation in further prices
- Has a form of floor value mechanism – cost of mining versus price – if price goes to $2k, nobody mine – supply stop
- Confidence - When it is lost – depending on how bad - impossible to regain –requires confidence – or short memory
- The fact that BTC doesn’t have an Intrinsic value doesn’t matter as much as how resilient it is to confidence shocks– BTC just went through a confidence shock to the market – faired worse than shares
- Reserves and Gov decree - provide lots of subjective value in Fiat – lots of confidence – until there isn’t
- Doesn’t escape concentrations in control/supply – cheapest power or deepest pockets – China has both
- June 2018, over 80% of Bitcoin mining is performed by six mining pools - five of those six pools are managed by individuals or organizations located in China. Other is in Iceland.
- First – why concentration in china? Cheap power – mining takes a lot of Electricity power requirements
- Why Iceland or China – mining Using as much as Nigeria – 90m people – soon as much as japan
- No way it can be allowed if environmentalists get wind – but that is what you need to increase mining incentives – higher prices – current cost of mining 1BTC = $4k USD
- How do we value currencies? Subjective theory of value – what is the value? What we can use money for – and have confidence in –
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If prices are low - Then you hit a wall in the mining incentives – chain creation dries up
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Second – control of mining production and supply allows price manipulations – unregulated
- Painting the tape - a form of market manipulation whereby players attempt to influence the price of a security - buying and selling it among themselves
- create the appearance of substantial trading activity. ... Painting the tape is an illegal activity that is prohibited – but only in markets that are regulated
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We are both BTC miners – we both trade the same coins back and forward – slowly increasing the
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Also Called a ramp – old trick – think boiler room – painting the tape
- Price action is going up – who would have most influence on this?
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Could go to $50k - Looks to be having a second wind bubble – Remember the first Massive bubble
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Looking back to if Crypto or Gold can be banned – this is all dependent on the legal system and the competition that these types of assets face
- Gold – when it was banned it was the monetary backing of the time – and the Government wanted to get as much base for the currency as possible – hence they did a massive gold buy back from the population – were ways around it – collectible coins – but in general – they couldn’t have any competition in money and needed control over the supply –
- For Crypto – Central banks – BIS – looking at their own forms of digital currencies –
- They may ban cryptos – but only if they see them as competitors to their own currencies –
- The types that may be competition are stablecoins - stablecoin can be pegged to a cryptocurrency, fiat money, or to exchange-traded commodities – so if any of these exist that are competition - then they would be first on the regulatory chopping block
- Alternatively – if too much money goes into cryptos and it is seen as a destabilising factor – that is also grounds for the powers that be to regulate
Methods of legislation to be used – while Bitcoin and similar payment structures are outside any direct control of central banks and individual governments
- BIS V notes that cryptocurrencies ‘can only be regulated indirectly’ and discusses some of the possible approaches.
- also note that ‘Since cryptocurrencies are global in nature, only globally coordinated regulation has a chance to be effective.’
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What are some methods they can use?
- A first key regulatory challenge is anti-money laundering (AML) and combating the financing of terrorism (CFT). The question is whether, and to what extent, the rise of cryptocurrencies has allowed some AML/CFT measures, such as know-your-customer standards, to be evaded.
- shutdown of Silk Road, a major marketplace for illegal drugs, suggest that a non-negligible fraction of the demand for cryptocurrencies derives from illicit activity
- regulation could focus on the point at which a cryptocurrency is exchanged into a sovereign currency
- A first key regulatory challenge is anti-money laundering (AML) and combating the financing of terrorism (CFT). The question is whether, and to what extent, the rise of cryptocurrencies has allowed some AML/CFT measures, such as know-your-customer standards, to be evaded.
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Other existing laws and regulations relating to payment services focus on safety, efficiency and legality of use. These principles could also be applied to cryptocurrency infrastructure providers, such as "crypto wallets"
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ensuring consumer and investor protection - common problem is digital theft – access to distributed ledgers are complex - so most users access their cryptocurrency holdings via third parties such as "crypto wallet or exchanges”
- Irony is many people turned to cryptocurrencies out of distrust in banks and governments – but are relying on unregulated intermediaries – many examples like Mt Gox or Bitfinex – either being fraudulent or hacking attacks
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Major justification - concerns the stability of the financial system may be at risk without taking over cryptos
- widespread use of cryptocurrencies and related self-executing financial products will likely give rise to new financial vulnerabilities and systemic risks – Systemic risk is the competition from crypto crashing banking system
- cryptocurrencies with regulated financial entities could be addressed - The tax and capital treatment rules for regulated institutions wanting to deal in cryptocurrency-related assets could thus be adapted
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Regulate the exchanges – where most people trade crypto – you can regulate the crypto markets
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policy responses, including regulation of private uses of the technology, the measures needed to prevent abuses of cryptocurrencies and the delicate questions raised by the issuance of digital currency by central banks
- There are other laws that can achieve this – such as encryption laws – In the US - Senate Bill 4051, the “Lawful Access to Encrypted Data Act” – LEAD act - was introduced to congress last week
- This could effectively make cryptos illegal as they reply on data encryption too.
- Your ‘wallet’ is essentially a public key / private key combination - so in theory - only you are supposed to have access to this – but with this legislation the government would have a backdoor to this .
- Not going to happen in Aus? Well – we got our own form of this - the Assistance and Access Act 2018 – data encryption laws already in place -
I like the idea of a currency that people can use – but it goes against the foundations of a modern economy –
- Not seen as enough of a threat by the monetary powers that be –
- Might not be thinking outside of the box enough – Personally – I don’t see Cryptos as an investment
- Meant to be a medium of exchange – chances gov lets it take off and replace their own forms of currency is essentially zero
- Those who actively trade crypto and know what they are doing can make money off it – just have to declare this as assessable incomes
- For me – there is too much volatility and legislation risks to see it as a viable long term strategy
- The real meta for future investments – not too dissimilar to that of what has done well – that with real value
- In all of this thought and theory – action is more important – decision fatigue – information overload –
- Just do and learn from that – few tips on what I have learned – real assets that people will have confidence in and will use –
- Bonds – Difference between Corporate credit and Gov bonds – but you wont be as rewarded for owning these due to increased supply or lowering yields when these should rise as risks of default increase
- Property in a lot of places is overvalued in its price – but there is some that is not
- block of land or an inner city apartment – what has better chance of going up in price from here? Which is already overvalued? A lot of this is monetary policy – but going forward – price growth may have to become reliant on fundamentals – which will lower demand on assets which have larger levels of supply
- Usable land – goats – water – own produce – or a house with a block on it has
- Shares – ones that people have confidence in
- shares in a tiny mining company that is still yet to make a profit or shares in Telstra or WOW
- When it comes to returns – you can get specific – growth, income, etc.
- Depending on what your requirements are - May be best to avoid indexes – getting a lot of companies in there that may not meet your return requirements
- Gold – Own gold as well - I like gold – but it forms its place in my portfolios – as a capital hedge and as a position against the devaluation of cash – gold does have long term growth when valued against cash – but doesn’t pay income
- Resources – water – this one is interesting – do another episode on this to expand further
In summary – the investment strategy needs to be what is right for you – but it needs to be specific – not just doing something because it is the next new thing or because everyone is doing it.
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. Today - Understanding domino effects within an economy –
- This episode is aimed to help think more about orders of effect and consequences from actions –
- Talked about this in last FF ep – this episode is a bit of a lighter episode – been talking about heavy theory for a while
- Purpose of this episode is to help explain the working of the real economy -
- expanding on a thought experiment to help you understand the difference between government policies – that promise the best – but can deliver the worst –
- It is fun to do and helps to expand thinking and understanding of the economy – and how we are the major driving factor behind the economy –
- how are we the driving force? It is based around our choices - and that what most policies do is just get in the way of choices -either directly or indirectly – and this can disrupt the economy from maximising itself – which is us making optimal choices
- Every action has some consequences – good or bad
- Can happen everywhere – in nature – say there is a river – it gets diverted – then this floods somewhere else
- how policy can act as a diverting factor and always have consequences –
Most people are familiar with the concept of a consequence – to start with – think about your personal situation and consequences
- In your Individual situation - this is relatively simple compared to consequences of policies - still complex the further you take the consequences of actions out – however – less variables in the individual situation
- Have to worry about opportunity costs to decisions –
- Looking at your own situation – actions have consequences – those that occur in the instant - But also long-term consequences – relative to your own environment –
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Example - Change a household policy in financials – spend $20 less a week on coffee –
- That is the action – what are the consequences - In your own life you might be better off financially – may have less caffeine unless replaced with an alternative cheaper substitute
- Financially – the outcome is dependent on your action on what you do with the funds and over what timeframe – in one year you might save $1,040
- Pay $1,040 of mortgage off – would save an additional $20 in interest at 3.5% in first year
- Invest in something – wealth growth of $1,040 – might walk away $42 better off in the first year if it earnt 8% - total of $1,082
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What about over 20 years? Mortgage – paid off $20,800 of mortgage but saved $9,310 of interest – investing would be around $51,310 in total value better off
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This is just one simple example – but you can do this for a lot of other actions that you take – even if you cant place a dollar value on it – like spending time with family -
- Either way - Being aware of your own actions and consequences is an important first step –
Now let’s expand this out to the macro – that business has $20 less in revenues this week –
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That is about $1,040 p.a. less for this company each year – this isn’t a major deal long term – if they are losing one customer – they can survive this –
- But expanding further –on average let’s say they have 200 customers each day – 25 per hour for 8 hours - Average customers/number of sales per week – 1,400 - average price of coffee is $5 – $7,000 revenue per week or $364k p.a.
- say that 60% of customers go – they are only earning $2,800 p.w. now – or $182k p.a. – doesn’t sound bad?
- Well - what about the costs - Wages per hour – major cost – rent as well – also inputs for making coffee
- Wages – Say 3 employees – each earning $25 per hour – minimum wage but with the casual loading - $600 per day in wages – assuming working for 8 hours
- Rent – say $25k p.a. so about $70 per day
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Product inputs – milk, coffee, cups – $1 per coffee in costs - $200 per day
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Total costs p.a. = $240k costs at a minimum
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What does a business have to do now – cut back on costs - The coffee shop would have to cut back on the purchase of these inputs – cut back on staff wages – has to find $60k of cutbacks to even break even – but even more for the business owner to make a living off
- But this also has its own flow on effects - which is less demand for those businesses who were selling coffee, cups, sugar, milk etc –
- Coffee company that produces and packages the coffee to sell to the shop– would have to buy coffee – have equipment and plants to roast and process – has employees – so has their own costs and revenues to worry about – same for the company selling milk – who gets this from farmers -
This is one relatively simple example of just one coffee shop and the flow on effects – to Help your personal understanding about the economy – and investing as well – as it helps to show which businesses may not fair so well when one industry is impacted heavily by policy
- If anyone listened to the Episode a little while back on how we are the economy – this is relevant –
- Taking it a step further – the companies that supply this coffee shop – not a big deal if one of their customers has to cut back or goes out of busines –
- Similar to the individual ceasing buying coffee – it is just one of many they supply to – so to them it wouldn’t be a big impact
- Also – while it sucks for those few employees that now aren’t able to work or have reduced hours – there are other coffee shops to get work at -
- Say this happens industry wide – that is less for these supplier businesses on a massive scale –
- Those supplier business would likely lose large chunks of revenues - need to cut back on their own costs – this obviously has flow on effects of their own – at a large enough level – could put pressure on sub industries selling cups, so who supplies them would suffer as well – and so on
- Rental for café or pop up coffee shops – then there would be a major impact- so those who are the landlords for these businesses would suffer
- On the Government side – this is also less tax to collect – so lower revenues for them as well – could also be concerning to the economy - as they may have to raise additional taxes or can just get deficit money to cover expenses – but that is just more debt in the economy – which it has to try and soak up
- Taking it a step further – the companies that supply this coffee shop – not a big deal if one of their customers has to cut back or goes out of busines –
- See the nature of consequences here?
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Larger point that this should be making - Our voluntary interactions with one another drive the economy –
- Our choices to purchase – drive business success
- Our choice on working – drive our own success – but also the ability to help drive the economy on many sides
- We are providing a service – working in a coffee shop or one of the businesses that supplies them their inputs – or in any field –
- Also generating an income that can be spent on other businesses – that through the chain effects of the economy – drive other companies
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Who then can employ more people to also complete this process
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It is very complex- impossible to map out accurately -
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When policy gets put into place that creates a disturbance to this – it has flow on effects to the economy
- Why it is unknown – and can have unintended consequences
- People or businesses will naturally try to survive – and when policy changes the very nature of an industry – any interconnected industry can be affected – and any industry that is connected to that can also be affected
- Same with the employees that work in any of those roles
Examples of domino effects – at the larger scale – especially when thinking about the recent shutdowns
- Changes to the economy based around what is being said is the new normal –
- Think about just part of the Retail sector – work wear – if you are only going to be shoulder up on zoom calls from home – will your dress habits change?
- Suit sellers – large retailers in the US like Brooks Brothers filing for bankruptcy
- Flow on effects – those that work in the stores and their incomes gone, the landlords, the people or companies that make the clothes – the companies that provide the goods to do so
- Machinery companies, dye companies, textiles like cotton, then those who grow the cotton – these are just a few as I am probably missing hundreds if not thousands of other affected parties
Now – think about large scale government or Central banking policies and interventions into the economy –
- Market distortion and misallocation of resources on a grand scale – it is almost mindboggling when looking at the consequences of this to the whole economy
- As these sorts of policies do affect directly or indirectly everyone and every business within it
- Might not be directly noticeable in your daily life – beyond may your mortgage repayments going down –
- But similar to you deciding to spend $20 less at the coffee shop -
- Cost of money goes down i.e. interest rate is just one – what about QE? Or the market misallocation now with SPVs?
- This is why I have the view of less is more when it comes to policy
- It might sound good on paper – but it will have unintended unforeseen effects that can create a worse overall situation – talked about rental control and price controls in general never working out
- Creates a distortion between the real economy – us and our voluntary interaction – and destroys this – along with-it long term – that sector of the economy
- This is all just something to start thinking about – and if you are interested – start training your thinking about how the economy really functions – as opposed to what theoretical economists say based around a closed model based on assumptions that have no foundations in reality
Something to start in your own life if you think about it – that your actions do have consequences –
- Planning for yourself long term – making sure you are making the right choices –
- You cannot control monetary policy or Government policy – but you can control your choices to try and maximise your situation regardless of what is going on around you
- Also – understanding these concepts Helps you not to get tricked by unicorn governance – train yourself to ignore bad promises
- If a politician promises something that sounds great – help to think about
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition.
Today is more a Say What Wednesday episode, I need to catch up on some of your questions and this one fits in nicely. This is a question I got from Ross about rethinking monetary policy.
“Am currently reading Stephanie Kelton’s book the deficit myth. As she is a proponent of MMT Explaining her perception of debt inflation. And the role of government in the way money is distributed in the economy. As well as the way taxes are used to incentives behaviour rather than just a means for revenue. She makes a point that when nearing low unemployment, wages should rise and then consequentially so should inflation. She argues that the feds decision of how much slack should be allowed in the economy is often misguided, and basically says that monetary economist demand that unemployment is necessary. Which leaves a winners and loses overview of the overall economy. So to ensure we don’t pay too much for anything people have to be unemployed. How can this be morally justified and is the opportunity as she argues to reach full employment while having our parliament along with the federal reserve better utilise issued currency and taxation schemes to manage the rate of inflation so that people aren’t left behind?
As we have seen in the US unemployment was like 4% yet inflation remained low. How do you explain this phenomenon and is it perhaps time to rethink monetary policy around the developed world?”
This is a great question – lots to run through
- Role of Governments in the economy – and role of CBs
- The theory of unemployment and if it is necessary or not – and who the winners and losers are
I am familiar with Stephine’s work – havent read this book but started seeing her name pop up in researching MMT also following politics – Bernie sanders economic advisor
At the core of this concept – Theoretical framework in political economy – called public choice –
- The founder James Buchanan – think about politics without romance – this means looking at the actual effects of a policy as opposed of idealistically assuming that we will end up with the kind of perfect outcomes promised – as they only exist in people’s imaginations
- No policy is perfect – system is complex – due to it being complex there is no algorithm or model to predict what will happen outside of the potential of a first-order effect – Basics flaw of any policy decision making
- Michael Munger – calls this unicorn Governance – its not enough to judge a policy or a theory by its intentions – or by what you hope will be the end result – you might get what you want initially – but could have bad long term effects –
- Concept of Second-Order Effects – actions have an intended consequence (outcome) - each consequence has another consequence, and so on.
- Thing that is forgotten about in Governments – As the second or third consequences only appear once they leave office
- dominoes—1000 lined up, one tap causes a chain of events to occur - Once it starts - difficult (if not impossible) to them all falling down
- For instance, the view of taxes are used to incentivise behaviour rather than just a means for revenue has been proven to be ineffective. For example, when they are used to influence behaviours (like tax incentives for “going green”) and reduce the incentives for others (e.g., taxes on tobacco and alcohol), the end result in most cases has created a taxes on the poor.
- Make prices high on those goods – which are disproportionately spent on by those in lower income brackets – Similar to the alcopop tax – did it reduce peoples drinking? No people just bought a whole bottle of vodka
- In addition, the notion of taxes being used to help curb inflation is a method of indirect pricing controls – has second-order effects
- Example of price capping – Cap Electricity Prices – outcome is flat prices (whatever regulators decide)
- First Order – Electricity suppliers set their prices to the cap price
- Second Order – Electricity supplies (companies) revenues may decrease – Especially over time with increase in their costs – (wages, transport costs, inputs into electricity like coal)
- Third Order –- The share values start to decline as investors flee for fear of limited future potential returns
- Fourth Order - Profits begin to fall for the energy supplies costs go up but prices are capped
- Fifth Order – Share values begin to plummet – reducing the capital the company can raise – reducing ‘Capital Expenditure’
- CAPEX – What companies spend on large projects to grow the company – Energy company – Origins Gladstone pipeline – billions of dollars spent on upgrading for energy needs – Gas – a lot cleaner than Coal
- Sixth Order – Companies begin to have to let employees off, reduce maintenance on the infrastructure, and so on.
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Sounds a bit far-fetched – but it happened in California in the 90s – in RSA - happens across all things
- Rent control in NYC – After WW2 - provide returning veterans with affordable housing - so city’s housing commission capped rent prices (with no increases) in certain areas of the city
- law - rent control couldn’t be removed form an apartment unless the original tenant moved or the building was condemned
- Noble but the cost to maintain properties continued to rise - landlords couldn’t raise rent prices to compensate for their increased costs.
- landlords refused to upkeep the property—it was a waste of money -Financially – better to let the building deteriorate around the remaining tenants
- Rent control in NYC – After WW2 - provide returning veterans with affordable housing - so city’s housing commission capped rent prices (with no increases) in certain areas of the city
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over time there was a decline in the quality of property and eventually supply, as buildings were condemned
- making housing even more expensive — the opposite of the original intent
- The more complex a system is – the greater the number of Second-Order Effects
- Consequences can be interrelated or dependent upon each other in millions of different ways
- Uncertainty guarantees that nobody knows exactly how exactly – not at the first consequence, or at the 20th.
- Every action has a consequence, and those always have their own consequences – even if you don’t know they will
- That is what is so dangerous with Government Policy – Especially those granting Positive Rights, not protecting Negative Rights
- Approach making changes to a complex system with extreme caution: what you get may very well be the opposite of what you expect.
The issue is that at the core of all of this, MMT is assuming that Governments are now more responsible for the economy
- In my personal views, they haven't been able to manage their own departments or budgets well due to no market feedbacks along with a lag in decision making.
- Track record - Any time governments take further control of the economy – increased regulations - slow decline has been witnessed – extreme examples –
- Socialism – Complete control – unicorn governance – did it end up better for the people long term?
- under MMT – not truly socialism – as they don’t take over the companies that produce- but at the top level they take over the very cost of money and control of price gains – take over the disbursement and allocation of money
- The question – will these policy decisions lead to a better outcome? It assumed that economists and politicians have better foresight and have better intentions than the individual
- Went through recently the fact that every one of the Feds board members are multimillionaires based on their asset holdings
- Do they know what is best for the average person? Or what will make their own portfolios and asset values go up further?
- Policy responses in relation to a statistic are not a good way to approach this –
Especially when the measurements can be flawed - Gov inflation stats or unemployment stats shouldn’t be taken at face value – or policy shouldn’t be built around these – but it is –
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Inflation – CPI measurements - general level of price growth –
- First- it ignored economic innovation and assumed that future demand does not vary from the historic
- Secondly – it is rife with statistical manipulation - such as import substitution of goods even though it is meant to measure the statistical concept of indexing domestic consumer prices
- In western nations that are heavy on importing cheaper goods overseas – gives the appearance on costs going down –
- Also – doesn’t actually take into account the real price increase but the increase assuming no difference in products – called Hedonics -the science of trying to work out how much product quality has changed and adjusting inflation to take account of the fact more expensive products are not just inflation - but due to improved quality
- Example - original iPhone versus the ones now- it would discount the cameras and additional features as those as product improvements and reduce the cost to match the base rate cost – even though people are paying more
- Looking at alternatives – non-governmental statistics that measure price growth –
- Chapwood index comprised of 500 constant items -shows an approximate 10% annual rate of price inflation – also Shadowstats gets a similar 10% approximation
- Therefore - policy of targeting a general level of prices through broad-based indices such as the CPI has issues in what these stats actually represent – making policy even less efficient
- Unemployment - To be included in the unemployment statistics, you have to have had looked for work and were available to work in the reference week, or were waiting to start a new job.
- unemployment theory in general works off the basic assumption that these segments of people are firstly, willing to work in any role (which a lot of people aren't), but it also doesn’t account for the fact that in the statistics there are transitional workers included – if someone is taking a months break before starting their next job = unemployed
- It can take time to find the right job that people want – so can take a few months before one comes up
- Beyond the statistical measurement – which is conducted by a survey - When it comes to this theory of unemployment, monetary policy does look at the "sweet spot" for unemployment.
- The theory of this is that the labour market will reach a point where each additional job added does not create enough productivity to cover its cost, making every successive job after that point inefficient and detractors to any business (or Government) that hires them
- Would a business hire someone for $60,000 if it may only help their productivity by $30,000? No
- Well – why don’t they hire them for $30k? well they might be allowed to due to award agreements and minimum wages –
- Looking at the morality - The morality of these sorts of proposals focus on one side, the equality of the economy and think of it as an aggregate – these stats and theories don’t take individual choices or freedoms into account
- Could be argued that it is not moral for the Gov to say that Businesses have to pay $25 per hour for labour
- As what if someone wants and job and would be willing to get paid $20 p.h. – but the business cant afford $25 p.h. – so that individual doesn’t get that job and has to keep looking
- There is also the wage inflation theory that comes from an increasing demand through low unemployment - Ross – point in the book – need to have unemployed to ensure we don’t pay too much for anything – and so wages don’t rise
- Going back to the Statistics – a number like 5% assumes that these people are the always unemployed
- Not the same people month to month though - When looking further into the 'long term unemployed' (i.e. individuals who have been looking for work for longer than 52 weeks), this represents around 15%-25% of those who are unemployed – so if unemployment is 5% - then 1% long term unemployed – so are we experiencing inflation – cause 1% as long term unemployment is pretty low – but these are people who can’t find work
- Why might they not be able to find work? But also, why don’t we see inflation or wage rises? –
- unemployment theory in general works off the basic assumption that these segments of people are firstly, willing to work in any role (which a lot of people aren't), but it also doesn’t account for the fact that in the statistics there are transitional workers included – if someone is taking a months break before starting their next job = unemployed
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These jobs no longer exist in Australia and goods are imported from overseas from cheaper labour countries – Could it be that unemployed people are a by-product of the costs of production being too high?
- Government regulations – minimum wages and award wages – puts companies in a tricky spot – small and medium businesses can’t offshore – but large companies can – and reduce their taxes – so it creates an unfair playing field
- But through globalisation policies and free trade – this has created the trade of labour – sending work overseas – holden plant – based around costs of labour and regulations – had to be subsidised – in the end failed and all those jobs gone – is it moral that all those jobs were lost?
- Has there been much real wage growth in a lot of sectors beyond what is forced by legislation – again – stats are misleading as it doesn’t take into account individuals in same role for life – but the average of population
- Assume that it is 3.5% p.a. but has been going down over the past 30-40 years – whilst goods have been offshored – factor particularly relevant in the US as to why wages may not rise, is due to the mobility of labour. For wages to rise, an economy needs to be isolated but with free trade, or mobility in labour – which a lot of the models account for- however with free trade of mobility in labour - the wages tend to average out across nations as well – if you have 1m legal immigrants coming into a country – who are willing to work for less – downwards pressure on wages
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Only way to get rid of unemployment fully is to force people to work in roles provided to them by the government – nobody can leave or go to another job – as those seeking other jobs are counted as unemployed
Finally - Claims that Governments can use taxation schemes to manage the rate of inflation so that people aren’t left behind? And that US unemployment was 4% but saw no inflation rise -
- Theory of inflation as well – if people have higher wages and spend this – should also lead to inflation
- One of the reasons for inflation staying low, even with low unemployment can come down to a number of factors. Firstly, inflation can take 18 months in general to materialise along with the issues in measurements of inflation.
- Participation rate – 5% - down to 1% due to 4% no longer looking
- The supply of a lot of consumer goods, such as electronics, clothes, etc. through online discounters has reduced the prices of this component. Hence, there is a natural downwards pressure on inflation.
- In addition, these theories don't take into account the use of peoples surplus cashflow, such as repayment of debt (or saving) instead of spending, which also has a deflationary effect.
- Lets say there is inflation that materialises – how would the Gov reduce inflation through taxation? Take more money away from people to spend – so there is less in circulation and reduces the multiplier effect
Could go on for days about this – but my question to a lot of these theories is, does monetary policy (i.e. the interest rates) really either create or destroy jobs? Are Governments responsible for hiring people to fulfil roles – as that money has to come from those working outside of the government to cover –
- For me in my business, and for my clients and people I talk to who own businesses, it is government regulations that are the inhibiting factor for employment growth. The barries to entry that governments enforce on companies and the additional costs and regulations that come with this, reduce employment opportunities within the small to medium business sector.
- Removing disincentives such as payroll tax may help – where companies have to pay taxes based on wages –
- Say company paying $2m in wages – in QLD would have to pay around $55k in tax to Gov for that – if larger company paying $20m in wages – that is $950k in tax – 4.75% - that could hire more than 10 people
- I definitely think that it is time to rethink monetary policy, but probably not in the direction of MMT. In my views, MMT involves too much control over the economy which is part of the structural issues that the current system faces.
- This comes back to second-order effects in theory compared to in practice, as with any once forced change in a variable in a complex system, down the road some unimaged outcome is always present – MMT sounds like unicorn Governance – appeals to emotion – in reality – could get 0% unemployment Mao style
- In my view – the rethink needs to be less and not more – The reasons why we are in this situation is that CBs and Govs already have a lot of control –
- So they are magically going to solve the economy with more control? But you never see any mainstream Government economist or policy maker argue that they need less control – as that puts them out of the job – self interest rules the day
I don’t have a perfect solution for this – but options in a future Furious Friday episode – we can look at some alternatives that have shown practical results
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition.
Policies that governments and CBs have implemented that affect asset values
Relates back to Ryan’s investment thesis - As a millennial I understand that the government has to do their best to keep the ageing baby boomer asset prices (predominantly US share market and Australia property) high so they don't have to fund them in retirement through pension- though I am not sure I am that interested in paying top dollars for these assets in which puts me right out there in the risk curve for not a high enough potential return.
Go through monetary policy and how this has affected asset prices – and how it will likely continue to do so
Reasoning for policies that have inflated asset prices - Not for the reason of pension funds -
- Not sure about the government not wanting fund pension – They aren’t funding them – we are with tax money – there is no asset sitting there to fund it –
- If They are trying to keep asset prices high – it is for the wealth effect – spending effects due to confidence
- Or for their own wealth – financial disclosure for the fed board came out and they are all multi millionaires with trusts and investments into indexes and shares that suspicious benefit like GE
- Also politically expedient for the larger chunk of the population – keeping the largest group of the voting public happy – or those why pay them the most in the way of lobbying
- Property – most people live in this and cant fund their retirement off it –
- land restrictions and taxes haven’t helped
- Look at traditional assets – for investment Strategy in places i.e. can’t beat them, join them - However – monetary policy is not fiscal policy – Governments are directly keeping a lot of asset prices high – Monetary policy from CBs has a greater effect – lets run through them one by one
Cash itself – in times of uncertainty or need of liquidity is king – but not a good asset class – shouldn’t be seen as an investment – it is a medium of exchange
- infinite money-printing will eventually destroy fiat currencies – by when? Why knows –
- With the acceleration of printing it may be far quicker than might be generally thought
- This final act of monetary destruction follows a 98% loss of purchasing power for dollars since the London gold pool failed – established in 1961 under the Bretton Woods system – but lasted less than 10 years with France first pulling out in 1968 - and then the gold window fully collapsing in 1971
- And now the Fed and other major central banks are committing to an accelerated, infinite monetary debasement to underwrite their entire private sectors and their governments’ spending, to prop up bond markets and therefore all financial asset prices
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Have to rethink inflation theory - Inflation of prices – not goods
- inflation is commonly presented by modern economists as a rise in the general level of prices – based around theory this is correct – but misleading
- Going back to the pre-Keynesian definition - inflation is an increase in the quantity of money which can be expected to be reflected in higher prices
- Expected to be reflected in higher prices – important the expected part – as it is theoretical as the effects on prices can be a number of different factors
- Split into two categories – prices of consumable goods -and prices of other assets – shares, property and bonds
- For price inflation of goods - The effect of an increase in the quantity of money and credit in circulation on prices is dependent on the aggregate human response.
- In a nation of savers, an increase in the money quantity is likely to add to savers’ bank balances instead of it all being spent - in which case the route to circulation favours lending for the purpose of industrial investment – this was historically the case
- Product innovation, more efficient production and competitive prices result; and a price countertrend is introduced, whereby many prices will tend to fall, despite the increase in the money-quantity.
- Banks used to need savers – but not anymore – have capital notes and investors – along with Central Banks to provide all the funds – plus – there is no free market for interest rates due to competition between banks for your cash now
- When you don’t need savers – you can have very low interest rates -
- Trends for higher levels of household debt which then takes away from savings further
- Which lowers people’s ability to consume domestically – and need more imports from other countries where goods are produced more cheaply – this has a deflationary effect on goods
- On the other hand – Asset prices increasing can be a by-product of increased level of money – money created through credit (or debt) has to flow somewhere -
- Now the breaks are off when it comes to additional credit being produced – means more money into the system –
- If this goes to main street – may see inflation in consumer goods – helicopter money policies
- In a nation of savers, an increase in the money quantity is likely to add to savers’ bank balances instead of it all being spent - in which case the route to circulation favours lending for the purpose of industrial investment – this was historically the case
- For price inflation of goods - The effect of an increase in the quantity of money and credit in circulation on prices is dependent on the aggregate human response.
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If this goes to wall street – which most is – will see inflation of prices –
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Regardless of where the money goes – eventually when too much money is introduced you get too much debt to be covered by the economy – ran though this in the debt jubilee episode – eventually a fiat currency collapses – what happens to the assets in the country where the currency fails?
- Looking historically - process of a developing collapse of a currency usually starts with outsiders reducing their exposure to it
- astute speculators would start selling off assets that back the fiat currency – bonds and treasury notes
- In the modern economy - it is impossible to judge how it will play out - but the USD dollar having the role of reserve currency appears to be most exposed to foreign liquidation – outside of the US economy - foreigners account for $25 trillion USD in assets held – from equities, treasury notes and bonds, deposits and cash – most of this cash is in assets outside of deposits though -
- Looking historically - process of a developing collapse of a currency usually starts with outsiders reducing their exposure to it
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There is little incentive to hold cash – beyond the stability and liquidity it provides – interest rates are too low –
- Inflation creates a negative real return – without Even the thought of negative rates
Currency destruction and the policies that have affected asset prices – again - created money has to flow somewhere
- In addition – due to cash being devalued – and saving rates being low – people put money into other assets that are expected to beat cash returns and inflation – these are your more traditional assets like shares, property
- Need for assets with good capital growth – but the issue with most Major assets that have been propped up by monetary policy – the same monetary policy that is destroying the dollar
- Not all assets within these groups are the same – go into this more next episode – But property – block of land or an inner city apartment – shares in a tiny mining company that is still yet to make a profit or shares in Telstra or WOW – Bonds – Aus Government bonds or capital notes issued by Virgin
This being said – for the purpose of simplicity when talking about how policies have affected them – I will be talking about as an aggregate -
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Bonds – the debt instruments themselves
- Increase of supply – but also increase of demand from the debt instruments
- March saw record outflows from corporate bond funds (-$42bn) – investors worried about corporate defaults – but since then = now witnessing record inflows to corporate bond funds (+$85bn since the start of April) – as the back-stopper in the form of SPVs and the Fed are there to soak up supply
- Traditionally - Bond yields - which cannot fall by much – should begin to rise as a government deficit increases – due to risks of holding – but with the Fed and other CBs actively pushing these down – no additional returns for the higher levels of risks of defaults –
- This also pushes up other assets with it – Monday episode on WACC – that is for shares
- Also the episode on CAMP – with the risk free assets expected return going down
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For property – the purchase of mortgage funds also has an effect
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Bonds have had a good run for the past 20 years – negative price relation to interest rates
- Interest rates decline – price of bonds goes up – with older bonds with fixed coupons at 4% - they are in high demand – but you pay top dollar off them
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As a millennial investor – probably not the best long term investment to put large chunks of money into if capital growth from here is a goal
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Property – are paying top dollar in Aus - Banking regulations and inflation targets – lowering interest rates
- I think high property prices is a by-product – inflation targets and demand side theory = lowering interest rates an easing of credit
- If interest rates rise – bad for property – affordability for interest rates - I think will be a driving factor for growth
- On the Government side – it is town planning and taxes/regulation that keeps property prices high
- Don’t think that this is the intention of these policies – more a second-order effect
- But in conjunction with monetary policy – which has spiked demand – created high property prices
- Demand- not viewed as people alone – but how much credit people have access to
- Aus population not that large compared to other countries – especially for the amount of available land that we have – but the amount of household debt we have is large
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Limited supply to a handful of major cities – decent average incomes to service debts
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And large demand through falling interest rates – giving the additional perception
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Inflation targets – real value of debt goes down – so borrow money to invest in an asset class that gets capital growth
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Shares – Main factors – Increased credit availability, QE and lowering interest also affected demand for shares
- Shares are a representation of a company -not all companies made alike –
- Money through QE – enters the financial system and has to flow somewhere –
- Example – investment manager or Super fund – sells bonds – gets cash – cash gets invested somewhere – shares or re-rolled into bonds –
- Shares are a representation of a company -not all companies made alike –
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Increased ‘liquidity’ turns into artificial demand for assets – pushing prices up
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Increased debt and availability of credit it has pushed the market up
- Leveraged investments in shares – either from home equity, margin loans, leveraged products
- Large rise in margin trading accounts – all increasing the size that can be demanded for shares – if you have one person with $10,000 – that can gear at a 75% LVR – create $40k of cash – equivalent of having 4 people with $10k each -
- Increased share prices through share buy backs
- Leveraged investments in shares – either from home equity, margin loans, leveraged products
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Similar to Property – investors are aware of Inflation targets – real value of debt goes down – so borrow money to invest in an asset class that gets capital growth
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Another factor - Lowering interest rates make people move up the risk curve to get an income
- Bonds and Cash both pay almost no income at the moment – so the ‘blue chips’ can be seen as an alternative
All assets can be propped up on prices – overdemand – hand sanitizer or toilet paper
- Not to avoid these – but be aware – That some of the assets that have benefited – and likely will continue to be benefited – relating to Ryan’s point on potential returns
- Out of these – Don’t expect Shares to have a significantly lowered returns –
- Aus Shares – Returns come from Dividends – 2-4% growth on average – but more comes from dividends and FCs
- Unlike US share – Aus shares haven’t been the major recipients of US QE policy
- The increase of credit doesn’t look like it is going away any time soon – and with it – asset price inflation
- However – this may create a situation in which they will have to “reset” the system in some way or another – based around CB and IMF white papers – looks like they are thinking of a completely centralized digital currency – whether it is country by country or a one world system – hard to tell – but a shift to digital is likely - central banks that were researching CBDC’s has now risen to 80%
- Don’t think that CBs will really let the dollar fail at face value – will do a monetary reset before that
- Shifting to digital - Final part next week will look at alternatives like Crypto or gold
- Also look at the investment strategy of focusing on real assets – and the importance of this in a world with increasing funny money
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury.
Investing in the equity or debt markets in the world with greater levels of Central bank interventions –
The rebounds of the market – seems to be responding to the Fed and the US Treasury
- Last week – the ASX recorded its biggest one-day rise in two months – the market hit the 6,130 mark and then took a tumble – went down to close to 5,700 – then rebounded – this rebound seemed to be after an escalation in policy support from the US Federal Reserve was announced
- In one day -the S&P/ASX 200 Index surged 222.5 points – or just under 4% - biggest one-day gain since early April
- This brought an end to the start of a sell-off trend – previous 3 trading days reduced the market y 7% - since then been hovering around the same level
- This episode is to explain why this is the case – and how the Central Bank involvement in the markets going forward can sharp large rebounds in the markets – and provide a false confidence for investors – especially those with an appetite for shares and assets higher up the risk curve
To start with – think of the market at the moment as a ball on a hill –
- The hill itself is the potential for upwards and downwards movements of a ball - The ball itself is the price of the market
- Someone kicks the ball up – it going up – loses pace and then starts to roll back down – but then the Treasury and the Fed are standing there ready to kick it back up – and repeat this process – how?
- Expanding their powers to get further involved in the share market – or the game of kicking the ball – through The purchasing of corporate bonds
- Last week – the Fed said it would begin buying corporate bonds directly off the market – this is one of the more significant policy developments from the central banks since QE was introduced in 2009
- The intention to expand asset purchases to include corporate bonds was first unveiled by the Federal Reserve at the end of March – officially implemented for the first time at an expanded capacity last week
- I covered this topic though back in February – in an episode called “What Central Bankers may do in the next financial collapse” - although the central bank was yet to put the plan into action at that time – it was just simply paying attention to what they were saying they were going to do –
- Previously under QE – The problem for the Fed alone is that it is only allowed to purchase or lend against securities with government guarantees
- these are assets like Treasury securities, agency mortgage-backed securities, or debt issued by Fannie Mae and Freddie Mac – why the Fed was allowed to buy back the worthless MBS off investment banks back in 2008/09
- But they can’t buy any equity or debt in companies – which would be a form of government sponsored funding mechanism for companies –
- However – now The Fed is bypassing the banks or asset managers to inject money into the financial system – now they are lending directly to the private sector through the purchase of their debt
- The Fed will now start to buying private debt, directly from companies as they go to market to raise capital and as existing bonds and other securities are offered on secondary markets
- The additional assets that can be purchased - this includes municipal bonds, non-agency mortgages, corporate bonds, commercial paper, and every variety of asset-backed security
- The only things the government can’t buy are publicly-traded stocks and high-yield bonds
- Companies have two ways of raising funds – Through equity (more shares) or debt (bonds and notes) – the cost of this is what is important to valuations – come back to this in a minute
How is this all being done -
- The Fed is not just buying secondary issuance - but primary issuance through a special purpose vehicle – Covered the SPVs in the episode - Crony capitalism and Modern Monetary Theory in action!
- What happened - the Treasury created a series of special-purpose vehicles (SPVs)
- A special-purpose vehicle (or entity) is a legal entity created to fulfill narrow, specific or temporary objectives. SPVs are typically used by companies to isolate the firm from financial risk – it is how property developers work with each single development – limits liability into one single entity
- The aim of these is to buy all manner of financial assets, backed by $425 billion in collateral conveniently supplied by the US taxpayer via the Exchange Stabilization Fund.
- an emergency reserve fund of the United States Treasury Department, normally used for foreign exchange intervention
- The Fed will lend to SPVs against this collateral which, when leveraged, could fund $4-5 trillion in asset purchases of additional assets beyond what the Fed itself could access in its mandate.
- Round about way for the Fed to circumvent their mandates – as even though the assets inside of the SPV may not have government guarantees, the SPV itself can
- In QE - the Fed moves assets onto its own balance sheet – Under a SPV - the Treasury will now be buying assets and backstopping loans through SPVs that the Treasury will own and control
- Backstopping is a practice of purchasing assets if nobody else is demanding them
- SPVs are a form of shadow bank - create money by “monetizing” debt or turning it into something that can be spent in the marketplace – injecting liquidity back to the sellers of these debt instruments
- So the SPV decides what assets to buy and borrows from the central bank to do it.
- central bank then prints the money - which are used to purchase the assets backing the loan
- In other words, this is a step towards the federal government nationalizing large chunks of the financial markets and companies listed on them – so now, the Fed is providing the money to the Government to buyout large sectors of the financial markers, whilst having BlackRock doing the trades
- The purpose of this – Looking at the SPVs – none technically serves a purpose beyond buoying the markets
What are the effects of this on the markets –
- Listed companies have two ways of raising funds – Equity or Debt –
- Equity is capital raisings – issuing more shares to raise money
- Debt is issuing bonds or capital notes in the company –
- The central bank intervention pushes the cost of debt and equity down in the world's largest capital market, which in turn lifts the value of shares relative to other lower-risk assets such as bonds
- In Australia – The RBAs policy program is narrower than the Fed's, Australia's central bank struck a similar tone of unqualified support at its last monetary policy meeting
- From the meeting - RBA's commitment to keep funding costs "as long as required" – this has added to the liquidity-fuelled rally on the ASX
Why does this matter – Beyond the fairly evident intervention into markets – propping up prices through affecting valuations – how is this done
- When it comes to the valuation of companies – FCC over the WACC
- WACC – Debt and equity costs of operating – used in the denominator of an equation
- If the debt costs of operating are low – the WACC is also low – so then the valuations of the business can rise – even without raising the FCC of a firm – the FCC of a company can drop but the valuations can rise –
- So if the Fed – or other central banks start bailing out these large companies – remember there is around $72trn of Corporate debt floating around - $19trn of this is owned by companies that cant generate enough revenue to make the interest repayments –
- Large concern to investors is that companies have too much debt – so their costs are high and if revenues fall slightly – that is game over for the company – therefore there can be a sell off of the shares
- Also – if the existing investors in the debt market get worried about this – they may sell of their bonds in the companies – which would lower the price but raise the yields/i.e. the servicing costs of the debt – which could also wreck a company – to avoid this – Treasury can buy up any excess supply
- Naturally – some of the largest recipients of this – are the Financials – and other industries with heady debt burdens
- The index-heavy financials sector accounted for close to a third of the rise in the combined value of the ASX 200 shares, with lenders among the primary beneficiaries of central bank liquidity.
- ANZ rose 4.5 per cent to $19.23, Commonwealth Bank added 4.2 per cent to $69.09, National Australia Bank climbed 4.1 per cent to close at $18.85, and Westpac advanced 4.1 per cent, ending the day at $18.09.
- In addition – the correlation of markets means that if this is done in the US – and their markets rebound – our markets prices will be affected
- At this stage – these SPVs are just being used to backstop the market – but In essence but also as a long-term effect, the Fed is giving the Treasury access to its printing press which is what is the worry in the long term, as the issue I see in the long term is that all of this gives Governments more control over the economy – and the supply of money
- Long term – this has the potential to create a socialist monetary state – gives the printing press needed for funding Universal Basic Incomes – and once these powers are in place – any future administration can look at implementing these policies
- Going further - Congress could designate a Special Purpose Vehicle to fund its infrastructure projects – or other public services that need a printing press - including Medicare for all, a universal basic income, student debt relief, and similar programs.
- It could also use the funds to purchase a controlling interest in insolvent or profligate banks, pharmaceutical companies, oil companies – nationalising these companies
- Another possibility would be for Congress to fund these programs in the usual way by issuing government bonds, but to enter into a partnership agreement first by which the central bank would buy the bonds, roll them over indefinitely, and rebate the interest to the Treasury.
- That is how Japanese PM has funded his stimulus programs – was in an aim to get inflation – but the Japanese consumer price index is at about 0.4% - the more of these policies that went on – the lower it got
- At this stage - the Bank of Japan has monetized nearly half of the government’s debt.
- What this is all about – the share market harnessing the power and endless printing press of the central banks – Especially in the USA
- If this continues to play out – whilst the ball may want to roll to the bottom of the hill – the Fed and other central banking officials will be there ready to kick the ball back up until it loses momentum again
- Rinse and repeat – but this doesn’t create a better market – but a more fragile one built on debts –
- Companies to be bought – those with natural demand for their products –
- Skews incentives – for large companies to become further zombified – taking on larger debt levels as they know someone will always be there to purchase it – and as long as these SPVs continue to be a backstop – companies wont be punished
- But is playing a dangerous game – as with one announcement – the markets can tank
- Delaying the inevitable
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition.
Been watching a very interesting social experiment play out – the rise of the nation of CHAZ –
- Capital Hill Autonomous Zone – If you haven’t heard about it – it is a LARP – live action role playing for an anarchist/communist state – not really a new country or nation -
- Area in Seattle – about 6 city blocks – protesters have taken over a zone in the city and are calling this a decentralized state – saying that they are separate from the US gov and self-determinate in law
- their goals are focused on creating a neighbourhood without police initially
- Now that it has been going on over a week – had some time to put together more demands - a zone of rent control, the reversal of gentrification, the abolition of police and funding of community health
- The area is cornered off by fences and barricades at intersections – this week the city of Seattle and representatives of CHAZ agreed on a footprint for the zone – the Mayor Durkan's signed off on this – informally – she made a blog entry - reasoning for the agreement between the two parties: "The City is committed to maintaining space for community to come to together, protest and exercise their first amendment rights. Minor changes to the protest zone will implement safer and sturdier barriers to protect individuals in this area."
- As part of the agreement the city agreed to remove the old barriers and replace them with concrete along the new agreed-upon zone boundaries
- Personally – think it is fairly funny – Not for the people who live there – but a lot of great videos are coming out of naked people running down the street high on LSD, or rolling around in dirt, also likely out of their minds
- But this social experiment does raise an interesting topic – is this true communism? Proponents always say that real socialism or communism has never been tried – so is this it? The people running themselves in a form of anarchy where there is no state – but the economic ideas they have are more on the communist side
Lets get into it - There are a million words for it –
True communists advocate for a completely classless society – read the communist manifesto - initially there is socialism – where government controls all means of production and distribution of goods – Final stage is communism – Everyone owns everything with no government – no police force and the people rule themselves –
- The initial stages – belief that control is necessary to eliminate competition among the people and put everyone on a level playing field.
- Socialism is also characterized by the absence of private property.
- The idea is that if everyone works, everyone will reap the same benefits and prosper equally. Therefore, everyone receives equal earnings, medical care, housing and other necessities - Sounds nice
- Have different forms - Democratic Socialists – Believe that they can achieve this through the democratic process
- But once they have it, the ‘democratic’ part ceases to exist – Once Governments get so much power they no longer need the population to gain power – What happens then?
- Socialism can work – In tribes of 100 people – Everyone carries their weight – there is no welfare in these tribes - otherwise you get an axe in the back of the head
- Today it is the opposite – Under communism those carrying the most weight get the metaphorical axe in the back of the head first – as they create the inequality (through owning the private property) and need to go to achieve the goal – the only way to level a forest is with an axe
Two ways of installing communism -
- Slow and stead - Fabians - take their time to come to power without direct confrontation, working quietly and patiently from inside the target governments – death by 1,000 cuts
- Fabian Strategy - advance the principles of socialismvia gradualist and reformist effort in democracies, rather than by revolutionary overthrow
- Quick and forceful - Marxists - in a hurry to come to power through direct confrontation with established governments – revolution
- Talked about this in previous episodes – Russia, will do another series on China and other countries as well
- CHAZ is a mini version of this
For this overthrow to occur – there needs to be the right environment created
- The road to communism is paved with apathy, hopelessness, frustration, futility, and despair in the masses of people
- Movement that came out of hate of authority – aimed at police – which is the law enforcement arm of the state – police don’t make the laws – they enforce them – so they can be the targets as they are on the front lines
- Perception against reality – your society can be fine – but if you think that it is unfair or hopeless – then that becomes your reality - Fidel Castro is an example of this – how perception is more powerful than reality
- He overthrew Batista in Cuba in 1953 - With the help of the US media, New York Times, CBS – turned Castro into a international celebrity and spread the perception that there were thousands of freedom fighters across the country –
- At the time that Batista fled – Castro had only about 300 guerrillas – lot more to the story – but one of the major components was the media role in creating the perception
- Castro promised a better life out from under the western capitalists and the Cuban police state – never materialised – things just got worse
Looking at Chaz – Looks like a form of anarchical Communism on a speed run – but with the Governments help this can keep going for a while –
- Lets call it foreign Aid playing along with the idea of CHAZ – it is only surviving off what others are providing
- Was going through stages of starvation, but people are providing food and water
- Boarders provided by the Gov – normally true communism has boarders to keep people in
- Needing the state to provide them porta potties, cleaning services
- It reminds me of a grown adult living at home in the basement and stating that the basement is their section of the house now – they are living in a free state and don’t want to live under the rules of their parents – oh, but they still want free board, food, for their parents to clean for them and provide their every whim
- It will collapse in on itself – just let it happen – but what is also interesting is the complicit nature of the Government in the local area - The Washington Governor or Mayor of Seattle could end this overnight – they do have the power – which can be enforced by the police
Within the system of CHAZ – there is meant to be a classless society – with no power structure – but Like any system with a power vacuum – something will fill it – nature abhors a vacuum – in Latin “horror vacui” - those with the more power will take it – either the biggest or those with guns
Something will always replace Authority – by what degree has been the issue – every revolution – the people never end up in charge – the person with the guns does – and often it is more authoritarian than before
Issue with Authority – Anything with Authority/powerful entity to provide everything for you – can take it away – the issues with the extreme authority that comes out of situations like this:
- Is corruptible (simple) – absolute power – Something powerful
- "You either die a hero, or you live long enough to see yourself become the villain." – Dent
- Every Great Leader – Caesar, Alexander – got to a point they couldn’t stop or step down from fear of enemies
- The more power an institution has – the more they are fought over
- Political power – addicted to power – regardless of who has it – Church as an example -
- Only one religious war going on right now – coincidence that there is no separation of church and state?
- Crackpot dictatorships – Governments in Africa are fought over for absolute control – breeds an environment of extreme unrest
- Removes accountability to individuals - Milgram Experiments – people will kill if told to by authority
- 3 people, 1 not in on the gag - Increasing shocks to wrong questions -
- Thought it was for the greater good, and that the scientist would take responsibility –
- Examples – Any war atrocities – Nazi Guards etc.
- Same with mass psychology of crows – people do some pretty bad things due to the anonymous they feel in a crowd – particularly when the energy picks up – force multiplier – resonant factor
- What happens when the money runs out? House of cards falls down
- Communist countries have to come from an already wealthy base – money needs to be there to be redistributed- Marx said so himself - CHAZ couldn’t exist within Angola- those people would be on the first flight back to the US
- Becomes very fragile – Very much so here – We are in a position not too be self sufficient and need to give Gov more power – making situation worse.
- Don’t get me wrong – Governments are needed – But the question people disagree on is needed for what?
- Authoritarian – Libertarian – How much freedom do you have as an individual
- Government intervention levels/size of government
- Rules and regulations – One end Dictatorship, the other Anarchy
- Economic Left (Communism/Socialism) – Economic Right (Capitalism) –
- Control of markets and own means of production – Intervention
- Property rights and no regulations – Communism on one end and Free market on the other
- These people are claiming new authority – taking it by force as is with political uprisings – puts them in the anarchy boat – but they are also wanting equality for all and free stuff – hence on the communist/socialist side
- But they morph over time – anarchy evolves into authoritarian when someone with a gun takes charge
- It naturally does – a group of 10,000 people wont agree on everything -
- Authoritarian – Libertarian – How much freedom do you have as an individual
IMO - Best way to minimise this is through the right balance of Positive and negative rights
Positive vs Negative rights – past ep as well – policies which either make it illegal, or legal to force you to do something
- Health care is an example – Nobody can stop you from seeking medical treatment, vs medical treatment is covered by the tax payers – who is then forced to pay for someone else
- Not all rights are made equal - Negative and positive rights- oblige either action (positive rights) or inaction (negative rights)
- negative rights - first generation of rights - positive rights - second and third generation rights – new thing
- negative rights– civil and political rights - freedom of speech, life, private property, freedom from violent crime, freedom of religion, habeas corpus, a fair trial, and freedom from slavery –
- This is where governments do provide a role – meant to protect their citizens – but over time this was not enough
- Introduce positive right- right to be subjected to an action or another person or group;
- positive rights permit or oblige action – you have to do something, compared to not doing something with negative
- food, housing, public education, employment, national security, military, health care, social security, internet access, and a minimum standard of living
- These frequently conflict - carrying out positive rights often infringes upon negative rights.
- The positive right - social welfare = government needs to provide services.
- funding = increasing state expenditures= require raising taxes = infringe upon negative right
- The right not to have their money taken away from them., positive rights are generally harder to justify and require more complex ethical substantiation than negative rights.
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Too many positive rights in society – i.e. everything provided for you - Causes population ‘behavioural sink’ - It would be nice to have everything taken care for us – what does this do?
- Mouse Utopia – Every need met (threats, food, etc) – within 2 years population dead – 3840 mice possible
- Only ever reached 2200 – Population turns in on itself and split up
- Males/females started fighting,
- Beautiful ones – Group of mice took themselves off and spent all time grooming – no mating
- Not overpopulation like originally thought – giving the mice something to do (purpose) prolonged experiments
- Only ever reached 2200 – Population turns in on itself and split up
- when all your needs are lavishly met, one creates struggle for a purpose to live. That explains the Real Housewives series – all their fights and problems are self-made – to a kid in Africa seems trivial
- “pursuit of happiness”-always making choices on what action will add to our well-being (make us happy)
- Choices is the pursuit of happiness – But results of choices not all equal – some momentary pleasures (impulses) lead to pain (not happiness)
- learn from choices – avoid those that caused pain, keep trying new things
- Mouse Utopia – Every need met (threats, food, etc) – within 2 years population dead – 3840 mice possible
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foresight - recalling past experience - we learn to postpone immediate gratification and see what choices are really in our interest. Thus, learning self-control based on experience is essential to happiness.
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Part of moving up Maslow’s hierarchy of needs as well
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Locke - continuous process of choosing is part of human beings’ unchangeable nature - choices about what we believe gives us well-being
- our right to make these choices is inalienable, and, unless our actions attack the rights of others, it is wrong for government to interfere
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Rights differ on political orientation - Positive rights such as a "UBI" are emphasized more often by left-leaning thinkers, while right-leaning thinkers place more emphasis on negative rights such as the "right to keep more of your own money"
- So the rights from CHAZ are essentially positive rights – they require looking after – and the tax funds from Washington/Seattle are going towards this – hence they are positive rights through the taxation to provide for others
- I’m sure a lot of these people think that they are doing good – But they will all learning a very valuable lesson soon – hopefully they can learn – see that a lawless society isn’t the paradise – as it comes down to morality of the group -
When it fails – claims that this wasn’t real communism – and they will be right – no groups would have been mass murdered or simply starved to death – and they are a microcosm being looked after by an actual Government
Allowed to continue for now – set up some web cams and watch people run around naked on LSD and for things to eventually wind down – but should be taught as a lesson – not as a schematic on how to try this again in a few years.
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition. Part 2 from last week with Ryan’s question – Starting to look at this - What is a debt jubilee – what are the chances of this occurring and how would this affect the economy –
- Dates back to biblical times - The official term ‘Jubilee’ comes from the Old Testament- in some parts of Mesopotamia -Jubilee Year of Leviticus 25 was based on Babylonian practice for over 2,000 years -the practice of debt cancellation, called “andurarum.”
- When any new ruler would take the throne, the first thing they would do would be to free the personal debts – was written into Babylonian law
- forgive the personal debts that had mounted up - among the small holders on the land - liberate the “bond-servants” -people who had been obliged to work off their debts in labour – essentially freeing of slaves
- Economic states are different between now and almost 4,500 years ago – back then - the main creditors were royal families and their close supporters – either the religious orders or wealthy nobles
- So the cancelling of debts really only meant removing debts owed to themselves
- But this wasn’t purely altruistic – What the king lost in immediate payment, he got back in encouraging a land holding peasantry, who could pay future taxes and provide the backbone of the army. Moreover, rivals to the Crown, foreign enemies or internal upstarts, could foment rebellion by threatening to cancel debts themselves, if the new Monarch did not do so first if there was a rebellion
- In times of social unrest – it is something to watch out for – a socialist politician coming in to promise the cancellation of debts
- In the modern economy – the fiat system – there is a lot of debt – it is a global phenomenon
- When money has nothing backing it –
- Hence why the chosen policy prescription for all financial ills is to throw more money at the problem - even if it means piling up the debt – especially when the problems are created by debt
- This can work when economies are growing and have very low debt levels – but when debt levels get too high and there is no growth – starts to strangle an economy
- Regardless of the economic effect – there has been exploding global debt -back before the GFC in 2007 – was sitting at $116 trillion USD - current levels are around $250 trillion – about to accelerate due to the stimulus packages governments rolling out
- debt has increased by over $130 trillion, but GDP has only risen by $27 trillion
- countries have borrowed five times more than their economies managed to produce
- Global GDP is about $142trn – so $100trn more debt than output
- Puts the economy in a fragile position - the risk of deflation, which means prices are falling, across the entire economy
- Another policy response - central banks have been lowering interest rates to fight deflation – policy makers seen as the number one threat to global economic stability
- debt has increased by over $130 trillion, but GDP has only risen by $27 trillion
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Three major sectors who have debt – Governments, Companies (large and small) and individuals
- Governments – Makes up around $70trn of the global debts – Lead by the USA and China
- Large debt levels – then Rising interest rates would compound the problem – interest repayments cost a lot to a nations budget - Example in 2008 – US annual interest on debt $253 billion and consumed 8.5% of the federal budget – projections that in 2026 the interest may be $762 billion and take up 12.9% of the budget – with lower interest rates
- Debt-to-GDP ratios are rising rapidly - Finland, Canada and Japan had the highest increases in a 1-year period - puts countries in a vulnerable position in the event of a downturn
- Governments – Makes up around $70trn of the global debts – Lead by the USA and China
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According to the World Bank, countries whose debt-to-GDP ratios are above 77% for long periods experience significant slowdowns in economic growth – estimates that Every percentage point above 77% knocks 1.7% off GDP over the future
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Companies – Corporate debt is around Gov - $72trn – but almost $19 trillion dollars of debt is owed by companies that don’t earn enough to cover interest payments
- With potential of lowering demand for products – in a bad position – but through SPVs the Fed is buying up corporate debt with more newly created debt – debt on debt
- Individuals – Mortgages – credit cards, car loans, and student debts – for the individual side – the debt repayment and interest costs reduce consumption – also impacting economic growth
- Level of credit growth was over 10% p.a. whilst wage growth was at about 3.5% p.a.
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These levels of debt growth without the economic growth cannot go on forever.
- Previous policy responses proposed – trying to get economic growth through MMT
- when interest rates can’t go any lower and QE has already been tried – and rolling this out on steroids - a central bank’s last resort is to provide relief for the common people
- Economies are basically reaching this point – additional payments to people
- The theory is that debt cancellation is needed when debts go beyond the ability to be paid, and all personal debts, all non-business debts, tend to mount up beyond what they can be paid.
- debt-strapped individuals right now who lost their jobs, or their stores have closed down, or they work in restaurants and they’re unable to earn the money to pay.
- Remember – The debt jubilees in ancient societies weren’t egalitarians – cancelled out of self interest –
- Today - the politicians would cancel debts as a promise to get into office - or because it doesn’t want to make the economy fall into austerity - reason would be to preserve stability
- Options – Debt defaults eventually- or debt forgiveness through jubilees
- Either way – there is quite a cost to this - Will any lender ever lend another penny after this?
- Potentially - Lenders will always begin lending money as long as they see that there’s a normal ability to pay. The problem is that somebody has to lose when the debts can’t be paid. And the question is who should lose?
- The people through defaults? Businesses, governments, or the financial system of banks
- The people losing out would crash the economy worse – so economists and politicians who are proposing this is saying that the Governments can simply pay for this – under MMT – the governments would be able to print the money
- Ironic – there was a form of private jubilee in 2008 - the Fed printed $4 trillion to buy up the banks’ bad debt -but at the same time 10 million American homeowners were foreclosed
- main economic justification for a modern debt jubilee - debts forgiven, governments, households and individuals could spend the money currently devoted to interest and principal repayments on consumption which would – aim would be for an increase in economic demand and encourage economic growth, and eventually take the world economy out of constant crisis
- The benefits of a Debt Jubilee are also meant to go to governments – the proposals would mean Govs are no longer bound to interest or debt repayment – meaning they can turn around and increased social spending
- Governments - relieved of debts – similar to individuals could increase their own consumption - would be free to offer generous social programs without having to hike taxes
- Infrastructure spending could then be increased – restarting the debt cycle - as in the past with debt forgiveness – such as the 2000 cancellation of debts to developing countries – they are now back in debts – some larger than previously
- Previous policy responses proposed – trying to get economic growth through MMT
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Of course, not everyone wins from a Debt Jubilee - The losers would include credit card companies, lenders and banks, all of which would lose the value of the debt which for them is an asset – and with it the income that they can generate - the problem with a modern Debt Jubilee is the state would have to recapitalize the central banks
- These lenders are powerful – so it depends on how a jubilee would be implemented – devil is in the details - obviously the banks will resist – they would lose out on billions or dollars every year
- The lending system has to remain in place and will play an important role, once we get through this
- credit is important – when used correctly it can really help the economy grow –
- Business loans – loans that lead to economic output – can help get companies off the ground to employ more people
- personal debts and credit cards on the other hand – they help consumption now at the cost of future consumption – similar to a low of other loan structures
- Example – personal loan to buy a car now - $20k – but if you have to spend $4k of interest on it - $4k less in consumption that can be made – worse with mortgages due to the long lifetimes and higher interest costs
- credit is important – when used correctly it can really help the economy grow –
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Difference between personal and business loans is that consumption with individuals is likely just being delayed – whilst the production and economic output from businesses that comes from loans would never occur without them
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In reality there is nothing preventing central bankers from doing a complete global reset, putting all debt back to zero – would likely come at the same time as a monetary reset
The end result – almost impossible to predict what a jubilee would look like – the form that it takes – from just some nations getting debt cancellations – to some people in countries – all the way to every person, gov and business debt on earth –
- At the current rate – doesn’t take much imagination to see that debts are getting out of control – they can keep going forever under fiat but at what cost? Shrinking economies and most countries becoming third world
- At the same time – inevitably the world’s reserve currency, the US dollar - would collapses under the weight of unmanageable debt
- A triggering event for this could be mass selling of US Treasuries by foreign countries – as they own about $6 trillion of US Govs current debt
- This would cause the dollar to crash – and then monetary response would require interest rates to go up – to increase demand – this would destroy those who had borrowings - Business confidence would plummet and mass unemployment would occur - growth would plummet – so to avoid this - could trigger the need to forgive debts
- We will look at other government policies that go into this and alternative assets as well in coming episode – but A lot of this debt has gone into asset prices – house prices – shares and the companies that back them – so if the debt is forgiven – then the asset prices may just go up – the debt would be what you wouldn’t want to own in this case
- If the debts are forgiven - don’t think this technically means that the money will be ripped out of the economy – would be a reset –
- Also could lead to massive levels of inflation – if wages can grow by more -not a problem but without that – would be
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. Today we’ll talk about what rules the market, fear, and why it is important to have some fears but also overcome them
Fears rule the market – and the more fear makes the market more volatile
- Occurs on both side – fears of losing money – fear of missing out on returns
- Drives large crashes and drive large rallies – obviously selling and buying affect price – but the fears can be behind the behaviours of buying and selling
Behaviours of the current market –
- Volumes are spiking on the market in trades –
- See a spike in volumes in large movements on ASX –
- March – Saw double the average in trading
- Been a record surge in Nasdaq volume more recently – also their equity call volumes hit their decade high –
- Calls – options that are essentially leveraging to buy the market in the future – works well when the market goes up
- At the institutional levels - Goldman's prime desk notes that while overall hedge fund gross leverage fell -2.5 pts to 247.1% (96th percentile one-year), net leverage rose +1.0% to 75.0%, the highest level in over two years
- Low was in April – Gross was 229% and net exposure was about 62% - so up over 10%
- E-Trade - reported that its daily trading volume in April was more than three times as large as it was in the same period last year – other discount brokers have reported similar figures
- TD Ameritrade – 3m trades a day in April – 800k year earlier
- One potential contributor – lowering or removing commissions – in rational terms - getting rid of commissions shouldn’t have had a substantial impact
- Going by the numbers – say you invest $5k – brokerage in USA is cheaper than AUS – about $5 to $10 max – can get about $10 in Aus – is about 0.1% or 0.2% - saving this cost won’t have much effect on the ultimate outcome
- How much trading would you have to do for it to make a difference? But free is always appealing – and the fear of missing out on a free lunch can be large
- nobody really knows what is driving the massive spike in trading - people might just have a lot of time on their hands – or as Richard Thaler mentioned - it is replacing gambling - casinos are closed and there were no sports to bet on
- $400bn gets gambled each year – online is about $50bn
- Small trader call buys up massively – average since 2000 was about 2m contracts – spiked to 12m
- See a spike in volumes in large movements on ASX –
Fears at the moment – nobody is immune
- Institutional fears – institutions like investment managers have lots of fears –
- Investment managers – FOMO – not outperforming benchmark
- Why? The success of their future is reliant on performance – people will withdraw funds from them so their MERs income goes down
- If they are sitting on the sidelines in a market rally – and underperform in the short term – bad for their longevity
- Individuals – Fears of missing out – or fear of losing funds -
- Market panics caused by overselling – market bubbles buy overbuying –
- Neither is based in rational but hope -
- Fears can be rational – why invest? Fear of not having enough in retirement or Fear of inflation kicking back in
- There is risk involved with investing – property or shares – or anything that has price movements – but not going to get good long term returns without risks
- Market panics caused by overselling – market bubbles buy overbuying –
- Central Banks – Fearing deflation
Can’t let fears rule investment decisions
- Investing is an action, controlled by behaviours – emotions change your behaviours.
- Getting a good investment midframe allows you to invest well for the long term – not letting emotions rule your investment decisions
- Understanding how the market behaves can help to overcome your fears of the market though
This means controlling your fear more than trying to control investments – Cant control what investments do short term
- Fear is an emotion – Which stops you from investing
- Starting is the hardest part – getting the right fame of mind and overcoming fear
- But staying motivated and on track is just as hard
- Life gets in the way – and new things happen and crashes
How to start? Needs based plans – ignoring your emotions
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What is your purpose for investing?
- What are you trying to achieve? – If you don’t know your reason to invest, you cant answer this
- Long term growth? Passive income?
- How will you achieve this? Strategies and investment options
- Save a deposit – Buy Property
- Monthly investing into Managed funds, LICs, rather than savings
- The most important thing is to just start – but fear will take over and indecision
- Information overload will be hard to overcome
- Diversified products help to remove this – ETFs = let someone else make the investment decisions for you
- Taking the plunge – Start small if you are uncomfortable
- You don’t need to put everything in, but a small about
- Some people like to jump into a cold pool, others start with feet and slowly move in to acclimatise
- Information overload will be hard to overcome
- What are you trying to achieve? – If you don’t know your reason to invest, you cant answer this
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Example: Like a pool of investments, some people do dive heard first into pools, but what happens when they cant see the bottom, or cant swim?
- If they break their neck or drown, would people say that pools are dangerous, or the behaviours were dangerous? Or if you constantly heard about the 372,000 drowning deaths every year – might be petrified of swimming
- Say it is your pool, or a pool you go in every day? You know what you are in for – So you know if you should dive, or slowly get in.
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Prior experiences do affect your future behaviours
- Buy a property that goes down – Will you be more or less likely to buy another?
- Buy shares right before a crash – will you be more or less likely to think share are too risky?
- LESS likely in most cases – But these are some of the best long term investments thanks to GROWTH
- Don’t let one bad experience stop you
- Or something you hear about – fear will come in from hearing about other people losing money
Failing at investments – FEAR = failure
- Rational fears vs Irrational Fears – Some fear is good, but only of very risky investments, or of diving in head first!
- Stops people from starting to invest – Fear of the unknown – well, shares are ownership
- Investments will fall apart if you respond by fear!
- Doing the wrong thing – fear selling
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FEAR leads to – following others instead of doing what is right for you.
- Do they know something you don’t? SO you follow them just in case, even if irrational!
- Buying – Leads to buying at peaks of bubbles
- All because people buy property doesn’t mean you should.
- All because people buy shares, doesn’t mean you should.
- Selling – Leads to selling in the crashes
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How do you avoid this? I have some Rules when I invest: There aren’t 10 – there are 5
Rule 1) Invest for the long term with a purpose!
- This means holding through the cycles
- Also investing in a diversified portfolio to survive – long term!
- Not putting more into one investment than I can afford to lose
Rule 2) Don’t invest out of hope, or more than you can afford to lose – That is gambling
- Invest with a greater certainty
- Avoids you chasing the risky (and unlikely gains)
- EXAMPLE – the only losses I have in shares is from hoping they will be big returns in the short term….they weren’t
Rule 3) Don’t do what the crowd is doing, just because they are doing it
- that is called Contrarian investing.
- Buy when others are selling
- Personally, I love doing this. Like the divorce sale of investments
- Sell when others are buying
- Personally I don’t do this, as what would I buy if I sold? I just wait for the crash and get things on discount.
- I just don’t buy at these points, but I don’t sell.
- You cant time the market, but you can know when things are cheap or expensive.
- Buy when it is cheap, and don’t buy when it is expensive
Sentiment –
Goldman Sacs put out a poll survey to traders –
- No conviction – Then ranging from Bearish, Slightly bearish, Neutral, Slightly Bullish, Bullish – 2% had no conviction
- Bearish – bears think the market will go down – swipes down like bear claws – Bearing is 17% and Slightly bearish is at 32% - 49% in total
- Neutral is 14%
- Bullish – bulls think the market will do up – bulls buck up with their horns – 7% Bullish and 28% slightly bullish – 35% in total
- Traders are a segment of the market – but looking around based around volumes on different sides – can see the average bulls and bears
- With the Greed and Fear index – if you bought when it dips below 20 and sold over 90 or close to 100 for past 3 years – buying at bottoms and selling at tops – not saying that it is a good strategy – not advice – but find it interesting
- Robert Shiller coined the term Narrative Economics – major stories are contagious and spread - In standard economic theory – fundamentals are considered – make decisions based around things like fair valuations, interest rates, and expected profits before investing – it seems like today – the narrative is often more emotionally compelling and resonant than an argument about valuations or boring economic terms -
Rule 4) Don’t listen to the media – Their job is to sell fear and there is always a new crash
- Try to sell when to buy: Look at the fads of investments – short term holds – but longer term someone is left holding the bag.
- You don’t want to have to change your investment wardrobe every 6 months.
- What do you replace it with? When you sell an investment, it goes to cash
- Then what do you buy?
- You are back are square one – Figuring out what to invest in now!
Rule 5) - If in doubt, remember rules 1 to 4!
- Summary – Just start, but don’t dive in head first unless you know how deep the pool is.
- Come up with your own rules over time as well. And avoid the fear!
Getting started in investments and keeping going is all about your behaviours.
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition.
Last Friday, we went through theory versus practical reality of public infrastructure spending – roads and railroads are needed.
In this episode - Look back at an economic crash – in relation to infrastructure – I Know there are differences – but illustration of when too much of a good thing can go bad – especially when economic or development policies create a reliance to the economy on economic growth – especially when there is speculation involved
What am I talking about? Crash of 1873 - What was it –
- To start – US coming out of their Civil War(1861-1865) – in an effort to deal with unemployment and economic fallout- infrastructure was proposed – The US has a long history of government job creation program –
- Job creation efforts were undertaken at the local level by cities or state by state –
- During the 1857, 1870s and the 1890s economic crisis and depressions going on
- New York, Boston, Phili – developed municipal programs to aid the poor or unemployed –
- But the administration and financing of these programs presented major problems for each city or state –
- Logistics was one but funding was another major one –
- Led to the proposal for statement government to take over for cities and for the federal government to take over from the states – assumed the responsibility for these work relief programs
- So a boom in railroad construction commences - 33,000 miles (53,000 km) of new track were laidacross the country between 1868 and 1873
- Back then - the railroad industry was the nation's largest employer outside of agriculture due to the work programs –
- Most of the boom in railroad investment was being driven by government land grants and subsidies to the railroads - involved large amounts of money and but due to the size started becoming a ticking timebomb of financial risk
- a large infusion of cash from speculators caused spectacular growth in the industry as well as in construction of docks, factories and ancillary facilities that process the goods needed for construction – timber, etc –
- But how long does it take for infrastructure like railroads to make a return – years – so the capitalwas involved in projects offering no immediate returns
- Now enters the Coinage act 1873
- In 1871 - the German Empire ceased minting silver thaler coins in 1871 – most countries had gold and silver coins – similar to today but back then they were the actual metal, not just imitations
- But Germany doing this caused a drop in demand and downward pressure on the value of silver
- Less demand lower prices
- But this had affects in the United States
- One effect was in the mining industry – as the US was where much of the supply of silver was mined
- But also on their monetary system – United States Congress passed the Coinage Act of 1873 - changed the US silver policy
- Before this - backed its currency with both gold and silver - minted both types of coins
- This Act moved them to a de factogold standard – resulting in no longer buying silver at a statutory price or allowing for silver to be converted from the public into silver coins
- Statutory price used to be a monetary tool – set the price of metals like gold and silver based around the money supply –
- So the immediate effect of depressing silver prices and also changing the coinage law reduced the domestic money supply – this resulted in raising interest rates – hurting those who carried heavy debt loads
- This perception of instability in United States monetary policy caused investors to shy away from long-term obligations, particularly long-term bonds. The problem was compounded by the railroad boom, which was in its later stages at the time – started kicking off company failures
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One of the biggest failures - In September 1873, Jay Cooke & Company, a major component of the United States banking establishment, found itself unable to market several million dollars in Northern Pacific Railway bonds. Cooke's firm, like many others, had invested heavily in the railroads on both sides – the ownership but also selling bonds (the debt) in the investment to investors
- Around this time investment banks were anxious for more capital for their enterprises in railroads – easy cash cow and could get government loans – but new monetary policy of contracting the money supply (again, also thereby raising interest rates) made matters worse for those in debt – those who speculated on infrastructure investments – that wouldn’t see returns for years – were no left holding the bag with higher interest repayments
- In addition – put a halt on more infrastructure spending – there were plans by Cooke and other entrepreneurs to build the second transcontinental railroad, called the Northern Pacific Railway.
- Cooke's firm provided the financing - ground for the line was all ready to go - But just as he was about to swing a US$300 million government loan reports circulated that his firm's credit had become nearly worthless – loan was ceased and in September 1873, the firm declared bankruptcy.
- Another flow on effect – was on the insurance industry - Many US insurance companies went out of business as deteriorating financial conditions created solvency problems for life insurers – they invest in a low of what is seen stable investments – like bonds
- Other effects- The failure of the Jay Cooke bank, followed quickly by that of Henry Clews - set off a chain reaction of bank failures
- Factories began to lay off workers as the United States slipped into depression. The effects of the panic were quickly felt in New York, and more slowly in Chicago, Virginia City, Nevada (where silver mining was active), and San Francisco.
- The New York Stock Exchange closed for ten days starting 20 September – first time in history that the market was closed
- By November 1873 some 55 of the nation's railroads had failed, and another 60 went bankrupt by the first anniversary of the crisis.
- Construction of new rail lines plummeted from 7,500 miles (12,070 km) of track in 1872 to just 1,600 miles (2,575 km) in 1875 – remember that this had become one of the backbones of the economy
- 18,000 businesses failed between 1873 and 1875 – flow on effects of banks failing but also companies providing goods and services to the railroad industry
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Unemployment peaked in 1878 at 8.25%.
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Building construction was halted, wages were cut, real estate values fell and corporate profits vanished
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Further flow on effects created a second business slump by 1877 – example - the market for lumber crashed, leading to several lumber companies going bankrupt
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With the depression, ambitious railroad building programs crashed across the South, leaving most states deep in debt and burdened with heavy taxes. Retrenchment was a common response of southern states to state debts during the depression.
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Social unrest and Rioting – In 1877, steep wage cuts led American railroad workers to launch the Great Railroad Strike. Initial protests broke out in Martinsburg, West Virginia when the Baltimore and Ohio Railroad (B&O) cut worker's pay for the third time in a year.
- As the workers began rioting, with reports of looting and attacks on civilians and police - dispatched federal troops. Within the week, similar riots had erupted in Maryland, New York, Pennsylvania, Illinois, and Missouri.
Summary of events - Why did it go bad
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The Panic of 1873 arose from investments in railroads. Railroads had expanded rapidly in the nineteenth century
- Eventually – as investment in railroads continued, new projects outpaced demand for new capacity - returns on railroad investments declined – remember they were already delayed in nature –
- You had a share market crash in most major financial centres -USA, EU with Vienna - investors divested their holdings of American securities, particularly railroad bonds
- This mass selling depressed the market, lowered prices on shares and bonds, and impeded financing for railroad firms - Without cash to finance operations and refinance debts that came due, many railroad firms failed
- others defaulted on payments due to banks
- Large banks then failing changed investors expectations. Creditors lost confidence in railroads and in the banks that financed them. Stock markets further collapsed.
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The panic spread to financial institutions in Washington, DC, Pennsylvania, New York, Virginia, and Georgia, as well as to banks in the Midwest, including Indiana, Illinois, and Ohio. Nationwide, at least one-hundred banks failed.
What is happening today?
- There is a Push for large infrastructure spending – a lot of speculation surrounding this -
- Push for spending to help boost economic growth and to provide employment
- Investment speculation – from Super funds involvements – Government policy as well
- Also have large investment funds that are looking at this – if you cant beat them join them
- Not on railroads – but Mostly on the same thing – green infrastructure
- ROE – is it low or high? ROE is relatively low – it is high cost but thanks to Gov subsidies it can provide a profit – but what if these go away?
- Or – what if supply outstrips demand? If most of the projects over time have little demand – lower ROE – similar to the railroads – diminishing marginal returns on everything
- Interest rates are low – so the borrowing costs of any infrastructure will be low for some time
- and lots of funds will come from Governments or Super funds – so it isn’t their money
- Either invest the money in the project – or buy bonds in the project (capital notes) to finance them
Can the same thing happen as the crash –
- Not likely – there is a safety net now in the financial system and Central banks –
- Liquidity issues? More QE or bailouts –
- Super funds can put a lot of their money into this and have the guarantees of the debt not being too risky
- Especially in low interest rate world – but if we go through a new monetary system – if it creates higher interest rates then the amount of debt around would create massive issues
- But is it a good idea? Well time will tell – the debt on the infrastructure projects will be around for a while
- But may be a similar thing to Chinas WMPs – a shadow banking rolling ponzi scheme –
- Takes long time to get a return on infrastructure projects from implementation to be in working order –
- A lot can change in economic conditions over the 5-10 years it may take to see ROE on these projects
- Taking more debt out and if it isn’t quality investments – where supply outstrips demand – the infrastructure policy could be another trap in the future for another bubble and collapse
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Links -
https://resources.saylor.org/wwwresources/archived/site/wp-content/uploads/2011/08/HIST312-10.1.2-Panic-of-1893.pdf
https://www.federalreservehistory.org/essays/banking_panics_of_the_gilded_age
https://books.google.com.au/books?id=u_6uDAAAQBAJ&pg=PA170&lpg=PA170&dq=infrastructure+crash+1894&source=bl&ots=_OzgH-SsIv&sig=ACfU3U29tw7Dw11WpH2TKUM_HtYmjgBUlg&hl=en&sa=X&ved=2ahUKEwi55uymnPnpAhUZA3IKHWy3C1wQ6AEwEXoECAgQAQ#v=onepage&q=infrastructure%20crash%201894&f=false
Welcome to Finance and Fury, the Say What Wednesday edition. This week’s question comes from Ryan.
“I would love to run by a thesis I have and would love to hear your opinion on the matter.
I have recently been reading all of Ray Dalios ''Changing World Order' publications on LinkedIn and some of Raoul Pal's information and Jesse Felder's.”
I remember Jesse releasing his advice to start buying Gold back in late 2018 and since then gold has done really well. Additionally Raoul's thinking is along the line of at some point the government's continual persistence of printing money to attempt to keep the market prices inflated will eventually lead to the millennial's to start investing in alternative assets that could potentially have value and increase in high percentages over the medium term.
My thinking has been shaped by these people predominantly in that although the share market may be continually propped up by the central banks- at some point all the fiat currency printing and devaluing of currency (savings) and associated debts (bonds) will have to be dealt with in a debt jubilee type scenario. Especially if the economy (goods and services) can't soak up these debts.
From this point of view I am thinking that bitcoin or cryptocurrencies that can't be 'printed' as such out of thin air and gold to a certain extent will continually rise in the future until something occurs along the lines of;
-
asset prices fall to valuations that make them attractive to purchase again
-
the government contravenes and makes policies that forbid people to hold gold or cryptocurrencies (this happened in the past with gold)
As a millennial I understand that the government has to do their best to keep the ageing baby boomer asset prices (predominantly US share market and Australia property) high so they don't have to fund them in retirement through pension- though I am not sure I am that interested in paying top dollars for these assets in which puts me right out there in the risk curve for not a high enough potential return.
Do you have any thoughts on this as I would love to hear other point of views to pick apart my thesis and form a better knowledge before committing too much in any direction?
Good points – number to go through –– brings up a number of good points – to cover properly going to take a few episodes – this episode will be some summaries now
- Been reading Ray dalios posts on ''Changing World Order' – First few chapters of his book is out – rest comes out in September-
- The premise Reminds me of another book a read a few years ago called ‘why nations fail’ by a few economists
- Three major points to cover to break this down
- The economy and debt jubilees
- Policies that governments and CBs have implemented that affect asset values –
- Alternative assets
On the debt jubilee - My thinking has been shaped by these people predominantly in that although the share market may be continually propped up by the central banks- at some point all the fiat currency printing and devaluing of currency (savings) and associated debts (bonds) will have to be dealt with in a debt jubilee type scenario. Especially if the economy (goods and services) can't soak up these debts.
- A debt jubilee is a clearance of debt from public records across a wide sector or a nation. Such a jubilee was proposed as a solution to debt incurred or anticipated during the 2020 in the Government measures around the world
- Demand side thinking - Calls to reduce debts to help consumers consume more –
- Student loans is a big one that is brought up – reduce debts and they have more money to consume
- Debts that may be done away with would be at the nation level – has occurred before –
- An outright cancelation of sovereign debt shouldn’t be ruled out. During the Great Depression, France and Greece had about half of their national debts written off completely. In 1953, the London Debt Agreement between Germany and 20 creditors wrote off 46% of its pre-war debt and 52% of its post-war debt. The country only had to repay debt if it ran a trade surplus, thus encouraging Germany’s creditors to invest in its exports, which fuelled its post-war boom. As we pointed out, in 2000, $100 billion worth of debts owed by developing countries were wiped off the books.
- Again, this is not as far-fetched as it sounds. Because we live in a fiat monetary system, currencies are not backed by anything physical; the reserve currency, the US dollar, was de-coupled from the gold standard in the early 1970s. It's not like a raid on vaults full of gold, which have an inherent, physical store of value.
- In reality there is nothing preventing central bankers from doing a complete global reset, putting all debt back to zero.
- going further to get rid of them at the individual level is a different thing together -
As a millennial I understand that the government has to do their best to keep the ageing baby boomer asset prices (predominantly US share market and Australia property) high so they don't have to fund them in retirement through pension- though I am not sure I am that interested in paying top dollars for these assets in which puts me right out there in the risk curve for not a high enough potential return.
- Not sure about the government not wanting fund pension –
- They aren’t funding them – we are with tax money – there is no asset sitting there to fund it -
- They are trying to keep asset prices high for the wealth effect – spending effects due to confidence
- Also politically expedient for the larger chunk of the population – keeping the largest group of the voting public happy – or those why pay them the most in the way of lobbying
- Property – most people live in this and cant fund their retirement off it –
- land restrictions and taxes haven’t helped
- I think high property prices is a by-product – inflation targets and demand side theory = lowering interest rates an easing of credit
- Some governments are happy to do pension payments – Labor right now is calling for additional stimulus to continue being paid going forward
- Strategy in places of cant beat them, join them
From this point of view I am thinking that bitcoin or cryptocurrencies that can't be 'printed' as such out of thin air and gold to a certain extent will continually rise in the future until something occurs along the lines of;
-
asset prices fall to valuations that make them attractive to purchase again
-
the government contravenes and makes policies that forbid people to hold gold or cryptocurrencies (this happened in the past with gold)
-
True that Gold cannot be printed out of thin air – but synthetic versions of it can based around futures contracts – also the price of gold can be set by monetary authorities –
- Example – to be a money base $10k as a price level is what some like Jim Rickards suggest
- Each crypto can be capped in supply – but they are exactly printed out of thin air with 1s and 0s –
- According to crypto market capitalization aggregators, there are more than 5,000 cryptocurrencies in existence today and over 20,000 different types of markets
- Long term – what if Governments get their hands on this as a form of MMT –
- When it comes to asset prices falling – depends on the type of asset
- Property and shares –
- Crypto – looks like it became correlated with shares based on confidence – in the share market crash BTC also dropped by 47% - and had a rebound
- This will be its own episode – lots to unpack in this as well – with values and alternative assets to traditional investments
In short – real assets that people will have confidence in and will use –
- Property in a lot of places is overvalued – im looking at good usable land at the moment – mainly for myself
- Shares – ones that people have confidence in
- Gold – Own gold as well
Three episodes – to look at the overall thesis -
- Debt jubilees – what this means to an economy and the chances of it occurring
- Alternative assets – Gold v Crypto – are these a way to avoid this situation
- Assets that can be propped up by governments
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury - Where are we at? Market has been going up -
Looking at a chart – March in 3 particular years stand out – 2008, 2009 and 2020 –
Why? They are each their own respective bottoms of the market after declines –
In this episode - March 2008, March 2009 and march 2020 – are we sitting at a similar position as 2008 or 2009?
- Share market gone up from its March 23rd low – some analysts are seeing similarities with the massive rebound that took place when the markets were emerging from the financial crisis 11 years ago
- Some market analysists saying that the ‘flattening of the curve’ in terms of COVID-19 and states slowly re-opening are all helping the market look beyond the current quarter
- Signs that the market is looking to ahead - 6 months, 12 months out –
- Or is it short term profit seeking behaviours?
- By the market in speculation terms is myopic – so are traders buying long or seeing this as a short term profit maximisation strategy?
- There has never been a significant portion of the largest economies in the world shuttered as well as other economies around the world shuttered – or what that would look like coming out of it – the domino effect is impossible to predict –
- So the market gaining in price now – i.e. looking ahead
- Those analysis have also prompted many forecasts as to what the shape of the economic recovery will look like
- A lot are forecasting a likely V-shape recovery in equities occurring - with likely a U-shaped recovery following with the economy - are closely watching for broader participation as a positive indicator for the markets.
Look at the historical Patterns –
- First march pattern - Going back to December 2007 –
- Market at 6,600 – then by march had hit 5,127 = a 23% loss
- By end of may – market had recovered back to 5,931 – rebound of 16% but still 10% lower from peak
- Pattern – loss of 1,527, then a gain of 804 points – this rebound in points terms is around 53%
- Then by July back down to 4,900 – about a 17% drop – hovered around there until September
- Then dropped to 3,800 in October – then rebounded to 4,350 in November – then by December had dropped back to 3,222 – new low
- Pattern – Loss of 1,100 from July to October, recovery of 540 in November, then a loss of 1,014 – saw a rebound of 50% then a decline by double the rebound
- Second March Pattern – Going back to December 2008 – new low of 3,322
- Saw the stock market gaining in confidence has shot higher for a second straight session as investors bet that President-elect Barack Obama's plans to increase infrastructure spending will lift the economy back to health -
- Markets went back up to 3,800 by January 2009 –
- But then lost traction and went down to 3,145 by march 2009 – rallied after this until October 2009 -
- Patterns – markets went down by 1,014 – then went back up by 478 point - initially saw a 47% rebound – from the low in Dec 08 to Jan – then markets dropped again to a new low – drop of 655 points –
- Then from low point – markets went up until October 2009 when they stalled out again - went up and down and by mid 2011 was around the same level – about 5,000 – but by end of 2011 was down to 4,000
- Where we are at now –
- Markets went from 7,130 to 4,546 – large point drop within a month and a half – 36.24% drop
- Then by May they were 5,500, Now they are sitting at about 6,000 – 31.9% gain since the bottom
- Based around the larger retracement patterns in the 62% range, we aren’t quite there yet –
- Market would need to be around 6,130 to hit this point from the low
- Drop of 2,584 points, now had a rebound of 1,454 – equal to about 56% - another 130 points and we will see what happens
- Had no strong pull backs along the upwards movements – there has been a bullish breakthrough
- Markets went from 7,130 to 4,546 – large point drop within a month and a half – 36.24% drop
- Markets aren’t easily predictable – but What this should at least illustrate – markets move up and down in times of uncertainty – when and by how much who knows – don’t have a crystal ball -
People say that these are unprecedented times - Differences between now and 2008 –
- Time – event of GFC versus this – what till take longer to recover from?
- Works against the V shaped pattern expectations of what the markets are currently on
- The nature of the collapse – at the root both were governmental policies in lending and guarantees versus lock downs
- Difference is the sectors impacted – the housing market and banks –
- versus employment at a larger level and the flow on effects of this
- Staved off at this stage – Gov stimulus policies – super withdrawals - $10.5bn – spikes in demand
- Long term – may not last
- Risk free rates – talked about this in the CAPM episode last week – but the cash rates and borrowing rates are low – can borrow and invest at low opportunity cost –
- Makes bubble situations or rebounds in markets more prevalent – but speculative based – purely for profit maximisation in trading – not in the actual performance of the companies that make up the market
- Amount of money being pumped into markets – QE programs and Central banking policies -
- Back in previous crashes – had very limited CB intervention – today we do
- Interestingly – going back further to the 1929 crash – markets dropped 50% very quickly – at the bottom saw massive CB intervention – not when compared to todays standards – but the market rallied over a 5-6 months period – went back up 50-60% - then went
How the market works –
- The worst was priced in initially – markets are liquid – and they freak out
- Hits a low point – people enter the market
- But this all occurred As announcements of shut downs start –
- But then recovers – it seems counter intuitive – before the actual announcements started
- There has been little in the way of truly positive news – restrictions are being eased –
- But speculation can give the perfection of false confidence in the financial markets – and real confidence is the key long term –
- Profit seeking versus The average investors –
- Patterns reflect demand for shares – demand spike at the 5,500 mark – could be the average investor entering the market – sadly these could be the ones who get burnt in this
- Initial institutional investors who got in earlier may Then move into Profit taking
On the fundamentals side – What is the share market – a speculative price instrument
- It doesn’t have too much with the fundamentals – but the perception of fundamental performance of the economy
- The market keeps going up – pricing in much better economic news than what is coming out –
- But the really really bad news seems to be over for now – but this has nothing to do with economic news of unemployment, GDP, etc – all the market cares about is profit
Back in April, much of the rally had been fuelled by mega cap companies, prompting a warnings about the narrow breadth of the market -
- With the ASX – the banks have finally had the rebound from people buying into these – so catching up a bit –
- A lot of Aus companies may be around the fair value level now that the market hit 6,000
- It still does have some base in expectations – expectations of pricing – prices and profit taking –
- Thus creating a self fulfilling prophecy when it comes to market declines – then – but back in at a lower point and then sell once the gains reach a desired level –
- Whilst the economy is tanking – the companies that make up most of the ASX are likely to benefit longer term – as they are a protected class – but that doesn’t mean their prices won’t go down from there –
- Again – the market is a speculative environment –
- News about the economy or pretty meaningless measurements to our everyday lives like GDP will effect the market – that is the distinction to make –
- What is bad for us can sometimes be good for the market and vice versa
Are we at March 2008 or 2009 –
- I would lean towards somewhere in between – why? The market does look forward and try to react first –
- But if it is pricing in good things in 6 months time – hence the trend up – smallest bit of bad news can buck the trend
- Even on trend upwards – downturns occur – the market will be volatile going forward – everyone is in the same direction doing the same thing – leads to a situation where large reversals can occur –
- Dramatic moves in the market
- FOMO is in play – seeing the market jump up by as much as it has in the past few weeks
- When FOMO kicks in it does continue for a little while -
- Right my strategy is patience - probably the key with the share market – after such a large rally – markets tend to take a dip as profit taking kicks in
- Definitely could be wrong – markets may be going up to 7k again -
- I still firmly believe that this rally is completely nonsensical from an economic standpoint, however it is rational if you consider the monetary environment as prevailing – CBs taking over and emotions of fear as well
- Long term – when it comes to personally investing – if you are looking to make a quick buck in the next 3 months from buying now – you may be burnt - but if you are buying shares for the next 10 years – it is still a good time to buy
- Again – in volatile uncertain times – when probability is in play – if you have a 50/50 chance of losing 50% or gaining 50% - expected return is $0
- Do an episode probably next week - Dig deeper into fears that are driving markets – fear of losing out but also fear of losing money – and what is driving fear
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. Can public infrastructure spending help to boost a depressed economy?
In this episode we look at the theory of infrastructure spending on public goods, such as roads and bridges, versus the practical reality of this type of fiscal policy.
At the moment – there are lots of Proposals for Infrastructure to boost economy – USA, Aus, EU – beyond other stimulus measures – this is one that billions of dollars can be pledged to
First- what infrastructure governments spend funds on –
- Public infrastructure – for instance - spending on roads, bridges, train lines, sewerage systems - other such projects which are considered a public good – i.e. usable for all –
- This type of spending is one of the most advertised tools of anti-recessionary fiscal policy
- Why? When the economy struggles, politicians and public economists call for greater infrastructure spending as a form of stimulus
- This can be politically expedient as well - especially when the spending takes place in the politician’s state.
- However – how well does it provide stimulus to the economy?
The theory of infrastructure stimulus –
- Government stimulus spending - infrastructure or other Gov consumption on goods and services – part of the Keynesian assumption where an underproductive economy can be spurred back to full output by using new public expenditures – we have gone through this theory in previous FF episodes – but the aim is to boost aggregate demand – GDP
- In relation to infrastructure – the theory is that involuntarily unemployed persons can be given public infrastructure jobs and receive an income
- This then feeds back into the economy with consumption spending – meant to promote more GDP growth
- John Maynard Keynes theorised that public infrastructure deficit spending could produce a multiplier effect on economic growth
- Especially when real interest rates are low – can borrow – create jobs while the project is under way and those incomes produce more GDP in economic spending
- Australian GDP composition -
- household consumption: 56.9%, investment: 24.1%, net exports 0.5%, government consumption: 18.5%
- Of gov consumption – around 4.4% is infrastructure spending – pretty high compared to a lot of other nations –
- China 8.3%, India 5.6%, Saudi Arabia – 5.1%, South Africa – 4.7%, 5th on the list - Australia – 4.4%
- Basic assumptions on this theory - Keynesian stimulus spending assumes essentially zero opportunity costs if the deficit spending occurs during a period of higher-than-normal unemployment –
- Those who are unemployed could not be employed anywhere else – for higher incomes –
What this looks like in practice –
- Some assumptions I have seen – Economic policy institute - The “bang for the buck” is estimated by the one-year dollar change in gross domestic product (GDP) for a given dollar increase in spending. Multiplier indicates how much total output (GDP) changes in response to a $1 increase in deficit resulting from the fiscal policy change
- Outcome from increased infrastructure spending - $1.57 – could find a fair amount of papers theorising the benefits-
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One problem with theory of infrastructure spending - it ignores so-called "Cantillon effects"
- the relative change in different prices as the result of new money entering the economy
- new spending increases prices and demand in some areas faster and more deeply than in other areas - it has the side effect of misdirecting production away from areas where private citizens might voluntarily choose to dedicate their money – creating a misallocation of pricing
- Example – Massive inflows of funds into infrastructure spending pushes up the cost of infrastructure up – anyone who has had a damaged driveway gutter and requires the local council to replace this knows what I am talking about – minimum costs of $1,500 in most cases, just for a wheelbarrow of concrete
- Essentially, the economy trades off a short-term reduction in unemployment for a long-term misallocation resources and employment potentials that produces higher unemployment long term – as once the project is over those jobs are gone
- Also – employment only benefits one sector of the economy – those in public works/construction – at this stage of where the economy is at – this is not where the unemployment issues have materialised
- Another problem – it ignores opportunity costs – these may be very large opportunity costs and implementation costs associated with the high levels that are required for infrastructure spending
- I talked about the issue with not having any feedback loops in deacision making - governments do not produce anything with a calculable market value – or do they receive any feedback – it is not like their revenues, or the taxes we pay can be withheld by us if we don’t think they are doing a good job or agree with what they are spending it on –
- Their spending decisions are independent of consumer valuations and therefore blind to any real economic feedback
- There – no feedback on if infrastructure spending is the best use of resources, let alone any specific project for a road, bridge or highway – in addition, no recourse for wasted spending – i.e. the $1bn wasted on the east west link tunnel that never got built in Melbourne
- Good infrastructure can enhance the productive potential of the economy, but the political decision-making process often leads to bad decisions on spending, whether that is for electoral reasons or inefficiencies driven by a lack of market discipline – or having any recourse or feedback loops in helping make decisions
- Dig a hole and fill a hole policies can be implemented – to help boost employment and spend a budget – but it won’t provide any infrastructure benefit to our lives
- Based around the cantillion effect and having no opportunity costs in decision making – governments can impedes the private-sector from delivering infrastructure.
- If infrastructure projects are financed through taxes - the private economy shrinks by at least a corresponding amount long term
- If they are financed through deficit spending and the issuance of government bonds, then current capital markets experience crowding-out effects and other financial assets become more or less expensive than they otherwise should be – long term - when those government bonds are paid back through higher taxes or higher inflation (to eat away the real value of the debt) - the private economy loses again
- I talked about the issue with not having any feedback loops in deacision making - governments do not produce anything with a calculable market value – or do they receive any feedback – it is not like their revenues, or the taxes we pay can be withheld by us if we don’t think they are doing a good job or agree with what they are spending it on –
- the relative change in different prices as the result of new money entering the economy
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The estimate of the 1.57 multiplier doesn’t take into account these opportunity costs
Practical Reality
- Economists do have a hard time to produce empirical results of the benefits – they can in theory and produce models about assumptions – but even models that predict things like inflation show that they are off –
- difficult to find solid, demonstrable evidence about how effective changes in infrastructure spending have been
- The IMF produced a working paper in 2014 - found little evidence that global infrastructure projects produced economic gains - when projects received debt funding for growth – no change to trends for growths
-
Practical Challenges – paper by the National Bureau of Economic Research (NBER) in 2013 called - "Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment."
- Good title – but within it the economists identified at a few major challenges to the standard theory of increasing infrastructure spending for GDP growth
- the endogeneity of public infrastructure spending to economic conditions - endogeneity broadly refers to situations in which an explanatory variable is correlated with the error term or your probability assumption – simple English - there are too many variable to accurately predict what is having an effect on GDP – was is Gov spending or is it just good economic conditions?
- the decentralized nature of implementation – there are too many departments and no communication between them – delays and costing become an issue –
- Good title – but within it the economists identified at a few major challenges to the standard theory of increasing infrastructure spending for GDP growth
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lags between approved spending decisions and actual project completion – money may not be there by the time the works are ready to be completed - delivery of infrastructure generally tends to be slower and more costly due to extensive government regulations, such as land use planning laws, environmental commitments, direct government monopoly decisions and restrictions on transport infrastructure funded through charging the user – such as tolls
-
as I quickly went through earlier - government generally is not excellent at managing money or roads - Federal spending for highways is as much a political tool as an economic one –
- In addition - projects also tend to lose their "shovel-ready" status because of lengthy and expensive environmental and permitting reviews
- Approvals for public infrastructure projects can take between five and 10 years to be implemented, all the while costing taxpayers as tedious approval processes play out – then they have to buy up land and properties that lie on them – then regulations change and new approvals need to be applied for –
- Example - Moved to Brisbane in 2000 with my parents – were looking around and Kenmore bypass was planned – since the 1960s – have the land and in 2009 bought up the final blocks – but still have no money
- What good infrastructure like loads can help with – reduced connection and travel times – does this happen?
- A few anecdotal examples from my own life –
- One – spent $34m adding in a round about that added 20mins to travel
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Another was $60m spent adding an additional inlet to the ICB – actually made traffic congestion worse – an extra 15 mins as down the line the bottle neck still exists
Despite constant policy proposals - there is little practical evidence that public infrastructure projects are a net positive to the economy, or that they even boost net employment figures - There appears to be a disconnect between the theory – the political rhetoric and economic reality – how big? Who knows
- The macroeconomic models are all assumption based – and only deal with a handful of variables compared to what can actually affect the economy – plus it assumes individuals behaviours are fixed – that we aren’t adaptive
- So whilst in theory it does sound good – the actual output is unknow and the funds may be better spent elsewhere
Next week – look at Past examples of infrastructure and leading to crisis.
Thanks for listening.
Resources:
https://resources.saylor.org/wwwresources/archived/site/wp-content/uploads/2011/08/HIST312-10.1.2-Panic-of-1893.pdf
https://www.federalreservehistory.org/essays/banking_panics_of_the_gilded_age
https://www.statista.com/statistics/566787/average-yearly-expenditure-on-economic-infrastructure-as-percent-of-gdp-worldwide-by-country/
https://www.epi.org/publication/the-potential-macroeconomic-benefits-from-increasing-infrastructure-investment/
https://www.nber.org/papers/w18042.pdf
Welcome to Finance and Fury, the Say What Wednesday edition.
This week’s question is from Charl, regarding his home loan.
“My bank is currently offering a 2.29% interest rate on a 3-year fixed loan. I am currently on a 2.99% Variable rate with them and am considering taking them up on this offer. I have funds in an offset account and don’t want to lose out of the flexibility of a variable loan. Do you think I should fix the majority of my loan and keep it variable on a small component, or keep it variable for now to see where the interest rates go?”
To fix or not –
- Currently at record low interest rates – cash rate of 0.25%
- But can go lower – RBA kept rates the same
- But expectations that rates will be low for some time
- RBA ASX rate indicator
Future of interest rates –
- Will rates go up?
- The period is 3 years fixed – so in 3 years will variable rates will be higher?
- Don’t see it – shape of the economy and debt levels have created a bit of a liquidity trap
- What if rates were to increase –
- Household debt to GDP – quite high
- Australia's 6 million home loans, worth a collective $2.1 trillion
- Rate move of 0.25% means $5.25bn less to be spent in economy – given the demand side – keep rates low
- What would it take for interest rates to go up?
- The economy to recover and for GDP to be back on track
- Or inflation kicks in with a vengeance – has happened – US and Aus and lots of Western nations
- inflation emerged as an economic and political challenge in the US in the 1970s. The monetary policiesof the Federal Reserve board, led by Volcker, were widely credited with curbing the rate of inflation and expectations that inflation would continue. US inflation, which peaked at 14.8 percent in March 1980, fell below 3 percent by 1983.
- How did they do this - The Federal Reserve board led by Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981. The prime raterose to 21.5% in 1981 as well, which helped lead to the 1980–1982 recession, in which the national unemployment rate rose to over 10%.
- Australia followed suit as well with our – recession we had to have – was our last one in 1991 or so – The recession happened because of the unwinding of the excesses of the 1980s, the international recession of the early 1990s and the high interest rates - High interest rates were employed to slow the asset price boom of 1988–89 - Treasurer Keating, the Reserve Bank and Treasury itself generally agreed on the need for high interest rates in 1989 that lasted for 2 or so years –
- Our economy started to sink - The Government promised economic recovery for 1991 and launched a series of asset sales to increase revenue. GDP sank, unemployment rose, revenue collapsed and welfare payments surged.
- The recession started in the September quarter of 1990 and lasted until the September quarter of 1991. During the recession, GDP fell by 1.7 per cent, employment by 3.4 per cent and the unemployment rate rose to 10.8 per cent.
- but back then – Household debt to GDP was 40% - today it is 120% - 3 times larger compared to the ratio of the economy
- Imagine today – the destruction of increased rates to a few percentage points –
- Economy already fragile – would create mass bankruptcies and a depression
- Not out of the question though – could be done but it would be done knowing that it would create a bad situation
- Will they go down?
- They might – good chance that they will soon – depending on what happens next month with RBA –
- But cash rates are not bank interest rates – would need to be passed on
-
Does this mean that you will be worse off on a 2.29% fixed rate?
- Technically no – rate decrease of variable by 0.25% is still higher than 2.29%
- Looking at variable rates at the moment – sitting at about 3% for most big banks –
- The cash rate is 0.25% - if it goes to 0% and assuming the full thing is passed on – rates go down to 2.75%
- But looking at the cheaper rates -
- Does this low fixed rate mean that negative rates may be on the way? And What happens if they go into the negative territory?
- Would take some time to materialise –
- Could be offering low rates and fixing people in to secure loans at the bank level
-
Also – banks own finding costs have been reduced from the RBA - so may be part of this
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One factor – banks don’t like to lose money –
- Fixed rate of 2.29% seems to indicate they know something about the future of interest rates –
- Looking at longer term fixed rates – 5 years at 2.69% - don’t expect a rate increase for 5 years
- Also – variable rates – average is slightly below 3% - down to about 2.5% as some of the cheapest -
Issues with Fixed rates –
- If rates go down below the fixed rate –
- Breaking costs – if you have to sell the house – or discharge the loan – but if you are staying in there long term – the risk is lower
The strategy – not personal advice – what I would look at doing
- Splitting – Keeping some variable –
- Fix at the 2.29% a decent size of the loan -
- Strategy is over a 3 year period – how much can be paid back in addition?
- Also – how much is sitting in an offset account –
- Want to keep a buffer on the variable size -
- Also – see if you can Negotiate with bank for better variable – rate
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. How useful is investment theory when it comes to practically investing and calculating an expected return?
Lot of theory when it comes to investing – efficient frontiers, EMH – working out expected returns
In this episode – we will look at One aspect – CAPM – and look at Beta – see how well this can be used when selecting investing -
What Is the Capital Asset Pricing Model?
- The Capital Asset Pricing Model (CAPM) describes the relationship between the risk (volatility) of the market and expected returnfor an investment – used in the share market mainly –
- Foundation for theory that is used throughout finance for pricing securitiesthat have risk – volatility –
- The formula - calculating the expected return is as follows:
- Expected return = RF + BETA X Risk Premium
- Risk free rate of return - Investors expect to be compensated for risk and the time value of money. The risk-free rate in the CAPM formula accounts for the time value of money.
- 10-year bond is normally the risk-free rate
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The other components of the CAPM formula look at the incentives for an investor taking on additional risk
- This is due to investments beta is then multiplied by the market risk premium
- Risk Premium = Expected return of market – RF
- the return expected from the market above the risk-free rate
- gives an investor the required return or discount rate they can use to find the value of an asset.
- But the big one is the Beta - The beta of a potential investment is a measure of how much risk the investment has when compared to the market –
- The aim of Beta is a measure of the volatility of a security or portfolio compared to the market as a whole and is meant to show if the investment has a chance to provide above market returns
- The value of Beta effectively describes the activity of a security's returns as it responds to swings in the market.
- If a share is riskier than the market, it will have a beta greater than one. If a stock has a beta of less than one, the formula assumes it will reduce the risk of a portfolio – can be positive or negative
- Beta Value Equal to 1.0 - indicates that its price activity is strongly correlated with the market – could either be the index or a fund/investment that acts exactly like it – active fund that is a benchmark hugger -
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Beta Value Less Than One - theoretically less volatile than the market – seen as less risky than high betas
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Beta Value Greater Than One - indicates that the investments price is theoretically more volatile than the market – for example – if a shares beta is 1.5 - assumed to be 50% more volatile than the market - indicates that adding this investment to a portfolio will increase the risk, but may also increase its expected return
-
Can also have Negative Beta Value - Some stocks have negative betas. A beta of -1.0 means that the stock is inversely correlated to the market benchmark - inverse ETFsare designed to have negative betas – not great to have two assets with negative betas –
-
Examples – RF 2%, market return is 8% - CAPM relies on assumptions – come back to this
- Beta of 1 = ER= 2%+1x(8%-2%) = 8%
- Beta Greater than 1 – 3 = ER= 2%+3x(8%-2%) = 20%
- Beta less than 1 – 0.5 = ER= 2%+0.5x(8%-2%) = 5%
- Beta of -1 = -4% p.a. ER
- RF asset is low at the moment – long term – say it was 5% - how does this change
- Beta of 1 = ER= 5%+1x(8%-5%) = 8%
- Beta Greater than 1 – 3 = ER= 5%+3x(8%-5%) = 14%
- Beta less than 1 – 0.5 = ER= 5%+0.5x(8%-5%) = 6.5%
- Beta of -1 = 2% p.a. ER
- As the RF asset increases – the beta starts to become less important –
- But Theory that over the long term – additional beta means more growth - Is it true?
Beta in Theory vs. Beta in Practice
- In theory - beta assumes that a shares returns are normally distributed from a statistical perspective – average returns over time – but financial markets are prone to large surprises – like what has just occurred – the returns have outliers – not normally distributed – so the ER relying on Beta doesn’t have a short term (or LT) ability to predict the expected return
- How well does this stack up in practice - Look at BETA of a few managed funds – and returns
- Four funds to look at – compare Betas, the calculated ER, the actual 10y return
| Beta | 2.02 | 0.95 | 0.86 | 1 | | ER | 14.120% | 7.700% | 7.160% | 8.000% | | AR-10y | 6.69% | 6.84% | 7.75% | 5.66% | | Difference | -7.4300% | -0.8600% | 0.5900% | -2.3400% |
- Large Cap – benchmark unaware
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Large cap – geared – Beta of 2.02
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Large Cap – active growth – 0.95
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Index – 1
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Compare long term returns – the differences are not what is expected based on theory – but make sense -
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How – betas less than 1 have less of a systematic risk – this is the Beta value of 1 in a way - the risk of the entire market declining – when the whole index collapses -this is an example of a systematic-risk event - the Systematic risk of the index by itself is un-diversifiable risk –
- If it is your only investment – it means your funds will lose value – but a beta of less than 1 means it is less volatile than the market – but it may be get a better long term return if it goes stable consistent upwards returns that compound over time
- Why Beta isnt the best way to think about risk – or expected returns –
- Also on the other side – an investment with a very low beta could have smaller price swings, but these may be in a long-term downtrend – so it looks like it is less risky – but locking in a long term loss
- Similarly, a high beta stock that is volatile in a mostly upward direction will increase the risk of a portfolio, but it may add gains as well. It's recommended that investors using beta to evaluate a stock also evaluate it from other perspectives—such as fundamental or technical factors—before assuming it will add or remove risk from a portfolio.
- Another major problem of Beta - calculated using historical data points, it becomes less meaningful for investors looking to predict a future movements in prices – i.e. the expected return is relying on historical volatility –
- These data points become less useful for long-term investments – most risk measures like Beta are tracked over a 3 or 5 year timeframe - volatility can change significantly from year to year
- Also – volatility is a measure or price movements – but the price movements in both directions are not equally risky – or as good for your investment returns – i.e. volatility of 10% p.a. may either be up or down – Beta doesn’t track this
- The look-back period to determine a stock’s volatility is not standard because stock returns (and risk) are not normally distributed
Due to the problems of Beta – there are Problems With the CAPM
- Beyond Beta - the assumptions behind the CAPM formula have been shown to not work out in reality – most of modern financial theory rests on two major assumptions:
- First – markets are efficient - that is, relevant information about the companies is quickly and universally distributed and absorbed – there is no overbuying or overselling in markets – the market acts efficiently and the price of the market reflects the information that is available
- Second - these markets are dominated by rational, risk-averse investors, who seek to maximize their returns on their investments – therefore no buying high or selling low should occur – but emotions overrise the rational side of investors
- Other assumptions - that the risk-free rate and the expected return
- Risk free rate – assumed that it will remain constant over the long term –
- When this is used in getting the FV through discounting for cashflow – if the RF rate increases – it will increase the capital costs and make companies look overvalued – also the reverse is true – when it goes down – discounting for CF can make assets look undervalued – and good buys with higher Betas – which can be a massive trap
- Expected returns - The market portfolio that is used to find the market risk premium is only a theoretical value - it relies on assumptions – most of the time the index average returns is used – over a 10 or so year period as well – so the ASX200s return as a benchmark would be used for CAPM in Aus to substitute for the market – but this is an imperfect science as an be expected
- Risk free rate – assumed that it will remain constant over the long term –
- Regardless of these issues - the CAPM formula is still widely used because it is simple and allows for easy comparisons of investment alternatives – but markets are not simple – so watch out for relying on this if you are getting into investing
Summary – theory can help – but in understanding – practical use – limited – so when it comes to using these theories if you are getting into personal investments – it can be used in conjunction with other metrics when building a portfolio
- It is useful to understand how beta works – and how the expected returns
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition. Today we’re look at if economic data really means anything.
I was thinking – and do any of these numbers really matters to you? Or even to me?
- Think about this – talk about a lot of the metrics – GDP, Inflation, employment statistics
- As an economy – would you prefer to have high GDP – or having your disposable income increase?
- Employment statistics – or having the ability to find a good well-paying job
- Inflation measurement – or have the ability to save and be rewarded in interest income?
- Thought about this for a while – most of these numbers mean nothing for the average person –
- But unfortunately they have an indirect effect on our lives - What dictates economic policy – fiscal or monetary – GDP or employment stats aren’t what matters to the average person – but the setting of interest rates and having a targeted inflation policy does have a real world effect on people
First - Issue with these stats and measurements – done by the ABS
- Employment – You have employed, unemployed and not in the workforce - what makes someone employed? Working for 1 hour a week –
- Unemployed – if you don’t have a job, but you actively looked for one in the past 4 weeks, and can start work in less than a week –
- Not in the labour force – don’t have a job, couldn’t have started in the last week, not looking for work or starting a job in the next 4 weeks – if I ceased working now –
- ABS website - The Labour Force Survey is based on a multi-stage area sample of private dwellings (currently approximately 26,000 houses, flats, etc.), a list sample of non-private dwellings (hotels, motels, etc.), and covers approximately 0.32% of the civilian population of Australia aged 15 years and over. Sampling error occurs because a sample, rather than the entire population, is surveyed.
- Inflation – The Consumer Price Index (CPI) measures quarterly changes in the price of a 'basket' of goods and services which account for a high proportion of expenditure by the CPI population group
- What is in the basket 11 groups - Food and non-alcoholic beverages, Alcohol and tobacco, Clothing and footwear, Housing, Furnishings, household equipment and services, Health, Transport, Communication, Recreation and culture, Education, Insurance and financial services.
- These price movements collected from - The Household Expenditure Survey (HES) is used to update the weights in the years that it is available - The HES provides the most comprehensive data on household expenditure. The HES is a sample of just under 8,000 metropolitan households. Data are collected using a diary of personal expenditures in which residents aged 15 years and older record their expenditure over a two-week period.
- The cost of housing is measured as the price of a new home (excluding land). Mortgage interest payments are excluded – not a true reflection of cost of living
- GDP - Any economics textbook will admit that GDP is flawed when it comes to measuring production in an economy – (doesn’t include black market, and is very hard to measure accurately) –
- The majority of the estimates in the quarterly national accounts are based on the results of sample surveys -
- Think about all of these stats - So many people to keep track of – relies on data collection –
- Relies on surveys and naturally has sampling errors –
- Inflation is similar – survey of respondents in their purchases in the basket of goods – non-response and sampling 8,000 households out of the 8.5m households in Australia – 0.094%
- This is how it is done though - and state there is a 95% confidence interval – the issue is there is not a great way of measuring these statistics – too many people – too much variation – but monetary and fiscal policy makers need this data to make their decisions –
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Which is the problem – the need to try and control the economy – using Fiscal and monetary policies- but there is no great feedback loop on data –
- Feedback loop in important in decision making – example – touch a hot pan – you get burnt straight away – and you know it as your pain receptors fire instantaneously – you learn to not touch the pan again when it is hot
- Smaller business- make a decision to change products or services, charge different price – get an almost instant feedback – did it work or not? Make take a month or two to really see – but then a small company can pivot and has a wide range of actions that it can take –
- Government or CB level – change one policy – no idea if it has worked or not – as this is at the macro level where you have 1m other inputs – it is just to have assumed to have worked – and if it didn’t – just do more of the same thing – there is not really any pivoting – think about a ship changing course – small boat relatively quick – behemoth cruise ship – not as easy to do a 180 if you about to hit a dock
- Feedback loop in important in decision making – example – touch a hot pan – you get burnt straight away – and you know it as your pain receptors fire instantaneously – you learn to not touch the pan again when it is hot
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Almost like touching a hot pan and not having your pain receptors firing until months or years later – might not have any skin left by that point
Regardless – this is how the RBA - The Reserve Bank of Australia's – central bank that conducts monetary policy
- Their Purpose - providing stability in the financial system and promoting efficiency and competition in the payments system – indirect functions through having an inflation target
- What Is the Inflation Target? Officially: “keep annual consumer price inflation between 2-3% on average, over time”.
- measure of inflation is the percentage change in the Consumer Price Index (CPI)
- Run through this in previous ep – ABS gathers data on the price change between a basket of goods – fuel, eggs, building materials, etc. – aims to capture goods and services that households buy
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Why they need this - An inflation target provides the framework to monetary policy decisions –
- guides a central bank’s in its management of the economy - original purpose of CBs was to be the bank of last resort – not control the economy
- meant to help with Direct functions: issues Australia's banknotes and provides banking services to the Australian Government –
- So theories emerged – being more active in putting money into the economy by central banks and spending decisions by governments can boost the economy -
- So in the 60s Gov spending made up about 10% of GDP, consumption has stayed the same, 34% was investment
- Today – Gov spending is about 18.5% and investment down to 24%
- More government spending – giving out more consumption – make our GDP growth better? GDP growth has gone down over the past decade – almost no variation anymore - Gov spending has to come from somewhere – Tax or Deficit (i.e. more debt through issuing bonds) –
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The assumption is the spending is efficient – but centrally planned spending has been proven to be fairly wasteful – Investment has declined – gov spending has gone up -
Trying to set the data and manipulate it – controlling it rather than letting the economy to its own device
- So whilst these measures of inflation, GDP, employment, etc don’t directly matter to us as a population – the policies that come out of these do have a direct effect on our lives - as the policy decisions made by those in control over the economy affect our taxes, savings rates, etc.
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They also skew individual and business decision making – as when Data is used as a target – it ceases to be useful
- Origins of this concept date back to an RBA paper from 1975 – this was where a thing called Goodhart's laworiginated – from economist Charles Goodhart – talked about this 6 or so months ago –
- Officially phrased as "When a measure becomes a target, it ceases to be a good measure."
- Especially when applied in economics – based on the economic idea of rational expectations
- entities who are aware of a system - rewards and punishments - will aim to optimise their actions to achieve their desired results
- g. employees whose performance in a company is measured by some known quantitative measure (cars sold in a month etc.) will attempt to optimize with respect to that measure regardless of whether or not their behaviour is profit-maximizing – Sell all the cars at $100 – looks good for your performance but sends the company bankrupt – now your performance doesn’t matter as you don’t have a job
- Example of central planning (top down) policy – similar to socialism where measurement by weight in output leads to massive unusable nails – like Soviet Union
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For central banks – also occurs when individuals and investors know the policy decisions and then take actions that that can result in different outcomes on the target
- Example – signals from banks to lower interest – may increase prices of assets or be a bad sign for the economy = People may invest or start saving = less spending to policy to control inflation results in opposite direction –
- Individuals adapt – homoecnomicus doesn’t exist – the rational man that economic modelling relies upon
- Goodhart's law explains - when a feature of the economy is picked as an indicator of the economy, then it inexorably ceases to function as that indicator because people start to game it – but relies on everyone being rational
- Rational – depends on knowing how to act in response – most people don’t except those who know how to
- Big part of the widening wealth gaps (not income inequality) – I think it is between those in the past 25 years – or at least benefited through rising house prices and markets
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When the target is set – central banks aim to achieve the inflation rates regardless of consequences – They are set on their path to get back to 2.5% inflation while keeping economic stability –
- No secrets when it comes to how central banks are likely to respond – look at the trend – they ever increase their intervention into the economy to control it – all in an effort to hit their precious inflation target – to keep banks (central and commercial) and governments both happy
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What will they do To achieve it – requires total control and increased monetary control and intervention into markets – when they don’t get the desired result as projected – more control and intervention is needed – central banks think of themselves as all powerful –
- While original statement of Goodhart’s law fast saw light when Charles delivered it to a conference in July 1975 to the RBA
- General phrase - "When a measure becomes a target, it ceases to be a good measure."
- But the original formulation was: Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes
- has profound implications for the selection of high-level targets in organizations – across both risk and reward.
- Any statistical relationship will break down when used for policy purposes - These aim to try and control peoples behaviour
- But this creates a situation where if a lot of these Central bank policies cannot be unwound without creating a market collapse –
- Central banks are focusing on inflation – but money printing has resulted in inflation of asset prices – not in consumer economy – no real business growth (despite markets going up) – limited wage growth and affordability issues – bit of a mess
- Situation where the policy response is to lower interest rates to try to boost CPI through increased ability to spend more and businesses can increase how much they sell for – i.e. basket of goods goes up – but doesn’t work as the printed money never ends up in the equation, as velocity of spending is needed- if the money is in the financial system through sinking money into investments – then velocity of that under current model and measurement system – velocity is non-existent on those funds
- Governments are focusing on employment and GDP – so to reduce unemployment hire more people in the public sector – even if long term the budget cant afford it – or spend more money on government consumption to try and boost GDP
In summary –
- The data collected in the first place doesn’t give a good picture of the economy – to the average person the mean nothing anyway – might hear about it on the news –
- But when the savings rates they can earn go away, or house prices are unaffordable – these are issues that matter to them
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition. This week’s question from Jacob.
“Hi Louis – I have a question about the forecasts of our recovery. I read that the RBA is expecting the economy to have a v shaped recovery and it seems that the share market is also going back up. My question is do you think the recovery will be v shaped? Would be great to get your thoughts on this.”
Thanks Jacob – that is a great question – today run through what these recovery patterns are, look at the metrics behind them and see if these stack up against what a v shaped recovery pattern looks like
Before we get into the shapes – I have little faith in the RBA models – purely based on their track records and the modelling used
What Is V-Shaped Recovery?
- Description of a pattern of recovery – Lots of different letters to describe the pattern of recovery – V, L, U, W - the shapes take their names from the approximate shape economic data make in graphs during recessions –
- The type of recovery pattern is represented by the general shape of the chart of economic metrics that are used to measure the health of the economy - employment rates, GDP, productivity, etc.
- V-shaped recovery resembles a "V" shape in charting
- involves a sharp decline in economic metrics followed by a sharp rise back to its previous peak
- So the question comes back to – will the economy quickly and strongly recover to the previous peak?
- For this to occur - a significant shift in economic activity would need to materialise – either caused by increased consumer demand and spending, business employment going back to previous highs – and it would need to happen quickly
- First – look at one V-shaped recovery - The recession of 1953 in the United States is a clear example of one
- In the 1950s - US economy was booming – due to booming economy - FED anticipated inflation, and thus raised interest rates – this had the effect of tipping the economy into a recession – a lot of the growth was backed off borrowings to the business sector, being the new economic powerhouse for manufacturing and production after EU nations left in the dust from WW2 – so with higher costs - Growth began to slow in the third quarter of 1953 - but by the fourth quarter of 1954 GDP growth was back at a pace well above the trend - therefore the chart for this recession and recovery would represent a V shape –
- How does this compare to what is materialising today? Employment didn’t drop massively, consumption didn’t drop massively, it was mostly investment that stalled out – and the borrowings by businesses for investments were into productive enterprises – so real growth materialised from this – different to borrowing for buybacks
- Plus – the interest rate rise is nothing like an economic shutdown
- There are a bunch of reasons to expect this recovery to be longer than the market’s V-shaped expectations – some in the media are pointing towards a easy and quick recover once things are opened back up – so lets look at some of the factors
Current economic data – I have a problem with a lot of the data – do another episode on the flaws in reporting – but best we have
- Employment – there has been a material disruption to the jobs landscape.
- April unemployment numbers revealed a jump in unemployment from 5.2% to 6.2% - was less than forecasted – but doesn’t show the full story –
- all employees who received the government’s JobKeeper wage subsidy were counted as employed - even if they didn’t work any hours
- To be considered employed – you only need to be working 1 hour a week – so those in casual roles or other employment positions like cafes, etc who got cut in hours were still employed as well
- Seek data shows the reduction in ads being listed - this means there are fewer business looking to hire
- This has been a bit of a downwards trend – from 2014 was growing YOY on average by 10% - started to drop in 2019 and be a negative YOY change by 10% - but fell off a cliff being 60% down with the shutdowns
- The participation rate fell to its lowest level in sixteen years, from 66% to 63.5% - If the participation rate had remained unchanged, the unemployment rate would be over 10% - remember that if you aren’t looking for a job – you aren’t unemployed –
- look at the sectors of employment - the retail sector is the second largest employer in Aus – before the shutdowns – massive number of large retail stores were closing a significant number of stores – 10 major brands – this was before the shut downs – now have Flight Centre, lots of Target stores and the list goes on – so even if lockdowns didn’t come into effect – these stores were already in trouble -
- the construction industry is the third largest employment sector in Australia - a third of its employees are in residential construction
- Based around a few surveys - residential builders are experiencing cancellations of up to a third of new home building contracts – renovations/home improvement went up slightly – but this was a short term spike that may be falling off soon
- What can make this situation worse in retail, hospitality and construction – likely be fewer jobs for people to come back to when the JobKeeper payments cease. Jobkeeper payments have been helping support household incomes but the stresses on those incomes from this recession are already being felt. According to bank data, 10% of the banks’ mortgage books are already in hardship and that’s on top of the 2% officially in arrears – this will hurt consumption for those households
- This is occurring while between 1/3rd and ½ of the nation’s workforce are on income support through an increased JobSeeker payment or the JobKeeper wage subsidy – remember that as it stands - both of these programs are going to end after six months - unless the government extends them – was a stuff up in the estimates due to reporting errors
- But around the time that these will run out under the current system - the eviction bans protecting tenants and the bank holidays suspending mortgage repayments for landlords expire -
- So rather than us having an instant recovery – signs are pointing towards employment getting worse before it gets better and for disposable incomes being lower – resulting in more economic downturn
- April unemployment numbers revealed a jump in unemployment from 5.2% to 6.2% - was less than forecasted – but doesn’t show the full story –
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GDP – let’s think about recessions, and particularly their length – talked about this topic a few weeks ago - If a recovery is defined as a return to pre-crisis aggregate demand - following the Great Depression, it took ten years
- RBA - The peak-to-trough decline in GDP is expected to be around 10% -concentrated in the June quarter - Household consumption is forecast to decline by around 15% which accounts for over half the decline in GDP growth
- After lockdowns end - any short-term jump in retail sales will likely be pent up demand – but overall a lot of households will be forced to manage declines disposable incomes at a point where we are at still record levels of household debt
- On average – the length of all global recessions historically has been around 18 months
- For the data coming from the US - 39 of their recessions over the past 200 years averaged about 20 months before a recovery
- Given the reasons behind this economic collapse aren’t things like increasing interest rates, trying to combat inflation - the six months estimates for a v-shaped recovery don’t look too promising
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Businesses surviving –some businesses will do well through this crisis and recession - there are many more that will suffer – mostly small business which is a large chunk of employment –
- As an aggregate it seems the market might be unduly optimistic about the prospects for many businesses – those listed on the markets – some will do well – but others and those not listed may not
- PWC survey of businesses owners - based on the confidence levels – majority will take 6 months or longer to get back to business as normal
- To give an idea about the effects of confidence – lets look at the restaurant businesses in some US states where lockdowns have been unwound completely – this has revealed restaurant bookings are taking much longer to rebuild than the speed at which they stopped
- In Georgia, for example, where restaurants have been open for three to four weeks already - bookings remain 84% lower than their peak prior to shut downs - Florida bookings are 80% lower, Texas down 75% - it will take some time for bookings and demand for restaurants to pick back up – and some companies will go bust along the way – estimates are that as many as a quarter of restaurants in the US will never open their doors again
- In Australia – the profit margins on these types of businesses pretty small - thanks to labour and rent and other costs - so those businesses may have to either cut back on staff or go out of business where all the jobs are lost
- Going back to employment for a minute –
- but employment is twofold – need people to want to work but at the same time – need to jobs there for them to be able to work – so the impact on those job ads could mean participation rate and employment data remains depressed for some time.
- Confidence – underpinning lots of the above
- this recovery to be longer and more painful than the market’s V-shaped expectations. Of course, within such an environment there will be businesses that do well – but the share markets recovery pattern is not the economy – related in confidence – but only a few of all the companies in the economy are listed
- So in Summary - In contrast to a V-shaped recovery in which the economy rebounds as strongly as it declined – we might be in for more of an L-shaped recovery or potentially a U as well
- type of economic recession and recovery characterized by a steep decline in economic growth followed by a slow recovery - In an L-shaped recovery, a steep decline caused by plummeting economic growth is followed by a straight light indicating a long period of stagnant growth – this is the most dramatic type of recession, and recovery can take as long as a decade - don’t think it will take a decade to get out of this – but 6 months seems too small a timeframe -
- Mainly due to economies normally experience decreased economic growth every few years, and when economic growth decreases for roughly six months and then recovers – this is a normal recession – but when economic activities fall off a cliff – the downwards pattern isn’t a slope like a V – and the rebound also is the same trajectory back up –
Thanks for the question Jacob
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. One major issue for shares in Australia and around the world – with the lock downs and companies bottom lines being affected - Dividend cuts on the rise
In this episode we will look at the ASX and the dividend cuts. We will also cover which sectors are being affected and the overall drops compared to previous crashes, along with if there is an opportunity out these in this.
What has happened?
- If you have been living under a rock - The response from governments to manage Covid led to significant changes in daily life – also has had significant impacts on economic growth globally and in Australia
- 2020 will likely be one of the worst years on record for global developed economies as the impacts of forced shutdowns halts economic output - created unprecedented levels of economic uncertainty
- Forecasts from the RBA show the Australian GDP to contract by 6% in 2020, and June 2020 unemployment to be 10% - numbers might not be as bad as initially thought – see what happens next month – but what has happened is that listed companies are taking action at the board level on their dividend policies
- Dividends – These are profits paid out – if you are a shareholder – you are an owner in the business – therefore the company makes a profit – you should be entitled to some of this – DPR at the board level decides how much
- Dividends have had a massive impact on returns for the ASX over any other market –
- Over the past decade, the total return for the S&P/ASX 200 was 7.1% pa – of which 6.1% (about 87% of that total return) was from dividends including FCs – 0.9% price, 1.6% FC and 4.5% dividend over past 10 years - Dividend payments in Australia totalled $80 billion last financial year
- Our market has been fairly reliant on dividends as part of a total return – so the cuts to these in the short term makes for a poor total return unless price gains pick up the slack this year –
What does that mean for company earnings and dividends?
- The change in economic conditions has had a severe impact on the outlook for earnings over the next year
- Many companies have abandoned earnings guidance due to the extreme uncertainty around when some level of normal will return to business conditions and confidence
- At the same time - Capital raisings have been frequent (and in relatively large size, as they were during the GFC) to keep companies capital in a safe position -
- Prices of shares have reacted strongly to this news - yield stocks (like the banks) have been some of the worst performers in the ASX 200 – if Divs are cut these goes your returns
- Since the middle of February, over 30% of companies in the ASX200 have deferred, cancelled, suspended, or revised dividends
- 13% deferred payment, 4% cancelled, 4% suspended, 4% no dividend, 1% revised
- The cuts to dividends have been a significant headwind for yield-focussed portfolios
- DPS and EPS growth were already low before lock downs –
- EPS is the profits – DPS is how much of that is paid out – the market DPR was high – banks sitting at about 80% - so if profits drop by 20% - means no retained earnings – so drop DPS-
The ASX200 did have a high concentration in its income yield - Over 50% of dividends are paid by just eight companies - two-thirds of dividends paid by 18 companies – at the index level leaves market susceptible to the larger companies (banks) cutting dividends – like they currently are
What sectors will be the most affected in the ASX200 and their weighting on dividends
- Low risk
- Supermarkets, telcos, pharma, tech, gold and iron ore
- 64 shares making up 30% of dividend weights
- Possible cuts in 2020 and 2021 – 5% and 0%
- Medium risk
- Financials, building/construction, discretionary health care
- 107 shares making up 30% of dividend weight
- Possible div cuts in 2020 and 2021 – 33% and 20%
- High risk
- Travel, entertainment, casinos, shopping centres, energy (oil)
- 27 shares making up 10% of div weights
- Possible div cuts in 2020 and 2021 – 100% and 33%
- The outlier – banks 7 shares making up 30% of weight – Possible div cuts in 2020 and 2021 - 60% and 50%
- In total – average of 40% to ASX200 in 2020 – then 24% in 2021
- The big 4 - Australian banks have historically been key features of any yield portfolio due to steady franked dividends
- Unsurprisingly -they have been amongst the worst hit through the COVID-19 market downturn, as economic activity slows and net interest margins shrink (as a result of lower interest rates); from the market high on Feb 21st to the bottom on Mar 23rd Australian banks fell an astonishing 44%, underperforming the ASX200 index by almost 10%
- Also – whilst the market has rallied off the bottom through April and into May, banks are down 37% from the February market high – no real really in the banks seen
- Three of the big four banks acted quickly announce their dividend decisions; ANZ suspended its interim dividend, NAB cut its interim dividend by 64% (to 30c) and announced a $3b capital raising, and WBC deferred its interim dividend decision without a set timeline for a decision - Westpac's dividend suspension was the first such move by the bank in at least 37 years
- Still – the options for a lot of companies is to pay out all retained earnings and go bankrupt – so share values go to $0 or to hold the earnings and raise some capital if needed – so they can slowly recover over time and start paying dividends again
- At the moment though - the relative fall in price of banks mean they now trade on a forward dividend yield of 4.3% vs ASX200 at 3.6% - over the long term though – price and yields do change -
- Ex-CBA, the major banks are now trading on less than 1x book value, cheaper than the valuation in the depths of the GFC (CBA is now around its GFC trough book value multiple) – seems to show that the risks to the banks are well and truly factored into the price – along with investors jumping ship if they aren’t going to get Divs – which is the banks way of providing a return
- At the moment – banks are focusing on building up capital and retaining profits – means for now that the era of big bank dividends is on pause - for the short to medium-term – probably next 1-2 years – but given that the banks are forecasting bad loans rising from those who deferred loans cannot repay them in October – the reinstatement of dividends will be driven by how well the economy can emerge from its enforced hibernation
- One issue with capital raisings – will likely drop EPS and DPS going forward – NAB over past 10 years increased shareholdings by 30% - the $3b capital raising and $500m SPP will increase this by a further 7% of shares outstanding – so assuming total profits are the same – drop EPS by the same percentage
This won’t last forever – Long term – these is opportunity in markets that have traded down due to the dividend decisions – assuming that these companies survive and don’t have to take on massive debt.
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Even though we are now seeing similar dividend reactions as in the GFC for a lot of companies - the low-price entry opportunities offer investors access to potential future outperformance in stocks whose dividends are relatively untouched at the moment -
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Especially in the banks – the banks themselves and their success is linked with the economic outcomes – borrowing and confidence – so if the economy recovers and goes back to normal – so will the bank
- As we have seen - when the economy has a downturn, they will struggle a little bit
Summary –
- The price drops in markets initially - especially in yield stocks has been unlike anything seen in markets since the Great Depression - But at the same time there has also been an unprecedented response from governments and central banks via fiscal and monetary stimulus
- When the recovery begins is uncertain and dependent on numerous factors, but economies will recover and with it - Company earnings will recover as we move through the next year -with that dividends will eventually be reinstated – but still - Investing for yield has had a very difficult 2020
Yes – DPS and EPS will likely fall – comparing to GFC – and past events – dividends for companies that survive come back – so investing in companies that have the ability to weather the storm is important
- But shares are meant to be a long term investment – those who these policies most impact are those relying on dividend income to sustain themselves in retirement –
- Why having a cash buffer is very important – but longer term –
- The price of the market may slide further from here but if they do – good opportunity to lock in gains for the long term –
- The market is relative – buying now based on price is better than 4 months ago – not as good as 1 month ago – but may not be as good comparing to 6 months from now if the enthusiasm in the ASX runs out
- Still - rather than relying on the index – contrarian active approach can help to avoid these types of losses
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Furious Friday edition.
I love history – valuable lessons. When looking at us To those in the past - Culturally we are different, but biologically we are not. If any one of us was put back in time to grow up in past civilisations, we would be no different to the local people in that time period – the environment we grow up in has a lot to do with our values and outlooks
One thing is fairly consistent with human nature – path of least resistance – as an aggregate – driver for technology and innovation –
- Making things easier for our lives - Cars – less effort than walking, less mess than horses – getting food – go and hunt or grow it, or go to supermarket or fast food -
- Convenience of safety in numbers and ease of living – towns and cities developed – more people to defend and also produce and specialise – trade – and with this – the requirement of having others be in charge of decisions for the whole group –
- But what happens when the path of lease resistance starts to occur at the societal level in decision making?
- Individual choice gets outsourced – just like what occurs when outsourcing in building a house or getting their food from a supermarket – the rules that govern life and the economy is placed in the hands of others
In this episode - We will be looking back in history - looking at one of the greatest civilisations in history. And how they declined – economically anyway – many many things contributed to their decline – but there is a parable when it comes to their economic decline – what happens when the population becomes reliant on the government that has complete control over the currency?
- misallocation of resources and the devaluation of their own currency
Rome rise – and economic fall from the people losing power - Rome is a good example:
- It was a tiny kingdom that was overthrown in 509BC – for hundreds of years after getting rid of a king – the people were adamantly opposed to any form of centralised rule –
- But the romans were smart and adaptable as a culture – they didn’t invent too much in the way of technology for themselves – but were masters at adapting other technology and integrating it as their own
- With this they started to grow – through war and conquest – the next few hundred years saw Rome and the people start to grow wealthy – wealth through conquest – looking through cultural eyes of the times – this is how it was done – the state grew through conquest
Economic Side – in the early republic
- Citizens were only taxed in times of war – Citizens were land owners and had to have been given citizenship
- 10 years in the Roman Army was the criteria – true that the wealthy ended up getting citizenship – as they could afford the weapons, armour, horses to arm themselves to fight in wars -
- Misconception – Most of the early Roman army were from the middle to upper classes
- They had low tax collection – and only on the land owners – Each province had to pay a certain amount (not ind.)
- Tax collected (who was elected) – Pay Rome upfront then go collect his money back from people – very decentralised – same in rule
- Stay out of the way economic policy – If you weren’t a citizen – you didn’t have to pay any taxes – you had no say in electing senators – but the way they saw it was if you didn’t contribute to rome – through military service or paying taxation – you don’t get to vote
Rome went from a back water swamp to a wealthy country – became the age of Affluence!
- But at the same time – there started to become an economic disruption – the shift from a republic to an empire and Slavery
- What turned rome from the republic to a dictatorship - 27 BC – Augustus Caesar converted the Republic into an Empire
- Prior to this - By 60BC Julius Caesar (more or less godfather to Augustus) was elected consul however used this position to gain further power
- To build favour, he redistributed a lot of land to the poor and the soldiers of his wars
- Major contributor to their economic decline - Government corruption and political instability was growing over this time
- If Rome’s sheer size made it difficult to govern under the new Empire standards – Centralised authority compared to localised under the republic - ineffective and inconsistent leadership only served to magnify the problem
- Being the Roman emperor became a dangerous job – through the second and third centuries it nearly became a death sentence.
- The amount of power put into the political class was what started causing chaos – but also needed the public to like you – why bread and games strategies were so important
- Civil war thrust the empire into chaos, and more than 20 men took the throne in the span of only 75 years, usually after the murder of their predecessor.
- The Praetorian Guard—the emperor’s personal bodyguards—assassinated and installed new sovereigns at will, and once even auctioned the spot off to the highest bidder.
- The political rot also extended to the Roman Senate, which failed to temper the excesses of the emperors due to its own widespread corruption and incompetence – those with money started buying their way into the senate – as the emperor became the electorate – choosing who could run for office and not the local people
- civic pride waned and many Roman citizens lost trust in their leadership – but also became reliant on them
- There was no stable system of succession – Power disruptions in the Empire
- Created a Stagnant bureaucracy – where the people no longer had any power except in the mob – which could be quelled by the militarised nature of the roman state
- The downfall of Rome was also in part due to the Slave economy – remember that slavery was everywhere in the ancient world – looking through the cultural lens of the day -
- The import of free labour destabilised the economy - Through the conquest of wars and territory, there were a lot of slaves – this was occurring before the empire – towards the end of the republic – but after it got to one point where the majority of the working force were slaves -
- This introduction of free labour replaced those in paid labour positions
- Whilst the practice of slavery didn’t start with Caesar – he needed to keep slavery around but also keep himself popular with the roman people, hence the land redistribution tactic. This was funded by his very wealthy friends and the money he made from selling slaves - At one point, Caesar sold 53,000 people captured into slavery
- Mass importation of slaves caused destabilisation of the economy – displaced many workers – shut down most small businesses or individuals ability to work – through the empires policy to accumulate more wealth in the hands of the already wealthy – shut down whole parts of the economy
- Those in economic power bought more slaves –
- The economic shutdown has put employment in smaller sector down – they got into debt – and had to become workers for the wealthy oligarchs – or became reliant on the state for food and lodging
- But employment at larger estates was massively up
- But rome was still wealthy at the time - Society that is rich, demands free things – the welfare state in rome started to also rise
- Rome switched from Supply to Demand slowly– everything changed from 1AD onwards
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When Rome went to an Empire – Central control increased – like Julius Caesar wanted – Authoritarian nature increases
- The leaders had much greater say in the Roman spending – so needed more income (tax) - also needed more men for Army
- Needed tax – System was transformed into Income Tax (not wealth tax) – war was used as a justification – like in Aus, USA, etc. with our income taxes being introduced as temporary measures in WW1 and expanding in WW2
- Needed more men for army – increase spending as well and reform military – no longer the wealthy fighting – now the lower class -
- Spending requirements grew so much over time that Needed to increase number of citizens – Did have a few good Emperors
- But free entertainment, free bread, free housing was given out to population – keep them happy
- The leaders had much greater say in the Roman spending – so needed more income (tax) - also needed more men for Army
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As moneys value was taken over by empire – spending to keep people happy – needed more –
- Old way was conquest – so outpaced the spending needs of those in charge – who had increased say – instead debased currency
- Needed to keep up the spending and free bread to the people -
- devaluation of denarii (or denarius)
- Like coinage of today, Ancient Rome's coins represented portions of larger denominations - like our denominations, through inflation they experienced a loss of buying power. During the time of the Roman Republic, you could buy a loaf of bread for ½ As (1 cent coin) or a liter of wine for one As. A year's pay for a commander in the Roman army around 133 B.C. was 10-2/3 Asses, by Augustus' rule (27 B.C.-A.D. 14) 74 Denarii, and by the reign of Septimus Severus (A.D. 193-211), it rose to 1,500 Denarii – but was worth less in real terms – how can this happen for a coin based on silver which is limited? Reduce the silver content – same effect of printing money today – stable from 300BC to 1AD -
- You would think that more money being introduced – taxing peoples incomes and making more and more people citizens would result in more tax for the state?
- But by 200AD - Tax collection was 50% less than at 1AD – even though tax rates were up – and the number of citizens had boomed – lowered the requirements of citizenship along the way
- 200AD - Currency was only 40% Silver now – compared to over 95% in 1AD - 200 years ago -
- all territory became a pool of citizens – in 212AD Caracalla– Just as the final collapse started – took about 150y from here for the value of the denarius to hit 0.1% of its value 300 years prior -
- Poor leadership - Free stuff due to loss of jobs through slavery – the final Economic downfall of rome
- Even as Rome was under attack from outside forces, it was also crumbling from within thanks to a severe financial crisis - overspending had significantly lightened imperial coffers, and oppressive taxation and inflation had widened the gap between rich and poor
- The wealthy in political power - to avoid the taxman left to the countryside and set up independent fiefdoms
- At the same time, the empire was rocked by a labor deficit. Rome’s economy depended on slaves to till its fields and work as craftsmen, and its military might had traditionally provided a fresh influx of conquered peoples to put to work. But when expansion ground to a halt in the second century, Rome’s supply of slaves and other war treasures began to dry up.
- But by 200AD - Tax collection was 50% less than at 1AD – even though tax rates were up – and the number of citizens had boomed – lowered the requirements of citizenship along the way
Moral of the story – Fuelling demand through authoritarian controls never works – long term – can show promise in theory
- Hence - Demanded by the population (to be voted in) for an increase in the demand (consumption) of the citizens
- Required to tax more, reduce freedoms, increase controls on populations – as a government to be able to give you everything needs to also control everything – but at the same time can take it away
- Power/Authority of ruler – Created civil wars, infighting – leading to further authoritarian powers
- Julius Caesar wanted power to stop more civil wars – ended up creating one almost every time a leader died – 84% murdered
- The need to have public support for your wars/grab at powers - Creates need for providing more goods to population
- Rome became fat and lazy – lost what made them great and became solely reliant on their benevolent dictators – a lot of people lost their jobs – and the state was put under more pressure to fund the public –
- But without the ability to fund the war machine due to taxes dropping – started to debase the currency which created more problems down the road -
- When you have a system that rewards popularity of demand – not supply and independence of the people – it tends to last a while before collapsing
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Supply side isn’t some uncaring beast – it actually give people more than just money payments (or bread handouts)
- It gives people the freedom of choice – to choose what you do, how much you earn, how much you want to pay for thing
- The market decides – the market isn’t moral, but it determines the optimal outcome for pricing (based around our wants and demands)
- Until you get regulation and controls – then unfair competition increases
- Emperors couldn’t afford not to – their sole grip on power came from making the masses happy – started trying to one up one another for support of the crowd – but needed more and more money to do so – Their option:
- Expansion – but territory grew, so spending on military had to increase (along with everything else) – Lower requitement standards as well – but eventually couldn’t afford military
- Taking the path of least resistance takes the power away from the individual – something to watch out for
- Even with Rome - Along the way to their economic decline – People were fleeing Italy due to the inevitable collapse – but Emperor made it illegal to leave – they were placed on lock down – couldn’t cross their territory boarders
- People were working their jobs, but due to devaluation of currency, running at losses, so stopped working
- Emperor put in laws to force people to work, not leave and then also – their kids had to do the ‘family’ occupation
- Even with Rome - Along the way to their economic decline – People were fleeing Italy due to the inevitable collapse – but Emperor made it illegal to leave – they were placed on lock down – couldn’t cross their territory boarders
- Emperors couldn’t afford not to – their sole grip on power came from making the masses happy – started trying to one up one another for support of the crowd – but needed more and more money to do so – Their option:
- Until you get regulation and controls – then unfair competition increases
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Due to being stuck in a job, losing money, you become despaired and broke – so working class became indentured servitude to wealthy land owners –
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This all was the birth of feudalism and Monarchy again in medieval Europe from 500AD onwards
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This lock down on individual freedoms is a trend through history when those in power start to feel like they are losing power – they tend to freak out and become more draconian –
- If someone is assured in themselves – there is no need to crack down on the population or take supreme control
- Julius Caesar took dictatorship powers and marched on rome as the senate under the republic wanted him dead for war crimes – but he had immunity whilst he was a consul- but you had term limits under this – so had to create an empire and become dictator for life – same time – got popular through writing his own press releases – needed to keep that going and fund bread and games – it was self interest as he couldn’t lose power -
- The people have been pawns of greater powers all through history – the days of kings started through conquest – taking power – to the modern form of Greater power – what are known as Governments
- Founding father quote – Government is like fire, when it is well controlled it can help a country to grow and support it, when it gets out of control – it will destroy everything in its path – just like the Empire when it had too much political power in its hands – over the people and the economy – they started down the path of inevitable failure – the economic problem of unlimited wants but finite resources is ignored – as the Government is seen to have infinite resources if they can produce it at will – and to remain in power to keep the mobs happy – they will tend to do so – or lose office/power – easy choice for them –
Welcome to Finance and Fury, the Say What Wednesday edition. This week’s question comes from Francesca.
“I have really liked your podcast on the pandemic bonds, I had read about these bonds maybe a month ago in The Economist. My question after listening to the podcast on pandemic bonds was, who controls the world bank? Well I know...the member countries, but how could they screw it up so well? Thanks for keeping us update on it. And keep up with your great work Thanks!”
In this episode – look at the world bank, what they do, who controls it, who funds it and at the core – why does it have problems
What is the world bank –
- The World Bank Group is a family of five international organizations that make leveraged loans to developing countries. It is the largest and most well-known development bank in the world and is an observer at the United Nations Development Group. The bank is headquartered in Washington, D.C. in the United States – what makes up the group –
- the International Bank for Reconstruction and Development (IBRD), established in 1945, which provides debt financing on the basis of sovereign guarantees;
- the International Finance Corporation (IFC), established in 1956, which provides various forms of financing without sovereign guarantees, primarily to the private sector;
- the International Development Association (IDA), established in 1960, which provides concessional financing (interest-free loans or grants), usually with sovereign guarantees;
- the International Centre for Settlement of Investment Disputes (ICSID), established in 1965, which works with governments to reduce investment risk;
- the Multilateral Investment Guarantee Agency (MIGA), established in 1988, which provides insurance against certain types of risk, including political risk, primarily to the private sector.
- Not a bank in the ordinary sense, the World Bank Group is a unique partnership, made up by 189 member countries – has two goals: ending extreme poverty by 2030 and promoting shared prosperity by lifting the bottom 40% in every country.
- The IMF and the World Bank were both created at an international conference convened in Bretton Woods - 1944.
Who controls the World bank -
- The 189 member countries are technically shareholders – but each country is represented by a Board of Governors – they are the policymakers at the World Bank.
- Generally, the governors are member countries' ministers of finance or ministers of development. They meet once a year at the Annual Meetings of the Boards of Governors of the World Bank Group and the IMF – sets the agenda for the year –
- But The governors delegate specific duties to 25 Executive Directors – they make up the board of directors at the world bank - who work on-site at the Bank - five largest shareholders appoint an executive director, while other member countries are represented by elected executive directors - normally meet at least twice a week to oversee the Bank's business, including approval of loans and guarantees, new policies, the administrative budget, country assistance strategies and borrowing and financial decisions.
- office is usually held by the country's minister of finance, governor of its central bank, or a senior official of similar rank
- The United States and the World Banks relationship - The US Secretary of the Treasury sits on the World Bank’s Board of Governors, the World Bank’s highest governing body – the US gets to choose who is president as well- The World Bank is treated as an “exempt issuer” under the US securities laws since 1949 in recognition of its status as an international organization in which the U.S. is the largest shareholder (with about 17%). The United States’ membership in the World Bank was authorized by a federal statute known as the Bretton Woods Agreements Act (22 U.S.C. 286 et seq.).
- The other countries on the list – Japan (8%), China (5%), Germany (4.3%) – UK and France tied for 5th (4%) – make up about 42% of voting rights
- But – some of the countries have higher voting rights with other of the agencies – USA has around 23% voting rights its private sector arm, the International Finance Corporation (IFC)
- Statement: The World Bank looks forward to continuing to provide support to US investors so that they may consider supranationals when looking for safe investments – i.e. an organization is an international group in which the power and influence of member states transcend national boundaries or interests to share in decision making
Who funds the world bank has - three main income streams - The first derives from their lending operations, charging mainly the borrowing countries; and the second from their income on investments in financial markets. Additionally, the International Development Association (IDA) receives contributions from members
- Have replenishments every three years – Aus donated $345m (USD) - $526m Aus –
- Denominations are in SDRs though in a lot of cases – in total raised $23.5bn USD
- But they make most of their money through their investments or assets – like most banks these are loans
But what plagues the world bank – and in a way controls it – lack of transparency and corruption –
- The curse of any unaccountable massive organisation with hundreds of billions of dollars at its finder tips
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What they do – at the core they provide Financial Products and Services – but the private sector does well out of this – remember the 5 agencies -
- One provides loans to governments for projects deemed appropriate by the bank, one gives the money raised from member countries to give to other countries – both of these can be spent to hire the private sector, the other provides loans to the private sector, one works with governments to reduce the risk to the private sector and the other provides insurances against political risks – again mainly to the private sector
- In their own words - These loans support a wide array of investments in such areas as infrastructure, financial and private sector development, agriculture, and environmental and natural resource management.
- These loans are also made – In USD – or in SDRs - Make austerity requirements to the receiving countries if they are concessional loans –
- Practices even been criticised by their former Chief Economist Joseph Stiglitz - that the so-called free market reform policies in practice are often harmful to economic development if implemented badly, too quickly ("shock therapy"), in the wrong sequence, or in very weak, uncompetitive economies
- loan agreements can also force procurements of goods and services at uncompetitive, non free-market, prices.
- Again – their aim is to help “the vulnerable in the poorest countries.” But these very institutions are culpable of accelerating the spread of poverty
- There was a frenzy of deregulation and poorly planned privatization in third world countries – at the same time the World Bank cut away both oversight of the private sector and social safety nets for the poor beginning in the 1980s – most of the progress towards their goals is reported back to them from the very private companies that are implementing projects
- Even by 1998 – World Bank (and IMF) were presiding over a spectacular financial collapse in East Asia, Russia and Brazil – 2001 - Argentina went bust and half of its people were suddenly poor
- Defenders of the World Bank contend that no country is forced to borrow its money – but the people don’t borrow the money – the politicians do – and in already corrupt places – some of the money is bound to go missing
- Academics in the West decide what is best for developing countries -but when you listen to them the World Bank isn’t helping enrich their lives – but those that they are in bed with – topic the practices and how a lot of these projects don’t help as they are promoted is a topic that takes a lot to unravel – do another episode down the road on it - but there is no shortage of reports of corruption and nepotism in their practices -
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One organisation - Government Accountability Project (GAP) produced a 10-page investigative report focusing on corruption at the World Bank
- focuses on extensive internal problems at the bank including how “kickbacks, payoffs, bribery, embezzlement, and collusive bidding plague bank-funded projects around the world.”
- The estimates are that more than 20% of the loans distributed by the World Bank, or $4 billion annually, are associated with corrupt practices
- Another paper – by three economists with previous ties to the bank (Anderssen, Johannesen, and Rijkers) found that “aid disbursements to highly aid-dependent countries coincide with sharp increases in bank deposits in offshore financial centers -associated with local officials steal a significant part of development aid funds and hide that money in their personal offshore accounts
- The paper studies a sample of the 22 most aid-dependent countries, with average disbursements from the World Bank exceeding 2 percent of GDP: Findings - In quarters when a country receives aid equivalent to 1 percent of GDP, its deposits in havens increase by 3.4% relative to a country receiving no aid, but its deposits held in non-haven financial centers remain constant. The implied average leakage is around 7.5%:This means that for every $100 of development aid, $7.50 apparently becomes corruption profits, hidden in offshore financial centers.
- Ironically - The data the three authors use for their study all comes from the BIS and from the World Bank. The development aid that fuels corruption is actually money disbursed by two major World Bank institutions: the International Development Association and the Bank of Reconstruction and Development – other examples -
- One $600 million bank program was alleged to be corrupt as early as 1995, but it took two years for the bank to look into the issue at all, and another four years for the bank to officially open an investigation. The bank found indications of widespread theft involved with the program – got rid of a scapegoat and went back to business as usual
- In 2019, the Congressional-Executive Commission on China questioned the World Bank about a loan in Xinjiang, China that was used to buy high-end security gear.
- There are a lot of good people working there – and im sure that they are frustrated by the lack of leadership – but the culture is the problem that makes matters worse -
- Staffers have traditionally been professionally rewarded for ensuring that projects go through as planned, but not for reporting corrupt practices – and when whistleblowers report corruption they are often punished for doing so
- They were not allowed to inform affected governments or the press, except under the most stringent constraints. If they do, they risk deportation back to their home countries.
- It was a wistleblower who flipped the lid on one of the Bank’s biggest black mark in history. This resulted in the resignation of president Paul Wolfowitz in 2007 - who exposed his “cronyism, favouritism, incompetence and improper political dealings”
- This had part to do with paying his girlfriend a large salary scandal – but also showed revelations of coordinated support he received from the Bank’s general counsel
- more recently Jim Yong Kim suspiciously resigned last year – reason was to join a private-sector infrastructure investment fund
- The bank adopted a “whistle-blower protection policy” last year – but it hasn’t been taken up on as it can be a trap for staff members – removes confidentiality and the investigative reports remain within the organisation and be hidden
- Where does each stand in relation to these systemic problems with corruption and who controls them - World Bank themselves are without any real external oversight - impenetrable by the legislatures of their member governments – they are massive bureaucracies, coupled with immunities from national and international laws –
- Neither Bank nor Fund officials can be subpoenaed by national legislatures, nor can they be obliged to testify in court. No government can demand internal documents from them. While each has some disclosure policies, these often remain unimplemented because the organizations cannot be sued. This is the stunning contradiction of the G-20 action: the signatories declared, “the era of bank secrecy is over,” but then dumped a trillion dollars of public money into the most secretive financial institutions in the world
- so they essentially control themselves – and those who are chosen to be on the board – if anyone is pulling the strings behind this – who knows – no way to request any of that information – even for governments
- Given that government are giving away hundreds of billions of dollars without any accounting for it – the results are not surprising – but if an institution is going to collect public money and the profit off it – it should be accountable to the public
- I don’t think it is incompetence that is the problem – but corrupt unaccountable practices that are – that is how they can screw up their prime objectives so well
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3329392
https://ida.worldbank.org/about/contributor-countries
Welcome to Finance and Fury. Today will be a flow on episode from “What will happen to property prices if we continue along our economic decline?”, which was posted about a month ago. Due to the updated numbers and banks coming out with their forecasts for price declines, we will cover property again.
In the previous episode –looked at the Basics of property – where we were at prior to the government imposed economic decline
- Summary - In Australia – the characteristic of our property market prices being high come down to urbanisation, interest rates and regulations
- Urbanisation levels versus available credit (cash people have access to from savings or lending/mortgages of population)
- Concentration of people (higher demand with population levels) and the limited supply available when people are concentrated in living space
- But more importantly – it is the Borrowed funds by the population – household debt to GDP
- In conjunction with the urbanised population – higher the amount people can borrow or put towards property – higher the prices will be
- With the interest rate drops recently – the affordability of debt would have gone up – assuming income also continued on the same trajectory – but with the government restricting occupations and business – incomes may struggle to growth and many people will be left unemployed
- High levels of correlation Historically - Australian house prices rose in correlation relative to average wage earning – up until 1996 - prior to the banking regulations changes and a massively declining interest rate environment - The Australian property market saw an average real price increase of around 0.5% per annum from 1890 to 1990, approximately matching CPI – 100 years
- From 1990s - prices have risen faster resulting in an elevated price to income ratio -all capital cities strong increases in property prices - Sydney and Melbourne been the largest - rising 105% and 93.5% respectively since 2009
- coincide with record low wage growth, record low interest rates and record household debt equal to 130% of GDP - clearly shows unsustainable growth in property - driven by ever higher debt levels fuelled by the RBA - cutting rates beginning in 2011
- Today – property prices 7 to 10 times equivalent of average full-time earnings - up from three in the 1890-90s
- The property market was technically in a bubble prior to the government shut downs – but if average full-time earnings go down -if interest rates are also going down and banks are giving holidays on repayments for the short term – prices won’t likely drop in the short term – or between now and close to the end of the year
- Urbanisation levels versus available credit (cash people have access to from savings or lending/mortgages of population)
Where may property prices go from here – supply is no the current issue – but demand -
Demand side – important to look at the individual under home ownership – but also the investor landscape -
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Employment – ability to afford repayments – with the lower interest rates – affordability was okay – recent economic data:
- Australia's seasonally adjusted unemployment rate jumped to 6.2% in April 2020 was - 5.2% in March so a 1% rise –
- Silver lining is that this is below market expectations of 8.3% - but still the highest rate since 2015
- number of unemployed surged by 104,500 to 823,300 – but these are people looking for work - People looking for full-time rose by 115,000 to 622,300, while those looking for only part-time work fell by 10,600 to 200,900
- Australia's seasonally adjusted unemployment rate jumped to 6.2% in April 2020 was - 5.2% in March so a 1% rise –
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Still - Employment tumbled by 594,300, the largest drop on record, to 12,418,700, compared with estimates of a 575,000 fall, as full-time employment dropped by 220,500 to 8,656,900, and part-time employment declined by 373,800 to 3,761,800
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These numbers don’t look great – but don’t show the full picture – when it comes to underemployment and participation rates – looks a little worse - The participation rate fell to an over 15-year low of 63.5% - unemployment only counts people looking for work – those who don’t fall into the non-participation rate
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The underemployment rate rose 4.9 points to a record of 13.7%, and the underutilization rate increased 5.9 points to an all-time high of 19.9%. Monthly hours worked in all jobs fell 163.9 million hours, or 8% to 1,625.8 million hours – when thinking about economic output in the consumption side – the 8% drop in hours is close to the estimate on the 8% unemployment rate
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So does this loss of overall income matter - could create a negative feedback loop that further weakened the already-vulnerable economy – and bursts the property bubble –
- The flow on effects of lowering incomes – first – if people don’t have jobs – means less income = decision on spending – people will cur any economic spending to make mortgage repayments first – but it comes back to the threshold of people who can’t make either – no discretionary spending which hurts consumption as part of GDP – but also mortgage/debt repayment which then hurts property prices if this increases the supply of property available through defaults –
- Data from banks - lenders have released their own estimates – CBA, Westpac, NAB and ANZ pencilled in almost $5 billion in provisions for bad and doubtful debts caused by the government shut downs
- The bad debt charges drove a 45% decline in the big four's combined half-year profit to $6.8 billion - Westpac and ANZ Bank also suspended their dividends – NAB dropped theirs to 0.3c – see what CBA does
- Difference between now and 2008 - during the GFC the bad debts mainly came from large companies that couldn't refinance, such as property groups and also within the financial system which had underwritten and gambled off debts – CDOs - current risks involve households — which make up a much larger share of banks' loan books – due to government shut downs – there is probably some longer lasting employment shock against a backdrop where households are highly leveraged
- But what about bank holidays – the attempt to keep households and businesses afloat during the shutdown, banks have hit the pause button on repayments for six months – total numbers are 392,000 home loans and around 170,000 business loans – these loan repayments will restart in October – that is when the true picture will be seen – as the loans are still accruing behind the scenes - but this $5 billion in COVID-19 bad loan write downs is only about 0.12% of lending that banks are exposed to - $4.1 trillion in total credit exposures
- These are the amounts the banks think will be needed to have on hand to deal with the slew of loans that turn bad and obviously these numbers can go further up or down if circumstances change
- Higher levels of Debt – which to date has been fuelled by lowering interest rates - But the high levels of household debt leaves the property market venerable –
- High household debt leaves workers more vulnerable – over the next few months - the situation could be worse than expected because of high household debt – the higher levels of debt amplify the risks of unemployment
- Australia's total debt to household income is at a record high of 186.5%
- If unemployment continues to trend upward - expect mortgage stress may rise and increase downward pressure on prices
- What are the major banks thinking when it comes to potential price declines -
- CBA outdoing all of the others with its “worst case’’ forecast that house prices could fall by an amazing 32% property price decline by the end of 2022 – again this is the worst case scenario -
- NAB also ran a prediction, which assumed a fall of about 30% in property prices.
- WBC had a “base case’’ scenario which assumed a 15% slide in house prices this year and another 5% decline next year – still around 20%
- ANZ used a “base case” forecast which assumed a 4.1% decline this year and a 6.3% fall in 2021 – minimum of 10% of the next 2 years
- Why are these forecasts being predicted - When bad loans start to mound up and property prices reverse strongly, even a well-capitalised bank can suddenly look cash strapped – and those they are lending to are also cash strapped – given the banks have the deed over property with a mortgage – they can fire sale a property out from under the owners to recoup loses
- CBAs base case scenario would see the economy drop by 6% this year -but then rebound with 6% growth in 2021 and growth of 3% in 2022 - That would entail a cumulative fall in house prices of 11% - this is the base case
- most pessimistic scenario showed the economy shrinking by 7.1% this year and 0.8% in 2021 before a weak recovery of 2.3% in 2022 - This would produce the average 32% fall in house prices
- but more than $65 billion in loans on pause – which would reduce the overall upside of property price growth
- CBA had received repayment deferral requests on about 71,000 business loans worth more than $15 billion, 144,000 home loans worth $50 billion and 25,000 personal loans
- question remains - what happens when those payment deferrals come to an end in September/October
- All of this is almost impossible to forecast – but the constrained supply is helping housing market – for now
- But the real issue comes back to affordability for owner occupied properties – and investment returns from investment properties
- Owner occupied – might be taking a hit if the number of Australians struggling to repay their mortgages lifts to higher levels over the next few months as people are laid off – but the government Job Keeper and Job Seeker payments may help to supplement this side of the property price conundrum –
- In addition – those most in financial distress can claim the bank holidays – to pay slightly more later when the holiday is over - One economist warned that Australia could see unemployment reach about 10 per cent and house prices drop 20 per cent
- RBA has maintained a low cash interest rate policy - reduced the cost of financing property purchase
- easy availability of interest-only loans has made investment borrowing more profitable – increasing incentive
- But interest rates are almost zero – so the upside of this is essentially gone
- What is happening – Have record low interest rates – Individual side – things are that bad – but investor side is worse – break dese each down
- Trouble is – once a recession has been triggered – it can go on for a very long time - and the worst can drag on for years
- Even if everything went back to normal today – the flow on effects may take 6 to 18 months to begin to recover
- The property market is a complex system – like the share market – many different factors but one of the key ones is confidence – went through this on Friday -
- Owner occupied – might be taking a hit if the number of Australians struggling to repay their mortgages lifts to higher levels over the next few months as people are laid off – but the government Job Keeper and Job Seeker payments may help to supplement this side of the property price conundrum –
- CBAs base case scenario would see the economy drop by 6% this year -but then rebound with 6% growth in 2021 and growth of 3% in 2022 - That would entail a cumulative fall in house prices of 11% - this is the base case
- High household debt leaves workers more vulnerable – over the next few months - the situation could be worse than expected because of high household debt – the higher levels of debt amplify the risks of unemployment
Summary - Potential outcomes – do vary -
- In the best-case scenario, capital cities could see house price declines of about 5%
- In the worst-case scenario, prices could fall about 20% - 30%
All comes down to the level of unemployment – and affordability – bad loans increasing and properties needing to be put onto the market as fire sales -
- Probably start with Investors having to sell off properties – cash strapped investors without tenants/rental incomes
- Even long term property’s upside may be limited for economic factors – interest rates bottoming out may be the biggest one
No way to tell exactly – but regardless – property will likely take a hit – to the size of prices declines – who knows – be more or less suburb dependent – if already massively overvalued with larger available supply – not a good sign – but for some suburbs – may not be as drastic
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition. A lot of people are talking about how this shut down having a similar or worse economic effect than the great depression. Today, we are going to look at recessions, what happened in the great depression, and compare the governmental policies being proposed to help boost the economy. We’ll look at their theory behind this and consider whether it will it help the recovery?
- Talk about a recession or depression similar to that of the Great Depression – think about the roaring 20s – I know nobody listening would have been alive – but it had a stigma – the music would never end – western nations were developed – times were good and nothing could cease the music – the depression kicked in – After an initial recession
- Recession - a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.
- 6 months of negative – Before now - We haven’t had a recession under this definition since June 1991
- What happens if it keeps going? Depression - is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe economic downturn than a recession – characterised by length and severity
- a decline in real GDP exceeding 10%, or a recession lasting 2 or more years – so if GDP drops by 10% - which it could – then the economy is officially in a depression
GDP – The measurement of what we are marked against
- GDP = "an aggregate measure of production equal to the sum of the gross values added of all resident and institutions engaged in production – Income or Expenditure approach – we will look at expenditure
Four Components of ‘Expenditure’ GDP– might be boring for those who know the theory already – but those who don’t – quick intro
- C (consumption)- normally the largest GDP component in the economy = private expenditures in the economy (household final consumption expenditure).
- categories: durable goods (cars, TVs), nondurable goods (food), and services.
- Equation - Value added = Price sold at – costs of inputs (labour, materials, etc)
- Higher profits lead to consumption increasing GDP
- I (investment)- business investment in new equipment/services
- construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory
- Spending by households on new houses is also included in investment.
- "investment" in GDP does not mean purchases of financial products
- classed as 'saving', as opposed to investment - avoids double-counting
- company uses the money received to buy plant, equipment, etc.
- G (government spending)is the sum of government expenditures on final goods and services.
- salaries of public servants, military and any investment expenditure by a government.
- does not include any transfer payments, such as social security or unemployment benefits
- Net Exports = X (exports) – M (Imports)
- Exports - represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added.
- M (imports)represents gross imports. Imports are subtracted - imported goods will be included in the terms G, I, or C
- salaries of public servants, military and any investment expenditure by a government.
To boost GDP – Both supply and demand economic theory want to boost aggregated demand – most efficient method is the increase consumption – as it makes up the lion share of GDP – same goal but different views on how to do it
- Demand side - boost domestic demand - expansionary monetary policy, or expansionary fiscal policy (transfer payments)
- This is what we are used to – and this is what we will be getting more of down the road
- The policies decision are focusing on boosting consumption – demand side economics – consumption represents around 60-70% of GDP in most western nations – our economy is consumption based
- so lets look how well this works in the long run – go back to one of the worst GDP crashes
The Great Depression was a severe worldwide economic depression during the 1930s - beginning in the United States
- started in 1929 and lasted until the late-1930s – some countries almost up until WW2 (1938-39)
- Personal income, tax revenue, profits and prices dropped - international trade plunged more than 50%
- Unemployment in the U.S. rose to 25% and in some countries rose as high as 33% (in Aus due to agriculture, manufacturing) – nobody to trade with and being dependent on export markets
- longest, deepest, and most widespread depression of the 20th century.
- What triggered it? major fall in the US share market - September 4, 1929 - Then October 29, 1929 (known as Black Tuesday) –dow jones index 381 to 230 – almost 40% - Between 1929 and 1932 – low point of 45 (from 381) – Loss of 88% - took 25 years for the US market to recover - worldwide GDP fell by 15% - met both definitions for depression
What was the cause? A lot of finger pointing at the time – there were two predominate theories
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Keynesian(demand-driven) - consensus = large-scale loss of confidence from market crash led to a sudden reduction in consumption and investment spending
- panic and deflation (price reduction) set in = people hold money to avoid further losses - Further exacerbates a decline in an economy – comes from uncertainty -
- Keynes- lower aggregate expenditures in the economy contributed to a massive decline in income and to employment that was well below the average – at the moment – we have both a drop in confidence – due to uncertainty about government responses – but also lowering in employment so incomes as an aggregate may drop heavily – depends on the numbers
- called on governments during times of economic crisisto pick up the slack by increasing government spending – but this time around additional stimulus directly to businesses and individuals
- Theory also states that the private sector would not invest enough to keep production at the normal level and bring the economy out of recession
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But government and business spent more in the first half of 1930 than in any 6-month period prior – why didn’t it help?
- Consumers - suffered severe losses in the stock market the previous year - cut expenditures by 10% - businesses can increase investment – governments can hand out stimulus – but if people aren’t spending this theory fails
- interest rates had dropped to low levels - but expected deflationand the continuing reluctance of people to borrow meant that consumer spending and investment were depressed.
- Core issue with increasing money supply – what if nobody borrows? Due to no confidence – of if they do borrow – their cashflows go towards repayment of debt due to uncertainty – do these sound familiar at all?
-
But This theory doesn’t point out the cause though – just why it might have gotten worse from 1930
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Monetarists - believe that the Great Depression started as an ordinary recession
- but the shrinking of the money supply exacerbated the economic situation –they argued that the Great Depression was caused by the banking crisis that caused one-third of all banks to vanish
- Market crash = reduction of bank shareholder wealth and more importantly monetary contractionof 35%, which they called "The Great Contraction." This caused a price drop of 33% (deflation).
- during the first 10 months of 1930 - 744 U.S. banks failed (9,000 banks failed during the 1930s)
- Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay.
- future profits looking poor, capital investment and construction slowed/ceased.
- surviving banks became even more conservative in lending - built up capital reserves, made fewer loans
- vicious cycle developed and the downward spiral accelerated – sound familiar? Same thing in 2008 and now
- Today – banks reining in lending through increased requirements – worried if people will lose jobs – so have tougher lending requirements – regardless of cause – from bank failures to a forced shut down of the economy –
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Criticisms – Fed not lowering interest rates soon enough (by increasing money supply) = Central Banks failed to inject liquidity into the banking system to prevent it from crumbling – and bank failures – this is what is different this time around – but the bank lending
-
Federal Reserve passively watched the transformation of a normal recession into the Great Depression – true – but what power does a CB have to keep small businesses open or to make people spend the money that fiscal policy is giving them
-
What was the cause of the great depression – many theories about what happened after – but Friedrich Hayekand Murray Rothbard - wrote America's Great Depression (1963)
- their view - the key cause of the Depression was the expansion of the money supplyin the 1920s, of which led to an unsustainable credit-driven boom
- Banks/Share traders – margin requirements were only 10% - Brokerage firms lend $9 for every $1 investor had deposited
- When the market fell, brokers called in these loans, which could not be paid back
- Whilst the debt levels on margin loans at the individual levels were lower this time around – the debt levels were still higher
- Personal debts on mortgages, CCs, personal loans – at the corporate level have highest levels of debts – gov levels as well – and in parts of the world economies was funded by QE policies -
- Back in 1920 into the 1930s - The chain of events proceeded as follows:
- Massive increase in money supply and speculation – driving share market and bond pricing up unsustainable
- Market dropped - Outstanding debts became heavier – prices/incomes fell by 20–50% but the debts remained at the same dollar amount
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Debt liquidation and distress selling - Contraction of the money supply as bank loans are called in by the banks – created further liquidity issues -
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A fall in the level of asset prices compared to loans – then a greater fall in the net worth of businesses, triggering bankruptcies
- A fall in profits - A reduction in output, in trade and in employment
- Pessimism and loss of confidence – people see prices going down – so why spend $1 today if cheaper tomorrow?
- Opposite to inflationary pressures – ‘rather you pay me today than tomorrow’
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Today – we have MMT – out of all of these steps the one that QE and government payments are trying to avoid is the contraction of the money supply – trying to provide ‘liquidity’ to banks and governments -
-
But Credit expansion cannot increase the supply of real goods - merely brings about a rearrangement
- diverts capital investment away from the free market/market conditions – how economic wealth is created
- Instead - production to pursue paths which it would not follow under normal conditions
- the upswing lacks a solid base - It is not a real prosperity. It is illusory prosperity –
- Example – the real value of goods goes nowhere – just the prices of things but your PP stays the same
- Growth is not an increase in economic wealth, i.e. the accumulation of savings made available for productive investment.
- arose because the credit expansion created the illusion of such an increase.
- Savings plummeted due to lower rates (no incentive to save – look at interest rates today) – but instead repayment of debts replaces savings – debts are high – savings rates are low – confidence is low = repay debt instead of spending
- Hans Sennholz - argued that most boom and bustsin an economy - were generated by government creating a boom through easy money and credit, which was soon followed by the inevitable bust
- like in 1819–20, 1839–43, 1857–60, 1873–78, 1893–97, and 1920–21,
- The crash of 1929 followed five years of reckless credit expansion by the Federal Reserve System again – to little effect
- Looking back on both Demand and Monetarist theories – see any problems? Their solutions are what contributed to the share market bubble – artificial increase in money supply + artificial push to increase demand
- It might try to put a bandaid over the problem – but never actually treat the wound – so you end up losing an arm down the road
- Similarities to today – prior to the crash - we already had a massive bubble in markets from easy money policies and the amount of credit – not equity – in markets –
- Today – rather than putting in protectionist policies and individual taxes increases (reducing the individuals take home pays) – they just shut down sections of the economy to the same effect – lower money which individuals can demand
- Fiscal stimulus – the jobkeeper payments - $1,500 a fortnight – for all workers – even if they were only earning $300 a FN prior –
- Pensioners – getting an additional payment and subsidies on rent or electricity –
- This flow of money is demand side – tried to boost the demand – but what good is it if there is no supply –
- diverts capital investment away from the free market/market conditions – how economic wealth is created
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The only supply is large companies – further reducing the supply to the economy or shoring up the monopolistic behaviours of the market
Summary -
- Keynes -stimulus to boost aggregate demand is only really effective in relatively closed economies (why they tried tariffs back in 1930 – made it worse though)
- free capital flows and globalization pretty much most of the stimulus has been in fact relatively ineffective – if money being introduced in Aus is spent on Amazon – US does well – needs to be spent in local small business to help our economy
- The multiplier has been small - indeed negligible - and the stimulus have been therefor rather poor.
- these policies can hardly be justified - I don't think the answer lies in yet more Keynesism, any more than it necessarily lies in printing yet more money
- So all considering, why should be we expect any different now – it comes down to individuals decisions – if people get money
- But old Economists still love this idea – But how is this money ever repaid? Not their problem – dead before bill is due
- But with MMT – debt isnt seen as an issue – as Govs can just print money – so get into as much debt now and then print your way out of it later
- Australia – Total Money supply (M3) 15 years ago was $500billion – today is $2.2 trillion – Growth of 10% p.a.
- M1 though has sky rocketed – in the past year – went from $360bn to $1.2 trn – more than tripled – but this happened in July last year –
- Despite what politicians are saying – printing money to try and boost the economy will likely fall short of what the targets are
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Saw What Wednesday edition, where every week we answer questions from each of you.
This week’s question is from Adam “Hi Louis - Really enjoy your podcasts. Not sure if this is too outside of your comfort zone but I would be really interested in hearing a podcast on whether it is still viable to set up an off shore investment company. as we move into a period where the government is taking on more and more debt I've started looking into offshore options on the internet. I know the Turnball's etc have offshore companies to manage investments, but has most of the advantages largely disappeared through inter-government transparency?”
Investing Offshore – look at how it is done, if it still can be with increased transparency – and the pros and cons
- Why would you want to invest overseas – create an offshore investment? Reduce tax and reduce transparency – but these things aren’t so easy as they were 20 or 30 years ago
- In Australia – and most western countries – we have high levels of tax – especially the more you earn – consumption, state taxes – taxes on investments –
- Investment Income taxes or CGT – have the 50% discount – on CGT which some other nations don’t have – But Also have Franking Credits to help offset dividend income
- Even Super as a tax structure is an effective tool to reduce tax payable – but does have legislation risks -but TBH – so does every investment vehicle that we have – even investing overseas can be at the whim of a DTA – laws change
- The OECD though have a massive reach when it comes to monitoring offshore tax havens - they now control the tax systems of most countries in the world through policy directives - investing offshore less attractive due to OECD – “aligns the information exchange provisions to the current OECD standard by replacing Article 19 of the existing Agreement. The new Article 19 continues to provide for the exchange of tax information by the tax administrations of the two countries”
- OECD say their purpose is to “eliminate unfair tax competition” – to make countries have the same sort of tax rates – reducing the incentive of investing off shore – but also increase information sharing to avoid people hiding taxable incomes
- In Australia – and most western countries – we have high levels of tax – especially the more you earn – consumption, state taxes – taxes on investments –
- At the corporate level – companies like Google, EBay, Starbucks and Facebook have shown they can do tax minimisation very effectively – tax conduit and tax sink country strategies - structures involving Ireland (only 12% corporate tax rate), and Netherlands (tax-free for holding intellectual property) – covered this a while back in the series in the EU including the City of London corporation – so the big companies have worked out the game – but at the individual level – can we do this?
- This is the difference between tax minimisation – and tax avoidance –
- What you do have to be within the law – which is very hard to achieve with the increased regulations – not only in Australia with the AML/CTF rules – Austrac – ATO – along with OECD intergovernmental cooperation –
- Many of the ultra wealthy and massive companies do this – how they remain competitive – if you have to pay 30% tax versus 1% tax like in Apples case – you can easily out compete – but they did get caught and had to pay some tax back
- But as Kerry Packer once said when questioned about his tax strategies - “I am not evading tax in any way, shape or form. Now of course I am minimizing my tax and if anybody in this country doesn't minimize their tax they want their heads read, because as a government I can tell you you're not spending it that well that we should be donating extra.”
- But we are not companies – Companies have protection – and now if directors of a company do something illegal they are liable – unlike a multi-billion dollar company – we don’t have the budgets to pay for lawyers for millions of dollars a year to 1) work out a tax strategy for us or 2) defend us against the state if we get taken to court – which has an unlimited budget due to tax funds –
- Example of this in action is Project Wickenby –
- The Project Wickenby was cross-agency taskforce – spearheaded the Australian Government's fight against offshore tax evasion - taskforce was established in 2006 to expand upon Australia's financial and regulatory systems through preventing people from participating in using jurisdictions that weren’t forthcoming on information about individuals investments or tax payments – stereotype on Switzerland
- task force led to over $2.2 billion in tax liabilities being raised. It also increased tax collections from improved compliance behaviour following high profile investigations, prosecutions and sentencings – essentially scared people into ceasing investing overseas or not declaring all of the income - celebrities like Paul Hogan were caught in this
- Project Wickenby finished on 30 June 2015 when the Serious Financial Crime Taskforce was established.
- The Project Wickenby was cross-agency taskforce – spearheaded the Australian Government's fight against offshore tax evasion - taskforce was established in 2006 to expand upon Australia's financial and regulatory systems through preventing people from participating in using jurisdictions that weren’t forthcoming on information about individuals investments or tax payments – stereotype on Switzerland
- One scheme that got shut down was being used by HWI – with a tax planning scheme of using companies in Vanuatu to shift money through – How did this work?
- A Vanuatu “management” company was set up and agreements were made between this company and an Australian company whereby management, royalty or IP fees were charged – then tax deductions were being claimed to offset income in Australia – again what Apple and many other companies do – but if no management or IP is being provided – and fees being charged are high – it is illegal – especially as the money that should have been paid was being treated as a loan
The days of using dodgy tax planning schemes to avoid paying tax are well and truly over
- The question is – what is the point of doing it at the individual level? – but also how do you do it and how much will it cost to achieve
- Not a legal expert in this subject – but experts who deal in these matters aren’t cheap – might cost you $20-30k in legal fees each year to maintain – so the tax savings better be worth it
- The fact is – we are limited as an Australian investor from using tax minimisation strategies (legally) through overseas structures – you can still do it though in some manners – not advice – speak to a tax lawyer
- There are still many ways you can sometimes minimise your tax by investing offshore – Method –
- In order to invest in an offshore jurisdiction - you need to open an offshore investment account
- This account would be a form of brokerage/trading account – but you would need to also opened an offshore bank account – all the normal documentation is required to ID you or a company that was opening it – again your information can be shared back to Aus with the ATO
- There is special emphasis on the offshore location because that is the major reason for opening an offshore investment account
- The location is a tax haven where capital gains earned on any investments made are tax-free - If you trade the markets and are still an Australian resident, you can set up a company in Switzerland, Singapore, Hong Kong, or Malta, and although you still have to pay tax in Australia, you don’t have to pay tax until you bring the money back into Australia
- Some of these countries require you to buy a property there as well – and some accounts have a minimum of $100k to into the millions you need to bring into the country to qualify – again – these strategies are mostly beneficial to the ultra-wealthy
- Other benefits come in the form of reducing investment income payable – from DTAs
- Using offshore companies in a range of jurisdictions with tax treaties with Australia, eg. Malta, USA, New Zealand, Ireland
- Take Malta as an example – have a DTA with them since 1984 – Dividend income is taxed at 15% - as a withholding tax – But – is this better than tax on dividends here? Depends on your MTR but also franking credits
| MTR | Net Income | Net Tax | | 0.0% | 1.428571 | 42.9% | | 21.0% | 1.128571 | 12.9% | | 34.5% | 0.935714 | -6.4% | | 39.0% | 0.871429 | -12.9% | | 47.0% | 0.757143 | -24.3% |
- Examples – per $1 of dividend on a FF share –
- Not until you get above $180k in income do you start paying more in Aus off a FF share
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Also – Super – I know you cant access it until you are 60 – but after this time there is 0% of tax – in the interim – income tax is 15% - but if you get a FF dividend in a WRAP account – get $1.214 for every $1 with FC
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Being a non-resident of Australia – which is the opposite works as well - If you choose to become a perpetual traveller and establish a residency outside of your home country - becoming a non-resident – you can pay 0% tax here in FF dividends, but don’t get FCs, pay 10% in tax on interest income as well
- Need to meet one of the non-residence tests – generally out of the country for 6 months of the year and prove that you don’t intend to live here permanently again (domicile test)
In summary –
- Strategies to reduce tax by investing overseas are going – and the costs and complexity to maintain a structure may be more than any tax savings – also – don’t want to do anything illegal – important to ask a professional in tax law about this to avoid any massive fines or jail time
- But remember there are strategies that work well in Aus to help reduce tax payable on investment income
- Family trusts if you have beneficiaries – using super – personally having franking credits on dividends – these can yield lower taxable income results compared to if you do so in a country overseas after costs associated with this
- Thanks for the question Adam
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. What investments will do well and those that wont in a world with higher levels of inflation
Financial investments – Been talking about MMT and inflation – but what hasn’t been mention – a lot of these intentions of providing business with credit, helicoptered money, ensuring government is financed and QE have had a secondary objective - to support and prop up financial asset and markets – but these policy efforts favour some asset classes over others
Uncertainty and risk
- Risk and uncertainty are related but different
- Risk = speculative/volatility
- Uncertainty = Unknown risks – generally creates freeze response initially – just don’t do anything – spend or invest
- Uncertainty creates an environment where people avoid risks but then once they become afraid exit from existing risks
- In shares – creates selling – not sure what is going to happen – we are loss adverse = sell to avoid losses
- The important point is 1) have confidence in assets to avoid absolute losses and 2) getting growth to negate inflation – balancing act between taking on risk for reward – but managing the risk to get long term losses
- Confidence is key – Confidence in any asset is what is needed
- Why is confidence important? If a lack of confidence/panic is what causes prices on assets to drop heavily –
- then the solution is to be in assets that while may be impacted in prices (short term volatility) – will not go to zero
- Asset goes down in value – so what? - Depends on type of asset and what you do, and what those investments are to you
- Why growth is important – it adds an additional component of returns –
- Total return is income plus growth – income only assets are normally tied to interest rates – Cash and FI –
- Say you have cash – getting 1% return – that is interest but no growth – real growth is negative with inflation over a 10 year period – unless interest rates are above inflation
- Say you have shares – dividend returns (income) of 4% p.a. – this alone puts you above current inflation – but the growth can be positive and negative – longer term – if you get 4% growth – long term total return is 8%
Lets look at the asset classes - General information - What assets to avoid
- Cash – pretty obvious one – cash is a medium for exchange – not a great asset over the long term –
- Great in short term – important to have emergency funding –
- But long term – cash is not the best strategy – this is due to the current low interest rate environment, inflation and monetary policies – money has lost around 98% of its real value since becoming a fiat based system
- Saying back in my day - $1 could buy you a pair of shoes – cause $1 was worth a lot more – but also – going back in time interest rates were at the same income yield as share dividends are today
- With constant inflation targets – this has eaten away savings and the real value of cash – but the
- Bonds – with debt levels going up – and interest rates being low – if inflation kicks in then bad long term assets
- First - look at how financial assets are valued – A lot of it comes down to debt yields and interest rates
- in the fiat currency world, the principal asset from which all others take their valuation is government debt – the 10 year US treasury or Bond yields
- Risk free assets – in risk premiums
- But these RF returns are almost becoming obsolete - with US Treasury debt yielding less than one per cent for all but the longest maturities (50+ years) - in Europe, Switzerland and Japan - negative rates are common – these models aren’t designed to work out the value of assets if the return on something risk free is negative – as who would buy a guaranteed negative investment?
- Commercial banks and investment managers are no longer demanding any new debt instruments for new government debt – so central banks across the world have to pick up the slack - are effectively becoming the only significant actors on the buy side for not just government debt, but a wider range of financial assets as well –
- In the USA - The Fed has already stated it will offer additional support to bond markets by buying ETFs invested in corporate bonds – through SPVs –
- This puts a floor under bond spreads – so there is an artificial demand to avoid a collapse – but this is reliant on monetary policies – what is they stop one day? Prices of these assets then crash – CBs hope to support everything from junk to investment grade, because if it did not, spreads would blow out even more, threatening bank balance sheets which are thought to carry some $2 trillion of this debt both directly and in collateralised loan obligations.
- Bonds are no longer really an investment IMO – but become a merger of government and private funding mechanism that has removed the incentives for most investors to invest in debt
- Upsides are limited – only get additional yields if the default risks rise traditionally – however – now even though default risks are rising – yields haven’t been – as these bonds are being bought up by central banks and artificially lowering the incomes that other investors can get
- With inflation – and limited yields – and risks of interest rates rising – bonds may not be a great long term investment asset class
- If inflation kicks in – and interest rates rise in response – then bond values decline and real losses are compounded by the inflation
What assets can do well – ones with real values and with growth or their own inflation in price gains
Alternatives and Growth assets -
Alternatives -
- Commodities and precious metals – Silver – and also gold
- Gold – Has a real value of storage – depending on how much additional money is introduced – a monetary reset will be required – gone for a long time without one – one of the longest periods in modern history
- Talks that gold will be the backing agent – but I personally don’t think so – based on Central Banks and the IMF – may be more likely to be some form of digital currency or crypto – could have gold backing it – but just as likely to still have some form of Fiat backing it – essentially a stable coin
- In either case – Gold prices would likely rise due to uncertainty and people seeking a historical safe harbour
- Silver – GSR – in inflationary times – Silver beats gold – again no guarantees – but in current part of economic cycle – we are deflationary – but when things pick back up and inflation comes back – silver may have a bit of a resurgence – when this happens no idea – but things move in cycles and the next stage of the cycle is likely to be inflationary
- Check out K wave episode and the one on the GSR if you havent heard this
- Infrastructure – not really an alternative – but one that people don’t think about that often –
- But focusing on what people need to use – Infrastructure – hard to get into this directly – but there are MFs and share assets that buy these types of assets – shares that work in infrastructure directly – as the road to recovery that a lot of governments are pointing to is increased spending on infrastructure – money needs to go somewhere
- Gold – Has a real value of storage – depending on how much additional money is introduced – a monetary reset will be required – gone for a long time without one – one of the longest periods in modern history
Traditional Growth assets – Property and shares - Reason – need to get capital growth of assets to offset rising inflation
- Shares – Solution – Step 1 - Buy good companies, diverse business models, diverse markets and lot of different companies – diversification.
- Companies with relatively lower debt to peers in group – havent been doing debt fuelled buy backs
- Step 2 – Don’t panic sell if they go down
- Alternative option – to get better diversification - Managed Funds/ETFs – Active or passive?
- High conviction – Active funds – Benchmark unaware - ones that are undervalue through not ETF purchase
- Why active is important?
- Contrarian trend – can avoid any overpriced share in the index – even if a company isn’t making money – people buy them and they get into the index – the prices go up for no other reason
- Good active managers who select smaller number of shares
- High Conviction - Contrarian to whole index –
- Goes against the trend of full invested funds in passive – active managers can hold cash for bargains
- Benchmark unaware - being a large cap manager limits bargains and forces managers to into the top end of an index which will suffer in large passive ETFs/index selloffs -
- Break up the risk through investing consistently - cash set aside for financial emergencies is important
- dollar-cost averaging – breaking up cash if holding a lot – or natural form from surplus cash
- Do it from cashflow - Spend less than you earn – invest the rest – regardless of what your fears or greed
-
Property – Central banks have already supported house prices with interest rate policies –
- Now some are also buying mortgage debts to avoid drops in demand – these have been in hopes that by preserving a wealth effect, investors will not only continue to feel well off but be encouraged to keep investing – property itself should have some land value going forward – something that supply cant be massively increased in – as land has a natural capped supply – as opposed to apartment blocks that can be put up in the thousands relatively quickly
- Risk of inflation to rents – rents may not be able to be increased at rates on inflation – menu pricing – increasing rents by 5-10% p.a. is hard eventually to find a tenant – especially with the build to rent scheme and offering of subsidised rents – competitive market
- Leveraged nature – going forward – if inflation kicks back in and interest rates remain low – may present more of an opportunity for real growth – not nominal
- Now some are also buying mortgage debts to avoid drops in demand – these have been in hopes that by preserving a wealth effect, investors will not only continue to feel well off but be encouraged to keep investing – property itself should have some land value going forward – something that supply cant be massively increased in – as land has a natural capped supply – as opposed to apartment blocks that can be put up in the thousands relatively quickly
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Borrowing for investments – could be a strategy that works – this is just an illustration – borrowing to invest can be very risky and not for the faint of heart – The adventurous will borrow fiat to buy growth assets – can be anything – shares, on property, etc.
- in the expectation the fiat repayment will be very low going forward - the suppression of interest rates by central bankers is likely for some time –
- so if interest rates stay low – and If inflation kicks back in – it is a double win –
- Example – Borrow $10k – IO loan at 3.5% - inflation goes up to 4% - and invest in a growth asset that can get you 8% return – over a 10 year period what does this look like
- Investment value – $21,600 - real value of investment with inflation $14,600 (PV) - then real value of the debt $6,750
- Interest you have had to pay - $3,500 - but deductible – assuming inflation – real value of repayment $2,838
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Assuming no deduction, including for inflation and interest rates – net value of strategy is $4,990 in 10 years
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Over 20 years
- Investment value – $46,610 - real value of investment with inflation $21,272 (PV) - then real value of the debt $4,564
- Interest you have had to pay - $7,000 - but deductible – assuming inflation – real value of repayment $4,758
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Assuming no deduction, including for inflation and interest rates – net value of strategy is $11,950 in 20 years
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Lots of assumptions here – but just an example of how the strategy works
Summary – Assets that while not retaining value like you could want (drop in price) – if you hold you can survive
- Have a range of investments (not just bank shares)
- Some physical assets – Gold
- Shares in companies that people will still use – not fad companies or ones build on people’s discretionary spending – but essential spending and things that the economy and we cannot go without -
- Property and infrastructure – physical assets – That you can hold and not need to sell
- Borrowing to invest for the longer term - Make sure they are quality assets
- Don’t sell – enter market slowly during a panic
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition. Today we’re looking at Modern Monetary Theory action. The first stage, how this is going to be practically done, involves the merging of the central banks and Government Treasury. We’ll also look at the increase of Crony capitalism that will emerge out of this. Large companies in debt get bail outs, but most get to remain open and actually profit out of this.
The first step of long term implementation – Central banks and treasuries merge
- MMT proposes governments that control their own currency can spend freely, as they can always create more money to pay off debts in their own currency –
- The theory suggests government spending can grow the economy to its full capacity, enrich the private sector, eliminate unemployment, and finance major programs such as universal healthcare, free college tuition, and green energy.
- If the spending generates a government deficit, this isn’t a problem either. The government’s deficit is by definition the private sector’s surplus – but the part of this theory that we will be focusing more on today is the enrichment of the private sector
- But this requires an intermediary – a government agency to take over and hand out the cash - Well – in the USA - there seem to be the groundwork in the CARES act (Coronavirus Aid, Relief, and Economic Security Act)
- There has been a lot of talk about Trump reigning in the Fed – but in reality – it is more of a merger - The main reason the Fed is now working with the Treasury is that it needs the Treasury to help it bail out a financial industry burdened with an avalanche of dodgy assets that are fast losing value – along with the record levels of corporate debt
- Think GFC 2.0 – bad debt on companies or financials in risk of defaults -
- The problem for the Fed alone is that it is only allowed to purchase or lend against securities with government guarantees
- these are assets like Treasury securities, agency mortgage-backed securities, or debt issued by Fannie Mae and Freddie Mac – why the Fed was allowed to buy back the worthless MBS off investment banks back in 2008/09
- But they can’t buy any equity or debt in companies – which would be a form of government sponsored funding mechanism for companies –
- But now to get around this limitation, the Treasury created a series of special-purpose vehicles (SPVs)
- A special-purpose vehicle (or entity) is a legal entity created to fulfill narrow, specific or temporary objectives. SPVs are typically used by companies to isolate the firm from financial risk – it is how property developers work with each single development – limits liability into one single entity
- The aim of these is to buy all manner of financial assets, backed by $425 billion in collateral conveniently supplied by the US taxpayer via the Exchange Stabilization Fund.
- an emergency reserve fund of the United States Treasury Department, normally used for foreign exchange intervention
- The Fed will lend to SPVs against this collateral which, when leveraged, could fund $4-5 trillion in asset purchases of additional assets beyond what the Fed itself could access in its mandate.
- Round about way for the Fed to circumvent their mandates – as even though the assets inside of the SPV may not have government guarantees, the SPV itself can
- In other words, this is a step towards the federal government nationalizing large chunks of the financial markets and companies listed on them – so now, the Fed is providing the money to the Government to buyout large sectors of the financial markers, whilst having BlackRock doing the trades
- So rather than the Government taking over the Fed, this scheme essentially is the start of merging the Fed and Treasury into one organization.
- In essence but also as a long-term effect, the Fed is giving the Treasury access to its printing press which is what is the worry in the long term, as the issue I see in the long term is that all of this gives Governments more control over the economy – and the supply of money
- Long term – this has the potential to create a socialist monetary state – gives the printing press needed for funding Universal Basic Incomes – and once these powers are in place – any future administration can look at implementing these policies
But why is this required – not the UBI but the bail out of large companies – through the creation of SPV
- Public companies are supposed to act in the best interest of their shareholders – but what is 'in the interest' of shareholders has taken on a distinctly short-term bias – covered this a lot – shareholder value theory from Friedman – biggest trend in short-term practices over the past decade has been share buybacks
- Drives up the share price - juicing EPS – if you haven’t listed to the episodes on Corporate debt bubbles fuelling the markets – may be worthwhile to go back and listen
- But now thousands of the companies lobbying the government for bailouts have spent billions on buybacks over the last decade - many public companies have raised the capital for buybacks from issuing debt
- Remember: 2019 was the 'year of the buyback', the second-biggest on record after 2018, third was 2017 – Over the past few years Trillions was issued as corporate debt to buy back corporate equity -
- Most major companies should have been extremely well capitalized after a record bull market - But interest costs were low, and short-term shareholder values had to be maximised – and the real bull market may have never existed - perception
- The market is competitive after all – if one company is manipulating its price for the perceived capital gains – then other companies want a piece of that to not look like underperformers this quarter
- Now these companies are crying poor – as if their revenues suffer – they can’t even afford the interest bills on the debts raised - Remember – this debt wasn’t for productive long-term investments – so the net effect is total profits decline whilst the EPS looks like it has gone up
Calling for bail outs is All in response to The policy effects from lock downs –
- But most of the Big businesses have been able to are allowed to stay open – smaller businesses suffering – lots of people work for smaller companies – self-employed people etc.
- Look around – what companies are doing well right now – in Aus the two monopolistic companies in WOW and WES/COL – or Maccas and other large fast food chains – but the average restaurant is currently feeling it – then in the USA Amazon, Walmart, tech giants
- In these sort of situations - An economic downturn almost always favours giants like Microsoft, Apple and Amazon, - the new normal being proposed seems almost tailor-made for their future success
- Their share prices have climbed back up - combined value rose more than three-quarters of a trillion dollars since the recent market low — more than the cumulative gain of the bottom half of all stocks in the S&P 500 – seems like Investors are betting, in part, that these government policies will accelerate the already growing power of America's corporate colossuses
- Seems to be a sign of the market as well – they have resilient business models because they can do everything online- can keep processing orders – but the market/investors are betting on the future – that the bigger, stronger company is going to win versus its smaller peer
- the depth of the current economic decline makes it reasonable to expect that such large companies will emerge in an even more dominant position this time around – made much worse due to the high failure rates of small businesses
This has been a long-term trend – Large companies making up large amounts of indexes – Aus is bad – top 10 = 40%
- But top 10 stocks in the S&P 500 make up 27% of the index - The top five companies alone — Microsoft, Apple, Amazon, Alphabet and Facebook — account for 20% of the index.
- This also makes markers more volatile – few companies go poorly – then the whole market does
- Example - All five closed lower one day last week - drag the S&P 500 down 0.5% - but 330 of the 500 companies in the index were higher – same for us – can have most companies in bottom 250 of ASX300 go up, but if banks and resources – or top 20 companies go down – market would decline
Main reasons for this long-term trend – increase in Crony capitalism – this is an economic system in which businesses thrive not as a result of risk in a competitive market, but rather as a return on money amassed through a nexus (connection) between a business class and the political class
- While the concentration of market wealth in top companies has hit a peak in recent weeks, it has been a long-term trend in recent years – reflecting the changes in the structure of the corporate world. The years since the 2008 financial crisis have been marked by an increase in the consolidation of some industries, such as banking, retail and airlines.
- Giant companies will dominate – and take larger amounts of employment and profits - not due to free market – but due to political policies – barriers to entry and financial support
- In the USA – in 1975 –top 100 companies took home 49% of the earnings of all public companies – today it is at 85%-90%
- Many of the largest financials should have gone under in 2008 – but they were bailed out and no competition was allowed –
- This time around – large companies that have been mismanaged again will be bailed out through the SPV
- At the same time, the peculiar quirks of the COVID-19 crisis — almost coincidentally — play to the business strengths of the big companies that were already the largest players in the US economy
- Regulation and the non-enforcement of anti-trust laws has been another major reason – Companies allowed to buy up everything – even if it isn’t within their business model – reduces competition and concentrates the market further –
- Politicians don’t want to enforce this – lose donor funding through lobbying efforts – but who cares about small businesses – they don’t give them anything
- Political policies – allowing one rule for me and one for thee –
- Large companies allowed to stay open – they are having their debts bought back for poor management – But the average business has been shut down or lost customers – small business owners are getting fined or jailed – but it is all okay, as now they get government money. Or do they?
- When it comes to the individuals - This is where MMT comes back into it - Doesn’t really take much to explain how demand side spending will occur – bonus payments to welfare recipients – talks in the USA to cancel student debts – giving additional tax refunds – doesn’t matter in what form is occurs – the end result it to put more money into people hands– why?
- People get money to spend – and the large companies that remain open like Amazon are where they will be spending it
- The policies decision are focusing on boosting consumption – demand side economics – consumption represents around 60-70% of GDP in most western nations – our economy is consumption based
- Push or pull – chicken or the egg - Theory goes - for infinite growth – doesn’t matter if people have choice on where they work or personal freedoms – if you give them money they will spend it – and spend it at large stores – well then the economy will be fine – we are just seen as consumers in this economic model –
- And if governments can print the money and control this as a monopoly – along with having control over policies which allow monopolistic companies to prosper whilst others suffer – you have a monopoly on a monopoly
- There is an extreme example of this – it is fiction but – idiocracy – brawndo employed almost everyone in the country and replaced all water with power aid equivalent –why? Is it for profits – no, Brawndo'sgot what plants crave: It's got electrolytes!
- Why were they allowed to do this? They bought out the FDA and FCC and a company got to determine – food companies – sugar studies
- Just something to watch out for – continue looking at this next week – Monday what investments can work going forward – and which ones wont -and Friday look at some data on expectations for the recovery
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition. Today’s question comes from Mario.
“With the success of Warren Buffett’s Berkshire Hathaway would it be wise to invest in their Class B shares? It is often said that Berkshire Hathaway is one of most successful investment houses and so I wonder if it’s a really good long term horizon investment? Class A shares are so high and out of the reach of most people but I note Class B shares are more accessible but come with risk of changes and further dilution from Berkshire Hathaway. Also from a yield perspective I was unable to understand if they actually pay consistent dividends but then given Berkshire Hathaway view is about value investing am correct in thinking this stock is more growth oriented?”
Thanks so much for your thoughts and views - Mario
In this episode – Look at difference between class a and b shares – long term growth prospects and dividends, then the difference between growth and value
Berkshire – Difference between class A and B
- The primary difference between Berkshire Hathaway Class A stock and Class B stock is one of price.
- Class A – current $267,080 – was $342,122
- Class B – current $178 – was $228 – both have had about a 22% loss
- Because of the price difference, Class B shares offer increased flexibility for investors because Warren Buffett has declared that the Class A shares will never experience a stock split
- because he believes the high share price attracts like-minded investors, those focused on long-term profits rather than on short-term price movements
- Imagine owning just one share of Class A share – if you need $50k, need to sell the whole thing as opposed to selling a chunk of your class b shares –
- Where did they come from – and how do they operate - In 1996, Buffett created Class B shares (BRK-B)
- Initially offering investors the ability to invest in Berkshire Hathaway for one-thirtieth the price of a Class A shares
- Then a 50-to-one stock split in 2010 sent the ratio to one-1,500th.
- Does this mean that you are at risk of further dilution? Yes and no – yes the shares can be further diluted – but unlike say share placements – which are issued to the public – the shares are split and you retain ownership – so your 1 share turns into 50 shares – then over the years people sell off and the ownership spreads around
- Class B shares carry correspondingly lower voting rights as well. Buffet stated that the purpose of creating the Class B shares was to give smaller investors the opportunity to invest directly in Berkshire Hathaway, rather than only participating indirectly through mutual funds that mirror Berkshire Hathaway’s holdings.
- One final difference is that Class A shares can be converted into an equivalent amount of Class B shares any time a Class A shareholder wishes to so do. The conversion privilege does not exist in reverse. Class B shareholders can only convert their holdings to Class A by selling their Class B shares and then buying the equivalent in Class A shares.
- Summary - There's no substantive difference between the two, except that a share of Class B stock has 1/1500th the value of a Class A share and a corresponding fraction of its voting power.
- A and B: Pros and Cons – for those investors who are able to either choose between investing in a smaller number of Class A shares or a much larger number of Class B shares, there are a few pros and cons of each to keep in mind.
- pure performance – there is normally no difference between Class A and Class B shares (represent stakes in same company) – but there can be due to market dynamics and differing pools of investors -mainly due to liquidity however – those investors in class A shares may spot this and jump across – so isnt really a factor
- Flexibility – Class B is obviously better – but for same voting rights, would need to own 1,500 b shares for one A share
Difference between the type of internal investing style versus the Berkshire shares
- Value investing – Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors actively ferret out stocks they think the stock market is underestimating
- High-profile proponents of value investing, including Berkshire Hathaway chairman Warren Buffett, have argued that the essence of value investing is buying stocks at less than their intrinsic value. The discount of the market price to the intrinsic value is what Benjamin Graham called the "margin of safety".
- buying securities that appear under priced by some form of fundamental analysis
- Growth Investing – Growth investing is a style of investment strategy focused on capital appreciation. Those who follow this style, known as growth investors, invest in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios.
- Internally – they buy companies based on Value –
- They buy out whole companies – but only if they see value – metrics can be based on synergies or restructuring – as a conglomerate can act differently to an individual or institutional growth investor
- But Berkshire shares don’t really trade like value – they are Growth
- One metric is the PE ratio – sitting at about 43 – which is in the growth territory
When it comes to Berkshire Hathaway Class B shares, they are definitely a long-term growth focus as they don't pay any dividends.
Why don’t they pay dividends - Reinvesting is Top Priority -
- reinvest profits in the companies he controls for a number of reasons – can be to expand their reach, create new products and services, etc
- Rather than pay investors income – wants to pay them back in capital growth
- Major uses of cash - he has said that he has three priorities for using cash that are ahead of any dividend:
- Reinvesting in the businesses
- making new acquisitions – may be preparing for a major acquisition - hadn't made one in nearly four years
- recently sold out of airlines and other companies the company having a record amount of cash on hand - $130 billion – more than enough to buy out CBA twice over with the currency exchange
- buying back stock when he feels that it is selling at "a meaningful discount to conservatively estimated intrinsic value."
- It purchased $700 million of its own stock in the third quarter of 2019
Also – total returns needs to be remembered – income + growth = total
- BRK shares look like they grow a lot (and they do when compounding) – because no income is passed back on to individuals –
- Comparison in total returns - Look at Vanguard International index (hedged so all in USD) – has almost the same returns assuming income is reinvested –
- 10y 9.02% vs 8.45% for BRK
- 5y 3.97% vs 4.02% for BRK
- But – what BRK does well is tax deferral investing – they are the master at this – you pay no tax along the way – and internally nor do they really – so no cuts to reinvestments – that is how they truly perform well – good for investors as well until they sell – and get CGT
However, when it comes to the long-term focus on the company, Warren is 89 so his longevity in the business may be limited.
- The future success of the business comes down to how well the company is managed without his presence, but I think it will be just fine
- I can imagine that this is on the companies mind as well – as well as the major institutional investors –
- There might be a bit of a panic when he passes – especially as he has 30% of voting rights and 16.45% of direct ownership – so this may be split up or given to trusts – probably wont cause a spike in supply -
Summary – little difference from class of shares – just at a fraction
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. With everything going on in the world, the notion that inflation could return with a vengeance may materialise.
This will be a two part episode. Today, we’ll look at the potential paths for inflation and quickly assets to hold and those not to. Next Monday, we’ll go into further detail about the investment strategies and why each investment does well in certain conditions.
First, what is inflation:
- In economic terms – Inflation is the measurement of the increase in prices of goods = CPI in measurement terms – basket of goods and how the costs to purchase them changes
- Central bankers try to use inflation to reduce the real value of the debt to give debtors some relief in the hope that they might spend more and help the economy get moving again
- Therefore – inflation erodes the real value of a currency – due to prices of a good increasing – reducing your purchase power unless wages increase at same or greater rate –
- Technically – Extreme levels = Hyperinflation is when the prices of goods and services rise more than 50% a month.
- If you have $100 bill in your wallet – which could buy you 20 cage free 12 pack of eggs at $5 each today
- You have another $100 bill and take it to buy eggs a month later – but the prices go up by 50% - now can only get 13 and 1/3rd egg cartons – reduction of about 33% of your purchase power
- If a good or service could cost one amount in the morning but be more expensive by the afternoon – how would you respond?
- You would buy more now? Or wait? Buy now – this creates shortages in stockpiles – leads to undersupply which further spikes price rises
- Hyperinflation massively increases uncertainty due to a rational behavioural response people make - but not accounted for in economic models – therefore – spending now rather than saving for the future is an ‘irrational behaviour’
- Don’t think we will get to hyperinflation – but the IMF is predicting inflation to kick back in for most of the world – between 5-10% - emerging markets will be the hardest hit
- But with cash rates low – real returns on holding cash would be negative with even the smallest levels of inflation
- So In this episode we will look at the factors that will create inflation along with where to avoid holding investments – and what types of investments combat inflation
First - Causes – number of different causes – but demand and supply come into it – but with some stress to the government budget, such as wars or their aftermath, sociopolitical upheavals (like a lockdown), a collapse in aggregate supply or one in export prices, or other crises that make it difficult for the government to collect tax revenue – many different reasons – as it isn’t just one trigger that creates inflation – requires a perfect storm of situations
-
Starts for a combination of reasons – but in most cases - step is when a country's government begins printing money to pay for its spending – increasing supply of money – decreases real value –
- It is all about perception – well known example - Germany – Weimar Republic in Germany in the 1920s printed to pay off war debts – along with losing backing for supply of money in the form of gold in the WWI treaty
- But number of Deutschmarks in circulation went from 13 billion to 60 billion from 1913 to 1914
- First time printed money to pay for WW1 – economy was strong and prepared before war
- But German government also printed government bonds - same effect as printing cash - so Germany's sovereign debt went from 5BN to 156BN DMs
- But number of Deutschmarks in circulation went from 13 billion to 60 billion from 1913 to 1914
- It is all about perception – well known example - Germany – Weimar Republic in Germany in the 1920s printed to pay off war debts – along with losing backing for supply of money in the form of gold in the WWI treaty
-
But from WW1 - 132 billion marks in war reparations – from taking away production capacity - lead to a shortage of goods, especially food. Because there was excess cash in circulation, and few goods, the price of everyday items doubled every 3.7 days. The inflation rate was 20.9% per day. Farmers and others who produced goods did well, but most people either lived in abject poverty or left the country.
-
But today - Every government does this still - not to pay off war debts but fund spending – budget deficit is the term for the indirect way of funding this through bonds – which are purchased off the financial system which received an increase in their money supply from the Central Bank – but MMT claims that inflation isn’t materialising as it is horizontal transaction – no increase in net assets – however – If the monopoly of currency kicks in and there is no netting with debt – and money moves vertically – especially with the supply shock we might face if companies cant survive the locks down – inflation may kick back in
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Since inflation is visible as a monetary effect, models of inflation focus on the demand for money.
- This is where Economists see both a rapid increase in the money supply and an increase in the velocity of money if the (monetary) inflating is not stopped.
- Historically – both of these have been a root cause of inflation or hyperinflation
- increase in the velocity of money - central to the crisis of confidence hyperinflation model - where the risk premium that sellers demand for the paper currency over the nominal value grows rapidly
- This is where Economists see both a rapid increase in the money supply and an increase in the velocity of money if the (monetary) inflating is not stopped.
-
radical increase in the money supply in circulation - i.e the "monetary model" of inflation – increased Gov spending would achieve this
Where we are today - Economic environment of ultra-loose monetary and fiscal policies, along with commodity shortages, disrupted supply chains and globalization weakening is setting the stage for a potential surge in consumer prices
- monetary authorities – central banks - face pressure to keep interest rates low, capping the cost of servicing ballooned government debt – but they also want inflation to erode this debt too
- central bankers have printed trillions of dollars over the years in stimulus to achieve inflation.
- Theoretically – it should have worked – but it hasn’t – why?
- An increase in the money supply is one of the two causes of inflation – Monetarist theory – but after too much inflation - instead of tightening the money supply to stop inflation, the government keeps printing more – often out of perceived necessity
- Milton Friedman – “inflation is always and everywhere a monetary phenomenon” – may have been true back in his day – but not true today – pre-70s money was user demand responsive = only grew through trade – more a country produced, more it could export – leading to monetary influx of funds – leading to companies being able to charge more – so prices went up creating inflation – with it – growth of the economy but only between a bandwith of inflation
- Today – with Inflation being targeted and therefore manipulated from Central banks – it has become a function of behavioural psychology – the inflation trend is promised to us – and has been well delivered from the 70s all the way up until a few years ago – hard to get people to change their inflation expectations after the expectation and confirmation bias is there – but issue for central banks is it is very hard to raise inflation from under 1.8% to 2.5% through policy
- Anyone paying attention knows that Central Banks are trying to force inflation – i.e. the reduction in the real value of items valued in fiat currency – this for the financial system is something that can be profited off
- This leads to the other exacerbating causes – as behavioural is certainly one – monetary side to cover but quickly touch on behavioural –
- To make the most of your money – you would want to spend sooner and stockpile on the goods you can
- Infation is part of a complex system – i.e. has non-linear developments – therefore cant simply be increased from 2% to 2.5% or 3% - instead inflation hits a point it quickly spins out of control – jumps to 6%, then 9%, etc.
- The other is demand-pull inflation. It occurs when a surge in demand outstrips supply, sending prices higher.
- cause people to hoard, creating a rapid rise in demand chasing too few goods. The hoarding may create shortages, aggravating the rate of inflation
- But such a prospect is unlikely with such massive increases in unemployment – estimates by the International Labour Organisation show that Almost half of the world’s workforce is in danger of losing livelihoods from the shutdowns.
- This would create a deflationary shock – and this is dominating at the moment - There’s a collapse of demand
- Inflation expectations, as proxied by five-year, five-year forward swap rates, are near record lows in the U.S. and Europe.
- But now with Vertical Money – and if MMT comes into the picture – this demand shock can be negated
- Some asset managers have started to hedge their portfolios against inflation - started building an overweight position in commodities for the first time in four years, while going underweight bonds
- Why do this now and not in the GFC where there was economic fallout? Today there is a synchronized stimulus between monetary and fiscal policy - with monetary easing supercharged by fiscal spending - as opposed to previous responses during the financial crisis, when central banks cut rates and started QE (which never went to public spending), but governments also reined in budgets.
- Created a situation where some economists see commodity costs rebounding with an economic recovery after lockdowns are lifted and stimulus takes effect. Inflation could exceed 5% in 2021, and perhaps even reach 10% -- outcomes resembling the aftermaths of World Wars I and II.
- Mostly due to the monetary and fiscal expansion being aimed at putting money in the hands of people – will it succeed – who knows – but after lockdowns end and people are given stimulus - there will be some degree of pent-up demand
- Also - The further consequences of a potential unwinding of globalization as nations shore up their own supply chain and focus on local production – could lead to price shocks as well
- So a lot of this comes down to jobs and employment – if everyone is still out of work in 12 months – and Governments stimulus doesn’t occur at the rates or effect expected – likely no inflation –
- But if that loss of jobs leads to a loss of supply – prices may actually go up – especially if demand is stimulated from fiscal policies just a bit
Potential Economic fallout from large levels of inflation – at the national level
- Larger levels of inflation send the value of the currency plummeting in foreign exchange markets.
- The nation's importers go out of business as the cost of foreign goods skyrockets - Unemployment rises as companies fold.
- government tax revenues fall, and it has trouble providing basic services.
- Historically – Governments make it worse - The government prints more money to pay its bills, worsening the inflation
- But if the whole world is going through inflation – then it
Is it possible today – well, hard to say for certain, but it is a probability – Today’s environment is drastically different than it was in the late ‘70’s and early ‘80s when inflation was nearly out of control. Today, disinflation is the primary challenge central banks face, not inflation.
- Note - am not predicting it or saying it is an imminent likelihood – but if it were to kick off it would happen quickly - jumping from under 2% to 6, 8, 12% - better to be in a position before this happens
- World is massively indebted – massive trick though – money technically isn’t in circulation (i.e. printed) – in the financial system or owned to other governments – essentially not in your hands to affect prices
- Either of the previous may be the trigger – but the second effect is either loss of some confidence forcing an increase in the money supply – or a loss of all of it - destroying confidence
- Today’s markets depend on the artificially low interest rates - Raising interest rates wreck all of the debt in the economy
General information - What assets to avoid
- Cash – pretty obvious one – cash is a medium for exchange – not a great asset over the long term –
- Great in short term – important to have emergency funding -
- Bonds – with debt levels going up – and interest rates being low – if inflation kicks in then bad long term assets -
What assets can do well – ones with real values and with growth or their own inflation in price gains
- Commodities and precious metals – Silver – and also gold
- Growth assets – Property and shares - Reason – need to get capital growth of assets to offset rising inflation
- Borrowing for investments – could be a strategy that works –
Go through these next Monday in detail
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday. Last episode, we went through the combination of monetary and fiscal policy, larger scale of QE and the quick introduction to modern monetary theory. Today I was going to go through the recovery of the economy today, but will do more on modern monetary theory instead, as this is part of it and needs to be explained further before looking at the future working of the economy and how it is shaping up.
- Conventional economics has struggled to explain much of what’s happening in the world today –
- Examples - How can we have record low inflation and interest rates at the same time? How can some governments continue to increase their deficits and yet their bond yields go down and currencies go up? How Governments issue bonds with a 30-year negative yield as who would buy them?
- Economists always are looking for new theories to explain these antithetical phenomena but also to rectify the problems created by the original theories
- This has triggered the current obsolete Economic theories to change - to another economic theory based around the control of the economy– Governments haven’t had enough control over the economy, see? Too reliant on CBs
- Unfortunately – more control over the economy seems to always be the trend for answers to problems – rather than taking any of the blame for the previously imposed policies – they come to the conclusion they just didn’t have enough control over the economy to make their policies work properly – it isn’t the theories problem – but you and I – we didn’t behave how they assumed we would – and what they assume is the determinate on the theory and models
- hence – monetary and governmental powers need greater control over the economy - why there is a big push for Modern Monetary Theory (MMT)
- What is it: a theory that describes the use of a fiat currency as a public monopoly from the issuing authority
- What does this mean – well – this one simple statement is pretty telling -
- Fiat currency – currency issued by decree (can’t use others) – but now it can be treated as a public monopoly – remember everything public isn’t us – but by the issuing state – the government – means the government takes over control of the currency and with it – the economy
- normally the government's central bank role – but MMT is the merging of the central banks with governments
- What does this mean – well – this one simple statement is pretty telling -
- There is a lot of unpack in this concept – so to start - Where did it come from? - The basis of this theory of money argues that money originated when Governments attempted to direct economic activity – instead of other historical accounts where coinage as a medium of exchange was a spontaneous solution to the problems with barter
- The basic assumption of this whole theory is that fiat currency has value in exchange because of sovereign power to levy taxes on economic - activity payable in the currency they issue –
- The power comes from enforcement though – and through the nature of fiat – you cant use any other currency
- This theory though has its origins from a German economist Georg Knapp in 1905 - argued that "money is a creature of law" rather than a commodity – i.e. it only has value based around what Governments say versus the underlying purchasing power of a commodity – in most cases through history this has been Gold or silver
- at the time of this theory - the Gold Standard was what most countries used – form of metallism where paper money derived their purchasing power from the gold backing it – i.e. how many paper notes can you exchange for gold
- he argued the state could create pure paper money and make it exchangeable by recognising it as legal tender – so instead of having anything tangible backing it – the value of money could be anything the government said – but as long as they control it and can tax it
- This was the initial birthing ground of the Fiat system – but the Central banking system of today would seem foreign by Knapp’s days standards – Central Banks didn’t used to wield that much power – they were responsible for the nations funding mechanisms – but they weren’t in sole control of the amount of money or the cost – that was more free market based
- The basic assumption of this whole theory is that fiat currency has value in exchange because of sovereign power to levy taxes on economic - activity payable in the currency they issue –
- So Why now implement MMT– there are probably a multiple number of reasons – but the power of Central Banks has grown – IMO – beyond the Govs power when it comes to money or the economy – so now the Govs want to take some back – all in an effort to help us of course -
- MMT theory suggests that it can work based on the notion of employment - MMT advocates argue that the government could use fiscal policy to achieve full employment – create a working class - all through creating new money to fund government spending – Governments can spend to employ people – and raise the money themselves rather than tax
- But – based around this theory - the primary risk once full employment is reached is inflation - which they say can be addressed by raising and gathering taxes and issuing bonds to reduce money and the velocity of money in the system
- Under current Fiat – interest rates and inflation targets are the tools to help achieve full employment and economic growth
There is a lot of Theory to all of this – and the distinction between money is broken down into horizontal and vertical
- As we stand today in the western financial systems – when it comes to the government raising funds – this is known as horizontal transactions – the money moves horizontally between the issuer – the Government – to investors – like pushing a wad of cash along a flat surface – simply changes hands back and forward
- but these "horizontal" transactions do not increase net financial assets to the economy or Government – as whilst the amount of cash being passed to the Gov in exchange for a bond increases the available funds they have- it is offset by liabilities – this is a problem for Governments – and macroeconomic theory
- Think about their funding mechanisms – taxation or debt – with Debt – i.e. bonds – they issue $1bn in bonds – they get $1bn in cash in return – but has the net balance sheet increase? They now have $1bn in cash (assets) but also owe $1bn in debt to the entity that bought that bond
- Therefore - MMT adherents state that the balance sheet of the government does not include any domestic monetary instrument on its asset side - as it owns no money - All monetary instruments issued by the government (bonds) are on its liability side and are created and destroyed with spending and taxing/bond offerings – horizontal transactions with no net benefit to the economy at large
- but these "horizontal" transactions do not increase net financial assets to the economy or Government – as whilst the amount of cash being passed to the Gov in exchange for a bond increases the available funds they have- it is offset by liabilities – this is a problem for Governments – and macroeconomic theory
- But this is where in MMT - "vertical money" comes into the picture – as now that cash raised from this bond can be passed down to us – vertical is this money entering circulation through government spending
- Keeping with the helicopter money policies – say that you have a fleet of helicopters – all hovering around – they pass money and debt instruments to one another – so they are moving horizontally –
- Essentially what QE has been doing – keeping the money at 1,000 feet above our heads and changing hands
- But now – those helicopters now drop this money onto us in the form of government spending
- Under the current Fiat system – the ability of Taxation and Government giving a currency the sole authority of legal tender enables them the power to raise debts (both for us borrowing in mortgages and them in bonds)
- Effectively - the value is done so through having demand through monopoly – we cant use anything else –
- In addition, fines, fees and licenses create demand for the currency
- All of these along with private confidence and acceptance of the currency, maintains its value – in the case of petro dollar – allowed for artificial demand through oil purchases in USD
- How does a government create money? Or have it as vertical money in the economy
- MMT argues governments mustspend in order to achieve full utilisation of an economy’s resources - similar to Keynesianism
- The first counter-intuitive point MMT makes is that government spending comes first and tax revenue flows from that.
- This can be tough to get your head around – brings up chicken or the eff debate – but there technically has to be money already in the economy before you can tax that money
- the first step is a government createsmoney by employing workers, paying pensions, unemployment benefits or spending on infrastructure, etc.
- So – due MMT theorist maintain that if government can issue and pay distribute its own currency at will rather than raising through debts – is can maintain the same level of taxation relative to government spending (the government's deficit spending or budget surplus) and all of this can be used as a policy tool that regulates inflation and unemployment - and not a means of funding the government's activities by itself
- But this requires governments to spend responsibly – have fiscal control – which is the fallacy of this theory – what Government in history has ever done this long term? Sure, one or two terms of leaders have managed this – but on average – they have not
- Especially if they want to change the horizontal to vertical - remember MMT labels any transactions between the government, or public sector, and the non-government, or private sector, as a "vertical transaction"
- But the justification of this is that if the government isn’t injecting newly created money into the economy, the only other way it can grow an economy is by people borrowing
- They say that as people borrow more and more, the only way growth would be supported is through lower and lower interest rates, courtesy of central banks - But at some point, people reach their borrowing limit and then it’s up to governments to create the growth – this is narrow minded thinking – what happened in the economy before the 1970s – or even 1913 – was there no growth in nations? Well there was – at massive rates compared to today – what created it? Technological innovation and free market ideologies – prior to this there wasn’t much growth – as the central powers of governments controlled everything – but from John Locke and the enlightenment era – saw a massive boom in not only in the economy but also quality of life – remember we are the economy – not a government
- The theory goes on - since it’s governments that create money they can never be insolvent, which means they are never financially constrained
- But they go on to state that they should be constrained by the resources available in the economy – which is the people – our labour – future productivity – but with higher levels of government spending – will productivity go up or down?
- The USSR had massive government spending – so did Mao’s china – issuing their own currencies - but it wasn’t until they gave back the productive ability to the people were actually able to feed themselves for a change
- Economists who like this theory - state that deficits don’t actually accumulate to become a burden on future generations with crushing interest rates or catastrophically weak currencies –
- The evidence - they say look at the US and Japan for confirmation of that – The only reasons they haven’t been paying it off is that they keep raising more debt to fund it – seems like a poor argument – so what? Governments just keep racking up the debts?
- But the justification of this is that if the government isn’t injecting newly created money into the economy, the only other way it can grow an economy is by people borrowing
- Effectively - the value is done so through having demand through monopoly – we cant use anything else –
- Keeping with the helicopter money policies – say that you have a fleet of helicopters – all hovering around – they pass money and debt instruments to one another – so they are moving horizontally –
In summary - MMT's main tenets are that a government that issues its own fiat money:
- Can pay for goods, services, and financial assets without a need to collect money in the form of taxes or debt issuance in advance of such purchases;
- Cannot be forced to default on debt denominated in its own currency;
- Is only limited in its money creation and purchases by inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilized at full employment;
- Can control demand-pull inflationby taxation and bond issuance, which remove excess money from circulation (although the political will to do so may not always exist);
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Does not need to compete with the private sector for scarce savings by issuing bonds.
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If governments had spent responsibly on doing what they should – the debts would have been quickly paid off – and we would be left off in a better position to cover any shut downs
- Instead – they continue to tax us to death – and eat out savings away with forced inflation – so when they choose to shut the economy down under enforcement of fines which would destroy businesses further – we as the economy are further trapped into relying on them – a lot of people don’t want to have to do this – see it in USA with 17m people all of a sudden out of work and relying on food banks to survive – lining up for 6 hours to get basic needs – whilst Nancy Pelosi (speaker of the house) is on a talk show talking about what is getting her through – a freezer full of $13 a tub ice-cream in a $24k fridge set up – as she thinks this make her relatable
- These are the sort of champagne socialists who come up with these theories – wealthy individuals in power
Government logic – our policies stuffed the economy – so we need more power to fix it – Repeatable cycle that creates so many problems
Next episode – continue to look into this – How this is going to be practically done – involves the merging of the central banks and Government Treasury – also – look at the increase of Crony capitalism – large companies in debt get bail outs – but most get to remain open –
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday Edition. This weeks question comes from Gab.
“I had a question regarding a leveraged ETF from Betashares called GEAR. It is designed to offer around 2:1 exposure to the ASX 200, with 0.8% management cost. Looking at the long term growth and dividends, it seems like an excellent way to get exposure to the market and bank in around 20% franked divided (at 107% ??). Also no margin calls .... Am I missing something? It seems too good!”
Not personal advice – Just general information
GEAR
- The Fund is ‘internally geared’, meaning all gearing obligations are met internally by the Fund.
- How this works - combines funds received from investors with borrowed funds and invests the proceeds
- The Fund’s gearing ratio (being the total amount borrowed expressed as a percentage of the total assets of the Fund) is managed between 50-65%
- This is the LVR - rebalance the LVR to the middle of the range (i.e. 57.5%) whenever it reaches either the minimum 50% or maximum 65% threshold
- Current gearing ratio – 60.1% - As at 27 April 2020. Calculated as Fund borrowings divided by Fund total assets. Current Gearing Ratio is as at start of the above date and can be expected to vary throughout the day.
- Current gearing multiple – 2.5 - Represents the Fund's approximate exposure, for the above date, to movements in the Australian share market (as measured by the S&P/ASX 200 index). For example, if the Fund's gearing multiple is 2.1x, and the S&P/ASX 200 index goes up 1% that day, the Fund would be expected to go up approximately 2.1% that day.
- A LVR ratio of 65% means that for every $1 invested, an additional $1.86 is borrowed to invest (providing a gross exposure of $2.86 for every $1 invested)
- What they invest in – passive investment strategy - ASX 200 Index
- broadly diversified share portfolio consisting of the largest 200 equity securities on the ASX by market capitalisation (as measured by the S&P/)
- designed to provide leveraged exposure to a passively managed portfolio of broadbased Australian equities. The Fund will gain its Australian equities exposure by investing in the constituents of the S&P/ASX 200 Index, weighted by market capitalisation
- How it operates – they use just one lender to gear - Deutsche Bank AG as the Lender to the Fund. At the time of review, the Manager has disclosed the Fund's borrowing cost as 1.85% p.a. – but their underlying costs are lower – MER at about 0.8%
- At the moment – a lot of gearing funds are cheaper – massively low cost to borrow due to lower interest rate environment –
- That is one thing to watch out for – if funding costs go up, the MER goes up quite a bit – these types of geared funds were sitting at between 3-6% not that long ago – so that would reduce future gains
- Price movements – was at $94 – price currently at $13.76
- Did hit $10 at the bottom.
- But unlike margin loans - GEAR gives you the opportunity to make magnified gains when the Australian sharemarket rises, and vice versa.
- Income yields – do look good at the surface level –
- Good dividend levels and also franking levels – but this is due to the gearing of the funds
- 12 month distribution yield – 16.7% - but grossed up including fanking credits = 24.4%
- Figures based at 31 March 2020. Yield figures are calculated by summing the prior 12 month net and gross fund per unit distributions divided by the fund closing NAV per unit. Franking level is total franking level over the last 12 months – have the disclaimer of Past performance is not an indicator of future performance.
- They say their level of franking is 107.6% -
- Looks a little Skew due to the Gearing –
- Break it down – they are a passive index fund – in the ASX200 – what is the ASX200 dividend yield –
- What is the franking?
- Now apply the gearing ratios – 2.5 times the funds invested - It does amplify the incomes –
- ASX200 – about 5% p.a. = close to about 13%
- Franking – ASX has about 62.42% franking as well – so grossing this up allows for additional flow throughs for distributions
- comparisons in distributions –
- First of 2020 - $1.02 – 12.25% yield based around the lower price
- 2019 - $1.76 distribution – 13.43% yield
- 2018 - $1.65 distribution – 15.83% yield
- 2017 - $1.37 distribution – 15.27% yield
- 2016 - $0.94 distribution – 9.19% yield
- It is calculated as the difference between total Fund return and NAV return. NAV return is the change in the Fund's NAV price. Total return is the NAV return plus reinvestment of all distributions back to the Fund. Past performance not indicative of future performance.
- Good incomes – but the total returns need to also be looked at –
- 3m – negative 54.39% - 1y is about negative 45% - but the average annual return is -9.01%
- These include the distributions though – quoted returns = Returns are assuming income is reinvested – and does not take into account tax
- Returns have two components – incomes and growth = total return -
- Capital growth versus income –
- Distribution on income – taxable – but do get the franking credits to offset this – so in a lot of cases – taxable incomes of about $40k and above would result in net 4.5% tax payable
- Exchanging growth for income which gets taxed
- Reduces the yields a bit when breaking it down -
- Is it a good time to buy? It is all relative – good to time buy compared to 3 months ago? Yes
- 3 months from now- maybe not -
- Would caution against it for now – likely the ASX isnt through the woods –
- In addition – the growth returns on geared funds at this stage do have some longer term upside
- But overall - When it comes to geared funds – they are ones that do almost need to be timed to work well –
- Typically invest when the market is low – avoid buying when funds are slightly higher
- The returns are amplified but the issue is that the losses are amplified
- You lose 50% - you have to make 100% return back to original value
- Whilst geared – one or two bigger declines in a decade – which can happen – wipe out potential growth returns –
- As can be seen now – has a negative return since inception – and this includes the distributions being reinvested
- Also – if the funding rate costs do go up – could result in lower payments of distributions
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. Credit cards and pay day lenders are on the rise, as some of those out of work are becoming strapped for cash. Today, we look at this further but also look at some alternative strategies to avoid the debt traps. We’ll also look at how to use this as a chance to get spending habits back in line.
First – situations to avoid getting further into debt
- High interest loans are being offered to people via text messages - offering short-term loans to get them through whilst they are unable to work
- Known as pay day lending – but also offering short-term high-interest loans
- Obvious issue with this is that these loans trap vulnerable people in a debt cycle that is difficult to escape
- No doubt – a lot of the population is going to suffer financial stress –
- The National Debt Helpline says almost 10,000 people have called for help during the past month, but demand is so high that some calls are not getting through.
- "A lot of people who are calling us are incredibly stressed and really worried about how they're going to put food on the table," said Katherine Temple from CALC, which helps to staff the helpline.
- Callers' problems include credit card debt, trouble paying personal loans, mortgage arrears and other household debt.
- Welfare organisation Good Shepherd, which administers a scheme offering no-interest loans of up to $1,500 to people on welfare, says it has seen a significant increase in enquiries from people who have never needed emergency financial help before.
- They sound enticing – you are out of money and you get messages offering the promise of quick finance with limited requirements – just click the link and get the money you need now – Up to $30k paid within the hour
What are these loans and how do they operate -
- Small Loan - Loan Amounts: Minimum $200 to Maximum $2,000
- Terms: Minimum 16 weeks to Maximum 50 weeks
- Costs: Up to 20% Establishment Fee charged upfront plus a monthly fee up to 4% based on a maximum Annual Percentage Rate (APR) of 98%
- Example: Loan Amount of $1,250 over 28 weeks repayable weekly - $1,250 (Principle Amount)+ $250 (20% Establishment Fee) + $350 (fees based on APR of 98%) = $1,850 total repayable in 28 weekly instalments of $66.07 - $154 p.m.
- Medium Loan - Loan Amounts: Minimum $2,005 to Maximum $3,000
- Terms: Minimum 39 weeks to Maximum 52 weeks
- Costs: $400 Establishment Fee plus fees based on a maximum Annual Percentage Rate (APR) of 48%
- Example: Loan Amount of $2,500 over 52 weeks repayable weekly - $2,500 (Principle Amount)+ $400 (Establishment Fee) + $760 (fees based on APR of 48%) = $3,660 total repayable in 52 weekly instalments of $70.38 - $305 p.m.
- These loans result in additional costs having to be covered for funds today – at a more expensive rate than what those if they are already in financial trouble can afford
- They have come under legislation in the past few years - Last year, one payday lender became the first target of the ASIC new product intervention power, after it charged repayment rates of up to 1,000% via various fees – such as missed repayments
- To avoid this – some people are putting additional expenses on their Credit Cards – racking up an additional bill for this as well to be paid back in the future -
- If people were already in debt, would be getting further into it
Debt collectors and bankruptcy
- If a debt collector is chasing you for money, you do have some legal protections under consumer laws.
- Amid fears that large numbers of people could be declared bankrupt over unpaid debts due to shutdowns, the Government has temporarily relaxed some of the rules in this area.
- It has changed bankruptcy laws so that creditors cannot apply for bankruptcy over amounts of less than $20,000.
- The new rules apply for a period of six months from March 25.
- People who owe money will have up to six months to respond to a bankruptcy notice before bankruptcy proceedings can take place.
What other Financial options are available during COVID-19
- Australian banks are offering some customers the option of deferring mortgage repayments for up to six months, as well as forgiving fees and restructuring other types of loans.
- At the same time, people in financial crisis can access up to $10,000 of their superannuation savings before July 1, and a further $10,000 after that date.
Other option – If you don’t need to do it – don’t take money out of super – i.e. you aren’t in debt or are struggling for income
- But say you do need spending – then you can use it – instead of pay day lending – but then SS back to super
- Avoid the massive upfront costs – high interest rates and also save tax on the repayments
- Or – One of my friends had some CC debt – met the requirements but got a new position
- Made me think of a strategy for their situation - Use super access as eligible as they were made redundant before getting a new position – then pay off CC debt – But – only if he was going to SS the funds back
General illustration only – might not work for you
- Example - $10k on CC debt – paying 18% of interest each year – and having trouble paying this off –
- If you wanted to pay this off in 12 months – would be about $940 p.m.
- If you are on say $70k p.a. – net income PM is about $4,615 – so would leave you with $3,675 p.m. after repayment –
- Option - Withdraw super – $10k – if you meet the requirements – and then SS the money back in to super over 12m
- SS $11,764 - $10k net after 15% - replace the money
- Net result – save yourself about $1,244 in interest payments – save yourself about $4,083 in tax personally -
- Still have to pay 15% tax to super – so net tax about $2,800
- Net income would be $300pm more than trying to repay the CC loan personally
- Obviously the returns for super cant be forecasted – but as long as the funds can be SS back in soon – market rebounds can help to be avoided to be missed
This can be a time to re-address spending - and get out of debt – but making sure you don’t get back into debt - What are the elements that help?
- Regaining control – Finances shouldn’t control you –
- Having control/certainty reduces stress – Knowing what you are in for helps, but being able to control it works better
- Tail wagging the dog – Financially stressed people spend to feel better
- Have $10k in CC debt, so spend $300 on a night out to make it better – spending gives control
- But you can get control over the debt – forming good habits and increase certainty
- What you can do - Endowment effect – Put more value to what you already own
- Turn it into thinking about Keeping your money – put a premium on your spending habits
- Essentials – 0% - no need to put a FV on this – unless you think a porche is an essential
- Non-essentials – Gross the price up by a factor:
- Example - New TV is $3,000 – Life of TV is 10 years –
- Earn 7% on that over the same time - Is the TV worth $6,000?
- Opportunity cost - To part with your money - the item better be worth it
- Have to change habits though - Ways to solve – Break Three timeframes to focus on
- Turn it into thinking about Keeping your money – put a premium on your spending habits
Now, medium and longer terms – Build the basics now
- Short term – What you can do right now – Gaining control
- Get disciplined – Stress comes from the unknown – Jocko says – Discipline equals freedom
- budget – Get to know what you are spending, and when you are spending it
- Set aside money to cover this – Aim to have your own left over as well
- Pay yourself first – Getting out of debt first – then building wealth for your future –
- Direct debits – Once you know your costs and incomes, you can pre-plan – set and forget to remove the stress
- Get apps to track it for you
- Very simple to do – can be a harsh reality – ‘hard truth’ – if your income has gone down and your spending was meeting your income – can be a good chance to lower the hedonic treadmill – unpleasant but would be beneficial long term
- Example - Once you are covering your bills with ease – Managing to get ahead – Ready for next stage
- Get disciplined – Stress comes from the unknown – Jocko says – Discipline equals freedom
- Medium term – Once you are feeling less stressed – In control you can plan for the future
- Start planning – Saving targets to be achieved need longer term planning
- You need to have covered the basics before moving on to stage two
- Examples – Wants: Holidays, new cars, home deposits
- Long term
- Start Investing – Long term goals normally include having debt paid off or generating a passive income
- Long term goal of reducing financial stress for your future.
- All three are important
- The long term will become the short term if you aren’t careful
- Short term - Stress occurring now – Meeting the bills day to day (ultimate stress and priority)
- Stress that will occur in a few years – May not be at the front of mind, but when it comes time that you need a new car
- Stress that will occur at retirement – One of the long-term consequences of not planning is having stress for the rest of your life financially
- Get to 65 – Don’t have enough to live off – Well you are back to the short term – day to day trying to get by
- Might have a nice car, or house with a lot of debt – but you will need to work until you are 80
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition. In today’s episode we look at what the future of the economy looks like?
First – I want to say a massive thank you to everyone who has given great feedback and your support – many of you have reached out – great to hear you are enjoying the content – so thank you – really great to hear that many of you are enjoying it
Before we get into the content – quick recap on the previous two episodes -
- First episode two weeks ago - went through how we are the economy –
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Last week – went through numbers being used as justification for these lock downs – These numbers sound very scary –
- Recapping on some numbers- but this time from the Covid shut downs - What other numbers sound scary – In Aus - Three million people have lost working hours and 390,000 have lost their jobs due to the shutdowns – 26% of the working population have been directly affected to date from the shut downs – 1 in 4 - Australia’s working population – 13m – 62% Full time – 38% casual – Underemployment – one of our major issues – even prior to the government shut downs
- What does unemployment and underemployment create – beyond the lower economic output – but also deaths - Study and Numbers come from – meta analysis – Study: losing life and livelihood: systematic review and meta-analysis of unemployment and all-cause mortality
- For every 1% unemployment – 5,300-10,000 deaths – so if unemployment goes up by 10% - may be up to 100,000 deaths - Drug overdoses, despair, alcoholism
- Scaling for population – big assumption we are similar – but lets say unemployment goes up by just 3% - about 2,400 people who will die in Australia – for each year that they cannot find work
- Outside of our first world nations – what is going on in the 3rd world?
- Potential of massive amounts of deaths – Especially in India – Not from Covid – but Starvation is their major concern right now – They have about 15k active cases and 680 deaths – in a country of 1.3 billion – so 0.001% case rate
- Remember – we are the economy – regardless of the function – even if you are doing daily jobs in Mumbai
- Over 7000 Indians die of hunger every day – likely to go up massively if people aren’t allowed to work – no social safety net there
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Why did the Indian prime minister do these shut downs, even though more people die in the streets of Mumbai of starvation related illnesses every day when compared to coronaviruses – WHO and World Bank loans – had to do it to meet conditions for $6bn of funds to be leant – question: will this go to the starving people? Or remain within the oligarchic system India has going on? Who knows – but personally doubt it
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There is the term being thrown around of unprecedented – but only in relation to the virus - The response is the thing that I find to be unprecedented – but in all media reports it is covid19 that is the unprecedented event – that is this is the most dangerous illness – but with no evidence to show it –even with the skewed numbers of deaths – and historically no pandemic or loss of life has caused the markets to panic in this way, or governments to shut down our way of life – and with it the economy –
- But What is also unprecedented is the extensive responses by Governments and Central banks – these responses whilst unprecedented in their implementation today – were already in talks within the Central banking and global economic communities – was reading about it all and covered it 8 or 9 months ago on the podcast - Check out the episode from September/October last year – one of the first Episodes: We are entering new economic and investment territory – An introduction to QE, what does it look like and what does it mean for investments?
Regardless of the cause - We are living through transformational times – new environment for finances, investing and our economic way of life To get that – run through main components of the market economy going forward – what is being implemented -
- Few components – but in summary – the Permanent QE, also low interest rates and moving towards cashless economy, additional Fiscal expansion through Government spending, additional direct payments to the population in an effort to help boost demand through Helicopter money policies – these are all now playing out
- The only thing that hasn’t that was being covered last year was the Abandonment of the dollar – to be replaced with the IMF SDR – new reserve digital currency replacing this –
- But with oil demand collapsing – the petrodollar system may be on its last legs given the pressure of government shut downs in addition – new financial reset may be coming soon – especially with the levels of the debt economy being driven up further right now
Looking to Australia and the RBA – what are they doing – focus on two broad issues – current outlook for economy and the recovery = today – look at the immediate outlook for the economy in relation to the overall components to the new market economy
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First – lets look at the economic indicators which are used as a measurement for the economic health of a nation -
- GDP - The result of both the restrictions and the uncertainty - over the first half of 2020 RBA expecting the biggest contraction in national output and income witnessed since the 1930s – great depression
- Putting precise numbers on the magnitude of this contraction is difficult, but our current thinking is along the following lines: GDP fall by around 10% over the first half of 2020, with most of this decline taking place in the June quarter
- Employment - Total hours worked in Australia are likely to decline by around 20% over the first half of this year. The unemployment rate is likely to be around 10% by June
- Inflation - expecting a significant decline in the June quarter. The large fall in oil prices, combined with the introduction of free childcare and the deferral or reduction in some price increases mean that it is quite likely that year-ended headline inflation will turn negative in June. If so, this would be the first time since the early 1960s that the price level has fallen over a full year.
- GDP - The result of both the restrictions and the uncertainty - over the first half of 2020 RBA expecting the biggest contraction in national output and income witnessed since the 1930s – great depression
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Major problem for central banks – debt deflation – covered this as well – but take numbers with grain of salt – modelling never accurate -
Essentially – the economy and a large chunk of the populations livelihoods are going to be ruined - so There is a lot of cash being thrown around to solve this – where is this coming from – Permanent QE policies to fund the Deficit spending – which is facilitating the helicopter money policies – But also need to have lower interest rates -so governments can continue this – which reduced funding costs – along with moving towards a cashless economy to avoid a further deflationary spike
- First – Permanent QE – The funding arm for deficit spending by Governments - as is facilitated through QE – bonds issued by Government are bought up in the secondary market – allows the Gov to continue to raise funds through issuing bonds = that money can then be distributed out
- RBA Purchases of government bonds had been scaled up significantly. As a result of these purchases, central bank balance sheets had expanded rapidly in March.
- Central banks had also sought to accommodate increased demand for cash and support market functioning. They had increased the provision of liquidity to the financial system by increasing the size and extending the maturity of their regular open market operations. Many central banks had also sought to improve market functioning – particularly of key bond markets that provide important pricing benchmarks – by directly purchasing securities in secondary markets.
- The Bank had purchased in aggregate around $36 billion of government bonds in secondary markets. This had contributed to generally improved functioning of these markets, including a reduction in bid-ask spreads and achievement of the three-year yield target. Furthermore, the Australian Office of Financial Management (AOFM) and state and territory government borrowing authorities had issued securities, consistent with market conditions having improved.
- Alongside these purchases, the Bank had injected around $50 billion of liquidity into the financial system through its daily open market operations to support credit and maintain low funding costs in the economy
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The lowering of rates is also very important – This is the costs to this method –
- If it was going to cost governments 10% p.a. to deficit spend in interest – would spiral very quickly –
- But if it costs them 0.25% or 0.1% in some cases – is maintainable in the longer term –
- Especially if through the redistribution policies of funding – can help to get inflation back up to 2-3% as the RBA target sits –
- If it was going to cost governments 10% p.a. to deficit spend in interest – would spiral very quickly –
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This way – the real value of repayments over the life of these bonds is actually negative – Paying 0.25% but the value of the bond decreases by 2.5% p.a. – means that when you have to repay the bond to the investor in 50 years – have to pay less –
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Example – Per $100 of debt (bonds issued) – You would have to repay $29 in 50 years’ time – you would have had to pay $12.50 in coupon payments – but discounting this – to todays value over 50 years = $7 – so in total – about $36 is the cost for raising $100 today – so you walk away 64% better off being a government doing this – assuming you can get 2.5% of inflation
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Now – this seems like an awful deal for anyone who buys these bonds, right? Like a super fund or investor- you would be correct – but that is where the RBA comes into it with QE – as they are buying these bonds in the secondary market – as when you can print money to buy these bonds – like the RBA can – any funds you print to buy debt are profits – so the RBA prints say that $100 in the previous example- they then can make a further $12.5 in nominal income off it over 50 years – free money for them - If you could print money to buy anything paying you a positive return, wouldn’t you?
- If you needed to work for your money – and you had savings – probably wouldn’t do it – but if you could print billions and these are the only investments that you can buy = free money
- And if you are the government – who can spend today in your political term – at a future discount of 64% - good deal –
-
But all of this is bad for us – well unless in the short term you are a recipient of the helicopter money policies – go through in a second - we were already fast reaching the limits of monetary printing - markets are still trying to work out how to price that in
- Past model – print money - Get GDP growth through aggregate demand increase – mainly consumption
- Therefore – due to velocity of money (turnover) – get multiplier effect – more times money changes hands the bigger the effect = $1 might lead to $3.2
- Trouble is that turns out inflation is mostly driven by behaviours/psychological phenomenon
- GDP growth, inflation, productivity are all missing in action despite 9 years of declining rates and 6 years of monetary doping and financial engineering the world over.
- If you increase money supply – money needs to go somewhere – sometimes through existing off investment managers or pension funds or new bonds issued from the bank
- RBA will give CBA $1bn of newly printed money – in return gets CBA Bond to the value of $1bn with a coupon
- Bank uses new money as deposits to fund further lending – leading to more economic growth through increased consumption – then we are meant to get inflation –
- If you increase money supply – money needs to go somewhere – sometimes through existing off investment managers or pension funds or new bonds issued from the bank
-
Found to be very ineffective – UK QE = £375 billion of new money just to create £23-28bn billion of extra spending in the real economy
- Over time reduces growth if money went into mortgages – lowers spending due to larger loans to repay as borrowing capacities rise as rates drop due to this policy
-
Where does this money go? Well into hard asset prices going up – making it harder for the average joe to get into property for instance – but it doesn’t create inflation – as there is no velocity to the money
-
Even before this – there were No positive outcomes from QE- leading falling credibility of Central Bankers, as they ran out of policy space – but in an ‘emergency’ – people will be desperate for the money and also distracted to what is going on behind the scenes
- But given the economic crisis – they now are the saving heroes – rather than provenly failed controllers of the monetary world
- Yet - Australia – Lowering rates – calls for QE – Quantitative easing – printing money for liquidity
- Officially - known as large-scale asset purchases through using newly created money
- Type of monetary policy – an extreme one – where a central bank creates a policy to buy predetermined amounts of government bonds or other financial assets in order to inject liquidity directly into the economy
- Purchase of bonds and assets – starting to see the mandate expanded in the USA – Corporate debts – in Japan and SNB – into ETFs – i.e. the share market
That is where the new evolutionary phase of combining QE, deficit spending, and ‘helicopter money’ – is the nuclear fusion of monetary and fiscal policies – With helicopter money – well imagine a helicopter – no one by the police thermal imagine people for social distancing – but to drop cash on the population – this is the combination of monetary and fiscal policy now that is being implemented to create the velocity of money and as they are hoping – get some inflation back
- Helicopter drop is an expansionary fiscal policy that is financed by an increase in a economy's money supply – I.e. deficit spending through QE- it involves printing large sums of money and distributing it to the public in order to stimulate the economy – demand side economics – but if supply is shut down – does it work? Well for business allowed to remain open – it does – go through this side to the economy next FF episode -
- Funded through deficit spending – so Gov issues bonds to fund spending – more debt every year
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Money to spend/buyers of bonds are the Central Banks by more QE – in perpetuity
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Trouble is that there is a lot of evidence that this policy type won’t work – well – for our economic benefit anyway – just leave with money to pay back for future generations – but based around the basic calculations – governments can benefit and so can central banks – as when you can create money to buy up ‘assets’ – even if they are debt instruments – you make the coupon rate – regardless of how small it may seem – when talking in the billions and trillions – is a lot of money
- But extending this – beyond what the RBA is doing – what other central banks are doing is buying up debt in companies or the equity in those companies- this is not he free market – but what a soviet Russia would be proud of
- Next FF episode – look at the potential recovery along with what the nature of the economy might look like at the top end – i.e. large companies versus smaller business –
Sources –
https://www.rba.gov.au/monetary-policy/rba-board-minutes/2020/2020-04-07.html
https://www.rba.gov.au/speeches/2020/sp-gov-2020-04-21.html?fbclid=IwAR2GrfTiT5UxHRuYwwXR7DoM7Kiiu2RwsDypO8hAiZ3GA4zNxgj7OyE29Iw
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition. This weeks question comes from Scott in Texas.
“Thank you for your steady course on the social and resultant economic collapse from Govt reaction to the covid 19 virus. I am just as dismayed as you that we, in a democracy, are letting our lives be dictated to by a small majority of politicians using fear to control the masses. The math of who gets the virus and death rates just do not justify the controlling measures happening all around us. I keep asking myself, who is profiting and how are they pulling the puppet strings of control???”
This is an amazing question – and one personally I have been looking into for the past few months
- So many levels to this – As the saying goes- never let a crisis go to waste – and is very applicable now – many different organisations and groups that are gaining some benefit from this – either additional profits, additional influence or legislative control – you can disagree about the motives all that you want – but the end result is the same – the public has lost a lot of personal freedoms - whether people are willing admit it or not – whether it is for your protection or just a cycle through history repeating – doesn’t matter
- The narrative that this is the new normal – that the governments get to determine our freedom of association and social behaviours
- We will go through those profiting out of this – along with those enforcing the control and benefiting out of this economic collapse –
- but also how to identify the same pattern - what we can do to avoid falling prey to this same repeating cycle through history – as they have been happening for thousands of years – it is just the education on the historical events where these same patterns play out is completely void unless you take time to look
When it comes to this in quick summary of how it plays out before going deeper into it -
- First step is to have an argument by authority made – you need some justification
- The next step is having the public opinion on your side –
- This is done through a number of ways – First step is to create hype or sensation around an event –
- But the most important is to use the argument by authority to instil fear – do as we say or bad things will happen
- The next step is the enforcement – through legislative means in conjunction with punitive fines as a method of enforcement
- These three steps all happen in such quick succession that I wouldn’t really call them steps – but simultaneous actions that don’t work without one or the other – but helps to break them down to explain
- Final step is the normalisation – this is one of the more important parts – as once legislation passes – and it becomes the new normal – it allows additional control in perpetuity
How are they pulling the puppet string - Where did the initial modelling and recommendations come from for shut downs –
- Very rational came from the Imperial College COVID-19 Response team – along with the WHO Collaborating Centre for Infectious Disease Modelling – built models based around the assumption of this being the most serious respiratory virus since the 1918 influenzas – modelled deaths if nothing was done, versus if we shut everything down – this is your argument by authority
- Problem with modelling – all assumption based and working off inaccurate data – but the whole flattening the curve narrative is build around the modelling from this –
- But other Drs, virologists and epidemiologists have come out that the flattening of the curve prolongs the spread and creates more deaths in total due to the time span – no way to be sure – but what we can look at is the modelling
- Dr Knut Wittkowski – Former Head of the Dept. of research and design & Biostatistics - Rockefeller University – models are worthless – if your inputs for models are flawed – the outputs will be off by orders of magnitude – “from the very beginning I never believed in them, because it didn’t make any sense. They have put out models with no relation to reality and then you can prove anything you want, or even the opposite. We have no idea what these models are based on, I can see no information on what these models were built around beyond that they started with M and ended in Odel. No or very few epidemiologists were ever consulted, it was all virologists and they aren’t trained or really understand the concept of complex non-linear systems that drive epidemics and that you have to incorporate this in your thinking to make sense of the data’
- It reminds me of the climate change modelling – where no negative feedback loops were incorporated into the models – hence you get linear growth in temperature – but the climate is as complex as the human body – it is a complex non-linear system – which models built around basic assumptions will be orders of magnitude off on
- Yet – the whole world had to be shut down and enforced through Government decree – based around this flawed modelling
- Side note – done many episodes on a trauma-based society – and how control is implemented from there –
- Episode was called - Never let a crisis go to waste - Why to watch out for proposed economic solutions after a financial collapse - Danger of Authority figures – Milgram experiments - The Milgram experiment on obedience to authority figures- in particular – those wearing a white lab coat – they don’t even need to be a scientist as long as they claim to be one – but scientists – again – only the ones that fit in with this being the worst threat humanity faces – beyond the other scientists that say man made global warming is the worst threat humans face – but when it comes to Covid – I have found just as many leading scientists and experts who say that it is nothing worst than the common flu – who do you believe? This is the hard part – but the governments and media sure have selected the ones that they believe
- There is a pattern here – same scam that has been perpetrated on the public for thousands of years –
- Do what we tell you or everyone will die – goes along those lines
- Back in the ancient Mayan days – the priest class knew exactly when a solar eclipse was coming – Maya Calendar can still predict solar eclipses to this day – the ruling class used to convince the citizens that next week the snake god Kukulkan was going to swallow the sun and we are all going to die – unless we perform these rituals to protect you – if we don’t do this ritual then the sun will be gone forever and we are all going to die – lone and behold – the next week comes around the solar eclipse starts – rituals start and the snake god lets go of the sun and the rulers say ‘look, we saved you’
- I know this sounds ridiculous – as it is – but is it any more ridiculous to worship models with no base to reality? To trust with impunity what the experts tell us without actually looking ourselves?
- Today – the rituals are the shutting down of the economy and social distancing – and the priest class are these scientific models
The next step of getting the population to consent – If the first step has been done correctly – this step become easier
- This step is all about having the public opinion on your side – done through using the argument by authority in conjunction with public figures and the media spreading it
- This is done through a number of ways – First step is to create hype or sensation around an event –
- But the most important is to use the argument by authority to instil fear – do as we say or bad things will happen
- Fear – fear is the key driver of population consent – people will give away freedoms for safety
- Last week – went through numbers being used as justification for these lock downs –
- These numbers sound very scary – like NYC with deaths now jumping above 10k deaths – but this was in a revised count – ‘revised’ as this toll now included 3,778 people who were not even tested for covid19 but were to presumed to have died from it – could have been anything but due to having
- Ask yourself the question – why try to inflate the numbers? Honestly, why? Even the Governor was playing into this – along with the next story
- Also in NYC – the mass graves in Heart island – where media was reporting inmates buying coffins in mass graves – but no context was given – is this unprecedented? It sounds bad – implying NYC had run out of graves due to so many people dying
- First – practice has been occurring for 151 years – as since 1869 prison labour has been used to bury unclaimed or unidentified New Yorkers– even since 1980 – 68,955 people have been buried there in mass graves by inmates around 33 per week
- But these numbers have gone up recently – are there more people dying? Or did NY change the time to claim a body from 30 days to 2 weeks – well they did – in a time travel restrictions and limitations on funerals have been enforced - so these same statistics cannot be reliably used as a comparison
- Due to the changing of measurements or benchmarks being used – and also giving these numbers out of context – they are seeming scary – even in deaths in Italy, Ireland and Germany – but the official reports do say that if someone has corona and dies – they will be added to corona deaths
- All of this makes the problem seem much worse than it is – went through the testing – not actually testing for a virus – just RNA sequence which can lead to false positives due to massive error – even with the PT PCR tests – amplify results – one tiny spec of any RNA sequence in cells that look to fight off any injury to a cell – it is Covid19 positive- again – why?
- But scientists are confused that people who have recovered are still testing positive – or testing positive twice? Either this virus acts like none other ever seen – or the tests are flawed
- When it comes to public figures – no shortage of celebrities – dying on the inside of lack of attention – doing posts of singing imagine to remain relevant
The final step is the enforcement – through legislative means in conjunction with punitive fines as a method of enforcement
- Saw an article about how the QLD Gov made $1m over a weekend in fines –
- I was thinking about this – in a time where people are losing jobs and incomes – but yet having to get finned
- Heard lots of good stories about police officers – there are a lot of good ones out there – because they are people –
- That is what can be lost in having an us v them mentality – they are given a job to do and have to do it – many of us are given jobs to do but don’t want to do them
- But the ones enforcing this are the Governments - when it comes to enforcement – recent example in Germany – Beate Bahner – she is medical lawyer published a press release on April 3rd decrying the German lockdown laws as “flagrantly unconstitutional, infringing to an unprecedented extent many of the fundamental rights of citizens. These measures are not justified by the Infection Prevention Act, hurriedly amended just a few days ago. Long-term restrictions on leaving home and meeting others, based on high-death-rate modelled scenarios, which fail to take account of actual critical expert opinions, and the complete shutdown of businesses and shops with no proof that they pose any risk of infection, are thoroughly unlawful.”
- She called for a nationwide protest on Easter Sunday to “end the tyranny at once,” before Heidelberg Police announced that they would seek to prosecute her for inciting Germans to break the law. Then – she was arrested and taken to a psychiatric ward- as obviously she was unsound in mind to question these government imposed shut downs – if this doesn’t raise some questions or concern about Governments to you –
- and how governments have complete control - For those few keyboard warriors reviewing the podcast or sending emails saying that you think I was crazy and talking about big brother – that is purely due to the fact they are ignorant to what Governments have the power to do –
- Like wanting to track their very movement at every second – can listen into conversations – all for your protection of course – remember – based on historical president – in every case that these bits of legislation get passes – they never go away – if someone can point me in the direction of one bit of additional governmental control that got implemented in an emergency – for it to all of a sudden be revoked once the emergency is over – please do so – even monetarily – the ‘emergency’ measures from the GFC the Fed implemented were still going on just prior to this pandemic
- Also – just don’t say that I am wrong or am conspiratorial – tell me how – I want to learn – might do you some good to put your own thoughts to paper – put 1,000 words together with a coherent argument
- But remember – a lot of this is a choice – you don’t have to download the app to track you at every second
- The normalisation phase – normalising is an easy process – make something a habit – have the enforcement of human behaviours go on for a month or two and becomes ingrained as a habit for people
Who is profiting – Quick summary – go through economic side more on Friday
- Hospitals – in the US through Medicare payments – went through this in last FF episode
- Governments through having the ability to raise additional funds through debt – not there money to pay back
- State police through additional fines – always keep your enforcement arms well funded and able to pay them
- Large companies are profiting –
- Also pharmaceuticals - the race for a vaccine is on – and the winner stands to make billions
- With no legal liability – even when Baxter was caught and admitted to having live strains of the bird flu in their vaccines in 2009 – which would just give people the illness – no legal liability
- But when it comes to the monetary system – profits mean nothing when you can print money – control and influence over the economy – which remember is us – is what matters – we will go through that further this Friday
Summary – no way to tell who exactly is pulling the strings – but it doesn’t matter – the effects are real –
- But our own governments are the ones enforcing it – and benefiting from it – along with the financial system –
- Using manipulated data as control and hyping the fear around this beyond what would be credible if the data was even trying to be honest
- Smoke and mirrors – the economy was already pretty stuffed – have been talking about that for the past 18 months
- It is a good out – to take advantage of the fear of a virus whilst you pull the pin on a mess that was created by monetary policies in the first place -
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury. Today is a share market update. Don’t get tricked by the rebound in prices. We will be looking a bit into the pattern recognitions in relation to markets
The market is low compared to 3 months ago – if looking at 10 years in the future – would be a bargain – but does this mean it is at the low point
Look at major declines of the past – how they have compared – but also the repeating patterns they have
Taken a massive battering initially – price declined by historic rates – almost came out of nowhere –
Went through previous pandemics in the past – never been a decline like this – the markets always continued to grow – what is different – governments shutting the economy down –
Going through a dead cat bounce – or seems to be –
How the market works –
- The worst was priced in initially – markets are liquid – and they freak out
- Hits a low point – people enter the market
- But this all occurred As announcements of shut downs start –
- But then recovers – it seems counter intuitive – before the actual announcements started
- There has been little in the way of truly positive news
- News – Government bail outs and Central banks entering additional QE or debt buyouts for the Fed for large companies in the USA – but long term is this a good thing?
- New stimulus measures for spending but this all comes off the back of deficit spending – or debt –
- Spending on your and your children’s Credit cards – your futures-
- Might give some initial positive response but longer term – is a bad thing when compared to true economic growth void of the government or central banks taking control over the whole market
On the fundamentals side – these governments will likely have a wide spread reach
- What is the share market – a speculative price instrument
- It doesn’t have too much with the fundamentals – but the perception of fundamental performance of the economy
Examples – Lets look back to the GFC –
- Prices went from about 6,784 to 5,127 initially – about a 24.5% decline – pretty big
- But then they rebounded by 15.7% - going to 5,127 - before losing about 18.4% - going down to 4,840
These patterns – Have a very similar pattern to Fibonacci ratios i.e. 61.8%, 38.2% and 23.6% often find their application on stock charts. Whenever a stock moves either upward or downward sharply, it tends to retrace its path before the next move.
- The Fibonacci sequence is a series of numbers, where a number is found by adding up two numbers before it. Starting with 0 and 1, the sequence goes 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, and so on and so forth till infinity. If we divide any of the number in the series by the previous number; the ratio is always approximately 1.618. The ratio of one number divided by the next settles at .618, which is known as the golden ratio. In nature, this is the proportion of a perfect spiral, like that.
- Can look at plants or trees – or even an artichoke or a pinecone – the number of rings in each of the layers of plants are in order of the golden ratio – or even in a sea shell – is observable all around in nature if you are looking
- When I was younger – I get really into this – Forecasting Financial Markets – The psychology of successful investing – great book that details this – is a detailed ones – about 450 pages – and goes pretty in depth into complex topics – but anyone interested in the subject – well worth it
- The use of the Fibonacci retracement is subjective - traders may use this technical indicator in different ways
- traders are all watching and using the same levels or the same technical indicators, the price action may reflect that fact.
- This goes into detail about the human psychology along with the self-fulfilling proficies of markets – once a repeatable pattern is known by investors – like the Fibonacci ratios – do traders then set their buying and selling conditions around this? And if they do, does this not create the market patterns that play out?
Now – not exact – but rounding for the market numbers is taken into account –
- Fibonacci sequence sees ranges around the 62% mark – 40% mark and 23% mark-
- Looking at the GFC – had an initial loss of 24% - then a rebound in prices by 65% - then a drop by 20% but a rebound by about 34% - then a drip by 34% then a rebound by 26% -
- Looking at the most recent declines – we are now at about a 23% decline from peak – after an initial 32% decline – but had a 42% rebound in prices compared to the collapse (14% price gain from the low)
Start to see the pattern? The numbers coming into the patterns of the market –
- Never in history has there been a massive drop in the share market like we have seen but then – all of the sudden the market just recovered and continues to climb without then taking another down turn
- There has always been a flow of the market going up and then back down – profit taking, to a self-fulling prophecy – who knows
Why does this phenomenon occur? Could be any number of reasons –
- This week – the market may start to lose steam – or technically continue to gain in prices to the breaking point –
- There is obviously no way to be sure – but reading the tea leaves that at the charts – there may be two options
- One – the market starts to drop from here – there has been a large initial gain of about the 14% mark – in a matter of weeks – but more likely is number two – but no guarantee of this
- Or two – the rebound goes to about the 5,780 mark and then takes the next downturn – would take another 2 or so weeks – so be looking towards the end of this month (April) and then the market starts its retreat
- Working off the numbers – we are at about a 42% rebound – but due to the large initial drop – not unexpected for the market to continue over the next two or so weeks to continue pushing up in price to the 64% rebound point – at the 5,780 mark before taking the next plunge
Honestly – it wouldn’t surprise me that over the next 18 months – with the way the Governments are handling this and requiring immediate intervention from Central banks – that this is a long drawn out decline –
Will have rebounds along the way – but can be the dead cat bounce trap
That is where there will be plenty of bad market news to come –
These shut downs are going to wreck the economy in the long term –
Go into it further on Friday – but when it comes to the share market – lets think about what it is made up of –
The largest companies that are listed –
But these don’t make up the whole economy – we do –
All the mom and pop stores – so to speak – or smaller businesses out there that employ a large chunk of the population –
They are who are getting affected by these shut downs –
The larger companies – lets go through the top 20 in the ASX –
- These are what make up 60% of our market – remember this – most of out market is made up of 20 companies – looking at the ASX300 – 280 companies make up just over 40% -
| Health Care | 10% | 10.21 | | Financials and Real estate | 23% | 22.57 | | Materials, Industrials and Energy | 16% | 15.64 | | Consumer Staples or Discretionary | 7% | 6.98 | | Telecommunications | 2% | 2.46 |
- Breakdown -
Looking at the fundamentals of spending – What are the industries that have been affected -
- Gyms and Fitness – down 96%
- Entertainment and venues – down 90%
- Travel – down 84%
- Public Transport – down 80%
- Cafes – down 42%
These industries make up a fraction of the overall listed market – but – make up a massive amount of the whole economy
- Why I keep saying the ASX and all share markets come back to a more speculative side as opposed to fundamentals to the whole economy – which is currently being crushed by government policies
- Go into this further in Friday’s episode – but the ones that will come out on top in all of this are the large companies that are allowed to remain open in this period – Amazon, the banks who are protected from legislation from TBTF – along with a range of other industries
But when it comes to each of the major industries – the spending on these has actually increased for the most part –
- Health Care – Pharmacies – up 18%
- Industrials and Real estate – Well home improvements up by around 14%
- Consumer staples – food delivery increased by about 59% - and spending at super markets hasn’t really dropped – if anything had a spike initially with all the hoarding of TP and other goods
- Financials may take a hit though – with credit applications being down around 35% and increasing financial distress
Again – that is where the share market as an aggregate is hard to predict and price in – as it has become purely speculative in the modern era since Milton Freidman’s -Shareholder value theory came in
Getting back into the share market –
- It still does have some base in expectations – expectations of pricing – prices and profit taking –
- For the larger institutions who are in the know – who have the ear of politicians – the same politicians who also miraculously sold off all their share holdings just before the market crash (as most politicians are exempt form insider trading due to holding public office) – they can utilise these known events to sell down –
- Thus creating a self fulfilling prophecy when it comes to market declines – then – but back in at a lower point and then sell once the gains reach a desired level –
- Whilst the economy is tanking – the companies that make up most of the ASX are likely to benefit longer term – as they are a protected class – but that doesn’t mean their prices wont go down from there –
- Again – the market is a speculative environment –
- News about the economy or pretty meaningless measurements to our every day lives like GDP will effect the market – that is the distinction to make –
- What is bad for us can sometimes be good for the market and vice versa
Summary – As I said – no way to tell really which way the market will go – but at this stage –
- After such a quick rebound after such a large drop – the largest in history in such a short time frame – wouldn’t be out of the norm to expect another down turn from here –
- How low the market goes – again – is very subjective to the whims of the selling that are on mass –
- Wouldn’t put it past the market hitting the 4,400 mark – or about another 18% drop from here – then – having another smaller rebound before going into the 3,800 at the low point – but this is purely speculation –
- Would require a number of events to play out – but unlike previous crashes – the monetary policy has been at the forefront of this – which is also a little suspicious – almost as if the policy responses were already to go
- So hitting the sub 4,000 mark may be less of a probability when compared to previous historical crashes – but not outside of the norm in the grand scheme of things
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition. This is episode two in the coronavirus series, so if you missed last Friday’s episode, it might be worthwhile going back and having a listen to it. It covered the concept of the economy and how we make it up, but today well jump in to it.
The whole point of this series is to look at the question “Is the cure worse than the disease”. In this episode we’ll start to look at this. First we need to go through the numbers that have been represented to us and we’ll start from the disease side of the equation.
This episode is all about the numbers, and when it comes to numbers, this is one of my personal strengths as I’ve spent my life looking at numbers. I will spend some of the time in this episode looking at the validity of the numbers being presented to us. In addition to numbers, another personal strength is pattern recognition, which makes me good at what I do. On the flipside, I know that can make me fairly abrasive and to the point which is a downside to my personality, because I’m no much a people pleaser, but prefer to just present the facts as they become apparent.
- Numbers are important, as they are the justification for shutting down the whole economy
- So in this episodes, we will look deeper into the numbers – and once these numbers are explained – it might start to raise some question – if they haven’t for you already - on the factors being represented as the justification for the shut downs
- When it comes to these numbers - None of this is my thought or opinion – but from experts who have spent their lives researching pandemics – or from the official statistics – which can easily be misrepresented – as nobody has taken the time to explain any of this or on the other side of the casual observer - not been bother to take the time to look deeper – on the media’s side – they are just willing to misrepresent the facts if they think it will get additional ad revenue through views, for scientists – additional funding, for hospital insurance payments or for governments – greater control
- This episode is to help provide evidence – not just rely on Arguments based on emotions or from Authority – because as we will see – those presenting these arguments are relying on inaccurate statistics as their foundations
- In addition – Once you see how these numbers and statistics are being reported – you might see why I question the official narrative
Before getting into the numbers surrounding the disease – how many people have been affected by the Government restrictions
- No way to be sure – but hazard a guess to everyone in some way or another
- Personally - through being restricted in their choice of association – or even going out in public without potentially getting fined, professionally or economically through loss of employment or income, or investments/super dropping - Effects – range massively – but far more wide spread than those who have the disease
Let’s get into the numbers - First – and the easiest – is the cases being reported – Corona cases versus active cases – the total cases being reported are not the number of active cases –
- The total cases – 2m – but recovered 500k – in Aus – 6.4k but 3.6k recovered – 2.7k with the illness – but 97% have mild conditions – so the number who have recover now is greater than those who have it – apparently -
- But – all the data points like worldometer – click on the sources – it is from Twitter or Channel 7
- There are no links for sources from any health officials that are verifiable – you have to dig deeper to find the sources from each state’s health authorities – but even these are based around the assumptions of testing – which we will get into
- Other sites like ourworldindata had to stop using the WHO data to inconsistencies in reporting
-
Trusting the numbers for this pandemic – relies on consistency of accuracy – but in Previous cases – Swine Flu of 2009 – the CDC and other government organisation got caught out for not testing anyone – whilst continuing to report increasing numbers in cases -
- So the CDC ceased to test people - But yet – the media kept reporting ever higher numbers – even though there was no way to track this – but people believe that any source from the media must be legitimate – as otherwise they would be caught out
- CBS investigative reporter, Sharyl Attkisson, was working on a Swine Flu story discovered that the CDC had secretly stopped counting US cases of the illness - while, of course, continuing to warn Americans about its unchecked spread – but her story got crushed – managed to track down the original and other reports on this – links in the show notes –
- Understand that the CDC’s main job is counting cases and reporting the numbers – so what was the Agency up to, and why stop?
- Here is an excerpt from the 2014 interview with Sharyl Attkisson: “We discovered through our FOI efforts that before the CDC mysteriously stopped counting Swine Flu cases, they had learned that almost none of the cases they had counted as Swine Flu was, in fact, Swine Flu or any sort of flu at all! But in the end, no [CBS television news] broadcast wanted to touch it. We aired numerous stories pumping up the idea of an epidemic, but not the one that would shed original, new light on all the hype.” – why is this? Well - it went against the narrative
- But what is being said today sounds very similar to events playing out back then - in 2009 announcements were coming out of the WHO and the CDC; there was this bad virus; it was spreading; travellers were carrying it; people were being tested at airports; the source of the germ seemed to be animal-to-human transmission (a coronavirus); deaths were being reported; fear was rising
- At this time – focusing on the 2009 Swine flu pandemic – it was hyped to the sky by the CDC and the WHO – and western media – where every major health organisation was calling for people to take the Swine Flu vaccine
- But the problem was, the CDC was concealing a scandal – that they stopped testing - while, of course, continuing to warn Americans about its unchecked spread
- Reporters and by extension – the average citizen was saying that this was the big one – other people were saying that this was a bioweapon created in a lab to destroy humans – exactly like what is playing out just like now
- Then, the CDC estimates there are 22 MILLION cases of Swine Flu in the US – but was a guess with no actual testing – instead of coming clean - they doubled down and said 1 in 6 people in USA might be infected
- We will come back to this and many other so called pandemics in a future episode – as these diseases are an easy out for governmental or corporate liability from making people sick – know it sounds crazy – but wait until we go through it in a future episode – as I said – been doing a lot of research and am fairly decent at pattern recognition – ironically – at the very same time many people are getting sick from pollutants from air pollution in Wuhan or northern Italy (massive cases of pneumonia or COPD) or faeces lakes around the pig farms in Mexico in 2009 – but a random virus is the cause – but what about all the other people in the world getting sick? Great question – again we will go into this in further detail in a future episode – along with the virus hunter organisation responsible for this
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The same thing is playing out now as back then - the media and politicians are massively focusing on the numbers –
- Politicians – shutting down every day life and by extension the economy based around nothing truly new – they might say this is a new disease – but listen to any honest virologist or doctor – it is SARS 2
- Media – getting a lot more in revenues from reporting these numbers – and being their own source for statistic sites
- Most reporters, when an epidemic is announced, take the bait – always looking for news – the worse the better -
- A new virus story always sounds good – it will get attention – as people will want to know about it if it can be dangerous to them
- These are just some of the factors to why I am suspect of the numbers – if someone is a proven liar – do you continue to trust what they say – We have all had that one friend – who embellishes the truth or just lies cause they are insecure – question: do you trust them when they tell you about the time they hung out with some famous person?
- If there was no real Swine Flu epidemic beyond what the media, WHO and CDC was telling us – why should we trust them this time around? Well – because people are dying – this is where it is important to look at the numbers of those dying – and the causality versus correlation
Before we get into that – lets go through the testing and the methodology
- The testing – how it is being done and what is the accuracy for false positives – lets have a look at what is being used as testing – and how it was formulated – as I haven’t seen anywhere in the mainstream run through this – when you learn how it is done – may raise some questions
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Watched a lecture from Dr Andrew Kauffman – He has two full hour lectures – first is in the show notes – but in summary
- Traced the events back to ground zero at Wuhan- where the Covid-19 reportedly originated at an unsanitary seafood wet market – went through how the first tests were conducted surrounding a mysterious case of pneumonia – just note that Wuhan is the most polluted city in the world – and all history – heavy metals and also has one of the highest pneumonia rates in the world – but instead of looking at other possible causes like “bad seafood” from unhygienic conditions in the wet markets, or just the worst air pollution known to man - the medical team immediately suspected a virus – as the patients did not recover after taking antibiotics
- Out of the first 198 patients, lung fluids were taken from 7 of them; but instead of “purifying and visualizing” the suspected virus, what the team did was look at the genetic material called RNA and its sequencing; a diagnostic test called PT-PCR (Polymerase chain reaction) was quickly undertaken by which it was concluded that the RNA pertains to the Covid-19
- But as these tests merely looked for the RNA – this has been misleadingly as a testing base – as no actual virus was identified – just markers in people who are sick – however it has been thus used as a basis to identify the virus
- Traced the events back to ground zero at Wuhan- where the Covid-19 reportedly originated at an unsanitary seafood wet market – went through how the first tests were conducted surrounding a mysterious case of pneumonia – just note that Wuhan is the most polluted city in the world – and all history – heavy metals and also has one of the highest pneumonia rates in the world – but instead of looking at other possible causes like “bad seafood” from unhygienic conditions in the wet markets, or just the worst air pollution known to man - the medical team immediately suspected a virus – as the patients did not recover after taking antibiotics
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But the basic flaw of this kind of method is that the RNA present could also be present in other particles in the lung fluids such as exosomes; as a result, exosomes could have been misidentified as the virus
- exosomes naturally occur in body cells and can be found also in the lungs. Exosomes are produced by the body’s cells to fight toxins coming from a variety of sources: disease, infection, toxic substances, stress (fear), ionizing radiation, cancer, asthma, injury, etc. These exosomes play a beneficial role in a person’s health because these enzymes fight toxins or injury to a cell when there is an insult or infection in the body
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These was no “gold standard” provided for the test – which would require the “purification and visualization” to determine that the RNA came only from the virus, not anything else – instead – the test failed to meet the “gold standard” and the result is that exosomes would also be detected in those tests
- He presented electron micrographs of exosomes and of what is thought to be Covid-19 - Two sets of comparative micrographs reveal the similarity of their shape and appearance - measurements by nanometer, the size and diameter of what is said to be Covid 19 and exosome, whether inside or outside a cell, are exactly the same. Both of them also contain RNA and the same ACE 2 receptor
- Also – expert James Hildreth, M.D., the President and CEO of Meharry Medical College who said in his professional article that “. . . the virus is fully an exosome in every sense of the word.”
- the production of exosomes that are, in turn, detected as “false positive.” - this test does not conclusively determine if a person is infected with Covid because it functions only in the finding and sequencing of RNA which could be present in other particles.
- It is estimated that this has a rate of 80% for error, this test could lead to a “false positive” that could bloat the numbers of so-called positive tests
- So - The more testing, the more cases with the number of false positives being present - estimates around 80% of false positives – similar to the number of those who show no symptoms – question – if someone has no symptoms – are they sick?
- In addition – in regions where there have been larger groups of the population tested – many come back as having already had the illness or have anti-bodies to it – which should bring up additional questions in the methodology being used
Last but not least – the death rates – this is the one that most people are relying on – that huge numbers are dying – well – lots of people die every day
- Dying of coronavirus – or dying with coronavirus – or even a false positive in testing – first – lets look at how death certificates are reported
- CDC advice on death certificates – ‘COVID should be reported on the death certificate where it is assumed to have caused or contributed to death’ “if the deceased had another chronic condition such as COPD that may have also contributed, these conditions can be reported in part 2 – but technically not the actual cause of death
- But as one Doctor reported in the US – Dr Scott Jensen – don’t even need to test someone for Covid – you can assume it contributed to death if they died of respiratory illnesses – like pneumonia
- Other diseases – like Pneumonia deaths in the USA have gone down massively – whilst Corona has gone up to pick up the shortfall – for example – when looking at the weekly cause of deaths from pneumonia or the flu – these have gone down for the most recently reported figures – up until week 11 of the year – about mid-march
- 2014 – 52k, 2015 – 58k, 2016 – 47k, 2017 – 53k, 2018, 64k, 2019 – 48k – this year for 11 weeks – 43k – or about 10k less than average – which is about the same as the deaths from Corona reported back then – not implying anything – just find the discrepancy in numbers interesting given the testing and reporting on death certificates
- Even numbers in Italy – If you have no pre-morbidity – has a 0.9% chance of death from Covid – of those average age has been 78 – then - over 50% of deaths have been in those with 3+ pre-morbidity condition – i.e. have cancer, heart disease, etc.
- All of these numbers and reporting of deaths based around the leeway in classifications and historical statistical averages seem suspicious – at the minimum they should be questioned
- For those saying Drs are dying from this – well Drs are dying – but is this outside of the norm? Drs can be some of the unhealthiest people – doing shift work – my friends tell me about the overweight smokers who are Drs they work with – all because someone is a Dr doesn’t make them immune from death! This argument is silly when you look into it
- What about medical errors – here – rather than is the cure worse than the disease – is the treatment worse than the disease?
- Remember Medical errors are the 3rd leading cause of death – this isn’t to disparage the medical industry – my two best friends are Drs in the hospitals – their jobs are much harder than mine – but a lot of it is guess work – and when the higher up authorities give you a false positive or treatment plans to base your decisions on – issues will happen -
- For example – one Dr in the USA has called for hospitals to stop using ventilators for Covid patients – it is apparently a respiratory disease – so why is this?
- They claim that the treatment using Ventilators – are they actually causing deaths –80% of patients put on ventilators have died – one Drs is pushing for stopping using them – As whilst there is an oxygen deficiency in blood cells in positive patients – which could be from a number of factors – the ventilators increase pressure in lungs – which can kill if not needed
- Why in the USA were they being used? – beyond the false positive testing – one statement from Minnesota State Senator, Dr. Scott Jensen has shed some light on this – he says:
- “Right now Medicare has determined that if you have a COVID-19 admission to the hospital you’ll get paid $13,000. If that COVID-19 patient goes on a ventilator, you get $39,000; three times as much. Nobody can tell me, after 35 years in the world of medicine, that sometimes those kinds of things [don’t] [have] impact on what we do…”
- He also clarified that these 2 payouts mentioned are standard insurance payments from Medicare in the USA - which would go to the hospital and some hospitals have a pay-share plan with their staff doctors – commission structure
- In comparison – take a Medicare patient who is diagnosed with simple non-COVID pneumonia. The hospital would receive a one-time Medicare lump-sum payout of $4600 – when looking at the economics and incentives – there is a big incentive – at least in the USA for a positive Covid test and to treat with a ventilator – even through it might kill the person
- CDC advice on death certificates – ‘COVID should be reported on the death certificate where it is assumed to have caused or contributed to death’ “if the deceased had another chronic condition such as COPD that may have also contributed, these conditions can be reported in part 2 – but technically not the actual cause of death
In summary, if anything, all of this should at least raise some questions, which is why I have been suspect of this whole situation from the start. Based around the errors in the testing along with the classification in reporting of cause of deaths and no way to accurately tell how dangerous this illness is. But I do have a good idea about how dangerous it is to shut down whole sections of the economy as we went through that last week.
- When it comes to Australia = Our curve has flattened – if not crashed – but the vast majority of cases initially were from those overseas – but again – given the misinformation around the official reporting – the question remains – is not the cure worse than the disease
Next Furious Friday episode, we will again be looking at this further, into the economics of the situation. Also, next Say What Wednesday episode will be looking at this also due to a great question around this whole topic.
SOURCES:
https://ourworldindata.org/covid-sources-comparison
https://canadafreepress.com/article/new-china-virus-swine-flu-hoax-history-matters
https://www.cbsnews.com/news/swine-flu-cases-overestimated/
https://www.cdc.gov/flu/weekly/
Dr Andrew Kaufman - https://www.youtube.com/watch?v=KGGd7-vvd9Y&t=1383s
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition.
This week, the question comes from Andrew:
"Last episode you mentioned super and a product that lets you invest in third party platforms. Would like to hear more about that."
What is super?
- Most people think of superannuation as just something your employer pay in to so that when you turn 60 you can access it.
- Even though your employer pays into super, that is your money! 9.5% on average
- don’t care and why would you right? out of sight, out of mind and decades away from becoming relevant.
- If you could log into your bank account and click a few buttons to save a few hundred dollars a year, would you?
- The real cost of super is opportunity cost – doing nothing now will hurt
- Any problem ignored long enough will grow – until it is too late
- Pay attention and make it work – don’t regret the future
- One thing I hear clients say all the time is ‘I should have looked at this years ago’ – regret is worse than effort
What are your options:
- Super is a vehicle to invest funds for retirement – A car is a vehicle
- You can get a Mazda, or Mercedes but the aim is to get you from point a to b!
- Like cars there are different types of super accounts with different features
- Have many types – but major three types – Industry, retail or SMSF
- Industry
- Industry super funds are multi-employer funds (employer associations and unions).
- Investments - limited to around 10 multi-sector investment options (eg. Growth, Conservative, Balanced), limited insurance options
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Retail – Platforms for investments – can be for investments but also super
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A Master Trust is a superannuation fund in which a large number of members deposit their money.
- The trustee of the Master Trust pools the money together and purchases interests in the underlying investments, typically managed funds.
- The value of the investments of each member incorporates the fees, franking credits and some taxes from the underlying investments.
- WRAP account – External super trustee but you have control over investment decisions
- You get a cash account
- Then you select third party investments – Managed funds, Direct Shares, LICs, ETFs
Breakdown
- Both types of accounts are operated by a trustee
- WRAP - the investor holds the underlying assets in their own name
- For master Trusts - Investments are held by a trustee in its name, on behalf of the investor
- Both Wrap Accounts and Master Trust May hold managed funds – but different type and flow through of distributions
- Wrap accounts have access to the wholesale managed funds pricing, as well as direct investments such as shares and term deposits
- Franking credits are distributed to individual investors through the cash account
- Master trusts allow access to managed funds but at a badged cost – incorporate fees into the unit pricing and take it out prior to passing on returns – similar to Industry funds
- Franking credits are incorporated into the unit price of the underlying investment
- How valuations work – and the costs for each of the accounts
- WRAP - The value of a member’s investment is determined by the underlying assets
- All fees and taxes are unbundled from the unit price and disclosed separately
- Master Trust - The value of an investor’s account is determined by the trustee based on the value of the underlying investments
- All fees and some taxes are bundled into the unit price for each investment and allocated to the investor
- Cash management and investment planning
- WRAP accounts - A cash account is used for each member through which income and expenses are passed
- An investor’s assets in a wrap account can be transferred to a new wrap account – in specie
- Master Trust - Income from the underlying assets is paid to the master trust and then distributed to members
- If you want to change to a different master trust you will need to sell your investments in your current master trust, which may result in a taxable capital gain or a capital loss, as well as other transaction costs
- WRAP accounts - A cash account is used for each member through which income and expenses are passed
- WRAP - The value of a member’s investment is determined by the underlying assets
- Wrap accounts have access to the wholesale managed funds pricing, as well as direct investments such as shares and term deposits
What are the advantages of wrap accounts and master trusts? These administration structures are designed to provide different benefits –
- Access to a wide range of investments including low-fee wholesale funds, plus any cost savings that may apply as a result of pooling a large number of investors’ monies
- Comprehensive and consolidated reporting and valuations for all your investments in the structure
- online access so it’s easy for you to keep up-to-date with your investments
- transparent fee structure so you know what is being paid on your behalf
- Biggest is the range of investments – having the direct flow through to your account rather than it being passed on at the fund level – flexibility in investment planning
What’s right for you?
- Have larger sums of money to invest, Require access to direct investments and a very broad range of managed funds, want to be hands on and Want sophisticated reporting, Wish to benefit from franking credits being credited directly to their account.
- Industry – low options, standard based on risk profiles
What to do to make sure you make the most out of it?
- Most important thing is to Pay attention – get the right investments
- Cars: You can have a Ferrari but if the driver (investments inside the account) is awful, the car may crash! Not getting to point B!
- Make sure your contributions are going in there
- Treat it like your own, cause it is – If you think you don’t have any investments, well you do in your super
- Managed funds are investments – just doesn’t look like it with industry funds
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury – Today – will be looking at the potential outcomes for property market from here –
- How the effects of the Government responses to Corona may affect the property market – there are many things in play – prices in the property market complex system – so many unknowns – but based around some possible outcomes – we can look at the flow on effects – but no way to be sure to the levels these may materialise
To start with – have to look at the Basics of property – where we were at prior to the government imposed economic decline
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In Australia – the characteristic of our property market prices being high come down to urbanisation, interest rates and regulations
- Urbanisation levels versus available credit (cash people have access to from savings or lending/mortgages of population)
- Concentration of people (higher demand with population levels) and the limited supply available when people are concentrated in living space
- But more importantly – it is the Borrowed funds by the population – household debt to GDP
- In conjunction with the urbanised population – higher the amount people can borrow or put towards property – higher the prices will be
- With the interest rate drops recently – the affordability of debt would have gone up – assuming income also continued on the same trajectory – but with the government restricting occupations and business – incomes may struggle to growth and many people will be left unemployed
- Regulations – aims which increases the incentive for higher urbanisation – Supply side -
- How - Town planning – the restriction of supply of available developments – but more recently – reducing peoples ability to go to a property to buy this at an auction – but real estate agents have adapted to online auctions –
- Thing that will keep out property prices slightly higher on the Supply Side - limited government release of new land (reducing supply) - government restrictions on the use of land
- Local Government - Very constricted land supply and extremely onerous planning approval processes
- Beginning in the introduction by local councils of upfront infrastructure levies in the early 2000s
- Urbanisation levels versus available credit (cash people have access to from savings or lending/mortgages of population)
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State Government - Unusually high stamp duties - under the Constitution have control of environmental and land use issues
- 1980s - started progressively implementing more rigid planning laws that regulated the use of land
- 1990s – further concentration and increase on restricting greenfield development in favour of "urban densification", or infill development - Land rationing through banning development in all but designated areas = extreme land price inflation
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There is good evidence to suggest that the price of a new unit of housing is the ultimate anchor of all housing in an area, so when planning laws that implemented land rationing severely drove up the cost of new homes, all other homes followed suit
- To date – there is no restrictions placed on construction sites – projects still going ahead -
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Federal – Legislation for the entities which determine lending, etc – GST, APRA, ASIC – financial framework
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Historically - Australian house prices rose in correlation relative to average wage earning – up until 1996
- June 2014 - IMF reported that house prices in several developed countries are "well above the historical averages" and that Australia had the third highest house price-to-income ratio in the world.
- 2016 – OECD - reported that Australia's housing boom could end in 'dramatic and destabilising' real estate hard landing
- Historically – prior to the banking regulations changes and a massively declining interest rate environment - The Australian property market saw an average real price increase of around 0.5% per annum from 1890 to 1990, approximately matching CPI – 100 years
- From 1990s - prices have risen faster resulting in an elevated price to income ratio -all capital cities strong increases in property prices - Sydney and Melbourne been the largest - rising 105% and 93.5% respectively since 2009
- coincide with record low wage growth, record low interest rates and record household debt equal to 130% of GDP - clearly shows unsustainable growth in property - driven by ever higher debt levels fuelled by the RBA - cutting rates beginning in 2011
- Today – property prices 7 to 10 times equivalent of average full time earnings - up from three in the 1990-90s
- The property market was technically in a bubble prior to the government shut downs – but if average full-time earnings go down -if interest rates are also going down and banks are giving holidays on repayments for the short term – prices wont likely drop in the short term – or between now and close to the end of the year
Where may property prices go from here – have the demand and supply sides – but will probably take months to materialise
Demand side – important to look at the individual under home ownership – but also the investor landscape -
- Employment – ability to afford repayments – with the lower interest rates – affordability was okay – but the Treasury thinks that unemployment will rise to 10%- sees an extra 700,000 to 800,000 people unemployed
- this could create a negative feedback loop that further weakened the already-vulnerable economy – and bursts the property bubble –
- The flow on effects of lowering incomes – first – if people don’t have jobs – means less income = decision on spending – people will cur any economic spending to make mortgage repayments first – but it comes back to the threshold of people who cant make either – no discretionary spending which hurts consumption as part of GDP – but also mortgage/debt repayment which then hurts property prices if this increases the supply of property available through defaults –
- Higher levels of Debt – which to date has been fuelled by lowering interest rates - But the high levels of household debt leaves the property market venerable –
- High household debt leaves workers more vulnerable – over the next few months - the situation could be worse than expected because of high household debt – the higher levels of debt amplify the risks of unemployment
- Australia's total debt to household income is at a record high of 186.5%
- If unemployment gets up to the 10% - expect mortgage stress may rise and increase downward pressure on prices
- The areas worst hit by mortgage stress would be those exposed to the areas of government restrictions to work – areas like tourism, hospitality workers, or service workers – but the number of these who own homes is unknown – most of the younger workers are likely renting –
- High household debt leaves workers more vulnerable – over the next few months - the situation could be worse than expected because of high household debt – the higher levels of debt amplify the risks of unemployment
Supply Side -
- First – let’s look at the transaction methods of properties – what makes property liquid - Auctions/sales – but this has been made hard – This is the method most properties are sold in Syd and Melb –
- Think about shares – anyone can jump online and click sell – or buy – so makes shares very liquid –
- But to sell property – comes down to individuals being able to visit the property to consider their buying prospects – I don’t think anyone (unless they have endless amounts of money) would buy somewhere without being able to enter it – buying property for most is an emotional decision
- Therefore – the restriction on auctions or the limitation on in person visits to properties might work in property favour – if people can sell on mass and there is a lot of people willing to buy - prices might not drop – think of shares – if markets basic transaction ability is frozen then no shares can be sold - hence price losses can be limited – but all of this is short term –
- Looking at the numbers - About 40% of the country's real estate auctions were withdrawn over the weekend –due to the stricter social-distancing measures being enforced by the Government - slowed down property market activity – as there is now a ban on auction gatherings and open homes -forced agents to instead undertake online auctions and private sales mostly negotiated by phone – but again – the uptake of these will be limited
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But the real issue comes back to affordability for owner occupied properties – and investment returns from investment properties
- Owner occupied – might be taking a hit if the number of Australians struggling to repay their mortgages lifts to higher levels over the next few months as people are laid off – but the government Job Keeper and Job Seeker payments may help to supplement this side of the property price conundrum –
- In addition – those most in financial distress can claim the bank holidays – to pay slightly more later when the holiday is over - One economist warned that Australia could see unemployment reach about 10 per cent and house prices drop 20 per cent.
- Summary of what might happen – first – look at the Outcome from – 1994 to 2019
- Brisbane – Median house price $126k to $550k. Borrowed $101k at 9%, today $419k at 5%
- Annual repayments $13k to $31k – 20% to 31% of median incomes in servicing – even though record low rates – repayments overall are higher due to larger principal components of repayments
- Owner occupied – might be taking a hit if the number of Australians struggling to repay their mortgages lifts to higher levels over the next few months as people are laid off – but the government Job Keeper and Job Seeker payments may help to supplement this side of the property price conundrum –
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Based on trend – median house price would be half of prices today prices remained correlated to wage growth
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Even with lower rates, we spend way more on servicing a mortgage – so if the population loses the disposable income – can even afford the principal repayments
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Flow on effects – diversion/misallocation of resources - excessive lending to the residential housing sector at the expense of businesses - lead to "a banking system which allocated capital away from the most productive areas of the economy — business — is ultimately bad for growth, bad for competition, bad for jobs, bad for business and in the end, bad for us
- This has the effect of slowing the recovery – less jobs when the shut downs end – less private companies that exist
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What is happening – Have record low interest rates – Individual side – things are that bad – but investor side is worse – break dese each down
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One Major problem for property may lie on the investor side of supply - Investor – this may be the first thing to be squeezed
- About 25% of Australian properties are investment properties – this is the portion of the market which is the rental market
- Freezes on rents – if cashflow of these properties dries up – and people cant make repayments out of their own cashflow – then the sales of these properties might be around the corner -
- Legislation – Illegal AirBnb - There are around 346,581 AirBNB listings in Australia – makes up around 4% of the property market – now made illegal -
- AirBnB was very profitable for the short term listing environment – due to it being illegal now – they will have to go towards long term listing for rentals – which can push down rentals on average – making investment property income yields even worse than they are due to the high property prices
- Interest rates low – but do the investors in the market have enough surplus cashflow to maintain repayments on loans if no income is being received – but if not owner occupied – can get the bank holidays – so may have to sell – but
Hard to say how severe the house price decline may be –
- A lot of it comes down to how long governments intend to restrict the economy – implementing their quarantine and containment efforts which are the things that will carry a hefty economic impact long term
- Trouble is – once a recession has been triggered – it can go on for a very long time - and the worst can drag on for years
- Even it the government eased restrictions today – the flow on effects may take 6 to 18 months to begin to recover
- The property market is a complex system – like the share market – so these government policies are making things too early to predict the longer term effects on property prices –
What has been keeping prices higher – Credit availability and affordability and concentration/urbanisation
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greater availability of credit due to financial deregulation and lower rates
- Debt growth averaged 15% per annum compounding (1998–2015). During the same period national economic growth was less than 3% with debt stripped out - low interest rates since 2008 allowed for the increasing borrowing capacity fuelling growth
- The influence of interest rates and banking policy on property prices is evident –
- Coupled with financial deregulation - led to greater availability of credit and a variety of financial products and options
- Debt growth averaged 15% per annum compounding (1998–2015). During the same period national economic growth was less than 3% with debt stripped out - low interest rates since 2008 allowed for the increasing borrowing capacity fuelling growth
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RBA has maintained a low cash interest rate policy - reduced the cost of financing property purchase
- easy availability of interest-only loans has made investment borrowing more profitable – increasing incentive
- But interest rates are almost zero – so the upside of this is essentially gone
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Previously Allowed for expansion of bigger properties and became easier and cheaper to borrow more money – bidding war from rampart auction markets – but now that is illegal – the upside for property seems to be done with
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What was Good news for property prices – currently density of property supply, and was the high population growth through the immigration levels and also of overseas investment/property purchases –
- Prior to Corona - government restrictions put into place – there were additional restrictions placed on foreign buyers –
- But now – if people can immigrate to Australia for a time period – the question is how will this affect property? Well – given our low national replacement – not great in the longer term –
- Potential outcomes – do vary -
- In the best-case scenario, capital cities could see house price declines of about 5%
- In the worst-case scenario, prices could fall about 20% - 30%
All comes down to the level of unemployment – how long government restrictions on the free market continue – and how cash strapped invertors become over the next few months
- Probably start with Investors having to sell off properties – but regulations may stop this occurring – due to rental protections
- Even long term property’s upside may be limited for economic factors – interest rates bottoming out may be the biggest one
- Do another episode in a few weeks on property again as more information becomes apparent at the moment – a lot of guess work
No way to tell exactly – but regardless – property will likely take a hit – to the size of prices declines – who knows – be more or less suburb dependent – if already massively overvalued with larger available supply – not a good sign – but for some suburbs – may not be as drastic
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Hi Everyone – Welcome to Finance and Fury, the Furious Friday edition. The whole point of this episode is to remind people of the original purpose of the Furious Friday episodes of this podcast – that is to think for yourselves –
For those of you newer to the podcast – there are three episodes a week – Monday is personal finance – Wednesday is answering questions – Friday is more of a commentary on what is going on – a deeper dive observing the political, socioeconomic, and many other topics – as this all related to economics
Recently received many comments or reviews saying to stick to my lane and to not cover corona as millions would die - instead do economics or investment topics – I was – and still am –
- Government measures globally to combat this invisible enemy (as politicians refer to it as) are affecting the economy – so in an effort to understand if these actions are justified, I was looking into what is going on –
- If something is crashing the economy – then that is exactly what I am going to cover – whether it be a natural disaster, climate change rhetoric, or a virus – as there are political policies proposed in response to each which has an economic effect
- That is what this new Furious Friday series is about –the government responses to a virus – and to look at the justifications for their policies which are economy crashing – so we will be looking at this further and the incentives that are in play – as the very foundations of economics are incentives – based around the economic problem –
- So this series is dedicated to those telling me to stick to economics – as this is exactly what I am doing – if you can’t understand that then this may not be the podcast for you and there are plenty of other podcasts you can go and listen to – or the Project needs listeners
- We're all on the same team – and I want the best for every one of you – as I actually do care about people – hence why I have my purpose - do my job and also do this podcast– I want the best for people – why I warn about the authoritarian issues we are blindly walking towards
- In the next few Furious Friday episodes – will be looking into this topic – doing a deep dive – but don’t just trust what I say – that is no better than trusting the media – go and look for yourself – think for yourself – don’t just follow the mass consensus – helps to avoid the situation of a herd all running off a cliff – I will leave links on the show notes on the website for each episode – but research the numbers yourself – not on the news – ask yourself – are these numbers outside of the normal? Answer might surprise – but we will go through this further later in the episodes -
- In the past few weeks been called Alan Jones to Alex Jones – that is fine – actually made me laugh – but the truth is more important than any personal attacks I may face – I don’t really care about social shame and these people are responding in a manner of panic and emotion – and actually haven’t made a single good point – they just parrot the media and do personal attacks – and evidently emotion can be manipulated – just like fear – a powerful emotion
- Examples – Stop it – millions will die - don’t you care about people dying? Yes - I care about people dying unnecessarily as much as anybody else – but my motives are to be able to have an honest conversation about the measures being put into place
- And my reactions to the situation aren’t being driven by emotional manipulation from Governments or media – they are driven by thinking things through - in an effort to find the truth or logos of a situation
- So I want to get the poisonous accusation that has been already made out of the way – that anyone who criticises the shutdown of society doesn’t care about the old people dying, or even, wanting people to die, out of the way
- It is the same as if you oppose war – like I do – for example the Iraq war – anyone back then that opposed the war was targeted by saying that they must then support Saddam Hussein’s fascist regime and that they think he should be allowed to torture people – see how ridiculous this sounds? – is a binary way of thinking
- All it does is shut down serious conversations about the validity of an action - similar in the attempts to crush dissent on other politically hot topics like climate change – those that do this are acting like a dictator – shutting down any dissent if it breaks their narrative of the world – in a democracy – discussing issues is the only way to retain a democracy – otherwise you live in a fascist or dictatorship if you aren’t allowed to question your leaders actions
- When it comes to the current government actions – a lot of the publics thinking is binary – which is a completely false dichotomy – either it is a question of saving lives or a question of saving the economy -
- People who talk about the economy as if it’s just some kind of abstract machine of numbers and profits don’t understand the economy –
- the economy is all of us – our lives make up the economy as without us – there is no economy – but in addition – it is our livelihoods – so not just lives but individual’s ability to prosper that make up the economy as an aggregate
- We are how products are created, we are who buy those products – and unfortunately – with the way modern society has been structured is that we cannot function without the economy – for me, caring about the economy is caring about every life that exists within it – as without people – there is no economy
- Financial Markets are a subset of the economy – these days that is the speculative side
- But the overall economy is a function of our lives - nobody is buying, then nobody is selling, which means nobody is working, and if nobody is working, then there is no way for people to live in a society that is based on monetary exchanges, so how do we pay for our houses and our food then?
- Going deeper - How do we pay for the social services that Governments provide – like education systems or pay public doctors or build hospitals? – As yes, as tax payers we are funding these services
- If we have no economy to make our own way – then we become reliant on a Government - which is socialism – as everything then is nationalised and owned by the government – but without an economy to tax – socialism cannot exist as the taxation income required to fund government spending projects dries up – results on Governments relying of deficient spending (which is where we are at now with the emergency measures) – look around – read about any country that turns to massive deficit spending long term – hasn’t worked out for any country in history in the long term – starts to create a zombie economy or a modern day Venezuela - where people are eating their own domestic pets to survive
- This is why a conversation about these measures is important – otherwise we can blindly end up in a much worse position –
- Over the past few weeks – society as we know it and our personal freedoms have been shut down – and in return the economy has been put on hold – so for anyone out there still doubtful about the fact that we are the economy – the causal effect of our freedoms being removed to go to work or operate a business = and the economy shutting down should start to become evident – we are the economy – hence why governments of socialist nations that try to make themselves the economy fail so fantastically -
- As when civil liberties have been curtailed in the name of fighting against anything – even inequality – the economy and us always suffers
- But there has been hardly any scrutiny or opposition against these ever-stricter measures being unjustly forced upon us – people getting fines $10k for driving around – not even leaving their car
- We live in a country with ‘representative democracy’ where parliament determines what is good for us – just like a parent and their children – now - our most basic freedoms have been eroded – If we had any kind of leadership that was honest about looking after our best interest – there would have at least been a debate before implementing these measures -
- To me - this has demonstrated that we don’t really have a free or democratic society any longer – we have had no say in any of this – hence the representative nature of democracy – we get to choose who leads us but have no say in what they actually do
- Now - we are all virtually under house arrest and Government determined rituals all have to observed – even though you wouldn’t know about them unless you watch the media – does this not raise some alarm bells at the speed and the ease with which this is being enforced on us – when we aren’t sure what a reasonable excuse to leave the house looks like – I have done a lot of research on history – especially the authoritarian side to history – one key of control is to have laws that evolve and are subjective – creating mass confusion – where anything you do may be illegal – hence – the population freezes out of fear
- So this whole Furious Friday series will be to just talk for a moment about the extraordinary situation we find ourselves in - we have closed down virtually the whole of society and most of the economy, and in the process we have stored up immeasurable problems for the future – ignoring the factor of now losing the most fundamental rights of even leaving your home unless the Government deems it essential
- I am just seeking an answer – we are presented with a problem – and the way of solving it by those whose only job is to constantly seek more power is to shut down the country and strangle civil liberties
- Think for a second – Australia’s Government is starting to model their policies off one of the most despotic country in the world, the People’s Republic of China – even the WHO praised them for being the role model to follow – which raises alarm bells – an organisation like the UN wanting people to lose their individual sovereignty – this isn’t suspicious at all
- Are these measures justified – well what happens to a society which trashes its economy? I will tell you what happens. It is unable to afford proper health provision or to provide a social safety net – such as the Age Pension
- all of its standards decline, its food gets worse, its air quality gets worse, its housing gets worse, its water quality gets worse, and everybody gets sicker – Looking at the concept of Human Rights – These only exist when a country is in first world conditions – If we have no money left to provide for health care – health care can no longer be provided – what about welfare like the Age Pension? How much pension is provided in third world nations?
This series is in an effort to lay these facts out and to explain fully why I think the way I do about the events now playing out–
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be 3 episodes at minimum over the next few Fridays – as what I think comes from many many hours of research – probably say over the last month around 80 – 100 hours spending reading published studies and – not just reading and then parroting social media or other news pages –
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In all of this – I want to find the truth to the question – is the cure worse than the disease?
- The real question is, is this serious enough to warrant putting most of our population into house imprisonment, wrecking our economy for an indefinite period, destroying businesses that honest and hardworking people have taken years to build up, saddling future generations with debt, depression, stress, heart attacks, suicides and unbelievable distress inflicted on millions of people who are not especially vulnerable, and will suffer only mild symptoms or none at all?
- The complete failure to debate it is astonishing to me – Science by consensus versus science by the scientific method
- The fact that people can’t even drive in their car – not even getting out – shows the hand – to me a lot of these measures seem illogical
- So we will be looking at the disease itself but also the measure being put into place – and their consequences
In the next few episodes, we will look deeper into the numbers – but a few factors – which should at least raise some questions – quick summary – we will go through each of these in a lot of detail in the next episode – leave sources in next episode to these
- The testing – what is the methodology of this? Is it qualitative or quantitative? Is there a gold standard to test against? how it is being done and the accuracy to false positives – estimates around 60-80% of false positives – similar to the number of those who show now symptoms – should raise some alarm bells – so if someone doesn’t show symptoms – are they sick given the degree of error rates
- The distinction between dying of corona virus – or dying with coronavirus –
- CDC advice on death certificates – ‘COVID should be reported on the death certificate where it is assumed to have caused or contributed to death’ “if the deceased had another chronic condition such as COPD that may have also contributed, these conditions can be reported in part 2 – but technically not the actual cause of death
- Even numbers in Italy – which is being used to ratchet up the fear – If you have no pre-morbidity – has a 0.9% chance of death – of those average age has been 78 – then - over 50% of deaths have been in those with 3+ pre-morbidity condition – i.e. have cancer, heart disease, etc.
This episode is just as a little introduction – but don’t worry – I will do a deeper dive into some anomalies which aren’t apparent unless you actually look and think about them in the next Furious Friday episode - Next Episode – looking at the numbers and methodology to see the validity of these responses -
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition. This weeks question comes from David.
David says: We have seen some ASX fixed income Listed Investment Trust (LIT) have fallen 10-30% from their NTA. Are you able to do a series to cover those to see if it is now a good investment opportunity? My thinking is that the massive drop is a function of retail investor fear (they don’t know what they are invested in) rather than the decline in the actual value of the investment.
Great question and we will look at some of the ones David sent through - NBI, PGG or KKC
important to note – not all fixed income is made equally
What is fixed income/interest?
- A Fixed Interest is a debt instrument - a form of lending.
- Financial Product designed to raise money for the entity that issues the bond
- I liken it to an interest only loan – You need money? You borrow morning with the mortgage as the product and pay interest back
- When a company or Government needs money – Someone (you) purchase that bond – Essentially loaning money to the issuer when then pays you interest
- At the Bond Maturity – you get the initial loan back (unlike a PI loan)
- LITs or ASX listed products – most of these are companies that are active managers of fixed interest –
- Similar to a LIC or ETF – the hold number of FI investments that make up the product
- For LITs – The price they trade is the price for demand for the investments themselves –
- Doesn’t always relate to the NTA value – or underlying investment values that the company holds –
- These LITs like NBI, PGG or KKC Buy and sell other companies debt
- Buy it off someone else who bought it – secondary market – trade to make a profit
- In most cases though, active bond managers tend to not hold FI to maturity to try and keep a longer term duration.
- As they sell these on the secondary market however, the funds invested aren't lost (even though the sale occurs before maturity) as someone else will buy this off them.
- Costs - It can be pretty expensive for the given returns (which are likely being represented after the MER) but they do at least provide capital protection on an investment without getting cash like returns.
- Index bonds – Cheap 0.1%
- Active – can be expensive, similar to a share managers costs – some of these charge around 0.8% MERs
First- the FI assets themselves
- Why do they exist?
- Like People, Governments (Fed, State, etc)/companies need to fund their expenses with debt
- Create a product (bond) – Sell it to someone else – get the money and pay a yield on the amount to the purchaser
- Issuer – Sets a Face Value – how much they want and how much they will pay
- Purchaser – transfers money to them and gets paid coupons – similar to interest you pay in loan
- Price – Price = FV at issue – as coupon rates are priced in based around interest rates
- Purchaser – Can hold the bond and get income, or sell it on the secondary market
- If you buy fixed income/interest on the secondary market, it essentially works the same as if you bought it on the primary, except the maturity date is closer (so if you held you would get the face value back)
- you get it at a different price to the Face Value (due to interest and coupon payments being different in most cases)
- can go above – interest rates drop compared to coupon yield
- Below – interest rates goes up compared to coupon yield
Types of FI – and the risks attached - Meant to be safe/defensive – whole point of diversifying but corporate bonds are correlated to the shares
- What is the type of debt instrument and who is the issuer –
- Government Bonds – Either safe or not – depends on country
- Types of Bonds – Who needs to raise money?- As of 2017, the size of the worldwide FI market (total debt outstanding) is estimated at $100.13trn – a lot of which is corporate
- How you tell – Ratings system
- S&P and Moodys – AAA = High quality – BB to D = Junk
- Watch out – can be fooled – MBS was considered AAA – which are a large component of FI as well
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What is the maturity – Long maturity leaves you open to interest rate risk
- Duration – measurement of sensitivity to interest rate movements
- 1 = $1 change in 1% interest
- 7 - $7 change for 1% interest
- Duration – measurement of sensitivity to interest rate movements
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Based around the time until maturity of bond
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Interest rate movements crease bond movements
- Tend to look for one about 5-7 duration, and another with -2 duration (can hold cash and loans)
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One safe gov bonds, other takes a punt on under-priced debt (risk of default lower than price shows) –
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Major issue with a lot of FI investments now –
- Interest rates are low to zero – so risk of price losses from rising interest rates have increased –
- Most important one right now – that a lot of companies may go out of business and default on their FI products
- At the moment – not a lot of Gov Bonds have dropped much in value – defaults risks have gone up but still not as high as corporate –
- Corporate debt has dropped in valuation though – as with the shut downs and the fact a lot of companies have issued out massive FI amounts over the past decade – lots of debt they may not be able to repay
But as David pointed out – the prices for the LIT investments have dropped more than the NTA of their underlying investments
- Whilst LITs act like shares – managers buy and sell debt – two types of assets, equity and debt (only if you own it
- Debt is traded like a share – but then these LITs are also traded as a share – so have the double downside risk when people panic sell –
- As david said - massive drop is a function of retail investor fear (they don’t know what they are invested in) rather than the decline in the actual value of the investment - Yes and no –
- The large drop is out of retail fear – but the quality of investment isn’t great – so the drop is technically justified
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Issues that a lot of these FI managers face -
- Fixed income is debt instruments – types – Government, SemiGov – or corporate debt
- Most of these LITs have corporate debt – so the risk of defaults is going up and the NTAs are slow to be updated in some cases -
- Type of FI matters – as the risk of default is important –
- Fixed income is debt instruments – types – Government, SemiGov – or corporate debt
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But also – the legislation changes that mean that the reporting requirements to markets isnt currently in place and also that creditors or debt holders can not be repaid for a time if the company is in trouble
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Quality of credit as well – this is what really matters
- If the company doesn’t have to report to the market – like in the ASX – important information is
- Duration – how sensitive they are to interest rate changes
Have a look at the individual investments
Prices – Dropped massively from the initial crash – 21-Feb to their bottoms in 23 March – Which is when the government and monetary responses started kicking in – rebound of 20%-50% since then in prices – but still below NTA values
NBI – NB GLOBAL CORPORATE INCOME TRUST
- Price was about $2 until the crash – went down to $1 – 50% loss – back to about $1.45
- but the NTA is slow to be updated - NTA is now sitting at $1.60
- No need to point out that this is a little different – and why the prices came back – but they are still sitting below out of fear – but important to note that the NTA is unaudited estimates –
- Hazard a guess that it might be slightly off
- Credit Quality – very low: BB – 40%, B – 44%, CCC or below – 16% - Average credit is B+ -
- Higher risk and higher yield
- Hedged to AUD – 55% of holdings in USD – so the NTA shouldn’t have changed in value from currency movement but this would have backfired in recouping any losses
PGG – Partners Group Global Income Fund
- Price was about $2 until the crash – went down to $1.10 – 50% loss – back to about $1.38
- but the NTA is slow to be updated - NTA is now sitting at $1.34 – remember that this NTA is an unaudited estimates – but is closer in line with the actual price
- Credit Quality – low as well: B
KKC – Credit Income Fund
- Price was about $2.48 until the crash – went down to $1.45 – 40% loss – back to about $1.58 – small gain
- Unaudited estimate on NTA is now sitting at $1.98 – was sitting at $2.55 a month ago – so 25% drop – but it is still estimated above the prices – but may not be accurate - Hazard a guess that it might be slightly off – but could have just been a victim in the overall retail sector selloff
- The majority of the portfolio is focused on more defensive sectors such as Healthcare, Services, Software and Capital Goods which are less exposed to obvious negative impacts from the virus; and has low exposure to the energy and travel/leisure sectors, with no exposure to companies operating airlines or cruise ships.
- But the unit pricing is still done monthly – so see how the next month plays out
One thing to watch out for – the retail investors selling these LITs might be doing so due to the lack of disclosure and cutting their losses – hard to work out the true NTAs if companies are absolved of their reporting obligations – in environments like this hard to
Also – in investment structures like this – they are only as strong as their weakest link – defaults in the lower end of the credit quality can quickly result in redemptions and fund outflows which trigger further losses up the chain – of the whole price of the investment
Durations aren’t too bad – usually corporate credit isn’t that high – on average about 4-5
Summary – FI is meant to be in a portfolio if you want downside protection – but a lot of these
When is it needed? Why buy?
- Downside protection – Prices can move, but not by much compared to shares – but also true on the update –
- For long term growth – and looking for rebound of markets – shares may work better
- Higher yield than cash – in a lot of cases you get more income
- Middle ground to cash – better income for some risk – but a lot more risk due to corporate defaults at this stage -
- Is it a good time to buy? Seemed to have averaged out in prices now and flattened – whilst some are slightly below the unaudited estimates on the NTAs at this stage, this might be for a valid reason – if looking to gain additional growth over long term – FI have a limited upside
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury – Today we'll be looking at some of the pitfalls of the recent financial measures to combat the economic fallout that is going on
Two major ones when it comes to the personal side of this-
- Money out of super – Easing the rules of requirements to the access of superannuation funds under the ‘financial hardship requirements’
- Mortgage payments – The repayment ‘holidays’ on mortgages
Before we get to it – with either of these options - If you are in extreme financial hardship and need to do this – do it – but if not and just want to take money out of super or go on holiday for a mortgage – don’t - work off a strategy of survive now but pay later
Mortgages - Banks also come to the party to provide repayment ‘holidays’ to ease short-term cash flow burden to keep home loan repayments if people have been impacted by the government measures
- Under these new rules - borrowers can defer their loan repayments for up to 6 months –
- National Australia Bank, Westpac and ANZ said on Friday that affected home owners could pause repayments for up to six months, pending a three-month review, as part of new support packages for home owners and businesses.
- Banks had been offering support to those affected— including up to a three-month deferral of mortgage repayments — under existing financial hardship policies
- This sounds like a generous offer – in theory – but it acts like any holiday – if you do it on a loan you have to pay for it when you get back – that is the case with these repayment holidays – the interest still accrues and you are left with a larger debt to repay –
- News articles state that Economists have backed plans by the big banks to let home owners impacted by the coronavirus crisis defer mortgage repayments for up to six months – so must be good -
- But when a home loan repayment is deferred for six months, interest is calculated and added to the loan balance each month which can result in customers paying interest on interest each month
- So when the 6 month holiday is up – the loans kick back in at a higher repayment level-
- The problem here is that the interest is simply being added to the loan balance - compounded monthly
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What are the costs – lets look at some examples –
- If you have a loan of $600,000, payable over 30 years at a 3% interest rate and monthly repayments of $2,529
- Not making repayments for 6 months will cost an additional $15,118 – the value of repayments deferred
- This will add an additional $22,527 on your loan and add on 15 months in repayments – however
- If you have a loan of $600,000, payable over 30 years at a 3% interest rate and monthly repayments of $2,529
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The loan is a 30 year loan – so technically it would instead would be $2,593 pm
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The saving grace of this is that interest rates are incredibly low at the moment –
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But if you’re considering getting a holiday on your home loan – these measures can fall into a privatised debt trap
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That is where the hope is that the economy will miraculously bounce-back in 6 months time when we emerge from social lock-down and government controls ease
- I think this may be kicking the can down the road – reminds me of subprime lending a little –
- For now - Lower repayments but when the loans kick back in – will people’s incomes be able to afford it? If not, and property prices are lower – may create defaults –
- Saving grace in Aus for Property is the recourse on borrowing – the collateral that is required – which wasn’t in place under the loan arrangements pre-2007
Superannuation -
- Government announced the relaxation of the restrictions to superannuation under the financial hardship requirements
- Previously – had to be about to be kicked out of your home and on government welfare to get the $10k out –
- Now – anyone who had been affected by coronas can lodge a request through the ATO/MyGov to get money out of their superannuation fund.
- Between now and the end of this FY – 30 June 2020 – can get $10k – then for the following three months – a further $10k – in total can withdraw up to $20,000
- As I said at the start – if you are about to be ruined financially and have to do it – then consider it – but this will cost a lot in the long term –
- The timing of the policy is pretty bad - encouraging people to take money out when the market has just dropped 35% - the $10,000 was maybe worth $14,400 a few weeks ago
- Or – if you take the total $20,000
- Some people may not even have $20k in super who are the ones most affected – younger casual employees
- If they were to take their entire balance out, not only would they effectively need to start again from $0, but they would lose out on the next 30 years of compounding.
- Essentially - you’re accepting $20,000 for what was a short time ago – may have been worth $31,000 a few months ago – but could be worth a lot more in the future
- Other side- the rebound – have far less in the account to take advantage of the market rebound
- Either way – the compounding effects of losses are the same (assuming account fees and insurance costs are nil)
- Few Examples – What compounding returns look like over different time frames – until access of funds at 60
- Obviously depends on returns over time – 7% or 8% on average – take the full $20k out:
- 40yo – 20 years - $84,957
- 30yo - 30 years - $175,100
- 20yo – 40 years - $360,885
- Present value of funds today – with inflation of 2.5%
- 40yo – 20 years - $51,847
- 30yo - 30 years - $83,500
- 20yo – 40 years - $134,400
Summary – that is it – just a quick summary of some of the potential downfalls to long term
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition.
Today – want to run through what is happening within the industry superannuation environment – not looking good
- With the market crash – cracks in the financial system are starting to appear – with almost no asset class but cash being safe – a lot of super funds have gone down in value – but this isn’t the only issue when it comes to industry funds
- The issue is the type of investments held – which have been placed in illiquid – i.e. hard to redeem investments – such as private equity, infrastructure or direct property – lots of funds have 25%-30% of their investment balances in illiquid investments – cant easily be sold down to meet redemptions
- So as people request switches out of their one size fits all allocations of ‘growth’ or ‘balanced’ to cash or other asset allocations like conservative, they are having a hard time to do this
When it comes to markets – the saying goes that ‘A rising tide lifts all boats’ – but a low tide can leave boats stranded on the shore line - quote that it’s only when the tide goes out that we discover who has been swimming naked – Think it was warren buffet who said this – in any case
- With the recent market declines – it looks like many Australian industry funds is looking pretty naked right now
- Think about this for a minute – inflows of $130bn p.a. of employer contributions and not much investment oversight from the regulator APRA – why not have a naked dip – nobody is really watching and you get a little cocky when the water level keeps rising
- Of the 530 super funds listed in modern industrial awards, 96.6 per cent are industry super funds. That’s some gravy train that essentially guarantees constant inflows of cash – which for the past decade has been seen as a guarantee of liquidity
- But now the tide has changed – and those who are now left naked are the trustees of the biggest industry superannuation funds and their board of directors
In this episode we will look at the current crises going through industry funds and the issue with illiquid investments
- Industry funds have had a good ride over the past decade – it has been demanded that the corporate sector, especially the big four banks who are also regulated by APRA - take money from their owners and give it to causes deemed worthy by these industry super funds – like the capital notes that form part of the bail in regulations
- However – these are still deemed liquid as they can be traded on the secondary market
- Industry funds have been complacent - Consider the causes of the arrogance and power of large industry super funds.
- Even up until 2016 – they didn’t need to disclose the true costs of their investment options – the MER or ICR for a lot of investment options went from 0.3% to over 1% in some cases overnight as soon as the regulations changed – as borrowing costs, management fees had to finally be disclosed
- They have been coddled by an industrial relations agreements that mandates that industry funds be flooded with contributions due to the default agreements – has given them the sense that inflows can cover redemptions or transaction switches
- Easy to get complacent - With that guaranteed inflow of cash, it’s hardly surprising that industry super funds have grown fat and lazy about risk – it isn’t their money after all – but they made two critical assumptions which are currently being tested:
- Number 1 - that these vast inflows would always exceed the outflows – either in the form of switches in investment options or what they had to pay pensioners in the income stream phase, along with rollovers out to alternative super platforms where you can decide where your money is invested
- Number 2 - they could keep less of their assets in cash or liquid assets to meet redemptions – and place these in illiquid investments like private equity, infrastructure of direct property which can provide generous investment valuations to help returns appear higher
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In fact, they doubled down on this bet by investing more and more of their members money into illiquid assets — they filled their portfolios with infrastructure, real estate, private equity and other forms of long-term assets that can’t be easily and quickly sold to meet redemptions – one thing I have noticed over the past decade – go back to 2010 – the investment options within industry funds didn’t have much in the way of these alternate investment asset classes – but now they make up about 1/4th of most balanced options
- The benefit of this is that these illiquid assets can’t be easily valued— experts will tell you that the valuation of illiquid assets is essentially guesswork.
- think about a share portfolio – liquid and easily valued – based around the share prices on the daily market – but now apply this to private equity – companies that aren’t listed and only get a guess work valuation once a year – or unlisted property – which again has some private company give you the guesswork as to what is might sell for
- If you don’t have a deep and liquid market into which to sell an asset, you really have no idea what that asset would fetch if and when the time came to sell
- The benefit of this is that these illiquid assets can’t be easily valued— experts will tell you that the valuation of illiquid assets is essentially guesswork.
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This was a major issue in the GFC – lots of assets that were illiquid in nature had to be frozen for redemption – in the property sector, a lot lost 80% of their value due to fire sale tactics
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But to date - The fact the valuation of illiquid assets is open to huge variation was a terrific advantage in so many ways for industry insiders during the good times.
- Industry super funds could use boomtime assumptions to produce inflated valuations to prop up their performance relative to retail funds that don’t have the same guaranteed gravy train of inflows to invest in unlisted long-term asset classes.
- That gives the industry funds one heck of a competitive edge and those inflated performance figures make for handsome bonuses for employees of industry funds and asset managers such as IFM.
- This apparent outperformance by industry super funds seems to made APRA and many others turn a blind eye to this practice – as long as on paper the returns are there, there is no reason to look further –
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Hence – industry funds have been able to resist sensible regulation by pointing to their “healthy” performance, and have received exemptions from the kind of stock-standard rules that govern other trustees of public money.
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Now the tide has gone out – some of the largest industry funds have sold to members as “balanced” investments – now don’t look to be so balanced - Over the years – Industry funds have turned their balanced funds into not so balanced funds – chasing greater returns – and investing in a risky way all to drive the most inflows through competing in their internal special Olympics – when you see ‘best performing super’ only comparing industry funds – not other platforms that provide tailed asset allocations in funds which have beaten the industry funds year on year
- Few examples – of current major industry funds and their current asset allocations
- Balanced funds – rule of thumb - I work off a 35% defensive (cash and FI) and 65% growth – but needs dependent
- Aus Super – 3% cash, FI 12% and Credit 5% = 20% defensive – which is growth – have 25% in illiquid investments between Private equity, infrastructure and direct property
- Sunsuper – Even worse – have 3.5% in cash, 9.7% FI – bit over 12% in defensive – have 26% in illiquid investments between Private equity, infrastructure and direct property
- QSuper – More in line with balanced – but only recently - 40% in defensive – but majority of their FI investment is in Corporate debt – but 22% outside of this is still in illiquid investments
- With the recent market decline – a crisis is emerging and has exposed the illiquidity issues industry funds face
- Funds have been relying on inflows – but many of their members have lost their jobs or lost hours of work, drying up the guaranteed flow of new superannuation contributions
- In addition - government has announced an emergency and temporary exemption allowing members in financial trouble to withdraw up to $10,000 a year from superannuation for each of the next two years.
- The liquidity problem facing industry super funds has been compounded by the fact many members have been switching from what the industry funds call “balanced” options into cash options, requiring funds to liquidate long-term assets in the “balanced” options.
- This new environment has forced industry funds to slash questionable valuations of illiquid assets in their “balanced” funds to avoid redeeming members or members who switch out of balanced funds into cash options getting a windfall at the expense of members who remain in the “balanced” funds.
- So it is starting to show cracks in how these funds have been investing funds – has been allowed to occur due to the lack of transparency within the reporting requirements of the industry funds – so the jig is up. When comparisons between industry super funds and retail funds are adjusted for risk - industry super funds don’t look so healthy after all – it has just been the fact that investments have been in ‘illiquid’ funds that get non-market valuations that the risk to return measures have been allowed to be manipulated
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Now that the tide has gone out, we can see two issues with greater clarity.
- First, trustees of industry super funds haven’t done a stellar job of managing risk through the full economic cycle, through good times and bad. There was too much complacency from more than two decades of uninterrupted economic growth. And maybe some naivety too: Australian industry funds are relatively new, emerging only in the 1980s after the introduction of compulsory superannuation payments.
- Second, APRA stands condemned for letting industry super funds get away with second-rate governance and poor management of risk through the full economic cycle.
- The biggest question is how this group has been protected from scrutiny and sensible regulation for so long, and what can be done to end its immunity from the kind of critical examination the rest of the financial sector has always faced
- The other issue when it comes to the industry sector is their voting power, and buying power,
- Board members often send their salaries back to their unions which can be passed onto political parties
- In addition – before the crash the super industry made up $3trn of funds – Aus GDP is about $2trn along with the share market being about $1.6trn -
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This political power is part of the reason for the large push for the super guarantee charge contribution increased from 9.5 per cent to 12 per cent – more guaranteed inflows at the expense of private employees take home pays
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Starting to hear talks and requests from the industry funds where they may be requesting bail outs - Consider the hypocrisy of these super funds now wanting a bailout to deal with a liquidity problem of their own making – they got greedy and wanted to show that they had the best performances during the boom times – been going on for years
- Now their mismanagement has exposed risks that their members have been told about – as even as someone who
- And the same industry funds want the Reserve Bank of Australia (aka the taxpayer) to bail out their members to protect their boards from claims of mismanagement. The industry funds no doubt will point to the help the government is giving the banks as a precedent for a bailout.
- To date -nothing from the government to do this – which is good – people should honestly know the gambling game that industry funds take with their money – but what the gov should have done is actually require APRA to do its job
- It boggles me to how the industry fund sector has escape scrutiny of its dirty little secrets for so long – had the royal banking commission into financial services – which occurred after banks sold off their financial services arms – so they aren’t the ones regulated – but remaining financial services professionals -
- The mismanaged industry super funds is compelling evidence that workers should be allowed to keep more, not less, of their hard-earned money
- Might sound weird for someone in financial services to say – but I like freedoms – hence people can choose to SS their income rather than being forced to through increased SG payment
Summary – This market crisis exposes the poor management of millions of Australians superannuation funds –
Why I have been against industry funds - choosing where money should be placed over individuals choosing where they money is investment in other super platforms that allow you to decide
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition.
Question from John:
“I have a question on how to capitalise on the depressed global market ie what investment strategies might be worth considering if any. I know it’s very much early days, but I’d be curious to hear your thoughts, if you have any, on timing, likely post -CV19 effects of the financial measures that are being put in place (ie what might the recovery look like)”
Great question – Very deep topic - the situation is changing every day – so doing this podcast on an ever-moving situation creates a dilemma – what I say today at time of recording – may not be accurate by the time you listen – evolving
- But what we can do is look at the causes of the loss of the economic confidence and the markets crashing –
- Then look at to the triggers of potential market recoveries along with asset classes
Start and look at what happened in the ASX – Shares have been hammered – lost 32% in a matter of a month -
- Record Drop in such a short time – why? Was it fears from the death rates?
- Looking at the numbers of pandemics in the past and how markets responded -
- Back in 1918-1920 – Spanish Flu - ASX market went up 12%, 18% and 10% - so pretty solid years
- This is meant to have killed 50m people – when world pop was 1.8bn – so just under 3% of population
- Asian Flu - 1956-1958, an outbreak of Influenza A would travel from China to the U.S. and rest of the world, killing 2 million people worldwide according to the WHO – Markets went up 10%, 18% and 23%
- 2009 Swine flu - CDC from April 2009 to April 2010 there were about 60.8 million cases of the swine flu with about 150,000 to 575,000 fatalities - 12,469 deaths in the United States – markets went up 40% and 3% - coming from bottom of GFC
- For comparison, the WHO estimates that 250,000 to 500,000 people die of seasonal flu annually – but it doesn’t create a market collapsing
- Important point – it is not the virus that investors and by extension – the markets are responding to – 30 pandemic like illnesses in the past 40-50 years – markets have never responded like this before
- This all comes down to a few elements working in conjunction – Confidence and expectations but it appears to be in reaction to what Governments are doing –
- Confidence and Expectations - How the price of the market works – expectations – if people are worried about losing money – they will sell down shares and hence – trigger the start of a market decline
- First panic sellers start the self-fulfilling prophecy – market sees losses from mass sales and then the flow on effects of further sales continue
- Example – if only 100 people in market – 1 sells their shares – not much effect – but now if 15 people sell their shares lowering prices by 10-15% - creates a panic for the rest – they sell – losses continue to grow
- So markets are responding to the Government policies – on both sides – on shut downs and then printing their way out of the problem
- I’ll do a full break down in another episode next week to run through government stimulus packages – these keep changing as well –
- Support and resistance levels in the share market – this is what speculative trading reverts to – there is a minimum point based around fundamentals that the market can drop to –
- Floor and ceiling – floor is support – ceiling is resistance – think of a super bouncy ball – throw it with enough force can break through a weak ceiling – that is where buyers and sellers act as the support and resistance -
- You foundations and floor can be solid – i.e. the true valuation of all business in the market as an aggregate - but this doesn’t matter in a panic – the market responds to demand of buyers and sellers –
- If everyone dump their shares now – then all companies would go to essentially zero – smash through the floor
- That has been what has occurred in a smaller extent over the past month
- When you look at the amount of money in the ASX in super funds or in custodial holdings for index managers – it makes up slightly more than half of the market – so when people now sell the index – the index drops -
- You foundations and floor can be solid – i.e. the true valuation of all business in the market as an aggregate - but this doesn’t matter in a panic – the market responds to demand of buyers and sellers –
- Confidence and Expectations - How the price of the market works – expectations – if people are worried about losing money – they will sell down shares and hence – trigger the start of a market decline
- Back in 1918-1920 – Spanish Flu - ASX market went up 12%, 18% and 10% - so pretty solid years
But long term – given government involvement – something to watch out for – Government restrictions being eased will be a sign of the start of market recovery – but economic recovery may take some time
- Going back to the episodes on the future of the economy – the thing to watch out for is the monetary reset – gold and other physical assets – and other physical assets will be better than cash – but in a panic cash is what people run towards –
- Think of the economy as a flow of money – Money sold from assets has to flow somewhere – if not repurchase – has to go to cash – for most of the global economy – cash is USD – why AUD has tanked in comparison – not due to our dollar weakening but USD strengthening
- Now enter permanent QE and helicopter money = money supply increasing on top of the demand for dollars - inflation = silver being better than gold but only once real inflation kicks back into the system –
- This comes form economic recovery and real price inflation in goods – not due to artificial supply shocks
Clients and friends have been worried about inflation/hyperinflation – what does the road to hyperinflation look like
- Covered in a previous SWW episode – but first is Lowering supply – supply shock
- Increased demand – helicopter money – giving people money to spend
- By this comes back to confidence – if there I no confidence – people will save the funds
- In Australia – may not materialise – a lot of our goods are imported and also – people spend more to pay mortgages
- So biggest concern is the currency lowering to lead to inflation
This said – lets look at asset classes –
- Cash – Right now – a great asset class to have as it can be used to buy longer term assets – but Cash won’t be king once inflation kicks in – given the low interest rate environment – inflation will destroy the real value of money
- Fixed Interest – Debt Instruments – not all made equally – but it is still all debt -
- Government bonds – Are growing in size now due to deficit spending
- Interest rate drops have boosted existing bond prices based around coupon payments
- But the more of these out there – and the fact that interest rates have very little downwards movements – can be a risk for prices long term – also – some do suffer inflation risks
- Capital Notes or corporate debt – would avoid
- Capital notes – used as part of bail ins if banks default – APRA controlling super funds and banks has been a match maker – forced them to buy – Example QSuper – most of their ‘bond fund’ is in corporate debt – wont disclose which companies but given the rise over the past 2 years as banks have been issuing notes – have one guess where the money is going
- Overall – with QE and lowing interest rates and yields – the next decade for FI may not look so pretty
- Gov Debt – have trouble paying this back but the central banks are buying these up at this stage though QE – prices as well can crash if there is a long maturity and higher duration risks – increasing the sensitivity to interest rate movements
- Corporate debts – especially capital notes issued by the banks at risk – would avoid – interest rate risks but risks of default or being used as bail in if notes in banks is high
- Shares – longer term – starting to look attractive
- Recovery at this stage of markets going up – dead cat bounce – been playing out for the past 2 weeks – bouncing around the 5,000 mark – whilst low prices – Have the potential to drop lower at this stage
- Personally – think they may – Crashes come in compounding events –
- GFC – took 18 months to play out – first 9 months saw a crash but then the Lehman Brothers collapse created a further crash –
- When did things turn around after the GFC – When the global committee known as the G20 got together – Again – Governments controlling the economy after the mess of their legislation changes in 1986 in Aus and the UK and 1999 in the USA came to fruition
- From here – if we do drop back to the lower support levels of 4,000 – but from current levels would be a 22% drop – hence why DCA is going to be a better strategy over the next 6-12 months as opposed to dumping in everything now
- Nobody knows where the bottom will be – has to do with confidence – markets responded to government stimulus – but market sees this as a positive sign – as it is speculative – which is a fragile reason for a price gain – similar to large crashes of the past – do have a dead cat bounce – who knows when this may continue to decline – so slow and steady entering markets is the best approach at this stage
- Gold and precious metals – provides a good hedge against inflation or market crash from here
- Gold price – based around what the future of the economy looks like –
- The best thing about gold and precious metals – prices in USD – so the price of these assets help to avoid the Aud demise if we continue to deficit spent – USD gets away with it – can finance through being global currency reserve –
- But petro dollar may have seen its slow demise along with the de-dollarization I talked about 5 months ago with the China/Russia alliance and their IMF SDR backing
- Government bonds – Are growing in size now due to deficit spending
All this being said – no way to tell exactly how the policies will play out – or how the market will respond –
- Saw on Monday a 7% gain in the ASX due to the announcement of more stimulus by governments – But at what long term cost – this money is coming from debt
- Therefore - This money needs to be paid back – but not if Governments default
- Current size - $189bn – with 19m adults in Aus - $10,000 more per person that gets added to the debts that we owe governments – if you are a tax payer
- But the market is now more speculative –
Summary –
- IMO – Best investments for the longer term – start to rebalance back towards shares
- Bottom is probably not here – but if markets continue to decline – continue to rebalance
- Have capital hedges in a portfolio – Gold and precious metals
- Evolving at the moment – so hard to say when timing is best.
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, I’m Louis. Today, I want to talk about overcoming fears and focusing on your purpose and making a plan to become self-reliant – fears of the virus, or government responses and losing jobs - and instead focusing on what can get you through hard times – purpose and relationships – focusing on the positives
There is a lot of fear going around – it a massive distraction and disruption to almost everyone’s lives –
- People are losing jobs – losing an income and being out of work is very stressful
- Governments are taking more control – population is becoming reliant on governments
- Central banks taking further control over financial markets – QE, money printing and funding the government deficit spending
- General panic hoarding goods and people turning on their fellow humans – as they are competition or a threat of getting them infected
The constant reporting creates worry – either getting the disease, losing your livelihood, or having to fight others for the precious resource of TP – availability bias – the framing as well – saying the virus is something to worry about – but the Government are the ones implementing these draconian rules – but this is in our best interest of course
- And it seems like there is no way around it – governments telling people and business what they can do to the extreme – fining people and businesses for not doing as told – forcing people into shutting their own businesses down or having to be more than 1.5m apart in public –
- Guess speeding fines weren’t enough – not fining for not socially distancing
- But what is bad for your health – being in a reactionary state – things happening to you – destroys cells which affect your microbiology
- Being isolated and not able to go outside and get some Vitamin D – creates a horrible state for humans to live
- But a very easy environment for Government’s to control – Divide and conquer – Caesar did this to the Gaul’s
- We are easy prey when isolated – as society has become – with this disease – now people are becoming ever more so
people get sick and die - Fact of life – people die – 210,000 every day –Government has turned this into control Stalin – one death is a tragedy – one million is a statistic – Irony in this statement – for those close to us – it is a tragedy to lose someone – but we all must go through it – but when it comes to Government reports – these deaths are just statistics – and statistics can be manipulated – people dying of heart attacks – but they are added to corona deaths
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Made people afraid of numbers – and focusing on the negatives – preying on availability heuristics – but not reporting on other numbers –
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A recent Johns Hopkins study claims more than 250,000 people in the U.S. die every year from medical errors. Other reports claim the numbers to be as high as 440,000.
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Medical errors are the third-leading cause of death after heart disease and cancer
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But there are plenty of good things happening –
What to do? Become self-reliant is the only way out – the government controls are ramping up – so have to get outside of this – and reliance – like with Age Pension
- Irony in me saying this – to be in my profession I need to be registered and controlled by 5 Government Agencies – ATO, ASIC, AUSTRAC, TPB, AFCA – even with this – focusing on your purpose can help get through their interference and focus on the positives – and make part of your long term purpose to become FI
Purpose – to become financially independent - what does this mean – income self-generated and not relying on the Government – To help work out your Purpose – get the workbooks from FF – in the members section – if in lock down – good chance to complete the workbooks
First step - Take 100% responsibility – Don’t be a victim and let things happen to you - To be successful you need to be 100% responsible for your own life.
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How to start taking 100% responsibility:
- Give up all excuses – have to stop playing the victim - takes a lot of less mental energy by giving excuses up. They don’t matter. Past is the past.
- all the reason why you can’t and why you haven’t up until now, and all your blaming of outside circumstances. You have to give them all up forever.
- Change your response to events – try to make this a habit - takes time to change.
- need to regain control over your mindset which will determine your behaviours in responses to the event. The first question should be “what can be done to get the best outcome?”.
- Equation: Event + Response = Outcome (Jack Canfield)
- If you get stuck in a traffic jam - ‘I hate this traffic, this sucks’ or ‘It isn’t a big deal in the grand scheme of things’. One will lead to a better outcome than the other by reducing your anger at the situation. If the traffic was the problem, then everyone would have had the same response, but as you can respond in the way you want, you can get a better outcome.
- It is important to change your responses if your current ones aren’t getting you the outcomes you are after. If you continue the same behaviour (responses) then you get the same results.
- Give up all excuses – have to stop playing the victim - takes a lot of less mental energy by giving excuses up. They don’t matter. Past is the past.
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This is the process of learning through failure
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You can’t control the event, but you can control your response which leads to a better outcome.
- Successful people wouldn’t be where they are if they let their excuses take control
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Blaming and excuses are a waste of time. It may make you feel better in the short term, but it doesn’t solve the problem and takes away energy.
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Give up complaining! We are all guilty of complaining, either voicing complaints to others or mumbling them to ourselves.
- The truth is that we complain about events that we know can yield a better outcome than our current situation. We don’t complain about things that just exist. For instance, we don’t complain about gravity being gravity. To give up complaining, change is needed in your response.
- We normally don’t though as changing a response can be uncomfortable. People may judge you but who cares? It will take effort but it is worth it!
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Complaining is pointless in most situations as we normally complain to the wrong people anyway. You will complain about your partner to your friends, about your boss to other employees. We never talk to the person we have the issues with.
Overall, taking 100% responsibility makes life simpler. If you accept that you have 100% responsibility, therefore control you can become the master of your own success - the world doesn’t owe you anything, you have to create it!
Once you are there – Figure out what your purpose is – this is the path that will give you guidance
- It is important to find your purpose as if you don’t know what you want, it is impossible to get it.
- ‘what is the meaning of life?’ - is no one overall meaning to life except to exist and eventually die
- But there is a meaning to your life. You just need to find it and live up to your potential – purpose
- you need to decide what you want and what is important. You have to Be clear why you are here!
- Have to look at what you want – not what others want
- This is a societal norm, which is slowly changing. Most people spend their lives conforming in to societal dreams.
- Programming in life slowly changes our real purposes to conform to the new social norms. This leads to taking actions in life which will get the approval of others rather than ourselves
- We are told from childhood the word ‘no’ and ‘don’t do that’. While this was said to help protect us, it has led to crushing dreams.
- While conformity has been important in evolution (by not sticking out and getting ousted by the tribe), it has lead into conforming to a normal level of life or living someone else’s dreams.
- This is why you need a reason to get out of bed in the morning which is your purpose. If you have this purpose, something to work for, you will be successful and happier along the way.
- What is your purpose? – if you don’t know, to figure this out requires a bit of brain storming.
- need to write some lists of things that are important in your life. Use the workbook:
- I care about, What I am great at, I love doing – try to write 20 things for each: total of 60
- The more the merrier – doesn’t have to be something big, more = more brainstorming
- beside each one put a plus or minus against it – if you really enjoy or are great at = put a plus against it.
- something that you just put in there to make up the numbers, put a minus sign against it.
- From those from each list – select the top 2 with plus signs against them – put them in the below this
- This will leave you with 6 things in total.
- You might find that the things you are great at are the things that you love doing, because you care about them!
- common to see this sort of overlap as generally, if you enjoy doing something, you are normally pretty good at it!
- This is how you find your purpose in life. It will take some playing around with to get right. Be honest with yourself.
- example: care: Making a difference in lives, great at: personal finance, I enjoy doing: Teaching
- It really is that simple and needs to be refined over time, but what is really important is action. Taking action towards your purpose will be the difference between following your purpose versus following someone else’s. We will cover off on the action steps in the next episode.
- need to write some lists of things that are important in your life. Use the workbook:
Once you have your purpose, you need to know what you want out of it: getting the vision right and start achieving it! Time to build a vision of your ideal life - Having a purpose is the reason to get out of bed each day.
- Having a vision, allows you to complete a picture of your ideal life.
- A vision is an ideal picture of how you want your life to look - Your vision should show you where you want to head and provide some motivation and focus to help achieve this. Life happens, there will always be setbacks but the best way of overcoming setbacks is keeping your long-term vision in mind and working towards this.
- So how do you build your vision? - first step is to make three lists,
- What I want: This list is for the material things you wish to have in your life. From houses, cars, even owning a business.
- What I want to be: This list is for the type of person you want to be, from happy and positive to being a leader in your field.
- What I want to achieve before I die: This list is practically a bucket list where you can think about the things that you want to achieve in life.
- Under each heading, you need to list 20 things for each one so once you are done you should have 60 in total.
- hard to come up with 20 things for each, so listing small things or expanding on larger ‘wants’ can help. So instead of just saying ‘I want to be successful’, list out individual items which mean success to you.
- Once you have a list of 60 things - sort through your lists and placing each in to seven areas of your life.
- This covers off 7 areas in total. For each one you need to have a clear picture of what each area should look like!
- Work/career – What are you doing for your career? Is it something that you enjoy? Is it something you can have freedom? Can you make a lot of money from it?
- Finances – What does your financial situation look like? Are you out of debts? Do you have a portfolio of investments, paying you an income? This is the key to financial independence after all. You need to have enough in finances to give you all the free time in the world to focus on everything else.
- Free time/Recreation – What do you do in your free time? Are you going on holidays each year?
- Health/Fitness – What is your ideal fitness? Are you 80 still in great physical and mental health?
- Relationships – Marriages, kids, parents, everyone etc.
- Contribution to the world – Do you give back to society?
- Personal goals – What do you want to do before you die? Can fit into the previous – so merge
- Remember, that your personal vision is where you want to be – so you need a clear picture on what it looks like, what it feels like, you should almost be able to taste it!
My purpose – help people become financially independent – and through doing this become FI myself
- Face your fears and anxieties so they don't become debilitating. Identify ways to create a sense of personal control or mastery in your life. Practice stress reduction techniques, such as mindfulness meditation or get outside and exercise. Shift your focus to the positive emotions in daily life
Get outside of the Fear – Don’t let Government dictate to you what you should be afraid of – as this is a control mechanism – done a few eps months ago on how trauma is a tool used for population control – search trauma-based society
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition.
- Always told to listen to the experts – argument by authority – The experts know what is best for you –
- Also – the higher authority in your life – the government – knows what is best for you
- Now - You aren’t allowed to gather at home with more than 10 people – have to socially distance in public or face a $1,000 fine – due to a central power telling you so
- Interesting thing with experts and higher authorities – we only ever hear from one side – the side that works in with the Governments narrative
Today – want to share What are other experts saying? We have to believe all experts after all - There are plenty of Other experts – who have differing opinions
- Dr Joel Kettner- former Chief Public Health Officer for Manitoba province (Canada between Saskatchewan and Ontario) and Medical Director of the International Centre for Infectious Diseases – must be worried right?
- What he says: I have never seen anything like this, anything anywhere near like this. – Sounds bad right?
- I’m not talking about the pandemic, because I’ve seen 30 of them, one every year. It is called influenza. And other respiratory illness viruses, we don’t always know what they are. But I’ve never seen this reaction, and I’m trying to understand why. I worry about the message to the public, about the fear of coming into contact with people, being in the same space as people, shaking their hands, having meetings with people. I worry about many, many consequences related to that. In the province of Hubei, where there has been the most cases and deaths by far, the actual number of cases reported is 1 per 1000 people and the actual rate of deaths reported is 1 per 20,000. So maybe that would help to put things into perspective.
But it might be very deadly – or infectious –
- Dr Sucharit Bhakdiis a specialist in microbiology - head of the Institute for Medical Microbiology and Hygiene and one of the most cited research scientists in German history
- What he says: We are afraid that 1 million infections with the new virus will lead to 30 deaths per day over the next 100 days. But we do not realise that 20, 30, 40 or 100 patients positive for normal coronaviruses are already dying every day. [The government’s anti-COVID19 measures] are grotesque, absurd and very dangerous. The life expectancy of millions is being shortened. The horrifying impact on the world economy threatens the existence of countless people. The consequences on medical care are profound. Already services to patients in need are reduced, operations cancelled, practices empty, hospital personnel dwindling. All this will impact profoundly on our whole society. All these measures are leading to self-destruction and collective suicide based on nothing but a spook.
- What about Italy? Dr Yoram Lassis an Israeli physician, politician and former Director General of the Health Ministry. He also worked as Associate Dean of the Tel Aviv University Medical School and during the 1980s presented the science-based television show Tatzpit.
- What he says:Italy is known for its enormous morbidity in respiratory problems, more than three times any other European country. In the US about 40,000 people die in a regular flu season and so far 40-50 people have died of the coronavirus, most of them in a nursing home in Kirkland, Washington. In every country, more people die from regular flu compared with those who die from the coronavirus.…there is a very good example that we all forget: the swine flu in 2009. That was a virus that reached the world from Mexico and until today there is no vaccination against it. But what? At that time there was no Facebook or there maybe was but it was still in its infancy. The coronavirus, in contrast, is a virus with public relations. Whoever thinks that governments end viruses is wrong.
So why are scientists referring to it as COVID19 -
- Dr Wolfgang Wodargis a German physician specialising in Pulmonology, politician and former chairman of the Parliamentary Assembly of the Council of Europe. In 2009 he called for an inquiry into alleged conflicts of interest surrounding the EU response to the Swine Flu pandemic – where some members of their board represented the companies producing the vaccines
- What he says: Politicians are being courted by scientists…scientists who want to be important to get money for their institutions. Scientists who just swim along in the mainstream and want their part of it […] And what is missing right now is a rational way of looking at things. We should be asking questions like “How did you find out this virus was dangerous?”, “How was it before?”, “Didn’t we have the same thing last year?”, “Is it even something new?” That’s missing.
What are we spooked of – Covid19 – how did this get its naming – COronaVIrus Disease 2019.
- From the director-general of the WHO: “Coronavirus” refers to the family of viruses that the disease belongs to and is named for its crown-like shapes under a microscope - “corona” comes from the latin word for “crown” – then 2019 is the year
- In naming - “We had to find a name that did not refer to a geographical location, an animal, an individual, or a group of people, and which is also pronounceable and related to the disease,”
- But what is the name given to it within the medical community: SARS-CoV-2
- Coronavirus Study Group of the International Committee on Taxonomy of Viruses - pathogen is “a sister to severe acute respiratory syndrome coronaviruses,” hence the “SARS” in the name
- But the WHO is already pushing back on using the name SARS-CoV-2 for the virus - “From a risk communications perspective, using the name SARS can have unintended consequences in terms of creating unnecessary fear for some populations. For that reason and others, in public communications WHO will refer by using: ‘the virus responsible for COVID-19’ or ‘the COVID-19 virus,’ but neither of these designations is intended as replacements for the official name of the virus.” - Which has SARS at the front – or as scientists call it SARS – 2 - It is essentially SARS 1 and SARS 2 -
- Hendrik Streeckis a German HIV researcher, epidemiologist and clinical trialist. He is professor of virology, and the director of the Institute of Virology and HIV Research, at Bonn University.
- What he says: The new pathogen is not that dangerous, it is even less dangerous than Sars-1. The special thing is that Sars-CoV-2 replicates in the upper throat area and is therefore much more infectious because the virus jumps from throat to throat, so to speak. But that is also an advantage: Because Sars-1 replicates in the deep lungs, it is not so infectious, but it definitely gets on the lungs, which makes it more dangerous. You also have to take into account that the Sars-CoV-2 deaths in Germany were exclusively old people. In Heinsberg, for example, a 78-year-old man with previous illnesses died of heart failure, and that without Sars-2 lung involvement. Since he was infected, he naturally appears in the Covid 19 statistics. But the question is whether he would not have died anyway, even without Sars-2.
- So it is branding – they don’t want to say it is just another form of SARSs – But even Taking what we are being told at face value- it is a new deadly type of coronavirus – Like SARS, MERS or what was a fictional disease (CAPS) use in a ‘war games’ scenario called Event201 –
I like to read and research events – and found some interesting works by a few groups – based around hypothetical scenarios of a virus outbreak – similar to war games, or model UN projects play out –
- Occurred in October 2019 – Event 201 simulates an outbreak of a novel zoonotic coronavirus transmitted from bats to pigs to people that eventually becomes efficiently transmissible from person to person, leading to a severe pandemic. The pathogen and the disease it causes are modeled largely on SARS, but it is more transmissible in the community setting by people with mild symptoms.
- Event 201 – A global pandemic exercise - CAPS Pandemic - Official Statement - Selected moments from the Event 201 pandemic tabletop exercise hosted by The Johns Hopkins Center for Health Security in partnership with the World Economic Forum and the Bill and Melinda Gates Foundation on October 18, 2019, in New York, NY. The exercise illustrated the pandemic preparedness efforts needed to diminish the large-scale economic and societal consequences of a severe pandemic.
Going back further - Operation Lock Step – The Rockefeller Foundation 2010 Report
- Title - “Scenarios for the Future of Technology and InternationalDevelopment- Covers a scenario called “LOCK STEP: A world of tighter top-down government control and more authoritarian leadership, with limited innovation and growing citizen pushback.”
- This about most countries in the world – more government top down control – not much happening with the economy – innovation was being stifled – lots of protests and civil unrest – yellow vests – France and EU – protests in Hungary over shutting their borders, Wuhan over environment, HK over instilling their own rulers – lots of unrest – Similar to where the world was just 3 months ago
- Scenario - “the pandemic that the world had been anticipating for years finally hit. Unlike 2009’s H1N1, this new influenza strain — originating from wild geese — was extremely virulent and deadly. Even the most pandemic-prepared nations were quickly overwhelmed when the virus streaked around the world, infecting nearly 20 percent of the global population and killing 8 million in just seven months…The pandemic also had a deadly effect on economies: international mobility of both people and goods screeched to a halt, debilitating industries like tourism and breaking global supply chains. Even locally, normally bustling shops and office buildings sat empty for months, devoid of both employees and customers.” This sounds eerily familiar.
- Then the scenario gets very interesting: “During the pandemic, national leaders around the world flexed their authority and imposed airtight rules and restrictions, from the mandatory wearing of face masks to body-temperature checks at the entries to communal spaces like train stations and supermarkets. Even after the pandemic faded, this more authoritarian control and oversight of citizens and their activities stuck and even intensified. In order to protect themselves from the spread of increasingly global problems — from pandemics and transnational terrorism to environmental crises and rising poverty — leaders around the world took a firmer grip on power.”
- What was this scenario – one of panic and fear – if enough panic and fear can be forced onto populations – the more they will allow their own freedoms to be reduced for safety
- Safety over freedom - Fear is never a good guide to sound reason. Many people would gladly surrender some of their liberties, in exchange for peace and stability. This is what the game-plan is all about. How much liberty will people give up?
- Too much hype and limited facts; the conclusion is that there is 99% fear, and 1% facts. The main stream media are scant with information.
- Experts opinion on the subject - Dr Peter Goetzscheis Professor of Clinical Research Design and Analysis at the University of Copenhagen and founder of the Cochrane Medical Collaboration. He has written several books on corruption in the field of medicine and the influence of big pharmaceutical companies.
- What he says: Our main problem is that no one will ever get in trouble for measures that are too draconian. They will only get in trouble if they do too little. So, our politicians and those working with public health do much more than they should do. No such draconian measures were applied during the 2009 influenza pandemic, and they obviously cannot be applied every winter, which is all year round, as it is always winter somewhere. We cannot close down the whole world permanently.
- Should it turn out that the epidemic wanes before long, there will be a queue of people wanting to take credit for this. And we can be damned sure draconian measures will be applied again next time. But remember the joke about tigers. “Why do you blow the horn?” “To keep the tigers away.” “But there are no tigers here.” “There you see!” – Simpsons did this with a rock -
- I find these Hypothetical scenarios very accurate to how events have played out – if nobody had tuned into the news last few weeks – and hadn’t talked to anyone – wouldn’t know anything is going on beyond Government announcement to policy changes – living off grid that isn’t reliant on the system
Thought of something very interesting – None of us have a say – Government does the measures – nobody asked if we would like to keep our jobs – they are deemed a hazard and cancelled – The Gov officials still get to keep their jobs – in QLD we are still being forced to go vote this Sat – using social distancing which will be enforced though – for our protection of course – same pencil
The question remains – why would any government destroy the freedoms of the people it is meant to protect – but instead we are treated like children with no say – but in this case the kids are paying the adults – similar to child celebrity parents – didn’t end out so well for calkin – Psychological effects of this – everyone becomes afraid of each other – told to socially distance – other people are the carries and the threat – don’t be close to communities you can rely on – isolate – sperate – fear other people and trust us to protect you
Social snitching – where we are turned against one another – dobbing in those having people over = house parties or going outside – similar to Stalin, Mao’s and NKs populations – use social shame as a way for people to self police
- Based around the normalisation of these measures – what stops this occurring any flu season or the outbreak of a virus – flu season basically lasts all year due to the seasons – if the experts say we need to – people may be likely to follow
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Links:
Rockefeller Report - http://www.nommeraadio.ee/meedia/pdf/RRS/Rockefeller%20Foundation.pdf
Event 201 - https://www.youtube.com/watch?v=AoLw-Q8X174
Experts say - https://www.zerohedge.com/geopolitical/12-experts-question-covid-19-panic
Welcome to Finance and Fury, the Say What Wednesday edition. This week, two questions – both from John’s about banking system security -
First John: I know you’ve spoken about this before, but would be interested to hear about if you think there could be liquidity problems with our banks here in Aus, ie a run on the banks like we have seen on TP etc and in Scotland etc during the GFC. Is our money safe in the banks, or in my case offset accounts with non bank lenders?
Second John: Just a question I’m relation to bank savings. Do you think our savings ‘Australians’ is at risk of being confiscated if some banks were to collapse? I am aware there are Government Guarantees of up to $250k. But with huge stimulus packages in place and potential many more, would it be possible they wouldn’t be able to guarantee this?
Great questions – Run through –
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Liquidity problems – bank runs –
- Are your funds in banks safe? Offset accounts - Will the guarantees kick in?
Go into massive detail on a few episodes – a couple of them are called if you want to look them up – back in July 2019
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The Cash Bill - stabilising the financial system for negative interest rates, Bail Ins and more, all at your expense
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The Governments war on cash and personal freedom continues with the introduction of the Currency (Restrictions) Bill 2019
- Financial Reset – Investments to avoid in a negative interest rate world
Human psychology on bank runs –
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Recent example of how bank runs occurs – TP – people are worried that there wont be enough – so rush and horde goods – panic buying
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But when the cash is yours – want to withdraw it from the bank
- What is different now – online banking
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Bank runs on cash – banks have other options – capital notes –
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APRA has been ready for bank runs – legislated each bank issues billions in notes – fixed interest hybrids that act as capital requirements of tier 2 – based on lending
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Then – banks can afford to lend more based on this and require less on deposits
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Banks only lose money on the loans – deposits are a liability to them – pay you interest – well not anymore – or in negative rate environments – good deal for banks –
- But bank runs might not be that bad – if they are – then can shut down people withdrawing funds, or limiting to an amount per day
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The cash restriction bill can mitigate the cash economy and business/government no longer taking cash is having this effect to not be able to use cash
Are banks safe – Depends – may not collapse but may charge you interest to store money with them
Is your money safe in banks - other factors like bail ins and deposit schemes
According to an IMF paper titled “From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions”:
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The language is a bit obscure, but here are some points to note:
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What was formerly called a “bankruptcy” is now a “resolution proceeding.”
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bank’s insolvency is “resolved” by turning its liabilities into capital. Insolvent TBTF banks are to be “promptly recapitalized” with their “unsecured debt” so that they can go on with business as usual.
- This power is statutory. Cyprus-style confiscations are to become the law. Some countries can – ours is a grey zone
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A lot of the recommendations have come from the Financial Stability Board – Reformed in 2009 – Background for context
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Chairs – Current – former partner of Carlyle Group – Last – 30 years at Goldman Sachs, Mario Draghi – ex Goldman
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Current ECB president - member of the Group of Thirty founded by the Rockefeller Foundation. The Group of Thirty is a private group of lobbyists in the finance sector
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FSB – recommended that banks raise a “buffer” of securities to be sacrificed before deposits in a bankruptcy
- TBTF banks are required to keep a buffer equal to 16-20% of their risk-weighted assets in the form of equity or bonds convertible to equity in the event of insolvency - Called “contingent capital bonds”, or “bail-in bonds,”
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fine print that the bondholders agree contractually (rather than being forced statutorily) that if certain conditions occur (notably the bank’s insolvency), the lender’s money will be turned into bank capital.
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Just know that most banks alone aren’t able to do that much damage – but when the people working for banks get the authority and executive powers of Governments to socialise the financial system – bad outcome for us
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This system is a socialist policy – not free market economics – technically closes to fascist system of Government and business merging/restricted, but without the central planning
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Either way – Result – Recommendations for policy which incentivises risk taking, then privatises profits but socialises losses
the end game outlined in the IMF's post – their ideal world — one without cash and to change human behaviours financially to act as ‘homoeconomicus’ – the rational individual that the models require to work – by rational – what they think is the best decision to maximise utility – how most economics works – what would an economist do – most people aren’t economics and don’t do this – nor should they – hard to measure utility across individuals – different values
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What behaviours are they trying to promote with negative rates and cash bans
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if depositors have to pay the negative interest rate to keep their money with the bank = consumption and investments are more attractive – economic theory says that GDP should go up – jolt lending, demand, etc.
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But if rates go lower = people borrow more, and have less cashflow due to paying debts = no consumption occurs
- Negative rates then free up cashflow – as your principal repayments start to reduce – spend in economy
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Banks don’t need depositors funds as much – savings rates are about 2.8% anyway – due to notes issued as replacements – ones that can be controlled through legislation – easier than stopping people doing a bank run
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Just in case – still want to make sure that this reduces in chance of occurring – cash restriction bill
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the central banks get greater control to influence your behaviour and economic outcomes.
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For those who have faith in monetary policy and central banks, this is no problem - one year on from the banking royal commission, faith in our financial institutions — and the regulators who failed to police the banks' bad behaviour — isn't exactly at an all-time high
- Creating a weird world where savers are penalised — and borrowers get paid — upside down
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Bail in laws –
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Offset account – as it is a deposit account – can be used as bail in provision –
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Most people with loans would have much more in offsets than savings – or should at least –
- But the catch is that all your deposits will likely to be with one ADI – and potentially above the $250k
But how good are government guarantees
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Government Guarantees – May not actually help - You have a few problems there: A guarantee only applies to a bank going insolvent and collapsing— with not enough money left over for depositors. Bail-ins (if they are in fact legal) will just take your money to prevent that from happening. That is, the government guarantee won't cover a bail-in.
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Guarantees are capped at $20B per ADI – stated in Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008
- Activation of the EAFD 1.20 - A declaration outlines the total amount available to make payments to depositors of a declared ADI. For the first three years of the scheme (from 2008), the amount that can be appropriated for the purposes of meeting depositors’ entitlements is unlimited. After three years, the maximum that can be appropriated is $20 billion. The declaration must also outline the amount available for the administration costs for implementing the scheme up to a maximum of $100 million
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RBA aware of this - in their “Depositor Protection in Australia” - “Payouts of deposits covered under the FCS [The Australian Government’s Financial Claims Scheme] are initially financed by the government through a standing appropriation of $20 billion per failed ADI [Authorized deposit-taking institutions]
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Total size of deposit accounts totalled $2 trillion (Commonwealth Bank — $581 billion, ANZ — $467 billion, NAB— $407 billion and WESTPAC — $533billion). This includes savings, term deposits, chequing, debit card, transaction accounts, mortgage offset accounts, pensioner deeming accounts, retirement savings accounts etc… So only $80 billion (or 4%) out of this $2 trillion dollars is actually covered by the guarantee.
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Question remains – once they activate it – where will the money come from?
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If the gov is set on debt funding – can get more printed funds to cover the costs
Summary
Is our money safe in the banks, or in my case offset accounts with non bank lenders?
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Bank runs may be hard now and if they start occurring – can be ceased quickly
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The effects would be minimal compared to runs of the past with the new funding mechanisms of capital notes by the banks
- Non-bank lenders though - non-banks cannot accept deposits therefore they are not ADIs (authorised deposit taking institutions) - source their funds from elsewhere. These funds are wholesale funds usually from Australian Banks or overseas institutions – Falls under ASIC regulations now APRA – so non banks don’t have the same ‘safety nets’ as ADIs
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Do you think our savings ‘Australians’ is at risk of being confiscated if some banks were to collapse?
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First step of bail ins would be to use the capital notes to convert into shares (equity) – lowering prices of shares – or to write these off – so the holders of these notes would lose funds but banks would remain solvent
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If this fails – may have to do Cyprus style bail ins for deposits – deposits/offset accounts are
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Will the Gov be able to cover the deposit scheme?
- Govs are printing more to spend isnt the issue – but the maximum amounts allowed under the legislation
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury –
- Last year through September, October and November – was running through the future of the economy – was looking at this through a few episodes – interesting to see a lot of what was discussed playing out now
- In those episodes – went through a Big disclaimer - transformational markets are something that cannot be 100% predicted – no way to know where it will end up
- But did look at possible outcomes proposed based upon what the economists and monetary officials were saying – they are who influence policy decisions after all- are recommending to implement
- What we went through is a new evolutionary phase of the monetary system - combining QE, government deficit spending, and ‘helicopter money’ - the nuclear fusion of monetary and fiscal policies – aimed to be the life line to the economy – regardless of the economies economic output –
- Also went through what would be needed to implement this – basics economic behind the policies – e.g. trying to stimulate inflation and avoid deflation (real increase in debts) at all costs, also greater control over the monetary supply – avoiding people using or hoarding cash,
- Major proposals were permanent QE implementation, lowing of interest rates and the introduction of the cashless economy: To get that – the main components of the market economy going forward were 5 major policy steps -
- Permanent QE
- Lowering rates and moving towards cashless economy to avoid BOJ bank run situation
- Fiscal expansion – Government spending – redistribution
- Helicopter money – additional government payments to the population or lowering taxes
- Abandon the dollar – IMF SDR – new reserve digital currency – or Central bank/national government crypto
- Episode names – if you haven’t heard them or cant remember them – and want a refresher
- Ep 1 - We are entering new economic and investment territory – An introduction to QE, what does it look like and what does it mean for investments?
- Ep 2 - What will be the next market interventions from Central Banks to achieve inflation targets?
- Ep 3 - How Government spending through fiscal expansion aims to help the economy today, for future generations to worry about repaying.
- Where are we at now – Seeing a lot of these policies being rolled out
- fiscal expansion through abolished government debt ceilings and increase government spending, lowering of interest rates and the de facto implementation of the cashless economy, now the proposals of helicopter money policies (‘stimulus’ bonuses to people, cutting to taxes, universal basic income, and their like, all funded through the expanded fiscal spending) i.e. – giving money to the population as part of demand side economics
- What was missing – a reason – there needed to be some form of economic panic and collapse to justify massive efforts – economic shutdown to government controls
- The Fed had no reason to cut rates – Places like the RBA were expected to in 6 months, but not cutting 0.5% in a matter of weeks
- announced extraordinary measures to help prevent a recession - The RBA said it would also provide at least $90 billion at 0.25 per cent over three years to banks if they lend that cash to small and medium-sized businesses
- Central banks had no reason to increase liquidity – QE - RBA will buy Australian government bonds as part of its first-ever quantitative easing program
- Governments had no justifiable reason to blow up debt ceilings and expand fiscal spending – especially in a time of asset price growth and reasonably predictable low economic growth rates – it is okay if numbers are low as long as they are expected
- The Fed had no reason to cut rates – Places like the RBA were expected to in 6 months, but not cutting 0.5% in a matter of weeks
Today want to go through Reserve bank and government responses – Monetary and fiscal side implementation of the sort of policies covered in October last year – 5-6 months ago
Central banking side of things – Monetary policies
- Lowering interest rates – cost of money goes down – interest repayments go down –
- QE and repo markets –
- Quantitative easing – provides Yield curve control to keep the 3-year bond rate at 0.25%: we would have thought they would have gone out for 5 years, given banks need to issue debt with this duration to fill lending books. This will be achieved by purchases of Australian Government bonds in the secondary market, starting today, but the size and duration were not detailed; and
- QE - provide a three-year funding facility to provide cheap loans for Australian banks - A Term-funding Facility: allows banks to borrow 3% of their outstanding funding from the RBA at 0.25% for three years and given current outstanding credit of around AUD2.7 trillion, this provides around AUD90 billion in ultra cheap funding
- Facility that allows a better pass through of the rate cut for mortgages – but banks could keep it for themselves. They will be able to get even more funding from this facility if they lend more to small and medium-sized businesses
- purchases of Australian government and semi-government bonds
- Done directly to provide state governments with the ability to fund larger stimulus programs.
- However, the Central Bank and government bonds are supposed to be risk free and by lending to corporates, they no longer are – it’s a side point, but they are now exposing themselves to currency and credit risk. The key questions are not only what triggers an event, but also how do they decide where the line of going to far is?
- The key unknown is how impaired the transmission mechanism of monetary policy is with COVID-19 and ultra low rates, i.e. will cheaper funding be passed through to the real economy?
- Based around what occurred in the USA – No – just stays within the financial system -
- That said, if the supply side of the economy survives (rather than being bankrupt), there will be an initial bout of disinflation as supply is greater than demand (bad for equities in an earnings sense). Overall, we suspect the package reduces severe tail risks, but not recession risks, although they are doing what they can to minimise the economic dislocation of COVID-19.
That is why more is needed – Fiscal side as well as a flow through of expanded spending and helicopter money
Before this - Governments had no justifiable reason to glow up debt ceilings and expand fiscal spending – especially in a time of asset price growth and reasonably predictable low economic growth rates – it is okay if numbers are low as long as they are expected – had no reason to increase payments to the population
Fiscal side of things –
- Package announcement - $17.6 billion across the forward estimates, representing 0.9 per cent of annual GDP. This package will protect the economy by maintaining confidence, supporting investment and keeping people in jobs. Additional household income and business support will flow through to strengthen the wider economy
- Also – announcement of around $66bn in total
Increased government intervention – what are the proposals -
- Delivering support for business investment - The Government is backing businesses to invest to help the economy withstand and recover from the economic impact of the Coronavirus
- two business investment measures in this package are designed to assist Australian businesses and economic growth in the short term
- Increasing the instant asset write-off - the Government is increasing the instant asset write-off threshold from $30,000 to $150,000 and expanding access to include businesses with aggregated annual turnover of less than $500 million (up from $50 million) until 30 June 2020
- Backing business investment - The Government is introducing a time limited 15-month investment incentive (through to 30 June 2021) to support business investment and economic growth over the short term, by accelerating depreciation deductions.
- Businesses with a turnover of less than $500 million will be able to deduct 50 per cent of the cost of an eligible asset on installation, with existing depreciation rules applying to the balance of the asset’s cost.
- Cash flow assistance for businesses - This assistance will support businesses to manage cash flow challenges resulting from the economic shutdowns – aims to help businesses retain their employees if incomes drop –
- two measures are designed to support employing small and medium enterprises and to improve business confidence
- Boosting cash flow for employers - The Boosting Cash Flow for Employers measure will provide up to $25,000 back to small and medium-sized businesses, with a minimum payment of $2,000 for eligible businesses. The payment will provide cash flow support to businesses with a turnover of less than $50 million that employ staff.
- Go to around 690,000 businesses employing around 7.8 million people.
- Supporting apprentices and trainees - The Government is supporting small business to retain their apprentices and trainees. Eligible employers can apply for a wage subsidy of 50 per cent of the apprentice’s or trainee’s wage for up to 9 months
- two measures are designed to support employing small and medium enterprises and to improve business confidence
- Stimulus payments to households to support growth This measure will assist around 6.5 million lower income Australians, which will support confidence and domestic demand in the economy
- Stimulus payments The Government will provide a one-off $750 payment to social security, veteran and other income support recipients and eligible concession card holders
- Around half of those that will benefit are pensioners.
- Assistance for severely affected regions - This measure provides $1 billion to support regions most significantly affected by the Coronavirus outbreak
- Stimulus payments The Government will provide a one-off $750 payment to social security, veteran and other income support recipients and eligible concession card holders
- Support for affected regions and communities - The Government has set aside $1 billion to support those regions and communities that have been disproportionately affected by the economic impacts of the governmental control - including those heavily reliant on industries such as tourism, agriculture and education.
- Targeted measures will also be developed to further promote domestic tourism.
- The Australian Tax Office (ATO) is also providing administrative relief for some tax obligations for people affected by the Coronavirus outbreak, on a case-by-case basis.
- two business investment measures in this package are designed to assist Australian businesses and economic growth in the short term
Additional measures include:
- Temporarily doubling the Jobseeker Payment, previously called Newstart
- Allowing people to access $10,000 from their superannuation in 2019-20 and 2020-21
- Guaranteeing unsecured small business loans up to $250,000
- Reducing deeming rates by a further 0.25 per cent for Centrelink
The total economic assistance package is worth $189 billion, according to the Government, equivalent to 9.7 per cent of Australia's gross domestic product
Central banks alone have a large challenge - this is something way beyond their control – Governments are driving the shut downs
- Economic quarantines can’t be fought with interest rates and liquidity injections - this is a matter of confidence – look at how the markets initially responded the emergency measures – went down in price – market lost value –may have some thing to do with lack of initial confidence – things must be had if Central banks are doing this – so loss aversion kicks in
- Central banks have found that they have run out of ammo – especially USA – become evident over the past 12 years
- Governments as well set the public responses – so they are expanding their fiscal responsibilities as part of helicopter money under modern monetary theory
- Interesting to see how things play out from her
- Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/”
Welcome to Finance and Fury, The Furious Friday edition
You probably are exhausted about the coronavirus - What you probably haven’t heard about is A little known type of bond created in 2017 by the World Bank.
- The World Bank – Headquartered in Washington DC – back in June 2017 – issued Pandemic Emergency Financing Facility (PEF) – call them pandemic bonds
- Technically their debt/lending arm – the International Bank for Reconstruction and Development
- Facility created by the World Bank to channel surge funding to developing countries facing the risk of a pandemic
- Is an international organisation created in 1944 – part of the Brenton woods era of creation of agencies
- The World Bank has two main goals: to end extreme poverty and promote shared prosperity – does this primarily by providing loans to its borrowing member government clients in middle-income countries
- Loans in the form of bonds – done so through the international capital markets for 70 years to fund its activities
- 2017 – the World Bank issued $425 million in a new type of “pandemic bonds” - Marks the first time that the World Bank is in the business of infectious diseases – with a maturity in just a few months – July 2020
- Was oversubscribed by 200% - with investors eager to get their hands on the high-yield returns on offer
- World Bank Group President Jim Yong Kim said. “We are moving away from the cycle of panic and neglect that has characterized so much of our approach to pandemics. We are leveraging our capital market expertise, our deep understanding of the health sector, our experience overcoming development challenges, and our strong relationships with donors and the insurance industry to serve the world’s poorest people. This creates an entirely new market for pandemic risk insurance. I especially want to thank the World Health Organization and the governments of Japan and Germany for their support in launching this new mechanism.”
- How does it work - Investors buy the bonds and receive regular coupons payments in return but if there is an outbreak of disease, the investors don’t get their initial money back
- PEF financing to eligible countries will be triggered when an outbreak reaches predetermined levels of contagion, including number of deaths; the speed of the spread of the disease; and whether the disease crosses international borders. The determinations for the trigger are made based on data as reported by the World Health Organization (WHO)
- There are two varieties of debt, both scheduled to mature in July 2020.
- First bond raised $225 million - coupon rate of around 7% p.a. Payout on the bond is suspended if there is an outbreak of new influenza viruses or coronavirus (SARS, MERS).
- The second, riskier bond raised $95 million at an interest rate of more than 11%. This bond keeps investors’ money if there is an outbreak of Filovirus, Coronavirus, Lassa Fever, Rift Valley Fever, and/or Crimean Congo Hemorrhagic Fever.
- The World Bank also issued$105 million in swap derivatives that work in a similar way to protect the losses
- Done to attract a wider, more diverse set of investors – as it minimises the loses
- Countries eligible for financing under the PEF’s insurance window are members of the International Development Association (IDA) – an arm of the World Bank Group that provides finance for the world’s poorest countries
- The PEF, under its insurance window, has the capacity to provide payments up to a maximum of US$ 425 million during its initial 3-year period for all qualifying outbreaks combined
- But the catch is that there are established ceilings of maximum payments for each of the disease families covered. The maximum payout per disease is capped at US$275 million for pandemic Flu, US$150 million for Filovirus - but US$195.83 million for Coronavirus – less than half of funds raised
- Technical side to these bonds – in essence - are a combination of bonds and derivatives priced today (insurance window), along with a cash window, and future commitments from donor countries for additional coverage – convoluted and complex structure
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What are these windows - The PEF has two windows.
- The first is an ‘insurance’ window with premiums funded by Japan and Germany, consisting of bonds and swaps including those executed today.
- The bonds and derivatives for the PEF’s ‘insurance’ window were developed by the World Bank Treasury in cooperation with leading reinsurance companies Swiss Re and Munich Re - Swiss Re Capital Markets is the sole book-runner for the transaction
- Swiss Re Capital Markets Limited, Munich Re and GC Securities were also joint arrangers on the derivatives transactions.
- The bonds will be issued under IBRD’s “capital at risk” program because investors bear the risk of losing part or all of their investment in the bond if an epidemic event triggers pay-outs to eligible countries covered under the PEF.
- The second is a ‘cash’ window, for which Germany provided initial funding of Euro 50 million. The cash window will be available from 2018 for the containment of diseases that may not be eligible for funding under the insurance window.
- The first is an ‘insurance’ window with premiums funded by Japan and Germany, consisting of bonds and swaps including those executed today.
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A pandemic has been called - The premiums bondholders have received thus far were largely funded by the governments of Japan and Germany, with some from Australian Aid – seems like the taxpayers have been covering the costs of this –
- Like the whole funding for the WHObehind the United States and United Kingdom -but yet Reports have claimed that most of the bondholders are firms and individuals based in Europe – so using tax funds to pay the investors in these bonds
- Claims that investors who purchased those products could lose millions – Who bought these? - Asset managers – about 16% - Pension funds about 42% of the risky bonds – but the derivative positions should cover most
- But the individual list of bondholders are not publicly available – just the types of funds
- Market analysts and non-aligned economists have argued that these pandemic bonds were never intended to aid low-income pandemic-stricken countries - instead to enrich the financial sector
- American economic forecaster Martin Armstrong went on the record to call the World Bank’s pandemic bonds “a giant gamble in the global financial casino” – due to the derivative structures and counterparty risk - these bonds could present a structured derivative time bomb – all exploding at the same time the government controls around the pandemic are tanking markets
- Armstrong went on to say that it is in WHO’s interest to declare the coronavirus outbreak a pandemic, but noted that, in doing so, they would cause bondholders to take a significant loss bottom of forms – but only if the derivatives don’t provide shift the risk to the counterparties
- Irony of this scheme - – ineffective for doing anything to reduce an outbreak – or provide funding in a timely manner
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- These pandemic bonds fund created by the World Bank “to channel surge funding to developing countries facing the risk of a pandemic” and the creation of these so-called “pandemic bonds” was intended to transfer pandemic risk in low-income countries to global financial markets – remember this was the WHO who backed the World Bank’s initiative – as triggering a pandemic is in their authority
- Many policymakers have criticized the World Bank's pandemic bonds - Under their provisions, the bonds haven't yet made any payouts to threatened countries, because their terms require a waiting period of 12 weeks from when the triggering outbreak began
- Goes against what advocates said these pandemic bonds are meant to do. There was initially a belief that money would become rapidly available to countries early on in an outbreak
- If the goal was to stop a disease from spreading to new countries, then time was of the essence in setting a triggering event -- and unnecessary delays are incredibly counterproductive.
- Critics, however, have called the unnecessarily convoluted system “World-Bank-enabled looting” that enriches intermediaries and investors instead of the funds intended targets, in this case, low-income countries struggling to fight a pandemic. These critics have asked why not merely give these funds to a body like the Contingency Fund for Emergencies at the World Health Organization (WHO), where the funds could go directly to affected countries in need.
- Even Larry Summers, the former World Bank chief economist and the Secretary of the US Treasury who recommended sending garbage to poor countries dismissing the PEF as “financial goofiness.”
- The program was “designed to fail” because the bonds were crafted in order “to reduce the probability of payout but also limit the amount of funds to be paid out in an event to the derivative counterparties
- Current triggers guarantee that payouts will be too little because they kick in only after outbreaks grow large.
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Summary 1. It appears that All of this was created to enrich financial speculators rather than just providing funding for an outbreak 2. Anyway - Remember – the world bank ‘loans’ funds to third world nations – like all banks it isn’t a gift 1. Gets these low-income nations in a position further indebtedness to the World Bank – denominated in USD 1. So whilst the USD is surging right now due to the panic for people trying to get more of the reserve currency, the level of funds that have to be repaid grows 3. Problem with this – we just have to take their word on it – there is zero evidence they actually do what they say – and they are the ones saying they do this 1. Who knows if the money gets paid out or if it goes towards helping reduce the spread – as others have said – it is too little too late.
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Say What Wednesday edition
This week the question from Jayden – Are CBA and other bank shares a good investment for dividends at the moment?
Based around current price and un-updated yields – Based around prices and assuming dividends will continue to be the same – might say yes – end of the episode – thanks for listening – but wait - is there something else going on?
Start with Some Banks are close to their post GFC prices – ex CBA – does this mean they are a good time to buy?
Few things happening – The Council of Financial Regulation - (the Council) is the coordinating body for Australia's main financial regulatory agencies.
- There are four members: the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of Australia (RBA)
- RBA – Governor chairs the Council and the RBA provides secretariat support. It is a non-statutory body, without regulatory or policy decision-making powers
- Objectives are to promote stability of the Australian financial system and support effective and efficient regulation by Australia's financial regulatory agencies.
- But they all have their part to play in controlling the financial system – in particular, APRA, RBA, and Treasury
- Recent developments –
- QE - RBA is ready to purchase Aus Government bonds in the secondary market
- Between three entities – Super funds controlled by APRA, RBA who is doing the buying, and Treasury who is doing the selling of the bonds to the super funds on the primary markets
- Repo Market – RBA also conducting one month and three month repo operations in the daily market – until further notice
- Additional Repo market – conduct repo operations of six-months maturity or longer at least weekly, as long as market conditions warrant
- Statement - APRA is ensuring banking institutions pre-position themselves to take advantage of the RBA's supportive measures
- Forcing banks to enter the repo agreements of exchanging their treasury notes for the injection of liquidity
- QE - RBA is ready to purchase Aus Government bonds in the secondary market
- Why? They say they are wanting to support the smooth functioning of that market, which is a key pricing benchmark for the Australian financial system.
- The Reserve Bank and the AOFM - The Australian Office of Financial Management is a part of the Department of the Treasury. It manages the Australian Government's net debt portfolio - are in close liaison in monitoring market conditions and supporting the continued functioning of the market.
- Statements - Australia's financial system is resilient and it is well placed to deal with the effects of COVID-19. The banking system is well capitalised and is in a strong liquidity position. Substantial financial buffers are available to be drawn down if required to support the economy.
- The RBA is trying to support the liquidity of the system – this is where repos come into it – giving the banks and financial system enough cash to survive
- As part of this support it will be conducting one-month and three-month repurchase (repo) operations until further notice. In addition, it will. The Australian Prudential Regulation Authority.
- But the Government are the ones creating disruption to the whole economy –
- When they shut everything down and nothing happens – they will turn around and pat themselves on the back saying ‘good job’ we saved lives – whilst destroying livelihoods and further enshrining an autocratic financial system
- Interesting statements – “APRA and ASIC will take account of the circumstances in which lenders, acting reasonably, are currently operating during the prevailing circumstances when administering their respective laws and regulations. Both agencies also stand ready to deal with problems firms may encounter in complying with the law due to the impact of COVID-19 through a facilitative and constructive approach. In particular, each agency will, where warranted, provide relief or waivers from regulatory requirements. This includes requirements on listed companies associated with secondary capital raisings, annual general meetings, and audits. ASIC will also work with financial institutions to further accelerate the payment of outstanding remediation to customers as soon as possible.
- Second Capital Raisings – The ability of companies to raise equity capital in the virtual absence of alternative debt issuance or bank funding
- Is seen as an important safety valve that enables companies to reduce debt exposure and shore up balance sheets
- Something deeper is going on – A shortage of Dollars and funding mechanisms for the financial system – requiring the liquidity injections – all because the World has been hit with Margin Calls - $12 trillion – banking system is fragile
- Go back to 2009 - Fed's emergency response during the GFC - which included credit facilities backed by corporate bonds and even shares - all the way to unlimited FX swap lines with foreign central banks – all of this was in response to a massive margin call that resulted in the aftermath of the Lehman and AIG collapse – as the conventional cross-border funding pathways froze up
- Therefore – this forced Central banks like the Fed to step in and flood the world with dollars to avoid a catastrophic surge in the dollar as the entire world scrambled to obtain the world's reserve currency.
- Post GFC - the BIS published a paper titled "The US dollar shortage in global banking and the international policy response" – explains how the then Chair Ben Bernanke bailed out the entire developed world’s financial system – due to facing the dollar shortage crisis due to the sudden deflationary shockwave unleashed by the GFC –
- At the same time - ground the global economy, and conventional dollar funding pathways to a halt
- While at the same time reached all-time highs in the counterparty risk after Lehman's collapse and liquidity concerns compromised short-term interbank funding – short term loans to each of the banks – as banks didn’t trust each other – no longer would provide the contracts – why the repo market is so fragile at the moment – needing central banks to provide the funding instead of other commercial banks
- Wasn’t just USA – Aus and EU as well - the major European banks’ US dollar funding gap had reached $1.0–1.2 trillion by mid-2007 – but all liabilities to non-banks were estimated to be $6.5 trillion
- Essentially - an unprecedented crisis as a result of a global dollar margin call
- Had the Fed not stepped in with a barrage of liquidity-providing instruments and facilities, the rest of the world would have simply collapsed as the $6.5 trillion dollar funding gap closed in on itself - this triggered the first-ever launch of virtually unlimited dollar swap lines between the Fed and all other central banks – therefore the severity of the US dollar shortage among banks outside the United States, like Aus banks, called for an international policy response.
- Remember – central banks can provide their own currency – but they could not provide sufficient US dollar liquidity – which acts as the global currency reserve
- Requires reciprocal currency arrangements (swap lines) with the Federal Reserve in order to channel US dollars to banks in their respective jurisdictions – therefore as the funding disruptions spread to banks around the world, swap arrangements were extended across continents to central banks in Australia and New Zealand, Scandinavia, and several countries in Asia and Latin America, forming a global network
- The swap lines between the US Fed and RBA are there – along with the Reserve bank of NZ and every other major banks
- Remember – ever since the financial crisis nothing has been actually fixed in the structural issues of the financial system - instead, the Fed and now other central banks inject more liquidity every time the system gets stressed – like now
- But all done through the issuance of even more debt, and kicking the can down the road whilst masking the symptoms of the crisis
- This liquidity upon liquidity has only made the system much more reliant on the Fed's constant bailouts and liquidity injections.
- This can be seen by the events over the last few week - the dollar shortage is back with a vengeance, as confirmed by last week's concurrent surge in both the Bloomberg Dollar index and the FRA/OIS spread – used as an indicator of interbank dollar funding availability.
- As it stands - there is now - in JPMorgan's calculations - a global dollar short that has doubled since the financial crisis and was $12 trillion as of this moment, some 60% of US GDP
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Enter the Government responses to the novel coronavirus and subsequent oil crisis - has led to a historic run on the dollar – so the supply chains is a payment chain in reverse - an abrupt halt in production and economic output created by Governments extreme overreaction can quickly lead to missed payments elsewhere – multiplier effect – this is why we are seeing the combine rate cuts with open liquidity lines through Repo and QE and a pledge to use the swap lines
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So the financial system is fragile – and the flow on effects from Governments are unknown at this stage – so Looking directly at Big 4 ASX listed banks–
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Fundamentals at this stage and Capital raisings – shares listed
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Looking at the bank shares – their prices and Shares issued -
| Price Pre GFC | Post GFC | Price 1 month ago | Price Today | Yields | PE | Outstanding shares growth | | CBA | $60.00 | $26.79 | $88.80 | $67.87 | 6.37% | 12.28 | 14.16% | | ANZ | $30.39 | $12.06 | $27.24 | $18.39 | 8.70% | 8.63 | 10.76% | | WBC | $29.00 | $14.52 | $25.21 | $17.54 | 9.97% | 9.21 | 15.32% | | NAB | $40.52 | $17.67 | $27.41 | $17.45 | 9.51% | 10.03 | 32.91% |
- Revenues - Might be further rate cuts – Banks businesses rely on lending – and as lending rates drop – so does their ability to generate a return
- Though many in the markets spent much of last year focusing on how lower interest rates would impact bank profitability, that problem seems somewhat less pronounced in the current environment of panic and future default potentials
- The Net interest margins – (interest income to interest paid out, as there isn't anything paid out) – therefore this pressure may be overstated – the real threat to banks comes from the asset quality (loans) from a slowing global economy - bad debt charge forecasts for each of the major banks have been increased by $300M p.a.
- Real issues comes from bad debts
- For example- WBC - increased their bad debt charge forecasts to $1,200 million – across FY20 and FY21.
- ANZ - increased by $300M to be $1150M for FY20 and $1200M for FY21
- Why you are seeing the Banks with Hold ratings on NAB, WBC and ANZ – CBA has Buy across a few brokers
- CBA is better positioned than the other big four to mitigate the impact of lower interest rates (even if its impact is overstated), a fact that potentially explains why the biggest of the big four has traded at a premium to the other banks in the last 14 months
Summary – Assumptions around buying 1. Long term – If the central banks can provide enough liquidity and that defaults on loans don’t become prevalent – yes – banks should recover in prices 2. Dividends – may have to cut from here – but still technically a good dividend payment even if a 30% drop – down to 7% FF in a lot of cases 3. I view bank shares as good-paying Term Deposits with Franking credits – don’t view them as good long term growth companies – competitive markets 4. But the prices from here – depending on the central banks kicking the can down the road – do have the ability to drop in further panic
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury – Focus on what you can control
Australia has been cancelled – IMO - The largest overreaction in history – the world of medical martial law
- Working from home, no public gatherings, not even meant to shake hands -
- Panic is the disease – The panic is creating the real world effects – shortages, people potentially losing jobs, share market crashing – The fear of the virus is having the real world events – cancelling ANZAC day
- Can't change anything about the virus and there are so many stories going around – bioweapon, most deadly disease ever, 5G creating this – who knows what to believe – doesn’t matter – all of these stories serve the same function – of creating fear by putting this outside of your control
- What is another name for a story? A Novel – In this case – the Novel Coronavirus –
- Definition of novel – noun: an invented prose narrative that is usually long and complex and deals especially with human experience through a usually connected sequence of events
- Coronavirus - any of a family of single-stranded RNA viruses that have a lipid envelope studded with club-shaped projections, infect birds and many mammals including humans. Coronaviruses can cause a variety of illnesses in animals, but in people coronaviruses cause one-third of common colds and sometimes respiratory infections in premature infants.
- Irony here – the stories of the virus are the thing having the real world effects
- All have the same effect – first is fear – The fear has gone viral – like a viral video or meme spreading in the internet age – I haven’t met anyone with the virus – the news reports on public figures with it – but anyone out there know somebody personally with it? Or who has died of it?
- There are over 7bn people worldwide – so there will always be someone to report on
- But we have accepted mass quarantine and the cancelling of events – in fear of us getting it – that is the real danger – what legislation can be done to us in response – shutting down of events
- Second effect is like a magic trick – everyone looking at your left hand in fear while you pick pocket them with the right
- The Story - Doesn’t matter if it is a bio-weapon, released by the US government in China, or released by the Chinese Government, or is 5G - all those novels make you focus on the enemy of the disease – not the personal freedoms and loss that is occurring
- In the end – the effects of this are coming from the lockdowns, cancellation of events, markets crashing and businesses responding out of fear of the future – all to an invisible killer – that has created the response for massive disruptions in life - 197 confirmed cases of coronavirus (COVID-19), including 3 deaths
- The last one was over a week ago – 82yo man in Aged Care facility, others 95yo woman 2 weeks ago in same Aged Care facility – other was a 78yo man weeks ago
- The real killer – fear, despair, depression – Suicide remains the leading cause of death for Australians aged between 15 and 44 - fears of losing a job or the depression form that is a bigger killer
- Based around annual figures – 192 Australians would have committed suicide over the past 2 weeks – tragically – I know one of these people
- But these effects are creating additional fear
- Seen a lot of people expressing worry and fear - They’re afraid we’re about to all get sick and die, lose their jobs, the share market is going to continue to crash –
- The Stories and media reporting is manipulating people to be in a constant state of fear - When we are scared, we don’t think clearly or act effectively – fight, flight or freeze – most people freeze – so fear over things outside of your control is not a useful emotion. It’s not practical – nor are these solutions – lets the magician trick you out of your wallet
- Being practical is better - You need to shake the worry off and get control of your thoughts and actions
- First, the bad news. There’s not a darn thing you personally can do to prevent the things above from occurring. We are little fish in a big sea full of predators who are the ones that can actually cause change on those levels.
- Now the good news. What we can change are our immediate environments and responses to events.
- If you are expending a great deal of energy and emotion, focus it on the things that you can change. These are the things that will have the biggest effect on whether you live or die – and whether you can take advantage of bad situations
- Event + Response = Outcome – Share markets – Event = market crashing – response is to either sell, hold or buy –
- Outcome = Retaining funds or buying when markets are down = regain long term returns
- Selling = outcome of guaranteeing losses
So far – this episode has been a bit of a bummer - I see so many people utterly panicking over things beyond their control. We, the ordinary, everyday people, cannot prevent what governments want to do - but we can make our opinions known but sometimes a public outcry works against you - Actions to take in your own lives –
- Your power ends at the knowledge of these events – and information is not knowledge
- When the wheels of the government are already in motion, there isn’t a whole lot we as individuals can do to stop them - We are screaming into the void when we rant about it – they can cancel sporting events
- We can be outraged all we want – personally only have the power to point out these things to try and help calm as much as I can. I cannot fix the responses - matter how much I want to do so - I’m not a powerful politician
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We’re probably being lied to anyway and see through the vested interest of those presenting the information
- Ask yourself - Do you really deep down think we get the whole story on any of these events?
- We’re probably never going to know – but the “reality” we’re given depends on the agenda of the news network that shows the footage – at lot out of context – all to try and prove that their narrative is as bad as they say
- We simply cannot rely on the news to accurately inform us. The mainstream media is the modern-day Ministry of Propaganda – lookup operation mockingbird, the Smith-Mundt Modernization Act of 2012 or read trust me I’m lying if you want to learn more about this – Through the media, you can get a general idea of what’s going on – but everyone’s got a bias. Everyone’s got an agenda.
- Example of this following the numbers in cases – China Feb 12th – China reported 44k – next day went to 59k – so modelling shows exponential growth – and was reported on as such – but wasn’t due to new people getting the illness – but the methodology changing on testing – China started diagnosing patients by ground glass in lungs from CT scans
- Testing can’t be trusted in a lot of regions - Many coronavirus patients have 'ground glass' in their lung scans. ... CT scans are considered less thorough than lab tests
- Reading some studies - Of 1014 patients, 59% (601/1014) had positive RT-PCR results, and 88% (888/1014) had positive chest CT scans. In patients with negative RT-PCR results, 75% (308/413) had positive chest CT findings.
- Consultant – Paras Lakhani – radiologist at Thomas Jefferson university – all it represents is fluid in the lung spaces – notes that it isn’t helpful – all types of infection – bacterial, viral, or sometimes non-infections cases like someone who vapes appears with these patterns
- Also - CDC did admit to – testing has false positives for other types of coronaviruses – SARS, MERS or the common cold
- And the little guys lie us got dragged along for a brutal ride on a tidal wave of manufactured panic – by experts working off these numbers in modelling – you can see news, but know that you’re only getting a biased fraction of the real story
- Last thing that you can do is see through the magic tricks to distract - Everyone has a vested interest –
- World bank and Central banks - World bank with their pandemic bonds (cover on Friday) and Central banks are allowed to expand mandates to take further control over the economy
- Media – Reporting is their moneymaker
- Experts – get funding from this or are making paid appearances
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Work out your sphere of influence – as this is what you can control
- Then there are the circles that really count the most:
- Relationships - your close friends, your family members, your immediate neighbourhoods.
- Finances – your investments, cash balances/emergency funds
- When you think about where you personally can make the most changes that will have the greatest effect on your survival, where does your power lie? It’s within what you can control - things we can actually do something about so completely freaking out over the news is not productive at all.
- The lesson about focusing our energy on the things we can control is the most important thing
- My ability to respond is limited to sharing practical tips and advising – wish I could do more but that’s the reality. And you’ve got to live in reality.
- Then there are the circles that really count the most:
- Your power lies what you can control – and that is being prepared and having emergency planning in place –
- This is the Good News - you do have power – Can prepare your finances for these types of events and have good social circles/community in place to become better prepared
- Preparing finances – Few things here – but the biggest is making sure you have a few months of cash buffers
- Investments – if they go down – control your actions and don’t sell – if you have surplus cash – better to invest
- Cash reserves – if you have months of funds to survive being fired or losing business income out of government responses to Corona – less likely to panic and be able to avoid sensationalisms
- Insurances – if you get sick and can’t work – make sure covered
- But these are all things that should be done anyway – regardless of media creating panic – if you have control and know you will survive – no need to fall into the fear trap
- Building a network - You build your community by being a decent human being, by helping when you can, and by looking out for one another – even family members - by building our inner circles, those small intimate circles, we become stronger. Treat others with respect. Seek out those with the same values who are also helpful and respectful. Those are the folks you want around you Bottom of Form.
- Looking after your health – be physically fit, eat well, and don’t let these events stress you out
- is this foolproof? Or course not. But nothing is – at least there is a plan in place
- Try to focus on what you can control, not on what you can’t
Summary - the current events can be incredibly overwhelming.
- When you find yourself getting overwhelmed, take a look at your circles. Are you getting overwhelmed by the big circles you can do nothing about?
- Be prepared ahead of time - Be aware – your situational awareness is your best defence
- If you’re letting the news cycles drive you into a panic, then it’s time to take a step back. Turn off the television, phone or computer or wherever you get your news. Focus on what you can do – and there’s a lot you can do – but panicking over things you can shouldn’t be one
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Correlation of Chest CT and RT-PCR Testing in Coronavirus Disease 2019 (COVID-19) in China: A Report of 1014 Cases
https://pubs.rsna.org/doi/10.1148/radiol.2020200642
Welcome to Finance and Fury, The Furious Friday edition
What has created a system where the share market can go down so quickly? The perfect storm – Panic, OPEC agreement breaking down – computer algorithms kicking in, mass sell-offs of index funds
- The recent collapse in the stock market – speculation is rampart with discussion of a new crash looming on the horizon – even with Monday’s record breaking drop – market into retreat
- Important context – that a chain reaction collapse was only kept at bay due to massive liquidity injections by the Federal Reserve’s overnight repo loans should not be ignored
- Began in September 2019 - has grown to over $100 billion per night… all that to support the largest financial bubble in human history with global derivatives estimated at $1.2 quadrillion – or 20 times the global GDP
- Thanks to media – and not to be offensive – but general financially illiteracy – the underlying reasons as to why the economic system is so fragile and crash has been misdiagnosed as the coronavirus
- Today – want to give a bit of context around the structural issues to a financial collapse – if it does manifest into one
- Similar to a virus spreading – and killing people – depends on the hosts health – healthy wont die
- the nature of the modern financial system with panic and collapses is very similar – the US economy catches a cold – the world markets collapse
Big topic – so where to start – first with some background 1. In some previous episodes – Quoted Franklin Delano Roosevelt in his Inaugural Address of 1933 - “The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.” 2. This was in reference to the ‘money changers’ only being able to create the bubble of the 1920s (roaring 20s) via access to the commercial deposits of banks – leveraging these using margin loans and debt instruments for profit over investing into productive side of economy 3. Roosevelt – for all his faults in socialising the US system – wanted to take on Wall Street – Didn’t have the publics best interest in mind – but rather nationalising (taking over) the banking system – wasn’t able to so instead created the banking Act of 1933 – especially the “Glass-Steagall” section of the act - forced the absolute separation of productive from speculative banking, guaranteeing via the Federal Deposit Insurance Corporation (FDIC) only those commercial banking assets associated with the productive economy, but forcing any speculative losses arising from investment banking to be suffered by the gambler 4. This focus on the now rather than later ushered in the system of “post-industrial monetarism”. 1. This would be a system ushered in by Richard Nixon’s announcement of the destruction of the fixed-exchange-rate Bretton Woods system and its replacement by the “floating rate” system of post 1971 fame. 5. During that same fateful year of 1971, another ominous event took place: the formation of the Rothschild Inter-Alpha Group of banks under the umbrella of the Royal Bank of Scotland, which today controls upwards of 70% of the global financial system 1. The intentions of this group were well laid out in the 1983 speech by Lord Jacob Rothschild: “two broad types of giant institutions, the worldwide financial service company and the international commercial bank with a global trading competence, may converge to form the ultimate, all-powerful, many-headed financial conglomerate.” 2. Wanted to get commercial and investment banks back into bed with each other – to use debt and financial instruments to make themselves filthy rich 3. This policy demanded the destruction of the sovereign nation-state financial system – nothing really new – the age-old scheme of controlling the money system – but this time it would be on a global level 6. At around the same time - had Milton Freedman’s economic theories – around shareholder theory – argues that a company has no "social responsibility" to the public or society; its only responsibility is to its shareholders - revolutionised wall street to focus on maximising profits in the short term – long gone is the long term focus of companies with what is best in 10 years – now it is quarterly based – hence why share buybacks are so prevalent – what can be done now to boost prices – even at the detriment of the long term 1. A record number of CEOs resigned right before the crash – around 220 in total I believe – but major companies
Due to the Interconnection of the financial system and share markets – Deregulation of the Financial system – whilst regulation of every other business increased
- Deregulations – Two major financial centres of London (UK) and New York (USA)
- London - 1986, the City of London announced the beginning of a new era of economic irrationalism – known as the “Big Bang” deregulation - swept aside the separation of commercial deposit taking and investment banking
- The “Big Bang” set a precedent for similar financial de-regulation into the “Universal Banking” model in other parts of the western world
- USA – In September 1987 – the 20-year market gain through speculation resulted in a 23% collapse of the Dow Jones
- Within hours of this crash, international emergency meetings had been convened with former JP Morgan tool Alan Greenspan introducing a “solution” which would have the future echoes of hyperinflation and fascism written all over it.
- The creation of a new instrument - “Creative financial instruments” was the Orwellian name given to the new financial asset popularized by Greenspan, but otherwise known as “derivatives” - Came up with the derivative instruments as a concept and the time bomb is set -
- Still had the problem of separation of commercial and investment banks – but by 1999 a politically castrated Bill Clinton found himself signing into law a treaty authored by then Treasury Secretary Larry Summers known as the Gramm-Leach-Bliley Act, which would be the final nail in the coffin for the Glass-Steagall separation of commercial and investment banking in the United States.
- The new age of unregulated trading and creation of over-the-counter derivatives caused these strange financial instruments to grow from $60 trillion in 2000 to $600 trillion by 2008 – But around $1.2 quadrillion today
- New problems of supercomputing and algorithm trading - creation of new complex formulas which could associate values to price differentials on securities and insured debts that could then be “hedged” on those very spot and futures markets made possible via the destruction of the Bretton Woods system in 1971.
- So while an exponentially self-generating monster was created that could end nowhere but in a meltdown, “market confidence” rallied back in force with the new flux of easy money – under the new Fiat system
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Interconnect nature – Globalism, trade and reliance on other countries for production - Nafta, the euro and the end of history
- During this same period of Clintons administration - another change to legislation occurred - was passed called the North American Free Trade Agreement (NAFTA). With this Agreement made law, protective programs that had kept North American factories in the U.S and Canada were struck down, allowing for the export of the lifeblood of highly skilled industrial workforce to Mexico where skills were low, technologies lower, and salaries lower still.
- With a stripping of its productive assets, North America became increasingly reliant on exporting cheap resources and services for its means of existence.
- Again, the physically productive sector of society would collapse, yet monetary profits in financial sector boomed
- Replicated in Europe with the creation of the Maastricht Treaty in 1992 establishing the Euro by 1994
- Universal Banking, NAFTA, Euro integration and the creation of the derivative economy in a space of just several years would induce a cartel of finance through newly legalized mergers and acquisitions at a rate never before seen
- Created mass monopolies over the economy – companies from the 1980s were absorbed into each other at great speed through the 1990s in true “survival of the fittest” fashion as regulations on domestic companies in the productive sector were introduced
- But counter parts in non-western countries didn’t have to abide by same regulations – so with companies working under the Freidman method of profit maximisation – production and jobs and contribution towards GDP left western nations –
- Free trade = factors of production like labour shift
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By the 2000s – the fundamental health of productive companies was diminished – whist the speculative side to the economy – investment banking and derivatives were let out of the box
When the first signs really all kicked off – THE 2000-2008 FRENZY 1. With Glass-Steagall now removed, legitimate capital turned into speculation – nothing productive to invest in anymore in the economy – so looked for profits elsewhere. Billions were now poured into mortgage-backed securities (MBS), a market which had been artificially plunged to record-breaking interest rate lows of 1-2% for over a year by the US Federal Reserve - so borrowing was easy, and the returns on the investments into the MBSs massive in comparison 1. The speculation also swelled as the values of the houses skyrocketed far beyond the real values to the tune of one hundred thousand dollar homes selling for 5-6 times that price within the span of several years – due to borrowing capacities increasing and the loss lending regulations 2. As long as no one assumed this growth was ab-normal, and the unpayable nature of loans given – creating a leveraged rise in assets - then profits were supposed to just continue infinitely 3. The stunning “success” of securitizing housing debts immediately induced a wave of sovereign wealth funds to come into prominence applying the same model that had been used in the case of mortgage-backed securities (MBS) and collateralized debt obligations (CDO) to the debts of entire nations – Australia is no different 4. The securitizing of bundled packages of sovereign debts that could then be infinitely leveraged on the de-regulated world markets would no longer be considered an act of national treason, but the key to easy money. 2. Regulators and politicians said they fixed the problems from 2008 – but Nothing changed though 1. For all the talk of an “FDR revival” under Obama, speculation wasn’t actually regulated under the Dodd-Frank Act or the Volker Rule of 2010. No productive credit was created to grow the real economy under a national mission as was the case in 1933-1938. 2. Banks were not broken up while derivatives GREW by 40% with the new bubble concentrated in the corporate/household debt sector now collapsing. During this time, nation states continued to be stripped, as austerity was rammed down the throats of nations. 3. Western economies – Like Australia and USA started to struggle further – talking about the underlying health of countries and their productive output – speculative assets or hard assets like shares and property did well – but now suffer through large gains and large losses – most recently is a good example- ASX lost 27% in 3 weeks 4. GFC from October 07 to March 09 – around 18 months for 50% loss – from Aug 08 to March 09 – 34% loss in 7 months – we are almost there in 3 weeks 3. The ruling class, the media and many others were surprised by the 2016 Brexit and election of President Trump 1. But when viewed from the point of those who were affected by these global focused policies and speculation over productivity – shouldn’t come as a surprise – why a lot of countries are seeing a new wave of nationalist spirit has become a fire which the technocrats have lost their capacity to snuff out.
Summary 1. Economy and by extension the markets are fragile - No longer is the focus for the board members of companies to be productive – or for institutional investors to invest into companies long term that are productive in the economy – core of the post-industrial monetarism model 1. Focus is in profit maximisation at any cost through speculation – The cost though is increased volatility in markets 2. Nature of the new beast – have to ride it out – but thanks to the speculative nature – cheap shares are available every few years
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Say What Wednesday Edition
Question from one of my friends – What is happening to oil prices? Is it a time to buy oil linked companies due to large losses?
Over the past few days the price of oil has plummeted 1. On Monday - the Brent has dropped as much as 31% to just $33 1. one of the most dramatic bouts of selling ever and is the biggest one-day drop in Brent on record 2. Goldman's shocking price target cut, which now expected Brent dropping into the $20s 2. What is going on - Oil pricing war between Russia and Saudi Arabia – See different headlines – 1. Putin Launches "War On US Shale" After Dumping Mohammed bin Salman & Breaking Up OPEC+ 2. Saudi Arabia Starts All-Out Oil War: MbS Destroys OPEC By Flooding Market, Slashing Oil Prices 3. Truth is somewhere in the middle – OPEC and Russia oil price war – with the US industry as potential targets
Important first step when looking at oil price OPEC - The Organisation of the Petroleum Exporting Countries - intergovernmental organisation of 14 nations - headquartered since 1965 in Vienna, Austria - International cartel
- Mission of the organization is to "coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets, in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry."
- Cartel wording – to keep prices high enough to turn a profit for its members
- The current OPEC members are the following: Algeria, Angola, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, the Republic of the Congo, Saudi Arabia (the de facto leader), the United Arab Emirates and Venezuela. Ecuador, Indonesia and Qatar are former members
- But two of the world largest producers – USA as number 1 and Russia as number 3 – Are not OPEC Members - Those members not officially in OPEC are members of OPEC+ - which is where the drama starts
It appears that OPEC+ is no more 1. Last week OPEC+ was meeting in Vienna to discuss how much supply of oil should be allowed for the year 1. To keep prices high – supply needs to be cut 2. Heading into Friday's session, OPEC had been pushing for an additional 1.5 million barrels per day of cuts, reducing production by 3.6% of the world's total supply 1. would have required Russia and other non-OPEC states (but mostly Russia) to contribute 500,000 bpd to the extra cut. 3. Russia said that they were unwilling to cut oil production further - The Kremlin had decided that propping up prices as the coronavirus has impacts to reduce the global energy demand would be a gift to the U.S. shale industry. 1. Russian Energy Minister Alexander Novak said that "considering the decision taken today, from April 1 of this year onwards, neither we nor any OPEC or non-OPEC country is required to make (oil) output cuts." 2. Over the past few years – US frackers had added millions of barrels of oil to the global market while Russian companies kept wells idle – and higher prices were helping USA more than Russians with lower production costs 3. On the news - Oil prices fell more than 10% - wasn’t just the market that got a shock – a lot of the ministers were caught by surprise – like any treaty or agreement – when one party doesn’t agree – why should you do anything? So deal to cut supply fell apart
Saudi Arabia’s turn was next – Had to respond 1. That is where the OPEC and Russia oil price war really kicked off over the weekend when Saudi Arabia aggressively cut the relative price at which it sells its crude – this was by the most in at least 20 years - in an effort to push as many barrels into the market as possible 1. This was the first major decision since the Saudi state producer Aramco, which IPOed just before the price of oil started to drop in Jan 2. Aramco widened the discount for its flagship Arab Light crude to refiners in north-west Europe by a hefty $8 a barrel, offering it at $10.25 a barrel under the Brent benchmark – so prices dropped 1. In contrast, Urals, the Russian flagship crude blend, trades at a discount of about $2 a barrel under Brent – 2. Saudis move is trying to reduce the ability of Russian companies to sell crude in Europe – which is their major market 3. Cannibalistic competition – you take a loss short term to price out competitors then create a monopoly 4. a flood of Saudi supply as demand is in freefall - could send oil into the $20s - what is the worst-case scenario for oil prices? Brent traded at an all-time low of $9.55 a barrel in December 1998 - also during one of the rare price wars that Saudi Arabia has launched over the last 40 years – similar to now 3. In addition - a second announcement came right after - in addition to huge price cuts, Saudi Arabia was set to flood the market with a glut of oil to steal market share and capitalise on its just-announced massive price cuts as the kingdom plans to increase oil output next month 1. told some market participants it could raise production much higher if needed - going well above 10 million barrels a day – up to 12 million barrels a day if needed 2. Currently sitting at 9.7mb/d – then in April going to 10m b/d – then up to 12m if needed 4. This is the oil markets equivalent of a declaration of war – a price war at least – but at least petrol should be cheaper
All of this means that the OPEC oil cartel is now effectively dead – at least for now - Why do this on the Saudi’s end?
- Could be an attempt to impose maximum pain in the quickest possible way to both Russia and other producers, most notably shale, in an effort to bring them back to the negotiating table, and then quickly reverse the production surge and start cutting output if a deal is achieved – form of heavy-handed negotiating tactic
- Estimates that Russian producers may lose $100m a day out of the lower prices
- But it has already been tried once - back in 2014/2015 - and the result was humiliation for Saudis as not only did US shale come out stronger, but Russia had no problems absorbing the lower prices.
- Most likely outcome is that Russia will be able to withstand a shock price far longer than Saudi Arabia, which has budgeted for a Brent price of $58/b for 2020 (which would lead to a 6.4% budget deficit)
- Could lead to social unrest and government turmoil in Saudi Arabia, and may explain why earlier today Saudi crown prince launched another crackdown on dozens of royals and army officers following the arrest of powerful princes, who may compete for the throne once the public mood in Saudi Arabia turns nasty in the coming weeks
- Russian Minister stated - "Of course, to upset Saudi Arabia could be a risky thing, but this is Russia’s strategy at the moment – flexible geometry of interests,"
- Rather than flexible geometry – Russia is much more flexible in its budget at the moment - unlike the rest of OPEC+, Russia's budget is much better prepared for a lower oil price than it was six years ago
- So for now the Kremlin can now sit back and wait as one after another OPEC nation and their oil producers sink into the negative territory - and its production permanently taken offline amid social unrest, resulting in far lower long-term output – Look what happened to Venezuela last time oil went down – they nationalised oil under socialist policies and wasted the premier oil manufacturer in the world – but a lot of the other OPEC nations are not much better off – third world or developing nations that rely heavily on oil
- All of this has Shocked OPEC and the oil markets – But now Saudi which now faces social unrest with the price of oil far below Riyadh's budget, and - in a repeat of the Thanksgiving 2014 OPEC massacre - sending oil prices plunging by the most since the financial crisis.
The ultimate target is potentially the US shale – at least if the Russian translations can be trusted 1. Russian state-run think tank Institute of World Economy and International Relations president Alexander Dynkin as saying, "The Kremlin has decided to sacrifice OPEC+ to stop U.S. shale producers and punish the U.S. for messing with Nord Stream 2." - Nord Stream 2is a new export gas pipeline running from Russia to Europe across the Baltic Sea 1. Narva Bay - Just south of Finland and entering Germany in Greifswald 2. US may look at enforcing sanctions on the completion of the pipeline 2. So Russian initial Strategy – to not cut production and to look at boosting sales into Germany and rest of Europe – one pipeline is completed will be lower cost on exports 1. That way Russian oil would be better than US oil for Europe – which is a big market 3. Then Saudi strategy - drag the price of oil low enough for long enough – to make it not profitable 4. US in the middle – A decade ago, the shale industry barely existed, and falling oil prices cushioned the blow to the U.S. economy by making energy cheaper. Today, an oil market bust could pretty quickly plunge Texas, North Dakota and Appalachia, among other places, into a recession. 1. Estimates show that if crude drops further – 25% of shale industry producers in USA wouldn’t be producing profitably due to costs 5. Russia may just succeed where Saudi Arabia failed in 2014, after shale - funded generously by junk bonds - not only survived the great oil price crash of 2014/2015, but has since reached record output 1. But market isn’t the same at back then due to the fears of demand drop due to coronavirus 6. Summary – This is nothing new – commodity world went through this in Nov 2014 with Saudi decision to (temporarily) break apart OPEC, and flood the market with oil in failed hopes of crushing US shale producers - who survived thanks to generous banks extending loan terms and even more generous buyers of junk bonds 1. Nonetheless resulted in a painful manufacturing recession as the price of Brent cratered as low as the mid-$20's in late 2015/early 2016 2. And over the weekend – seems to be a repeat as Saudi Arabia launched its second scorched earth, or rather scorched oil campaign in 6 years
Effects on our market 1. ASX saw a massive drop on Monday 8% - Oil search down 35%, Santos down 27%, Worley down 20% - for a reason- profits due to lower demand and increased supply likely to be affected – 2. If oil prices continue to drop – some of these companies will be put to the test - but long term – should come back up 1. But when depends on 2. Why I haven’t been a fan of long investment into resource companies that focus on one commodity – especially one that is controlled in the price and the supply by an international cartel 3. We are a long way off from ‘green’ energy replacing oil – so if things bottom out – could be a good speculative buy – 3. But Could the price drop even lower now than it did in 2014? Yes: back in 2014 there was no coronavirus panic having the potential to reduce global oil demand due to fear-mongering and Government responses 4. But what happened to oil companies back in 2014? Compare prices to 2016 then recently before drop 1. Worley went from $16 down to $3 – but back to $16 before their recent drop to $10 2. Oil Search went from $10 to $6, back to $8 but has dropped to $3.36 3. Santos – Went from $13 down to $2.84 – Went back to $8.50 before dropping to $4.92 – 5. So these companies are volatile – but further losses are possible if prices get pushed down further than $20 – which is what the market has priced in – Could hit their 2016 low prices or less - 6. If they rebound? Depends on what happens to the price of oil and demand
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury
Today – Talk about a Money Illusion and the GSR
- Gold has been on a rally – but silver hasn’t gone up by as much
The Gold-to-Silver Ratio: What is It and Why Does It Matter? 1. For experienced investors, the gold-to-silver ratio is one of many indicators used to determine the right (and wrong) time to buy or sell their precious metals. 2. The gold/silver ratio is simply the amount of silver it takes to purchase one ounce of gold. If the ratio is 25 to 1, that means, at the current price, you could use 25 ounces of silver to buy one ounce of gold. 25 to 1 would be considered a narrow ratio 3. Other factors – including economic uncertainty, inflation frenzy and debt – have encouraged millions to invest in gold and silver, and in the past few years, small-scale investors have begun to climb aboard. 4. Yet despite these market developments, to many, the gold-to-silver ratio remains a vague, elusive mystery. 5. Currently – GSR ratio is around 96.5 times - $26 for Silver and $2,718 for Gold 1. Buy 96 ounces of silver for one ounce of gold 6. What can this number tell us? 1. Investors who trade gold bullion, silver bullion and other precious metals scrutinize the gold-to-silver ratio as a signal for the right time to buy or sell a particular metal. 2. When the ratio is high, the general consensus is that silver is favoured. This is because, relative to the ratio, silver is somewhat cheap. 3. Conversely, a low ratio tends to favour gold and may be a signal it’s a good time to buy the yellow metal. Many large-scale, experienced investors may trade their silver for gold as the ratio drops. 4. Unfortunately, because the gold-to-silver ratio fluctuates so wildly, it can be difficult for novice or small-scale investors to read the signals and make a profit.
Historically, what did the Gold-to-Silver Ratio look like? 1. Since 1687 – as far back as the records reach – the gold-to-silver ratio vacillated between roughly 14 and 100. 2. Prior to 1900, the gold-to-silver ratio hovered around 16. This was likely because many countries were using gold- and silver-backed currencies. For instance, France and the United States (among others) assigned statutory limits on what the ratio could be. 3. 1900 - Throughout the twentieth century though, the gold-to-silver ratio has averaged about 47-50 and has fluctuated wildly at times 4. Fundamental reasons - U.S. Geological Survey estimates that there’s 17.5 times more silver in the Earth’s crust than gold, which could provide another explanation for the pre-1900 gold-to-silver ratio average.
Take a look at some of its implications 1. The most important implication is that there is no characteristic value for the gold-silver ratio (GSR) 2. That means that there is no "true north", or no mythic value (16, for instance) to which it is attracted, and to which it would return if only the world stopped manipulating its price 3. Economists have some conclusions around why the ratio changes over time – has to do with inflation and interest 1. The gold-silver rises during deflationary periods and disinflationary periods 2. The gold-silver ratio falls during inflationary periods 4. What is unclear is whether a rising GSR causes deflation, or deflation causes a rising GSR – either way – a strong correlation 5. To dig deeper – have a look at some measures that can be used for deflation/inflation
First – look at the USD Index versus Gold prices Important as gold and silver are valued in dollars -
- Intervals when both the USD index and the gold price rise are considered deflationary
- Deflationary - deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%. Inflation reduces the value of currency over time, but sudden deflation increases it
- If gold rises and the US dollar index falls - we have inflation
- Inflation is price rises – not the same as CPI – CPI is used to measure prices but leaves out the rise in hard assets – and other essentials in cost of living, like level of debts being taken out
The cycle of money - has four stages – Inflation, Disinflation, deflation, and reflation – Very similar cycle to the K wave theory
- In stage one, the groundwork for inflation is laid by central banks but is not yet apparent to most investors. This is the “feel good” stage where people are counting their nominal gains but don’t see through the illusion – that inflation is the cause for a lot of the price gains – summer period
- Stage two is when inflation becomes more obvious. Investors still value their nominal gains and assume inflation is temporary and the central banks “have it under control.” – This is where a weakness in purchasing power starts to increase
- Stage three is when inflation begins to run away and central banks lose control. Now the illusion wears off. Savings and other fixed-income assets like bonds rapidly lose their real value.
- If you own hard assets prior to stage three, you’ll be spared. But if you don’t, it will be too late because the prices of hard assets will gap up before the money illusion wears off.
- Finally, stage four can take one of two paths.
- The first path is hyperinflation, such as Weimar Germany or Zimbabwe. In that case, all paper money and cash flows are destroyed and a new currency arises from the ashes of the old.
- The alternative is shock therapy of the kind Paul Volcker imposed in 1980. In that case, interest rates are hiked as high as 20% to kill inflation, but nearly kill the economy in the process.
- This last phase should have technically occurred if inflation was visible in the CPI measurements –
- There is so much money created from debt – but put into hard assets and not being spent In the economy – so it isnt visible
Going back to look more closely at the GSR Time periods – Looking more recently
- 2008 - we were experiencing disinflation – as the GSR rose from 55.7 to 77.1
- 2009 was characterized by inflation, and the GSR fell from 77.1 to 63.3.
- 2010, we had disinflation, and the GSR rose slightly Bottom of Form
- Then there was a big inflationary pulse into late 2011 saw the GSR falling to 40.8
- The following disinflationary episode that lasted through 2013 saw the GSR rise to 65.9
- Since then, the dominant trend has been deflationary, although realistically there have only been two deflationary pulses--through early 2015 (GSR 74.5) and over the past 18 months (GSR at 88.6). Most of the time has been consumed by short inflation-disinflation cycles, with slight rises and falls of the GSR without significant trend.
- Over the last 12 years – bigger picture is deflation – some cycles of inflation and disinflation
- deflation is a decrease in the general price level of goods and services – Characteristics are accompanied by real debt levels rising, pressure for lower wages, declining business profits,
- Relates to the K wave theory – does line up – Autumn get disinflation and winter get deflation
- Especially over the last 12 months – seeing gold go up quite a bit whilst silver has risen, but not by as much
- So long as deflationary conditions persist, the GSR may rise without limit. As long as debts are created beyond any ability to repay them, deflationary conditions will rule.
- Under such conditions, despite the GSR being pretty much the highest in history, gold remains a better investment than silver.
- However, as much of the actual deflationary effect is brought about by cycles of inflation and disinflation, there are brief intervals where silver makes a better investment than gold.But rather than using the level of the GSR as your selection criterion, you need to look closely at monetary policy instead.
What does this mean for the future? 1. Some experts predict the gold-to-silver ratio will return to its long-term, pre-1900 average of 16 to 1. Many factors are cited in this favourable claim 1. It's worth noting however, among these experts are some of the most ardent advocates for silver investing. 2. in order for the ratio to return to its pre-1900 average, the price of silver would need to rise to approximately $105 per ounce in USD - 2. From Here – and where we are at in the cycle – likely that gold continues to rise at a greater rate than silver – 1. gold-silver rises during deflationary periods and disinflationary periods – could be a large reason why it is rising at the moment and has hit 96 2. However – if we suddenly get high levels of inflation creep into the economy over the next few years – through proposals of helicopter money – then silver would be a decent hedge against the loss of real value of assets from inflation
Summary The gold-to-silver ratio is indeed one of several valuable tools used to determine the optimum time to buy gold or silver bullion.
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- Just remember that it is wise to avoid using these as the sole tool when making investment decisions - Only the most experienced investors make profits using a short-term view, and even they suffer errors in judgment.
- With a long-term view, you may choose to buy silver when the ratio is high – buying higher quantities with fewer dollars
- Typically, the gold-to-silver ratio serves as an impetus for diversifying holdings - If one investment flops, alternate investments in your portfolio pick up the slack – or losses
- Precious metals baskets and the like can help to diversify and hedge against inflationary periods
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday Edition
Today is a follow on from Last FF ep – on K waves – if haven’t listened – worthwhile to go check
Today – is the cycle relevant today with central banks – and go through the most recent cycle – meant to start in 1949 and end this year
First - Summary from last week – K-wave – summarises the long term cycles of economies in capitalist countries - Each cycle has it sub-cycles – which are dubbed as seasons as broken down into four sub-cycles – Each K wave is a 60 year cycle (+/- a few years here or there) – then the internal phases that are characterized as seasons: spring, summer, autumn, and winter:
- Spring: Increase in productivity, along with inflation, signifying an economic boom
- Summer: Increase in the general affluence level leads to changing attitudes toward work that results in a deceleration of economic growth
- Autumn: Stagnating economic conditions give rise to a deflationary growth spiral that gives rise to isolationist policies, further curtailing growth prospects
- Winter: Economy in the throes of a debilitating depression that tears the social fabric of society, as the gulf between the dwindling number of "haves" and the expanding number of "have-nots" increases dramatically
Key indicators – In a K Wave theory – the two most common indicators are inflation, interest rates and asset prices – back in Nicolai’s time – these moved freely – but not anymore
- Inflation – it is targeted by central banks and the measurements are skewed
- Data being skewed – not the cost of living but the basket of goods selected
- What makes up the good? I break it down into two – Essentials and discretionary
- Look at the prices of the two – One has been going up massively whilst the other is declining – goes which?
- Essential – food, health care, petrol, housing, education – all up massively – over CPI increase
- Discretionary – TVs, clothes, computers – stuff you buy off Amazon – going down massively
- Targets – money is introduced into the economy to create inflation – but lowering interest rates -
- Data being skewed – not the cost of living but the basket of goods selected
- Interest rates – it is controlled not on supply and demand factors – but on the determination of monetary authorities
- Asset prices – Shares, property and commodities – depending on the stage go through corrections, gains or stagnation
Let's look at each of these through the cycles – see if they line up 1. Spring – 1950-1966 – longest period in cycle – around 25 years 1. Inflation – starts to rise – due to consumption starting to increase 1. Australia saw a spike in inflation in 1950 – went to almost 25% - but then dropped heavily to almost 0%- inflation used to be more volatile before being targeted – but by 1966 was back to about 5% 2. Interest rates – normally fairly flat initially – towards end of cycle start to increase 1. Interest rates were 5% then went to 5.5% but averaged around 5% for the whole time – 2. This is a large factor which contributed to inflation back then – but the spike was likely due to price increases due to limited supply coming out of WW2 3. Shares – Start to rise as well in the spring time – and they slowly did - 12. Average annual ASX return of 12.52% 13. Had 4 negative years – nothing major – 3%, two 7% and one 12% 4. Property – also is meant to increase – it did – 50s to 66 saw mild increases at average of wage earnings 2. Summer – 1967-1981 – around 5 to 10 years 1. Inflation – quickly rising inflation - towards the end meant to see double digit levels if inflation 1. From 67 rose from about 5% to 15% by 1976 - and stayed around the 10% margin until early 1980s 2. Interest rates – are rising to combat inflation – normally soaring 1. Credit growth builds heavily – whilst interest rates increase – inflation also goes up – so real debt levels isn’t so bad 2. Rates went from 5.38% in 2967 to 7.25% in 1970 – then to 10% by 1974 – then to 13% by 1981 3. Shares- The share markets normally go through a bit of a correction as well or just make no progress and stagnate 1. Average annual ASX return of 17% 2. Had the corrections mid and end of cycle – 73 and 74 lost 23% and 27% respectively 3. Then in 1981 and 1982 at end of cycle lost 13% and 14% back to back - 4. Property – From 67 to 75 saw some decent increases – prices went from $160k to $220k – 37% gain in about 8 years – but then stagnated and went down slightly until 80s
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Autumn – 1982 -2000 – around 7 to 10 years – this is the period when things start getting a little out of sync
- Inflation – starts to drop – which it did – trended down from 1981 till the RBA and other central banks set inflation targeting in early 90s –
- Went from about 8% to close to zero with the implementation of inflation rate targeting in 1993
- Inflation did spike towards 2000 – but only to about 5% -
- Interest rates – falling heavily – which they did
- Creates a credit boom which creates a false plateau of prosperity that ends in a speculative bubble
- Rates kept rising though – 1982 were 13.5% and went up to 17% by 1990 –
- But dropped after this – from 1990 to 1992 – went from 17% to 10% - then down to 7% in 2000
- Shares – market prices rise heavily to a peak and crash
- Average annual ASX return of 16%
- Rose in 1983, 85, 86 by 67%, 44% and 52% respectively
- Property – meant to increase as well and started massively in the mid 90s – went down between 1980 and 1987
- Bonds – also rise a lot – which they did slightly – but not much
- Inflation – starts to drop – which it did – trended down from 1981 till the RBA and other central banks set inflation targeting in early 90s –
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Winter – 2000 – 2015 or 2020 depending on measurements – meant to be 3-year collapse and 15 year reset
- Inflation – Prices start to fall – actually went up – from 2000 to 2005 went from 2.5% to 5% - so not the expected result
- But since then inflation is down – despite monetary policies best efforts
- Interest rates – normally are meant to slowly increase – however – 2000s then has been trending down – and no massive signs of increasing
- Cash is the best investment normally in winter – but the interest rates dropping has created a situation where it really isn’t a good option – guarantees a real negative return over the medium term
- Shares – see a banking crisis – saw that in 2008 -
- Average annual ASX return has been about 8.91% since 2000 – Has been in winter – but have had a limited ability to rebound through fundamentals
- Property prices are meant to fall off or stagnate – what did we see – from 2000 the mother of all property booms –
- Nothing to do with the cycle – but credit growth – borrowings and interest rates falling
- Best investments are cash and gold – as shares and bonds (or debt) are in free fall for the first few years – but then go nowhere for a while
- But over the past few years – International shares were one of the best investments – however gold and precious metals has been going well
- The breakthrough for this phase comes from confidence – it comes from the overall market sentiment
- Inflation – Prices start to fall – actually went up – from 2000 to 2005 went from 2.5% to 5% - so not the expected result
So is this wave still true? Yes - I believe so – but with different time spans -
I personally think that waves still exist – but they have been subverted by intervention of monetary policy –
The issues
- But interest rates don’t move freely anymore – inflation doesn’t move freely anymore –
- Debt levels also no longer have a market response – people respond in market manners to them (borrowing more when rates are low)
- K wave was on point up until the winter cycle – remember – Central banks – RBA started controlling interest rates in an effect to get inflation in mid 90s – after which property and share boomed
Implications for 2020 and Beyond 1. Based on Professor Thompson's analysis, long K cycles have nearly a thousand years of supporting evidence. If we accept the fact that most winters in K cycles last 20 years this would indicate that we should be coming out of the Kondratieff winter that commenced in the year 2000 soon – but does it feel like it? First – look at the approximations of this theory - 1. Based around the analysis and probability - we should be moving from a "recession" to a "depression" phase in the cycle about the year 2013 and it should last until approximately 2017-2020 – but there has been no economic recession or depression on the GDP measure – as it has been silent – GDP can be manipulated by changing currency (for exports) or government spending – or even adjusting potential GDP – look at a graph – used to have big swings of up 6% down to -1% - but average much larger – then since 2000s – hasn’t moved above 2% in real terms – if anything trending towards 0% 1. Looking around in the economy – may seem like it there is a recession talking to the average business owner – but looking at the share market and bond price performance – not so much 2. Why? What K missed and what Thompson negated was the immense power over markets that the Fed and Central banks would play – but it is only masking the issue with high asset prices doesn’t mean a booming economy – why in the winter period – when shares and property are meant to stagnate – the real growth has still been increasing 3. Characteristics of Winter – * Share and debt markets collapsing – Only shares dropped in 2008/09 – while bonds had good year – but since they have both been going up * Massive debt defaults – haven’t materialised due to record low-interest rates for prolonged periods of time + If rates go up – may see these two materialise 2. But like all cycles, K wave analysis is more "descriptive than prescriptive" - it does help to provide insight into our current economic condition – that what rise must fall – the longer the delay is manipulated through low cost of money and printing to put money into assets occurs – the worse the winter can be 1. Over the winter cycle - the FED and the ECB, instead of prolonging the agony through trillion of credit expansion, should have let winter happen = liberate the "international market" and let it intelligently and efficiently do what it has done 18 times before – not a smooth ride, but even with central banking intervention – not smooth either 2. World bankers if they understood how cycles work instead of trying to control them - may comprehend and deal with the crisis – but letting it happen – instead they panicked and mis-diagnosed it as a credit/monetary problem – turning it into a credit/monetary problem since the 1980s 3. But the monetary and government policies of increasing legislation to reduce free-market abilities and technological innovation have prolonged the winter
What if we were never allowed to go into winter? 1. The crash of 2008 wasn’t as bad as it needed to be – the fire of the market didn’t clean out the failing companies (banks) but made them stronger 1. The share market collapsed in value by a lot – but the problems were masked through bailouts 2. But markets so have the ability to recover – they just need to be let to do their thing – but not under the guise of regulations or monetary policy – but peoples innovation and ingenuity 3. But the Major point – K Wave theories are only prevalent in Capitalist economies - would go further and say a free market - Where the market has adjustments based around incentives - But since 1990s – we don’t like in a free market economy when inflation is set (Goodhart’s law) and the interest rates are controlled - Puts a kink in the theory
Thanks for listening!
Australian Interest rates - https://www.loansense.com.au/historical-rates.html
ASX Returns – https://topforeignstocks.com/2017/06/14/the-historical-average-annual-returns-of-australian-stock-market-since-1900/
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Saw What Wednesday Edition
– Question from Jack
This is going to be a bit of a Q&A style episode – he did a lot of research and sent it through – making my job easy on this one – so thank you for that
Jacks Question - I wonder what you think of WISR (WZR) as they have received a fair bit of media attention and commentator optimism.
Before we get into it – a Short Bio on Wisr: 1. Wisr is an Australian marketplace lender offering peer to peer lending services. It is known for being the first company of its type to be publicly listed in Australia – before 2018 - changed names from DirectMoney under a rebrand to Wisr 2. But back in 2015 listed on the ASX through a reverse takeover of Basper Ltd, raising $AU11.2m at 20c per share 3. Claims to be Australia’s first ‘neo lender’ offering cheaper loan rates (depending on credit history) than the big four banks. 4. Issues small loans only between $5k and $50k then on sells them. The primary activity is writing personal loans for 3, 5 and 7 year maturities to Australian consumers, then on-selling these loans to retail, wholesale and institutional investors. 1. The business model relies on investors who what to buy these unsecured loans – get a yield on this 2. Loans are about 7.95% fixed repayment 5. Uses smart app technology and a new aesthetic approach to lending (in an attempt to increase market share from ‘dinosaurs’ that hold 99% of it).
Run through the analysis: Not personal advice – just a breakdown Financials (Quantitative)
- Free cash flow – this is the lifeline of any company – after costs/taxes/etc are paid – what does the company have left?
- In this case – been negative for a long time – last time the company had positive cash flow was 2010
- Net losses have been growing over the years - -$2.2m in 2011 – to -$7.73m in 2019
- Doesn’t help that the outstanding shares have gone from 10m in 2010 to 790m in 2019
- This hurts the EPS – and potential to pay dividends - which is the next thing
- Operating margins and net profits at -252% and -257% respectively
- EPS - The EPS is the profit divided by the number of shares, since the profit is negative there is no EPS.
- Earning: -$7.7m – so EPS is around -$0.013 – so for every dollar your put into this company, losing $0.076 p.a. based around last price of $0.17
- EPS is estimated to be positive in about 3-4 years – based around assumption of 67% earnings growth per annum – which is a huge forecast
- ROE – Also hasn’t been positive since 2010 – had a massive loss since 2016 each year – been over 50% each year
- Future ROE: WZR is forecast to be unprofitable in 3 years – but based on massive assumptions
- The PE – cant be done as the earnings per share is negative
- Price to Book - WZR is overvalued based on its PB Ratio (15.3x) compared to the AU Consumer Finance industry average (2x).
- Nothing really intangible assets if the company goes bankrupt
What is keeping this company afloat – two factors – Jack points these out well 1. Equity Raisings - Shareholder cash is keeping the company afloat. Risk of liquidation is low, more likely a slow death by continued losses and shareholders evaporating. 16. Looking at the balance sheet - June 2019 - Shareholder equity - $16.77m = 90% of capital 2. Insider shareholdings - One shareholder group owned 44% in 2018. Recent surges don’t guarantee liquidity despite a high MC, especially since I am predicting this company is going nowhere by EOY, so likely at some point significantly downward to adjust for unjustified herd buying re livewire report - 1. The Top 20 Shareholders of WZR hold 67.18% of shares on issue. 2. Good Media Coverage - Media (livewire reporting) – I'm always a bit skeptical of fund managers saying a company will boom 1. If they think it will – why not buy it themselves? 2. Trying to change market perception to get large returns on the previously bought shares
Jack asks - Are there really signs of a continued turn around / market expansion? Maybe they have been around the bend and it is only going to get better, but why? Possible upsides?
- Good points - Earnings vs Savings Rate: WZR is forecast to become profitable over the next 3 years, which is considered faster growth than the savings rate (1.1%).
- Earnings vs Market: WZR is forecast to become profitable over the next 3 years, which is considered above average market growth.
- High Growth Earnings: WZR's is expected to become profitable in the next 3 years.
- Revenue vs Market: WZR's revenue (61% per year) is forecast to grow faster than the Australian market (4.2% per year).
- High Growth Revenue: WZR's revenue (61% per year) is forecast to grow faster than 20% per year.
- Very low /no debt (relying on shareholders instead) – not always a good thing – shareholders want higher returns than debt raisings – but NAB has just provided them a third-party funding facility
Downsides 7. Jan 2020 raised $35 million through a placement and share purchase plan (30k max per shareholder), subject to shareholder – this is often done for additional funding for large projects, because nobody will lend to them (as debt is cheaper long term to raise capital off) or that they need money to stay solvent 1. Given the tech is in place -probably the last one - 8. More opportunity for larger competitors (economies of scale) to offer cheaper rates in tougher markets were interest rates to drop further 1. Focusing on the tech side of things rather than the fundamentals of the business model 2. Gaining additional market share – may be hard and there is potential of legislation risks – competitors are the ones with market monopolies 9. Employees benefits of $5m, $2m larger than revenue 10. Future expectations are based on hopes – recent price gain from growth in customer base - A positive is they seem to have sold more loans up 281% to $68.9m (FY18 $18.1m) which will yield revenue in 2020. This seems to be a result of their positive remarketing and new technology aimed at (attracting) those in financial stress 1. But this sector of lending is fairly unregulated at this stage
Unanswered questions 1. How are they going to maintain recent consumer intake from their new applications? The apps are already out there, are they really going to continuously steal more customers? This where my analysis could be undone, but even if it is and they gain market share I doubt it's going to be dramatic and with continued losses I would expect a late-year downturn in the price. 2. What is going to happen to the 35million shares just raised? 3. 181million new shares on an MC without underlying profitability (70% of issue lost since conception). 4. Market psychology is with momentarily with them 5. Is a takeover or merger possible? – Always possible – could boost the price in the short term. Given the management team hold 30m shares expect them to want to sell them.
Jacks comment - Otherwise, poor fundamentals surviving only on shareholder positivity – I agree
However – look at Afterpay – pretty much same story – but thanks for peoples expectations – price went up
Summary breakdown 1. Dividends are nil – Financial health is pretty poor 2. Value is bad – technically is priced in for massive future gains, even at $0.17 per share 3. Historical performance – 1 year performance is good after bound - but very volatile share – 5 year return is still -14% p.a. 4. Only upside is speculation of future performance – I don’t invest out of hope – 5. May go well – but remember – the current market price is based on this expectation = But if it doesn’t – prices will only go up if more people buy outside of the company and inside investors
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury
What a week last week was for markets – ASX lost value of just under 10% - All around news of the Coronavirus and speculation on Government responses – So Aus and international markets have dropped heavily – might be thinking that it is solely out of expectation that companies will lose money from the Virus outbreak.
- Well – the overall Market has tanked which companies most affected? - almost every one
- Medical companies dropped, banks dropped, A2 Milk – which has large sales to china went up over the week
- In the US - FANG stocks went down heavily – Google, FB, Amazon – down 14% - understand Amazon if cant ship goods – but why FB? If anything – people may be spending more time inside online
- What does this all say? Could the Selloff probably have less to do with the coronavirus than what is being reported on? – let's have a look at this further to see – or if it is just speculative selling/profit-taking – and if it is a good time to buy?
- Before we get into it – Nobody has asked the question – why has the Chinese Government which from observation – doesn’t really have a high value of life on its population – shut down their economy through extreme quarantine measures for 80,000 sick people and around 2,700 dead? Are the numbers more? Or is something else going on
- China has a population of 1.4bn –80k = 0.0057% of pop - In Australia that would be 1,400 people with the illness – 50 of those would pass away based around the estimated death rates – those who are immunocompromised or over the age of 60
- Even if it is 50 times larger – there would be 135,000 dead – historically for China this is a good weekend on a collectivised farm – I know they are past those practices – but even in modern times:
- They aren’t without their human atrocities – Falun Gong practitioners being imprisoned and tortured, reports of organ harvesting, treatment of the million Uyghur Muslims in “re-education camps” – but all of a sudden, they really care about their people? I find it hard to believe – might be the case
- China has a population of 1.4bn –80k = 0.0057% of pop - In Australia that would be 1,400 people with the illness – 50 of those would pass away based around the estimated death rates – those who are immunocompromised or over the age of 60
- Now - Not saying this is related, or implying anything – but two interesting things I noticed around the timing of the quarantines -
- Wuhan was having mass protests last year – same with HK – not much happening with those now?
- Also – China just lost the trade war and were about to sign an agreement with the USA – losing yet again
- They were dumping their US treasuries leading up to December last year – then the quarantines effectively are shutting down the global economy
- Nobody knows what is going on – all we do know is that the market is going down and Governments seem to be overreacting – resulting in panic selling and global fear occurring
- The responses from the media and Governments are creating the economic uncertainty – not the virus itself
- Perspective - Assumptions are that 5% to 20% of western populations will get the flu/mild or severe– each year – death rates in the west from the flu are lower than Coronavirus – but in China – flu deaths are around double already due to health care system – so every year 70m Chinese at a minimum will get the flu – working off the numbers - in the past week – more people in China have died from the flu than the coronavirus
Regardless of the rational for the selloff – there has been a crash/correction – and a quick one at that – the volumes are huge – to the point it is one of the most coordinated sell offs in history – to break this down:
First – let's have a look at How crashes work – analogy to a movie theatre –
- Anyone been to a movie theatre – people slowly arrive at different time – some go early to buy the best seats, some rock up later, some don’t like the ads to turn up just as the movie starts – people all get in slowly –
- Similar to buying patters of markets – buy orders come in over time – different institutions and individuals dribble in
- But now let's say that the room can fit 200 people – but the movie is very in demand – and this is the one cinema showing it – people will pay a lot for the tickets – prices start to go up and the room starts getting crowded
- Out of greed – and to make more money – the cinema allows 300 people to cram into the room – so it is packed – but the exits are the same size
- Now say someone cried out fire – and the room panics – everyone rushing for the exits – cinema clears a lot quicker than what it filled up
- This is similar to how markets behave – the bears take the window whilst the bulls take the stairs – markets go down in a panic faster than what they rise in a boom
- Markets don’t crash when they are overbought – but they crash when they are oversold through panic – like over the past week
- S&P 500 had its fastest movement from peak to correction on record – a matter of 6 days – next: Feb18 was 10 days, Oct55 about 15 days – Nov07 took 35 days
- Dow had its peak to correction at the fastest pace since the 1928 panic – right before the great depression
- Overall - US markets saw their worst week since Lehman (Oct 2008) – similar in Australia
- Need some historical context – what are the week-on-week changes in the S&P500 over the past 100 years –
- Worst is the 1928 great depression along with the GFC – losses of around 18% week on week
- Then Hitler invading France - in 1941 – about a 15% reduction in week on week
- Right now – we are the same as the 1987 black Monday, dot-com bubble – with around 10%
- Following the trend of the 2000 crash, 1928 crash – the Nasdaq and US markets (and maybe Australia) may be in for a potential dead cat bounce (small rebound through buying) and then declines over the next few months further from here – albeit at a slow rate compared to the last week
- But this all depends on the panic and fear in the market – nothing fundamentally has changed since last week – still in the same leveraged position with record low-interest rates – which may decline further in response to boost the markets
- Similar to these events - Investors are selling stocks first and asking questions later – the signs of panic
- Market over the past week was showing signs of pure liquidation - ‘Get me out at any cost’ (regardless of crystallising losses) - seems to be the prevailing mood – depending on Government responses to the coronavirus – the weigh on the global economy may increase - There is much that is unknown – and also premature to suggest the base case for a recession triggering event
- Important not to forget that asset prices have already diverged significantly from fundamentals over the past few years - in part because of central bank policy, share buybacks - but also because passive investment’s main signal is price action – becoming price taking and not price making – looking at the sell offs – large caps in indexes (like the FANGS in the US, and Banks as well) have been hit hard – for no fundamental reason
- Volumes of sales have been very high - Stock market volume has exploded higher as the crash has accelerated - notably higher volumes than during the mid-2018 crash
- Globally – shares lost over $5.1 trillion in market cap in the last 6 days - that is the biggest loss ever
- Global banks shares were also a bloodbath this week - The biggest 6-day collapse in bank stocks since the peak of the GFC – is lending going to be restricted from the coronavirus?
- Interestingly - What happened beyond the share market also shows some signs of panic instead of fundamentals –
- The US Dollar rose by the most since July 2019 in Feb (but the worst week since 2019) – whilst the AUD fell
- Silver suffered its worst monthly drop since May 2016 and on Friday - Gold's worst day today since June 2013 – Lots of questions about the crash in gold but the likely culprit was the BoJ putting in massive sales
- Oil also collapsed again in February for its worst start to a year since 1991
- Central banks are now meant to save us – so what Comments from the Fed occurred? Fed speakers and Jay Powell issued statements which definitely didn't suggest that a Sunday night rescue was planned – but a possibility
- "Further policy rate cuts are a possibility if a global pandemic actually develops with health effects approaching the scale of ordinary influenza, but this is not the baseline case at this time” – so the Fed isn't even worried about this compared to the ordinary flu?
- “Longer-term U.S. interest rates have been driven lower by a global flight to safety, likely benefiting the U.S. economy. Even with the current stock market price drop, equities have been on a long upswing. We will use our tools and act as appropriate to support the economy."
- But The market implied rate cuts indicate that one cut is guaranteed soon – same in Australia over the next few months – probably won’t happen this week based around out implied rate curve – but who knows
From here – is likely that another wave of selling will likely occur before a stronger bottom is finally reached in markets 1. The composite technical overbought/oversold gauge is also trending for more extreme oversold conditions soon - but these are typical of a short-term oversold condition 1. In plain English – in 2019 everyone was piling into the theatre creating overcrowding – but now large amounts of people are running for the doors – guess they didn’t like the movie 2. So - What to do from here? – Remember - We were not this oversold even during the 2015-2016 decline, much less the two declines in 2018 from September to December
Was having a look at historical patterns and what actually defines a market crash – 1. On average the market rises by about 0.04% per day – with Standard deviation – average daily volatility is around the 1% range 1. At this stage – the ASX is below the 50,100,200,300 DMA – shows a very quick decline and very volatile 2. Volumes as well point to an overselling phenomenon – but doesn’t mean that is it overdue to one factor 2. Market crashes occur when shares are already oversold – looking at the data – for the days where the market goes down by 5% or more - it happened 22 times in the US – 82% of those occurred once shares were already oversold – 1. Interestingly - 12 of those days occurred in the GFC time period 3. Mathematically speaking - the bulk of the recent decline is already priced into the market out of future fears 3. That is where the odds of a 5-standard deviation move (which we have gone through) are about 1 in 3.5 million 4. But since 1958 (15,647 trading days) there have been a total of 39 days with +5% moves: 17 positive and 22 negative – so whilst statistically this should be very very rare – does happen a bit in markets – or about 8,700 times more than would be statistically predictable 5. Therefore - technically and statistically - equity returns have more “fat tails” rather than those defined by a normal distribution – so this is really nothing outside of what is possible in markets 4. The bottom line is that a 5% decline in a given day is a good definition of a “Crash” – Over a month – 20% and over a few months – 30-40% 8. Outside of the 2008 – 2009 Financial Crisis, if you bought the close of a down 5% day you made an average of 8.46% over the next 3 calendar months with 90% of those instances yielding positive returns. The only exception, but still notable, was October 16th 1987 9. Looking just at the 2008 – 2009 experience, buying the first down 5% move on September 29th was not a great idea, but if you had the fortitude to stick with it you were at least breaking even within a year. 5. Looking at this present-day event: what if we get a 5% crash day as a result of concerns about the coronavirus' effect on the global economy? 6. History says buy that these types of crashes are opportunities to make solid 3-month returns with little risk of further cataclysmic drawdowns. 1. However - If you think the COVID-19 bears closer resemblance to the 2008 Financial Crisis than a “garden variety” crash - then history says to buy the first down 5% close in a small size and wait for more to add to positions – essentially a dollar cost averaging approach – nobody knows when it will bottom out – but if the market tanks from here this week – some shares may start to appear fair valued
Bottom line: At the time of recording this - we’re going into a Friday-Monday sequence – with large one-week losses in previous crash events – like in 1987 and 2008 – 2009 – there was the possibility for markets to have a down 5% day - From here there are two scenarios –
- We are going to get a bounce over the next few weeks – but may be a dead cat bounce
- Or this shows the cracks in the economy
Either way – I am holding off before moving funds back into the market – but it is important to Be Ready To Execute
Whatever further drop we get from here will likely be short-lived when viewed in a timeframe of years - So have your game plan together before-hand as the opportunity to buy in may be coming soon - Bottom line: markets right now are vulnerable to a crash – due to structural issues - so Be ready to at least stick a toe in the water if that happens.
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Furious Friday Edition
With the current state of the markets – and the focus only on today's news and short-term cycles - In this episode – we will be looking at economies and markets in relation to Waves and cycles in a complex system –
- Like seasons in weather – markets have cycles – like weather though, predicting it is not the most accurate –
- To do this though we will have a look at what is known as a Kondratieff Wave - And do they still have applications to modern financial markets almost 100 years later
Understanding Kondratieff Waves 1. A Kondratieff Wave is a long-term economic cycle believed to be born out of technological innovation - results in a long period of prosperity, then a lull, then a decline 1. Theory was founded by Nikolai D. Kondratieff - a communist Russia-era economist who noticed agricultural commodity and copper prices experienced long-term cycles – focused on other economic cycles involved which have periods of evolution and self-correction. 2. With every rise comes a fall – due to the creative destruction element before the take-off of technology 3. In 1926 - Kondratieff published a study called Long Waves in Economic Life which first looked at these periods 2. Kondratieff noted that capitalist economies have long waves of boom and bust, that he described similar to the seasons in a year. 1. Kondratieff's analysis described how international capitalism had gone through many "great depressions" and as such were a normal part of the international mercantile credit system - The long term business cycles that he identified through his research are also called "K" waves. 2. Long term means long term – not a few years like a business cycle - but 60 years – around 70% of the average life span – so most of us may see one and a half of these cycles play out 3. Today - Kondratieff Waves are relegated to a branch of economics called "heterodox economics," in that it does not conform to the widely accepted, orthodox theories espoused by economists. 1. Provides an alternative approach to mainstream economics that can help explain economic phenomenon that is ignored by equilibrium models – or traditional economics – does do by embedding social and historical factors into analysis – incorporates behavioural economics of both individuals and societies into market equilibriums over long timeframes. 1. Mainstream economists who are currently implementing policy – essentially ruling the economic world should be presumably achieving full employment, constant GDP growth with near-perfect utilisation of resources – but also stay there - perhaps buffeted by mild external shocks – but in all their efforts they fail in the real world 2. K waves faced a lot of hostility on the academic side – criticise equilibrium models of economics which is what academics are built on – 4. Similar to the academic side - This theory was also not welcomed in Kondratieff's Russia - His views were not popular to communist officials, especially Josef Stalin, because they suggested that capitalist nations were not on an inevitable path to destruction but, rather, that they experienced ups and downs 1. At the time – USA was going through the 1929 crash and the great depression of the 1930s – USSR was no better off but the propaganda machine (similar to NK today) couldn’t have the theory of that it was a temporary decline 2. As a result, he ended up in a concentration camp in Siberia and was shot by a firing squad in 1938
So does this wave theory hold up today almost 100 year later? 1. Start by looking at the identified patters - following Kondratieff Waves since the 18th century. 1. The first resulted from the invention of the steam engine and ran from 1780 to 1830. 2. The second cycle arose because of the steel industry and the spread of railroads and ran from 1830 to 1880. 3. The third cycle resulted from electrification and innovation in the chemical industry and ran from 1880 to 1930. 4. The fourth cycle was fuelled by autos and petrochemicals and lasted from 1930 to 1970. 5. The fifth cycle was based on information technology and began in 1970 and ran through the present, though some economists believe we are at the start of a sixth wave that will be driven by biotechnology and healthcare. 2. Modern day economic academics have started to pay attention to this – subject of "cyclical" phenomenon – essay from Professor W. Thompson of Indiana University – took a step back and looked at K waves – concluded that they have influenced world technological development since the 900's – that these developments commenced in 930AD in the Sung province of China - he propounds that since this date there have been 18 K waves lasting on average 60 years 1. Most people are quite familiar with business cycles that tend to be denominated in terms of months to years – For example – typical business cycle goes - Sales are good, people are confident about the future, and unemployment is reduced. Then sales fall off, the immediate future seems gloomier, and unemployment increases. 2. The Kondratieff wave is a longer version of economic fluctuation – built off the theory of technological innovation and subsequent diffusion at the world level - can also have some rather major implications for war, peace, and order in the world system through political instability 3. What drives k-waves has been the subject of considerable analytical dispute. Arguments have been advanced that bestow main driver status on investment, profits, population growth, war, agricultural-industrial trade-offs, prices, and technological innovations 1. Truth be told – who knows what really is the cause – however, the effects of these cycles are what is notable and what we will focus on
Each cycle has it sub-cycles – which are dubbed as seasons as broken down into four sub-cycles - The K wave is a 60 year cycle (+/- a few years here or there) with internal phases that are sometimes characterised as seasons: spring, summer, autumn and winter:
- Spring: Increase in productivity, along with inflation, signifying an economic boom – 1949-1966
- Spring (25 years) – Inflationary phase with rising stock prices and increased employment and wages.
- Phase: new factors of production emerge, creates good economic times, where consumption goes up – people spend more and there is rising inflation – it is the starting period of inflation
- Best assets are typically real estate and shares – but as this is the start of the new cycle – typically it means that these assets have just gone through a crash
- This stage is all about confidence turning around and picking up – and when confidence is high – everything booms
- Except bonds – due to inflation
- Summer: Increase in the general affluence level leads to changing attitudes toward work that results in a deceleration of economic growth – 1967-1981
- Summer (5-10 years) – Stagflation phase with rising interest rates, rising debt and stock corrections. Imbalances lead to war – either economic or physical
- Interest rates normally rise which combats inflation – and the risking debts also get slowed down –
- The share markets normally go through a bit of a correction as well or just make no progress and stagnate –
- There can be a build up of capital goods as consumption starts to lower
- Hubristic 'peak' war followed by societal doubts and double-digit inflation – but commodities do well in the stage
- Summer (5-10 years) – Stagflation phase with rising interest rates, rising debt and stock corrections. Imbalances lead to war – either economic or physical
- Autumn: Stagnating economic conditions give rise to a deflationary growth spiral that gives rise to isolationist policies, further curtailing growth prospects – 1982 - 2000
- Autumn (7-10 years) – Deflation phase where falling interest rates lead to a plateau and stock prices increase sharply
- Inflation starts to drop to due consumption decreasing
- The financial fix of inflation leads to a credit boom which creates a false plateau of prosperity that ends in a speculative bubble
- In this phase due to falling interest rates – debts rise massively – this causes real estate to boom and for bond prices to rise – shares also do well before they have their peak and crash
- Autumn (7-10 years) – Deflation phase where falling interest rates lead to a plateau and stock prices increase sharply
- Winter: Economy in the throes of a debilitating depression that tears the social fabric of society, as the gulf between the dwindling number of "haves" and the expanding number of "have-nots" increases dramatically – 2000 – meant to be 2020
- Winter (3 year collapse and 15 year readjustment) – Depression phase with stock and debt markets collapsing
- But commodity prices are increasing.
- Excess capacity worked off by massive debt repudiation (or debt default), commodity deflation & economic depression. Inevitably – a 'trough' breaks psychology of doom and things move back to the spring cycle
- Best investments are cash and gold – as shares and bonds (or debt) are in free fall for the first few years – but then go nowhere for a while
- Winter (3 year collapse and 15 year readjustment) – Depression phase with stock and debt markets collapsing
Implications for 2020 and Beyond 1. Based on Professor Thompson's analysis, long K cycles have nearly a thousand years of supporting evidence. If we accept the fact that most winters in K cycles last 20 years this would indicate that we should be coming out of the Kondratieff winter that commenced in the year 2000 soon – but does it feel like it? – Gone on a bit long already and it is a deeper topic – so will cover the current cycle in closer detail next Friday Episode 1. In sum, the Kondratieff wave appears to be highly pervasive and hence an important underlying function of the world system – think this is an interesting concept and deserves more recognition than it currently receives. 2. In addition to technology being a major factor in K cycles, credit and banking also play a crucial role. 3. This is due to the fact that new technology spurs growth, initiative, and risk-taking. This mindset encourages investment and lending, thus when the multiplier effect kicks in, economies expand rapidly. 4. Moving the focus and analysis on more modern times – can be seen that periods of "K" expansion and contraction bring with them phases of bigger booms and busts. 1. The picture is doubly exacerbated by increasingly more integrated world funding mechanisms which means these booms and busts are global rather than local and increasingly more political than economic. 2. Also – the credit capacity of Central banks – in modern times they are on steroids compared to the constrictions placed under the gold standard 3. The very fact that Central banks since the 90s have been trying to control inflation and the very cost of money may have broken this cycle- as far as following the timelines but not the patterns 4. A Kondratieff Wave is a long-term economic cycle, indicated by periods of evolution and self-correction, brought about by technological innovation that results in a long period of prosperity.
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Welcome to Finance and Fury, The Say What Wednesday Edition. Where we answer your questions.
I'm Louis Strange and today's question comes from Mark.
Hi Louis, I just heard about IBC (INFINITE BANKING CONCEPT) and I would like to know your input on it. They are saying you can be your own bank by setting up a cash flow whole life insurance policy. Then you are able to borrow against your liquidity, I would like to hear your thoughts on it.
Spoiler – this probably can’t work in Australia – run through what this is first and then go through reasons why
The concept isn't that new – History
- The first large-scale attempt to market this concept came about in 1980 – the concept of LEAP - The Lifetime Economic Acceleration Process – since then had IBC with Be Your Own Banker and then also Bank On Yourself more recently
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But the concept dates back further than 1980 - roots of this strategy go back generations — at least prior to the American Civil War – how did it work in practice?
- Started with Farmers - struggled with extreme seasonality of cash flows
- So farmers would generally have to borrow money to buy farmland, to plant, and to have money to live on while they paid their mortgage, paid their laborers – all while waiting for the harvest if harvest went well - used the money to pay off the debt
- But back then the risk was that someone died before the mortgage was paid off – as back in those days, people frequently did not live beyond their mortgages – rather than risk losing the family farm, the family would buy life insurance - If the farmer died before the mortgage was paid off, the life insurance company would pay the death benefit, and the farmer finally ‘bought the farm’ from the bank — which is where the term comes from.
- Keep in mind that this was in the days before we had index funds, and before we even had mutual funds as we know them. Or even Super accounts
- Started with Farmers - struggled with extreme seasonality of cash flows
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The system worked well for farmers - If they saved aggressively within a life insurance policy, they got a death benefit, and a ready source of liquidity from loans from the life insurance policy.
- And since the policy was ultimately secured by the death benefit, it was a safe loan from the point of view of the insurance company and a bank
- Once the farm was paid off, the next generation didn’t have a mortgage anymore - so they could use this policy to buy more land, or to buy a new tractor or combine, build a new house, or anything else they wanted to do.
- IBC evolved from this concept - Here’s the pitch, in a nutshell:
- Over the course of your life – a lot of people pay interest to creditors on all manner of loans - most mortgages, but also cars to credit cards to even HECS repayments – these interest repayments compounding over time represents a tremendous drain on individual wealth.
- Instead – if you aggressively saved money within a certain type of life insurance policy, you could fund these purchases from that policy — and pay the policy back, rather than the bank
- Technical issues with this phrasing – it is the functional equivalent of paying yourself for the loan, with interest – essentially - you are retaining the interest within the cash value of your own life insurance policy, rather than paying off the bank
So how does this work and what is Infinite Banking? 1. Infinite banking claims to be the process by which an individual becomes his or her own banker – I do use claims here 1. Go through definition of a bank later - 2. But Infinite banking is a concept created by American Nelson Nash – wrote a book called “Becoming Your Own Banker” 1. Nash talks about the use of whole-life insurance policies that distribute dividends and how owning such policies allows individuals to dictate the cash flow in their lives by borrowing against/from themselves instead of depending on banks or lenders for loans 3. Practical terms – uses the mechanics of Whole Life policies - which is the platform on which IBC is implemented – First - how does this work compared to a term life? 1. Term Life Insurance - A term life insurance policy operates like other types of insurance you may be familiar with 1. You take out Life cover at a set level and pay premiums based around your risk factors – age, occupation, etc. 2. Most term life insurance policies expire without the insurance company having paid out any death benefit claim – at 99 if owned personally or 75 inside super – but most people don’t hold it to then as the premiums get too much 2. Whole Life Insurance - a permanent life insurance policy never expires and is set up to pay into 1. It is a hybrid form of policy – has investments which you contribute into along with an insurance component 2. Unlike Term insurance on stepped premiums – most WOL policies have fixed premiums – pay more now into the policy - effectively “overpaying” for the pure insurance coverage in the early years, while “underpaying” in the later years – but the life insurance company takes the incoming premium payments and “puts them to work” by buying financial assets, such as conservative corporate bonds. Over time, the life insurance company builds up a stockpile of assets effectively “backing up” a Whole Life insurance policy that it has issued in the past 3. Cash Surrenders - Now consider that as a customer with a Whole Life policy gets older, he or she is a ticking (financial) time bomb from the insurance company’s point of view, because the moment of death — though uncertain in any particular case — is getting closer and closer. That’s why the life insurance company would be happy to pay such a customer a cash surrender value to “walk away” from the policy, and this amount increases over time – also can come from a residual of what is invested 4. Policy Loans - the owner effectively builds up equity over time, as the cash surrender value increases. As part of the contractual arrangement, if the owner wants cash but does not want to surrender the policy, he or she has the option of borrowing money directly from the life insurance company, with the cash surrender value serving as the collateral on the loan. This occurs “on the side” as it were; the money doesn’t “come out” of the policy.
- What this means in practice is that someone who has built up a well-funded Whole Life policy can obtain financing from the life insurance company at a predictable interest rate with no questions asked.
- For these WOL polices – the insurance companies normally won't asses a borrower’s credit score, annual income, the purpose of the loan, etc. the way a conventional lender would – as the money is coming out of your own policy
- It is all about using a WOL policy loan and paying this back – so if you need to buy a new car or you don’t borrow money from conventional lenders but, instead, take out a policy loan from your life insurance policy
- Had a look at the old AMP policies – rate of 5% is the current offering – but these are mature products – don’t think they offer them anymore
- For these WOL polices – the insurance companies normally won't asses a borrower’s credit score, annual income, the purpose of the loan, etc. the way a conventional lender would – as the money is coming out of your own policy
- Digging Deeper into the Infinite Banking Concept - In Nash’s infinite banking concept (IBC), the cash surrender value(s) of whole-life insurance policies act as collateral for a loan. The individual simply needs to call the insurance company and ask to take out a policy loan.
- A whole-life insurance policy is meant to cover the entirety of an individual’s life, not simply to assist family/friends in the event of the individual’s death – Also due to the nature of the policy – where you over pay now – there should be returns on this to generate an increase in the cash value of the policy
- Advantages of Infinite Banking –
- Liquidity of the loan - loan can be taken out quickly and the individual can secure cash in hand faster – allows for emergency funding
- Disadvantages of Infinite Banking -
- The costs of the policy can be high and you need to aggressively put money into it for the cash surrender values to grow - so if you have a large financial commitment already with a family, then it can be hard to make work
- The money you borrow is essentially your own money – just being lent to you by the insurance product
Firstly – this is a USA strategy – don’t think it would work so well in Australia for a number of reasons - 1. Whole of life isn’t offered here – Why? - In short, superannuation was viewed as a replacement, or alternative for, a permanent/whole of life insurance policy 1. The government made superannuation compulsory to all workers in Australia in 1992 to ensure all Australians would have enough money to retire on 2. Both employers and employees contribute to the super fund by depositing money which is kept aside and used later in life when the individual reaches retirement – when you pass away – family gets the benefit as well 3. Similarly to Whole Life Insurance, Superannuation now can include a death benefit insurances which is paid out in the event that the fund member dies before reaching retirement – Term life insurance policies 4. Superannuation and term life insurance policies work hand in hand to deliver a very similar function to what whole life insurance can provide alone – minus the lending side of things - Therefore, whole life insurance is no longer available for purchase. 2. Mostly in America – IRS has different treatments to the ATO of recognition of dividends for insurance companies 1. Also – access to funds by APRA and the ATO is reliant on preservation ages – Even SMSFs you can do in house asset loans – but only for around 5% of the value of the fund 3. Problem with borrowing against the existing whole of life in Australia – most people either don’t have these policies or don’t have enough cash balance to be able to borrow against their available funds
Summary – 1. Technically not being your own bank - Definition of a bank – ADI - You deposit funds in your own account – with a ADI – 1. The equivalent of setting up a loan agreement with yourself – which you can do from a company 2. Self-insurance strategy – not be your own banker – 2. For example – say you need $600k borrowings to buy a home? How are you going to buy a home if you don’t have $600k inside of a WOL policy to borrow from the insurance company? 3. The concept in the USA could work on smaller borrowings – like a big purchase on a CC or car loan – if enough is inside of the policy 4. But since Super and Term life now replaced the strategy of the WOL – IBC may not work here 5. In modern times – just be aware of a lot of these concepts are heavily marketed by those selling these products for a living - and are designed for more affluent investors with lots of free cash flow and who have long term liquidity needs – which don’t meet the needs of most everyday people
Thanks for the question Mark
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury
Today – going to cover the Central banking playbook in the next crisis – If there is ever going to be one!
Today – was doing some reading so will have a look at some comments from key central banking figures over the past few years – and look at the market implications – as either markets will crash at some point and central banks will conduct bail-ins and also buy up shares – or they will actively try to avoid a crash by a BOJ strategy – constantly buying shares and offering incentives (continued low-interest rates) for investors to continue investing
To start with - Back in June 2017 - several key officials provided some bizarre honesty in their statements – all of this occurred from individuals under Janet Yellen's Federal reserve – Now the Fed Chair is Jerome Powell – appointed by Trump – but the playbook likely hasn’t changed – Let's have a look though at the statements from back in 2017 – rare to get anything from Fed officials for the market implications of their comments -
- First - San Fran Fed president John Williams – now become the Fed's #2 as he took over as head of the NY Fed in 2019 (major Fed Branch) – he said "there seems to be a priced-to-perfection attitude out there” and that the stock market rally "still seems to be running very much on fumes."
- He also added that "we are seeing some reach for yield, and some, maybe, excess risk-taking in the financial system with very low rates. As we move interest rates back to more normal, I think that that will, people will pull back on that."
- But what happened when they announced an increase of rates back in Mid-2018 – markets dropped by more than 10% over a few months until they cancelled the plans of increases
- Next – has the then-Fed Vice Chairman Stan Fischer – echoed John Williams' statements - that "the increase in prices of risky assets in most asset markets over the past six months points to a notable uptick in risk appetites” all thanks to the lower interest rate environments creating people chasing yields –
- All of this occurring when the measures of earnings strength – like the return on assets, continued to approach pre-GFC crisis levels at most banks
- But given the interest rates were a lot lower - the return on assets should have been expected to have declined relative to their pre-crisis levels--and that fact is also a cause for concern."
- Fischer then also said that the corporate sector is "notably leveraged", that it would be foolish to think that all risks have been eliminated, and called for "close monitoring" of rising risk appetites.
- Essentially – what was covered in the corporate debt episode – as listed companies have taken on massive levels of debts and if rates were to normalise – their earnings would be destroyed by the interest repayments
- Lastly - you have the lady herself – the then-Fed Chair Janet Yellen – she said that some asset prices had become “somewhat rich" although, like Fischer, she wanted to assure the public that share and bond prices are fine – but what she left out was that they are fine as long as you assume that we will be in a record low-interest rate environment in perpetuity – as her next statement points out - “Asset valuations are somewhat rich if you use some traditional metrics like price-earnings ratios, but I wouldn’t try to comment on appropriate valuations, and those ratios ought to depend on long-term interest rates."
- So as long as interest rates don’t go up – the PE ratios of some of the largest companies in the US at 100 times is fine – given a lot of their growth of price is backed off debt and buy backs
- Quick reminder - back in 2017 at the time of these statements - the S&P500 was trading at "only" 2,400 – back when the Fed was only starting to consider a hike in interest rates and QE4 was more than two years away – thanks to not raising rates and the implementation of QE4 – S&P500 now at 3,386 – all time highs –
- Digging a little deeper – one of the more interesting things that Yellen said was in response to a question on financial system stability - Yellen said that the implementation of the post-crisis regulations had made financial institutions much "safer and sounder", and as a result she went on to predict that there would never again be a financial crisis "in our lifetimes" – her actual statement was - "Will I say there will never, ever be another financial crisis? No, probably that would be going too far. But I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will."
- First – she was 71 at the time – so maybe she was expecting an early grave - While some were quick to compare this statement by Yellen (who then was 70--years old) to Neville Chamberlain infamous - and very, very wrong - 1938 prediction of "peace in our time", perhaps she was hiding a trump card all along... A trump card which she revealed only now, almost three years later.
- But what I find more interesting is that someone in her position may just be saying this to help provide confidence to the market – however – the fact she refers to legislation changes – such as the SIB and SIFI regulations and controls over the market which could ban trading and shut down markets during times of crashes – seems like she knows more to the story
- Which makes me think that she meant something else – such as when looking at the transcripts when she was speaking via a video conference with bankers in Kansas City - Yellen said that the Fed would take a page out of the SNB's (Swiss national bank) and BOJ's (Bank of Japan) playbook - and "might be able to help the U.S. economy in a future downturn if it could buy stocks and corporate bonds."
- Of course – she didn’t mean the whole "US economy" – for instance, every worker and person who pays tax – but those who own the most amount of these assets – the Fed and other financial institutions/investment managers and their political cronies.
- This being said – on the public surface - Yellen was quick to walk back this "hypothetical" scenario, saying that "the issue was not a pressing one right now" and pointed out the U.S. central bank is currently barred by law from buying corporate assets – but the laws can change
- The idea was already "incepted" in the heads of America's political rulers (whose fate is just as tied to the performance of the stock market) and the law can be changed literally overnight.
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- Similar to SSC – politicians have a lot of money in markets – and rely on the markets as a sign of economic health – even though it is not – look at Bloomberg – 9th richest man on earth running for President – has a lot of wealth in markets
- And after all, it is only a matter of time before a crisis does hit, and now Yellen has explained has to happen to avoid an all out social catastrophe in a country where financial assets account for nearly 6x of GDP – all time high compared to average pre-90s of 3 times GDP
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- To validate her point, Yellen said that the Fed’s current toolkit might be insufficient in a downturn if it were to “reach the limits in terms of purchasing safe assets like longer-term government bonds."
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- "It could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions,” – referring to the wealth effect – where economists and central bankers still rely on this as a basis to help boost GDP growth by getting people to spend more – 1. Regardless – Yellen said that the Fed buying equities and corporate bonds could have costs and benefits... But mostly benefits, if only for the Fed, and those in the know – who would get very rich.
- Keep in mind that what Yellen said was merely a paraphrase of Ben Bernanke's famous April 2010 Washing Post oped in which he defended his use of easy monetary policy in facilitating higher stock prices – again, the idea is to boost asset prices to – quoting from Bernanke here - "to boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."
- None of these policies are really true or "trickle-down" economics - which isn’t a thing – it is a design – central planning similar to communist countries – in China – all the building of ghost cities using tax payers funds goes to the Communist party members who own the construction companies – and in the US and Western societies – this wealth goes to those who own the assets that own the shares and bonds – in US society – top 10% of people who own 93% of all equities – again a choice to participate – but those who did own shares have gotten great returns – I am technically one
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- But these haven’t been real returns – and doesn’t provide a free market – supply side economic gain for all - Bottom of Form – as the bottom 90% of the population who own virtually no stocks and owe most of the debt, got very, very angry as they watched how the Fed plundered their future and hopes to become wealthy, and resulted first in the election of Trump, and the upcoming election of a socialist candidate as America goes full-on populist in response to the Fed's catastrophic policies.
- However, thanks to Yellen we now know that the Fed won't go down without a fight... or at least without monetising everything – whilst Yellen is no longer the chair of the Fed – just last month she told a conference the Fed would fight a future recession by buying government debt and jawboning interest rates lower
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- But she did add that other tools will be necessary - including expanding the range of assets it would purchase – i.e. shares
- Painting a picture that before the current fiat regime of central banks finally ends and before stocks go limits up as the revolution starts, the Fed will order a Permanent open market operations (or POMO) of, well, everything in one final, last-ditch effort to keep social stability by creating the impression that stocks are stable and rising even as society implodes
- Genius strategy – expand the fiat system massively to buy real assets – like shares and bonds – then switch monetary bases once the value of fiat goes to almost nothing
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- Begs the question - Will it be successful? Normally – long term I would say that it won’t be = but when we consider that that's precisely what has been happening for the past decade - have to think really hard just how much further the Fed can keep kicking the can before it all comes crashing down – it will likely continue to keep markets high until they decide to cease the expanded operations in the markets
But the Next Level – this is what is an additional concern
- What happens when the central banks own most of the shares in companies?
- Say they do buy up a majority of corporates and have an influence on these companies
- Central banks are pushing for climate change reforms – getting involved where they don’t belong –
- Every central bank is now on the same page – repeating the same UN talking points
- But as a shareholder – you get voting rights – so Fed could gain access to control of the “private” (use the term loosely) markets – beyond the control over Governments and their debt they currently have
- Central banks like the SNB and BOJ already own a large chunk of their share markets – question is – do they get voting rights and how would they use them? Control the board and decisions of a company
- So under this system – Zombie companies will reign supreme – Those that the Central banks own can technically be propped up regardless of the money they continue to lose – Banks would become more involved to help their balance sheet grow -
- Therefore, there would be no free market of companies rising and falling based around their performance –
- The injections of printed money will save them from their declines in prices – so, whilst their performances suffer and they lose money – their prices will continue to rise -
Summary 1. With Central banking intervention into markets – they can keep coming up with schemes – 1. SSC and Blunt – keep coming up with something for prices to go up – but inevitably – the complex system of markets beats out = the markets can correct and have done so. 2. All comes down to Central banking hubris – that they think they are supreme and solve every economic problem – 3. A long way from their early charters of being the bank of last resort – just to provide liquidity to commercial banks in the event of bank runs – now they can control markets and the very cost of money.
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Welcome to Finance and Fury, The Furious Friday Edition
This week – see what lessons can be learned from - Last week - Story of Financial alchemy in its early days with the SSC bubble
Been many bubbles since then – The Markets have a Cycle to them 1. History of the last 90 years – exclude wars and a few other drops that weren’t the result of a bubble bursting – you have 1. 1929 crash (-46%), credit squeeze of 1961 (-23%), OPEC stagflation of 1970s (-59%), 1987 crash (-50%) and the 1990 recession that followed (-32%), tech bubble in 2000s (-22%), GFC of 2008/9 (-55%) - 2. Good news - Markets do recover – we are back to all-time highs for the index - but keep repeating the same cycles – debt being flooded into markets – leverage grows, investment prices rise and seeing the artificial price rises, people jump in to not miss the boat – no pun intended – especially as we will be looking at the SSC bubble last week in relation to these common factors over time 3. But like any cycle – what goes up must come down – and there are elements to each stage -
Core to the SSC bubble – wasn’t just an individual (John Blunt) but also a group of individuals who saw a way to make themselves filthy rich – and the general public who didn’t want to miss out
- Takes a few elements for a bubble to form and pop – almost like a perfect storm
- Three major parties involved when it comes to the elements of a bubble cycle – those facilitating it, those driving it (and will profit from it) and those looking to partake to not miss out – a lot of whom do so when it’s too late (those who lose from it)
- Sometimes the first two are the same entity – or working together
- For the SSC – Facilitating it was Harley and the Crown, then Blunt saw this as an opportunity to make himself filthy rich, driving the bubble – as he dreamed up a scheme of the market and public perception manipulation
- This is when the prices went up by a lot – but continues to climb when all three elements come together
- When everyone is jumping in out of emotions (or greed) to get rich – but got the opposite outcome once the bubble popped
- Which is when the fundamental price gain factors (leverage) start to run out of benefits –
- And the amount of money the public has available compared to banks/central banks isn't the same – we cant create or reduce the amount of money at a whim
The First Element – Facilitators – Normally a bigger entity – like a Government through legislation or a Central bank through leverage/money-printing/monetary policy – essentially – the creators of a scheme
- The whole scheme for the SSC was thought up by a Government official and a corrupt businessman – John Blunt
- Blunt's first scheme – use those technically worthless army debentures (loans) and made them attractive – so the price went up
- Knew that the offer to do a swap at under market value would be massively in demand – and increase the price of the army debentures – so before he announced this scheme – he went out and bought massive amounts of these army debentures –
- Then he announced so the value of the debentures went through the roof due to people trying to get them to trade for his companies shares – then could trade the technically worthless debentures back to the government for the land that he wanted in Ireland – this was technically illegal – but he was lending the government money – so no action was taken in the end
- This was technically a mini-bubble
- But was Similar to the bankers doing swaps on Synthetic CDOs in the GCF – was peddling something worthless and pumping the price up using leveraged strategies – treating some of the highest risk mortgages as AAA credit
- How many of the masterminds of any bubble go to jail? The banks are some of the Governments biggest donors – so maybe a scapegoat or two – but never the culprits
- For the SSC – A large part of this bubble was to create a scheme and to never report the truth to the public – but keep confidence high to make sure prices would continue to rise – so those involved could continue to profit
- If the truth is ever known – the jig is up – So had to keep the population in the dark – and nothing has changed – we are all busy, and economics/finance can be hard to understand unless you devote a large chunk of your life to it -
- Legislation can be another major element – and the adverse effects
- Initially – the SSC was created by a Public-Private partnership – to take over all the Crown's debt
- The only reason that it looked like a good investment was the monopoly trading rights that were provided by the state – created artificial demand for the company – but the underlying profits were non-existent
- Then – after the price rises - SSC - had its copy cats – others started their own share scheme – started popping up everywhere – crazy ones – like flying machines – so money going into SSC started to cease
- Bubble Act was put into place in 1720 – which forbade the creation of joint-stock companies without royal charter, was promoted by the South Sea Company itself before its collapse
- All of this had another unintended effect/consequence – as other schemes which people thought could make them more money instead were starting to take off –
- Essentially the banning of every other scheme except the SSC – but due to this act – had opposite effect – which was those who invested in the now banned schemes lost their money - so had to sell their SSC stock to make it up – as they were otherwise broke
- In the modern-day – many bits of monetary policy or legislation create bubbles
- Initially – the SSC was created by a Public-Private partnership – to take over all the Crown's debt
- Lesson - Don’t trust the government is legislating in your best interest – or monetary policy is being conducted for your benefit - Looking at the payments that politicians get after they leave office when they pass favourable bits of legislation
- Clinton – was getting $500k a pop for a 20 minute speech from the same banks that he allowed to be deregulated
- In 1995 Clinton loosened housing rules by rewriting the Community Reinvestment Act, which put added pressure on banks to lend in low-income neighbourhoods – the HUD departments regulations also changed where Fannie mae/Freddie mac had to provide a minimum of 30% of loans to low-income households – which banks knew they would lose money on these through defaults so wanted some way to make money off them along with having guarantees that if these loans went belly up (as they would) – banks liquidity would be safe –
- Then a few years later – under pressure from the same banks - Passed the The Gramm–Leach–Bliley Act, also known as the Financial Services Modernization Act of 1999 - provided the removal of the Glass-Steagall act (allowing investment and commercial banks to operate together) and also exempted credit-default swaps from regulation - allowed banks expand off balance sheet derivative positions with no reporting obligations
- Then – Central banks – and monetary policy – anyone who owned property or shares since 2009 has done very well out of these policies to fix the problem by buying assets and increasing prices artificially – but those that don’t still have to flip the bill in taxes and are priced out of affordability – ill cover the new Fed plan in the next crash in another episode soon
- Thing to learn from the first element of bubbles – Governments aren’t your friend – but those who pay them the most and can provide the most benefit –
- Obviously, they won’t say this to your face – the perception is that they are here to help to get votes – but the outcome is the complete opposite
- Requires some level headed thinking when things seem too good to be true
The Second Element - Those driving the bubbles – By again, providing confidence and price gains for the public’s perception
- Government guarantees – backing – for SSC – back in 1717 – King George became the SSC leader – then politicians were bribed with cash ($2-3m each today's dollars) along with getting shares for free – then due to political involvement the company became too big to fail – if the company failed - prestige would fail and the powers that be would lose money – sound familiar to the 2009 crash? – but it was after this public perception the SSC price started to rise – but by breaking the agreements and letting their prices rise beyond the government debt backing it – but the government officials didn’t care – they were going to get rich –
- The driving factor is confidence – whether it be fake or real – doesn’t matter – has the same effect of stimulating demand
- Confidence is key for bubbles – But the effects of public officials getting into the shares and King George taking over leadership of the company gave the public the perception that the shares must be a good thing - a lot of confidence in the shares
- Effect - share price rose from £114 to £330 – but the next month the shares went down to £310
- So confidence was slightly lost – and demand went down – which couldn’t happen
- Leverage buy ins - new scheme – buy the shares with 20% down and regular payments every 2 months (similar to how warrants work today) – created leverage on leverage – allowed people to buy way more than they could afford –
- Effect - Could by 5 times the number of shares today with only 20% down - very leveraged and driven by greed – if people saw the price go down then people may stop buying
- Price quickly rose to £550 – but then soon after prices dropped again to £510
- Lending to people to buy - – Loan people the money to buy the shares – loans from SSC to individuals – then they would buy their own shares back off them and push the prices higher
- Effect - Prices went to £600 – seeing this – people wanted to get in – greed took over rational sense
- Lesson – price gains are not a sign of a good investment – especially when leverage/debt is the factor that creates the growth
- Saw last week – SSC went from £100 - £1,000 within around a year – was it due to the spectacular performance? No - the company was technically losing money from operating –
- Was due to the last element – the public demand on top of the first two elements
The Last Element – The general public - Those who mostly get caught out – but also are pushing the prices higher
- The first two elements have the same effect – to artificially stimulate demand –
- This creates a situation where the public has Confidence in investments continuing to rise – through conflating a rising asset price to a good investment –
- If the shares of a company go up by 20%, 60%, 100% - you might think that the company is doing really well
- But the share price doesn’t reflect the company’s performance – just the demand for the share
- Can be out of expected performance – or just blind faith and that people don’t want to miss the future gains – like in the case of the SSC – and also a lot of the largest shares listed in the US markets
- For the SSC - in England at the time – not enough money in whole country to prop up prices – so the - £60m to the market cap of £300m – due to the leveraged nature of the funds
- Modern day derivates and price elevations are a good example of this
The Inevitable Consequence - The bubble busting – Too good to be true turns out to be true – fear and panic spreading
- For SSC - Risk was that when the real information gets out to public and confidence is lost – to those paying attention – due to them not making any money – mass sale orders come through – then the prices drop – then the rest of the market out of fear - loss aversion – sell as well – hence the bubble bursts –
- For SSC – the offers that were too good to be true were the issue of shares at the top of the market at £1,000 – created a massive sale for profit-taking – those who bought the shares with 20% down at £500 – or earlier
- But also - What broke the bubble – Blunt offered a 30% p.a. dividend – which woke up the people – losing confidence – fell hundreds of pounds – In 3 weeks – went from over £1,000 to £150 – bankruptcies and suicides were rampant
- The economic effects were widespread – required BOE to buy the shares back – at the market prices
- This trend becomes Inevitable – a threshold of people catch on and sell – or a monetary body – either a group of banks or central bank restrict credit – For example -
- 1929 was a group of banks recalling margin loans all at once-
- 1961 was Aus central bank tightening credit growth due to property prices going up
Over time – I will do a deeper dive into each of these bubble events – but for today – that’s all – thanks for listening
Thank you for listening to today's episode. If you want to get in contact, you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Say What Wednesday Edition - Where every week we answer your questions
Today's question is from James
Hi Louis, Just a question regarding owning your home. Me and my partner would like to eventually own our own home but we are worried about such a large sum of our overall wealth going into a single asset - our future house. How would you correctly diversify your assets in this scenario, were there any strategies to doing this? Especially with house prices at the moment, it really seems like all your eggs will be in one basket - and for a while.
What I’ve seemed to gather is that owning your own house is more a lifestyle asset and a liability. All I seem to hear is nothing but expenses / fees / costs, a low amount of capital growth all for a relatively high amount of risk. Was this true?
Thanks James – and Awesome points
In this episode – we will tackle this using the economic problem and opportunity costs –
- The economic problem – that we all have limited resources of savings and cash flow – and need to make this work towards achieving our goals
- Opportunity costs of doing so – what is the next best thing that we could be doing with our financial resources?-
- I.e. putting your deposit towards long term investments or your cashflow going towards the repayment of a mortgage against doing monthly investments
First – What is a home? – a lifestyle asset – is still technically an asset as it has a value – as long as someone else is willing to buy it off you
- I personally have never really seen a home as a financial asset - because as James pointed out it technically losses you cashflow when it has a mortgage – and even when it doesn’t from a mortgage, if this has been repaid – with rates, body corporate, ongoing maintenance costs for upkeep on the property
- Classification – Can you live off it? Anything that doesn’t make you a passive income but instead loses you cash flow can't be used for financial independence
- Technically - a negatively geared investment property can set you back in FI
- This being said – renting also costs cashflow
- That is where the decision does come back to lifestyle and the fact that everyone needs somewhere to live. Everyone needs somewhere to live –
- Property ownership is expensive – a mortgage is normally the biggest expense –
- PI loans eat a lot of cash flow – but the P component can be treated as forced savings that you can’t use
- But does decrease your I payments over the long term
- Sinking deposits of $100k plus into a lifestyle asset – while it may continue to grow in value long term, you can use this to generate a passive income unless you rent a room out – but then Gov will make you pay CGT on your own home if you ever sell
- Opportunity cost of this is using the lump sum to invest instead and cover your rent
- PI loans eat a lot of cash flow – but the P component can be treated as forced savings that you can’t use
Property Capital Growth – 1. I’ve covered this in a few previous episodes (are we in a property bubble and many others) – but Australian property from the mid 1990s has had a meteoric rise 2. Created a situation where people love property out of the expectation of buying and experiencing the same meteoric growth rates – 3. Pre-1990s wasn’t the case – property grew with wages at around 3.5% p.a. from 1890 to 1990 – 4. What changed? Banking regulations and the amount people could borrow thanks to declining interest rates 3. But anyone looking to buy property at this stage and get the same price gains should keep in mind that it is reliant on credit growth from borrowings – so if people can afford to keep increasing the size of a mortgage from say $700,000 to $5.4m in 30 years – we won't get the same price gains – 1. Looking back on the average mortgage growth over the past 30 years – that is what it has been – from $90-100k to $700k in most of Aus – worse in areas of Sydney/Melb – wage growth at record low rates would only be able to cover $1.9m – so I don’t think so – but may be wrong 4. I personally sold off my last property in 2017 – was lucky timing as the market was at the peak in the area I sold – 1. Used the funds to invest and build a further passive income – passive income from investments could already cover my rent – so this went into reinvestment
Question of Renting vs Buying – look at the option of what is the interest cost, rates, BC is applicable, and spending on upkeep versus rental price
- Rent V Buy – in Aus with the price of property – I prefer renting if it is an apartment in the city – or house in the surrounding suburbs – why?
- Example – Apartment I am in at the moment is worth about $650k-$700k – pay just under $2k p.m. in rent –
- For same property at a 3.5% interest rate – would be paying $1,500 p.m. in interest at under 3.5% - assuming a 20% deposit of around $130k – but add on Body Corporate and rates – additional $5k p.a. ($420 p.m.) – total interest bill and minimum expenses are the same as the rent –
- But opportunity cost of the $130k tied up in the deposit – use this for an investment instead that provides a passive income
- Then add on the principal amount of $820 p.m. – at minimum – cashflow wise I am better off by around $1,362 per month – or $16,300 p.a. to direct towards investments
- This example doesn’t include the capital works or sinking funds requirement on the place either -
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This all being said – this is a financial decision - But lifestyle considerations come into play – most people want to own their own place to live long term – avoids dealing with tenancy issues, dealing with real estate agents or the owners selling out of the blue
- Comes down to security and ability to make amendments to the property as you like – renovate or paint a wall
- Lifestyle isn’t financial though – it is what you want to achieve to suit what you want
- If apartment living is what you like – then buying apartments to live in long term can work
- Have to buy for now and the future –
- Property (even your own) is a long term thing – if you are planning on having kids/starting a family – and want to move to a bigger home in a few years but are buying now – may as well save more and buy a bigger home
- Why? Transaction costs – stamp duty, agents fees
- Example – Buying an $800,000 place in NSW – stamp duty of $31,777. When you sell it – agents fees of around $20k – so a minimum of around $50k to buy and sell – 6.5% of the value – No guarantees that prices will jump up that much in the time you might want to turn around
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The risk – Shouldn’t view your own PPR as a speculative risk
- Speculative risk is that you lose money on it in the short term through volatility – you are buying for the long term
- Buying at $900k to see the valuations drop to $800k sucks – but as long as you don’t need to sell – what does it matter?
- The risk of owning a PPR is that it eats all of your cash flow up – through having too large a mortgage or interest rates rising – if this is the case and you have nothing left in cashflow to make additional repayments or to direct towards investments – that can be a risk
- Everyone needs somewhere to live – but once you retire you also need something to live off – super or investments –
- Worst case – Age pension which isn't a guarantee
How would you correctly diversify your assets in this scenario, are there any strategies to doing this? 1. The option is using your own property as an investment vehicle – 2. Not advice but a strategy – Create a separate loan facility as an investment loan – and push all your cash/savings into this – 1. Then draw the months worth of savings that you would have invested anyway to invest – debt recycling 2. Not for everyone – and now not a great time to do it due to markets being at all-time highs 3. The economic problem of cash flow – This is limited in most situations – as disposable incomes are the restricting factor 1. Mortgage repayments versus investing the funds 2. PI repayments - Interest component is covering the costs of interest – the principal is repaying the loan – and is what saves you interest long term – but at the moment rates are low – not expected to go anywhere for a little while – say you could make P repayments over 5 years and 4. Opportunity cost factors (such as paying down debt versus investing) and also diversification factors 1. Own home shouldn’t be treated as an asset – centrelink doesn’t as you don’t live off it but live in it
The Question – Doing what is right for you long term
- Me personally – wouldn’t buy an apartment – BC costs and no land to property price ratio –
- For me land is what is important – now building a new deposit to buy a few hectares of land around 30-40mins from the city – as for me having access to own food that can be grown and fresh water has been my plan for over a year now
Summary 1. DO the numbers – 2. Look at your cash flow – and opportunity cost 3. But also – your lifestyle considerations come into play
Thanks for the question James
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury
- 2020 has seen a very noisy start to the year – But what’s new?
- The media is constantly reporting on one major event after the other – fear sells better than nice stories –
- The more fearful the event – the more traffic that is driven on clicks – the more clicks the more revenue from advertising – always remember that – their only incentive is to make money first – and reporting on the stories that will make the most money comes before informing you
- The greater the human or investment market implications a story implies – the more fear comes with it
- And it is constant – 24 hours per day, every day each week – never a break from bad or fearful news
- Today – want to talk about strategies to sift through what is money-making clickbait – especially when it comes to investments – and how to
- First – look at the news cycle for Australia in 2020 so far –
- Started with bushfires, moved on to WW3 with US/Iran tensions, now the coronavirus outbreak is creating fears of a global pandemic – all being reported that it could be a big hit to global economic activity
- The way these topics are covered are scary in terms of their consequences – mass deaths and potential economic fallout
- Creates significant uncertainty around the short-term economic outlook
- Then again much of 2018 and 2019 saw endless talk about how much the trade war was going to knock off global growth, Brexit was going to cause a massive economic shock, that Trump was a Russian asset, that Korea was going to nuke the USA, the list goes on – there is a never-ending worry list – news these days turns out to be just opinion pieces and noise
- But all of this reporting relies on one thing – our myopic natures – or the fact that once a new global scare is reported on – we forget about the world ending event that was reported on just a week prior –
- Do an exercise – look at the major headlines of news in the way back machine – or in newspapers from the 50s or 60s, 70s, 80s, etc –
- Truth be told – probably never been an easier or safer time to be alive – but if you are trapped in a mental prison – you may not think so – that is what it comes down to – us –
- Again – our myopic nature and a lack of real education of the past creates the image
- With technology and social media – created a huge psychological aspect to this that is combining with the increasing availability of information and intensifying competition amongst various forms of media for clicks, that is magnifying perceptions around various worries.
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Our natural state shouldn’t be to worry – but we are biologically driven to do so when presented with bad information
- Epigenetically – those who survived hunter-gatherer days were those who were most in tune with danger – watching out for animal predators in nature – or worrying about having enough food to survive the winter – real dangers to survival
- But those real problems no longer exist for over 99% of us in the Western world – however we are still hard wired to look out for them
- Therefore - We all suffer from these behavioural traits – to watch out for dangers - in its financial manifestation this is known as "loss aversion" – essentially - a loss in financial wealth is felt much more than the joy felt from an equivalent sized gain in wealth
- Being aware that we are naturally biased to be more risk averse and on the lookout for threats which leaves us more predisposed to bad news stories as opposed to good news stories is the first step - So bad news and doom and gloom stories find a larger audience than good news or balanced commentary - appeals to our instinct to look for threats
- Bad new sells - Obviously, those in media know this – and prey on our aversion to risk to sell more stories
- Also – remember that media outlets all competing for your attention – so have to outdo the other in shock and awe and hence- tend to overexaggerate the real effects – so remember there is no balanced news
- This is further compounded by the over exposure to bad information in relation to our daily lives and our investments
- Just 50 or 60 years ago – humanity didn’t have to see the bad events of billions of people unlike in the online era of the internet
- The information age is what it is referred to as - This is great in the sense that we have access to more information then ever – but information is not knowledge – especially when the information is not accurate – and therefore not useful –
- Another issue with information is that it is almost impossible to digest all the information out there – nobody has the time – and if we can’t filter it, it becomes information overload and therefore noise
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Information overload is bad for investors as when faced with more (and often bad) news we can freeze up and make the wrong decisions with our investment as our natural loss aversion
- Combine this with our availability heuristics and what is called the “recency bias” – it is a bad outcome for our mental stability –
- Availability heuristics is that we put more weight to something if we hear more about it – for example - if you hear about the dangers of the coronavirus more so than the dangers of heart attacks – people are more afraid of a virus where 99% of cases are in China – as opposed to exercising and eating properly - heart disease is the leading cause of death in Australia and whole world - for both males and females
- 2015 - heart disease caused 12.4% (19,777) of the 159,052 deaths in Australia
- I might be wrong here – but I don’t think one person has died in Aus from the Coronavirus – but every year over 6,000 people in Aus die from Coronas/alcohol-related diseases
- Recency bias is when we give more weight to recent events – again thanks to our myopic nature
What can you do to tune out what is noise and what is actual news - How to manage the perpetual worry list 1. Evidence – I am amazed at media reports with no backing evidence – hence opinion pieces 1. When there are no statistics or evidence backing claims -just ignore – treat this as just noise 2. When you read a news article that doesn’t back up any claims – and states that something will happen – again – just treat it as noise – ignore it 2. Understand how markets work – Information is not knowledge – knowledge is not power unless applicable 1. A diverse portfolio of shares returns more than bonds and cash over the long-term because it can lose money in the short-term 2. The share market can be highly volatile in the short-term – we all want to minimise our losses – 3. My major concern is not market volatility – but the control over markets that Central banks now have – 4. Volatility is driven by worries and bad news increasing levels of volatility is normal – it is the price to be paid for accessing higher long-term returns – but this can be done in an intelligent way
- Focus on the long term – Truth is that markets go up more than they go down
- Put the latest worry list in context and focus on the long term - Remember that there has always been an endless stream of worries. The danger is that information overload is making us worse investors as we focus on one worry after another resulting in ever shorter investment horizons.
- The global economy has had plenty of worries over the last century, but it got over them with Australian shares returning 11.8% pa since 1900 and US shares 9.9%pa
- This being said – there are structural issues wrong with the economy at the moment – low-interest-rate environment creating an increased appetite for risk – many companies on the market losing money while their share prices increase – Fed QE policies pushing up markets –
- But the media isn’t over-reporting on these factors – which are the real concern at the moment
- Focus on your strategy – Helps to filter news so that it doesn't distort your investment decisions
- Your investment philosophy and strategy – if you don’t know what this looks like – workbooks in the members section of the website – financeandfury.com.au - help you work through it
- Help you in building your own investment process – all about focusing on a long-term strategy - does depend on how much you want to be involved in managing your investments.
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Don’t check your investments so much - Be less myopic – similar to checking the news daily – checking investments too much in the short term will increase the availability and recency bias – make you think that investments go down more often than they do over the longer term
- If you track the daily movements in the ASX - it has been down almost as much as it has been up- has slightly more negative days at almost 50/50 - day to day it is pretty much a coin toss to a positive or negative return –
- But looking at each month and allowing for dividends – positive becomes 65% - negative 35% of the time
- Looking at a yearly basis - the probability of a positive year is about 80% - losses at about 20% for Australian shares and 27% for US shares
- Looking over a decade – ASX is almost at 100% and US shares at 82%
- Part of the reason why I have been talking about potential downturns in the near term is that we are approaching our positive decade in the next year – US is gone beyond their positive returns
- But in short - The less frequently you look the less you will be disappointed and so the lower the chance that a bout of "loss aversion" triggered by a bad news event will lead you to sell at the wrong time
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Be Contrarian - look for opportunities that bad news throws up. Periods of share market turbulence after bad news throw up opportunities as such periods push shares into cheap territory.
- Use the knowledge from this podcast to protect yourself – it is okay to invest now – but if the Fed reduces QE and share buy backs decline, then markets may be in for a tumble – be prepare to take advantage of them
Summary - 1. My experience around investing has been that there are always little stories that are over conflated – a lot of these are distractions away from the structural issues and real reasons markets go through highs and lows - end up just distracting you from your financial goals 1. Why it is important not to take extremes – be prepared but not frozen by fear – 2. Plan for the worst – if markets go down – do you need the funds in the next 3 years? – if yes, don’t invest everything you have 3. But keep cash and non-correlated investments – in conjunction with investments that will retain confidence 1. Not a fan of financial institutions at the moment – looking over the last 30 years that is where a lot of the financial crashes centre around – so while the market can drop by a lot – banks drop by more while other companies that we rely on to survive – don’t drop as much 4. But ignore the media news – no way to tell when markets will go down – but having investments in the market is important – If you don’t have any – maybe hold off for a little bit – and buy if a decline starts
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Furious Friday Edition
Today - Lesson from the past –
Story of Financial alchemy in its early days Specifically – turning debt into equity – i.e. financial alchemy
- Story Starts - In 1700s the English Crown had amassed massive debts – all from fighting wars with the French and Spanish, also a massive civil war – along with colonialist intentions –
- When in August 1710 Robert Harley was appointed Chancellor of the Exchequer
- Position - senior official within the Government of the United Kingdom and head of Her Majesty's Treasury
- When he took over – got a bit of a shock - £5,000 in assets - £9,000,000 in debt – to give an idea of this size – that debt is still being paid down – last announcement in 2015
- Politically – things were also a mess - At the time – two parties – Tory’s and the Wigs – very bipartisan who couldn’t get anything done – raising taxes to pay this was out – so turned to the Bank of England
- The government had already become reliant on the Bank of England – back then up until around 30 years ago - a privately owned company
- BOE was chartered in 1694 – chartered 16 years previously by the Wigs, which had obtained a monopoly as the lender to Westminster - in return for arranging and managing loans to the government
- But in this time period – the Tory party was in power – so the Wig controlled BOE was offering massive rates – and the government had become dissatisfied with the service it was receiving and Harley was actively seeking new ways to improve the national finances
- Couldn’t raise funds from other European nations – was at war with most – so turned to John Blunt – was a crafty man
- Blunt saw this as an opportunity to make himself filthy rich – dreamed up a scheme –
- Back Story on Blunt - Before this moment in time – Blunt had a company Hallow Sword Company – monopoly of selling swords to Gov and the army –
- Cooked up a scheme in the past – wanted to buy land in Ireland which was owned by the government – but needed funds – so he had a plan – trade share in hallow sword company at under market value for army debentures (debt) – but can’t repossess the debentures – so made them technically worthless – but knew that the offer to do a swap at under market value would be massively in demand – and increase the price of the army debentures – so before he announced this scheme – he went out and bought massive amounts of these army debentures –
- Then he announced so the value of the debentures went through the roof due to people trying to get them to trade for his companies shares – then could trade the technically worthless debentures back to the government for the land that he wanted in Ireland – this was technically illegal – but he was lending the government money – so no action was taken in the end
- Similar to the bankers doing swaps on CDOs in the GCF – anyway
- As blunt was helping the government – Harley had his man – as he needed funds –
Came up with the South Sea Company (officially The Governor and Company of the merchants of Great Britain, trading to the South Seas and other parts of America, and for the encouragement of fishing)
- Was a British joint-stock company founded in 1711, created as a public-private partnership to consolidate and reduce the cost of the national debt
- How? Made a plan – the trading company – Scheme would be similar to what blunt did with his own company –
- Anyone who held Government debt would be able to trade the debt for shares in the SSC – then Government would pay the SSC 6% interest on the debt they took over – about £500,000 p.a.
- To make it enticing - South Seas Co was given monopoly on trading in south seas – and tried to get hype around the shares - convincing that the shares in the company were going to skyrocket – here was a chance to make millions – the term millionaire was coined in this time period with the SSC stock rising – which happens later in the story
- East India Company was doing well – and public perception was that the SSC company was going to boom like the EI company
- But the promise of the trading profits of the SSC was a scam though – South America was run by the French and the Spanish who the British were at war with – needed peace – but the majority in the house of lords didn’t want this
- Queen Anne was approached by Harley and Blunt – and got 12 more lords in the house of lords – lords was all it took – no voting – blunt got Queen Anne to push through these lords to get a majority vote for peace – but the peace deal only let 1 ship a year into the ports – but the public was never told –
- Had famous authors and others push the scheme still
- 1714 – King George took over with Anne’s death – But the wigs took over at the same time – so Tory’s no longer in power – and Harley was kicked out – so Blunt took action - Got the king to invest into SSC – forgave two years worth of interest payments that they owed – but in return – was allowed to issue more shares in the SSC
- 10,000,000 of new stock was issues – which was massive – half the size of all the companies shares in the whole of Britain – this on a company that to date- had only lost money on trading
- This Convinced the government to continue to offload more government debt to the company – as they now had more shares to offset it –
- Put in perspective – say today that one company was half the size of the ASX but with no income (only losses) – the Government just turned around and made it bigger by trading more of their debt with it (Government bonds)
- 1717 – King became the SSC leader – company became too big to fail – if the company failed - prestige would fail –
- From around 1719 – the shares in the SSC started rising £100 to £114 pretty quickly – the previous agreement was that the market cap (number of shares to the share price) had to be equivalent to the government debt – £100 of equity for £100 of debt – almost the same to banks today – look at their financial sheets – the assets and liability offsets
- But at a £14 difference in price rise – the company could sell these shares at a profit and pocket the difference – as with this price rise they didn’t take on any new debt
- Gave Blunt ideas – the company still wasn’t making money remember –
- Now decided to take on the £31,000,000 debt the government racked up by 1719 – if successful – make the SCC he biggest financial institution in the world –
- But Needed to convince the Gov to let them take over the debt – so to convince in this case was to bribe – with about $2m each today worth of bribes – But still wasn’t enough – as the BOE was also another contender to sell the debts to and the Wigs were favouring this - so offered them shares in the SSC –– In the end – SSC got the rights to consolidate the government’s debt – Share swaps took place
- But the effects of public officials getting into the shares and King George taking over leadership of the company gave the public the perception that the shares must be a good thing - a lot of confidence in the shares
- Within a few months the share price rose to £330 – but the next month the shares went down to £310 – which wasn’t good news – remember – this company didn’t make money – the only way to make money for investors was a price rise from speculation – or more irrational purchases –
- The share price couldn’t decline otherwise the scam would be up – So Blunt Came up with a new scheme – buy the shares with 20% down and regular payments every 2 months (similar to how warrants work today) – created leverage on leverage – allowed people to buy way more than they could afford –
- Could buy 5 times the number of shares today with only 20% down
- But as long as stock prices went up – people could sell a small amount every 2 months to fund their next repayment on the shares – the amount of leverage went to on average 5 times the amount of shares compared to the money they had in the bank
- Created further greed in the market - When people profited or others felling like the missed out – they bought more stock
- The new scheme worked - Price quickly rose to £550 – but then soon after prices dropped again to £510 –
- Remember – this cant happen otherwise the scheme would go bust – very leveraged and driven by greed – if people saw the price go down then people may stop buying
- Blunt came up with the Next scheme – Loan people the money to buy the shares – loans from SSC to individuals – then they would buy their own shares back off them and push the prices higher
- Prices went to £600 – seeing this – people wanted to get in – greed took over rational sense – even Isaac Newton wanted to get in – buying massive amounts of shares – about £20,000 worth which he lost in the end
- All of this had another unintended effect/consequence – others started their own share scheme – started popping up everywhere – crazy ones – like flying machines – so money going into SSC started to cease – as other schemes which people thought could make them more money instead were starting to take off –
- Similar to Crypto – BTC did so well so others pumped money into it – then all of a sudden new coins emerged – so the money started to flow into these as well
- But in England at the time – not enough money in the whole country to prop up prices – so the Bubble Act was put into place in 1720 – which forbade the creation of joint-stock companies without a royal charter, was promoted by the South Sea Company itself before its collapse.
- Essentially the banning of every other scheme except the SSC – but due to this act – had opposite effect – which was those who invested in the now banned schemes lost their money - so had to sell their SSC stock to make it up – as they were otherwise broke
- Prices initially Dropped for the SSC - But no rivals on the market – so shares in one week went from £503 to £830 due to removal of other share schemes –
- But remember – this company was highly leveraged – not making any money – company valued at £300,000,000 – almost 10 times the size of the £31,000,000 pounds of government debt that the valuation should have been based around – all the money in Britain was around £60,000,000 –
- Based around current markets – would be $85trillion USD – which sounds huge – but derivative exposure dwarves this today
- All of a sudden – prices started to decline – so blunt started to issues more shares- at £1000 per share – offering more incentives – 10% upfront with no payments for a year –
- Hype was so strong – sold straight away – those who bought early made massive amounts of money
- It was at this point that Blunt and a lot of politicians then he sold off a lot of their shares – the bubble was about to burst – The top of the market at £1,000 – created a massive sale for profit taking – those who bought the shares with 20% down at £500 – or earlier
- What broke the bubble – Blunt offered a 30% p.a. dividend – which woke up the people – losing confidence – fell hundreds of pounds –
- In 3 weeks – went from over £1,000 to £150 – bankruptcies and suicides were rampant
- But what happened – bailouts – bank of England and East India company share swaps – by Walpole – which is another story
- The economic effects were widespread -
What does this all have to do with today? 1. Greed – bubbles, BTC, leverage, Corporate debt fuelling markets – Central banking policies – fuelling markets with leverage 2. Political bribes and self-interest as well – 3. Cover this in another episode
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Say What Wednesdays Edition – Where each week we answer your questions
Today's question comes from Cameron
We are a couple, both aged 30 with approx 70k in each of our super accounts. We are interested in SMSFs with a view to purchasing property. How would one get started? What sort of costs are expected? Do couples pool their super?
Buying Property in an SMSF 1. First, you need a SMSF – self-managed super fund 1. An SMSF is a private superannuation fund, regulated by the Australian Taxation Office (ATO) that you manage yourself. 1. All other funds are managed by APRA - Australian Prudential Regulation Authority - the regulator of financial organisations (Banks and supers) 2. SMSFs can have up to four members. All members must be trustees (or directors, if there is a corporate trustee) and are responsible for decisions made about the fund and compliance with relevant laws 1. Two types of SMSF – Pooled and Segregated – 2. Most are pooled for simplicity – where you can pool your funds together for the purchase of the same asset – i.e. a property – 3. Still have individual member benefits – where your component of the super is allocated to you 3. When you run your own SMSF you must: 1. Carry out the role of trustee or director, which imposes important legal obligations on you 2. Set and follow an investment strategy that is appropriate for your risk tolerance and is likely to meet your retirement needs 3. Have enough time to research investments and manage the fund, keep comprehensive records and arrange an annual audit by an approved SMSF auditor 4. Organise your own insurance 5. Use the money only to provide retirement benefits.
- Who is it appropriate for?
- Large Combined balances
- Hands-on – and willing to take on trustee burdens
- Wanting to buy property
- You can get Direct shares or Term Deposits in other super accounts which aren’t SMSF
- Who sets this up?
- Accountants normally are the ones that would help to set up an SMSF, however, they would probably need to have a limited AFSL to do so. Depending on what they charge (which can vary) and the structure of the trustee, the costs can range from $2,000 to $4,000. This is then similar each year for the audits and returns to be completed.
- Given a combined balance of around $140,000, the ongoing administration costs would be over 1.5% p.a. which may hurt the long term performance. This is why ASIC have a benchmark of $200,000 for combined funds at which point SMSFs become more viable due to the accounting costs.
Buying the Property: 1. Must meet sole purpose test – Provide retirement benefits to members 2. Must not be lived in by a member or related party (family) 3. Must not be acquired from a related party of a member 4. Must not be rented by a fund member, or related party 1. BUT – Business real gets around these rules 2. Business real – if you own and run a business you can operate out of a property your SMSF owns 3. You pay rent to the SMSF at market rates – Arm's length transactions
Property purchased with a loan – Limited Recourse Borrowing Arrangement (LRBA) 1. Borrowing or gearing your super into property involved very strict borrowing conditions - called a 'limited recourse borrowing arrangement'. 1. You can only purchase a single acquirable asset with a limited recourse borrowing arrangement 2. Bare Trust – Set up to own property – And the trust is inside the SMSF 1. Has the loan so that the property it the sole collateral of the loan 2. Property has to be single acquirable asset 1. No change of character to property - You can't make alterations that change the character of the property until you pay off the SMSF property loan. 2. Not suitable for developments, renovations etc. 3. The deposit requirements for property also are around 20-25% of the purchase price and there are only two lenders in Australia which provide a mortgage inside of an SMSF. 3. Due to Bare trust - Geared SMSF property risks include: 1. Liquidity requirements – This is where the Investment Strategy of an SMSF needs to specify the cash balance requirements and that the contributions into the SMSF can cover the mortgage repayments (in case the property is not tenanted for an extended period. 1. Depending on age – ranges from 10-15% at lower end to 40% in cash balance 2. Higher costs – SMSF property loans tend to be more costly than other property loans. 3. Cash flow – Loan repayments must come from your SMSF. Your fund must always have sufficient liquidity or cash flow to meet the loan repayments – Employer contributions 4. Hard to cancel – If your SMSF property loan documents and contract aren't set up correctly, you can't unwind the arrangement. You may have to sell the property, potentially causing substantial losses to the SMSF. 5. Possible tax losses – You can't offset tax losses from the property against your taxable income outside the fund.
- When it works well
- Decent balances – ASIC guidelines of $200k minimum – technically no minimum – but makes it viable
- The more the better – Flat fees of $2k p.a. plus investment costs
- Can Diversify into other investments
- Comes back to having enough to spread it around
- Have other sources of income inside SMSF to offset deductibility – if the property is slightly negatively geared
- The property: Commercial real – own it yourself and lease it to yourself
- Decent balances – ASIC guidelines of $200k minimum – technically no minimum – but makes it viable
- What Won't work – Risks of Buying property
- Property is heavily negatively geared
- Deductions are lost if no additional income earned by SMSF to offset it
- Also, the maximum rate of tax is 15% for accumulation
- Not much in super – the only asset is a property
- Not diversified
- The big risk to your retirement balances
- Not making lots of contributions
- Sometimes the property income won't cover costs
- Need to have an employer or personal contributions to meet cashflow requirements
- Need to renovate - Cant make changes to the property until the loan is paid off
- If you need to renovate you will be stuck
- Hard to wind up SMSF
- Loan documentation (if not set up properly) would require the sale of the property before SMSF can be closed
- Property is heavily negatively geared
If you are looking at doing it, seek advice! One thing not to muck up your retirement
Thanks for the question – Don’t forget that these episodes are open to anyone who has a question – go to www.financeandfury.com.au and get in touch through the contact page!
Welcome to Finance and Fury
Today – want to run through Coronavirus –
Is it market noise or is it going to be an economic doomsday? 1. First - It is too early to quantify the potential impact of the coronavirus on China. Much will depend on the attack and case fatality rates of the virus 1. Coronavirus first emerged in the city of Wuhan, China - based on media reports - could affect growth in China and the rest of Asia-Pacific – spreading to the rest of the world – 2. The severity of the impact of the coronavirus will depend upon the attack rate (the proportion of the population that falls ill) and the case fatality rate (the proportion of deaths) 3. At this point, uncertainty about the nature of the virus is so high that it renders quantitative assessments pretty meaningless – but it may be helpful to think through how the virus could affect the economy – to do this – let’s have a look back on the impact of previous episodes of pandemics 2. But the Impact of Past Pandemics Has Been Mixed - most commonly cited are the Spanish flu of 1918-1920, the Asian flu of 1957-1958, the Hong Kong flu of 1968-1969, the severe acute respiratory syndrome (SARS) of 2003, and the avian flu of 2004-2006. 3. The attack and fatality rates, measured at the global level, vary widely across these episodes reflecting the nature of the condition and the speed with which vaccines can be produced. 1. The Spanish flu was the most severe - health experts generally agree that most events have seen attack rates of 25%-30% and case fatality rates of less than 0.2% - but more recently for SARS, the avian flu - attack rates have been much lower, well below 0.1% 2. For the coronavirus - Health authorities indicate it may be too early to assess these statistics for the new coronavirus. 4. Nobody really knows how many are affected or what the death rates are - there are reports – but guess - 1. What is reported – Less than 500 people have died from this – 2. Before we go through the potential market effects - Time for some perspective – 1,700 people per day die from the flu – around 600k p.a. – why are people so afraid? The media 3. 1.2m people drown every year – so should we be more afraid of swimming than the flu? You might be if the media told you to be 5. There are two elements to the coronavirus which are being balanced - 1. Humanitarian. The bigger the shutdowns, the greater the preventative measures, the fewer people get infected and potentially die. 2. Economic. The bigger the shutdowns, the greater the preventative measures, the more significant the economic impact will be. 1. The focus is not on minimising the economic impact – focus is about preventing the spread of the disease. Or, for politicians, at least been seen to be trying. The economy is no longer the issue – which is why markets are responding with volatility - 6. This being said - I’m not a virologist, and I’m not pretending to be – have no expert knowledge if the measures in what works to prevent the virus from spreading 1. But the economic measures to date are significant and the world is not well-positioned for an external economic shock 2. Again - looking historically SARS killed fewer than 800 people and had been attributed to decrease China’s GDP growth by about 2%. The rest of the world was fine. The issue - The containment measures already in place are far greater than the measures for SARS. They may have a significantly greater economic impact. 3. China is more than 4x larger than it was at the time of SARS. At the time the effect on the world economy was relatively negligible 4. Retail, restaurants and tourism are a significantly larger part of the Chinese economy now, and these are more likely to be affected. 5. Also - SARS was basically at the bottom of the global economic cycle. Debts were low. China still had productive investment. The world was about to launch into the mother of all housing booms. Economic circumstances in 2019 are very different - Central banks have exhausted conventional measures and Corporate debt is at cycle highs.
Economic effects will come from Government policies of quarantine and limited trade – 1. Any economic hit will be felt most by industries exposed to household spending, especially activities that take place outside the home. Risk aversion and tighter financial conditions could amplify the impact, including on investment. 2. The Uncertainty around the coronavirus Adds to Economic Uncertainty – last thing financial markets need right now is panic and uncertainty 1. Past events – economic outcomes from the assessment of the avian flu pandemic of 2006 – from the Congressional Budget Office (CBO) assessment - potential hit to the U.S. economy – they looked at two scenarios 1. One mild and one severe with U.S.-specific attack rates of 25% and 30% and case fatality rates of 0.1% and 2.5%, respectively - estimated the overall short-term hit to U.S. GDP to be 1% and 2.3% percentage points respectively – but these estimates turned out to be too pessimistic 2. With Coronavirus - these are just guessing – no way to truly tell - best that can be done for now is to identify the potential channels through which the virus could affect the economy. 3. Potential channels that the economy may be impacted – 1. Household consumption - Consumers are likely to avoid public spaces to lower the probability of infection. These effects could be compounded by travel restrictions – so catering, entertainment, and travel services are likely to be most affected if this is the case 1. These segments are typically regarded as luxuries rather than necessities, consumers are unlikely to compensate by spending more elsewhere – especially in Australia – more likely to continue mortgage repayments - would dampen overall consumption 2. Company capital expenditure - Capital expenditure plans of companies are meant to be highly sensitive to expectations for demand – so if there is a prolonged slump in consumption - could, therefore, affect investment (impacting GDP growth) 1. But - firms are unlikely to react quickly unless the virus is confirmed to be substantially more potent than recent episodes when the effect on demand was relatively short-lived – likely to be brushed off by markets if this is the case 3. Government consumption - Higher spending on the response to the outbreak, including health personnel, emergency services, and vaccines, could moderately offset the hit to consumption – but likely to have little effect on the overall economy 4. Trade - Travel, and tourism would be the most heavily affected as individuals seek to reduce the probability of infection. This could be compounded by Wuhan's strategic role in China’s country's transport network. 5. Supply disruptions - Restricted movement of people and, in a worst-case, a high infection could curtail output in some industries. This would affect both manufacturing and service industries and could trigger temporary production outages or a drop in activity. 6. Finally – the Potential Economic Impact On China - The coronavirus is hitting China during Lunar New Year, a period when households tend to spend more on travel, entertainment, and gifts - Even if the virus is contained fairly quickly, the initial stages of high uncertainty are likely to affect spending. While centered in Wuhan, other large population centers including major tier-one cities have begun reporting cases – been spreading to the rest of the world - 1. To give a sense of how big the effects could be on China’s demand - consider that consumption contributed about 3.5% to China's overall real GDP growth rate of 6.1% in 2019 2. The supply-side impact, stemming from fewer people going to work, may be limited to the Wuhan area so long as the recorded cases remain concentrated in the city's immediate vicinity. Recent estimates indicate that Wuhan is China's sixth-largest city, with a population of about 11 million – so accounts for about 1.6% of national GDP 3. While this suggests any macro-level impact would be small, there are complicating factors if it is taken out of proportion – 1. Wuhan is an important national transport hub, given its central location and that the city is a stop on the two major north-south and east-west high speed rail lines 2. Also, a key player in China's auto industry - Wuhan hosts production facilities for seven major domestic and foreign manufacturers, and for hundreds of auto parts suppliers – is some potential for spillover effects –
- As we stand today - impact on financial markets has been mostly limited to equities – seeing it bouncing around between losses to gains – Economically – the short-term funding rates in China, including the repo rate, remain well within recent ranges and one-year swap rates have been edging lower
- The renminbi exchange rate has depreciated somewhat since the news broke, but this also be due to some retracing of the strengthening seen after the U.S.-China trade deal was signed – which is the more likely culprit = Implied renminbi volatility remains steady based around the market expectations
- Overall - too early to start thinking about revising GDP growth estimate for 2020 due to the coronavirus
What about the potential spillover Effect On the rest of the world? 1. Of course, much will depend on the extent to which the virus spreads outside China - again between the media and the high uncertainty – better to concentrate on the economic spillovers from China - The most important short-term impact will be felt on travel and tourism 1. In Australia - Tourism receipts in the region could fall as people curtail their travel plans in response to heightened health risks – other countries in the region that have large tourism sectors and would, therefore, have a relatively larger impact include Thailand and Vietnam – Thailand- tourism exports are about 11% of GDP. Tourists from China also represent a large proportion of arrivals for these economies, particularly for Thailand and Vietnam, where more than 25% of arrivals are from China – But these tourism numbers effects the local economy – if anyone has been to these countries – how many listed companies benefit from this in Thailand or Vietnam – think the local street vendors are listed on a market? Airlines may be impacted and large hotel chains – but that is it when it comes to the share market directly 2. Largest spillover will probably come from uncertainty – resulting in equity market volatility across the region 1. At least currency and bond markets have been calm 2. While prolonged volatility in equity markets could lead to broader risk aversion, there are few signs yet that financial conditions have tightened
This is a bit of a side note – but where is the real money going to be made from this? – in the WHO and the media 1. Media – fear creates more clicks – which drives more traffic for advertisers 2. WHO – The medical marshal law – pharmaceutical companies that sit on the pandemic council of the WHO – get to declare pandemics – such as swine flu – when they get billions of dollars out of vaccines for a virus – 1. Even the European council – year after swine flu in 2010 said it was a scare tactic that was a false pandemic to get billions out of the population
If you are worried about the economic effects - Where to avoid 1. Exposure to Chinese demand 2. Reliant on Chinese and global tourism 3. More importantly – longer term – 1. Companies with too much debt 2. Countries with consumers carrying with too much debt 3. Countries with too much debt not denominated in their local currency 4. Cyclical companies, like resources or capital equipment which tend to rise more quickly in booms but fall more rapidly in busts 5. Exposure to Chinese students - Banks exposed to the above 6. Australia ticks almost every box above. Europe ticks a lot. Canada has a decent spread. 4. But like most pandemics of the past – think it will blow over and be more market noise 1. This does depend on government responses 2. If markets do crash in response to this – will be yet another convenient scape goat to the underlying structural problems that markets face
Welcome to Finance and Fury, The Furious Friday Edition
Today – want to look at how much Corporate debt has been fuelling the top end of the share markets growth – signs that if liquidity is withdrawn, companies and markets collapse
Last FF ep – went through the flow-on consequences of low-interest-rate environment and QE policies - Free money
- Today - brings us full circle to the reality of the past decade: that any credit binge will always be popular because while the benefits of leverage come today, the costs of bad debt come tomorrow.
- Personally – Think about your personal situation for a minute – you could take a massive car loan for a new BMW, or go on a holiday on your CC = but the pain of repaying this comes later – the other option of saving over years to afford a new car or round the world trip doesn’t give you that lifestyle boost today
- Improving a business or learning a skill requires dedication and hard work - but Monetary “stimulus” – which is essentially credit - offers a siren-like, promise of effortless prosperity yet ignores the reality that credit binges always sow the seeds of their future destruction – in this case to the economy
- As an example – look back to September 15 last year - the normally low overnight repo lending rate soared to an astonishing 10% annualized rate - A shocked Fed felt compelled to “do something,” which these days invariably means adding still further to the pool of loanable funds
- Size of the add (via the Fed’s T-bill purchases and expansion of its repo facility) has been nearly a cool half-trillion, well over half of the total size of the Fed’s pre-crisis balance sheet.
- The Fed justified adding this tidal wave of liquidity notwithstanding its characterization that what happened was a mere “technical” glitch in the repo market. Technical, really?
- Why then have they just announced more liquidity to be injected again at about $100bn to avoid another spike in the rates?
- A practical take is that the market is talking to the best and brightest minds in central banking, and the Fed doesn’t like what it’s hearing: the repo market wants to clear at rates above the Fed’s IOER fiat rate, which, if allowed to do so, would likely invert the front-end of the yield curve. Inverting curves sounds a bit too much like ending a credit binge, leading to recession, and so the Fed’s response function is to “veto” (Latin for “I forbid”) the market’s signal.
- The Fed continues to continue to pretend the cycle need never end. But markets will be what they must be, and investors must face the consequences of the last decade’s credit binge – again in the future but not today
There are two subjects that the mainstream media seems specifically determined to avoid discussing these days when it comes to the economy: 1. The first is the problem of falling global demand for goods and services; they absolutely refuse to acknowledge the fact that demand is going stagnant and will conjure all kinds of rationalizations to distract from the issue. 1. End of Globalisation period – this is a whole other topic – might cover on Monday as part of coronavirus scare 2. The other subject – which is part of today's topic - the debt bubble, the corporate debt bubble in particular. 1. These two factors alone guarantee a massive shock to the modern global economy 2. But a reduction in globalisation isn’t the major immediate concern - corporate debt is the key pillar of the false economy - as the fundamentals are starting to catch up to the fantasy of where a lot of large-cap companies are currently trading at 3. Starting to see a pattern – that the share market is no longer an indicator of the health of the real economy 1. One reason is that corporate stock buybacks have been the single most vital mechanism for inflation in the prices for markets – where companies buy their own stocks back off the market - often using cash borrowed from each other and from the Federal Reserve/Central banks – 2. All done to reduce the number of shares on the market and artificially boost the value of the remaining shares – boosts the EPS as well – if earnings of a company look the same as yesterday, but now you have 10% less shares – then the EPS just rose by 10% - process is essentially legal manipulation of equities, and to be sure, it has been effective so far at keeping markets elevated. 3. But similar to financing lifestyle to look like you are rich and prosperous through a credit card – the problem is that these same corporations are taking on more and more debt through and also interest payments in order to maintain the façade 4. Over the period of a decade, corporate debt has skyrocketed back to levels not seen since 2007, just before the credit crisis. The official corporate debt load in the US now stands at over $10 trillion, and that's not even counting derivatives exposure – According to the BIS - amount of derivatives still held by corporations stands at around $544 trillion in notional value (theoretical value), while the current market value is only around $10 trillion. This is a massive discrepancy that can only lead to disaster – as it carries massive counterparty risks 1. Also – Derivatives through their function also act as a quasi-leverage system – pay a premium now for the nominal value at a later date 4. In terms of corporate debt-to-GDP - the credit cycle peak has spiked beyond any other peak in the past 40 years 1. Borrowing always has consequences - Even if central banks were to intervene on a level similar to TARP – troubled asset relief program - saturated markets with $16 trillion in liquidity – today – the amount of cash needed is so immense and the economic returns so muted that such measures are ultimately a waste of time 2. The Federal Reserve fuelled this bubble, and now there is no stopping it's demise. Though, they're behaviour and minimal response to the problem suggests that they have no intention of stopping it anyway. 3. Looking historically – 1991 – just before a crash – was at 43%, then dropped to 38%, 2001 – was at 45% then dropped to 39%, 2008 – was at 45% and dropped to 40% - Now at 48% - at the high water mark 5. But Currently, stock buybacks may be set to decline this year – not out of want - but need - have to quit, because the amount of debt they are accumulating is outpacing their falling profits - US Corporate profits peaked in the 3rd Quarter of 2018 and have been in decline ever since 1. But thanks to buybacks - The Price-to-Earnings ratio as well as the Price-to-Sales ratio are now well above their historic peak during the dot-com bubble, meaning, stocks have never been more overvalued compared to the profits that corporations are actually bringing in 2. The Fed has been putting effort into keeping the market strong – as the markets have been used as a proxy to real economy – as they used to be – but since central banking involvement – not so much 6. Some companies, like Apple and Warren Buffet's Berkshire Hathaway, are holding extensive cash reserves, but most do not. Also, the level of cash reserves held by certain top corporations suggests they know something is on the horizon. Why hold piles of cash when the stock market is a “sure thing”? Unless the debt bubble is about to collapse and cash will be needed to absorb the damage? 7. If this year is the year in which buybacks crumble – wouldn’t come as a surprise - Corporate profits degraded over 2019 and the slide is set to continue this year - This means profits are not going to come to the rescue and stave off the explosion of the debt structure 8. These loans are now coming due, and the Fed has indicated it plans to tighten liquidity once again next month while returning to balance sheet cuts – but at the same time The Fed will have to institute a full QE program on the level of the TARP bailouts and cut interest rates to zero in order to end the constant repo liquidity threat and kick the can for a couple more years – without this these loans are coming due at a positive rate 1. For now - central banks' intervention has achieved little except keeping stocks at all-time highs. The rest of the economy is in disarray – limited economic growth – despite the amount of money being pushed into the financial system 2. The real economy will start to drag down the markets – but the big question is always one of timing.
The Counter-argument 1. The best counter-argument is that there is plenty of liquidity out there. Central banks are pumping the world full of money which is what has driven stock market valuations to current levels 1. It is a good argument – and if they continue – then markets may go up further - It is also an argument that has a binary outcome - Market liquidity is a mind trick. If the market believes in the power of central banks, then stock markets can continue to rise – but how much faith will the market and the investments within continue to have with Central banks? 2. But with lowering company earnings - the faith in central banks may disappear once negative earnings appear and the extreme corporate debt levels are tinder waiting for a spark 3. Earnings growth is negligible. Valuations are more expensive than they have been since the tech bubble or pre-GFC 2. This episode is just a counter to the last minute irrational exuberance 3. It's hard to imagine a scenario in which there are no major shocks to the financial structure for the rest of the year - with the corporate system tapped out and no longer able to act as a support for the bubble, the fundamentals will start to take over again. 1. Geopolitical events will also have a more visible effect. A whole year without a pandemic threat like the coronavirus going global? 2. For those who listened to the complexity theory series – the basin of attraction is on a knife-edge – doesn’t take much for it to snap back like a rubber band
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Growth Index over time
Debt-to-GDP Percentage over time - United States
Welcome to Finance and Fury, The Say What Wednesday Edition
I've been looking at Soul Patt (ASX: SOL) recently as I've heard some commentators refer to them as the "Australian Berkshire Hathaway" but noticed they have underperformed the ASX200 index over the last 12 months. As they have overperformed over any other longer-term period, would you see this as an opportunity to buy in? And what do you think about this particular stock? Looking forward to hearing your thoughts. Thanks, Gab
Disclaimer – not advice – general discussion in nature – seek personal advice
- Washington H. Soul Pattinson and Company Limited – call it SOL for short - is an Australian investment company - SOL invests in a portfolio of assets across a range of industries - main business activities include ownership of shares; coal mining; gold and copper mining and refining; property investment; and consulting.
- While the broader market gained around 25% in the last year - SOL lost 16% (even including dividends)
- Keep in mind that even the best stocks will sometimes underperform the market over a twelve month period
- Long term shareholders have made money, with a gain of 14% per year over half a decade
- So, is the recent sell-off an opportunity to buy in? worth checking the fundamental data for signs of a long term growth trend
- I find it very interesting to look at share price over the long term as a proxy for business performance
- Not always the same thing - to truly gain insight, we need to consider other information, too. Consider for instance, the ever-present spectre of investment risks of the underlying companies or the changes in forecasted earnings
- One thing – not too correlated to historical crashes – losses minimal in 2008/09 and other corrections
- But has just gone through a loss in price
- Also note – is a High conviction investment operator – Similar to Monday’s episode -
Current Investments - SOL invests in a range number of companies across a variety of industries. In addition to a large diversified listed and unlisted portfolio, their larger investments are:
- TPG Telecom (ASX: TPM) is a force in the Australian telecommunications industry – 25.3% shareholding
- New Hope Group (ASX: NHC) is an Australian owned and operated diversified energy company which has been proudly based in South East Queensland for more than 60 years – 61% shareholding
- Brickworks Limited (ASX: BKW) - main business is the manufacture and distribution of clay and concrete products, property development and realisation, and investments - 43.9% shareholding
- Australian Pharmaceutical Industries (ASX: API) is one of Australia’s leading health and beauty companies. API has a number of brands and banners in the retail health and beauty industry, including Priceline, Soul Pattinson and Pharmacist Advice. – 19.3% SHAREHOLDING
- BKI Investment Company Limited (BKI) is a Listed Investment Company on the Australian Securities Exchange. - 8.6% holding
- Round Oak is a mining and exploration company focused primarily on copper, zinc and gold – 100% shareholding
- Milton Corporation Limited (ASX:MLT) is an Australian Listed Investment Company which aims to invest in a diversified portfolio of assets to generate growing dividends and increased value of assets – 3.8% shareholding
- Apex Healthcare Berhad (APEX.MK) is a leading healthcare group with operations in Singapore, Malaysia, Vietnam and Myanmar. Apex is publicly listed on the Main Board of Bursa Malaysia – 30.3% holding
- TPI Enterprises Limited (ASX:TPE) is one of nine companies licensed worldwide to manufacture narcotic raw material for the international pharmaceutical industry – 20% shareholding
- Ampcontrol Pty Limited is a leading international supplier of electrical and electronic products with a strong presence in providing products and services to the mining sector – 43.3%
- Pitt Capital Partners is an independent corporate advisory firm with a track record of completing successful corporate transactions. Since inception, they have advised some of Australia’s most successful companies on over $10 billion worth of transactions – 100%
- Clover Corporation Limited (ASX: CLV) is an Australian research-based company dedicated to providing quality lipid based products which enhance the health and well-being of the community – 22.6% shareholding
- Has got 75% of holdings in 3 companies though – New Hope Corp, TPG and Brickworks
- Large holding in New Hope Corp – which is a thermal coal mining – the loss of value from their shares seems to have come mainly from a drop in price from over $4 a year ago, to about $1.80 now.
- Comparison to Berkshire Hathaway – owns majority (100% or above 90%) of 71 companies
- Not the same as Berkshire Hathaway – would say closer to a high conviction LIC
Is it a good share? Growing DPS and EPS
- In his essay The Superinvestors of Graham-and-Doddsville (back to high conviction and value managers) Warren Buffett described how share prices do not always rationally reflect the value of a business. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
- Over half a decade, SOL managed to grow its earnings per share at 13% a year. This EPS growth is higher than the 10% average annual increase in the share price. So it seems the market isn’t so enthusiastic about the stock these days –
- Shares can act as trends – but like fashion, can be in and out -
- It’s probably worth noting we’ve seen significant insider buying in the last quarter, which we consider a positive.
- Share price drops – so those on the inside of the company buy up more
- But the earnings and revenue growth trends are even more important factors to consider
- What About Dividends? As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested.
- So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Washington H. Soul Pattinson’s TSR for the last 5 years was 89%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments! – has had stable dividend payments – growing
- Payout ratios - Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Washington H. Soul Pattinson paid out 56% of its profit as dividends. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business – which could be good or bad.
- In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Washington H. Soul Pattinson paid out 80% of its cash flow last year. This may be sustainable but it does not leave much of a buffer for unexpected circumstances. It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Net tangible assets per share - $13.76
Return on Equity - 1. ROE has a ROE of 8.0%, based on the last twelve months. Another way to think of that is that for every A$1 worth of equity in the company, it was able to earn A$0.08. 1. Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity 1. 8.0% = AU$359m ÷ AU$4.5b (Based on the trailing twelve months to July 2019.) 2. It’s easy to understand the ‘net profit’ part of that equation, but ‘shareholders’ equity’ requires further explanation. It is all earnings retained by the company, plus any capital paid in by shareholders. Shareholders’ equity can be calculated by subtracting the total liabilities of the company from the total assets of the company. 3. What this means - ROE measures a company’s profitability against the profit it retains, and any outside investments. The ‘return’ is the yearly profit. That means that the higher the ROE, the more profitable the company is. So, all else equal, investors should like a high ROE. That means ROE can be used to compare two businesses. 4. Is it good? Compare it to the industry average – but far from perfect here due to the nature of their business – Oil and Gas is 15% 5. But – has low debt - debt to equity ratio of just 0.088, which is very low. I’m not impressed with its ROE, but the debt levels are not too high, indicating the business has decent prospects. Careful use of debt to boost returns is often very good for shareholders. However, it could reduce the company’s ability to take advantage of future opportunities. 2. Has had good long term performance - Stock pickers are generally looking for stocks that will outperform the broader market. And in our experience, buying the right stocks can give your wealth a significant boost. 1. SOL shareholders have enjoyed a 63% share price rise over the last half decade, well in excess of the market return of around 23% (not including dividends).
Summary – Not advice - may be beneficial to hold long term – as short term may continue a decline if their major holdings go down
Major risks – coal business continues to decline, TPG gets beat out by TLS or Optus, or property takes a hit – which would impact brickworks
Thanks for the question Gab
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury
Want to touch on passive investing versus higher conviction investing I watched the Big Short last weekend – many people asked me if I had seen it and were surprised when I hadn’t – don’t watch many finance movies or documentaries – find them to be liberal with the facts or only cover the rudimentary factors – so I watched it – good movie – did touch on some of the deeper points of the legislation and had some nods to the root causes – like when Michael Burry had the Fannie Mae/Freddie Mack prospectus on his desk – Those were the Government controlled lending institutions – that were mandated to give out at minimum 30% to lenders who couldn’t afford the loans - Most interesting character was Dr Michael Burry –
- Michael Burry – Christian Bale’s character – interested in the real-life man - Did some reading –
- Started his Hedge fund in 2000 – Quickly made large profits from shorting the overvalued shares in the DotCom bubble – Market fell buy about 12% while he made about 55%
- Also called the subprime housing crash in 2005- profited in 2008 then shut his fund down
- Since then - Burry has started to focus much of his attention on investing in water, gold, and farmland – quoted "Fresh, clean water cannot be taken for granted. And it is not—water is political, and litigious."
- But in August, 2019 - Bloomberg News quoted an email from Burry stating his belief that there was a bubble in large US shares due to the popularity of passive investing - which "has orphaned smaller value-type securities globally"
- He is a traditional Value Investor – Uses Benjamin Graham’s value theories in making a decision –
- What is value investing? Looking at a share and if it is overvalued you sell – if it is undervalued – you buy = Got to have a good justification as to why it is over or undervalued – not easy to get right – needs a bit of foresight and the timing will always be off – can't predict to the exact day – may be able to predict the span of years –
- Seeking to work out what something is worth is price discovery – the market betting against the other -
- Bloomberg says that Burry’s view is that Passive investments are inflating stock and bond prices in a similar way that collateralised debt obligations did for subprime mortgages more than 10 years ago - Bloomberg made this seem like he was comparing CDOs and ETFs in their function – he was talking about the same effects – which is an inflated value of something
- Great quote that summarises the issue with ETFs –thought: “Like most bubbles, the longer it goes on, the worse the crash will be,” and “The theatre keeps getting more crowded, but the exit door is the same as it always was. All this gets worse as you get into even less liquid equity and bond markets globally,”
- That is where he sees the issue – in the shares held in the index which will have no liquidity – i.e. nobody wanting to buy or sell them – hence loss based around larger bids to sells
How did this start? - Spike in passive ETFs – Active V Passive – between the types of active – high conviction
What caused this rise in passive investing? Technology and cost – people can easily access at low costs
- Been a debate over the pros and cons of active versus passive investing - rightly fully so – as it brings into question the Merits of the different types of active investing
- Active funds select the shares to hold in the portfolio – whilst the index decides what shares to hold in an index fund portfolio – with this comes high versus low cost – so if an active manager pretty much holds the shares in the index but with slightly varying percentage allocations – is it worth paying the fees – not for active managers who hug a benchmark – or are closet indexers –
- Active managers have a rough job – have to justify the fees through outperformance – hard over the past decade - as the flow of money into index funds boosted their performances (flows of capital into the index – mostly the large-cap) –
- If I am looking for active managers - way to do this is to back their convictions and construct an index-unaware portfolio. As such, a subset of active funds has developed known as high conviction funds
- Issue – Used to be most active funds – all had different shares – but when in indexes – all the same share – granted there are different indexes – but if you buy any ASX index based on market cap – CBA will always be the number one share – same in any index –
- You might be able to sell an index still – but liquidity may be an issue – and liquidity is just how many buyers and sellers there are – may be a lot in most large-cap sectors – but when you get down into the bottom – slippage may be larger – and even though the bottom 250 companies only make up 25% of the ASX300 – the losses through spreads will likely be larger than the top 50 – and further losses to exit
- Brings me back to Michael Burry – obviously high conviction - Based around the latest reporting – he only has 7 shares in Scion capital $100m portfolio –
- Western Digital Corp. (WDC), Cleveland Cliffs, Inc. (CLF), Tailored Brands (TLRD), FedEx Corp. (FDX), Alphabet Inc. (GOOGL), Cardinal Health (CAH), Alibaba Group Holding (BABA)
- Diversified industries – tech, steel, clothing, IT, health, online commerce and supply chain – some are very low PE and may be bought out – beyond the individual shares – this shows he is a high conviction investor
- High conviction is a school of active managers - The ability of an active manager to outperform the index is a function of their skill, conviction and the opportunity.
- The broader the universe of stocks they can choose from, the more opportunity they have to find stocks outside the index. Their skill enables them to choose the right stocks and then, their conviction allows them to build positions in those stocks that may be very different to the index weighting, if they are in the index at all.
- High conviction equity funds generally have a smaller number of stocks. This narrow focus allows the managers to attempt to drive an information edge, through deep research of those select businesses
- There is no universally-accepted way to define high conviction funds. Generally, high conviction funds will be expected to contain a small number of stocks however that could vary from as little as 10 to as many as 40.
This isn't personal advice – but what are the Strength of high conviction funds over other active funds or indexes 1. If you are a conviction manager – you should be specialising and focusing on your strengths and therefore produce better results than the market 1. Why specialising helps - the sheer volume of information available makes it impossible for even the best quant machines to sort through and analyse it all 2. But putting all of your attention into a limited amount of stocks may enable an information advantage – Think about Dr. Burry – he was always looking for long positions – but some of his biggest gains came from shorts – he was focused on finding value and found overvaluation in a number of assets 2. What about diversification? – I talk about diversification all the time – and it is important – why an ASX index isn’t the best way to diversify either – 10 companies make up 40% of index – 5 of those – over 21% of index is in financials – next 10 companies (top 20) – make up just over 50% - but the bottom 250 only make up 25% - on average 0.1% - the price movement of a handful of share if they are outside of the top 20 won't impact much at all 1. Diversification may not always reduce your risks – i.e. buying 7 banking shares compared to Burry’s portfolio – but diversification is a necessary component of investing because it reduces risk when done properly- which doesn’t solely rely on the number of individual shares held 2. This hypothesis – study - The authors did a backtest study comparing randomly constructed portfolios with varying numbers of holdings of S&P 500 stocks compared with an equal-weighted portfolio of all S&P500 stocks. Using data from 1999 to 2014 they found that: 1. A 10-stock portfolio had a 35% chance of outperforming the market by 1% p.a. and a 22% chance of outperforming by 2%. 2. a 250-stock portfolio had a 0.2% chance of outperforming the market by 1% p.a. and no chance of outperforming by 2%. (Benello, 2016). 3. These are the results for random portfolios and do not take into account the skill of the investor. A skilled investor should be able to improve on those odds – also – take this with a grain of salt - since 2014 to 2020 – I'd say the numbers may look in the index's favour – due to the inflows and also large corporate buybacks – go into further Friday
How to find out if it is high conviction? – one method through looking at statistical measures that indicate divergence from the index - BMO Global Asset Management did a study where they compiled a universe of high conviction active strategies to compare them against index funds or other large cap active strategies – Finding – and what measures can be used:
- Tracking error – 3-year tracking error in the top 20% more than 50% of the time
- By taking the volatility of Excess Returns – or the Tracking Error – this measures the relative risk, known as a tracking risk of a portfolio against a benchmark –
- For benchmark-aware strategies - a moderate amount of Tracking Error is necessary – if the tracking error is too low, the manager is less likely to generate Excess Returns – remember – the error here is not being in line with the benchmark based around the level of risk to return – so a high Tracking Error indicates that the manager seeks Alpha at the expense of higher relative risk – almost no tracking error for index-like investments
- The normal expectation is that high conviction funds will be higher risk. The variation in returns would be likely to be higher as they are less diversified. Large position sizes would result in a bigger impact if a stock meets with disaster. Of course, the hope is that these higher risks are rewarded with higher returns.
- When reviewing the risk-return trade-off using both one-year and three-year rolling data, they found that the high conviction universe had both higher returns and lower risk than the benchmark, as well as the full universe, when risk is measured as standard deviation of returns.
- The study also found that downside risk was lower for high conviction strategies, with high conviction strategies in the bottom quartile of returns less frequently than non-high conviction strategies. The maximum drawdowns were also significantly lower. These findings challenge the assumption that high conviction funds are higher risk.
- Can also look at Beta – 3-year beta in the top and bottom 10% more than 50% of the time
- R2 – Coefficient of determination –
- In investing, R-squared is generally interpreted as the percentage of a fund or security's movements that can be explained by movements in a benchmark index.
- An R-squared of 100% means that all movements of a security (or other dependent variable) are completely explained by movements in the index – quick way to tell a benchmark hugger
- 3-year R-squared in the bottom 25% more than 50% of the time
- Upside/Downside capture – Returns consistency – when the market goes up – does it outperform, or and when it goes down, does it also perform
- It also found high conviction funds had a higher likelihood of improving performance (i.e. strong performance after a period of underperformance) and a lower probability of declining performance (i.e. bottom quartile performance after three years of top quartile performance).
- 3-year upside/downside capture in the top/bottom 20% more than 50% of the time
- Downside capture can be more important –
Is this right for you? – again – not investment advice 1. But high conviction funds are probably best suited to patient investors - Whilst the high conviction funds were sometimes in the bottom performance quartile this did not hurt their long-term performance. They found that the probability of top quartile performance in the three years following bottom quartile performance was 55% for high conviction strategies versus 24% for non-high conviction strategies for developed markets. 1. Investors who did not panic and sell out when the performance was low, were duly rewarded. 2. Due to performance – can gain large inflows – which there may not be the shares to use the cash 3. What is clear is that it works far better for patient investors who have the temperament and the time to ride out downturns. Used as a tool to add alpha to a well-diversified portfolio, it is likely to add to the efficiency of the portfolio. 4. When selecting a high conviction fund, investors need to understand the specialised skills of the managers, their processes and approach to portfolio construction and risk management, as well as the costs they will be incurring.
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Furious Friday edition
I often wonder – Why the Fed/Central banks continue with polices that create a massive misallocation or resources and are hurting the economy more than helping – well – what If they cant stop or a collapse might follow
Central bank policies cannot be unwound without creating a market collapse Central banks are focusing on inflation – but money printing has resulted in inflation of asset prices – not in consumer economy – no real business growth (despite markets going up) – limited wage growth and affordability issues – a bit of a mess
Situation, where the policy response is to lower interest rates to try to boost CPI through increased ability to spend more and businesses, can increase how much they sell for – i.e. basket of goods goes up – but doesn’t work as the printed money never ends up in the equation, as velocity of spending is needed- if the money is in the financial system through sinking money into investments – then velocity of that under current model and measurement system – velocity is non-existent on those funds
This episode focuses more on the Federal Reserve – they directly, and the USA being the economic powerhouse, and indirectly as well – control the economy now
- The irony of the modern economy - the "free market" in the USA is more centrally planned than the USSR could ever dream of
- Slowly becoming common knowledge that every single market is distorted beyond comprehension due to Fed policies
- Also - continued central bank intervention will only make the ensuing final crash that much greater, but nobody has any idea how to detach the Fed from capital markets not that they are so heavily invested
- Since 2008 – a lot of the market's performance was due to the Fed - their "emergency" measures implemented post GFC are still being continued – Why? Have we recovered from the GFC or not?
- A decade and more has passed since the financial crisis, and crisis-era policies are not only still with us – they have been expanded. The $60 billion per month that the Fed is now purchasing for its balance sheet is a new record rate of asset accumulation
- Not to mention the other central banks conducting the same operations – like Japan and ECB
- Starting to look like we are now living through the third consecutive asset bubble in a row – this one "the central bankers' bubble" which followed the dot com and housing bubbles om 2000 and 2008
- This bubble is fuelled by QE – This offers a conundrum - growth fostered by rising leverage can never be sustainable – you can massively increase your lifestyle – called a credit card – people do then boost lifestyle/consumptions on debt – but is it sustainable? After a little while, not so much -
- Gov/central banks aren’t the same as you and I – have much deeper pockets – i.e. all of ours – taxes, Gov Debt per person – as long as the population uses money – Central banks are owed that in repayment – as long as the governments can borrow – the population owes by extension owes money to the Government
- Why continue continuous printing - unsustainable monetary policy continues for one simple reason – to end it means a massive collapse –
- These monetary policies (like QE) - set up likely with intended consequences in mind – to provide confidence and boost asset prices through injection of cash (liquidity) into financial markets –
- But the unintended consequences undermining the sustainability of the current asset price regime are the real concern – it is a complex system – i.e. non-linear -
- Depending on where you stand – this was either another blunder by bankers to stumble into another trap – or the unintended consequences were intended as well
- Doesn’t matter – the same situation regardless – why better for those with power to have less ability to use it – best intentions don’t mean much when they end up in everyone else but you suffering – saying the road to hell is paved with good intentions
Take a step back – before central banks got heavily involved 1. When an individual worked – they received their paycheck – they consumed some of it and any surplus (savings) were deposited into a bank – this is then added to their pool of “loanable funds” which would then be auctioned out to a willing “bidder,” say a bank, a mutual fund, or a rental income opportunity – they then make an interest rate on this based around the market price of cash – which wasn’t set by Central banks – then in the 70s this system ceased 2. But when the 2008 crisis hit, market-clearing levels for loanable funds rose massively – 1. Created a situation where credit was priced out of reach for all but the most pristine (prudent) borrowers, asset prices were in free fall, and a financial system that had built an excess of leverage was at risk of implosion. 3. Response by Fed - initiated a suite of policies that included QE. Technocratic justifications aside, QE enabled the “printing” of new loanable funds. Unlike the worker who had to provide something of value in exchange for receipt of his loanable funds, the Fed simply conjured new funds from the electronic ether, thereby massively diluting the existing private sector pool of loanable funds. Predictably, bank deposit rates tanked, credit spreads tightened and cap rates were yanked downwards. 4. Of course, an asset price inflation spurred on by an expansion of credit is exactly what followed - That all changed with the 2013 “taper tantrum” and was reinforced by the 2018 abortive attempt by the Powell Fed to “normalise” rates and balance sheet so slowly that it was supposed to be like watching “paint dry.” Policies implemented as a response to crisis now can’t be exited without provoking the next crisis.
Monetary policies have become more of a problem than a solution 1. In basic economic - the supply side of any economy had the tendency through most observable times in history - to invariably configure itself to meet its demand-side – why having free-market supply is important – there will always be demand as long as people exist – supply makes it happen and through the growth of business (supply) - you get growth in demand’s capacity to demand (higher incomes) 1. But when money is free – and you have the deepest pockets – you can monopolise, buy everything out – and create an oligopoly, where there is a state of limited competition and there are only a few companies that control the free market – 2. Issue for these zombie companies - merger/buying activities spurred by artificially cheap credit will disappear once that credit is repriced. 3. Raising rates and normalizing the Fed’s balance sheet would now be tantamount to pulling the pegs out from the bottom of the Jenga tower. 1. Fundamentally – the economy is reliant on central banking injections into the financial world – to remove this wouldn’t be possible without forcing changes -would force the supply side to adjust in response to demand and a likely recession would result - 2. To look further at the corporate health of companies - Fed Policies Have Lifted P/E Multiples, Yet Aggregate Profits Have Stagnated
Central banks used to be viewed as the lender of last resort – the bank of commercial banks where if one was suffering liquidity issues – CB would lend to commercial banks –
- Today – involvement is almost absolute – but the faith in the power of monetary tools to manipulate economic growth is severely misplaced – no different from communist/central planned economies
- The economic problem – finite resources with unlimited wants – economics core principle is the management of scarcity
- But economists in the CB don’t know what scarcity is – thus the focus has been on demand side policies which require an increase in the supply of credit
- How scarcity works in the real world – Beachfront properties in highly populated areas – Sydney Harbour, Hamptoms
- The supply and demand laws here market forces that balance the number of people who can buy oceanfront real estate to match the scarcity of oceanfront homes – not many people have $10s of millions – the supply is essentially capped – so prices are mostly reliant on demand and its constraints
- i.e. – How much people can demand through their wallets - high mortgage rates, boom times in home price, or loan underwriting standards
- Now let's say the prices were dropping – fed would decrease the interest rate – or remove a few homes – to increase the price if it is below what they deem is reasonable – called to “stimulate” activity
- But now say prices got too high – they (if they could) – put up hundreds of houses –
- The supply and demand laws here market forces that balance the number of people who can buy oceanfront real estate to match the scarcity of oceanfront homes – not many people have $10s of millions – the supply is essentially capped – so prices are mostly reliant on demand and its constraints
- Economics without scarcity can be dangerous long term – but has its own theories
- Keynesian - point to the cause of rising real estate prices is “obviously” stimulative because higher prices spur such activities as home improvement adding revenue to the construction trades, one has to wonder: an instructive critique of this way of thinking can be found in the entertaining 19th-century treatise by Bastiat on the fallacy of the “broken window.” Wherever you might come down on the argument, the basic point is that trying to fool Mr. Market works about as well as trying to fool Mother Nature.
- If monetary policy were the key to earthly prosperity, surely all nations would have bootstrapped themselves by the simple artifice of helicopter money – high-income nations with a lot of taxpayers and legal system have – use the population as collateral on loans
- The unintended consequence - rather than igniting an economic boom - cheap and abundant credit has simply increased the asset prices relative to fundamentals – which haven't changed by as much as the prices have – getting into the bubble territory
- I.e. profits for corporate America have gone more or less nowhere for five years –
- Through a combination of share repurchases, creating higher EPS increasing share prices, along with massive flows into indexes to increase demand on the lower number of shares – prices have gone up – but not based on the company performances
- Another flow-on consequence - covenant-lite loans have enabled private equity to purchase businesses at high multiples has been unprecedented - Cov-lite is financial jargon for loan agreements that do not contain the usual protective covenants for the benefit of the lending party - Covenant lite loans are typically used for leveraged buyouts and other large, sophisticated loan transactions – i.e. borrowing to conduct buybacks
- Cov-lite loans as a percentage of all newly issued institutional loans is about 85% in 2019 – been increasing every year since the major rounds of QE kicked off in 2011 – was almost 0% in 2004 – rose to under 10% in 2006 – jumped to 30% in 2007 just before the crash – then back to 5% post-2008 – bounced a little until 2011 when jumped back to 25% - then climbed all the way to 85% now
- Created situation where liability side of the company’s balance sheet can be profoundly altered by central bank policy – making it look more profitable - but long-term growth is a function of businesses operating and providing a good and service than reducing shareholder equity on the right-hand side of the balance sheet –
- Operational improvements work best when the incentives to do so are market-based – not when credit is artificially cheap – for instance – borrowing to increase assets and long term profits based around market demand –
- I.e. profits for corporate America have gone more or less nowhere for five years –
- Continue to look at the health of the companies and markets next week –
- Next part – looking at market values that are there thanks to corporate debt – borrowing for buybacks
- And why Central Banks removing their credit or making it more expensive would result in market corrections
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Say What Wednesday Edition
Today's question comes from Chris
What are your thoughts on TraCRs? I can’t recall if you’ve spoken about them before on your past episodes, if you have which one was that and I’ll go back and listen? How would you say TraCRs compare to using a platform like Stake? Do you think there are better ways of getting exposure to specific foreign stocks than TraCRs?
Sorry if it’s an overload. Also thanks for doing the podcast I thoroughly enjoy your material and outlook
- What is a TraCR? Transferable Custody Receipts
- Structure to provide beneficial ownership of the underlying shares of a listed overseas company
- For example, if you invest in a TraCR issued over a US-listed share, you are buying an Australian security that gives you a beneficial interest in, but not a legal title to, the US share.
- A single TraCR provides the holder with the beneficial ownership of a single underlying share. The value of the underlying share of a TraCR and the applicable foreign exchange (FX) rate will be the main factors in determining the Australian dollar (AUD) value of the TraCR.
- Structure - structured to provide a TraCR holder with the beneficial ownership of international shares; and settled through CHESS and held in an Australian registry in the same way as Australian shares.
- How are TraCRs traded? You buy and sell TraCRs the same way you buy and sell other Australian securities.
- Exclusively quoted on Chi-X and can only be bought or sold on the Chi-X market or through a Chi-X participant
- Prices are on a one for one ratio with the underlying shares of a company listed offshore.
- You can terminate TraCRs and convert them to cash if an ‘illiquidity event’ occurs: if no liquidity is provided by a registered market maker for 20 consecutive business days then you will, under the terms of issue, be entitled to request that the TraCR issuer convert your holding into cash by selling the underlying shares (fees and charges will apply).
- All TraCRs that are bought and sold on Chi-X are cleared and settled through ASX Clear and ASX Settlement and covered by the Australian regulatory framework.
- What are the risks? Basic ones with all international investments – but also an additional layer of risk
- Foreign currency exchange rates: the underlying shares of a TraCR and TraCR dividends are denominated in a foreign currency and so investors are exposed to FX movements.
- Not being able to exercise rights attached to the underlying share: some rights attached to the underlying shares are not available to non-US residents
- Trading timezones - TraCRs trading when the underlying shares are not: the Chi-X market will be open at times when global markets, on which the underlying shares trade, are closed. Therefore, trading in a TraCR may take place before the main market for an underlying share has reacted to recent price-sensitive news or when market makers are not present – may not get price wanted
- Additional risks
- Not being able to sell/buy when you want: market makers may not provide liquidity all the time and so there may be no liquidity at reasonable prices at the time you want to buy or sell
- Price variations: TraCR prices may vary from the precise FX adjusted price of the underlying US share and change quickly and by more than changes in the price of the underlying asset.
- Dependency on the one organisation’s website - holders will not be able to trade TraCRs in the unlikely event that this web site is down.
- The way TraCRs are structured and the terms of their issue: TraCRs are different in structure and framework from the underlying shares on which they are based – as it is beneficial interest, not direct ownership – removed voting rights, has custodial risks – such as if TraCRs become insolvent or structure frozen in a liquidity crisis
- Liquidity risks - There is a risk that TraCRs become illiquid – i.e. difficult to sell or buy securities
- Can come from a lack of demand for the securities – remember you are trading the TraCR – not the share – may be 1,000,000 people wanting to buy the underlying share – but the market for Underlying Shares is likely to be more liquid than the market for TraCRs - possible the Market Makers will not provide liquidity in the TraCRs market – market maker is something that offers both buys and sell – making money out of brokerage or on price spreads (selling and buying are slightly different) = exchange services or large broking companies
- Issues is that is a TraCRs ceases to meet the Chi-X Liquidity Requirements - has the discretion to suspend or remove that Series of TraCRs from quotation on the Chi-X Market
- There is a risk that: — you may not be able to buy TraCRs or sell your TraCRs at a reasonable price or at all; and — the price of that Series of TraCRs may be volatile and diverge materially from the price of the Underlying Shares adjusted by the foreign exchange rate.
- The number of TraCRs on the issue may be small Regardless of the market capitalisation of an Underlying Company, the total capitalisation of a particular Series of TraCRs may be small. There is a risk that this could impact liquidity for a Series of TraCRs.
- Market Makers do not guarantee liquidity Under the market making agreements, a Market Maker is not required to make offers to buy or sell TraCRs or to otherwise make a market or provide liquidity for a Series of TraCRs.
- There are agreements in place provide fee relief to Market Makers if they do – but no guarantee that a Market Maker has to provide a role in buying or selling a TraCR –
- There is a risk that the trading of TraCRs may be halted or suspended by Chi-X at any time.
- Chi-X may halt or suspend trading in a Series of TraCRs if any of the information required to be made available on the TraCR Website in relation to the Underlying Shares of the relevant Series of TraCRs, is unavailable to the public for more than five consecutive minutes during trading hours on a Chi-X Business Day;
- Or — Chi-X deems such action appropriate in the interests of protecting investors and maintaining a fair and orderly market in TraCRs.
- Also - There is a risk that may change the Terms in certain circumstances, including as set out in Sections 9.4 and 14.14, and clauses 22.7 and 24 of the Terms. There is a risk that these changes may have negative implications for you and for the price of your TraCRs. (j) TraCRs expose you to operational performance and counterparty risk The operational performance of TraCRs is dependent upon DAIL, the Custodian and other Persons such as the Registrar and Stockbrokers. You assume the risk that DAIL, the Custodian and other Persons do not or are not able to perform their obligations in respect of TraCRs (e.g. in the event of the Persons’ insolvency). If these persons do not perform their obligations in a timely fashion or at all, it may affect: — the price of the TraCRs; — your ability to buy or sell TraCRs; and — the time it takes to process any Application, Cancellation Request or Sale Request.
- This is the potential issue with TraCRs – counterparty risk - is an “unsponsored product” as the offshore company is not involved in the creation, trading or operation of the TraCR product in Australia in any way. The issuer of a TraCR has no relationship with the listed company that has issued the underlying shares – so if they go bust, or the company owned in the TraCRr goes bust, lose lose potential
- Can come from a lack of demand for the securities – remember you are trading the TraCR – not the share – may be 1,000,000 people wanting to buy the underlying share – but the market for Underlying Shares is likely to be more liquid than the market for TraCRs - possible the Market Makers will not provide liquidity in the TraCRs market – market maker is something that offers both buys and sell – making money out of brokerage or on price spreads (selling and buying are slightly different) = exchange services or large broking companies
- What Process Fee is charged? Since you instructed your Authorised Broker to submit your application (rather than submitting the Application directly to the Registrar), DAIL would not charge the Process Fee. If you submitted your Application directly to the Registrar, DAIL would have charged you the Issuance Fee plus the Process Fee of A$40.00.
- Fees – Insurance fees of around 0.125% for the purchase amount
Other options – Trading platforms like Stake 1. Just note that trading name of Hellostake Limited - authorised and regulated by the UK Financial Conduct Authority 1. While they have an AFSL – 2. Do have some fees – Major Fees – FX – US$0.70 per $100 – have to buy using other currency – so in AUD about a 1% clip ($1 per $100) 2. Few other platforms are available to buy international shares – which is a potentially better strategy than the structure of TraCrs when liquidity in markets is solely reliant on central banks – 1. Difference is counterparty risk to not 3. That is when it comes to individual shareholdings – 4. How I do international shares is through managed fund and ETF structure 1. While can't be picky in individual shares – can focus on sectors or managers who specialise in what you are after – 2. Buy sells are lower – 0.3%-0.5%, so less than half of Stake – plus picking up hundreds of international shares in the hands of investors whose whole job is just to pay attention to one sector and trade it –
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Today – look at Why a Government benefit from high property prices, and why they might want high housing prices? To the point it moves away from being affordable – hurting population while benefiting Govs
They all say they don’t – and that their policies will help reduce prices - but why this is either just promises, or a known a lie –
Governments could easily solve the property price issues –
- Incentivise spread
- Company and personal tax zones
- EPA laws – makes it easier
- Infrastructure taxes – should be the opposite – Gov chips in and then gets the price back on the sale
- Remove costs –
- Stamp Duty – one of the biggest ways people thing property prices can drop
Wealth effect – The wealth effect looks at the impact of the rising value of assets on consumer spending - A rise in house prices creates an increase in wealth for householders. As a consequence of this increase in house prices, householders will generally:
- Be more confident about spending and borrowing on credit cards. They can always sell their house in an emergency.
- Increase in equity withdrawal. A rise in house prices enables homeowners to take out a bigger mortgage. Banks can lend more on the basis of the increased price of the house. Households could use this bigger loan to spend on other items. This can create a significant increase in consumer spending. For example, in 2006, with rising house prices, equity withdrawal added an extra £14bn to consumer spending. In 2008, with falling house prices, equity withdrawal was -£7bn. (people taking the opportunity to pay off the mortgage)
- Went through a few studies - First, large housing wealth effects are not new. We estimate large effects back to the 1980s. Second, there is no evidence that housing wealth effects were particularly large in the 2000s; if anything they were larger before 2000. Third, we find no evidence of a boom-bust asymmetry that might arise from households hitting borrowing constraints during housing busts
- often hypothesized that more households used their “houses as ATMs” in the 2000s than before due to automated underwriting, expanded credit, and increased access to home equity lines of credit (HELOCs). Moreover, household consumption may have been particularly responsive to house price changes in the bust because the decline in house prices pushed an unusually large number of households to high loan-to-value (LTV) ratios, causing borrowing constraints to bind.
- Large housing wealth effects are not new: we estimate substantial effects back to the mid 1980s; 2) Housing wealth effects were not particularly large in the 2000s; if anything, they were larger prior to 2000; and 3) There is no evidence of a boom-bust asymmetry.
Why maintain high property prices? Theory - How does a fall in house prices affect the economy?
- When there is a fall in house prices, there can be a negative wealth effect and a negative impact on economic growth
- households can be where most people have their main form of wealth/equity - see a fall in house prices, their main form of wealth declines, this reduces their confidence in the economy – may spend less out of concern – or are more likely to devote a higher % of their income to try to pay off their mortgage early.
- Falling house prices cause more people to be trapped in negative equity (a situation where your house is worth less than an outstanding mortgage). This causes a fall in spending and precludes any opportunity for equity withdrawal
- Falling house prices have an important psychological impact. A fall in house prices can pop a bubble of rising expectations.
- Falling house prices have a negative impact on the construction of new houses.
- After the 1990 house price crash, there was a sharp fall in consumer spending, and this was a major cause of the recession of 1991-92. Falling house prices weren’t the only factor harming the economy (the economy also suffered from high-interest rates and high value of Sterling) But, falling house prices was an important contributing factor
- When house prices are lower, and not as much economic activity around it – Gov has lower taxes
- State taxes – stamp duty, also fines as an income through EPA laws and restriction of use of land/planning regulations
- Federal – make income tax of those involved in property – real estate, developers, construction/builders (make GST as well)
- Higher all around prices create more income for Governments
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Monetary policy - Impact and relationship to interest rates
- Most central banks are committed to keeping inflation within a government agreed target - UK CPI 2% +/-1., Aus 2-3%
- If a Monetary Policy Committee felt prices was at too a level of inflation - above the target, then they may decide to increase interest rates. For example, the late boom of the late 1980s saw rising interest rates to combat the inflation in the economy
- Higher interest rates will reduce the rate of economic growth and moderate inflationary pressure
- However, the MPC is unlikely to increase interest rates just because house prices are rising at a rapid rate
- Why? Inflation basked only counts the increase in the costs of construction – materials/labour – not the sale price
- Also – wouldn’t want to create a situation of raising rates to decrease property prices for potential negative economic growth outcomes
- The MPC primarily consider headline inflation and economic growth - can’t use interest rates just to moderate house price growth - by intention at least – but it has the same effect of changing rates regardless of intent
- For example, in 2000-2007, there was a housing boom, but the in the UK, USA, didn’t change interest rates because they were focused on inflation and economic growth.
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Similarly, from 2012 to 2016, house prices rose rapidly – especially in Sydney, London, but dropped from 4.75% to 2% in Aus, and interest rates stayed at 0.5% in UK
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Question – is the relationship between house prices and interest rates – and increased spending correlated or causal – seems to be correlated in certain examples – as money becomes cheaper to borrow – or stays low while wages/wealth increases – additional borrowings can be afforded –
- House prices and interest rates – think this may be causal – trend of property – is it likely to continue to be affordable – not if interest rates go up –
- Wealth effect and house prices - Effect Causal? Think most likely correlated – but correlation changes
- Why? Second, in our model, households with negative equity are insensitive to changes in house prices. In the presence of long-term debt, underwater households are not forced to de-lever to meet an LTV constraint and, furthermore, are unable to sell their house without an equity injection. Since these households cannot access changes in housing equity that result from increases in house prices, they are largely unresponsive to these changes, as Ganong and Noel (2017) have emphasized. As a consequence, the large rightward shift in the LTV distribution that resulted from the fall in prices during the 2007-2010 housing bust had two offsetting effects on the housing wealth effect. On the one hand, more households were pushed closer to their LTV constraint and consequently became more sensitive to changes in house prices. On the other hand, more households became underwater on their mortgage to the point that they became insensitive to changes in house prices. In our model, these two effects roughly offset to deliver a relatively stable elasticity in the Great Recession despite a large rightward shift in the LTV distribution.
LVR constraints – are there signs of this in the economy – well, yes – the defaulting rates –
- If you are behind on your loan – and you aren’t able to pay this for any reason – but you have equity – you would sell and take the money – or be forced to by the bank – if you bought and have negative 10-20% equity in property, or forced to pay bank $60-100k to sell a $600,000 property = cash that you don’t have – you are stuck and may be forced to default
- When the amount of money that is borrowed to real value (i.e. LVR) is high (which is bad) = less spending in economy as anything spare is likely going to loan repayments
Wealth effect – like anything economic manipulated- has diminishing marginal returns and can create a misallocation of resources
- What happens when the money being printed is creating additional inflation on property – not consumer goods
- Affordability gets worse while not being detected or included in though process of monetary policy decisions
Instead of Governments trying to decrease housing prices – their policies seem to be making it worse –
- Increasing urbanisation - Another reason – is Climate change effects – and benefits that some say come from cities over living more rurally
- Town planning and climate groups – book Whole Earth Discipline, Stewart Brand argues that the effects of urbanization are primarily positive for the environment
- the birth rate of new urban dwellers falls immediately to replacement rate and keeps falling, reducing environmental stresses caused by population growth
- emigration from rural areas reduces destructive subsistence farming techniques, such as improperly implemented slash and burn agriculture
- urbanization upsurges income levels which instigates the eco-friendly services sector and increases demand for green and environmentally compliant products.
- book "Carbon Zero: Imagining Cities that can save the planet", Alex Steffen also speaks of the environmental benefits of increasing the urbanization level
- In July 2013 a report issued by the United Nations Department of Economic and Social Affairs warned that with 2.4 billion more people by 2050, the amount of food produced will have to increase by 70%, straining food resources, especially in countries already facing food insecurity due to changing environmental conditions.
- What isn’t really mentioned is the existence of urban heat islands has become a growing concern over the years.
- An urban heat island is formed when industrial and urban areas produce and retain heat. Much of the solar energy that reaches rural areas is consumed by evaporation of water from vegetation and soil. In cities, where there are less vegetation and exposed soil, most of the sun's energy is instead absorbed by buildings and asphalt; leading to higher surface temperatures. Vehicles, factories, and industrial and domestic heating and cooling units release even more heat. As a result, cities are often 1 to 3 °C (1.8 to 5.4 °F) warmer than surrounding landscapes. Impacts also include reducing soil moisture and a reduction in reabsorption of carbon dioxide emissions.
Welcome to Finance and Fury, The Furious Friday Edition
Today, the episode is delving a little deeper into superannuation
I Work as a financial adviser – see a lot of changes to the legislation of superannuation since I joined the industry in 2011 – Today - Episode on my theory of superannuation from a viewpoint you might not see anywhere else
History of Super –
- From 1970s - superannuation arrangements were in place were set up under industrial awards negotiated by the union movement – nothing like currently – they were union/company run
- 1983 - A change to superannuation arrangements came - through an agreement between the government and the trade unions
- Called “Prices and Incomes Accord” - the trade unions agreed that their members (workers) forgo a 3% pay increase to instead direct into the new superannuation system – important point of forgoing salary increase – come back to later
- This 3% was also matched by employers' contributions the employees' income –
- Though there is general widespread support for compulsory superannuation today, at the time of its introduction it was met with strong resistance by small business groups who were fearful of the burden associated with its implementation and its ongoing costs – still – passed anyway due to union support
- Created 6% in total for union/Government workers – but didn’t exist across the board yet
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1992 - the Keating Labor Government - compulsory employer contribution scheme became a part of a wider reform package - "Superannuation Guarantee" (SG) contributions
- Why? Reasoning of Australia, along with many other Western nations, would experience a major demographic shiftin the coming decades, of the aging of the population, and it was claimed that this would result in increased age pension payments that would place an unaffordable strain on the Australian economy.
- The proposed solution was a "three pillars" approach to retirement income:
- compulsory employer contributions to superannuation funds,
- further contributions to superannuation funds and other investments, and
- if insufficient, a safety net consisting of a means-tested government-funded age pension.
- The Keating Labor Government had also intended for there to be a compulsory employee contribution beginning in 1997-98, with employee contributions beginning at 1%, then rising to 2% in 1998-99 and reaching 3% in 1999-2000. However, this planned compulsory 3% employee contribution was cancelled by the Howard Liberal Government when it took office in 1996.
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By 2002-03 - Howard Government - The employer SG contribution was allowed to continue to rise to 9
- Limited employer SG contributions from 1 July 2002 to an employee's ordinary time earnings
- Before this – no cap in conts
- The SG rate was 9% from 2002-03 to 2013-14, when the Rudd-Gillard Labor Government passed legislation to increase SG contributions to 12% by 1 July 2019 - originally intended by the Keating Government in 1995 – but got strong opposition and replaced by Howard
- Abbott Liberal Government deferred the start of this planned increase to the SG by six years, from 1 July 2015 to 1 July 2021. The SG rate has since 1 July 2014 been- from 9.5% and in July 2021 the rate is planned to increase by 0.5% each year until it reaches 12% by 2025.
Super Today – has grown massively – increase in compulsory contributions, being tax-effective, and strong market growth
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It is massive – Estimates show it is likely cracked the $3trn mark as of last month – ASX is about $2trn – remember that every super fund has money in ASX products – so even assuming a 25% = $750bn of the market cap = 37.5% of ASX
- Massive inflows as well - $120bn p.a. of employee/member contributions
- The Australian industry superannuation funds is under fire for re-investing funds into questionable investments, to benefit related parties ahead of the investor. Thus, a conflict of interest exists with the parent entity re-investing funds into funds related to the parent entity. Thus the best rate of return is never sought out, and the bank or entity investing the money is not seeking the highest rate of return.
- Money in certain investments now is a concern -
- Debt - Bonds – Corporate and derivative position – repo markets
- Property – Build to rent schemes – especially for Gov buildings to occupy using tax payer funds
- Index – buying into markets and pushing prices up – for no fundamental gains
- Most non-self managed funds only provide very minimal information to the account holders about how their money has been invested. Usually, only vague categories are provided, such as "Australian Shares", with no indication of which shares were purchased. This makes the fund's management largely unaccountable to their members.
- Examples of legislation or policy changes that work against you – political/fiscal or monetary policy bank accounts
- Fiscal is taxes – where super in accumulation and now pension if you work and below 65 = taxed
- Also – money available to buy government debt to fund their expenditure
- Monetary is QE and having
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Where is also gets more corrupt - Who started super? Labour – but Liberals have helped it too – so it is a joint political effort
- But super is not all made equally – think super industry all gets along? Current political battlefield in my opinion
- Industry funds – Their investment options managed by them, control of flow, or at least who the money is given to for investment management
- WRAP platforms and SMSFs – ones outside of political control/backing
- You decide where the money goes – not the default option almost everyone is in with Industry super
- MySuper -default offering based around your age – used to be balanced across the board – but FOFA and stronger super reforms changed all of this
- These came from a campaign created by a Genuine politician - Bill Shorten – Shorten was elected to the House of Representatives in 2007 - was immediately appointed a parliamentary secretary – had almost a few years’ experience in the union
- Shorten was elected as the AWU's national secretary in 2001 and was re-elected in 2005. He resigned as Victorian state secretary of the AWU in August 2007. He was also director of the Superannuation Trust of Australia (now Australian Super) and the Victorian Funds Management Corporation.
- Any guess who some of his largest political donors were for his elections? AWU made $25k, but AusSuper made $25,500 to AWU just before – all of this happened in 2006-2007 just before his first run into politics
- Shorten - Assumed office in 2007 – became minister for financial services and superannuation, assistant treasurer and Minister for Workplace Relations in the Gillard Government in 2010 –
- Took him 3 years – must have been impressive – after graduating from Arts/Law degree – worked as a lawyer for 20 months then left to become a trainee union organiser. Worked his way up in the unions until becoming Vic state security in 1998 – where he remained until taking office in 2007
- Corruption internally as to where super funds are invested –
- Publicly – buying Gov bonds – might get a gov job later/funded for office – or vies versa
- Privately - Example of how this would play out – Say you are a board member, and some business/share or property area you have a financial interest in would benefit from an investment/boost to demand = direct the funds there –
- Aus Super is very transparent when it compares to other Aus industry funds – go to the end page
- One area they don’t disclose so well is private equity – they tell you the private companies but not the amounts
- Regulation changes under FOFA –
- Insurances of fofa – super v non-super IP
- Financial advice regulations –
- Allowed for banks, industry funds and product providers to continue to make money of their products for recommendation, but banned any other adviser have the same opportunity through nil-entry products
- Im all for this – Advisers shouldn’t get it – charge for a service provided – as opposed to poaching wealthy clients with $1m+ to make 3.3% on placing their money - but nor do I think industry funds charge management costs through investments if it is being outsourced, who charge their own costs (as an ICR)
- Also – nepotism in construction projects – safe secure investments into Government buildings which the tax payer pays for – Bris is a good example - Cbus invested –
- Super funds used to pass the borrowing/construction financing costs to the investors – without disclosing it – now it is at least disclosing, but not included in the costs of the investment directly -
- But super is not all made equally – think super industry all gets along? Current political battlefield in my opinion
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More recent 2019 election campaign - Shortens proposed legislation changes
- Franking credits – split in who gains the benefits – in pension phase, SMSF or WRAP gains 100% of benefits – but in unitised structures, tax offsets go to the overall fund – so the returns while not taxed, will be lower on FF income
- Trust taxes – potential to destroy SMSF structures – as they are non-unit in structure
- Just saw that every bit of regulation went to help the industry funds, while hurting accounts where you can control your funds.
- The Government will likely continue to intervene with the super industry – lots to gain and may ways to do it
- Tax side – easy on the fiscal budget – already done a bit – the introduction of tax in super – increase in taxes on contributions for those earning more than $250k (30% instead of 15%)
- Consumer protection - Losses to the superannuation funds from the global financial crisis have also been a cause for concern, said to be around $75 billion.
- Initial financial discussions determined that the Australian economy would be at risk if citizens were allowed to immediately access and withdraw Superannuation, further confirming the belief that mandatory Superannuation may not be a viable long-term fiscal management tool. This was compounded by a lack of proper industry regulation, allegations of fraud and financial misconduct and a host of other issues currently plaguing the industry as a whole - "Thousands of superannuation fund members defrauded in Trio Capital scandal"
- A sudden outflow – say people could access and just withdrew – markets could collapse – as billions if not trillions may flow out
- And create other bubbles – like in property – reallocation of resources
Summary 1. Lots of money flowing in – likely yours – 2. Pays to know where it is – and be aware of what powers that be have in plan for your super money
The inflow of SG - https://www.superannuation.asn.au/resources/superannuation-statistics
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Say What Wednesday Edition.
Today's question is from Mario
Thanks so much for continuing to put together your insightful and informative podcasts. I have a question about investment strategies that last the test of time and can survive and continue into generations and generations to come.
I have often heard about investment strategies that have survived through generations where the principle continues to be managed through conservative investment where capital preservation is key and the proceeds either continue to be reinvested or passed on to family.
My question is what are your views about an ongoing investment allocation that can in fact last the test of time and How is such a structure set up and continually managed so that the investment isn’t destroyed when it passes to the next generation of family members or through turbulent times like war or global financial crisis? There are many questions that come to mind about appropriate asset allocation and who decides this, who makes decisions within the family, protection against rouge family members or decisions that could destroy everything.
As always love to hear your views and opinions?
No easy solution here – custodial risks is present in a lot of things
Did an episode on how the wealthy preserve wealth through investments a little while back –
Summary – go check it out – was called: Title: How to protect an investment portfolio? And is it worth using hedging instruments or changing the assets mix? – Quick Recap https://financeandfury.com.au/how-to-protect-an-investment-portfolio-and-is-it-worth-using-hedging-instruments-or-changing-the-assets-mix/
- Old money families - what it takes to preserve wealth over centuries and not just short-term cycles - the frequent reply is "a third, a third, and a third."
- Stands for dividing one's wealth into one-third land, one-third gold, and one-third fine art
- Obviously some liquidity (cash) is needed for day-to-day expenses – along with allocations to speculative portfolios
- This isn't an investment strategy for capital growth as much as capital preservation – i.e. will the investment be around in 100, 200, or 1000 years –
- Looking at centuries timeframes for investments - land, gold, and art outperform riskier assets such as shares, bonds, and cash - sound weird but a viewed from the perspective of centuries and not just years or decades
- Why? These don’t typically custodial risk and have intrinsic value (usable by people)
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Objections/issues –
- Share and bonds can perform well for long periods – but they and also cash all involve some claim on a third party
- Contain credit risk in addition, the underlying market risk – volatility
- Credit risk is what ruins a lot of investments - the investor is always at the mercy of the issuer
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- Shares – Company go bankrupt and Bonds can default (no money to return for your loan)
- Paper currency in the history of the world has eventually proved worthless eventually – so why is it different this time?
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- No income or yield - Warren Buffett disparages gold because it has no yield. The reason it has no yield is that has no risk when bought and stored by you personally (beyond someone stealing it). Yield is what you earn when you take risk. Gold has no credit risk, no currency risk, no maturity risk, indeed no risk of any kind. It is just gold.
- In contrast, Buffett's Berkshire Hathaway stock when priced not in dollars but in ounces of gold has declined in value by about 75 percent since 2000 from 280 ounces per share to 70 ounces per share.
- Someone who bought gold rather than Berkshire in 2000 could today buy four times as much Berkshire stock using the same gold.
- There has been a similar appreciation in the value of fine art. Admittedly this is a selective example.
- Yet it is true that over centuries it is the hard assets, not the paper assets, that retain value through collapse and catastrophe. The old money knows this—they have seen it all before.
- Share and bonds can perform well for long periods – but they and also cash all involve some claim on a third party
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Alternatives - value of land, gold, and art is intrinsic – beyond valuations - If you own it, you own it
- No issuer who can suddenly make your land disappear or turn your physical gold into confetti
- Possible that a totalitarian regime or an invading army might confiscate tangible wealth – why I don’t like legislation
- Gold can also be confiscated if in bank institutions – held personally stuffed in a saddlebag or sewn into the lining of a coat and moved. Art can be removed from frames, rolled up, and carried in one's luggage –
- Admittedly land cannot be moved, but with good title and patience a family can reassert its claim even generations later once interlopers have been ousted
- No issuer who can suddenly make your land disappear or turn your physical gold into confetti
- No portfolio is perfect or without risk - too often we think of risk narrowly and ignore the greatest risks of all
- Due to short term focus – normally only happen once in a lifetime, if that – but looking through history – do happen
- In the form of monetary collapse, social disorder, regime change, and emergency edicts
Structures – Done similar eps in the past as well on companies, versus trusts or owning personally – Now – this is Not concrete – not legal or official advice – but general in nature – options -
- Start a company to hold the investments – doesn’t have a limited life – but leaves you open if you own it personally
- Investments - Buy Gold, Buy Land, Buy Art
- Can diversify into other options like shares or bonds as well – but these do carry additional issuer/custodial risks
- Way to pass these assets down to your family is to leave control of the directorships and ownership of the shareholding in your Will to your
- To use a FT to own or not? Why not FT over company? The limited life of 80 years
- Bloodline trusts –
- Establish trusts for vesting to create new trusts
Issues with this – need a third party as the executor – and it is going to be costly to maintain – and no guarantee that your kids or grandkids will continue to manage the money well
That is what this comes down to – the best way to preserve wealth through generations is to educate and instil the value of money and how to manage it –
Teach kids about money – have them understand the value of it – give them control over some of it before they get it in your will –
No way to force a square peg into a circle – unfortunately some people if not educated can blow the money –
Seen two cases I advise on – both same set up of having parents pass away and kids being left with money – one had access at 18 while the other had access to 25 –
One at 18 withdrew everything and bought cars, boats, jet skis, going out/holidays and a home they couldn’t afford on cashflow – soon to be left with little – other at 25 – invested and retained and is now set up for life
If you are talking in the $10s or $100s of millions – may be worthwhile to have lawyers be the custodians and set up a complex structure – but if not any benefit can be eroded over the years from accounting and legal costs
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Question comes back to – how much of your wealth do you need to preserve – and at what cost?
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- Depends on how big the next crash will be – who knows?
Lessons to take away 1. Intrinsic Values – Wealth preservation – 1. Shares are fine to invest in – especially after the market collapses – but only if you have confidence in them – would you use their products in a recession? Intrinsic values can become zero 2. Gold – physical metals – silver as well 2. Long term holdings – company won't have a limited life – but trusts do allow more flexibility 3. Long term – the best thing you can do to preserve wealth is to educate kids and instil the value
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury
On the last episode – looked at signs property prices will be high
Today – continue and look at based on these factors - Will property prices keep going up?
- First – recap of the Tell-tale characteristic to be able to tell if property prices are high –
- Urbanisation levels versus available credit (cash people have access to from savings or lending/mortgages of population)
- Concentration of people (higher demand with population levels) and the limited supply available when people are concentrated in living space
- Access to credit – it is the Borrowed funds by the population – household debt to GDP in Australia has grown massively until 2017 – stabilised/dropped slightly since – and property prices with it –
- One of the most privately indebted countries in the world - behind Switzerland
- In conjunction with the urbanised population – higher the amount people can borrow or put towards property – higher the prices will be
- Regulations – that have aims to increases the incentive for higher urbanisation
- How - Town planning – the restriction of supply of available developments
- Come back to Why next Monday
- Urbanisation levels versus available credit (cash people have access to from savings or lending/mortgages of population)
This episode – Looks at the factors controlling prices Supply and demand – many individual characteristics involved -
Supply – focus on limitations and restrictions in supply –
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A lot of major cities/urban areas versus viable rural areas– what to look for –
- Legislations – where are the most restrictive councils/states on land developments
- How much available land that is in demand is around – Available is important – Aus has 99.8% left available land
- Might be a lot of land that is vacant – but is it usable or available or demanded?
- Useable – most is, available – a lot isn’t – already held by developers or limited through state legislation (national forests or environmental regulations) – such as the CO2 sink laws that don’t allow you to cut down trees on your own property – one person made a firebreak on their property and got fined $100k by the state – but their house was the only one in the area to survive the recent fires
- Demanded – bigger one – where is?
- Available land – Look at Australia – 99.8% of the country isn’t urbanised – but we have very high property prices
- Why this alone isn’t a good measurement – but what is the population likely to do
- They are likely to want to live near a city due to employment or cultural/entertainment reasons
- Concentrates the supply and forces the demand into one of a few major areas
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Regulations and governments
- Whilst in USA – saw news that Democratic run districts prices went up $12k (extreme outliers – Detroit, San Fran), while Republican by $9k
- Looking at San Fran – seen a massive increase for prices – but thanks to feudal system San Fran has become – rich areas pay for their own private police, cleaners/sanitation – the city doesn’t provide it
- Increases built on increased costs and not fundamental tend to pop - they are bubbles = middle class in those cities are leaving – stealing less than $950 isn’t a crime but a citation – so property crime is highest in country – so people leave – reducing the demand and prices start to crash
- Use NYC as an example – limited development in a lot of Manhattan – when you look midtown or Tribeca regions you see massive high-rises – but you can buy airspace to avoid your view being bought out - so limits the supply of more high rises
- Whilst in USA – saw news that Democratic run districts prices went up $12k (extreme outliers – Detroit, San Fran), while Republican by $9k
Demand – leading into what the population might do
- Demographics – where the population is living and where immigration occurs – urbanisation factors
- Trends of urbanisation and immigration – the flow of people both internally and externally –
- Urbanisation – internal - are more people moving into cities from the country?
- Immigration - Say 200,000 people are coming into a country each year – and they have 20 or 30 viable cities to choose from – can get pretty evenly spread out – but with 3 to 5 – not so much
- Concentration combined with high levels of urbanisation = prices go up
- Sometimes – if population urbanisation is large enough – can have 30 viable cities and see prices go up massively
- Look at China – average income of china (very skew data – rural to city incomes)
- Price to income ratios – Shenzhen – 45, Beijing – 44.2, Shanghai – 40.91, Guangzhou – 33.
- China is playing catch up – rural and a lot of them = lower average incomes
- Sometimes – if population urbanisation is large enough – can have 30 viable cities and see prices go up massively
- How much money people have access to also comes into play – you could have 1m people bidding on a property – but if they only have $20 on average, but the one at the top has $1,000 = property goes for $1,000
- Equity/money access to = property price you can ‘afford’ – a term used – but more accurate to say purchase based around your access to money -
- Borrowing capacity and loan affordability – banks work out how much you can borrow – then allow you to borrow it – doesn’t mean it is affordable –
- Regulations affecting the access to credit – the two regulators who control credit – ASIC v APRA – alphabet soup organisations -
- APRA – regulates the banks – lending requirements and business practices – lending benchmarks and practices – also capital requirements – implementing the BIS’s Basel regulations as well (no on III)
- ASIC – regulates the consumer protection laws – National Credit Act – updated at end of 2018 to remove the HEM benchmark – Household Expenditure Measure or HEM was an assumptions based lending criteria – assuming how much the borrowers spending was every month – issue was the lifestyle option in assessment – basic, moderate, lavish = obviously every is basic if you are wanting to apply for loan – all done for QLD
- Couple – no kids - renting = $39,293 p.a to $70,728 p.a. from basic to lavish
- Say you are a couple with 3 kids renting - $53k p.a. expenses (own home $61,800 p.a.)
- Don’t want to say lavish -
- Thanks to ASIC – now banks had to change the benchmark of lending HEM to a look through the test – banks actually required to assess the borrowers spending – dropped lending capacity heavily – worsening the property price drops from 2018 and still continuing – Sydney lost about 9% of values on average since the start of 2018
- APRA needed to help banks out – increase borrowing capacity again – through the hurdle rate testing
- Was about 7.25% - now 2%+ variable rate – say around the 5-6% mark – people can borrow more – estimates for a single person on $80-90k = $80,000 more in borrowing
What will cause prices to keep going up? 1. Peoples wages are going up – their incomes grow to help catch up to the gap in affordability compared to fulltime earnings – historically pre 1990s – 3.5-4.5 times – today some areas of Sydney 11 – while other cities in the 7-10 region 1. Pre-inflation rate target – prices of property grew by 3.5% to 4% p.a. – in line with the wage growth of the nation - 2. The population can afford more of a loan just based around wage growth – but with decreases in interest rate along the way – remember 1991 was about a 17% interest rate – few years later went down to 10% - dropping further to 7% not long after – massive spike to the size of a loan people could borrow 3. Deposit gap to income ratios – increased by about 300% since 1990s 2. The interest rates decline – loan size can increase – which allows prices to grow at accelerated rates – 1. Example – your income goes up by 3%, but the leverage allows loans to grant you access to a further 15% at a 20% deposit/savings rate – loan access pushed up the prices due to affordability 2. People wouldn’t need to borrow that much if they were all rurally spread out 3. Thanks to changes to hurdle rate – as variable drops the number of borrowings can increase 3. Recent history of China´s housing market 1. During the global crisis, China´s housing market slowed sharply. In November 2008 the government introduced a CNY4 trillion (US$585 billion) post-financial crisis stimulus package. Developers were now easily able to obtain loans, with lower capital requirements. 2. Buyers took advantage, with looser lending conditions and lower interest rates. The result? Existing house prices surged by 19.7% in Beijing during 2013 (16.77% inflation-adjusted) and rose by 12.85% in Shanghai (10.13% inflation-adjusted). In 2014, house prices in Beijing fell by 4.11% (-5.45% inflation-adjusted), but prices surged again by 21.01% (19.09% inflation-adjusted) in 2015 and 36.73% (34.06% inflation-adjusted) in 2016. In 2017, house prices started to cool down due to the tighter government measures implemented in late 2016. 3. % of GDP grew from 10% in 2006 to 30% in 2018 4. Australia 1970 was about 10% - highest historical rate – from 1908s to 90s was about 15% - then from 90s went up to a casual 100% at the point Basel 1 was implemented - 4. The land supply is restricted – but people can still afford it as long as they can continue to afford more loans 1. Look at coastal property prices – tend to not move too much – why? Developers can buy up land regions and release developments as demand spikes occur 5. What matters most – current makeup of Australia – as long as borrowing capacity and wages continue to grow = prices will continue to grow 1. Borrowing – Legislation effects on the borrowing capacity – are a real thing – seen the effects between ASIC and APRA messing with the lending/banking regulations 2. Wages - not so much
Situations from here – who knows – but it is hard for borrowing to increase unless wages continue to grow
- Somehow – mortgage debt boom continues – if not – prices may stagnate for a while –
- If debt/money supply is constricted – will be a massive bust
- Or if land is going to be opened up – which I highly doubt – council plans as stands are to increase the concentration of population within outlier suburbs
Thank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday Edition
Welcome to FF FF – Hasn’t been a FF in a while – but last was running through Crypto markets in relation to the BIS and powers that be
Today – Want to cover the potential of what central banks using crypto and by extension, all of us looks like
This is a potential scenario for us – when – who knows? Maybe 2 years – 5 years – 15 or never happen – but Recent examples in the news - The Bank of England-authored Green New Deal (in 2008) and Synthetic Hegemonic Currency (takeover of Central Banking Crypto)
- In this, they outline what the Bank of England’s Crypto might look like
Another example - in BVI - Blockchain startup LifeLabs announced that it is developing a digital currency dubbed BVI~LIFE in partnership with the British Virgin Islands (BVI).
- The coin will be a stablecoin pegged 1:1 to the U.S. dollar — which the BVI have used since 1959 – pegging their fiat currency against the USD — and its use is expected to reduce transactional fees, increase transaction speed and be accessible to outsiders such as tourists
- What is a stablecoin?
Stablecoins are cryptocurrencies designed to minimise the volatility of the price compared to non-backed cryptos – like BTC
- How? - relative to some "stable" asset or basket of assets. A stablecoin can be pegged to a number of different things – can be cryptocurrency, fiat money, or to exchange-traded commodities (such as precious metals or industrial metals – like gold
- Similar to countries pegging their own currency to another – increase or decrease supply of your money base in response to maintain a peg –
- Compared to say BTC - perceived Advantages of asset-backed cryptocurrencies are that coins are stabilised by assets that fluctuate outside of the cryptocurrency space (unless pegged to another crypto) – reduces correlation risks –
- Bitcoin and altcoins are highly correlated - But even Backed stablecoins are subject to the same volatility and risk associated with the backing asset.
- A "stablecoin" which is neither stable or a coin - it is exactly a fiat derivative in the hands of Governments or Central Banks - a fiat derivative, it is not a move away from the dollar rather an extension of the dollar carried over crypto blockchains.
Why not BTC? – Stable coin will be required by the financial system – along with ability to regulate and control the backing of the currency (Gold or Fiat) – can't allow other currencies to continue if not backed by something that can be controlled – options to legislate to destroy confidence in any competing cryptocurrency – Will attack the Practicality of BTC first –
- Situation one – BTC is accepted by vendors using fiat currency – like currently –
- It can't have a base – to be accepted as a new type of financial system – just a derivative of the current through the pricing mechanics – we value it in AUD, USD or whatever you use day today
- Another currency could replace
- Businesses do currently accept BTC in exchange for AUD – But companies don’t want to get screwed through the floating exchange system – prices still in Fiat currency and the exchange is made for the equivalent value of BTC almost straight away
- Situation two – BTC is the valuation and companies have fixed exchange of goods to for BTC
- A basic car would cost 2 BTC – Would it be more profitable/secure to switch to accepting another currency?
- Also - BTC has a capped supply – So, alternative currencies would be adopted by people seeking the demand and profit from being early adopters - Currently thousands of coins –
- Viability – Unregulated and easily manipulated - Security in a cryptocurrency is everything – but the control by the monetary authorities is essential – excuse here will be that crypto like BTC is too risky for consumers due to the hacking/theft in the system – so will be banned as it is too risky to use
- Breaches have always been against currency exchanges and other ‘services’ that have grown up around Bitcoin – not the distributed ledger – so Gov’s/CB's can ensure the security of their own coins as the weak link of the wallets won’t exist
What do the options look like? – two viable options - between Fiat and Crypto
Fiat-backed – issued and controlled by the state – the promise will be to secure and guarantee the distributed ledger
- Cryptocurrencies backed by fiat money are the most common and were the first type of stablecoins on the market. Their characteristics are:
- Their value is pegged to one or more currencies (most commonly the US dollar, also the Euro and the Swiss franc) in a fixed ratio,
- The tether is realised off-chain, through banks or other types of regulated financial institutions which serve as depositaries of the currency used to back the stablecoin,
- The amount of the currency used for backing of the stablecoin has to reflect the circulating supply of the stablecoin - Examples: TrueUSD (TUSD) USD Tether (USDT) Libra.
- Fiat-backed stablecoins can be traded on exchanges and are redeemable from the issuer. The cost of maintaining the stability of the stablecoin is equivalent to the cost of maintaining the backing reserve and the cost of legal compliance, maintaining licenses, auditors and the business infrastructure required by the regulator – not expensive to just push a button to issue more or less
- The value of stablecoins of this type is based on the value of the backing currency, which is held by a third-party regulated financial entity
- The trust in the custodian of the backing asset is crucial for the stability of price of the stablecoin – so the Fiat system will still need to be viable –
- Also other option – is SDR – basket of currencies backing the digital currency – like IMF are looking into
- Already being tested out in the financial system for proof of concept – but the real issue is the future of Fiat – amount printed and the lack of confidence in the USD spreading
I think there is another option which is in the works – Commodity-backed 1. Stablecoins backed by commodities such as precious metals (gold, silver etc.) are much less likely to be inflated than fiat backed stablecoins. It is harder to mine gold or silver than it is to "create money out of thin air." The main characteristics of backed stablecoins are: 1. Their value is fixed to one or more commodities and redeemable for such (more or less) on demand, 2. There is a promise to pay, by unregulated individuals, agorist firms, or even regulated financial institutions, 3. The amount of commodity used to back the stablecoin has to reflect the circulating supply of the stablecoin. 2. Holders of commodity-backed stablecoins can redeem their stablecoins at the conversion rate to take possession of real assets. The cost of maintaining the stability of the stablecoin is the cost of storing and protecting the commodity backing. Examples: Digix Gold Tokens (DGX) and others. 3. A lot of central banks around the world and trying to buy up on gold – hence why gold and miner demand has spiked
Real issues – example of what has occurred in the stablecoin market – 1. The company/coin - Tether, the largest stablecoin by market capitalisation - faced accusations of being unable to provide audits for their reserves while continually printing millions of coins – who knows what the backing is? 1. Reserves from Gov could be Fiat backing (M0) or Gold in their reserves 2. So if these companies are likely able to easily do it - the gov is very likely to as well
What does this create for the future? – Remember – not saying it is a guarantee – but evolution of money does occur – helps to pay attention to potential future options
But the monetary system has been used as a method of control
- A Fiat backed cryptocurrency system look like - These are merely central bankers’ wet dreams for depopulation and fascism “with a democratic face” which their 1933 conference failed to achieve
- These can only be imposed if people remain blind to their own recent history
- Sir Mosely – British Fascists Union – noble elite always want control over the population
- Talked about the attempted coup on the US government –
- But what commodities are other options – as Fiat is likely to not provide a good long term backing for crypto – gold as well – may not be the best backing due to the same issues of Brenton Woods –
- Gov may issue too much of the currency without adjusting the price of gold to give the currency a backing value
- Example – under fiat system – gold could be a backing if to go to gold standard – supply isn't the issue – price is the issue – Gov could increase gold price to $10k USD, or $14.5k AUD to match the required pricing
- But they historically have not responded well to this – due to self-interested policies -beggar thy neighbour situations - gain a competitive advantage in export prices – so gold can and had fallen apart as a monetary supply
- I’m not a fan of either option -
When it comes to depictions of events in the future - Art imitating life – or life imitating art 1. Look at movie Intime – haven’t fully watched it – got bored 15m in – but concept is that time is used as a currency – 1. This a form of cryptocurrency that your life is backing 2. Seems crazy – carbon instead seems less crazy? Again – not saying that I think it will happen – but hear me out 3. What is after gold? – the backing of this may break down again – like it did in the past many times as nations broke treaties or rulers debased the supply of currency versus gold/silver content – the next traded resource is carbon 4. Might sound crazy – but the carbon trading scheme mechanism can create the bedrock of the laws needed to continue to create this system 5. Rather than trading time – you trading your breathing 6. Not saying that it is going to happen – but the legislation provides enough of a framework to implement – as it creates president on application to carbon emitters – which we are through breathing 1. 3bn tons of CO2 a year – estimate for us breathing – a lot of CO2 if the goal by 2050 is to get to 0 CO2 emissions 7. May take 100+ years to materialise – if it ever does – 1. But ask someone over 100 years ago – that their money will not have gold backing it – that a Central bank controls their money and can increase the supply and control the cost of money through the interest rate – and be creating policies to control the inflation rate – or price increase of the economy – 2. They would look at you like a loonie person
Central bankers and nations are researching and working on crypto-backed currencies - need nations to adopt as currency –
May ban Fiat ownership and replace with crypto first –
Then have to move onto gold
thanks for listening today. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday Edition,
Where we answer your questions, today's question is from Sol Tau
Thanks for the Podcast and all the great info it provides. Could you explain what leads to hyperinflation and if there is any possibility of seeing that sort of scenario in Australia?
This is a great question – and one topic I was going to tackle in a few weeks in relation to the monetary reset to crypto – so I'll jump the gun and cover potential hyperinflation
First – What is hyperinflation? 1. In economic terms - hyperinflation is very high or highly accelerating inflation rates 1. Inflation is the measurement of the increase in prices of goods = CPI in measurement terms – basket of goods and how the costs to purchase them changes 2. Central bankers try to use inflation to reduce the real value of the debt to give debtors some relief in the hope that they might spend more and help the economy get moving again 2. Therefore – hyperinflation quickly erodes the real value of a currency – due to prices of a good increasing – reducing your purchase power unless wages increase at same or greater rate – 1. Technically - Hyperinflation is when the prices of goods and services rise more than 50% a month. 2. If you have $100 bill in your wallet – which could buy you 20 cage-free 12 pack of eggs at $5 each today 3. You have another $100 bill and take it to buy eggs a month later – but the prices go up by 50% - now can only get 13 and 1/3rd egg cartons – reduction of about 33% of your purchase power 4. If a good or service could cost one amount in the morning but be more expensive by the afternoon – how would you respond? 1. You would buy more now? Or wait? Buy now – this creates shortages in stockpiles – leads to undersupply which further spikes price rises 5. Hyperinflation massively increases uncertainty due to a rational behavioural response people make - but not accounted for in economic models – therefore – spending now rather than saving for the future is an ‘irrational behaviour’
Causes – number of different causes – but demand and supply come into it – but with some stress to the government budget, such as wars or their aftermath, socio-political upheavals (changes in governments – mostly socialism/communism), a collapse in aggregate supply or one in export prices, or other crises that make it difficult for the government to collect tax revenue – many different reasons – as it isn’t just one trigger that creates hyperinflation – requires a perfect storm of situations
-
Starts for a combination of reasons – but in most cases - step is when a country's government begins printing money to pay for its spending – increasing supply of money – decreases real value
- It is all about perception – well known example - Germany – Weimar Republic in Germany in the 1920s printed to pay off war debts – along with losing backing for supply of money in the form of gold in the WWI treaty
- But number of Deutschmarks in circulation went from 13 billion to 60 billion from 1913 to 1914
- First time printed money to pay for WW1 – economy was strong and prepared before war
- But German government also printed government bonds - same effect as printing cash - so Germany's sovereign debt went from 5BN to 156BN DMs
- But from WW1 - 132 billion marks in war reparations – from taking away production capacity - lead to a shortage of goods, especially food. Because there was excess cash in circulation, and few goods, the price of everyday items doubled every 3.7 days. The inflation rate was 20.9% per day. Farmers and others who produced goods did well, but most people either lived in abject poverty or left the country.
- But number of Deutschmarks in circulation went from 13 billion to 60 billion from 1913 to 1914
- But today - Every government does this still - not to pay off war debts but fund spending – budget deficit is the term for the indirect way of funding this through bonds – which are purchased off the financial system which received an increase in their money supply from the Central Bank
- It is all about perception – well known example - Germany – Weimar Republic in Germany in the 1920s printed to pay off war debts – along with losing backing for supply of money in the form of gold in the WWI treaty
-
Modern day – I believe that once a country is cut off from the modern financial system – cant borrow/issue bonds for spending funding – so start printing as a response – not the only response they have though – they could always cut spending
- Theoretically -
- An increase in the money supply is one of the two causes of inflation – Monetarist theory – but after too much inflation - instead of tightening the money supply to stop inflation, the government keeps printing more – often out of perceived necessity
- Milton Friedman – “inflation is always and everywhere a monetary phenomenon” – may have been true back in his day – but not true today – pre-70s money was user demand-responsive = only grew through trade – more a country produced, more it could export – leading to monetary influx of funds – leading to companies being able to charge more – so prices went up creating inflation – with it – growth of the economy but only between a bandwidth of inflation
- Today – with Inflation being targeted and therefore manipulated from Central banks – it has become a function of behavioural psychology – the inflation trend is promised to us – and has been well delivered from the 70s all the way up until a few years ago – hard to get people to change their inflation expectations after the expectation and confirmation bias is there – but issue for central banks is it is very hard to raise inflation from under 1.8% to 2.5% through policy
- Anyone paying attention knows that Central Banks are trying to force inflation – i.e. the reduction in the real value of items valued in fiat currency – this for the financial system is something that can be profited off
- This leads to the other exacerbating causes – as behavioural is certainly one – monetary side to cover but quickly touch on behavioural –
- To make the most of your money – you would want to spend sooner and stockpile on the goods you can
- Petrol – before I left petrol was $1.3 and left with empty tank – got back less than a month and prices at $1.76 – if I had known would have filled up before leaving – but if inflation is almost guaranteed like in hyperinflation countries – I would have filled up and further reduced the supply even though I didn’t need to use it
- Inflation is part of a complex system – i.e. has non-linear developments – therefore can't simply be increased from 2% to 2.5% or 3% - instead, inflation hits a point it quickly spins out of control – jumps to 6%, then 9%, etc.
- The other is demand-pull inflation. It occurs when a surge in demand outstrips supply, sending prices higher.
- Cause people to hoard, creating a rapid rise in demand chasing too few goods. The hoarding may create shortages, aggravating the rate of inflation
- To make the most of your money – you would want to spend sooner and stockpile on the goods you can
Modern Example – Venezuela – massive levels of price increases - Prices rose massively starting in 2013 with 41% 1. In 2017, the government increased the money supply by 14% along with promoting a new cryptocurrency, the "petro," because the bolivar lost almost all its value against the U.S. dollar – due to USD increasing monetary supply – 1. The International Monetary Fund projected prices to rise 13,000% in 2018 2. Can't afford the cost of printing new paper currency 2. How did the people respond - began using eggs as currency. A carton of eggs was worth 250,000 bolivars compared to 6,740 bolivars in January 2017. Unemployment rose to 21%, similar to the U.S. rate during the Great Depression.
How did Venezuela create such a mess? Former President Hugo Chávez had instituted price controls for food and medicine.
- But mandated prices were so low it forced domestic companies out of business. In response, the government paid for imports. In 2014, oil prices plummeted. It eroded revenues to the government-owned oil companies. When the government ran out of cash, it started printing more. Rather than change its dangerous price and wage controls, President Nicolás Maduro is continuing unsustainable policies.
- As of 2019, Venezuela’s foreign debt is about $100 billion. Its inflation rate has hit 10,398% per annum.
- With the continued collapse of its economy, the country is facing a monumental problem of debt repayment. At this moment, it is the only country in the world suffering from true hyperinflation.
Is it possible today? – Well, hard to say for certain, but it is a probability – Today’s environment is drastically different than it was in the late ’70s and early ‘80s when inflation was nearly out of control.
Today, disinflation is the primary challenge central banks face, not inflation.
- Note - am not predicting it or saying it is an imminent likelihood – but if it were to kick off it would happen quickly - jumping from under 2% to 6%, 8%, 12%
- World is massively indebted – massive trick though – money technically isn’t in circulation (i.e. printed) – in the financial system or owned to other governments – essentially not in your hands to affect prices
-
Since hyperinflation is visible as a monetary effect, models of hyperinflation focus on the demand for money.
- This is where Economists see both a rapid increase in the money supply and an increase in the velocity of money if the (monetary) inflating is not stopped.
- Historically – both of these have been a root cause of inflation or hyperinflation
- increase in the velocity of money - central to the crisis of confidence hyperinflation model - where the risk premium that sellers demand for the paper currency over the nominal value grows rapidly
- Radical increase in the money supply in circulation - i.e the "monetary model" of hyperinflation
- Either of the previous may be the trigger – but the second effect is either loss of some confidence forcing an increase in the money supply – or a loss of all of it - destroying confidence
- This is where Economists see both a rapid increase in the money supply and an increase in the velocity of money if the (monetary) inflating is not stopped.
-
Today’s markets depend on the artificially low-interest rates - Raising interest rates would devastatingly pop the asset bubbles in property and a lot of shares
- But the problems in the economy today are structural, not liquidity-related – Central banks trying to solve structural problems with liquidity solutions. That will never work, but it might destroy confidence in the fiat system (mainly USD) in the process
- CPI has remained low, despite the CBs efforts – begs the question of - where the inflation is – because trillions have been printed since – and Governments as massively in budget deficits (borrowing to fund expenses)
- But there has been inflation. It’s just been in assets like stocks, bonds, real estate, etc. The market’s back to record highs again, in case you haven’t heard. The bottom line is, we’ve seen asset price inflation, and lots of it, too.
- Trick to the system today – borrowed funds through debt instruments (bond) isn’t printing to fund spending – and the money never hits circulation – as the increase in monetary supply is from borrowings – put into hard assets (like shares or homes)
- Inflation today in the fiat system has only been seen to be experienced in the 3rd world buy those nations, not in the ‘financial system’ – bonds can always be issued to fund spending
- But QE, if it was put into circulation, may have triggered hyperinflation - massively increase the monetary supply –
- Inflation moves into financial markets measured by price increases – Xero is at a PE of between 4,500 to 6,000 – but people still are wanting to buy – not rational
- Also – the borrowings/government debts – USA went from $9trn 2007 to $24trn estimated this year in government Debt – when gained from QE programs – where Gov bonds are issued and bought using the Central Bank printed money – all to cover funding costs i.e. spending – backdoor way of printing money for spending – just not reflected in money supply in circulation – as it is tied up in the financial system/government's coffers
- Amount of money within the financial system growing at compounding 13% p.a., while money in circulation growing at 5% p.a.
Potential Economic fallout - 1. Banks and lenders go bankrupt since their loans lose value. They run out of cash as people stop making deposits. 2. Hyperinflation sends the value of the currency plummeting in foreign exchange markets. 3. The nation's importers go out of business as the cost of foreign goods skyrockets. 4. Unemployment rises as companies fold. 5. Government tax revenues fall, and it has trouble providing basic services. 6. Historically – Governments make it worse - The government prints more money to pay its bills, worsening the hyperinflation
Today – Supply issues - Think about Aus – We thankfully have a lot of goods locally produced – but not everything. So, shortages of goods are possible – especially fuel – 80% is refined in Singapore and shipped onto us –
Also - A sharp decrease in real tax revenue coupled with a strong need to maintain government spending, together with an inability or unwillingness to borrow, can lead a country into hyperinflation.
Australia – large Social spending – 40% to Centrelink payments – politicians don’t want to reduce as political suicide
Thanks for listening today, if you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury,
Back from Holidays – spent some time in the USA -
Got me thinking about differences in property and their pricing – seeing property prices vary differently state to state – city to city – want to do a Series on property and its prices – Today - How can you tell that property prices will be high in a city?
What are the measurements/characteristics on a country/city can be used to determine if property prices in cities are going to be high?
This topic will take a few episodes to tackle properly – but in a quick summary
- Tell tale characteristic to be able to tell if property prices are high –
- Urbanisation levels versus available credit (cash people have access to from savings or lending/mortgages of the population) –
- Concentration of people (higher demand with population levels) and the limited supply available when people are concentrated in living space
- In Aus – we will go state by state – state pop, compared to largest city – we are fairly urbanised
- But more importantly – it is the Borrowed funds by the population – household debt to GDP
- In conjunction with the urbanised population – higher the amount people can borrow or put towards property – higher the prices will be
- Regulations – aims which increases the incentive for higher urbanisation
- How - Town planning – the restriction of supply of available developments
- Another Monday ep - Why - the wealth effect and easy to enforce regulations – why planners like concentration of property – for higher price growth over time as population grows and supply doesn’t meet it
- Urbanisation levels versus available credit (cash people have access to from savings or lending/mortgages of the population) –
What is urbanisation – method of measurement? Urbanisation – Could also say demographic trends of living
- Urbanisation is the increase in the proportion of people living in cities
- Historically – come from rural migration
- Urbanisation occurs because people move from rural areas (countryside) to urban areas (towns and cities) – Often a stage/occurrence of a country that is still developing
- However – in developed countries, it is reflected in the breakdown of population living in cities versus rural growing
- Urbanisation rapidly spread across the Western world from the turn of the century – peaked in the 1950s and hasn’t gone back –
- But now it has begun to take hold in the developing world as well
- turn of the 20th century, just 15% of the world population lived in cities –
- But in 2007 - was the turning point when more than 50% of the world population were living in cities
- the first time in human history this has occurred – and with-it growing property prices
- Australia – in the early 1900s – around 40% lived in cities – Today – about 75% - almost doubled
- Causes – Cover further in next episode
- Urbanisation occurs either organically or planned as a result of individual, collective and state action. Living in a city can be culturally and economically beneficial since it can provide greater opportunities for access to the labour market, better education, housing, and safety conditions, and reduce the time and expense of commuting and transportation.
- However, there are also negative social phenomena that arise, alienation, stress, increased cost of living, and mass marginalization that are connected to an urban way of living.
Global Trend – 5. Where available housing is allowed 6. Where available work is 7. Specifically – Developed Nations - Where immigration occurs from Overseas 1. Sydney, California, Vancouver – high levels of demand 8. Thanks to regulations and town planning – limits infrastructure and sprawl of the population 1. No incentive for companies to go to rural areas – no incentive for developers to develop rurally 9. For property prices – number of cities available to live in – the demand versus populations ability to borrow funds to throw more money at a property – these two factors then increase the competition and with it, property price growth
Measurements of Urbanisation – 10. Number of people living in cities versus rural areas 1. Shift over time – more people moving into the cities for opportunities
Australian cities and states – Urbanisation levels of just the major cities versus the whole state
- NSW to Sydney – 7.5m to Syd is 5.23m – 70%
- VIC to Melb – 6.4m to Melb 5m – 78%
- QLD to Bris – 5m to Bris 2.3m – 46%
- WA to Perth – 2.6m to Perth 2m – 77%
- Tas to Hobart – 550k to 200k – 36%
- NT and Darwin – 210k to 130k – 61%
Whist Travelling in the USA Was in NY – Colorado (Denver and Steamboat) – San Fran/California
- LA County – 10.2m, San Fran bay area – 7.5m – the whole CA pop is about 40m people – 45% of whole state lives in two cities –
- LA county is 12,305km2 – Sydney is the same area size but accounts for 70% of the state’s population –
- Average price is about $630k USD - Convert to AUD and it is $920k – pretty much exactly what Sydney’s prices are
- New York
- Steamboat – shows a good example of legislation
- Small ski town – 12,000 people in around 30km squared
- The median price of homes currently listed in Steamboat Springs is $749,750
- Costs of living scale – Aspen, Vail, then Steamboat – all small ski towns – but have highest property prices in the state of Colorado – why? Regulations/town planning limit number of properties
- Plus – Demand from wealthy –
- The amount of money the population has (from borrowed or not) will increase the property prices
In summary - 11. Urbanisation limits the available supply of property – 12. Amount people can borrow 13. But also – regulations – what policies
Cover these in detail over the next few Monday episodes. Next ep – tie it into looking at "will property prices keep growing”
Thanks for listening today, if you want to get in contact you can here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury
Looking around in Australia - increasing disparity in wealth, and social fragmentation
- That social fragmentation means Australians are become "more self-interested, more materialistic, more competitive".
- Our largest challenge as a society is the challenge of preserving social cohesion – where we are all working towards the same goals as a society –
- It is an Us Verse them – some want the 1% to pay for their homes, uni education, others want everyone to live in the dark by removing all CO2 use
- There’s no perfect society - We have the inevitable consequence of living in bigger, faster cities and working in more competitive workplaces.
- Our bodies respond to stressful events with a surge of adrenaline, which increases our reaction speed and helps ensure our survival - Trouble is, our bodies aren’t designed to cope with repeated stressful events and adrenaline rushes.
- If more "jobs and growth" and the higher incomes they bring are intended to make us happier, maybe governments would do better by us if they switched their objective from increasing happiness to reducing unhappiness.
- But Governments aren’t responsible for this – they are the reason why we are in a lot of messes
- It is up to you – Today looking back at the basics
Human behaviour – How do we act when we have something we didn’t work for (or earn?) like UBI or government incomes
- Won’t make you happy – Without the ongoing work for something, dopamine release isn’t going to be as great
- Working on the goal is what provides longer sustained releases of dopamine
- My experience – Sanding a deck – if I had paid someone to do it then there wouldn’t be that feeling of achievement
- Beyond dopamine
- Serotonin Status – Serotonin – from our position in a hierarchy - Spending money for nicer cars, suits, watches – Try to live up to an ideal image. Doesn’t actually increase serotonin –
- Fake it till you make it doesn’t work here if – Your brain knows that you are just flashy/show with no substance
- The belief (anticipation) that spending money will give dopamine and serotonin becomes a dangerous cycle
- Without fulfilment – Just have to keep spending to keep up these feelings
- Also – Turning to easy releases of dopamine - The wrong way to do it – Easy releases of dopamine
- Gambling – The thrill – Uncertainty and anticipation are strong here
- But not sustainable – Only lose money to get dopamine
- Risky investment – Get rich quick schemes – Often just lose money
- Gambling – The thrill – Uncertainty and anticipation are strong here
- Hedonic Treadmill - The tendency to revert back to a standard level of happiness
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- Money/goals - despite a change in fortune or the achievement of major goals.
- As a person makes more money, expectations and desires rise in tandem, which results in no permanent gain in happiness.
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- But – to feel happier we need to then spend more once you are hooked on this loop - MC hammer – paid his entourage first………didn’t work so well.
- The economists’ basic model views us as individuals, motivated by self-interest, and the goal of faster growth in the economy is aimed at raising our materialstandard of living
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- And if some of our problems stem from changing technology– pursuing friendship via screens, for instance
- Economists assume that economic growth will leave us all better off. Most take little interest in how our social wellbeing is
- Our real incomes have grown considerably over the years – even for people at the bottom – and economic reform can take a fair bit of the credit. It can take most of the credit for the remarkable truth that, unlike all the other rich countries, we’ve gone for 27 years without our least fortunate experiencing the great economic and social pain of recession and mass job loss.
- But though most of us are earning and spending more than ever, there’s evidence we’re enjoying it less. Our higher material living standards have come at the cost of increasing social and health problems.
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- Australians are wealthier than ever - but also more sleep-deprived, overweight, overmedicated and anxious and unhappy – taking these feelings out of society and pushing the blame onto things like Climate Change – form of projection of individual problems against a common enemy
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- But not helpful and won't solve the real reasons - Economists generally take little interest in social and health problems, regarding them as outside their field. But though problems such as loneliness, stress, anxiety, depression and obesity were with us long before the arrival of consumeristic cultures – but have got worse since the mid-1980s
- As our material problems have disappeared – you make up our own problems - social media and relative lifestyle of others that can be seen at a level never been seen in human history
- We can blame any Economic theory you want but the truth is when you watch what is happening around the world it is quite evident that we are an extremely lucky society – but when we live unhealthy lifestyles, our unhappiness, our huge suicide rates shows material focus isn’t making us happier or really wealthier beyond lifestyle assets
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- Politically – drive division based around where you sit in the wealth and lifestyle spectrum - The economic models require conspicuous consumption, which has created the affluenza virus
- Everyone has heard the statement - More money more problems – Contradictory statement – can be both true and false
- False – Money is used in exchange for what you want – cover bills, emergency – more money = less problems
- True – The love of money, or the stuff that comes along with it, or not valuing money = lead to problems
- Depending on which one you resonate with – healthy view of money, or cynical view
- Cynic – a person who believes that people are motivated purely by self-interest – i.e. more money is selfish
- Oscar Wilde- a cynic was 'a man who knows the price of everything and the value of nothing.'
- Everyone has heard the statement - More money more problems – Contradictory statement – can be both true and false
Conspicuous consumption 1. Conspicuous consumption - spending money on acquiring luxury goods or services to publicly display economic power = income or accumulated wealth of the individual 1. Why does this occur? You aren’t going to carry around a bank statement/share portfolio 2. Expressions of wealth then becomes materialistic – but this reduces your bank balance 3. Exchange of wealth for things 2. To the conspicuous consumer - the public display economic power is a means of their social status 1. Conspicuous consumption can eventually become invidious consumption - meant to provoke the envy of other people 2. But works against them - when someone else displays a superior socio-economic status – this hits your serotonin 3. Created a new form of illness – Affluenza (not the flu) 1. Defined as "a painful, contagious, socially transmitted condition of overload, debt, anxiety, and waste resulting from the dogged pursuit of more" – Economic problem – unlimited wants, finite resources 4. psychologist Oliver James – looking into the correlation between the increase in affluenza and the resulting increase in material inequality: the more unequal a society, the greater the unhappiness of its citizens 1. But this only occurs in a society where the material is held in highest value 2. Says more about Culture than inequality – what does it matter if someone has more stuff than you? 1. If the economy has been doing so well, why are we not becoming happier? 2. Are you truly lacking? Or do others have more than you? 3. Social media - online image sharing - Instagram – Overexposure - Previously was only what you could see 4. Back in the day – your neighbour had more goats then you - Then Your neighbour had a better car – or a TV 5. Now we see everyone – extreme wealth – billionaires with cars, private jets 6. Keeping up with the jones - New race to the bottom – these platforms are designed to stimulate dopamine – red notification buttons 5. Why? Competition for lack of substance is being fuel – marketing and advertising – create artificial needs 1. the manipulative methods used by the advertising industry – nothing new 2. Having celebrities (who people idolize) promote watches, cars, perfumes, etc. 3. Related to the stimulation of artificial needs
Where it comes from – Marketing triggers your Spending habits – marketers are smart – trigger neurotransmitters
- Dopamine – Reward system – Buying something is the easiest way to get this
- Serotonin – Status symbols – feeling higher up in the social picking order
- Money provides both of these things – If your brain connect serotonin to what others can see – then you can get trapped
- Serotonin is harder to do – Does require a bit more self-confidence (self-esteem) to be happy not chasing the way out through buying things – but your brain knows you are faking it if you buy knock off goods
- Societies can remove the negative consumerist effects by pursuing real needs over perceived wants, and by defining themselves as having value independent of their material possessions
- Price Versus Value – With investing as well
- Compare two shares – one with price above value, one with price below value – what to buy?
- Affluenza eventually leads to overconsumption – enter a cycle of consumer debt or overworking to waste money on depreciating goods
- Cars, jewellery, etc – try to sell second hand – learn what a depreciating asset really is
- Creates a pressure lead to psychological disorders, alienation and distress
- Cycle to self-medicate with mood-altering drugs and excessive alcohol consumption
- Consumerism as a primary source of stress and dissatisfaction because it creates a society of individualistic consumers
- People who measure both social status and general happiness by an unattainable quantity of material possessions
- Where more money can be more problems – if you constantly need more money = more problems in stress
Downshifting – Spending habits 1. This realignment of spending priorities promotes the functional utility of goods over their ability to convey status which is evident in downshifters being generally less brand-conscious 2. Identify the need for an "alternative political philosophy", and the book concludes with a "political manifesto for wellbeing" 1. Instead of buying goods for personal satisfaction, consumption down-shifting, purchasing only the necessities, is a way to focus on quality of life rather than quantity. 3. The long-term effect of downshifting can include an escape from what has been described as economic materialism, as well as reduce the "stress and psychological expense that may accompany economic materialism". 1. Focusing life goals on personal fulfillment, as well as building personal relationships instead of the all-consuming pursuit of economic success
What are the elements that help? 1. Regaining control – Finances shouldn’t control you – 1. Having control/certainty reduces stress – Knowing what you are in for helps, but being able to control it works better 2. Tail wagging the dog – Financially stressed people spend to feel better 1. Have $10k in CC debt, so spend $300 on a night out to make it better – spending gives control 3. But you can get control over the debt – forming good habits and increase certainty 2. What you can do - Endowment effect – Put more value to what you already own 1. Turn it into thinking about Keeping your money – put a premium on your spending habits 1. Essentials – 0% - no need to put a FV on this – unless you think a porche is an essential 2. Non-essentials – Gross the price up by a factor: 1. Example - New TV is $3,000 – Life of TV is 10 years – 2. Earn 7% on that over the same time - Is the TV worth $6,000? 3. Opportunity cost - To part with your money - the item better be worth it 4. Have to change habits though - Ways to solve – Break Three timeframes to focus on
Summary – 1. Know that most of what you see on social media is a lie – people only show their best sides 2. Don’t try to live up to anyone else – set your values – what is important to you 3. Know the value vs the price – regain control over your finances and happiness
Thanks for listening, if you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Why? – nobody else will help to confer information and thus Teach them about value of money – Kids don’t understand value of not just money as a medium of exchange – but that their time has valued attached to it – I don’t think some adults know that either
- At the very basis level – Doesn’t matter on which child psychology you read (Piaget, Freud, Erikson) – all have the understanding that children are egocentric – the world revolves around them – dues to brain development and availability heuristics
- What about me? Constant question from kids – or variation – when are we going to be there, or the why game
- Isn’t a bad thing – shows curiosity that can be lost if no nurtured
- But when it comes to money and value of items, monetary system – Prime directive (StarTrack) shouldn’t be to worship money – but to understand value of what it can be exchanged for
- This doesn’t just apply to kids – value is very important – not the price
- Value is the very basis of every investment as well – would you pay $100 for something wroth $10? Through branding and marketing, some people do? But yet, put that money into something growing by 8% p.a. rather than being thrown out in 3 years, better one option than the other.
The need to understand Money – Not to instil a sense of greed – the opposite- but that things aren’t free and that time is used as a medium of exchange – look at current state of society – lack of self awareness from protestors or disruptors -
- If You work – you spend time – let's say 40 hours a week doing something – you get money in return – the Gov takes some away – then you have money left –
- Teaching value is important – transaction – free pocket money isn’t good – entitlements of receipt –
- If they need $100 for splendour for schoolies - say no – pre-plan requirement
- Helps to avoid getting burdened with debt at a young age as well – if you don’t value money, you wont value debt –
- Or understand the negative value of debt and how it depletes future wealth
What to talk about 1. Is hard to talk about money with kids – Generational divides - Baby boomer generation – didn’t like to talk about it – culturally spread to the next generation and so on – generalisation of course – but Created taboo with money – created inept children 2. Also – education – about basic economics and financial system is lacking – where do kids get a lot of economic education – board games like monopoly
Unfortunately – where do a lot of people get their financial education – word of mouth from friends or family – or Monopoly -
Mentality of a zero sum game –
Monopoly is the best example due to the mass familiarity and use of a bad financial mentality
- Does Monopoly provide any benefit to certain players?
- We all start with the same amount of money in the bank, and two dice to roll each turn.
- Unless Ms Monopoly where gender helps outcome – either way - going first is best: Head start – reduce chance of landing on taken properties.
- Over time this advantage diminishes
- Example - You roll 5, buy the railroad. then 2nd - 4, 3rd - 6, 4th - 8.
- Other players have rolled a sum of 9, 15 and 23 (which is rather likely) in order from your second turn
If you play Monopoly a lot like myself – start to pick up the Basics in monopoly game economics;
- Don’t allow other players the ability to build houses, if you can.
- Build houses strategically on the most profitable for the costs - the orange set
- Manage your cash flow and reserves
- Avoid mortgaging properties, and with it your ability to win the game.
- Other tactics paying to get out of jail early on. Once all the board is fully owned, it can pay to have a few turns rest.
How to win?
- The number of ‘wins’ to ‘losses’ each turn ends up compounding over time.
- The more of the board you control, the more wins you will have.
- The more each property is developed, the greater your wins are going to be. Increase the chance of a win each turn, plus the size of each at a greater rate than other players, you will likely win.
But the most annoying part of Monopoly Is chance - How much is chance?
- Everyone playing knows what works in the game
- Difference in outcome is likely to come from how the roll of the dice works in the first 8 turns.
- The rest is up to us, but how much of the game's ultimate outcome comes from the luck of the dice?
- So when it comes to kids -0 so much of materialist consumer communications are spreading some bad psychological messaging – similar to how monopoly has installed a lot of people's psychological monetary beliefs.
I'll be honest, I don’t like monopoly!
- The outcome is too reliant on randomly generated chance
- Waiting and waiting for others to finish their turns = EG 8 people, then this may be around 88% of time played,
Who wins?
- Shift in the direction - clear who the winner is going to be
- We can just walk away from the table.
- But who likes to be robbed of victory?
It is lose-lose, Competition - which is why I am not a fan.
- If the real world was a zero-sum lose-lose game, then the outcome of life would likely take the same distributions of Monopoly where one person gets all the money at the expense of others.
- There have been similar times in history - Moa, Pao Pot, and Stalin.
- Stalin is the Top Hat and bank. First turn you get no money, he already owns the property. No $200 for passing GO. don’t leave - Stalin is a very trigger-happy kind of guy.
Thankfully we do not live in a society like this, or like monopoly.
How to best win any game: To cooperate or compete?
- Is it better to maximise your result through cooperation than competition?
- Competition in games is destructive by win conditions
- Healthy cooperation, improving yourself through interacting with other players to boost your results.
Societies that were in a lack of cooperation had no growth, so was zero sum competition!
Mentality comes from focusing on others as the cause of problems - Ignore others can be hard
- How do you truly measure another’s success to compare your progress? solely judge on our own criteria – project what we think their life is like
- But who cares what the 1% are going, any why waste time complaining about it? You will find out when you get there after all.
- It doesn’t help to think that Monopoly Man figures of the world are only wealthy thanks to stealing from the poor.
- 20-year-old protesters - whole working lives behind in accumulating wealth
- Warren Buffet -1% of what he is today when he was 50.
- But when you are only competing against yourself, nobody has to lose.
Practical side -
How can kids earn income?
- Chores for you or your neighbours – Child labour laws stop them from mining – but hospitality -
- Worked for my uncle during holidays labouring from 14 – getting a job in hospitality felt so much better after that
- Have them buy their own goods – have them work for it – don’t treat it as a punishment – make it a game – we all love games we can win -
- Kids are creative – Solutions: bake sales etc.
Focus on yourself your kids and what is best for you - Up to you! School isnt going to teach them practical skills to get through life
- It all starts at the individual level after all. If you want to change the world, start with yourself.
- If you have more capacity to help more, you can then improve the situation of others
- What can you do first?
Step 1 - Don’t compete with others, compete with yourself
- While there are other players in the game, you should only be keeping track of your own score.
- Competing against yourself - Focus on the outcome, not the competition.
- How are you going to compete against Warren Buffet? His 80bn at 13% a lot more in value than someone who got a 100,000% gain from someone invested $20,000 in bitcoin
Step 2 - Play by the bank's rules!
- The bank will always be the last one standing! How?
- Have something that people want, and would exchange money for.
Plus - use the rules of the basic game:
- Spend less than you earn.
- Cash flow is important.
- Millionaires average car is a Toyota, Ford, Honda!
- Start young and let compounding do its thing.
- Marginal increases will compound into massive benefits.
- Invest wisely and keep at it. Never invest out of hope
- Minimise how much of your wealth is taken from you.
- Be confident that you are getting better, without needing to show it off.
- Question: Pretend to be rich or make it a possibility?
Step 3 – Cooperate - Community – shared knowledge
- Cooperation is listening to this podcast. Working with others, knowing what they have done.
- Learning and buying investments.
- The only way to make money is cooperate. Buy the companies you want to profit off (shares) rather than try to protest or plunder them.
- Don’t compete with Buffet – Buy Berkshire Hathaway
These are the sort of lessons which are available to kids –
Get them involved with money decisions – problem solving – if they had $10 and needed to feed themselves or buy a new toy – what would they do?
Yes the system is unfair – but it is unfair for everyone –
More you earn the more you pay tax – so learn something about the tax law and reduce it legally
Thank you for listening, if you want to get in contact you can here: http://financeandfury.com.au/contact
Welcome to Finance and Fury
Traditional asset class allocation Diversification getting harder
Diversification in a world where most asset classes are becoming correlated
Diversification: what it is and isn’t 1. Diversification across asset classes is one of the most fundamental principles of investment portfolio construction 1. Reason - different types of assets perform differently at different stages of the economic cycle 2. When done properly - diversification across asset classes results in stable returns at less risk - An appropriately allocated portfolio helps smooth out the ups and downs of the markets so investors can enjoy the positive compounding of returns over time 2. About downside risks – whole portfolio shouldn’t fall as much in the face of a market correction – allows a portfolio to retain its value 1. A loss of 10% = 11% to reverse the loss 2. A loss of 25% = 33% to reverse the loss 3. A loss of 50% = 100% to reverse the loss – 90% loss = 900% gain 3. Asset allocation and Diversification - asset allocation is not the same as asset class-based diversification 1. Diversification means getting a better return for the same level of risk 2. Contrasts with just adding bonds to an equity portfolio to reduce its volatility, as doing so would also reduce long-run returns because bonds tend to return less over time than equities. Table 1 illustrates the power of asset class-based diversification 3. Example – $1,000 invested in the 1970s – 20% more from 50/50 with lower risk 4. While shares and commodities are both deemed relatively risky investments, combining them helps mitigate the risk of the portfolio – due to low correlation
Diversification has changed 1. Initially - 1952 - economist Harry Markowitz’s released ‘Portfolio Selection’ in the Journal of Finance - demonstrated that building a portfolio of imperfectly correlated assets could result in reduced portfolio risk for a given level of expected return 1. 1964 – in the same journal - Sharpe’s Capital Asset Pricing Model (CAPM) described the relationship between risk and expected return - introduced “beta” as a measure of sensitivity to market risk and the risk return relationship 2. 1986 - Financial Analysts Journal- examined the allocations of 91 pension funds - findings that on average, asset allocation decisions explained more than 90% of pension fund risk, as measured by the volatility of returns over time. 3. 2000 - Roger Ibbotson and Paul Kaplan argued that asset allocation policy actually explained 100% of the typical individual investor’s return 2. Then traditional Diversification died - The extremely negative impact that the GFC of 2007–2009 had on investment portfolios caused many people to question the value of asset class-based diversification. 1. The major reason is the correlations between asset classes - such as international and Australian equities 1. Large Negative economic shocks that affect the whole global economy (like the GFC) can cause all equities to fall 2. In other words - it has been observed that diversification disappears when it is most needed – but diversification never promised to ensure gains or prevent losses – but just showed the pattern based on different annual returns per asset class 2. Various asset classes are becoming increasingly correlated, therefore making it more difficult to build a truly diversified portfolio. 1. International markets use to be the staple of diversification – there has been an increase in correlation between the global equity markets - European markets Due to the EU 1. Emerging markets are also becoming more closely correlated with US and UK markets 2. Increase in unseen correlation between the fixed income and equities markets 3. PIMCO Australia also says long-term trends such as globalisation are driving correlations higher 1. 1. Correlations have been rising due to greater inter-connectivity between global markets. Multinational corporations have proliferated to such an extent that what happens in Europe and Asia impacts the US markets and vice versa. 2. Many Fortune 500 companies in the US depend on emerging markets for growth 3. Today’s world of globalisation - greater connectivity of economies and of financial markets 1. Means traditional asset classes are subject to more common shocks than in the past 2. Equity correlations since 1995 – Between USLC, USSC, Int LC, EM 1. 1995 to 2000 – USSC, Int LC, EM – showed low to mod correlation to USLC (0.3-0.7) 2. 2001 to 2007 – USSC, Int LC, EM – showed medium correlation to USLC (0.7-0.9) 3. 2008 to 2015 – Mod to high correlation – EM especially – 3. Reasons – due to markets becoming more globalised and more integrated and monetary policy 1. Also - passive investing and exchange-traded funds (ETFs) or index hugging long managers 4. There is a positive correlation between equities and bonds - both go up or down at the same time 1. For a long time - correlation between the asset classes has been negative 2. Depended on the stage of the economic cycle and whether the shocks affecting the economy are demand-driven or supply-driven.
Is asset class-based diversification still relevant? 1. Theory breakdown - Correlations were never constant 1. One criticism of Markowitz’s original theory was that it assumes asset class return, return volatility and the correlation in returns are relatively fixed, whereas they can change greatly over time as economic conditions change. 2. Needs to be constantly updated to reflect that markets today are different from 1950s 2. There is fact that correlations are increasing between the various equity markets and bond markets - used to be a staple of diversification 1. Now - Instead of looking for uncorrelated investments, the focus should shift to slight reductions in correlation. 2. Investments with correlations of 0.5 will provide greater diversification benefits than those with 0.7 correlations. 3. while bonds were traditionally valued for their steady income streams, their attraction has dimmed somewhat with interest rates near all-time lows 1. Therefore – if the risk-free rate (the 10-year government bond yield) is low, then expected returns from equities will adjust lower. 4. In response to all these changes, one approach is to look at less traditional asset classes such as commodities and alternatives to construct a diversified portfolio that enhances returns for an investor’s given risk appetite
Alternative approaches to portfolio diversification 1. More asset classes are needed to construct a diversified portfolio than in the past 1. Old school - a universe of large cap stocks and Government bonds was sufficient – today not the case 2. why investment universes have increased and now include corporate bonds, high-yield bonds, commodities, real assets and even currencies 3. How many asset classes is enough? The standard diversified portfolio contains five to six asset classes 1. Equities (domestic and international) and bonds (domestic and international) typically make up four of the classes 2. supplemented by cash and perhaps commodities 3. There is the risk of doing too much – Imagine bonds and share perfectly negatively correlated – your returns would be cancelled out 4. Also certain subsections like Emerging markets equities, for example, don’t tend to add much extra diversification benefit as their returns are more volatile than developed equity markets and returns from both tend to be highly correlated 4. But going into finer asset class diversification benefits – investing within assets classes – especially shares – 1. ASX300 – Index isn’t that diversified outside of Financials and Resources – investing in assets classes can help 2. The risk factor approach - defines risk factors as the underlying risk exposures that drive the return of an asset class 1. Shares - risk is split into general equity market risk and company-specific risk 2. A bond’s risk is a function of credit or issuer-specific risk and interest-rate risk 3. By understanding the underlying risk factors within various asset classes, investors can ultimately choose which asset class allows them to most efficiently obtain exposure to that particular risk factor 3. Using cash to reduce volatility and add diversification - A common recommendation for investment portfolios has been 60%-80% shares and 40%-20% bonds – using this as a benchmark investment portfolio, between 1928 and 2014, stocks provided about 71% of the return while the bonds acted as a stabilizer 1. But Bonds have enjoyed a prolonged bull run, but with the Federal Reserve now on the path to normalising interest rates, and several other central banks set to follow, is it really wise to have a 40% allocation to bonds over the next few years? 2. Cash could be the new stabilizer for the short term for equity portfolios - Cash is the least correlated of all assets. 1. Cash can act as an equity portfolio stabiliser similar to bonds. However, because cash is so stable, less of it is required to achieve the same outcome as a bigger allocation of bonds in a mixed portfolio. 2. Also – does minimize long term returns potential – but only if you continue to hold the cash long term 3. Further, unlike bonds, cash can be used to fund short-term expenditures so that the investor does not have to sell long-term investments at a loss. Cash can also be used to buy undervalued assets as they arise. 4. Of course, cash provides very little return, but neither do bonds at the moment. And with interest rates set to rise, returns from bonds could well be negative for a period. (Mindful Investing n.d.). 4. Rebalancing methods - left unchanged - longer term equities have a very strong returns compared to defensive funds - the portfolio will be more exposed to shares when they are typically getting more and more overvalued – make up more of the portfolio value 1. Limitations of diversification also need to be recognized. Diversification per se cannot protect investors from portfolio losses during major equity market meltdowns - why getting overall asset allocation right remains the most important consideration 5. No one best way to do it – but having capital hedges like commodities (gold and physical metals) and cash reserves to take advantage of buying opportunities can limit downside risk and through purchasing undervalued assets – maximise long term returns
Thanks for listening today. If you want to get in contact you can do so here: http://financeandfury.com.au/contact
Welcome to Finance and Fury,
Are we in a property bubble?
There is no question that the Australian property market has become significantly overpriced – but is it a bubble and due for a significant downturn? – For this – only talking about capital cities – most of the land isn’t in a bubble
First - A property bubble is a form of “economic bubble normally characterised by a rapid increase in market prices of real property until they reach unsustainable levels relative to incomes and rents” – then like most bubbles – prices at some point decline
- History - Australian house prices rose in correlation relative to average wage-earning – up until 1996
- June 2014 - IMF reported that house prices in several developed countries are "well above the historical averages" and that Australia had the third-highest house price-to-income ratio in the world.
- 2016 – OECD - reported that Australia's housing boom could end in 'dramatic and destabilising' real estate hard landing
- In past 12 months - Sydney and Melbourne have experienced price declines of up to 10% with potential of a further 10-20% loss in the near future – But the upturn in Australia’s markets over October 2019 has been remarkable, with the rebound in prices considerably stronger than many expected (Melbourne’s strongest property price recovery ever and Sydney's in decades)
- Driven by the combination of lower interest rates, easier access to credit
- Initial declines were largely triggered by the significant tightening of lending standards (removal of HEM benchmark) and the revealed mortgage fraud aka subprime 'liar loans' and widespread irresponsible lending practices
What has created our bubble? A number of factors - 1. The Australian property market saw an average real price increase of around 0.5% per annum from 1890 to 1990, approximately matching CPI – 100 years 1. From 1990s - prices have risen faster resulting in an elevated price to income ratio - all capital cities strong increases in property prices - Sydney and Melbourne been the largest - rising 105% and 93.5% respectively since 2009 2. Coincide with record low wage growth, record low interest rates and record household debt equal to 130% of GDP - clearly shows unsustainable growth in property - driven by ever higher debt levels fuelled by the RBA - cutting rates beginning in 2011 2. Today – property prices 7 to 10 times equivalent of average full time earnings - up from three in the 1990-90s
Demand side – 4. Greater availability of credit due to financial deregulation and lower rates 1. Debt growth averaged 15% per annum compounding (1998–2009). During the same period national economic growth was less than 3% with debt stripped out - low interest rates since 2008 allowed for the increasing borrowing capacity fuelling growth 1. The influence of interest rates and banking policy on property prices is evident – 2. Coupled with financial deregulation - led to greater availability of credit and a variety of financial products and options 3. RBA has maintained a low cash interest rate policy - reduced the cost of financing property purchase 1. Easy availability of interest-only loans has made investment borrowing more profitable – increasing incentive 4. Allowed for expansion of bigger properties and became easier and cheaper to borrow more money – bidding war backed from unowned assets 1. Now that rates are 3% - $600k loan is $2,530 pm – at 6% is almost $3,600pm – or $12k p.a. more 2. At 6% would be cashflow equivalent of $425k borrowing – or about a 30% drop since 2008 5. Between 1998 and 2008 inflation was about 36% and property prices increased by more than 300% on average in all capital cities except Sydney (up 180%) – Continued this trend – with property growth matching credit growth but no longer inflation or wage growth like it did before 1990 2. Interest rates - Major increase in property price comes back to lending capacity 1. 50s to 70s – 5% or so- Very consistent in the gold standard, Brenton woods era – pounds 2. 70s – 80s – went to 7, 8, 9, 10%, then in the late 80s – early 90s 10 -17%, by 92 – within 2 years dropped back to 10% - then went to about 7%, by 2000s – range of 7 – 9% (dropped to 5% in 2009) – Back to 7% after – but since 3. Last 8 years been dropping - Now looking at rates below 3% 5. High population growth, concentration and overseas investment/property purchases – Population size and growth - Great place to live – High levels of immigration -makes up over 60% of our population growth - One of the Highest growth in the world – Behind Saudi and NZ 1. 1901 at Federation – population of 4 million - Population now – over 25m - Growth of – 6 ¼ times in 100 years 1. America – 77m to 326m – growth of around 4 times 2. Why has our population grown by so much? – Lots of factors - We are living longer – 100 years ago the median age was 22 years and 4% of the population was aged 65 or over – Today - 37 years, and 14% of the population were aged 65 and over – but due to lowering birth rates – most comes from immigration 3. Immigration/Overseas purchases – When it comes down to it – the housing price increase is a story of private household debt – 1. 2008 foreign investment rule changes for temporary visa holders Stats show that there has been a large increase in foreign investors in the past decade – especially China (where you have a 99 year ‘lease’ while Commonwealth Nations (UK, Australia, etc.) is 9999 years - Additional demand has helped to inflate prices 2. In December 2008, the federal government introduced legislation relaxing rules for foreign buyers of Australian property. According to FIRB (Foreign Investment Review Board) data released in August 2009, foreign investment in Australian real estate had increased by more than 30% year to date. One agent said that "overseas investors buy them to land bank, not to rent them out. The houses just sit vacant because they are after capital growth 3. Kevin 07 really found his future employment – 2014 - October became the first President of the Asia SocietyPolicy Institute in New York City - He has also actively contributed to the World Economic Forum's Global Agenda Council on China. Rudd is also a member of the Berggruen Institute's 21st Century Council. On 21 October 2016, he was awarded an honorary professorship at Peking University. 4. Also – Temporary people living here - RBA stated "rapid growth in overseas visitors such as students may have boosted demand for rental housing" – Almost all of which occurs in major cities due to proximity to Universities 6. Supply Side - limited government release of new land (reducing supply) - government restrictions on the use of land 1. Local Government - Very constricted land supply and extremely onerous planning approval processes 1. Beginning in the introduction by local councils of upfront infrastructure levies in the early 2000s 2. State Government - Unusually high stamp duties - under the Constitution have control of environmental and land use issues 1. 1980s - started progressively implementing more rigid planning laws that regulated the use of land 2. 1990s – further concentration and increase on restricting greenfield development in favour of "urban densification", or infill development - Land rationing through banning development in all but designated areas = extreme land price inflation 3. There is good evidence to suggest that the price of a new unit of housing is the ultimate anchor of all housing in an area, so when planning laws that implemented land rationing severely drove up the cost of new homes, all other homes followed suit 3. Federal – Legislation for the entities which determine lending, etc – GST, APRA, ASIC – financial framework
More reflective of the price increase though is the Population distribution and access to housing supply 7. On the Supply-side – Mix between where people can buy and want to live 1. Urbanisation – The nature of Australian property supply is very centralised 4. Sydney 4.6m, melb 4.2m, bris 2.2m, Perth 1.9m, Adelaide 1.2m – drops off 5. GC 600k, Canberra – 367k, Newcastle – 308k 6. 65% of population live in 5 cities 7. America – big 5 – NY, LA, Chicago, Houston, Phoenix – 19.3m – 6% of total pop 2. But major contributor - Today – 85%-90% of Australians live in urban areas, 70+% in the cities 3. 100 years ago less than 40% of Australia’s population lived in our capital cities
- Outcome – 1994 to 2018
- Brisbane – Median house price $126k to $524k. Borrowed $101k at 9%, today $419k at 5%
- Annual repayments $13k to $31k – 20% to 31% of median incomes in servicing
- Based on trend – median house price would be half of prices today if inflation target credit regime didn’t take place
- Even with lower rates, we spend way more on servicing a mortgage
- Brisbane – Median house price $126k to $524k. Borrowed $101k at 9%, today $419k at 5%
- Flow on effects – diversion/misallocation of resources - excessive lending to the residential housing sector at the expense of businesses - lead to "a banking system which allocated capital away from the most productive areas of the economy — business — is ultimately bad for growth, bad for competition, bad for jobs, bad for business and in the end, bad for us
- Research conducted in overseas markets confirms that "in areas with high housing appreciation, banks increase the amount of mortgage lending and decrease the amount of commercial lending as a fraction of their total assets. This allocation results in firms receiving reduced loan amounts, paying higher interest rates, and reducing investment.
- With the misallocation of resources adds to the chance of property downturn – incomes, employment and ability to afford property is the determining factor long term as to “will the prices remain”
- Mortgage and rent stress - Increased housing prices and therefore increased borrowings can lead to difficulty in meeting housing payments. According to Ratings agency Standard & Poor's (S&P), "Arrears for sub-prime loans backing RMBS [residential mortgage-backed securities] jumped 126 basis points to 11.45 per cent"
Summary – 1. Consumer side – 1. One of the most highly urbanised population 2. Large areas of rural and remote Australia can not secure loans from banks against land in those areas. 2. Government side – 1. Very constricted land supply and extremely onerous planning approval processes - Unusually high stamp duties
The answer is yes – we are in a bubble – prices can continue to go up – but affordability is the key –
Unless wages keep going up or negative rates come in – property may struggle to continue to grow in prices
Thanks for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Furious Friday Edition
Monday ep this week went through BTC – Went through a monetary reset towards a crypto-fiat system –
Today – talk more The BIS and central banks versus BTC and the crypto markets – how are they planning to get there.
There are two side to crypo - especially Bitcoin – BTC is a divisive topic – garners strong passions in the population 1. One side are the proponents - hail it as the future currency - is immune to the manipulation of politicians and central banks – 1. Suggestions of Bitcoin being the basis for restoring world currencies to a new monetary standard or Bitcoin standard. 2. On the other side - Bitcoin is seen as an electronic version of snake oil, tulipmania and Ponzi schemes 1. While admitting to the underlying blockchain technology being useful and a great idea - not in the context of a currency 3. If you remove BTC and just said crypto currency - I think both sides are right mostly 1. Fiat system – is a bubble in its size – far surpasses tulipmania - isnt this a ponzi scheme? 2. Why not adopt that same model but in derivative form of some digital credit – stable coins – crypto pegged to a fiat currency valuation 4. So how will the takeover occur – through indirect methods – the back door into the crypto markets
To start with – look at the basis of all digital transactions – You need some form of 3rd party verification process – 1. Not needed with physical currency – I go to the shops and exchange my $20 AUD for food, tell checks and takes cash 1. An early theory of digital coins was to allow the same peer-to-peer transaction where the third party would be involved 2. But with all digital transaction, there must be a 3rd party verifier – why coin theory evolved 1. Everyday use of electronic money - this is the bank which holds the payer’s account 2. In BTC - the distributed ledger built on blockchain technology does this - provides a trustworthy system in an environment where no particular party is trustworthy – verifies each party from the coin/tokes code 3. The BIS has focused on the very functionality of cryptos – In their Annual Economic Report 2018, Chapter V is entitled ‘Cryptocurrencies: looking beyond the hype’ 1. While it says crypto in title - analysis and criticism is only focused on Bitcoin – but this does use blockchain technology 2. They find that there may be times where blockchains provide the answer to a lack of trust, but the payment system is not one of them – Their arguments lie in two parts: 1. Viable money systems have some essential characteristics; and 2. Bitcoin fails to fulfil these requirements – pretty basic -
Overview of Chapter V 1. BIS V begins with a historical review of money, noting that history is a graveyard of failed currencies - they derive the proposition that ‘money’ must meet the definitions of money: 1. A unit of account, providing a common measure of value across goods and services that are not otherwise comparable; 2. A medium of exchange - accepted token which can be exchanged for goods and services – under Fiat by decree – Gov only allowing AUD in our stores 3. A store of value that enables a holder to transfer purchasing power over time. 2. The BIS states that trust is central to the success of a currency - without trust in ‘the system’ a currency will soon cease to fulfil one or more of the essential characteristics of money – but which one? store of value, unit of account or medium of exchange? 1. I would go one further and say it isn’t trust but confidence – trust is a part of this – but Trust and Confidence do appear almost similar in meaning – but there is a slight difference 1. Trust refers to the firm belief that one has on another individual or thing – you trust your breaks will work even though you haven’t had a service in 10 years 2. Confidence refers to the assurance that we have on someone or something – you have confidence your breaks will work as your car was serviced last month 3. When confidence is lost it is almost impossible to get back 2. Trust in bank deposits is generated through a variety of means - regulation, supervision and deposit insurance schemes, 3. All come from the central authority of the state – trust money in your bank account is safe, but do you have the confidence in the bank not taking your money in a bail out? 4. Trust covers medium of exchange and unit of account – you trust that it will be useful in the future – same with store the value – why? Central banks have promised a rate of loss of value – inflation loss of money in real terms 5. What drives the ship (so to speak is confidence) – which comes an inward view of the financial system – 1. Those at the tops – group of 30, central bank Governors, etc – their actions show confidence they have in the system – why they are looking at alternatives out now – and turning to an option readily adopted by a large chunk of the population voluntarily 2. Well – because the type of currency is being accepted b the population – but the BIS is looking at banks being the controller of the currency – why? To create trust - ‘The tried, trusted and resilient way to provide confidence in money in modern times is the independent central bank.’ 3. Central banks are not some independent entity - resulted in inflation and a host of other collapses and economic bubbles that plague the economy since their inceptions –
- BIS has the following shortfalls with Bitcoin which prevents it from becoming a serious currency (don’t worry, theirs will solve these problems):
- Scalability – Scalability is certainly a serious issue for Bitcoin and other cryptocurrencies. Bitcoin can currently process somewhere around 7 transactions per second. By contrast, the Visa system processes around 24,000 per second!
- Research proposals to increases the Bitcoin rate, but none have yet been proven effective in real-world transactions
- There is another aspect of Bitcoin that causes scalability problems. The Bitcoin blockchain is big, currently about 170 Gb and growing at about 50 Gb each year, and it must be communicated to all the ‘miners’ in the Bitcoin system.
- If one coin tried to process national payments that the blockchain would soon swell beyond the storage capacity of most, if not all, computers. It would, says BIS V, bring the internet to a halt
- Bitcoin is the huge energy use. BIS V notes that Bitcoin uses the same electricity as a medium size country such as Switzerland. Other estimates put power usage on a par with Singapore or Ireland. The ‘proof of work’ protocol uses vast amounts of computing power and, therefore, vast amounts of electricity
- Power required for ATMs worldwide, the power used by banking computers and the SWIFT network, and the power required to provide security for normal financial institutions, then Bitcoin looks rather frugal.
- This is probably true, but it hardly seems fair to compare the power usage of payment systems that provide for a large proportion of the world’s population with that of Bitcoin which is insignificant as a payments provider.
- Value stability - obvious Achilles Heel. The first commercial sale which accepted Bitcoin was for two pizzas worth about $25. The purchaser paid 10,000 Bitcoins. In December 2017 the price was near US$20,000 and at the time of writing is just over $10k AUD or US$6,800- as we can see a ‘self-anchored’ currency such as Bitcoin is inherently unstable.
- Bitcoin adds blocks of transactions to the ledger on average once every ten minutes. A payee cannot be certain of payment at least until the particular payment is incorporated in the ledger. As BIS V notes, there have been times when payments have queued so that finality cannot be determined until much later
- The finality of payment - perhaps it is not as serious as imagined. After all, you don’t need too to be that old to remember when online payments took five days! Business seemed to survive in spite of it. Still, a modern payment system should achieve finality faster
- Scalability – Scalability is certainly a serious issue for Bitcoin and other cryptocurrencies. Bitcoin can currently process somewhere around 7 transactions per second. By contrast, the Visa system processes around 24,000 per second!
Bitcoin community response 1. Many cryptocurrency advocates ready and willing to answer the claims of BIS V – responses fall into one of two categories 1. All cryptocurrency proponents have a deep distrust of central banks – 2. “BIS V is hopelessly out of date” - There is active research going on, tests being done, new systems being built that will answer each and every criticism of BIS V – no arguing this point - researchers are indeed addressing the problems exposed by the BIS 2. The most important current research is (probably) the Lightning Network and the Casper version of the ‘proof of stake’ protocol - aimed at increasing the throughput transactions- allows blockchain technology scale to be a serious payment system - Casper protocols are intended to reduce the power requirements of the existing Bitcoin network by replacing ‘proof of work’ with ‘proof of stake’. 1. This work is done by MIT labs – where do they get their money - Donors include a few crypto companies and individuals (Jim Breyer, Jim Pallotta, Jeff Tarrant, Reid Hoffman and Fred Wilson) – all investment managers and venture capitalist billionaires in their late 50s 60s who are installed in the current financial system 3. BIS V is correct in its criticism of Bitcoin price stability and of scaling issues. 1. Look at BTC pricing – and one way of stability may by constant adjustments in the money supply- by an automatic algorithm – but that isn't what BTC is – but likely what Central Bank version may look like 4. Let's say that every kink is out of the system and the future is of cryptocurrencies – How will central banks and governments work towards a future for their cryptocurrencies? 1. Disintermediation of the payment system would undoubtedly have widespread financial consequences – cutting out the middle men of the economy – banks and Central Banks – so has to keep them involved – and use indirect regulations
Methods of legislation to be used 1. Bitcoin and similar payment structures are outside any direct control of central banks and individual governments 2. BIS V notes that cryptocurrencies ‘can only be regulated indirectly’ and discusses some of the possible approaches. 1. Also note that ‘Since cryptocurrencies are global in nature, only globally coordinated regulation has a chance to be effective.’ – Thankfully global Govs are incompetent – but doesn’t mean they won't try 3. What are some methods they can use? 1. The first key regulatory challenge is anti-money laundering (AML) and combating the financing of terrorism (CFT). The question is whether, and to what extent, the rise of cryptocurrencies has allowed some AML/CFT measures, such as know-your-customer standards, to be evaded. 1. Shutdown of Silk Road, a major marketplace for illegal drugs, suggest that a non-negligible fraction of the demand for cryptocurrencies derives from illicit activity 2. Regulation could focus on the point at which a cryptocurrency is exchanged into a sovereign currency 3. Other existing laws and regulations relating to payment services focus on safety, efficiency and legality of use. These principles could also be applied to cryptocurrency infrastructure providers, such as "crypto wallets" 2. ensuring consumer and investor protection - common problem is digital theft – access to distributed ledgers are complex - so most users access their cryptocurrency holdings via third parties such as "crypto wallet or exchanges” 1. Irony is many people turned to cryptocurrencies out of distrust in banks and governments – but are relying on unregulated intermediaries – many examples like Mt Gox or Bitfinex – either being fraudulent or hacking attacks 3. Major justification - concerns the stability of the financial system may be at risk without taking over cryptos 1. Widespread use of cryptocurrencies and related self-executing financial products will likely give rise to new financial vulnerabilities and systemic risks – Systemic risk is the competition from crypto crashing banking system 2. Cryptocurrencies with regulated financial entities could be addressed - The tax and capital treatment rules for regulated institutions wanting to deal in cryptocurrency-related assets could thus be adapted 3. Regulate the exchanges – where most people trade crypto – you can regulate the crypto markets 4. Policy responses, including regulation of private uses of the technology, the measures needed to prevent abuses of cryptocurrencies and the delicate questions raised by the issuance of digital currency by central banks
In the next FFFF ep – in a few week's time – look at the future of cryptos – the types of stable coins – and how it might work
Thank you for listening, if you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Say What Wednesday Edition
Question from Mark part 2:
Can you explain the repo markets that are going on at the moment? Apparently the banks are loaning money from the Feds at 10% so they have enough liquidity to survive the night/Bank run?
Announcement – Last SWW ep for the year – Taking a break – Monday eps still going but no Wednesday or Friday episodes
Repo market – Or repurchase market – What is it? And why are they done? What this says about the state of the economy 1. A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities 1. Agreement where one party sells Gov Bond they own for cash to another party – and promise to buy it back at a higher price in the near future – the inflated value is the repo rate 2. Active participants in the domestic repo markets are those who deal in Gov Securities – include commercial banks, Central Banks, securities dealers 1. Securities dealers - typically large domestic and international banks/investment managers that are market makers in domestic government securities – 2. Investment funds and other non-dealer institutions are also providers of high-quality assets to dealers. These institutions typically use repos to manage their short-term funding while maintaining their exposure to these assets, and in some cases to enhance portfolio returns. 3. Repo agreements are classified as a money-market instrument – as it functions the same as a short-term, collateral-backed, interest-bearing loan 1. Buyer acts as a short-term lender, while the seller acts as a short-term borrower 1. One party needs money – other party wants to make money 2. It is a sale for cash – a sale of a certain type of fixed interest security 2. The securities being sold are the collateral – Repurchase agreements are generally considered safe investments – but it does depend on the type of security sold 1. Most agreements involve U.S. Treasury bonds – also Government Bonds - 2. Central demand used to mainly be safe assets like these 3. More recently – MBS, CDOs – assets that aren’t so safe 4. In the case of bankruptcy, in most cases repo investors can sell their collateral – but not when the assets tank like 2008
- Repurchase agreements have a maturity period called the "term" or the "tenor." - Repos with longer tenors are usually considered higher risk – due to the fact that the longer the tenor - the more factors can affect repurchaser creditworthiness, and interest rate fluctuations are more likely to have an impact on the value of the repurchased asset.
- It's similar to the factors that affect bond interest rates – went through last Weds
- The Significance of the Tenor - counterparty credit risk is the primary risk involved in repos i.e. creditor bears the risk that the debtor will be unable to repay the principal – securities as collateralized reduces the total risk – but not by 100%
- Specified maturity date (usually the following day or week) are term repurchase agreements - A dealer sells securities to a counterparty with the agreement that he will buy them back at a higher price on a specific date.
- The counterparty gets the use of the securities for the term of the transaction, and will earn interest stated as the difference between the initial sale price and the buyback price
- An open repurchase agreement (also known as on-demand repo) works the same way as a term repo except that the dealer and the counterparty agree to the transaction without setting the maturity date
- The trade can be terminated by either party by giving notice to the other party prior to an agreed-upon daily deadline - automatically rolls over each day and Interest is paid monthly
- Nearly all open agreements conclude within one or two years
- Specified maturity date (usually the following day or week) are term repurchase agreements - A dealer sells securities to a counterparty with the agreement that he will buy them back at a higher price on a specific date.
- Repurchase agreements can take place between a variety of parties and reasons
- Example - The FED enters into repurchase agreements to regulate the money supply and bank for their reserves.
- The most common type is a third-party repo (also known as a tri-party repo)
- Repo Arrangement with a middle man - a clearing agent or bank conducts the transactions between the buyer and seller - constitute more than 90% of the repurchase agreement market
- Holds the securities and ensures that the seller receives cash at the onset of the agreement and that the buyer transfers funds and delivers the securities at maturation
- Two major clearing banks for tri-party repo - JPMorgan Chase and Bank of New York Mellon
- Facilitate the goals of both parties - secured funding and liquidity while the other makes a profit
- Example - a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price. That small difference in price is the implicit overnight interest rate. Repos are typically used to raise short-term capital. They are also a common tool of central bank open market operations.
- In your everyday life – say you don’t have any cash – you job is a delivery driver – but you are out of cash - need money to buy fuel as tank is empty – have a friend come over and buys your TV off you for $100 – and agree that after you finish work you will make $200 – buy TV back for $105 – if deal goes belly up well could sell TV for $100 – here the rate is 5%
The Significance of the Repo Rate 1. When central banks repurchase securities from private banks – it is done at a discounted rate, known as the repo rate 1. Repo rates are set by central banks - allows control of the money supply within economies by increasing or decreasing available funds for the repo market – Also affects banks/funds decisions 1. Decrease in repo rates encourages banks to sell securities back to the government in return for cash – which increases the money supply available to the general economy 2. Increasing repo rates decreases the incentives - so central banks can effectively decrease the money supply by discouraging banks from reselling these securities 2. To determine the true costs and benefits of a repurchase agreement - a buyer or seller must consider three different factors: 1. Cash paid in the initial security sale and 2) the Cash to be paid in the repurchase of the security 1. Also - The cash paid in the initial security sale and the cash paid in the repurchase will be dependent upon the value and type of security involved in the repo 2. Third major factor - Implied rate for repo - If the rate is not favourable, a repo agreement may not be the most efficient way of gaining access to short-term cash 1. But repurchase agreements offer better terms than money market cash lending agreements due to collateral 3. Risks of Repo - Repurchase agreements are generally seen as credit-risk mitigated instruments 1. The largest risk in a repo is that the seller may fail to hold up its end of the agreement by not repurchasing the securities 1. The buyer of the security may then liquidate the security in order to attempt to recover the cash that it paid out initially 2. Trouble is that the value of the security may have declined since the initial sale – hold and risk more loss, or take loss now 3. There is a risk for the borrower in this transaction as well - value of the security rises above the agreed-upon terms, the creditor may not sell the security back and abandon agreement
Upcoming Liquidity crisis - The Financial Crisis and the Repo Market 1. Following the 2008 financial crisis - investors focused on a particular type of repo known as repo 105 1. Lots of speculation that these repos had played a part in Lehman Brothers’ attempts at hiding its declining financial health leading up to the crisis – where they were entering repo agreements to continue funding operations and to cover losses = created a lack of trust in the system – so the repo market dried up and contracted creating a liquidity squeeze for short term funding 2. The crisis revealed problems with the repo market in general – bankrupt banks could continue to operate – putting other banks at risk of defaulting when the maturity of the repo occurs – There where and are major systemic risks 1. The tri-party repo market’s reliance on the intraday credit which the clearing banks provide 2. A lack of effective plans to help liquidate the collateral when a dealer defaults 3. A shortage of viable risk management practices 3. In late 2008 - regulators established new rules to address these risks – 1. Mainly by putting increased pressure on banks to maintain their safest assets - such as Treasuries 1. Incentivised to not lend them out through repo agreements 1. Up through late 2008, the estimated value of global securities loaned in this fashion stood close to $4 trillion – then the figure dropped closer to $2 trillion. 2. Further, the Fed has increasingly entered into repurchase (or reverse repurchase) agreements as a means of offsetting temporary swings in bank reserves 3. This IMO created the lack of trust between the participants in repo markets – if Treasuries cant be used as securities – well it is MBS, CDOs and other risky assets up on the table – the very regulations meant to help the system just made it more dangerous due to risks of default and the assets as securities defaulting with it 4. These changes are ineffective = there remain systemic risks to the repo space 1. If a default by a major repo dealer occurs - might inspire a fire sale among money funds which could then negatively impact the broader market 2. Talk about a shift toward a central clearinghouse system – with a new entity run by Central Bankers – 3. But this was talked about 10 years ago with no real movements towards it – maybe after the next repo collapse 5. Today – repo is back in full swing – showing signs of an upcoming liquidity crisis. It is as if the Fed’s injection into 23 Wall Street securities firms plus one foreign bank, in addition to buying up $60 billion a month in Treasury bills from Wall Street dealers, has never taken place. 1. 1. High yielding rates – when trust breaks down or when demand spikes – see spikes in repo rates – 2. Around the end of quarters and Calendar year (USA especially) due to tax bills due 3. Saw one in December last year but recently on the 17th September - 4. This is when the Fed began its Repo loan interventions – because banks no longer trust banks 5. This form of liquidity crisis is where the economic stresses start to occur due to a lack of money available to fund short term operations 6. There are some similarities to the liquidity crisis of 1998 and 2008 – when the financial system stops trusting one another and those that need money to stay afloat – can’t find anyone to enter an agreement with them 7. That is why we have seen some spikes in Repo markets around the world – Europe, China, USA – 1. Reserve banks are the only ones being the purchaser in repo agreements – so see spikes when massive demands are present 6. The repo markets operations are the signs that something isn’t right in the financial system – especially after the requirements for banks to hold more Treasury notes – have to sell off riskier assets at higher repo rates
Summary - No surprise that something isn’t right in the financial system – the spikes in the repo rates are a sign of the liquidity crisis occurring – especially as most managers for investments are almost fully invested – not a lot of cash or reserves in place to fund their own operations without the repo market
Thanks for listening, if you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury,
Last Friday – new monetary reset might be going digital
Today – Dive into Cyrpto/BTC potential traps of the future – The potential regulation and eventual centralisation of Cryptocurrency at the nation-state level – i.e. domestically in any country
Something always has puzzled me – Who invented BTC – I know the anonym's name and we all know the story –
- In 2008 - Bitcoin was proposed by unknown author or authors - pseudonym of Satoshi Nakamoto
- At the heart of blockchain is the distributed ledger - or a distributed network is a shared database
- So rather than one central entity holding the information, it’s spread through a network of millions of sites or nodes – in the early days decentralization offered many benefits over traditional, centralized systems: increased security and transparency
- As it uses a trustless, fungible and tamper-resistant distributed ledger called a blockchain
- Ironic it is called a decentralised currency, when you need power and the internet to access – and turns out – potentially Government permission
Take a step back – bit of conjecture in this episode – but think this through with me
- Blockchain is a revolutionary invention – another extension of the internet – I liked it initially as well
- But remembered one key factor - Where did the internet come from? Technology for GPS, almost the foundation for most of the stuff we use day to day? Governments or their funding arms – Like the CIA's DARPA – funding almost all tech since the 70s
- Examples – Internet and emails, Windows, WWW, and Videoconferencing, google maps, Siri, Unix, and cloud technology, GPS, VR
- Essentially – the foundation for most technologies – but bitcoin just came to be from an unknown source – in this day and age?
- There are plenty of narratives through history – Benjamin Franklin and the invention of electricity –
- Total BS – how? Step 1, fly a kite in a storm, step 2, attach a skeleton key to it – weighs a good 50grams – then he is shocked by lightning – is a narrative of history that falls apart with some scrutiny
- But Given the inventor of BTC is unknown – we don’t know where it came from – but following the trend – just as likely (if not more) a government as some lone programmer/group – especially when you look at the current
- Especially if it serves their needs in the end game – How do you get someone to adopt something –
- Willingly – Edward Bernays the founder of PR- Spin and book of Crystallising public opinion
- Examples = Smoking freedom torches for women, or selling American Aluminium’s waste products – fluoride
- Willingly – Edward Bernays the founder of PR- Spin and book of Crystallising public opinion
- By force is hard – resistance when told what to do – much easier to have people adopt by choice
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- New cool technology, antiestablishment, untraceable, profitable! Who wouldn’t want to get in?
- But What if that is what Central banks and the banks of Central Banks (BIS and IMF) want? They know fiat is going to collapse at some point – too much debt – never be repaid
- Central Banks – BOE’s Carney Floats Idea of New, Virtual Reserve Currency
- Statement: “Such a synthetic currency potentially could damp dollar dominance, ease burden of greenback’s moves on smaller economies”
- Banks of banks - It is well within regulations of banks - Rhetoric regarding cryptocurrencies is somewhat more moderate in a recent report from the BIS - finds that cryptocurrencies in fact, “rely on regulated financial institutions to operate, bringing cryptocurrencies within reach of national regulation.”
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- This isn’t to be taken lightly - The BIS regulates and holds capital on behalf of 60 central banks across the globe
- Though the BIS has expressed moderate conclusions about cryptocurrencies in the past
- Statements made by BIS Head of Research Hyun Song Shin in June and recently the BIS president - called cryptocurrencies “psuedocurrencies” and Bitcoin, “a combination of a bubble, a Ponzi scheme, and an environmental disaster.”
- But the new report from the BIS says that a close correlation of trading behaviour with regulatory news suggests the crypto sector responds like any other market to news about legality:
- “Cryptocurrencies are often thought to operate out of the reach of national regulation, but in fact their valuations, transaction volumes and user bases react substantially to news about regulatory actions…(E)vents related to general bans on cryptocurrencies or to their treatment under securities law have the greatest adverse effect, followed by news on combating money laundering and the financing of terrorism…News pointing to the establishment of specific legal frameworks tailored to cryptocurrencies and initial coin offerings coincides with strong market gains.”
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- BIS views the crypto sector being orientated towards lawfulness – as they see an increased dependence on regulated interfaces (exchanges and banks) and by “market segmentation,”
- i.e. – BIS statements: “These results suggest that cryptocurrency markets rely on regulated financial institutions to operate and that these markets are segmented across jurisdictions, bringing cryptocurrencies within reach of national regulation.”
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- Also - S. Commodity Futures Trading Commission - officially confirmed that both Bitcoin and Ethereum should be considered commodities
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- They know cryto market is going to get bigger – this is what the Governments actually want – why? Look at this in a second
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- Can Governments/Banks actually regulate crypto markets?
- Technically – cryptocurrencies can function without institutional backing and are intrinsically borderless – this raises the question of whether regulation is effective – in particular national regulation
- The BIS advises that lawmakers tasked with governing the sector should not be awed by technological claims, but should rather focus on understanding how crypto functions economically: “To tackle regulatory concerns, authorities will first need to clarify the regulatory classification of cryptocurrency-related activities, and to do so using criteria based on economic functions rather than the technology used.”
- In Aus – Or any country – very easy – A Financial Systems Legislation Amendment can be made – update definition of ‘property’ in currency subsection using a simple amendment
- Though the BIS has expressed moderate conclusions about cryptocurrencies in the past
Going deeper, is bitcoin an option? 1. What do you value BTC in? Is it AUD? Or USD? Think about that – When something is valued in Fiat – is it truly a new currency? 1. Is it really a new form of money if it is still valued in current currency – not in relation to good themselves 2. Fractal version of fiat currency – you need fiat money to start with to purchase under current economy 3. Therefore – the very conversion of crypto is where it will start in legislation changes 2. Unregulated leads to fraud and manipulation – or regulation being introduced 1. Future regulations are a worry – for the most part left alone – easy to regulate – Requires internet – 1. Aus providers easily block IPs – what if access through internet is blocked – can’t verify without internet connection 2. May have a base value purely due to the areas it is most useful for – tax evasion, laundering, terrorism, illegal stuff – North Korea blocked in cash transfers, but could trade in crypto - utility token until use taken 3. the supply of it also being snapped up by Governments – China, seized all of the citizens BTC, while on the surface against it, they likely have the largest control over the mining and ownership of BTC – come back to this in a sec 3. Doesn’t escape concentrations in control/supply – cheapest power or deepest pockets – China has both 1. June 2018, over 80% of Bitcoin mining is performed by six mining pools - five of those six pools are managed by individuals or organizations located in China. Other is in Iceland. 2. First – why concentration in china? Cheap power – mining takes a lot of Electricity power requirements
Why would China, or other Govs want Crypto market to grow – admits the possibility of Government doing a ban/buyout of Crypto – and implementing their own as a money base 1. History is a powerful tool – Gold used to be the money bass – hence the Gold seizures of 1900s 1. Gold used to be the monetary base – and Governments would ban private ownership of this to take all the gold for themselves 2. For example - Executive Order 6102 is a United States presidential executive order signed by FDR in 1933 1. "forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States" 2. Made under the authority of the Trading with the Enemy Act of 1917 - amended by the Emergency Banking Act 3. EO6102 required all persons to deliver on or before May 1, 1933 all but a small amount of gold owned by the population to the Federal Reserve – in exchange for $20.67 (equivalent to $410 today) per ounce 4. punishable by fine up to $10,000 (equivalent to $200k today) or up to ten years in prison, or both 5. Exemptions were made for those in the know – i.e customary use in industry, profession, art and also exempted was "gold coins having recognized special value to collectors of rare and unusual coins" 6. After all the gold was taken for $20.67 - Treasury then raised price of gold under the Gold Reserve Act to $35 an ounce – Governments/Banks made a massive profit – 40% overnight – again population got screwed 3. Why did they do this? - US was on a gold standard at the time – therefore people owning gold (i.e. the backing for money) was seen as a threat to the stability of the financial system 1. FDR desperately needed to remove the constraint on the Federal Reserve that prevented it from increasing the money – which was a limit to their Gold Stores 2. the ban on private ownership of gold in America—the home of the free— went on for over 40 years until 1975 when the population was allowed to own more than $100 in gold again 4. Gold also had many other regulations in other countries to be taken from the population to ‘stabilise’ the financial system 1. Australia Gold Confiscation - 1959 - The Australian government similarly nationalised gold 1. Art of the Banking Act in 1959 - allowed gold seizures of private citizens if the Governor determined it was “expedient to do so, for the protection of the currency or of the public credit of the Commonwealth.” 2. Made it legal to seize gold from private citizens and exchange it for paper currency 3. All gold had to be delivered to the RBA within one month of it's coming into a person's possession 2. Great Britain’s Gold Ban—1966 – Same thing – needed to stockpile more gold for financial system stability
- These three gold confiscations have commonalities –
- Were imposed by first world nation governments - were advanced societies, among the richest countries on the planet - yet they all confiscated gold due to this very factor – wealth appeared through monetary policy
- Arose out of economic crisis. Each government had abused its finances so badly that it eventually nationalised privately held gold from citizens
China is the canary down the coal mine – as they have just gone through another crackdown in crypto markets 1. Back on 5 December 2013, People's Bank of China (PBOC) made its first step in regulating bitcoin by prohibiting financial institutions from handling bitcoin transactions 2. Then - Cryptocurrency exchanges or trading platforms were effectively banned by regulation in September 2017 with 173 platforms closed down by July 2018
New Financial System likely involves Many new cryptos 0 which isn’t crazy
Since Bitcoin's inception, thousands of other cryptocurrencies have been introduced – no limit or requirement to join
Every country can have own form of currency – similar to crypto – but issued by the state – or central banks – like Fiat system
Would be easy to regulate –
Summary – there is money to be made in BTC and other crypto through trading within the bands – but long term has massive political risks – same reasons I wouldn’t invest in African mines – depending on country has massive political risk through Government nationalising
Episode is a cautionary tale – I may be 100% wrong – but it is potentially a point of view you haven’t heard and something else to consider
Thanks for listening today. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Furious Friday Edition
Today – want to explain why to watch out for proposed solutions to economic or societal issues
Last ep – talked about the battleground between the Bankers and Governments back in the early 30s –
- Was a wild political time - Communist parties, Nazi party – mass protests, rioting, damaging buildings and assaulting people
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Since then – nothing much has changed – except where civil unrest is occurring and the degree - Today
- Sub-Saharan Africa – South Africa, Zimbabwe protests – over fuel costs, power and water, food costs and shortages
- South America – Chilean, Ecuadorian, Bolivia, Venezuela – over costs of living, like healthcare, education,
- The Middle East/Northern Africa - Algeria, Egypt, Iran, Libya – Food costs and shortages
- In the UK and Australia and America - Climate activist demonstrations today are acting out their perceived disenfranchisement – in the 30s it was real (living through the great depression) – while one is manufactured (world ending in 12 years) - Climate activism – pushing for social unrest
- Hong Kong massive protests – Trying to separate from China – very similar to another event –
- The Hong Kong 1967 riots were large-scale riots between pro-Beijing/communists and with the HK government and HK Police Force – Britain took HK as part of 1st opium war in 1841, then 2nd took Kowloon in 1860 – then 1898 99y lease
- Instigated by pro-People's Republic of China (PRC) parties - massive strikes and organised demonstrations - police stormed many of the leftists' strongholds and placed their active leaders under arrest. The colonial government banned leftist publications and closed leftist schools - retaliated by planting decoy and real bombs in the city. Several pro-Beijing protesters were beaten to death by police, and leftists murdered some members of the press
- Now the protests are reversed to leave China rather than join it
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But With civil unrest came the atmosphere of change – not in a good direction –
- From unrest - Economic solutions are proposed that are also similar – Comes from two sides of Monetary and Fiscal -
- Fiscal - Increase in Government spending, lots of Large infrastructure spending with some additional services provided and Gov jobs along with the new positions – What are the remedies being proposed?
- Monetary – Central banking responses in lower rates, more money distributed
- Battle between central banks and governments - Price distributions and The government and banks' regulations
- Out to destroy Trump out of fear that a new FDR impulse is beginning to be revived in America which may align with the 21st Century international New Deal emerging from China’s Belt and Road Initiative and Eurasian alliance –
- Monetary – V Fiscal – Banks Destroyed FDR’s Post-War Vision - While FDR’s struggle did change the course of history
- FDR’s allies were ousted from power over his dead body, and they were recaptured by the same forces who attempted to steer the world towards a Central Banking Dictatorship in 1933
- IMF, World Bank or UN used as instruments for the internationalisation of the New Deal principles to promote long term, low interest loans for the industrial development of former colonies – like HK
- Why does this cycle repeat itself? Well - As it can be controlled – How? the population has something happen to them – a traumatic event – like a massive loss in wealth from collapse, loss of job, protests and civil unrest, or thinking world will end
- In a traumatic state – you are more likely to be susceptible to ideas given to you by others – especially if that idea will help to alleviate that stress – even if it really won't help the cause –
- The behaviour or action becomes the only goal for these groups – doesn’t matter if everything else is destroyed in the process
- Creates an easy environment to seize more control - Trauma based control – doesn’t have to be to the level of MKUltra or Project Monarch – but trauma in the form of stress, anxiety or worry – makes people susceptible to suggestions
- In a traumatic state – you are more likely to be susceptible to ideas given to you by others – especially if that idea will help to alleviate that stress – even if it really won't help the cause –
- Authority figures – either Create or use an event – provide the response = get the outcome you want
- The danger of authority figures – Milgram experiments - The Milgram experiment on obedience to authority figures
- Series of social psychology experiments conducted at Yale by Stanley Milgram
- Measured the willingness of study participants from a diverse range of occupations with varying levels of education, to obey an authority figure who instructed them to perform acts conflicting with their personal conscience - they were led to believe that they were assisting an unrelated experiment, in which they had to administer electric shocks to a "learner." These fake electric shocks gradually increased to levels that would have been fatal had they been real
- First set of experiments - 65% (26 of 40) of experiment participants administered the experiment's final massive 450-volt shock, and all administered shocks of at least 300 volts.
- Milgram summarised the experiment in his 1974 article, "The Perils of Obedience", writing:
- The legal and philosophic aspects of obedience are of enormous importance, but they say very little about how most people behave in concrete situations. I set up a simple experiment at Yale University to test how much pain an ordinary citizen would inflict on another person simply because he was ordered to by an experimental scientist. Stark authority was pitted against the subjects' [participants'] strongest moral imperatives against hurting others, and, with the subjects' [participants'] ears ringing with the screams of the victims, authority won more often than not. The extreme willingness of adults to go to almost any lengths on the command of an authority constitutes the chief finding of the study and the fact most urgently demanding explanation.
- From combining trauma to the experiment with a ‘scientist’ in the room telling the participants to shock more
- Ordinary people, simply doing their jobs, and without any particular hostility on their part, can become agents in a terrible destructive process
- Moreover, even when the destructive effects of their work become patently clear, and they are asked to carry out actions incompatible with fundamental standards of morality, relatively few people have the resources needed to resist authority – know that most people think they wouldn’t do this – but it is replicable
Cycle: Event + response = outcome 1. Event – even if real or manufactured, 2. Response - is normally created by those with the end outcome in mind 3. Outcome – what a small group wants Who holds authority – activist organisation formed and funded by the very institutions who will benefit from the proposed policy 4. Major parties fight over control over the population – three main groups to watch out for 1. National and Global Governments – UN, IPCC, G20, each nation-state 2. Financial system – Central Banks, IMF, World Bank, BIS 3. Think tanks/Activist groups – Multi-national Companies – Macarthur Institute, Google, FB, etc. all the same people 5. But all of these same authorities are pushing for the same thing – control of resources – Race of company, financial or government control of resources 6. With What? Beyond climate – new ground is Crypto issued by countries – at the expense of existing market 1. The future of currency and economy will very likely be digital – crypto and blockchain – banks want to get in front of this 2. There have been about 4 major currency resets/adjustments in the past 100 years – WW1 broke the gold standard – 1930s saw another shift in nationalised gold-backed currencies, 1944 saw the Brenton woods system pegging to USD – backed by gold, Aus stopped using Pounds in 1966 and AUD was created - then 1971 when Nixon declared the end to Brenton Woods we went to Fiat – Technically have been in the longest period of no monetary reset in the west in over 100 years 7. Bank of International Settlements (BIS) – still plays a large role in today world – Shift towards digital finance – complete control – either by companies of by central banks – it is a race 1. After issuing comments and reports heavily critical of cryptocurrencies over the last few years, Agustin Carstens, chief of the Bank for International Settlements (BIS), has acknowledged that central banks will likely soon need to issue their own digital currencies. 2. BIS – which acts like a central bank for central banks – is supporting global central banks’ efforts to research and develop digital currencies based on national fiat currencies. 3. Carstens: “It might be that it is sooner than we think that there is a market and we need to be able to provide central bank digital currencies.” 8. Private companies – Like Facebook planned Libra cryptocurrency - shook regulators worldwide, as the prospect of a tech firm with users in the billions launching is own money potentially poses a threat to state currencies 1. France’s finance minister has said that Libra must not be allowed to become a sovereign currency 2. Maxine Waters (US) asked Facebook to halt development so hearings can be held – block through administration 3. BIS itself name-checked Facebook - expressing fears that initiatives like this pose a long-term threat to central banks' control of money. Carstens: “Regulators need to ensure a level playing field between big techs and banks, taking into account big techs’ wide customer base, access to information and broad-ranging business models.”- “The issue is how will the currency be used? Will there be discovery of information, or data that can be used in credit provision and how will data privacy be protected?” he said, adding that a “simple way” to regulate such cryptocurrency networks is to start addressing “immediate and very obvious” money laundering concerns – which is all the justification needed to shut down competing currencies 4. US done already something similar - Liberty Reserve was a Costa Rica-based centralised digital currency service - payment processor, serving millions all around a world - it was shut down by the United States government. Prosecutors argued that due to lax security, the criminal activity could go undetected, which ultimately led to them seizing the service - In May 2013, Liberty Reserve was shut down by United States federal prosecutors under the Patriot Act after an investigation by authorities across 17 countries 1. Founders charged with money laundering and operating an unlicensed financial transaction company 2. Patriot Act itself is an example of using an event by Gov to push through legislation that is unconstitutional – removed due process – but passed congress next month after 9/11 attacks – passed 98-1 5. Hence – BIS has argued there was a strong case for authorities to reign in cryptocurrencies like Bitcoin 9. Central banks – Bank of England and Sweden’s are looking into digital currencies of their own - BIS’s new hub is designed to improve and develop the future of the financial system 1. “There needs to be demand for central bank currencies and it is not clear that the demand is there yet,” Carstens told the FT. “Perhaps people can do what they want by using electronic wallets provided by banks or fintech companies. It depends on the development of private stable coins.” 2. The BIS’s hub will be set up in Switzerland, Hong Kong and Singapore, in collaboration with their respective monetary policy officials, according to a statement.
What it will take to get there - Possible step from here – QE is unwound and markets collapse – require monetary reset as without inflation the debt can’t be paid back – so need to have a new issued reserve currency – almost what Germany did post 30s – Reset financially – but to do so you have to kill the competition
We will go through why I think BTC is a trap on Monday – Then go through the battle with the BIS, company-issued crypto, like Libra and existing crypto markets next Friday.
Thanks for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Say What Wednesday Edition
This week Question from Mark – two-part episode (over this week and next)
Hi Louis
I have 2 questions, can you explain how negative yielding bonds work, they are saying a third of the global bond market is in negative yielding debt and it is going parabolic.
How do people make money from negative yielding debt? It doesn't make sense.
Also, can you explain the repo markets that are going on at the moment?
Apparently the banks are loaning money from the Feds at 10% so they have enough liquidity to survive the night # Bank run?
How can a bond have a negative yield? 1. Negative-yielding bonds are bonds that cause bondholders to lose money when they mature. This happens when holders of such bonds will end up with less money than what they used to purchase them 2. Negative Yield works through the mechanics of bonds – when the prices go up to where the yield is close to zero – and they are based in a nominal real value $100 – in 10 years’ time inflation eats away at the value
First - Explanation of Fixed Interest (bonds) - terminology – 3. You don’t get interest payments - you get coupons = The periodic interest payments promised to bond holders are computed as a fixed percentage of the bond’s face value; this percentage is known as the coupon rate. 4. The face value (also known as the par value) of a bond is the price at which the bond is sold to investors when first issued; it is also the price at which the bond is redeemed at maturity. In the U.S., the face value is usually $1,000 - Face Value is the amount of money you get back in at maturity of the bond 5. Note that the face value is not the price – the price is what someone wants to pay for a bond 6. You cannot receive any coupons and the yield on the bond may be positive – if the nominal value of the bond will rise to give you a return – or yield 7. The maturity is the date at which you get your money back – Bonds are debt instruments – but what they really function as is a way of borrowing funds – funding projects/capital requirements for banks through selling a newly created asset and selling it to investors – in exchange for money – it is a loan that is in the form of an investment which can be traded –
In Current Markets - A yield decline will start to occur if investors are buying a bond for more than its face value
- How do Negative-Yielding Bonds Work? - To understand negative-yielding bonds, let’s first examine how regular bonds work to see how money can be lost on them at maturity - then how it differs from bonds that lose money.
- Two main categories for regular bonds: coupon and non-coupon paying bonds
- Normally - an investor should ordinarily end up with more than what they paid for the bond
- If there is no income (coupons) – price of bond should be at a large discount to maturity FV
- I.e. – Bond matures in 3 years for $100 – buy today at $90 – YTM = 3.5% p.a. even without coupons
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Very simple to calculate the Price of a Bond – literally a formula to get the exact price based around a few variables – A bonds price is that of the present value of all coupon payments plus the face value paid at maturity.
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F = face value, C = coupon payment, N = number of payments, i = market interest rate, or required yield, M = value at maturity, usually equals F
- This formula shows that the price of a bond is the present value of its promised cash flows. As an example, suppose that a bond has a face value of $1,000, a coupon rate of 4% and a maturity of 30 years. The bond makes annual coupon payments every year – 30 payments - If the interest rate is 4%
- Price = $1000 = same as FV – interest rates and coupons same – so no discount in price or premium of price
- What happens if the interest rate drops? Same bond – but interest rates now drop to -1% - price is now $2,760 – paying
- Each year the investor receives $40 in coupon payments and when the bond matures, they receive $1000 at maturity - though the investor paid more - yearly coupon payments made up for the difference of holding in cash with negative interest rates -
- But now let's say that the same bond sold for the same amount – but wasn’t paying coupons? They get a negative yield (return) on their bond
- Prices and Yield to maturity – Can lead to negative yields – another simple example -
- Maturity: 3 years, FV: $1,000, Coupon: 0% Price: $1,050
- During the three years, you get no income payments and when the bond matures you only get $1,000 back –
- Loss of $50 over the 3 years works out to be about a negative yield of 1.6%
- Therefore - If the total amount of income the bond pays over its remaining lifetime is less than the premium the investor paid for the bond, the investor loses money and the bond is considered to have a negative yield.
- With QE going on 10 years now – there are a lot of bonds being purchased in the secondary market – demand for bonds is high – the price can go up
State of bonds: Who Issues and Buys Negative-Yielding Bonds? 1. Negative-yielding debt is not new in Europe and Japan - issued by governments 1. Japan - the interest rate set is below 0% - so with negative interest rate the central bank charges banks for keeping deposits – which is passed on to consumers – 1. Monetary policy that tries to encourage banks to lend out money and stimulate the economy 2. The same strategy has been used by the European Central Bank. 2. Therefore - As countries put in negative interest rates - government bonds are created that have negative yields – or below zero returns – 1. Why would anyone buy them? Banks still purchase these bonds as they have good liquidity and there are a few options safer than a government bond. 2. Also – the more fixed-income securities become negative-yielding, the yields offered by bonds will continue to enter the negative territory - so investors buy bonds with negative yields because they believe future bonds will offer even worse returns – speculation to buy now to not get charged negative interest rates and to not lose more money in future if newly created bonds have worse returns
Number of bonds with negative yields are starting to reduce 1. The stock of Euro-zone government bonds with a negative yield on Tradeweb ballooned to around 5.61 trillion euros ($6.2 trln), or almost 69% of the total market, in August. It has since eased to around 5 trillion euros or 62%, according to data from the electronic trading platform. 2. Globally, the pile of negative-yield bonds including corporate debt has shrunk to around $12.5 trillion from a record high around $17 trillion just two months ago. 3. Indeed, this week France’s 10-year bond yield turned positive for the first time since July FR10YT=RR and the entire yield curve in Germany — the euro zone’s benchmark issuer — is no longer negative as it was a month ago. 4. But for many bond investors, it is still early days.
Part 2 of the question - Repo markets – A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of short-term borrowing, mainly in government securities. The dealer sells the underlying security to investors and buys them back shortly afterwards, usually the following day, at a slightly higher price – This is a pretty heavy topic – lots of parts to unpack - so part 2 will be next week
Thanks for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury
Today – want to explore the chances of the ASX booming next year
- Have been talking about complexity theory for the past few Monday episodes – Focusing on collapses – but what if positive feedback loops kick in further – in the form of potential QE from the RBA
- Want to cover this as a few developments have happened recently – pointing towards this possibility in 2020
- Speculation from Banks – the RBA balance sheets show this
First – the process of QE – covered what it is in the past and why it doesn’t help the population – just raise prices 1. Why? there is a concept of what is called the Cantillon effect - 2. 1. Cantillon effects – Under the assumption that all resources are fully utilised in equilibrium, a credit expansion implies that producers of capital goods in the ‘new’ processes of production bid away resources from ‘older’ processes. This is where the Cantillon Effect begins to work. 1. The injection of additional money increases the purchasing power in the part of the economy it arrives first – in other words – it changes the price structure through the reallocation of resources and income 2. This comes from Hayek – you could call him Keynes adversary in economics back in the 30s 1. Inflation in the Hayekian sense is thus strictly defined as a rise in the quantity of money, not in the price level 2. Inflation is not uniquely reflected movements of the price level, and the monetary cause of change the price structure will hardly be perceived as such. 3. What Hayek was missing is the amount of money that flows through to the people – main street 4. When Wall Street – i.e. the Bank and financial system get this – you actually won't see inflation 1. See price increases in property and share market, and bond market with QE 2. But won’t see it in the population – the majority of loans to consumers are non-productive –i.e. – they don’t yield economic output – like loans for businesses or growth of economy goes 3. Housing prices rising doesn’t create real growth – thanks to the debt backing it – long term the interest and massive principal repayments take away from economic investment or spending in economy
- In modern Banking system – printed money flows into banks first – redistribution of resources and prices – printing money doesn’t increase inflation if it never hits main street - Money flowing into Aus share market from Australia QE –
- Market collapse occurs – the RBA buys up shares ETFs using QE, i.e. printed money to reduce the effects
- RBA one of the last to do this – seen the BoJ get in, Fed, Bank of England – we look to be next
- But who benefits? How does the printing of money to buy assets (shares and bonds) help?
- If you are invested it raises the prices – if you aren’t – it just makes costs of living higher through property purchase, rates, and rental increases
- Wealth effect – not observed in economy though – theory only
- Also Governments - It is massively valuable for the state/local governments to have higher prices on land – more ongoing rates/taxes and lump sum - stamp duty/transfer costs
- Also beneficial to Fed Government – GST and CGT incomes- pump the prices up and make profit off the sale
- If you are invested it raises the prices – if you aren’t – it just makes costs of living higher through property purchase, rates, and rental increases
- With the theory out of the way – where do we stand?
- The RBA and banking system seems to be increasing their balance sheets – based around the released data
- Look at the issuance of capital by the banks – equity and debt – share purchases and subordinated notes issuances
- Big 4 banks been on a frenzy of both – public issuances of notes, SPPs, capital raisings, warrant issuances
- Where it becomes even more interesting is the RBA data releases –
- First some terminology - The RBA defines the monetary aggregates as:
- M1: currency in circulation plus bank current deposits from the private non-bank sector - $1.04 trillion
- M3: M1 + all other bank deposits from the private non-bank sector, plus bank certificate of deposits, less inter-bank deposits - $2.14 trillion
- These stagnant numbers don’t tell the whole story - M1 – has seen a massive money increase – June 19 was $360bn – July $1.014 trillion – then till sept last figures – this crept up slightly to $1.033 bn by $19bn – in one month almost doubled – 185%
- Note that M3 decreased from June to July - $2.157 to $2.128 trillion - $29bn drop
- There has been a massive increase in M1- But Back in 2009 – was $220bn – past 10 years grown by 370% -
- M3 – Total money has gone from $1.200 Trn to $2.128 Trn – about a 77% growth – but nothing compared to M1
- First some terminology - The RBA defines the monetary aggregates as:
- What does this mean – look at the US fed and it tells a story that helps –
- When M1 increased in 2009 and 2011 – but M3 didn’t – what periods were those – During QE1 and QE2
- In which the Federal Reserve expanded its balance sheet through large-scale purchases of Treasuries and other securities
- M1 growth was highly positively correlated with the growth in reserves generated by Fed asset purchases
- Reason - reserves held with the central bank are assets for banks
- When central banks expand reserves – commercial banks must either sell other assets (keeping the overall level of assets unchanged), issue more liabilities or equity (expanding the level of assets), or some combination of the two.
- In the USA - banks did not reduce their overall holdings of assets as reserves increased
- Instead - funded these new assets by issuing additional liabilities – like capital notes
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Banks in Aus issuing billions every month in Capital Notes, warrant products and Share purchase plans
- Look at announcements of banks over past 6 months – Just last month in November
- CBA - $1.65bn of PERLS notes
- NAB - $1.4bn of Sub notes
- WBC - $2.5bn capital raising from Equity - $2bn institutional and $500m SPP
- ANZ – 1bn Euros of Subordinated notes
- Remember that QE occurs through the purchase of these assets off the secondary market – i.e. institutional investors or super funds – who buy the assets at issuances (direct from companies or Gov) – then sell at a premium to the Central Banks
- Look at announcements of banks over past 6 months – Just last month in November
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If the trend in our markets is true – and RBA has printed $640bn with billions more on the way for QE - markets may go up
- Last week - Australian shares surged to a record closing high on Wednesday, supported by growing speculation the Reserve Bank of Australia will cut official interest rates and launch quantitative easing (QE) next year.
- The benchmark S&P/ASX 200 jumped 63.1 points, or 0.9%, to a record closing high of 6850.6, less than 0.4 per cent below the record intraday high set in late July
- Following a speech from RBA governor Philip Loweon Tuesday evening that outlined what could prompt the bank to implement unconventional monetary policy measures to support economic growth, lower unemployment and push underlying inflation higher
- additional support as Westpac Bank became the first of Australia’s big four banks to forecast the RBA will introduce QE next year – they expect two rate cuts next year (down to 0.25% by June 2020
- QE also expected to begin in the second half of 2020
- The Westpac call, joining a growing number of forecasters who expect the RBA to rollout QE next year, helped drive every sector to end the session higher
- Rising tide lifts all boats - gains of 1.2% for utilities, communications, information technology, consumer discretionary, REITs and materials.
- With QE speculation in overdrive, the All Ords Gold Index surged 2.8 per cent, helped by a lower Aussie dollar and government bond yields.
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Take All of this with a grain of salt – if US share market crash occurs we will be tanked – QE wont be able to save us
Issue with our economy – Doesn’t matter if prices of assets go up if people can’t keep up in wages 1. Also – if this is an effort to shore up banks and create credit to providing funding for bank bail outs – paints a different picture of where our markets are at 2. Also – as rates go down create more free money – higher home prices and lower savings 1. Make the current structural issues worse
Another interesting Factor - 3. RBA off balance sheet - Interest rate contracts; OTC swaps; For series breaks see Series breaks - Interest rate swaps are the exchange of one set of cash flows for another. Because they trade over the counter (OTC), the contracts are between two or more parties according to their desired specifications and can be customized in many different ways 4. Off the balance sheet Interest rate swaps massively increase – RBA data – 21. Sitting at $32trn – 44% gain from Dec to June (6 months) – Up from $21.7trn – remember shares are $2bn 5. Swaps are entered into when someone is in trouble – 1. Example – Greece before their debt defaults – couldn’t meet their repayments – so swapped with someone who could – Germany and other EU members 2. If your cashflow cant keep up with interest repayments – helps to swap the contractual repayments of interest with a counter party – i.e. one central bank or bank enters a contract to cover the other party’s interest repayments – fixed v floating 3. Over-the-counter (OTC) derivatives have played a significant role in episodes of financial stress, including the global financial crisis 1. because these derivatives are not traded on exchanges, detailed information about them has not generally been available. 4. These products have become more easily usable - Central counterparties (CCPs) have become much more important, in large part because of G20 reforms to increase the central clearing of OTC derivatives. 1. Australian banks still have significant exposures to other counterparties, including foreign banks. 5. Most are Fixed to Floating – which is done when you think your rates are going down 6. You want to fix at an income today – with other parties less likely to drop rates 6. This could be in anticipation of struggling banks or other Central banks to help ease their cashflows to avoid defaults -this is just speculation at hard to get the counter parties to these contracts – Further Speculation of QE being done – as contracts are a hedge
Summary Anyone’s guess- there are both positive feedback loops and potential negative feedback loops coming
Positive from RBA and QE – negative is USA ceasing QE and withdrawing credit
Thanks for listening, if you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Furious Friday Edition
- Last ep – lead up to the market crash of 1929 - and how thanks to central bank leveraging once removed – the market crashed
- Today – want to run through the internal political wars that were created – similar landscape to today
- Corporatism versus fascism – Private central banks versus the merging of the Government with Markets
- Has similarities to the modern era – with The New Silk Road and the Green New Deal
Start - The Living Hell that was the Great Depression 1. Throughout the Great depression - unemployment skyrocketed to 25%, industrial capacity collapsed by 70%, and agricultural prices collapsed far below the cost of production accelerating foreclosures and suicide. Life savings were lost as 4000 banks failed. 2. This despair was replicated across USA, Canada, Europe and Britain - the population was pushed to its limits making western countries highly susceptible to fascism and socialism/ communism ideals 1. England saw the rise of Sir Oswald Mosley’s British Union of Fascists in 1932 2. Britain, Australia and Canada had its own fascist/socialist solution with the Rhodes Scholar “Fabian Society” and League of Social Reconstruction (which later took over the Liberal Party in Canada and Labour part in Aus) calling for the “scientific management of society” 3. Mosley Fascists were more smash and grab power while Fabians were slow and steady 4. In America as well - Time magazine was telling people that corporate fascism was the economic solution to all of America’s economic woes – 6 times in 1932 5. Was a wild political time - Communist parties, Nazi party – mass protests, rioting, damaging buildings and assaulting people – while not on the same scale - climate activist demonstrations today are acting out their perceived disenfranchisement – in the 30s it was real (living through the great depression) – while one is manufactured (world ending in 12 years) 3. But With civil unrest came the atmosphere that one of the least understood battles unfolded in 1933.
Brings us to a political movement that isn’t really ever talked about - is another entity in the control sphere – never really gets talked about – could and have talked about commies, nazis, socialists, etc. – go check those eps out – but today want to narrow in on one type and its variants
https://financeandfury.com.au/give-the-people-what-they-want-socialism-for-the-masses-the-human-economy/
https://financeandfury.com.au/cannibalism-nazism-and-property-rights/
https://financeandfury.com.au/furious-fridays-evil-capitalism-efficiencies-incentives-equal-opportunities-and-reducing-poverty/
- Fascist/Corporatocracy versus the fascist/socialist – in this case – Central banks versus Roosevelt
- Corporatocracy is used to refer to an economic and political system controlled by corporations or corporate interests – an ideology which advocates the organisation of society by corporate groups
- In this case – the type of Corporatocracy is that of the financial system in the form of Central Banks and BIS (IMF in 1944 to try and solve this mess by more of what created it in the first place – very similar to today)
- But if you think about it – they both essentially want the same thing – complete control over individuals - just who is in charge is different
Let’s look at 1932 and how the Bankers’ Dictatorship Attempt went down – plans to overthrow FDR 1. Franklin Roosevelt (FDR) won the presidency in America – He was described by many as a fascist – he was an authoritarian – but I would say he was more socialist – using the Government as his tool to implement his ‘New Deal’ 2. Ideas were based off John Maynard Keynes – One of the engineers of the Versailles treaty talked about last Friday 1. Keynes advocated the planning of a nation's economic life, political supervision of private industry, and manipulation of the currency – all of which required a massive increase in the size and scope of government at the time – today is a given but wasn’t back then 2. Every Authoritarian loved this idea though – in Britain - first enthusiastic review by economist, Marxist and a founding member of the Fabian Society - G. Cole 3. In America were government officials in Franklin D. Roosevelt's administration - The greatest strides in American socialism occurred under Franklin D. Roosevelt or arguably Presidents Woodrow Wilson, Lyndon Johnson 4. But to pull these ideas off Roosevelt - threatened to regulate the private banks and assert national sovereignty over finance 3. This would have been bad for the FED and the private owners of the central banks – would destroy their plans for global fascism – control of the monetary supply 1. So the City of London Corporation needed a new global system controlled by their Central Banks 2. Don’t let a good crisis go to waste - their objective was to use the Great Depression as an excuse to remove nation-states from any power over monetary policy – putting it in their hands and not national governments 4. December 1932 - economic conference “to stabilize the world economy” was organized by the League of Nations under the guidance of the Bank of International Settlements (BIS) and Bank of England. 1. Remember - The BIS was set up as “the Central Bank of Central Banks” in 1930 in order to facilitate WWI debt repayments and was a vital instrument for funding Nazi Germany- long after WWII began. 2. Bank of England was privately owned at that stage - Independent Central Banks as enforcers of “balanced global budgets” 5. City of London with the Bankers organised the London Economic Conference 1. Brought together 64 nations where a resolution passedby the Conference’s Monetary Committee stated: “The conference considers it to be essential, in order to provide an international gold standard with the necessary mechanism for satisfactory working, that independent Central Banks, with requisite powers and freedom to carry out an appropriate currency and credit policy, should be created in such developed countries as have not at present an adequate central banking institution. The Bank of International Settlements should play an increasingly important part not only by improving contact, but also as an instrument for common action.” 2. Essentially – this was to deprive nation states of their power to generate and direct credit for their own development. 6. FDR wanting control over the economy shut down the London Conference – 1. Back in America - an assassination attempt on Roosevelt was thwarted on February 15, 1933 2. Gun knocked out of the hand of an anarchist-freemason in Miami resulting in the death of Chicago’s Mayor instead – 3. But without FDR being killed – he still was in opposition - hence London conference met an insurmountable barrier 4. FDR recognised the necessity for a new international system, but he wanted it to be controlled by Governments and not central banks 5. After this the London Conference crumbled - FDR stated “The United States seeks the kind of dollar which a generation hence will have the same purchasing and debt paying power as the dollar value we hope to attain in the near future.” 6. These words seem foreign in the Fiat currency of today – but the Brits drafted a statement - “the American statement on stabilization rendered it entirely useless to continue the London conference.” 7. Around the same time - FDR’s War on Wall Street – in his inaugural speech on March 4th: “The money-changers have fled from their high seats in the temple of our civilization. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit”. 1. Hence FDR declared a war on Wall Street on several levels, beginning with his support of the Pecora Commission which sent thousands of bankers to prison - exposed criminal activities of the top tier of Wall Street’s power structure who manipulated the depression, buying political offices and pushing fascism 1. Pecora called this out - stating “this small group of highly placed financiers, controlling the very springs of economic activity, holds more real power than any similar group in the United States.” 2. Pecora’s highly publicised success empowered FDR to impose sweeping regulation in the form of 1. 1) Glass-Steagall bank separation (one Clinton overturned), 2) bankruptcy re-organisation (remove investment banks from the control of the corporate reorganisation process by eliminating the equity receivership technique and put Government in charge) and 3) the creation of the Security Exchange Commission to oversee Wall Street. 2. FDR disempowered the London-controlled FED by installing his own man as Chair - forced it to obey Government commands for the first time since 1913 with Wilson 3. Had the plan to get the US out of the economic slump through the New Deal – 1. Four million people were given immediate work, and hundreds of libraries, schools, and hospitals were built and staffed 2. From 1933-1939, 45 000 infrastructure projects were built – similar to Climate infrastructure plans and the Chinese Belt and Road Initiative today - But he needed money - So what did he do? 3. Created a new lending mechanism outside of Fed control called the Reconstruction Finance Corporation (RFC) which became the number one lender to infrastructure in America throughout the 1930s – Similar to today with Climate funds – with the proposal of this to lend for infrastructure to help get out of the Depression 4. This provided an alternative option between the central banks on Gold Standard and his own Government lending (RFC) – He needed to be able to create money out of thin air to pay for his New Deal program – hard under the Gold Standard 4. This was done as he abolished the gold standard – remember GS constricted the money supply to an exchange of gold per paper dollar – limited how much he could spend on his public works – look at the history of Government spending to GDP from 30s 1. Also – GS could be manipulated by the Central Banks – making it a financial weapon rather than a bonus to the system – 1. Devaluations became a beggar thy neighbour policy – drop you currency peg to gold and you are more competitive due to lower cross exchange rates – France and Britain post WW1 and leading up to the depression – France was the last mover and lost badly in economic output 2. Also – Gold Standard had no inflation – Central Banks with limited inflation can lead to a world where the commodity prices below the costs of production – so inflation was needed for producers to become solvent 1. 1. Gold standard held that back – inflation of money supply was capped by gold supply – would accumulate through surplus of trade increasing money supply – 2. FDR imposed protective tariffs to favour agro-industrial recovery on all fronts ending years of rapacious free trade – Sound familiar? 5. FDR stated his political-economic philosophy in 1934: “the old notion of the bankers on the one side and the government on the other side, as being more or less equal and independent units, has passed away. Government by the necessity of things must be the leader, must be the judge, of the conflicting interests of all groups in the community, including bankers.” 1. 1. See – it is a policy war between Central Bankers and Governments over control of us all – resources determine our lives – any number of resources – power, food, water, shelter, or money to buy these things – this is all a resource 2. One does it monetarily/financially – the other does it on the physical resources and financially 3. Government – controls taxes, charges, regulations on land, employment, what you can and can’t do – every part of your life
- Like any war – both sides fight back – as such wall Street set out to destroy the New Deal
- Example, JP Morgan asset - Lewis Douglass (U.S. Budget Director) forced the closure of the Civil Works Administration in 1934 resulting in the firing of all 4 million workers.
- 1931 - NY bank loans to the real economy amounted to $38.1 billion which dropped to only $20.3 billion by 1935.
- Remember – they were positioned to the crash - had 29% of their funds in US bonds and securities in 1929 but rose to 58% by early 30s - cut off the issue of productive credit to the real economy – i.e. business lending over speculation
- Bankers not limited to financial sabotage – there was Coup Attempt in America – which was Thwarted amidst the conspiracy –
- Attempted a fascist military coup which was exposed by Maj. Gen. Smedley Butler in his congressional testimony of November 20, 1934 – Same person who wrote the War is a Racket book detailing those who influence nations to start wars profit from them
- Butler had testified that the plan was begun in the Summer of 1933 and organized by Wall Street financiers who tried to use him as a puppet dictator leading 500,000 American Legion members to storm the White House.
- As Butler spoke, those same financiers had just set up an anti-New Deal organization called the American Liberty League which fought to keep America out of the war in defence of an Anglo-Nazi fascist global government which they wished to partner with – America was divided in this time period – lots of immigrants in USA were German
- At the time of the incidents, news media dismissed the plot, with a New York Times editorial characterising it as a "gigantic hoax"
- Truth is probably close to the middle – wasn’t a hoax but a real plot that was in the ‘testing the waters’ phase –
- As historians questioned whether or not a coup was actually close to execution, but most agree that some sort of plot was contemplated and discussed – how close to execution is unknown – conspiracy definition
- Coup thwarted - 1937 - FDR’s Treasury Secretary persuaded him to cancel public works – see if the economy “could stand on its own two feet” – at the same time Bankers pulled credit out of the economy collapsing –
- Two million jobs were lost and the Dow Jones lost 39% of its value - Industrial production index dropped from 110 to 85 erasing seven years’ worth of gain
- Steel fell from 80% capacity back to depression levels of 19%.
- This was no different from kicking the crutches out from a patient in rehabilitation and it was not lost on anyone that those doing the kicking were openly supporting Fascism or Nazis in Europe - remember Prescott Bush, then representing Brown Brothers Harriman was found guilty for trading with the enemy in 1942 – as he bailed out the bankrupt Nazi party
- But after FDRs death – Bankers got back on top – from 1944 once the IMF was established and the BIS got back in control – 1 year later FDR dies in office and things took off
Next week – Finish with the world Today – Similarities taken from these episodes and apply to current political, financial and social environments
Hopefully, you found this interesting -
Thanks for listening today. If you want to get in contact you can do so here: http://financeandfury.com.au/contact
Welcome to Finance and Fury, The Say What Wednesday edition.
Today's question comes from David
Hi Louis,
I must commend you on your contribution to the finance community. If you have thought me one thing, it’s that the more you learn the more you realise how little you know. So, one thing that does perplex me is the Australian made product of the offset account. Whilst I understand how they work and the power they have when used correctly, I can’t figure out why the banks have them. I mean it’s the modus operandi of the banks to extract money from lenders via the mechanism of interest. Call me a cynic but I feel the banks must have an ulterior motive to this play. I would love to know your thoughts. - David
That is a great question – made me think as well and do some further digging – today - Offset accounts and Why banks allow them?
- First – the basic = Offset accounts are a type of deposit account that is directly linked to a loan – like a mortgage
- Money deposited into offset accounts effectively reduce the loans net position and the interest payable
- Means where a borrower has a deposit account and a loan (usually a housing loan) with the same institution.
- Instead of receiving interest on the deposit account, the interest payment due on the loan is calculated on the net balance of the loan
- As they act as deposit accounts – only ADI can offer true offset accounts – non-banks will offer redraw facility instead – which means the money is on the loan – different
- In Aus - Offset account balances currently total around $90 billion – almost over 6% of housing loans outstanding
- Annual growth in total housing debt of around 7-8% - Offset account balances grown by 30% - annual growth in net housing debt is still growing by 6-7% due to new loans -
Why banks allow them? – number of reasons 1. Simple one - Better with them than another bank - Incentive to have your money with them and not the competition 1. Also – repayments come from the offset accounts – easy for banks to have their funds – but minor 2. But one of the major reasons – they Allow for the further growth of credit – remember – they are deposit accounts 1. Because Offset accounts are deposit accounts – banks can use them as part of reserves in fractional lending for the creation of money 2. RBA - Offset account balances have also been making a significant contribution to household deposit growth 1. If offset balances weren’t in deposits but had paid the loan back – would reduce growth in household deposits by around 1% (from around 7-8%) -12-14% or so reduction 2. Mortgage payments reduce the ‘stock of outstanding credit’ – i.e. total amount of loans and are a negative growth factor on total credit - if everyone makes additional repayments the credit growth shrinks – the credit growth can be negative = no new lending and only repayments is negative credit growth 3. Offset accounts are an alternative form of mortgage prepayment that like an at-call deposit account – 1. Because it acts like an at-call deposit account, any accumulated funds are easily available for withdrawal or for purchasing goods and services - They are treated as such – can be used as any other deposit for lending by the bank 2. Also - while funds in the account are reducing your outstanding debt for the interest on the loan – you still have the same loan 4. For the individual with a mortgage and uses an offset account or redraw - similar household economic effects - net housing debt and interest payable are reduced 5. But for a bank - loans and deposits are higher than they otherwise would be – offset provides deposit funds and doesn’t give a negative credit growth effect – like redraw facilities do 1. If that $90bn was sitting in the loan (i.e. paid off) – less lending due to fewer depositor funds 3. Therefore – offset accounts Can increase banks lending income – not decrease it- 1. Say loans are 4% - you can save 4% or banks can charge it – 2. $100k in an offset – you save $4,000 3. Banks use it to lend $800k (12.5% deposit ratio) – they make $32,000 – net $28k better off
Also – Other factors like bail-ins and deposit schemes 1. Bail in-laws – We’ll leave a link on the website to the episodes covering the bail-in regulations and pitfall of this 1. In short – as it is a deposit account – can be used as bail-in provision – 2. Most people with loans would have much more in offsets than savings – or should at least – 3. But the catch is that all your deposits will likely to be with one ADI – and potentially above the $250k 2. Government Guarantees – May not actually help - You have a few problems there: A guarantee only applies to a bank going insolvent and collapsing— with not enough money left over for depositors. Bail-ins (if they are in fact legal) will just take your money to prevent that from happening. That is, the government guarantee won't cover a bail-in. 1. Guarantees are capped at $20B per ADI – stated in Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008 1. Activation of the EAFD 1.20 - A declaration outlines the total amount available to make payments to depositors of a declared ADI. For the first three years of the scheme (from 2008), the amount that can be appropriated for the purposes of meeting depositors’ entitlements is unlimited. After three years, the maximum that can be appropriated is $20 billion. The declaration must also outline the amount available for the administration costs for implementing the scheme up to a maximum of $100 million 2. RBA aware of this - in their “Depositor Protection in Australia” - “Payouts of deposits covered under the FCS [The Australian Government’s Financial Claims Scheme] are initially financed by the government through a standing appropriation of $20 billion per failed ADI [Authorized deposit-taking institutions] 2. The total size of deposit accounts totalled $2 trillion (Commonwealth Bank— $581 billion, ANZ — $467 billion, NAB— $407 billion and WESTPAC — $533billion). This includes savings, term deposits, chequing, debit card, transaction accounts, mortgage offset accounts, pensioner deeming accounts, retirement savings accounts etc… So only $80 billion (or 4%) out of this $2 trillion dollars is actually covered by the guarantee. 3. The question remains – once they activate it – where will the money come from?
In summary 1. Does benefit you – But so does repaying your home loan in most other means – except the accessibility – offsets are best for this 2. But benefit the bank as well – you repaying the loan doesn’t benefit them as much as you keeping the loan and then being able to keep expanding credit using the deposits – take your $100k and lend $900k – which they make 3% - 1. Also – more money with the bank to be used in ‘resolution proceedings’ with Bail in regulations
Thanks for the Great question David
Thanks for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact
Welcome to Finance and Fury,
For the past few Monday episodes been talking about complexity theory and markets – check out
- Last two eps – went through phase transition, feedback loops and how markets become fragile and some signs this is happening
- Most recent episode: https://financeandfury.com.au/how-do-you-know-that-the-share-markets-are-likely-to-be-in-for-a-collapse/
- Previous episode: https://financeandfury.com.au/how-to-analyse-share-markets-by-treating-them-as-a-complex-system/
- When applying complexity theory to current state of financial markets – exhibit characteristic of the point of criticality
- Lack of resilience (fragility – glass v plastic vase), flipping feedback loops = critical tipping points where markets are unstable
- In any system - the interaction between chaos and order builds resilience - The criticality of the balance between order and deterministic chaos is an optimal evolutionary solution for systems – too many feedback loops create a loss of resilience
- Making it dangerous – likely to enter chaos and then an alternative stable state – think of the gym – overtraining
- Know first hand – used to do 10-12 hard workouts a week – after almost 2 years body would shut down
- Today’s ep – looking at the things that have created a lack of resilience and what might shatter the vase
- Transitions are not inheritably negative – some may trend to order, not disorder
- Important point it the identification and the awareness of criticality – and the direction of the transition
- And the sensitivity of a complex system to parameters – i.e. ‘deterministic chaotic behaviour’ - ‘chaos is when the present determines the future, but the approximate present does not approximately determine the future’
- Butterfly effect - a small change in one state of a deterministic nonlinear system can result in large differences in a later state
- First – visualisation or measurement tool - basin of attraction – what is the pull to an unstable state –
- Imagine a normal distribution – dome shape – bottom – 0 – 100 – goes up – peak at 50 – basin of attraction is spread out equally over the whole 0-100 -
- Now say some point of attraction occurs – the basin of attraction narrows something pulls of the peak down the peak
- An attractor's basin of attraction is the region of the phase space, over which iterations are defined, such that any point (any initial condition) in that region will eventually be iterated into the attractor.
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Characteristics and current states of the market – what feedbacks reduced resilience
- Extreme indebtedness – i.e. debt saturation – think of the economy like a cloth – it has a limit on absorption – ShamWow can absorb a lot – but a small pond or swimming pool? Think of money as the water and the economy as the cloth - has debt tolerance limits
- Despite the record-low interest rates available to service such debt - The falling productivity of new credit lending is visibly at play. (decreasing marginal effectiveness of lending) –
- Bank policies are for low-risk high collateral lending – where does it go? Housing
- Over last half-decade or so – flipped 20/80 to 80/20 residential to business lending
- Rephrased in the context of complexity theory, the basin of attraction is not as steep as before.
- Despite the record-low interest rates available to service such debt - The falling productivity of new credit lending is visibly at play. (decreasing marginal effectiveness of lending) –
- Extreme leverage to buy financial assets - NYSE leverage is at all-time highs. A long trip up the basin of attraction.
- Extreme monetary policymaking brought the cost of capital close to zero, depriving the system from resilience through preservation of so-called ‘zombie companies’ and other mis-allocation of resources – misallocation of resources
- The market is no longer a marketplace where buyers and sellers meet for exchanges - rather a buyers frenzy
- Negative feedback loops flipped into positive feedback loops - creating a singularity between public and private flows in hovering up assets price-insensitively - one-sided regular flows
- Extreme indebtedness – i.e. debt saturation – think of the economy like a cloth – it has a limit on absorption – ShamWow can absorb a lot – but a small pond or swimming pool? Think of money as the water and the economy as the cloth - has debt tolerance limits
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Extreme valuations - markets have reached bubble valuations - disconnected to fundamentals
- Using most valuation metrics - the corporate debt to GDP, the price to book, enterprise value on sales and EBITDA
- US equity valuations at all-time highs when compared to trend growth - Extreme valuations for bonds and equities simultaneously, now unable to hedge one another.
- Patterns of correlation between major asset classes. Bonds and equities have been negatively correlated in last few decades – recently have been positively correlated – worth watching – bonds might not be the hedge
- Inability for valuations on Bonds to progress from here – mathematically - due to zero-bound on interest rates and pricing mechanics on bonds – prices are capped out
- Other anomalies like European bonds trading at negative yields
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Changing the structure of markets - the rise of passive strategies / ETFs - creates price-insensitivity of share markets
- Current investments - one-sided risk of the investor community, long-only, fully invested, short volatility
- The shift from active managers to passive managed ETFs in past years (for almost $3trn) is only the tip of the iceberg, and encapsulates the difference between risk-conscious and risk-insensitive investing, resulting in the clash between under-weighted longs (active managers) and over-performing longs (passive vehicles). Beyond ETFs, other quasi-passive players prosper as they mechanically go long with leverage, follow the trend or sell vol: the end result is that today it’s all one single giant position, and market risk became a systemic risk.
- The structure of markets resembles that of a pressure cooker, owing to the synchronicity of three elements:massive concentration of passive or quasi-passive players (90% of US daily equity flows), massive concentration in few fund players (top 4 Asset Management shops account for almost $15trn in AUM), massive concentration/correlation of investment strategies (90% are either volatility-linked or trend-linked).
The Question then becomes one of identification of such critical tipping points 1. What is the level beyond which a small change can provoke a large swing, a big transformation? What is the last snowflake on the snowpack that the system can take in before transformation? 2. May be several critical switching points, not just one, on one key variable. The resilience of the system may degrade to some tipping point where a small perturbation can push it into another state. The loss of resilience makes it flip, eventually, at a point. 3. Like all systems – you have within and from outside – the system and the environment
Tipping points within financial markets - where can we go from here? 1. Valuations may go higher – occurrence of a ‘melt-up’ – US started more QE, same with other central bankers - a possible scenario for markets to continue through their threshold – more fuel in the tanks based around leverage 1. Cash balances are thin, while leverage is already high - Most investors classed are now close to full investment, between 90% and 100% of disposable assets: private clients, pension funds, insurance companies, sovereign wealth funds, mutual funds, hedge funds – little cash left to put into markets though – so all new funds 2. But Debt metrics are beyond classic measures of tolerance in several countries – USA, Japan, now in China and Turkey, 1. Marginal effectiveness of new lending is on the decline – when measured using the credit-to-GDP gap’ of the BIS – shows that the new money being printed and put into the markets isn’t effective in stimulating any growth 3. When will Quantitative Easing reach its peak – seemed to be running out in mid-2017 1. Still an active tool in the hands of Central Banks, although capacity constraints are known - but is now expected to continue for a little while before it goes into reverse – which would trigger a big collapse of markets 2. But the tipping point may be already in - 2017 marked the peak in Quantitative Easing at $3.7trn of asset purchases $300bn p.m. 1. As this liquidity tide goes off - markets will start to face their first real crash test in 10 years 2. Only after the QE is ceased will we know what is real and what is not in today’s markets 3. We will be living through the unintended consequences for many years - zombie companies let to live and saturate the system blocking the rise of newcomers - political instability and populism (critical income inequality).
Endogenous Tipping Point: The Market Itself – Every element of today’s markets has a potential tipping point 1. Now that Central Banks controlling markets – them stepping away from QE, the ‘momentum and volatility factors’ entering turbulent waters are the first suspects - as passive and quasi-passive investors battle one another in a race to the bottom. A sudden rupture can be endogenous, and come from within 1. Financial booms can't go on indefinitely, they can fall under their own weight 2. Obviously, as always, there can be exogenous triggers too, tipping the balance and leading to a rapidly changing state. 3. Exogenous Triggers - It is because we are the edge of chaos and feedback loops are broken, system is degrading and at risk of deep transformations that triggers matter. In normal circumstances they would matter less and you may expect policymakers to have more of a control upon intervention. 1. May the trigger be Cryptocurrencies? Left unchecked by regulators, they have grown to a level where they must matter for global systemic risks, at 750 billion dollars, with emphasis on its volatility – come back to this in another ep 2. May the trigger be China? The extreme credit expansion of recent years seems a textbook case study to prove wrong the theories of a Minsky Moment. A total on- and off-balance sheet bank credit of 40trn, at almost 4 times GDP, a credit expansion well above trend (in danger zone according to BIS credit-to-GDP ratio gap measures), Corporate China at above 250% debt on GDP in only few years, a budget deficit at 13% of GDP (including local authorities) are classic recipes for overdue system failure. 3. May the trigger be inflation? Presumed by most to be dead, it is showing signs of resurrection, all the while as wages started to react to a tight job market in the US. US rates are stationing right at multi-decades downward trend-lines, the break of which would wreak havoc. 4. May the trigger be a ‘USD shortage’ or de-dollarization? The drop in the USD creates a drop in what most assets are priced in 5. May the trigger be political risk - political framework itself may be on the verge of a regime shift under the weight of ever-rising ‘wealth effect’ of QE 6. The populism in political circles that was visible in 2016 (Trump, Brexit, Italian Referendum) and 2017 (Germany, Catalonia, Eastern Europe) is therefore expected to play an even bigger role in 2020. 7. There will be an inevitable critical transformation in politics sooner or later due to economics – created by politicians and banking groups - In the words of Will Durrant: “in progressive societies the concentration [of wealth] may reach a point where the strength of number in the many poor rivals the strength of ability in the few rich; then the unstable equilibrium generates a critical situation, which history has diversely met by legislation redistributing wealth or by revolution distributing poverty.” Rephrased by Justice Louis Brandeis, ‘’we can have vast wealth in the hands of a few or we can have democracy. But we cannot have both.’’
In Summary – All the signs are there but what the trigger is – who knows – next week we will look at the chances of Australian market going up from here
– RBA increased M1 massively in the past few months – sign of the first QE moves which would push market prices up
Thanks for listening, if you would like to get in contact you can do so here: http://financeandfury.com.au/contact
Welcome to Finance and Fury, The Furious Friday Edition.
Today – continue talking about wars – the banker's wars – this time on us and financial markets–
- Gone through how bankers fund wars, central banks carry out monetary policy that leads to Hot wars
- Start a miniseries - How To Crush A Bankers' Dictatorship – likely be three eps over next Fridays – lots to unpack - Look at central banks – London, German and US connection - A Lesson From 1918, 1929, 1933 – look at how to break the trend -
To start this – the question of why often comes up – why would bankers influence politics, crash economies, control the economy and start wars
- Well, hear why from the horse’s mouth – Lord Montagu Norman, Governor of The Bank Of England, addressing the United States Bankers’ Association, NYC 1924- Quote: “Capital must protect itself in every possible way, both by combination and legislation. Debts must be collected, mortgages foreclosed as rapidly as possible. When, through the process of law, the common people lose their homes, they will become more docile and more easily governed through the strong arm of the government applied by a central power of wealth under leading financiers. These truths are well known among our principal men, who are now engaged in forming an imperialism to govern the world. By dividing the voter through the political party system, we can get them to expend their energies in fighting for questions of no importance.”
- Lord Montagu Norman was Governor of the Bank of England from 1916 to 1944. During this period, he participated in the central bank conferences which set up the Crash of 1929 and a worldwide depression.
- The quotation by Norman is a shorter version of the Bankers’ Manifesto of 1892: This adds a bit of additional context – Read another passage – “People without homes will not quarrel with their leaders. History repeats itself in regular cycles. This truth is well known among our principal men who are engaged in forming an imperialism of the world. While they are doing this, the people must be kept in a state of political antagonism. The question of tariff reform must be urged through the organization known as the Democratic Party, and the question of protection with the reciprocity must be forced to view through the Republican Party. By thus dividing voters, we can get them to expend their energies in fighting over questions of no importance to us, except as teachers to the common herd. Thus, by discrete action, we can secure all that has been so generously planned and successfully accomplished.”
- Why they do this – to retain control and to distract
- Only a few of them – lots of us – in reality – their positions are very fragile – while they have a lot of control – they have seen in the past what a pissed off population can do to them
- If you spend all your time fighting between left v right, men v woman, black v white – too busy distracted on newly created constructs
- Example – Germany population rising post WW1 – and how they were desperate to find a Fuhrer
First - What created the second world war? – conditions left after the first – all done at the treaty of Versailles
- Versailles and the Destruction of Germany - Britain had been the leading hand behind the orchestration of WWI and the destruction Germany – Germans knew it
- Kaiser Wilhelm realised this too late when he said: “the world will be engulfed in the most terrible of wars, the ultimate aim of which is the ruin of Germany. England, France, and Russia have conspired for our annihilation… that is the naked truth of the situation which was slowly but surely created by Edward VII”
- Who was his uncle – Nicholas II of Russia and George V who took over in 1910 were all first cousins
- Britain also organized the reparations conference in France - imposed impossible debt repayments upon Germany and created the League of Nations
- Lloyd George (politician) led the British delegation alongside his assistant Lord Lothian (secretary to the PM), Leo Amery, Lord Robert Cecil, and Lord John Maynard Keynes - all of these figures were members of the Round Table Movement that took full control of Britain by ousting PM Asquith in 1916
- After the 1918 Armistice – Treaty of Versailles saw to the dismantling of Germany’s army and navy
- Forced to pay the impossible sum of 132 billion gold marks, give up territories representing 15% of arable land, 10% of its population, 12% of its livestock, 74% of its iron ore, 63% of its zinc production, and 26% of its coal. Germany also had to give up 8000 locomotives, 225 000 railcars and all of its colonies across Africa, South America, etc.
- People often forget that those 10% of Germans were ruled by Polish, French and other nations – who were not kind to them – attacked and killed regularly
- Germany gave up half of its gold supply and still barely a dent was made in the debt payments
- In June 1920 – Bankers made the decision to use the printing press. Rather than the “miracle cure” which monetarists promised = resulted in an asymptotic devaluation of the currency into hyperinflation
- June 1922, 300 marks exchanged $1 US and in November 1923, it took 42 trillion marks to get $1 US
- 1Kg of Bread sold for $428 billion marks in 1923
- Further Results - industrial output fell by 50%, unemployment rose to over 30% - food intake reduced by over half of pre-war levels –
- Then to make it worse - a form of shorting the currency occurred by the bankers – making the situation worse = hyperinflationary blowout of Germany resulted in total un-governability of the state – Remember – Central Banking authorities did this – not the German people – who had no say
- Population under control of the Weimar republic at this time – imposed from 1918 - which was very ineffective – ended in 1933 with the Nationalsozialistische Deutsche Arbeiterpartei - Nazi Party
- The original solution was from the Wall Streets “Dawes Plan” – installed the London-trained banker by the name of Hjalmar Schacht.
- First introduced as Currency Commissioner in November 1923 and soon President of the Reichsbank
- Schacht’s first act was to visit Bank of England’s governor Montagu Norman in London
- Schacht was provided a blueprint for proceeding with Germany’s restructuring – Policy given from BoE Governor.
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- Policy-create new currency called the “rentenmark” at a fixed value exchanging 1 trillion reichsmarks for 1 new rentenmark
- The Reichsmark was the currency in Germany from 1924 until 20 June 1948
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- But hidden in the fine print allowed the germans to be robbed again - new currency would operate under “new rules” requiring austerity measures – i.e. Mass privatizations from Anglo-American companies purchasing state enterprises
- Industrial interests - IG Farben, Thyssen
- Mining and resources - Standard Oil
- Finances - Union Banking, Brown Brothers Harriman, JP Morgan
- Under the supervision of John Foster Dulles, Montagu Norman, Averill Harriman
- Ask yourself – what would you do if you were in that position? Almost starving to death again after almost dying by a bullet or losing your home, being left on the street, or sharing 1 room (studio) between 6 people, or worse, starving to death? All due to the games of some monarchs and central bankers?
- In Germany - civil unrest began to boil over - the London-Wall Street bankers couldn’t control
England wasn’t in great shape either 1. Well before American entered WW1 - enormous amounts of money lent from American banks to England to purchase weapons - from American manufacturers – racked up a big debt – once the war was over - debts needed to be repaid 1. But English economy was in ruins – bombed, broke, killed or mentally scared millions of men – no longer working – 2. Also - borrowed money used to buy weapons – not increase economic output domestically 3. Essentially no way for England to repay its enormous war-debts – again, bankers are smart so made them owe the debts in USD 4. Bankers knew that England had greatly increased its money supply as well without increasing its productive capacity – England also printed funds to buy weapons – 5. Result = pound plummeted in value - Start of 1920 - pound dropped to a low of $3.18. - pre-war $4.87 2. At this time - Benjamin Strong - Governor of the Federal Reserve Bank of New York for 14 years until his death 3. What we have here is that Montagu Norman (BoE), Hjalmar Schacht (who went on to run the BIS) and Strong all good friends 1. Strong and his counterpart at the Bank of England -Montagu Norman –conspired to return the pound to its pre-war parity with the dollar. The Politics of Money by Brian Johnson - Quote “Strong and Norman, intimate friends, spent their holidays together at Bar Harbour and in the South of France.” 2. How – Bank of England and FED leaders came up with a plan - Impossible to make pound stronger – easier to make the dollar weaker – reasoned that if the dollar was made weaker, the pound would become stronger as a result – teamed up 4. Proof - May 1924 - Strong said he was pursuing a “readjustment” to benefit England - “readjustment” was to pursue a policy of inflation in the US - keeping Britain from having to raise interest rates 1. Strong in his own words – “the burden of this readjustment must fall more largely upon us than upon them (Great Britain). It will be difficult politically and socially for the British Government and the Bank of England to face a price liquidation in England… in face of the fact that their trade is poor and they have over a million unemployed people receiving government aid.” 2. Confirmed in October of 1924 - Norman asked Strong to continue with this policy of low interest rates, or ‘easy money.’ 5. Strong/FED implemented easy money policies from 1925-28 – based on agreement with Norman to keep US interest rates below those of London 1. However, even all this was not enough to keep England solvent. As a result of her massive war debts – denominated as they were in dollars, not pounds – England’s position was hopeless. This hopeless position was further exacerbated by a national strike in May 1926. The strike began in Britain’s most important industry – coal – There were socialist/Communist/Fascist uprisings in England at this time 6. Anyway - Strong withheld increasing interest rates for the US was too late – today we call this easy money policy 1. Encouraged the surging American boom of the late 1920s – massively increased speculation 7. This is How the 1929 Crash was Manufactured – low cost of money creating speculation, increased leverage, and financial deregulation 1. 1923 - President Coolidge and financier Andrew Mellon (Treasury Secretary) de-regulated the banks 2. Introduced a Broker loans scheme (Margin loans) - speculators allowed to borrow 90% on their shares 3. investments into the real economy were halted during the 1920s speculation was the norm 4. 1925 broker loans totalled $1.5 billion, 1926 = $2.6 billion, 1926 = $5.7 billion - stock market was overvalued fourfold 8. When the bubble was sufficiently inflated, a moment was decided upon to coordinate a mass “calling in” of the broker loans- no one could pay them resulting in a collapse of the markets 1. Then banks like JP Morgan had already sold out before the crash - then bought up the physical assets for cents on the dollar 2. Prescott Bush of Brown Brothers Harriman (bank involved with German takeover) made his fortune in this manner 1. He then went onto bailout a bankrupt Nazi party in 1932 9. Market crash unleashed four years of hell in America, EU, Australia- leading to the great depression
Recently - The media has started reporting of “financial Armageddon” potentials – I have as well – but their solution is more of what has created this environment - global hegemonic synthetic currency – the SDR – which will replace the collapsing US dollar under a new system of “green finance’’
- Reporting of the media can create fear – I apologise if I have contributed to this – I want to help people not get caught by surprise – and to provide actual reasoning and some individual solutions –
- Media reporting is designed for a Trauma-based society control – create an event that causes trauma – people cant rationally think through the solutions shoved in their face – we all need to believe in something -
- But it shouldn’t be ignored that financial markets are sitting on the largest financial bubble in human history
- Very reminiscent of the 1929 bubble that was triggered on black Friday in the USA which unleashed a great depression
- Currently, Western economies are not in too a dissimilar position as post WW1 – in the 1927 or 1928 period
- Most Governments have unpayable levels of debt – similar to the Versailles debts on Germany
- 10 years of easy money policies (low rates) unleashed unbounded speculation - similar to the “roaring 1920s”
- Populations suffering levels of depressions, PTSD and disenfranchisement – vastly different reasons – some from watching their friends decompose in no-man’s land for months, some from overuse of social media or climate change fears
- Also - the solutions proposed o solve the situation is put forward by the same groups who created the issues - identical to what the world faced in 1933 as “central bankers” became the solution for the world depression.
- Start to look at next next episode – Look at the great depression – and the Bankers plan to overthrow FDR and put in their own leader
Thanks for listening! If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Say What Wednesday edition.
Today's question comes from Gab.
Hi Louis, thank you (as always) for the great content. I've got another question that I've struggled with recently, and I'm hoping you can shed some light on the topic. I've setup a family trust for our investments, but, as you know, they have a limited shelf life of 80 years. What happens when a family trust comes to the end of its life? What happens with the assets and are there CGT or stamp duty liabilities? Is there a way to minimize costs and maintain the trust structure? Thanks, Gab
Hi Gab, no worries at all! Glad to hear you are enjoying it.
Great question – Preface – not a tax expert – important to get legal advice - but this is what I know
- Family Trusts have an 80-year lifespan – when a trust is set up the time it is active can be set for before this, but the max is 80 years and is generally the default to maximise the benefits
- Known as The 'vesting' date – i.e. the point in time which a trust has to be wound up – in the trust deed
- May want to trust to wind up earlier – so change the vesting date earlier
- If this isn't specified, it defaults back to 80 years. At the point of vesting, this doesn't automatically trigger a CGT event, it is what happens after that does sadly.
- What happens at vesting time -There are normally two options at the point of vesting.
- Either a new trust is created which takes over the ownership of the assets held (triggering a CGT event)
- No new trust is created and the beneficiaries receive the assets directly (again another CGT event) – Official wording: On the vesting of a trust the relevant beneficiaries (who are entitled under the terms of the trust deed) become absolutely entitled to the property of the trust: that is, the interests in the trust property become fixed and vested in the relevant beneficiaries.
- Either way - Vesting of a trust may create capital gains tax (CGT) and income tax obligations
- Depending on which – different types of CGT events that may occur and income tax implications that may arise, these include:
- If the trustee and the relevant beneficiaries (who on vesting have a fixed interest) agree that the trust assets will be managed as if the trust has not vested, then this may amount to CGT event E1, whereby a new trust is created over the trust assets starting from the vesting date; and
- If the assets vest in a single beneficiary on the vesting date, then CGT event E5 happens when the beneficiary becomes absolutely entitled to the trust asset as against the trustee.
Stamp Duty – On property (not shares/Managed Funds) –
- Property has double-take = CGT + transfer stamp duty – similar trigger to CGT = event triggering the absolute entitlement or a new trust is established over the property
Look at the CGT consequences of Trust Vesting 1. Determining whether or not a CGT event happens on vesting requires a close consideration of the effect of vesting as specified in the deed. This will include consideration of the effect of vesting on the nature of beneficial interests in the trust and the nature of the property held on trust. 1. It may be the case that no CGT event happens by reason alone of the trust's vesting. But events occurring post-vesting may cause a CGT event to happen. 2. CGT event E1: the creation of a new trust - A trust vesting of itself does not ordinarily cause the trust to come to an end and settle property on the terms of a new trust. As such CGT event E1 need not happen merely because a trust has vested. 3. Circumstances might, however, occur in which the parties to a trust relationship subsequently act in a manner that results in a new trust being created by declaration or settlement so as to cause CGT event E1 to happen. 1. CGT event E1 happens if you create a trust over a * CGT asset by declaration or settlement. Note: A change in the trustee of a trust does not constitute a change in the entity that is the trustee of the trust (see subsection 960-100(2)). ... (2) The time of the event is when the trust over the asset is created. 1. If CGT event E1 happens and a trust is created over the assets, the trustee of the new trust is taken to acquire each asset when the trust is created and the first element of each asset's cost base is its market value – rollover event – roll from one trust to another 2. Exceptions - CGT event E1 does not happen if you are the sole beneficiary of the trust and: 1. You are absolutely entitled to the asset as against the trustee (disregarding any legal disability); and the trust is not a unit trust 2. CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust against the trustee despite any legal disability of the beneficiary. This CGT event does not happen if the trust is a unit trust – subsection 104-75(1) of the ITAA 1997 3. CGT event E5: beneficiary becoming absolutely entitled 1. The vesting of a trust may result in the takers on vesting becoming absolutely entitled as against the trustee to CGT assets of the trust, depending on what those CGT assets are and the particular interests of the takers on vesting. 2. The Commissioner's view of when a beneficiary becomes absolutely entitled and when CGT event E5 happens is explained in draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997. 3. In certain cases CGT event E7 may happen (for example upon actual distribution of CGT assets to beneficiaries), but it will not happen to the extent the beneficiaries are already absolutely entitled to the CGT assets as against the trustee. 4. These two are counter initiative – or mutually exclusive for any loopholes – but maybe not – 5. Was looking at ways around this – keeping a corporate trustee that is the trustee of the new trust and retain same beneficial ownership of beneficiaries – hats off to lawyers – no wonder tax law is a booming profession with legislation 6. No idea if this would work – but having a corporate trustee retain the assets, trust vests but indefensible entitlement to beneficiaries which aren’t absolutely entitled 1. In English – corp trustee that has more than 1 beneficiary 4. What I have seen - In itself - the vesting of beneficial interests in a trust does not have to cause the trust to come to an end 1. Nor cause a new trust to arise - even if vesting date is described as a 'Termination Date', Vesting does not mean trust property must be transferred to the takers on vesting on the vesting date, nor that the trust must be wound up either immediately or within a reasonable period (although the deed may require these events to occur after vesting) 2. Trying to see if this is beyond the 80-year timeline – 3. Not 100% sure if there is any way around it – I’ll do another episode if I find something good on this
If there isn’t a way out of CGT being triggered - It is normally best to start planning in advance of vesting, through the transfer of assets over a number of years in advance to minimise CGT through timing.
- CGT timing – Spread the investments
Options to minimise Tax on Investments (i.e. investment bonds or companies): Options –
- Family Trust – CGT Timing –
- Selling off/Transferring chunks investments to the new trust – or beneficiaries over a number of years
- $1,000,000 gain in 1 year can result in 45% taxes on the assessable gains for most beneficiary distributions
- $200,000 each year for 5 years split between beneficiaries can help get assessable amount down
- Set up an investment company – your own LIC
- Downside – own personally (otherwise run into trust lifespan)
- Might not be as tax-effective – 28.5% to 30% tax, with no CGT discount of 50%
- Investment bond –
- Done in previous episodes – features covered on those episodes
- But tax benefits – capped at 30% with withdrawals being tax-free after 10 years
- FF income inside of these results in no net tax paid on Income
Thanks for the question and thanks for listening today. If you want to get in contact you can do so here: http://financeandfury.com.au/contact
Welcome to Finance and Fury
Last week - The lead up of markets in relation to complexity theory – phase transitions and feedback loops in markets
https://financeandfury.com.au/how-to-analyse-share-markets-by-treating-them-as-a-complex-system/
Today – look at the question - How do we know that we are in for a collapse – or better - what are the early warning signs in of a change in feedback loops triggering a phase transition a complex system
- There are signals – complexity can pick up on but equilibrium can’t – Uber listing on the market with $1.5bn loss – signal
- Today's episode is a conceptual framework expanding on the previous episode – particularly focus on market fragility and what signals point to it increasing
- The last episode talked about how after a while the same positive feedback loop can create an increased instability in financial markets – this can occur between public and private investors – but after enough of the same feedback – exposes markets to the risk of a systemic risk escalation.
- But what sort of events act as generic early warning signals for chaos? – i.e. phase transition in the markets
To start – how is the probability of critical transformations assessed? What acts as early warning signals?
- Preface this – nobody can ever predict the exact point at which the system transforms – going through a phase transition of stable to collapse – financial markets are stochastic system - having a random probability distribution or pattern that may be analysed statistically but may not be predicted precisely
- Events that push the market out of equilibrium happen randomly – at any time – but the probability of one event triggering a collapse is low if the markets around a long term equilibrium between buyers and sellers –
- No net money entering or leaving the market
- But when more net money enters or leaves markets - what we can see is when the system (share market) has become inherently unstable, fragile, vulnerable – see bigger chances of large gains or losses
- Lots of money entering markets – through feedback loops - starts to exponentially increase the chances of anyone small perturbed event being the trigger for critical phase transition – right now
- All about probability – increasing with the nature of markets and the early warning signs
- Events that push the market out of equilibrium happen randomly – at any time – but the probability of one event triggering a collapse is low if the markets around a long term equilibrium between buyers and sellers –
- Another preface – expansion of similar policies that have created a bubble are currently continuing –
- QE4, printing press with cheap money – may create more of a bull run in the markets over the next 12 months
- But these events create more of a fragile market – so while the markets may run for the next few months to years, the collapse will be of a bigger magnitude when it occurs
When markets collapse – it is chaos – thankfully a school of complexity theory helps with this – that is chaos theory
- Jeff Goldblum – his character from Jurassic Park is a mathematician who specialises in chaos theory
- Chaos theory is very useful when the apparent randomness of chaotic complex systems (such as a share market) has an underlying pattern, along with feedback loops creating repetition and self-similarity and self-organization
- The metaphor for this behaviour is that a butterfly flapping its wings in China can cause a hurricane in Texas –
- The butterfly effect describes how a small change in one state of a deterministic nonlinear system can result in large differences in a later state, meaning there is sensitive dependence on initial conditions.
- What is chaos theory a branch of mathematics focusing on the behaviour of dynamical systems that are highly sensitive to initial conditions – looking at the theoretical probability of chances happening in non-linear models
- Initial conditions - called a seed value, is a value of an evolving variable at some point in time designated as the initial time – in financial markets – the variables change every second the market is open – number of buyers, sellers, currency exchange, employment, costs – many variables – at any given point – say now is time t – where do each of these lie? – then aims to look at the probability of something happening from here
- Chaos relates to the Sensitivity to initial conditions – this is a key characteristic of complex deterministic systems
- But due to the nature of complex systems – the system may change dramatically without a change to initial conditions, but rather as the result of moving beyond critical tipping points, or points of no return
- Why is it almost impossible to time market?
- Small differences in initial conditions- even due to rounding errors in numerical computation – so each calculation based around the assumptions can yield widely diverging outcomes - renders long-term prediction of market behaviour impossible - behaviour is known as chaos:
- Chaos: When the present determines the future, but the approximate present does not approximately determine the future.
- All this means is that markets may collapse at any time for any number of reasons – hence chaotic -
- Small differences in initial conditions- even due to rounding errors in numerical computation – so each calculation based around the assumptions can yield widely diverging outcomes - renders long-term prediction of market behaviour impossible - behaviour is known as chaos:
Collapses are well explained by the nature of complex systems – due to the features of complex systems – go through 6 main: 1. Cascading failures – there is a high level of interconnection in complex systems – lots of buyers and sellers following a crowd – creates a strong coupling between components in complex systems – i.e. buyers and sellers and the shares themselves 1. A failure in one or more components can lead to cascading failures which may have catastrophic consequences on the functioning of the system – cascading is thanks to interconnection 2. Localised attack may lead to cascading failures and abrupt collapse in spatial networks. 2. Complex systems can be open systems – like the share market which is frequently far from energetic equilibrium: 1. This is fundamental analysis – what is the share worth based on the FCF models – and what is it trading at 2. But despite this flux, there may be pattern stability 3. Complex systems may have a memory - The history of a complex system is important due to the cyclical nature of human/investor behaviour – being driven by fundamental human emotions of fear and freed 1. Because complex systems are dynamical systems they change over time, and prior states may have an influence on present states. 2. More formally, complex systems often exhibit spontaneous failures and recovery as well as hysteresis. Interacting systems may have complex hysteresis of many transitions – crowd behaviour and panics/hysteria 4. Dynamic network of multiplicity - dynamic network of a complex system – how connected is the system to the environment? The system is the market – the environment is the world – i.e. every part that interacts with the market from wages, confidence, debt level 5. Relationships are non-linear - In practical terms, this means a small perturbation may cause a large effect – i.e. the butterfly effect - a proportional effect, or even no effect at all. In linear systems, effect is always directly proportional to cause 6. Relationships contain feedback loops - Both negative (damping) and positive (amplifying) feedback are always found in complex systems 1. The effects of an element's behaviour are fed back to in such a way that the element itself is altered but in the non-linear fashion
Current signs and signals - 1. See a lot of listing on share markets – seen it with tech companies that aren’t making money but are listing on the exchange – payment platforms, tech start-ups, ones like Uber – signs of a peaking of markets 2. Derivative counter party positions are at an all time high - $1,200 Trillion estimate 3. Cost of borrowing all time lows – free money to bankers so no risks for gambling – if you could gamble on CC for 0% interest? 4. Aus banks offering Instalment warrants – geared equity products being issued in the billions – self-funding through dividend 5. ETF bubble – passive inflows and technology – talked about this already – but of the $15trn printed recently by central banks - $10bn in passive ETF/alternative structures 6. One of the biggest ones – Credit/lending in markets all time high in like NYSE – check out graph at website 7. (Thanks to advisor perspectives for putting together) 1. Back in Dot Com bubble – Negative balance 130bn at peak – went to -45bn while market dropped 47% 2. Back in Pre-GFC 2007 3. October 2019 – sitting at $240bn but was at $330bn back in July 2018 8. Stable/slowdown into Chaotic – Phase transition – 1. The lag between net leverage being withdrawn from markets - Occurs every time – cyclical non-deterministic patterns 2. Markets go up – then go down – the size of the transitions can differ – it looks like a big one is due -
Pretty heavy episode – leave it there
Next episode - explore the current possible triggers for the markets
Thanks for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact
Economic Warfare through currency, trade, and sanctions – tools that can be used to crush a nation without firing a shot – but have historically been a pre-curser to war – also – the war on all of us financially – conducted by Central banks/Fed
James Rickards – got through his 4 books this year and he has an interesting theory on financial wars turning into real wars -
Stages – where financial crisis lead to – transition from economic wars to hot wars
- Build up –
- Trade imbalances – starts when people living beyond their means begin taking on debt. Wages become distorted, production costs escalate and industries move offshore – results in trade deficits and unsustainable national debts
- Financial Crisis occurs – Debt levels reach tipping point and the financial system suddenly destabilises – economy crumbles and borrowing stops, bankruptcies rise and unemployment increases – leaves the country in a bad state
- Initial outbreak –
- Currency wars – political leaders/bankers cheat the rules of the game – economic laws of floating currencies – Governments print money to pay debts and devalue their currency – promotes more competition on exports and discourages imports
- Those who move first in devaluation gain the most
- Trade wars – As countries steal trade from one another – governments impose tariffs – global trade slows having the ability to make the financial crisis worse, or make it contagious – Politicians again devalue currencies and become populist
- Can then go to Sanctions – or cutting off a country completely from trade through blocking international transactions – like NK or counties in middle east
- Hot wars break out – when everything else fails – invade – but assured mutual destruction is too great a chance with nukes
Looking into it – has a very good point based on a few examples -
First – taking a step back and explaining what these are individually – 1. Nothing new about the first two on this podcast – so skip as covered this in previous episodes 2. Have also touched on Currency wars – A currency war refers to a situation where a country seek to deliberately depreciate the value of their currency – purpose is to help stimulate their economies 1. Currency wars begin in a condition of too much debt and not enough growth. Countries steal growth from their trading partners by cheapening their currencies to promote exports and import inflation. 2. A currency war is a tit-for-tat escalation of currency devaluation aimed at improving one's economic position on the global stage at the expense of another. 3. Currency devaluation involves taking measures to strategically lower the purchasing power of a nation's own currency 4. Devaluation, however, can have unintended consequences that become self-defeating – those are trade wars 3. Trade wars – introduction of taxes (tariffs) on other countries imports – helps make domestic production more competitive 1. Other side of direct subsidies – Holden – Say they get $100m p.a. in assistance from gov, but also benefit from 2. Why Germany has economically conquered EU – benefit from devaluation on what the Deutsche mark would be along with free trade across the rest of EU
- The present currency war started in January 2010. The problem with currency wars is that all advantage is temporary and is quickly erased by retaliation. Trading partners retaliate with their own devaluations. Currency cross-rates end up back where they started, with costs imposed due to the uncertainties.
- Not only is the world not better off but it is worse off because of the costs and uncertainty resulting from the currency manipulations.
- Eventually, the world wakes up to this reality and moves to the trade war stage. Once countries realize that currency wars don’t work, they turn quickly to trade wars through tariffs and other trade barriers.
- The problem is that trade wars don’t work either, for the same reason currency wars don’t work — retaliation or tit-for-tat tariffs soon puts everyone back where they started.
- The new trade war started in January 2018 with the announcement of tariffs, and those tariffs actually began to take effect last week. Just because trade wars have started does not mean the currency wars are over. Not at all. The currency wars and trade wars continue side by side - they become related and also self-defeating
- If the U.S. puts tariffs on China, which we have, then China can fight back two ways.
- The first is to impose their own tariffs on U.S. exports, which they have.
- The second is to cheapen their currency to offset the impact of the tariffs.
- If the U.S. imposes a 25% tariff on China but China cheapens its currency by 25%, then everyone is back where they started in terms of the costs of Chinese goods to U.S. consumers.
- This would be a potentially devastating development for markets – due to currency devaluations = capital flight
- If you are a US investor – If you invest $100 in China but going to lose 25% of value through currency what are you going to do? Keep it in china and potentially lose 25% of the comparative value – or sell – but also create panics through all markets
- A shock yuan devaluation as what happened twice in 2015 - U.S. shares fell over 10% in a matter of weeks in both cases
- There are individual winners and losers from the currency and trade wars, but the global economy as a whole is definitely a loser. This new trade war will get ugly fast and the world economy will be collateral damage.
- If the U.S. puts tariffs on China, which we have, then China can fight back two ways.
The narrative of trade wars, devaluations, and potentials of nuclear wars or terrorism has been able to distract from the modern-day weaponised economics - 1. Distraction tactics - dread surrounding potential nuclear warfare or terrorism distracts from economic threats behind the scenes 1. Important to remember that almost all wars benefit international financiers by creating an environment ripe for centralisation of wealth and political power. This notion tends to confuse some analysts and activists in the liberty movement. 2. The bottom line is this: Russia and China are in full support of globalist-controlled institutions like the Bank for International Settlements (the central bank of central banks) and the International Monetary Fund (IMF 1. Pushing for the SDR – so the IMF becomes the de facto ruler of a new global monetary system 2. It would appear that a crisis event is now being triggered in the form of an international trade war – this trade war is becoming widespread and will accelerate the de-dollarization 1. China has been preparing for the move away from the US dollar since at least 2005 1. 1. began issuing what are referred to as "panda bonds" – i.e. Yuan-denominated bonds 2. expanded its liquidity by trillions over the past 13 years 2. China now even began purchasing oil in Yuan instead of dollars - created what is being called a "petro-yuan" market 1. 1. Also - considering the fact that China is the largest importer/exporter in the world, it is only a short matter of time before many of China's trading partners switch from the dollar to the yuan for exchanges 2. This can dethrone the USD in oil/commodity/reserve currency 3. All of this is culminating is a final action - the end game for developing trade war 1. 1. Done through the complete dumping of the dollar itself by China and its allies 1. Building evidence that China is stopping purchases of US treasury bonds, this action may come much sooner than many people seem to think 2. People rightly point out that if china dumps US bonds – they will lose a lot of money in the process – 3. This is used as a reason why they won't – but Wars cost billions or trillions anyway 4. Assured mutual destruction in financial wars isn’t true – one country willing to lose billions to cripple another nation financially 5. Spend $500bn on a war – or lose $500bn in the markets – same money spent – but one is effective in hurting the USA – war with the USA would be much harder for china 2. The mainstream media automatically blames Trump and the trade war for instability in share markets – 1. Easy to point the blame there due to the attention the media gives him -but they completely ignoring the direct correlation between the Federal Reserve removing artificial support from stock markets and their continuing declines towards the end of last year – but they have recently entered into the markets to give them another boost 3. The central bankers created the massive market bubble – they could and have also created massive market meltdowns by removing support and withdrawing liquidity – 1. 1. Have a scapegoat to limit the suffer of any blowback to themselves 4. International financiers and central banks have everything to gain by pulling the plug on life support for stocks, bonds, real estate 1. In the midst of a trade war panic, they can pretty much do anything they want without retaliation. All future catastrophe can now be dumped in the lap of any number of scapegoats. Some people will blame Donald Trump and the conservatives that voted for him. Some people will blame China and Russia as the culprits behind our ills. Other people will blame “capitalism” and “free markets” in general for the crisis even though we haven’t enjoyed true free markets in well over a century. But, very few people will blame global banks specifically. 2. Central banks don’t suffer in depressions like the average joe – they lend the money through creating it out of thin air 3. Never directly take the blame either – benefit over the panic as the blame is pushed on “selfishness” of “nationalism” 1. They will call for a one world economic system built on a one world currency framework as the solution. 5. Their Wealth can be shifted into any number of assets anywhere on the planet — so the idea that they have anything to lose in this scenario is rather naïve – they can wait and buy back assets or short the markets 1. Bankers/thinktanks will push for even more power for existing organizations like the IMF and BIS - As history shows – when countries suffer economic breakdown, globalist institutions only grow under the guise of ‘if only we had more power before this we could have stopped it’ – Central banks were meant to put an end to crashes – but still going on 6. That is the major difference between hot wars and financial wars – 1. In hot wars – there is chaos and countries can lose power – China in the opium wars with the USA, Germany in ww1 and 2, 2. But in an economic war - centralized dominance remains possible and increases 1. So while the tragedy of mass unemployment, loss of monetary stability or loss of reliable food and energy production occurs - banking conglomerates and central bank organizations will thrive 2. Elites seem to be preparing for some instability in life - Google bunkers in NZ or other parts of America, or underground in London – 7. In summary – bankers fund wars and profit from them, also in financial wars – but have always retained and amplified control over the economy
There are two good examples of this sort of build-up –
- This happened in the 1930s and it seems to be happening again
- Let’s hope that history does not repeat and that we don’t end up in a Third World War, as the currency/trade wars of the 1930s helped lead to WWII.
- Come back to the History of WW2 leadup of great depressions – deserves its own episode
Next week – look back at 1929 – what happened in the great depression- with currency and trade wars – and how it helped lead to another world war – but also look at how to stop the trend
Thanks for listening to today's episode. If you want to get in contact you can here: http://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Say What Wednesday Edition.
Where each week we answer a question from you.
Hi Louis,
I have a questions about portfolio construction and asset allocation. I am 36 years old and am trying to understand what is the most appropriate asset allocation to have. There is so much material out by I am looking to build a portfolio that is skewed towards reliable income paying stocks through dividends even in down times and hence have favoured the larger Aussies LICs and ETFs. I am 100% in equities with 80% Aussies Shares (LICs and ETFs) and 20% international (ETFs US and Non US) however trying to understand what does a good portfolio and asset class look like and what are the things I should be further considering. I am looking to maybe add Gold (direct through direct ownership and Gold ETFs) and Bonds as I keep hearing these are good to have for assist in downtime but the income on these are very poor but then also thinking should I be having more international exposure / alternative asset classes like A-REITS/ emerging markets etc however as mentioned I am more focused on ongoing incoming paying stocks.
Would love to hear your overall high-level thoughts and views. Thanks, Mario
Three steps – Investing between asset classes - Investing within an asset class
Finding the right investments to fill them
Asset classes and correlation – Few things to cover off here
The ideal weighting of Asset allocations is important – Three questions to help determine this:
- It depends on the purpose of the investment portfolio. What do you need to achieve?
- Long term growth – Trying to maximise the balance
- Short term stability – Well diversified portfolio with low exposure to growth
- Drawing an income or reinvesting – Type of investment held
- How much time you have?
- Longer timeframes allow for more planning and take advantage of the long term growth
- Being 36 and assuming you won't need this for 20+ years, the volatility
- And how much risk you need?
- Returns come in two parts = Income + Growth
- If there is growth to the equation, it can lose value – Enter risk – But it can help long term
- Bonds – do provide some incomes but yields are low due to higher prices -
Portfolio construction – What you need to know for achieving needs – Three more questions from this
- What asset classes you need and how much of each you will need?
- What investments within each will you need?
First) Asset Classes – Selecting the correct mix of Income and Growth 1. Go through five big ones – Core to most portfolios (Doesn’t include direct property) 1. They can be broken down to their purpose - Example – If you need to draw a consistent income, you won't want much volatility 2. Asset classes - No growth – Low chance of capital loss (Defensive) 1. Cash – Interest 2. Fixed Interest – Coupon payments (FV back at the maturity) 1. Debt instruments – not all bonds – higher-yielding such as notes but the higher yield is paid due to risks 3. Asset Classes - Growth – Has a chance of capital loss (Growth) 1. Australian Shares – Dividends and Price gains (Generally higher Dividends than International shares) 2. International Shares – smaller dividends and Price gains 3. Listed Property and Infrastructure – Dividends and Price gains – but more volatility and leveraging risks
Second) How to determine the allocation to each class? The traditional way - Risk Profiles (Outlines but remember, not perfect) – But if income is the goal – focus on asset classes which have more income – Australian Shares
- High Growth – 100% to Growth – Longer-term 8+ years
- Growth – 80% to growth – Longer-Term – 7+ years
- Cash, FI of 20%
Third) Selecting the allocation to each asset class Even though something is defensive it can be income focused.
- Defensive – Generally for either income or capital protection
- Cash – How much income do you need? Need for reserves?
- Fixed Interest – Australian or International. Credit, alternatives or Bonds
- Higher risk (Corporate debt) – higher yields
- Growth
- Australian Shares – Market caps – Selecting a good weighting between asset classes – focus on higher Div paying shares
- ASX50 – Large Cap allocation
- Small-cap ETFs – Issue is when they are passive
- Income paying investments – can focus on higher Div paying/high yield ETFs
- ETFs – VAS = 4.1%, VHY = 5.3% but 7.3% grossed up
- International Shares – Countries and Market Cap of countries – some countries don’t pay dividends like Aus
- Van USA = 1.8% yield – Int Index = 2.4% yield – Average fixed interest index pays higher – Aus FI 3.8%
- Australian Shares – Market caps – Selecting a good weighting between asset classes – focus on higher Div paying shares
The aim of each asset allocation: Trying to do a balancing act to determine your risk tolerance 1. Risk – Volatility – Potential movements in price around a mean average 1. High potential for movements, considered higher risk 2. Speculative risk – Can become absolute risk (i.e. losing everything) but can be avoided (Diversification – the whole point of asset allocation) – could buy a few shares that payout 7% Dividend, but volatility may be a killer of returns 2. Income Focus of returns – want more Div paying companies- 1. So might be overweight to Aus FF shares – while being underweight to USA lower div paying companies
Back to the Question: Ideal Weighting for an income focus - general information only – not advice as haven’t taken personal situation into account
-
What is the purpose, timeframe and return needed?
- Purpose is to invest to generate a passive income while trying to minimise volatility
- You want to achieve a better income return than cash
- Allocation – Growth – about 80% Between shares and infrastructure –
- 20% bonds/fixed interest – pays higher incomes that US ETF
- Alternatives like gold while providing diversification and capital stability – no income so may not be appropriate
- Purpose is to invest to generate a passive income while trying to minimise volatility
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What to watch out for?
- REITS – leverage and income payments can come from capital gains - which dry up in downtimes
- Large Caps – Mostly Banks/Financials picking up the slack – their incomes may struggle over the next few years
- Emerging markets – Likely volatile and may not pay out incomes
- Yield trap – prices that drop can reflect a higher yield – without the dividend being paid
- Example - $100 share, $5 div = 5% yield – price drops to $50, looks like 10% yield – but may be a reflection of future income losses
- Finding the right investments –
- ETF structure – flow-through of returns – take what you get, so selecting correct underlying holdings is important
- LICs – not flow through dividends – but selected dividends like any normal company – can work in your favour for stability but at expense of growth as gains are reinvested but can be paid out
- Select what yields you are after 5-6% – make sure they are high quality
Thanks for listening to today's episode.
If you want to get in contact you can do so here: https://financeandfury.com.au/contact/
Welcome to Finance and Fury - Listen to last Monday episode on Share as a complex system – today diving in to discuss the application of a complex system and a financial collapse – or pre collapse – talk about phase transitions – build up and slowdown – pre-collapse
- Last ep - Complex is non-linear - more in the relationship of inputs and outputs than direct relationships of cause and effect
- Also Adaptive – so markets are evolving, dynamical as people will change their behaviour
- Shares have three characteristics of complex dynamical systems
- highly unpredictable - due to their non-linear relationships / interactions
- contagion effects – panic or bubbles are things that spread very quickly – through being interconnected
- modularity – while the whole system is well connected parts of the system are more connected within than between, which may help its resilience, or the ability for the system to return to equilibrium after turbulence
- broad inter-connectedness of global markets - only increased with globalization, the vast network of factors at play, the flipping correlation between assets over time
- External crises create a sudden shock experienced by financial markets over history – creates a far-from-equilibrium phenomena which is common in complex systems.
- financial markets are typical VUCA - Volatility, Uncertainty, Complexity, Ambiguity
- they are interconnected, interdependent, non-linear and a structurally volatile complex system
Metaphor -
- Avalanche – an avalanche is a complex system – Snowflakes and avalanches – avalanche is a good metaphor for financial collapse – systems analysis for avalanche is the exact analysis for the collapse of one bank, collapsing into another –
- As an example – say one Snowflake is one mortgage, or derivative position within a bank collapsing – how many does it take before one bank collapses – triggering more collapses in the system-
- both avalanche and bank collapse are complex systems – going through phase transition – something used in physics
- Phase is a state of being – steady, collapse, rebounding – so a transition is going from Steady to collapse to new paradigm –
- Helps o study collapse of avalanche – complexity offers insights into how financial markets behave –
- Important to distinguish between something that is complex and complexity –
- Something complex is linear – like a clock – or motor – constrained, but not complex –
- Complexity is different – parts are interactive and adaptive – which branch into infinity of outcomes
- You might know what may occur – but not why or truly how – has a massive computation problem – limits risk management
-
Example - back to the Avalanche – people at risk never really know when it will happen – but know that conditions are different and likely to affect chances – snow pack sides – systemic scale – larger = larger avalanche on expotential scale –
- Locate villages away =or stay above ridge line – or explode/descale and incur avalanche – cant predict but can try to stay safe
- Regulators help increase danger –
- allow Banks and derivatives are like snow packing up
- JP morgan to grow larger in size -like telling villages to build in path of avalanche
-
Allowing value at risk as a regulation tool is like – building ski lift in path of avalanche
-
WS execs know models unsound – but like it due to higher leverage – use anyway – bigger profits and higher buonus
- Regulations know as much as they want to land a job In the banks after
- The everyday man is in the path of the avalanche while bankers higher on the ridge
- A tipping point and subsequent inflection in any of those endogenous or exogenous subsets would clearly impact other subsets, and their own tipping points.
Phase transitions -
-
There is a space between order and chaos – this is called a phase transition zone where a system reaches criticality
- criticality – part of the self-organisation (characteristic in the last episode) – where investors have what’s called a critical point as an attractor – in English: how many people need to sell shares versus buy for the market point
- Example – Say sellers are represented by S – and there are 100 people in a market –
- S=1 – little change – if B = 99 – market likely to go up further – but this isn’t linear
- There is a threshold of S when reached that triggers more sellers
- Say S=10, this might trigger the next 20 to sell based around adaption and self organisation
- Now S=30, which might trigger the next 40 to sell = S=70 – now the market is in panic
- There is a threshold once reached triggers a phase transition – until the adaption and self organisation occurs to reverse the trend
- Example – Say sellers are represented by S – and there are 100 people in a market –
- criticality – part of the self-organisation (characteristic in the last episode) – where investors have what’s called a critical point as an attractor – in English: how many people need to sell shares versus buy for the market point
-
Probability of a collapse increases when the resilience of a system gets weaker
-
Resilience in a system is the ability to absorb shocks and to retain the same structure functions and feedback as before. It implies persistence, adaptability, transformability of the system. It requires a wide basin of attraction, a good balance between order and disorder. Essential to resilience is the presence of negative feedback loops.
- Resilience falls and the system nears a critical transition zone. The system stands at an unstable equilibrium, from where it can flip at any time on closing up to the tipping point.
- Approaching criticality has tell tale signs and can suddenly and abruptly morph into a whole new contrasting system
- is a place where its resilience may get weakened to the point where disorder and randomness prevail, and lead into a totally different environment – i.e. going through a phase transition
- As the system approaches the peak in criticality - it can then drift away from an ordered predictable states into a chaotic unpredictable state
- Metaphor - where snowflakes suddenly accrete to form avalanches at some critical tipping point
Phase Transitions occur around Changes In Feedback Loops
- How does the system degrade or reach criticality? How is resilience lost? How does it happen? – most common way is a change in feedbacks
- Feedback loops are essential forces in the build-up of any system
- Have mutual causal interactions between the elements of the system. The natural world is full of it. Negative feedback loops are the internal stabilizing forces of a system, as they bring the system back into balance early on after small perturbations.
- happens when self-correcting negative feedback loops weaken, and self-amplifying positive feedback loops arise.
- Self-amplifying positive feedback arise - $15trn printed in public funds from Central Banks - $10bn into passive index funds and similar investment products – feedback is 1) knowing this is happening and 2) continuing to invest for expected returns
- Self-correcting negative feedback weaken – the behaviours of the market adapt – eventually the ‘free ride’ probability lowers and people run for the hills and sell their shares – makes the markets fragile
-
Years of monumental Quantitative Easing / Negative Interest Rate monetary policies affected the behavioural patterns of investors and changed the structure itself of the market, in what accounts as self-amplifying positive feedbacks.
- This has been going on since 2009 – we are yet to see the unintended consequence of extreme monetary policymaking play out – but it created a system that through feedback loops has a far-from-equilibrium status
- We are entering a system where the resilience weakens and market fragility approaches critical tipping points
- Years of printing money and pumping it into hard assets like property or shares hasn’t saved the economy
- Has created a zombie states in the economy making it even more fragile – leverage is up with little real growth
-
A small disturbance is then able to provoke a large adjustment, pushing into another basin of attraction, where a whole new equilibrium is found.
-
So while it is impossible to determine the threshold for such critical transitioning - very probable that we are already in such phase transition zone, where markets got inherently fragile, poised at criticality for small disturbances, and where it is increasingly probable to see severe regime shifts.
Markets have entered into what complexity analysists call = the edge of chaos, a shift in feedback loops provokes a proximity to one or more critical tipping points. This is the zone where rare events become typical.
- Becoming evident that there is a decreasing rate of recovery and a critical slowdown in the effects of feedback loops –
- a general property of complex dynamical systems is that as they come close to a tipping point – which leads to a major critical transformation – or phase transition - a relatively minor disturbance can be the first slow flake that triggers an avalanche
- Most likely cause at this stage is the news of if we have a recession and the gig is up – people will see that the monetary policy on steroids approach has failed and the market will adapt – it will have reasons to suspect the possibility of a critical transition and the early-warning signals may enough to cause a panic
The build up – helped with feedback loops - Financial Markets Are ‘Complex Adaptive Systems’
- The more the market gets feedback in information - the tipping points get nearer
- markets are in an uncomfortable spot as the method of escape via lending cant
- An exogenous or endogenous trigger can easily push the equilibrium out of its small basin of attraction – enter into a phase transition and enter a new equilibrium
Welcome to Finance and Fury, The Furious Friday Edition.
Today is an interesting episode - Central Banks and Wars – Often wouldn’t think of these two together –
What is the purpose of a central bank? Financial stability, a lender of last resort, to smooth out the cycle of boom and bust? Not their original purpose –
- Why did nations first start central banks? To finance the material needs of the nation-state in times of war
- Central banks ramped up the funding capacity of wars – the long-term costs could be covered
- Britain had shown that its central bank chartered in the 1690s was necessary to finance a crown bent on war
- France too, under the revolutionaries and Napoleon, had set up their institution to ease the way for aggressive war credits.
- Central banks came into force early – Older nations like Germany - 1872, France – 1800, England – 1690 – ramped up after 1900s many more coming online
- USA – Federal reserve 1913 in USA, Swiss – Swiss National Bank 1906, Russian – 1922 – The Gosbank
- Central banks came into force early – Older nations like Germany - 1872, France – 1800, England – 1690 – ramped up after 1900s many more coming online
First – In society, we carry a conviction that a central bank must be separated from Governments - Removed the chances of moral hazard –
- The reasoning is that you don’t want a Government given the ability to have an open printing press when a populations demands are endless – why greater levels of socialist spending can and has bankrupted countries
- But what difference does it make when Governments are the owner of most Central Banks?
- Leaders of Governments have control who works there –
- Reasoning is clear - can a Government manage its affairs in the country without having control of its own money? Not well – Society would still function – but Governments would lose the ability to tax and then exist – If we were allowed to use anything for trade, no tax would be paid – so it is illegal to conduct any business in another currency, unless you do BTC but still pay tax when converted into AUS/currency – the control over the currency is the catch all
- But some Central Banks are privately owned – not by Governments – nobody really knows who owns them – Done big series on FED but this, as well as Italy – have private ownership -
- To be clear – In a lot of countries Governments and central banks are separated by decree, and are either owned by the Governments themselves
- Or by unknown private group of companies/groups/individuals
- He who controls the money controls a nation – Structure of the FED – shares of the New York FED, the primary bank, are owned by the regional FED banks
- Nobody is permitted to know the true beneficial owners of the regional FEDs
- The FED is free of necessity to publish accounts or to reveal the many trillions in profits it has collected from the public purse
- Going back to the founding of the FED does give clues to who the owners are -
- First- it was created by illegal legislation in 1913 - giving full control of the US money supply and credit = entire economy is a violation of the very Constitution of the United States
- Made The US government cannot subservient to a group of private bankers - if the government needs money – has to borrow from the FED and repay it with interest
- Ultimate beneficial owners of the US Federal Reserve Central Banks have been reliably documented as follows:
- Rothschild Banks of London and Berlin, Warburg Banks of Hamburg and Amsterdam, Lazard Brothers of Paris, Kuhn Loeb Bank of New York, Israel Moses Seif Banks of Italy, Goldman Sachs and the Chase Manhattan Bank.
- With Private Central Banks – impossible to have a free market – or with any Central Bank controlling the price of money
- It was a group of bankers at Jekyll Island who concocted the plan for the FED system – passed by Congress while most members were away on Christmas vacation – Signed in by Woodrow Wilson – he turned over control of both the US currency and the economy to banking interests - an act which even Wilson recognised:
- “I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. The growth of the nation and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world… by the opinion and duress of a small group of dominant men.”
- Others like Congressman Charles Lindbergh - “When the President signs this Bill, the invisible government of the monetary power will be legalized. The greatest crime of the ages is perpetrated by this banking and currency bill”
- But this wasn’t really anything new – just on a more massive scale –
- FDR - “The real truth … is, as you and I know, that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson”
- Rothschilds and other European bankers listed previously been very involved in the US financial system since the formation of the Republic – and aligns up with each onset of economic turmoil and wars – run through turmoils in another ep – But back to war -
A lot of these are really summarised for time – But please do research further if you are interested – lot of information available – Formation of the US republic - Irony is that America fought their war of independence due to a Central Bank – Bank of England – which just a over a hundred years before in 1776
- The United States fought the American Revolution primarily over King George III's Currency Act
- Forced the colonists to conduct their business only using printed bank notes borrowed from the Bank of England at interest – Interest is another form of taxation when it is on trade and goods produced – other reasons like the Naturalisation Act and restriction on inland migration – either way, 13 independent colonies teamed up and took on the English Empire – conducting a conspiracy in the process they would be killed for if caught
- After the revolution - the new United States adopted a radically different economic system in which the government issued its own value-based money
- Stopped private banks like the Bank of England (only went public in 1998) from siphoning off the wealth of the people through interest-bearing bank notes – bankers didn’t like that and had the US in their sights
- First incarnation of the FED in 1791 – Just one year after Mayer Rothschild stated "Let me issue and control a nation's money and I care not who makes the laws" called the Bank of the United States – privately owned
- Done largely through the efforts of the Rothschild's chief US supporter, Alexander Hamilton
- Was supposed to do the opposite of financing war - extinguish the debt from the war already fought then end
- Was only passed with a 20-year charter to expire in 1811 – and with public sentiment against this bank the charter was going to be revoked – so a crisis was needed to justify the charter being renewed
- Solution – Britain and EU bankers funded and supplied arms to American Indians who raided American settlers on the frontier, hindering American expansion and provoking resentment.
- Started the war of 1812 - The government found it impossible to pay for the war through current resources, in the emergency printing money that bore interest. After that war ended in 1815 - the nation in a climate of fear and economic hardship, the Rothschilds managed to have the bank’s charter renewed for another 20 years – But in 1836 not renewed
- Again, annoyed the bankers
American Civil War – Reading on google the leading cause of the war was the Abolitionist Movement – which is incredibly noble cause 1. But reading firsthand accounts from back in 1860 it seems like this was the issue used for War – similar to WMDs and Iraq 1. Decent amount of evidence that the severe divisions leading to the American civil war were deliberately inflicted upon the US by these same bankers – plan was “to exploit the question of slavery and thus to dig an abyss between the two parts of the Republic” – which already were at each other’s throats politically after Lincolns election 2. Germany’s Chancellor Otto Von Bismarck claimed the European bankers were responsible for the American Civil War, stating “The division of the United States was decided by the high financial powers of Europe”, 3. Jan van Helsing wrote “The reasons leading to this civil war were almost completely due to the Rothschild agents”, one of whom was George Bickly who persuaded the Confederate States of the advantages of secession from the Union 1. In a rational world – slavery would have been abolished without a war – the tide was turning – England - Slavery Abolition Act in 1833 abolished slavery – 2. But 620,000 US citizens died – 2% of the population – the equivalent of 520k Aus dying in a war 2. During, prior, and after the Civil War (1861-65), the U.S. decided to try going without a central bank – Thanks to Lincoln’s greenbacks – they did okay – so he had to be killed
Back to the FED – Tensions were rising in Europe in the 1890s – Everyone knew that a war was going to break out between major powers at some point –
- Bankers wanted a central bank back in USA – hence the FED - The difference now was that there was no expiration date unlike the previous 20 year charters - Allan H. Meltzer, the official Fed historian stated that the founders of the Fed, such as they were, did not intend to create “a permanent institution” – they simply forgot to put in a used by date
-
As opposed to other Central banks later created – the FED is still private –
- It be any accident that the U.S., very contrary to its previous history, has been oft at war since 1917? World War II, Korea, Vietnam (1959-1975), Gulf, Afghanistan (2001-), Iraq, Yemen, and Syria – probably missing a few
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Comparing the frequency of war – Major Wars since 1900 – Most would think WW1, WW2, Korean War, Vietnam, Iraq, Afghanistan, maybe a handful more -
- With the state of the News Cycle they go by in a section and forgotten about – especially if your nation is the invading force or should have no business intervening
- Time of wars – compare two periods – Pre-FED to Post-FED – wars started between periods
- 1900 to 1916 – the capacity of spending and technology were different
- Capacity much smaller – technology very similar – each had their own benefits – Germans had most of the best equipment
- Tiger II tanks were far better than Americans – it was just the superiority in numbers the industrial scale of US production had – one Tiger could take on a much larger bunch of tanks
- How that changed – now the US is the largest military empire known to man – far surpassed the Roman Empire1900 to 1916 – the capacity of spending and technology were different
- 2003 to now – average time of war went up by a factor of 3
- 39 wars still ongoing so that average is likely to rise further – as expansion of Central banks gives unlimited funding for wars
- 1900 to 1916 – the capacity of spending and technology were different
Summary – US military empire started in 1913 – funding capacity for war and changed from domestic conflicts to global
800 military bases in more than 70 countries
None of this would have been possible without printing press of Fed – which is a private group owned by bankers
Next Ep – Modern Financial wars – Examples of funding both sides along with using Central and Private Banks to destroy other nations economies
Thank you for listening, if you want to get in contact you can here: https://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Say What Wednesday Edition. Where each week we tackle questions from you – This week's question is from Gab
Hi Louis, I have a question I've been pondering lately, around small-cap ETFs or LICs. It seems like the whole reason for investing in small caps (the fact that you can get high capital growth) is negated by the construct of such instruments. As an example, let's say we have 40 small caps in one of these funds, statistically, only a handful of them will succeed, but the moment they grow, they would automatically be removed from the fund (at a profit, of course). This means you don't get the opportunity to see 100x or 1000x benefit from a future Amazon or Facebook, because they got sold at 10x, while the poor performing ones still bring down the overall performance of the fund. What do you think? Is this a reason to avoid small-cap ETFs or LICs? Thanks, Gab
Great questions and points!
First - What is small-cap?
- The index, the S&P/ASX Small Ordinaries Accumulation Index, is comprised of companies included in the S&P/ASX 300 index, but not in the S&P/ASX 100 index – Normally the bottom 200 companies -
- Accounts for approximately 7% of the market capitalisation of ASX listed equities.
- The Small Ords is well diversified with all 11 Sectors represented
- Not as top-heavy as the ASX300 – CBA makes up 7%, or top 10 making up 45%
- Between the 200 companies - largest allocation is about 1.5% - give more equal weightings
- As Gab Mentioned – the whole point of smaller companies in the future growth potential –
- Small companies offer opportunity - most of today’s large and successful companies started small
- In their youth, companies often experience their greatest growth – and that’s often when returns can be greatest.
- Small-caps, therefore, are important portfolio growth assets, although they can be riskier and tend to exhibit higher volatility than established large-caps
- But once it cracks the top 100 index, it is no longer in the small-cap – so it is replaced and picked up by the ASX100 index
Look at the net effects of a handful of these gaining AUD 1,000% 1. Example - SARACEN MINERAL HOLDINGS LTD is share 101 in the index – market cap of $1.55bn (1.5% of index) – if it moves up a bit it will be out 2. Number 300 is Sundance Energy – Market cap of about $50m – makes up 0.05% of index 3. Invest $10k in the index – SEA would make up $5 of your holdings 1. Say SEA rockets from 300 to 101 – 3,220% gain in the share = $5 into $166, which is good, but is a rare/extreme example
Brings on the issues with Index investing in the smaller cap - Not a massive fan of Index ETFs in the small-cap sector – the exclusion of the shares
- Shares get replaced - That is correct for small-cap Index ETFs/passive investments.
- Lots of underperforming companies – take the good in the bad in the index
- The smaller cap has more bad than good – hence why they are large well-known companies
- Very diluted holdings which minimise growth potentials – Similar to the SEA example – the largest gains don’t make much due to the nature of the index – diluted and the smallest companies now have the lowest initial allocation
Direct, Index v Active - Smaller stocks are often considered a ‘stockpicker’s market’
- The index exposure via Exchange Traded Funds are growing – and has been replacing active
- Small-caps opportunities can be easily missed - nature of small-cap means there is a lack of research coverage = many small-caps are ignored by analysts
- Small companies are often mispriced due to limited coverage
- Some are illiquid (low share turnover) because of a lack of popularity
- Index selection - How are they selected
- Constituents are selected by their place on the Australian Securities Exchange (ASX).
- Easy cheap way of gaining exposure to small-cap - For this reason, investors looking for more reliable investment opportunities are turning to ETFs, which give the ability to access markets in a low-cost, efficient way – via a single trade on ASX.
- Direct investing in small-cap – buying a handful of shares directly - This can make direct investments in small-caps a riskier game compared to investing in well-established large-cap stocks, for which there is ample research and analysis
- Fund managers have inside information as they go to these companies to do an analysis on the shares
- But active fund managers have trouble mastering the small-cap sector.
- Over five years, 52 per cent outperformed - Finding reliable opportunities can be hard, but good managers do their jobs well
- However, when comparing active managers in this space, the majority tend to outperform the Small Cap index over the longer term
- Long term performance of these managers does depend on the expertise of the analysts and the mandate.
- Investment mandates are important – what a fund is allowed to do and what does it target? – value v growth
- The funds that I look at are typically considered 'Future Leaders' which allows them to continue to hold onto these companies even if they become 'mid' or 'large' cap managers.
- Something benchmark unaware – so if a share does become
- Avoids issues of If it was a passive index fund – where the share would be sold off out of the holdings
- Higher conviction is also important compared to index – holding 40 companies versus
- When I put together smaller cap allocations – look for 3-4 funds that each play in a different space
- International and Australia – one growth manager and one value manager – that don’t pay attention to the benchmark and can be higher conviction – going overweight into small-cap companies that are likely to be good performers.
- ETFs enable investors to have a broadly diversified exposure to small-caps, which reduces the cost and spreads the risks of investing in this sector – but it can create missed opportunities –
Thanks for the question,
If you want to get in contact you can do so here: https://financeandfury.com.au/contact/
Welcome to Finance and Fury
Series on Share markets as complex systems – a different way of thinking about them –
- This episode, discuss some basics of shares and introduce complexity theory –
- Nonlinear, Emergence, Spontaneous order, Adaption, Feedback loops
Shares - What are they? 1. Ownership in a company – private or public company – shares are the legal title to your ownership in a company 1. As an owner of a company – you entitled to profits – that is what dividends are – decided by boards of public companies 2. You also get price gains or losses based around how much people want the shares – 1. Linked to performance but also irrational exuberance – future expectations 2. Share market – is the collective representation of all the companies listed on an exchange 1. ASX – Publicly available companies to purchase -
Share Markets are Complex Systems 1. I Used to break shares down to supply and demand – the equilibrium models – does work as an educational example (what and how) 1. Failure in explanation of why – shows the after the fact obvious points - people demand less, then prices drop – or never dilute supply and shares go to $320k like Berkshire Hathaway 2. Great explanatory tool for the mechanics – but essentially useless in practical terms 2. A complex system is a system composed of many components which may interact with each other. 3. What does this have to do with share markets? – 1. Share market is the collective behaviours in decisions to buy or sell a company – 2. Financial institutions, individuals, professional advisers like myself, every decision to buy or sell a holding in a share, bond, gold, etc. has characteristics of each – thanks to us and out human behaviours 4. What are Complex systems - chiefly focuses on the behaviours and properties of systems. 1. A system, broadly defined, is a set of entities that, through their interactions, relationships, or dependencies, form a unified whole - Systems exhibit complexity means that their behaviours cannot be easily implied from the very properties that make them difficult to model 1. Any modelling approach that ignores such difficulties or characterises them as noise won’t be accurate or useful. 2. Complex systems are always defined in terms of its boundary, which determines the entities that are or are not part of the system. Entities lying outside the system then become part of the system's environment. 1. Share market entities – shares and buyers/sellers are part of the system directly 2. Most other factors exist outside of the system (share market) – but they do have an effect – GDP, wages, confidence, individual preferences, regulations (SG conts), weather, etc. – probably hundreds of thousand things that can affect the environment of the share market 3. System-wide or global properties are all characteristics of how the system (share market) interacts with its environment (all factors that influence individual behaviours) 4. Behaviour of the system (share market) – does it go up or down tomorrow? Depends on the behaviour of those buying and selling shares – which in turn is affected by the environment of each individual doing the buying and selling 5. Systems that are "complex" have certain distinct properties – due to the relationship of the system – five of the most important – in no particular order 1. Nonlinearity - nonlinear system is a system in which the change of the output is not proportional to the change of the input – Something linear = add $100 to your bank account, have $100 in your account = then earn 2% interest = $2 return 1. Nonlinear = put $100 into the share market = shares might be worth $60, or $160 plus earning 0% to 7% in income – changes all the time which is not dependent on the inputs 2. Nonlinear systems may also respond in different ways to the same input depending on their state 1. News or purchases of shares may yield significantly greater than or less than proportional changes in output of the price changes 3. Most systems are inherently nonlinear in nature – a change in one variable over time, may appear chaotic, unpredictable, or counterintuitive, contrasting with much simpler linear systems 1. Think about human behaviours – not linear – so why should share markets perform in the same way 4. Why share forecasting is difficult to solve – but while chaotic behaviour may resemble random behaviour, it is in fact not random 1. Example is the weather – can be chaotic, where simple changes in one part of the system produce complex effects throughout – high - and low-pressure systems meeting 2. Emergence - occurs when an entity is observed to have properties its parts do not have on their own – therefore the behaviours only emerge when the parts interact in a wider whole 1. Share markets – the parts are the shares themselves and the people buying and selling 1. A share on its own won’t move in price – look at shares that have no buy/sell orders in a day – the price doesn’t move 2. Someone then comes along and either sells or buys a lot of the shares – this moves the price 3. This is the emergence of a price movement from the nature of us interacting with the shares 2. Emergent states in the markets can occur in bubbles or crashes – neither can exist without investors over purchasing or selling investments 1. Emergent states are used to refer to the appearance of unplanned organised behaviour in a complex system, emergence can also refer to the breakdown of organisation; it describes any phenomena which are difficult or even impossible to predict from the smaller entities that make up the system. 2. Share crash or bubbles – if you are buying shares, you aren’t asking every investor in the world if they are buying the same shares directly – you might see news about others actions and take action – but it is often reacting to others actions – so not in cahoots with them and pre-planned a sale 3. Example – 911 terrorist attacks created massive market sell offs – one event occurs creating the emergence of a selling state 3. Spontaneous order - also named self-organization = the spontaneous emergence of order out of seeming chaos 1. Related to emergence - describes the appearance of unplanned order, it is spontaneous order/self-organization 2. Spontaneous order in financial markets can be seen in herd behaviour - group of individuals coordinates their actions without centralized planning. 3. You have emergence from the interaction of investors with shares – but the bull/bear markets are the outcomes from spontaneous order – if everyone is buying due to signals = the markets will go up 4. Manifestation of self-interested individuals who are not intentionally trying to create order through planning 1. A free-market economy is an example of systems which evolved through spontaneous order 2. Started with barter – You have someone with milk who wants to trade it for some wheat 5. Two levels of the complex system and spontaneous order - spontaneous order is defined as "the result of human actions, not of human design" 1. Shares are companies created and controlled by humans – human design 2. The nature of spontaneous order isn’t created, controlled, and controllable by no one – human actions 6. Spontaneous order is an equilibrium behaviour between self-interested individuals, which is most likely to evolve and survive, obeying the natural selection process "survival of the likeliest". 4. Adaptation - A complex adaptive system is a system in which a perfect understanding of the individual parts does not automatically convey a perfect understanding of the whole system's behaviour. 1. Fundamental v Technical analysis – Fundamentals (revenues, market share, management) of a company may be great, or horrible – but the prices will act in an unexpected manner 1. Normally occurs in companies in vouge (next big thing industries like lithium shares, buy now pay later companies) 2. Adaption relates to complex systems due to the networks of interactions - the behaviour of the market is not predicted by the behaviour of the individual shares – collective versus individual holdings 1. Markets are adaptive in that the individual and collective behaviour of investors mutates and self-organizes – 2. There is often a change-initiating event or collection of events – think about the GFC – wasn’t just due to Lehman Brothers collapse – there were many flow-on effects – one after another 3. Where the Black Swan events (rare share market crashes) could happen at any time – it is the responses to individual events 3. Example – Recent issues with Deutsche bank – flow-on effects for the counterparties of derivative positions – then China banks are falling over as well – even enough of these occur the market adapts – not just to dumping DBK shares but everything out of fear 4. Complex adaptive systems are special as they have the capacity to change and learn from experience - share market 1. Occurs in any human group-based endeavour – inflows and outflows of the market 5. Feedback loops - Feedback occurs when outputs of a system are routed back as inputs as part of a chain of cause-and-effect that forms a circuit or loop - The system feeds back into itself 1. The notion of cause-and-effect has to be handled carefully when applied to feedback systems: 1. Cause – people acting out of self-interest – to make the most money in the markets or to avoid losses 2. Effect – prices go up, go down, or stay the same – depends on the size/magnitude 2. Simple causal reasoning about a feedback system is difficult because the first system influences the second and the second system influences the first, leading to a circular argument. 1. This makes reasoning based upon cause and effect tricky, and it is necessary to analyse the system as a whole. 2. Chicken or the egg – what one thing causes a share market panic? There isn’t one – it is a feedback of negative or positive information – news, price signals, deleveraging – eventually the feedback compounds and becomes a market panic 3. ETFs are an example of a feedback loop – people buy index funds – prices go up – so more people buy index funds – driving the prices up 1. Market trends are their own feedback loop – either a positive or negative reward from a decision will reinforce the behaviours 2. Happens in everyday life – not touching a hot pan is a feedback loop – pan is hot, touch it, get burnt, learn not to do it again
Summary – Share markets have a tendency of a complex system – due to characteristics – which are all connected 1. Nonlinear – nonlinear system is a system in which the change of the output is not proportional to the change of the input – Something linear = add $100 to your bank account, have $100 in your account = then earn 2% interest = $2 return 2. Emergence - occurs when an entity is observed to have properties its parts do not have on their own – therefore the behaviours only emerge when the parts interact in a wider whole 3. Spontaneous order - Spontaneous order in financial markets can be seen in herd behaviour - group of individuals coordinates their actions without centralised planning – everyone moving in the same direction 4. Adaption - Adaption relates to complex systems due to the networks of interactions - the behaviour of the market is not predicted by the behaviour of the individual shares – collective versus individual holdings 5. Feedback loops - Feedback occurs when outputs of a system are routed back as inputs as part of a chain of cause-and-effect that forms a circuit or loop
This is the reason why modelling and forecasting the short-term behaviours of share markets are pretty hard if not impossible
Now that the basics of complex systems are out of the way = Next ep – talk about the application to financial markets
Thanks for listening, if you want to get in contact you can here: https://financeandfury.com.au/contact/
Pre WW2 – Money and the incentive for war
History is written by the victor – the focus is often the war itself – but not what happens behind the scene -
- How has war shaped the economy? – Last week went through tax changes to economy
- This week – want to talk about the behind scene to war – financial interests and those who carry them out
Governments wage wars – the citizen fight them
- It is Governments which wage war with each other – Nation states, or NATO – Used to be directly – Nation v Nation–
- Now also indirectly – pre-cold war – nations went to war with one another – now, nations fund other countries to do it on their behalf
- But who else is funding the wars? Used to be the Monarchs (Governments) directly – not much in the way of banks/interconnected financial system in medieval periods – borrowed from other lords and money was gold/resources
- With the expansion of credit and fractal banking methods from Napoleonic period – bankers started gaining the ability to carry the monarchs (nations) through wars
- Two big changes here – 1) funding could come from other nations and banks 2) funding could come from money you don’t have -
- Source from Bankers and eventually central bankers (which fund governments war budgets)
- Two stages – Before central banks – Governments relied on private bankers -
- One prominent family which made their fortune from war – Rothschilds – there were others – but only one made a movie about themselves due to the public hating them – PR spin
- Patriarch – Mayer made his fortune through facilitating payments between the royals and mercenaries – Prussians in Frankfurt – Famously said: Permit me to issue and control the money of a nation, and I care not who makes its laws!
- Movie - House of Rothschild movie from 1934 – 20th Century Pictures (now fox) – 3 producers funded by Rothschild made this movie – academy awards – can go watch it – few inaccuracies – but the major one is the ending
- True parts – that in the European wars transferring the balance of payments was dangerous – can be taken away
- So sent 5 sons to major financial hubs – Paris, Frankfurt, Vienna, Milan, London – payments could be made in IOUs – someone in London needs money – can issue it in that country and not have to transport from Germany
- Ending of the movie - Panic at waterloo – Lord wellington v napoleon after getting free from Elba – British Bonds dumped by Nathan Rothschild – create panic – bought back on the penny – movie just had the second part – him being the saviour and fighting the war with money – either way – became the richest man on earth overnight -owning most of the British Governments debtor obligations
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Along with Global Central Banks – Monetary institutions like the BIS and IMF – created out of necessity due to wars
- BIS - Swiss based Bank for International Settlements - creation in 1930 was, according to the BIS, primarily to settle reparation payments – payments imposed on Germany following the First World War
- without WWI – a major crisis event – there would have been no mandate for the BIS to exist.
- As well as settling German reparation payments, the BIS was also recognised from the outset as a forum for central bankers – the first of its kind – where they could speak candidly and direct the course of global monetary policy.
- BIS - Swiss based Bank for International Settlements - creation in 1930 was, according to the BIS, primarily to settle reparation payments – payments imposed on Germany following the First World War
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Hjalmar Schacht - was Reichsbank President from 1933 to 1939 and Hitler’s finance minister, was a BIS director.
- tried and acquitted of war crimes following WWII.
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Walther Funk, a former Nazi economics minister and Reichsbank President from 1939 to 1945, was also a BIS director.
- Funk worked closely with Heinrich Himmler, who was chief of the SS - also pioneer of a 1940 paper called, ‘Economic Reorganisation of Europe‘, which was endorsed by the Nazi leadership and is stored in the BIS archive.
- the parallels between the plans of the Nazi leadership for a post-war European economy and the subsequent process of European monetary and economic integration were real‘.
- In other words, the objectives of post WWII internationalists mirrored those of the Nazi regime – BIS was involved in both
- IMF - would have been no mandate for the IMF to exist were it not for WWII - Fund was founded in 1944 (off the back of World War Two) at Brenton Woods conference - became part of what internationalists call the ‘rules based global order‘.
- All have expansion capacity for the lending capacity to fund ever lasting wars
- The thinkers of the day gave unification and one global system as a way to avoid conflicts like world wars - What these thinkers overlooked was that democratic societies have little say in wars by proxy and what the financial system wants – which is undemocratic
- Banks now have incentives – so democracy doesn’t do anything as banks aren’t democratic
- Politicians also act on the behalf of those who back them – central bankers or general bankers
- War Bonds – Issued by banks to fund the wars of nations – massive profits made out of these -
Example of political leaders carrying out the bidding of the bankers who owned them through personal debts -
- Another example - Churchill – Prime Minster for ww2 – led Britain into both World Wars with his famous ‘V’ salute
- Some of this information may come as a surprise – as he is revered by many people as the greatest ever Englishman – movies made about him – but I find it more interesting to read the primary sources from those who knew him and not reinterpretations in movies from Hollywood
- Churchill has been exposed as a puppet of bankers and served their interest before that of Britain and the millions who lost their lives
- Back in WW1 – he was Britain’s youngest-ever First Sea Lord – thanks to daddy’s connections - Lord Randolph Churchill
- he unwisely advocated an amphibious landing in Turkey (ottomans) to relieve pressure on the Western Front.
- A total of 500,000 British, ANZAC, French and Indian troops ultimately took part in the doomed battle of Gallipoli. Between the amphibious landing in February 1915 and their evacuation in December they suffered 50% casualties-with nothing to show for the immense human cost – stripped of command after that
- He clawed his way back into politics – changing parties and positions 4 times along the way but was elected Prime Minister
- his skills were on offer on several more occasions for the right price - known in the House of Commons as ‘The Shithouse’ from his initials WC – Now – moving on to WW2 -**
- Quote - “The unforgivable sin of Hitler’s German was to develop a new economic system by which the international bankers were deprived of their profits”
- Nazi’s seized the Rothschild bank in Austria (Vienna) – Was fully aware of the history of funding both sides of the war
- Churchill didn’t say that the killing of millions was unforgivable – it was the depriving of his friends from their profits
- Well known fact back them – Churchill's family was deep in debt to the Rothschild’s – along with being family friends
- Lord Randolph Churchill- close friend of Nathan Rothschild - received "extensive loans" from the Rothschild's
- He accepted £150,000 to bring Britain into World War II for the Rothschild bankers against Germany, and to latterly drag in the USA
- Incentives for banks was money – previous episode on JP Morgan’s involvement with WW1 and the USA – would have lost a lot of money if Germany had won –
- Churchill was so well-known for this helping the bankers that at the beginning of the war, before they entered the fray, FDR told him, “if anything happens to any American ships, our first thoughts will be of you British.”
- Sir Anthony Blunt - The master-spy, Rothschild operative - said on record that Hitler was negotiating for peace right through the war, and sent his deputy Rudolph Hess to Britain to pursue a peace which Churchill continually refused.
- Rothschild’s advice to Churchill was for ‘total destruction’
- Despite popular belief – Hitler never wanted to go to war with France or England –
- Hitler was a rabid Anglophile - and did not want war with Britain (or France) at all – Why would he let 400,000 UK and French soldiers retreat from Dunkirk? He saw the Brits as his allies – the royals were Nazi supporters after all
- History is fascinating - The Nazi/Soviet pact resulted in Russia and Germany splitting Poland in half, yet Churchill decided to take Britain to war with Germany and made Russia an ally – All while Stalin was carrying out his own Holocaust on a bigger scale – between 1932 and 1933 he starved/mascaraed 7m Ukrainian Christians to death – but Churchill entered into an agreement with him before the Holocaust even happened – remember – Churchill thought Hitler’s greatest sin was not allowing international bankers to make their profits – sheds new light on true motives
- This made no sense whatsoever to the intelligence services. Of course, the general assumption and indeed perception of ‘how the world really works,’ is that politicians always do what is right and proper for their country and its peoples, but this is far from being the case – But he was just serving the interest of the bankers – As Stalin didn’t get in the way of their profit making – even though he was doing the same things the Nazis did but 10 years earlier -
- Want to read something from Admiral Sir Barry Edward Domvile - was a high-ranking Royal Navy officer who was interned during the Second World War for being a Nazi sympathiser – cause he didn’t want to go to war
- “I had a strong suspicion that there was some mysterious power at work behind the scenes controlling the actions of the figures visibly taking part in the Government of the country. We always vaguely referred to this hidden control amongst ourselves as the Treasury … This mysterious power … which has wielded such a baneful influence in world history for many centuries. Ponder on this… on April 20th Hitler’s birthday, because his war with the usurers, asset strippers and bankers, brought Russia to threaten both Germany and England, Churchill took us into WWII, Poland was just the excuse, the same as in all the wars now. We fight them for the bankers.”
- Arthur Ransome - author and expert on Russian affairs, having cultivated friendships with both Lenin and Trotsky. He was a high-ranking MI6 operative with the codename S76.
- Reported first-hand from Russia that Churchill was working for Rothschild interests, not Britain’s. Many British researchers have long-suspected this to be the case, and Walter Thompson, Churchill’s bodyguard, said Churchill believed himself to be more at risk of assassination for betraying his own people in Britain, than from the enemies he made abroad – that is very telling – was more afraid of his own people finding out the reason he was so adamant to go to war with Germany when most didn’t want to
- Ultimately, treaties and international organizations cannot ensure world peace – While there is financial interests and politicians willy to carry them out – there will be wars –
- Wars have shaped the face of the global economy – from taxes, to institutions (IMF) to the very stability of a country
- he unwisely advocated an amphibious landing in Turkey (ottomans) to relieve pressure on the Western Front.
Now that the financial interests have been explained a bit - Next Episode: Examples of proxy wars – funding both sides
- Talk about the US politicians and Media Reaction to the Kurds – anarcho-Communist breakaway group from Turkey
- Washington Post'sheadline describing former ISIS leader al-Baghdadi as a 'religious scholar’ – who just happened to burn people alive in cages and responsible for the death of thousand
Welcome to Finance and Fury, The Say What Wednesday Edition
This week question comes from Matt -
Not so sure if this is your area of expertise or have come across this at all, although I have a question regarding insurance and identification of gender. People know that gender affects the price of insurance premiums paid and can save a significant amount if one were to identify as a female for insurance to pay less, would this be legal or do insurance companies have a way around this.
Cheers – from Matt,
Thanks for getting in touch. That is an awesome question!
- Actually, laughed out loud when this came through – very interesting point –
- Especially if someone does identify as another gender
- Today’s episode -
- Talk about disclosure requirements and pricing between male and females –
- Different genders pay different amounts for the types of covers
Disclosure requirements - Under current insurance legislation – non-disclosure 1. Insurance companies only offer the options of male or female for the applications, which often is confirmed in the medical underwriting process 1. No other when looking at actuary - a professional who deals with the measurement and management of risk and uncertainty 2. Statistics are what insurance companies work with – based in reality and stats on claim history 1. Interesting issue – people identifying as new genders 2. Contacted underwires – will look at covers – but assess as biological – not what is identified as 3. The underwriters would need medical assessments -makes it much harder to get 3. If the incorrect gender does slip through the application process, Insurance companies would likely be able to get out of paying a claim due to 'non-disclosure'. I.e. saying you are a female when actually you are a male would give the insurance companies an out from making any payment.
Premiums for genders – 1. Premiums differ for a number of reasons – but all comes down to chance to claim 1. Ages – really young – slightly higher, about 25-35 cheaper – then after 35 goes up more 2. Occupations – low-risk office jobs, versus underground mining 3. Health factors – smoking, pre-existing conditions – 1. Smoking likely 50% more in most cases 4. Genders – different genders claim on different covers 2. The Income protection premiums are higher for females while Life cover premiums are higher for males, 1. There is no clear winner in gender when it comes to overall, who pays the least amount – depends on the level of covers and types of covers
Run quotes – two people Aged 40 – working in office admin job – same incomes $80k
- Life - $500k – More expensive for males = 32% more
- Male – $254
- Female - $192
- TPD - $500k – About the same
- Female - $192
- Male - $192
- Income Protection - $5,000 per month – more expensive for females = 56% more
- Male – $1,164 + 111 = $1,275
- Female - $1,816 +170 = $1,986
- Trauma - $200k – More expensive for females = 12% more
- Male – $610
- Female - $684
- Totals - $2,475 p.a. for male and $3,206 p.a. for females – due to claims history and likelihood to claim
Depending on if you need more Life – the female is cheaper, if you are male, IP is cheaper – but have to disclosure biological gender – assessment is based around this and underwriters would write off to doctors
- If you don’t give real gender – it will likely create a reason for insurance companies to get out of paying out
Thanks again for the great question. If you want to have a question answered visit https://financeandfury.com.au/contact/
Welcome to Finance and Fury
- Today’s episode is a thought experiment –
- Investing in the potential future for the economy, Gov expansion and increased money supply – inevitably with The replacement of the Dollar – who knows when - over the next few years, decade, or never
- But it is an option – know that because the IMF is looking at it – and politicians are promoting these policies
- Permanent QE – will start to become a way to keep markets dropping – soak out additional supply
- Lowering rates and moving towards cashless economy to avoid BOJ situation
- Fiscal expansion – Government spending – and redistribution in the form of Helicopter money
- Abandon the dollar – IMF SDR – new reserve digital currency
- Investing in the potential future for the economy, Gov expansion and increased money supply – inevitably with The replacement of the Dollar – who knows when - over the next few years, decade, or never
- To start looking at investments – look at the desired effects On the Economy - What this will all do if the policy works as intended
- Boost Nominal GDP – sign of economic growth and to increase confidence, spending/consumption even further - Aim is to increase consumption – increased spending, increasing the inflation on money through velocity
- Nominal GDP is helped by inflation and these policy options – even if real changes don’t occur
- C – increased spending on consumption – doesn’t even have to be real if you create inflation – consumption stays the same but
- G – spending by gov goes up – so the infrastructure spending will be reflected in GDP
- I – If the economy is seen as to be growing – businesses might consider investing more, hiring more people, etc.
- Net Exports – through printing money in Western Economies – you pass on inflation to other nations
- USA expanding money supply through QE – China saw inflation – so had to devalue its currency to remain competitive – but this can be costly and emerging markets will see problems with their currency – exactly like Asian currency crisis in the late 90s – one of the root causes started with massive monetary expansion from nations like the USA from early 80s
- Boost Nominal GDP – sign of economic growth and to increase confidence, spending/consumption even further - Aim is to increase consumption – increased spending, increasing the inflation on money through velocity
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If it works great – it may work for a while – but I think that it will probably have a little real positive impact on the real economy
- First – these policies are concocted by economists about studies and theories to trial out
- Make up companies, medical companies – tested out products in trials before selling it to the public
- Economists and policy makers skip the testing and the option of you buying or not – choice
- Mass policies and increase Gov involvement – or central planning – impossible to properly forecast individual adaption and choice
- Secondly – The average person doesn’t look at the GDP when deciding to buy a new car, or even understand what GDP is – the disconnect with the average Joe is large between policy makers who fly in private jets to Davos and are driven around and given 6 Star treatment
- Don’t know how or why – can be a million different individual reasons it will come unstuck –
- Only know why after the fact – hindsight is 20/20 – but this underlying concept of disconnect with central planning and individual decisions (especially in the billions) is why nothing to date central bankers have tried has helped in the long term – often made it worse
- First – these policies are concocted by economists about studies and theories to trial out
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If this doesn’t work - Down the line - Create two things - mass uncertainty and liquidity issues
- When something promised to work doesn’t work – how confident are you the next thing tried will work?
- Eventually, the uncertainty of Gov/Central Bank involvement will increase – ceasing spending and investment
- As uncertainty grows it can turn to fear – market panics - Human behaviours/emotions play a roll –
- Why Complexity theory is starting to be a better metric in financial markets – Market Crash = Phase transition
- Will probably do a whole series on this – fascinating way of looking at markets
- Follows human behaviours and accounts better for adaptive changes in choice when compared to ridged equilibrium model
Uncertainty and Risk 5. Risk and uncertainty are related but different 1. Risk = speculative/volatility 2. Uncertainty = Unknown risks – generally creates a freeze response initially – just don’t do anything – spend or invest 6. Uncertainty creates an environment where people avoid risks but then once they become afraid exit from existing risks 1. In shares – creates selling – not sure what is going to happen – we are loss averse = sell to avoid losses 2. Talked about this in a previous ep - What assets will survive a financial correction – it will be those that people still have confidence in 1. Confidence is key – Confidence in any asset is what is needed 7. Why is confidence important? If a lack of confidence/panic is what causes prices on assets to drop heavily – 1. Then the solution is to be in assets that while may be impacted in prices (short term volatility) – will not go to zero 2. Asset goes down in value – so what? - Depends on the type of asset and what you do, and what those investments are to you
Types of Assets 8. Shares – Share will be volatile - probably go down in value – 1. Your options - 1. You sell – crystallise losses 2. They keep going to zero 2. Solution – Step 1 - Buy good companies, diverse business models, diverse markets and a lot of different companies – diversification. Step 2 – Don’t panic sell 9. Managed Funds/ETFs – Active or passive? 1. High conviction – Active funds – Benchmark unaware - ones that are undervalued through not ETF purchase 2. Why active is important? 1. Contrarian trend – can avoid any overpriced share in the index – even if a company isn’t making money (like Z1P or Afterpay) – people buy them and they get into the index – the prices go up for no other reason 2. Price making – in a correction there are many bargains on shares – passive funds won’t take 3. High Conviction - Contrarian to the whole index – 1. Goes against the trend of full invested funds in passive – active managers can hold cash for bargains 4. Benchmark unaware - being a large cap manager limits bargains and forces managers to into the top end of an index which will suffer in large passive ETFs/index selloffs - 5. I think of TLS, bank shares are volatile term deposits – not expecting great growth off them, the valuations are almost like a Utility company – but decent dividends 10. alternative asset classes – Hard assets – gold 1. Gold/Silver/Palladium/Platinum – Two options depending on how bad you think crash will be – 1. Really bad - Not on futures contracts or derivatives, but one that has the underlying asset 1. Not enough gold/silver etc. in the world to cover the size of ETFs/funds with positions in gold 2. Just a massive correction – Gold priced ETFs -
Summary – Assets that while not retaining value like you could want (drop in price) – if you hold, you can survive 1. Have a range of investments (not just bank shares) 1. Some physical assets – Gold 2. Shares in companies that people will still use – not fad companies or ones build on people’s discretionary spending 3. Don’t know how well Index’s will fare with the new overweight position in passive funds 4. Property – That you can hold and not need to sell 2. Make sure they are quality assets 3. Don’t sell – enter the market slowly during a panic
Thanks for listening, if you want to get in contact you can here: https://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Furious Friday Edition.
War is a racket –
Something that always catches my attention is when politicians get on 1. What is one thing they seem to get on about? Police enforcement, regulations on industries 2. On a more global scale - Going to war – see it in the USA right now, after 9/11, more often than not in history 1. Pushed by media for Views, companies who stand to make a profit 2. Pushed by Politicians – higher budgets and to keep their donors (Raytheon, Halliburton, etc. happy) 3. Just finished getting through War is a Racket – book from 1935 – Very quick read/listen – got me thinking
Today – and probably a few more episodes – War and the Economics of it - How it all works
- The Futility of War – why it is important – as I hope to illustrate – fought on behalf of the few at the expense of the many
- One of the oldest and most profitable rackets in history -
- Racket – not what it seems to the majority of people – conducted for the benefit for the very few, at the expense of millions
- First - History of war – Medieval to modern
- Wars are fought for a reason – to get something out of it – but this changes - helps to give context over time
Stages of war - Brief history of economy and wars 1. Tribal Warfare – total war – a direct conflict between small bands of people – normally hunter-gatherer 1. Very minimal trading between tribes – wars often territorial and either in constant warfare (constant raiding for resources off the other) or had treaties to at least not go on the others land (killing on sight) 2. Warfare among primitive tribes did not create much economic loss or gain - because the warring parties had not been engaged in trade before the hostilities – instead of trading, theft in raids 3. They engaged in total war – constant state of war – as it was a way of building your tribe 2. Moving into early Medieval times - Wars were generally waged by small armies of professional soldiers on behalf of lords 1. But wars, here again, were fought for territory – physical resources of gold, land, food, people 2. War was profitable for the victor – but only if the war was short – go to war and have one or two battles 3. Kings/rulers couldn’t afford to go to war for extended periods – run out of money and make the war pointless as cant recoup the losses 4. Tax network wasn’t sophisticated – tax collectors had a harder time and were much slower collecting off the people – hence why the crown's resources were used – and the kings kept the loot – but so did soldiers 5. ‘The spoils of war’ mean that the people fighting would also become enriched – through looting – especially in cultures like the Hun/Mongols/tribes of Gaul, Germania etc. 1. Generally did not involve non-combatants or their property – were some exemptions in the Viking age 6. We would call them minor skirmishes – picked up in the late medieval period 3. Late medieval period – the 30 years war – 1618 to 1648 - this is where the scale started to increase – civilian casualties 1. Things were different in Europe (before the French Revolution) when military, financial, and political circumstances produced limited warfare – few neighbours to fight or limited ability in resources 2. This is around the time when civilians really did start to suffer under war – creating famine and states with no money left to fix the problems – so created civil unrest - 4. Revolution – 1790s – and Napoleonic Wars – 1803 – 1815 1. Napoleon seized power in 1799, creating a de facto military dictatorship 2. Here wars were still fought over territory – but the economic landscape was changing slowly 3. The cost of the war in lives and coin – which could now be funded through debt and bonds from the Rothschild banking system – so the scale increased 4. But due to the scale increasing – so did the destruction of the resources being fought over – fertile lands and people to work on them – plus you end the war massively in debt to the banks rather than in a positive position like medieval periods 5. Rise of self-sufficient Monarchy – entering WW1 period – 1. War and Autarky - Autarky is the characteristic of self-sufficiency for political states or their economic systems. 2. Exists whenever an entity can survive or continue its activities without external assistance or international trade 3. Germany was an example of this – scare the major powers of Russia, Brittan, and French 4. The German militarists were aware of their vulnerability and so stressed the need for centrally planned autarky. 5. The three cousins ended up going to war due to treaties 6. In this context, philosophers concluded that, because the citizens only suffered from warfare, the way to eliminate war was to dethrone the despots. The spread of democracy, many thoughts, would coincide with everlasting peace. 6. But the rise of democratically elected individuals – Churchill, Hitler – didn’t put an end to the war 1. Thanks to central banks, war bonds, charging citizens Income Tax for the first time – war could rage on 7. Nationalism of late 19th century has been blamed for WW1, and subsequent wars - 8. Back then - War shifted the Market Economy – or Centrally planned economy – 1. Capitalist - Entrepreneurs can most efficiently effect this switch if they are allowed to earn profits and cater to the new demand, emanating from the government as it spends funds on military items. Whether the government raises its revenues from higher taxes, increased borrowing, or even inflation, in the end the citizens will have less purchasing power, and their reduced consumption frees up the real resources to produce items for the war effort 1. Gov did further intervene in the market though, by imposing rationing schemes and other controls, designed to ensure an adequate flow of resources into the war industries – but compensated with tax funds 2. Not like Socialist — the government seize control of production. During war, resources that normally go into consumer goods must be diverted into products for the military; private consumption must fall 9. Modern wars are won with who has the greatest access to resources – like all of history – so Capitalist countries defeat socialist countries – look at the cold war – markets produce entrepreneurs who are more efficient in churning out products and the economy having the money to buy it off them at a profit 1. Better weapons - Entrepreneurs are more efficient than central planners in the production of tanks as well as the production of television sets 2. Populations to tax – war is an excuse to charge you more tax –
History of Income Tax 1. Pre-WW1 – Taxes were state by state - 1884 a general tax on income was introduced in South Australia, 1895 income tax was introduced in NSW at 2.5% 1. Federal income tax was first introduced in 1915, in order to help fund Australia’s war effort in the First World War. 2. Company taxes – 1915 issued at 7.4% - 2. The Second World War saw fundamental changes to Australia’s taxation system. 1. Increased its income taxation in the early years of the Second World War to meet the costs of the war effort. 2. The federal government introduced payroll tax in 1941 – 2.5% 3. Company tax also increased from 7.4% to 45% 4. In 1942 the federal government introduced legislation that increased the federal government income tax rates to raise more revenue. 3. The Pay-As-You-Earn (PAYE) system, where employers deduct tax from employees’ pay in 1942 1. Between 1938-39 and 1941-42, federal government income tax revenue grew from 16percent to 44per cent of total federal revenue. 2. Post War - Land taxes were first introduced by state administrations 4. Then by 1950s – Top marginal tax rate was 75% to pay back 5. 5. At the time of Federation, Australia’s tax to GDP ratio was around 5 per cent. This ratio remained reasonably constant until the introduction of the federal income tax in 1915, which was used to fund Australia’s war effort. Between the two World Wars, government expenditure and tax revenues grew significantly and by the beginning of the Second World War, Australia’s tax take was over 11per cent of GDP – today the totals at 30% of GDP 1. So these taxes were introduced for funding the war – but did they go away once the war debts were paid off?
- How economies grow today - market economy involves peaceful cooperation
- Globalisation creates a division of tasks - therefore cannot function effectively amidst a war – trading ceases – in a world reliant on one another finds it hard to go to war
War evolved – like most things it changes based around the incentives and options at the time
- Evolved back to total war – but by proxy - Went through this in Neo-Con episodes – why conservatives aren’t conserving anything
- War in Afghanistan, code named Operation Enduring Freedom – started 2001 – going on to this day – Estimated costs (depending on what is included) - $2.4trn - Then Iraq war – since 2003 – Estimated cost of around $1trn as well –
Where the money goes 7. 2017, weapons sales from the top 100 companies totalled $398.2 billion, 1. Lockheed Martin - $45bn p.a. USA, Boeing - $27bn p.a. USA, Raytheon - $24bn USA, BAE Systems - $23bn UK, Northrop Grumman - $22bn USA, General Dynamics - $20bn USA = 5 out of the top 6 – USA 8. The USA is dominant in weapons – same in political parties – Note that these organization itself did not donate, rather the money came from the organization's PACs (Political Action Committees) but money flows from subsidiaries and affiliates 1. Combined top 5 stats – Combined Lobbyist employees – 421 – 352 or 84% are ex-politicians – Spent $122m in 2015-16 in lobbying activities – Clinton for $620k in donations from individuals in the company, Sanders $227k, Trump $182k 2. Donations to both sides – as you need all of congress to support military spending 9. Lots of money in it - 2019, the United States federal government has spent or obligated $5.9 trillion dollars on the wars in Afghanistan, Pakistan, and Iraq 1. Things like the Pentagon base budget; veterans care and disability; increases in the homeland security budget; interest payments on direct war borrowing; foreign assistance spending – or purchase of weapons 2. The current wars have been paid for almost entirely by borrowing. This borrowing has raised the US budget deficit, increased the national debt, and had other macroeconomic effects, such as raising consumer interest rates. 3. Unless the US immediately repays the money borrowed for war, there will also be future interest payments - estimate that interest payments could total over $8 trillion by the 2050s. 10. Doesn’t account for other costs - macroeconomic costs to the US economy; the opportunity costs of not investing war dollars in alternative sectors; future interest on war borrowing; and local government and private war costs 1. More importantly – the cost to the local population - in lives and economic output – can’t start a business if someone with a gun might take it from you Interventionism generates economic nationalism, which in turn generates bellicosity. This tendency is internally consistent; only laissez-faire policies are consistent with durable peace.
The modern market economy relies on Globalisation - which requires peaceful cooperation – 1. The rise of total war in the modern age is due to the rise of "statolatry" and interventionism – Have the previous eps in notes 2. War evolved – like most things it changes based around the incentives and options at the time 1. Only person against war are one individual from each side – Tulsi Gabbard and Donald Trump – Russian agents/assets 2. If you don’t want to go to war – you must be an inside agent - Like him or not – kept the USA out of three wars so far – 2016 with Syria and NK, now in Turkey 3. War is a justification of taking more off the people – higher taxes and getting into debts
Next part – run through the modern war era - explain how direct all out world wars and now proxy wars work and who it benefits -
Thanks for listening, if you want to get in contact you can here: https://financeandfury.com.au/contact/
Links
http://www.daviddfriedman.com/Academic/economic_of_war/the_economics_of_war.htm
https://en.wikipedia.org/wiki/War_Is_a_Racket
https://mises.org/library/economics-war
https://en.wikipedia.org/wiki/Smedley_Butler#Death
https://watson.brown.edu/costsofwar/costs/economic
https://www.opensecrets.org/orgs/summary.php?id=d000000104&cycle=2020
https://treasury.gov.au/publication/economic-roundup-winter-2006/a-brief-history-of-australias-tax-system
Welcome to Finance and Fury, The Say What Wednesday Edition
I would like to start by saying a big thank you for the knowledge you have passed onto myself and the community.
My question lies around equity, if you have a considerable amount of money in shares, say 200k, and you are wanting to buy a house at 400k are you able to use this as leverage?
Also, with negative interest rates possibly coming, keeping money in an offset account and lowering the interest for the mortgage of a property is not going to be the best, so placing them into shares is possibly a safer place to keep capital?
Thanks for getting in touch and great question! You are more than welcome, glad to hear you are getting value out of the podcast!
Two parts – 1. Go through shares as genuine savings in application process and deposit at time of loan 2. Go through negative rates and offset accounts – thought experiment on this and hasn’t been seen
Application time – Assessment and Genuine savings 1. Just to clarify - shares as collateral – if meaning “Genuine savings” yes - the funds that a home loan applicant has saved themselves gradually over time 1. During the home loan application process, lenders will assess your income, debt and assets, and how they affect your ability to service the loan. 2. What is classified as genuine savings? - each lender has their own genuine savings policies! 1. Savings/Term Deposits held or accumulated over 3 months. 2. Shares or managed funds held for 3 months - Equity in real estate (varies depending on the lender). 3. Many people receive a gift or have a deposit that would normally be considered as “non genuine savings”. However, if it is held in a bank account for more than three months, it may be considered as genuine savings. 1. There are still some banks that do not consider this as genuine savings, unless you have actually saved money on your own. 4. What isn’t genuine savings? The banks want to see that you’ve planned and saved a deposit yourself because this shows to them that you’re likely to be a good borrower. 1. Gifts, Inheritance, Tax refund, Lump sum deposits (proceeds from sale of property is an exception to this), Bonuses, Selling your car or other assets, First Home Owners Grant (FHOG) 2. There are actually many exceptions to the above, particularly if you’re renting. 5. Share portfolios as a source of income – Lenders won't look at the total value of your share portfolio when assessing your serviceability -Part of assessing your ability to repay your home loan 1. Because shares fluctuate in value - most lenders will only accept part of investment incomes 2. Some banks up to 80% while others will go much lower 6. Can’t leverage shares as part of a deposit - Why won’t shares be accepted as part of my deposit? 1. The deposit for a home loan needs to be in cash - limit lenders exposure to risk 2. Example - say you need $120,000 for a home loan deposit – have $20k in cash and $100k in shares - bank won’t accept the shares you own as a deposit – would need to sell them to fund the deposit in cash 3. Shares are volatile and can lose values – something banks don’t like - if you defaulted on your loan repayments, the lender would need to not only sell the property in question but also go after your shares in order to recoup its losses 7. Strategy to leverage using shares – 1. There is the strategy of selling the shares and using that to pay down the loan, then reborrowing those funds to repurchase the shares (hence turning interest repayments into deductible expenses). 2. The issue with this is if there are capital gains on the shares in the sale along with the low-interest rate environment reducing the benefit of this strategy. 3. Benefit to strategy is lowered with lower interest rates – risks also go up with share overvaluation
Offset accounts in a negative interest rate environment 1. Current offset accounts – they don’t pay you interest but just reduce it – so if rates go negative then likely just reduce the effective interest reductions – Look at a $400k 30 year loan 1. Example – Current positive rates at 3% = Repayment of $1,688 p.m. = $206k interest paid over 30 years 2. Example – Negative rates at -1% = Repayment of $954 p.m. = -$57k of less interest 2. Now with an offset account - $60k in an offset on the $400k loan - $340k effective loan 1. Current positive rates = $73k lower interest payable over 30 years 2. Negative rates = -$42k – so punishment of banks paying $14.5k less off of interest 3. While you might not pay more interest, the bank will pay less on your behalf if you reduce your principal amount. 4. Keeping payments the same will reduce the life of the loan though 3. The issue with taking cash to put into shares if rates become negative is that this creates a further bubble in shares. 4. So while investing funds at that point is meant to provide additional returns, it statistically means that you may suffer large losses for the funds invested in shares 5. But keeping funds in offset would be a negative in negative rates
Thanks again for the question. If you want to get in contact you can here https://financeandfury.com.au/contact/
Welcome to Finance and Fury,
Last week – talked about Goodhart's law - "When a measure becomes a target, it ceases to be a good measure." – yet central banks have made inflation the policy target – Went through permanent QE and lowering rates and cashless economy
Today – talk about fiscal expansion from govs and the need for deficit monetisation (helicopter money) and final step of abandoning dollar as reserve currency – effects on economy
To start - Step 3: Fiscal Expansion and Deficit monetisation
- The QE and lowering interests will flood banks with ‘liquidity’ = lots of money to lend out – to themselves (wall street) or main street -
- If this doesn’t work - government may eventually assume the role of resource allocator, through public spending financed by a permanent increase in the money stock
- If government spending does not help either, then helicopter money might, which is to allocate resources directly into the pockets of households – either cutting taxes or UBI
Fiscal expansion – The government spending more 1. Fiscal expansion may help, when coupled with monetary printing. Public spending in infrastructure, clean energy to cope with global warming, technologies, and education are obvious candidates. 2. China example – GDP 1. Consumption is lower than west – USA 71%, Aus think in the high 60% - China sits in lower 30% 2. Net exports only about 4-8%, large portion is Government spending and investment 3. Deficit monetisation - Monetizing debt is thus a two-step process initially 1. The government issues debt (Government bonds) to cover its spending 2. The central bank purchases the debt from secondary markets 1. Then perpetually rolls it over – issue more money to continually buy it back 2. Gov issues $1bn bond today to the market – 10y maturity – someone buys it (banks or super funds) – then central bank buys these off banks or super funds - it injecting money to be reinvested or lent 3. So Govs know that they can raise easy quick cash from issuing a bond – as Bank, investment manager or super fund will buy it off them and exchange the cash – and the buyer knows that the central banks will buy them back off them – sometimes at inflated values as issuing more money decreases interest rates = increase the price of the bonds above face value 4. So the middle men make profits, gov gets its cash for spending, then central bankers get to carry out monetary policy unopposed to all 3 parties benefit – as the central bank makes income from the cash rate they issue funds at 4. It turns out that Both Quantitative Easing and negative interest rates policies (NIRP) alone have turned out to be deflationary. 1. QE led to banks hoarding cash - resulting in a reduced impact on money supply = destructive at negative rates 2. Negative rates lead to banknotes hoarding (it just started in Japan, Switzerland) - contracts the money supply further: a smaller propensity to invest as uncertainties about the future growth, with fears of expropriation/bail-in/wealth tax, right at a time of lower inflation expectations and prospective returns.
Central banks and Governments will need to go further – Helicopter Money 1. The concept of helicopter money refers to Milton Friedman’s thought experiment of 1969 - 1. If there are negative rates why cannot there be negative taxes? In economics, a negative income tax (NIT) is a welfare system within an income tax where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government. 1. Aus Gov – low-income tax offsets, franking credits = exactly this – I think it has benefited us – but debt has finally caught up and the ever-increasing regulations hasn’t helped 2. So far in this list of policy tools, negative rates are synonyms of wealth tax, and bail-ins in disguise. As such, intrinsically deflationary. Which means self-defeating, as the whole point is to resurrect inflation in a moribund economy overloaded with too much nominal debt. But negative rates may become pure incentive to spending, and boost the velocity of money, if and when coupled with various forms of tax cuts, both temporary and permanent ones: raising minimum salaries, temporary / depletable spending coupons. 2. Some of the traits of this form of fiscal expansion may be inspired by Roosevelt’s New Deal, a series of government programs implemented between 1933 and 1938 to provide relief to people suffering during the Great Depression. - may lead to a temporary suspension of laissez-faire capitalism.
- Crisis policymaking should then target two objectives:
- Currency debasement: to reduce the value of debt vis-à-vis productive economy / income stream, to decrease debt ratios overhang
- Velocity of Money and Money Multiplier: to boost private sector spending, for both businesses and households, and its impact on output
- I hope this is starting to make sense – that this is a bought and sold system that is promising ever increasing spending for vote – who doesn’t like free stuff? Like $10k p.a. no questions asked – if politicians proposed this a lot of people would vote for them, regardless of any other policy.
- Summary – three levels of monetary redistribution – Banks, govs and households
- Objectives - A debasement of coinage is the practice of lowering the intrinsic value of coins,
- Issuing with leaving the system with an increased supply of money – the value of it goes down
- Inflation is slow – but when it kicks in it can go quick – hyperinflation
- Eventually, there will be too much debt for future productivity increases in the economy to pay off – using debt to grow is fine – as long as the growth is enough to pay off the debt
Final step: De-Dollarization and IMF’s SDR Reserve Digital Currency 1. If you are a fan of history – know that our current version of the dollar is been around for a while – but similar to older civilisations (asyrians, romans) – currencies collapse – 2. Many problems today including deficit spending, trade deficits, and income inequality have their roots in 1971 3. Current state of economy – after Brenton woods 1944 – US become the major player – global reserve currency – then form 1971 – off the BW system – Kissinger got the Petro dollar going – oil in OPEC nations had to be sold in USD – any leader who deviated (sadam, gadafi, alasad) US seemed to take a keen interest into very quickly after – That is a major thing keeping the USD up in demand 4. IMF has been moving towards replacing the USD as the global currency reserve – tried to do it in 1969 with the issuance of the SDRs – basket of currency backed by gold – could be used as a reserve instead of the USD – way to increase the monetary supply – but then 1971 comes and USD abandons any backing to Gold – making this SDR useless – so switches to basket of newly floating currencies 5. Which is why central banks have taken so much control – floating currencies need more management to maintain stability – remember central banks major goals is economic stability – includes currency controls 6. Today – China and Russia (both had negative effects on their economy/currency from US monetary policy) 1. As if it can be controlled – it can be used as a form of financial warfare – sanctions, being cut off from payment systems and exchanges 2. China and Russia - spoken in favour of a de-dollarization of the global economy 3. China - like Keynes’ proposal for a common accounting unit - dismissed at the Bretton Wood – 1. Originally called the Bancor, now it is the SDR 7. Central banks are running out of printing press – and the negative effects of their environment it evident 1. Like everything central planned – goes horribly wrong – in Soviet Union and China it was with peoples lives – for US and Aus, UK, EU – it is just economic growth that suffers – which is a blessing – unless Gov wants to get into authoritarian rule
SDR – Basked of currencies used as a reserve currency – Rather than hold 100% USD as reserves, 44%, plus China, EU, Frank, Pound. 1. Current suggestions for a possible way of dealing with it: National Central Banks could increase their SDR allocations at the IMF (thus expanding their balance sheets in the process, which accounts for more QE) 1. The IMF would then play the role of resource allocator and invest in member countries 2. Investments may include supra-national projects – Covered in SDGs – there is no shortage of push for infrastructure spending $6trn is needed annually over the next 15 years to address global warming 3. Don’t forget the additional $7.1trn necessary to invest for the purpose of global growth 2. Shifting reserve currency regime and investing in SDRs achieves a dual mandate of QE and Fiscal Expansion on social impact and growth-enhancing projects. 3. Also, it takes the utility function away from mere US domestic needs, at a time in which there is a disconnect between what serves the interest of the US and what matters to the rest of the world. 1. Europe has similar issues between Germany and the rest of the Union, which the EU could not address as yet: a supra-national body may attempt at that again, with or without the EUR. Needless to say, such policy coordination may well be utopist and far-fetched; however, the US Dollar plays his current role only given global coordination at Bretton Woods in 1944, so no much reason to believe this is an eternal fact of life either.
Summary 1. Central Bank keeps going with monetary printing and permanent quantitative easing 1. Debase the currency faster than the speed at which deflation increases the real burden of debts in the economy 2. Gov - starts large-scale fiscal spending programs 1. Monetized by the Central Banks through a permanent increase in the money stock, which further balloons its balance sheet 3. Banks are cut out as the middle men – money wasn’t getting out to the people but pumped into housing or between the banks 1. Banks as the transmission channel failed there – instead – plan to have income redistributed – the aim is to spur more growth 2. The government implements tax cuts, negative taxes, temporary spending coupons, permanent minimum salaries, so to re-allocate resources directly to households and forcefully reset inflation expectations. 3. Against this backdrop, there are negative rates on deposits, so to penalize cash hoarding and incentivize spending, and a cashless economy, so to prevent banknotes hoarding / bank runs and have more grip over inflationary spirals. Sometimes later, a new reserve currency emerges in the form of IMF’s SDRs, which may one day compete with the US Dollar in dominant reserve currency status. 4. In another way - inflation / currency debasement is default by another name. Inflation curtails the value of fixed income claims as much as default, at a time where there is too much debt for too little growth. 1. Seen as a more politically palatable course of actions than going through outright defaults 2. Plus - rising tide to lifts all boats but Big losers are the banks, and creditors in general 5. But at least the interest curve steepens back up, inflation expectations reset, rates rise without defaults, business gets unclogged and starts all over again. Banks get re-capitalized once, from zero, as opposed to multiple times in small increments out of negative profitability over a decade long period. The economy may then spring back to life, inflation and growth may resurrect.
Thank you for listening today. If you want to get in contact you can here: https://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition
Today is a Bonus episode on most recent series – Current events unfolding – Extinction Rebellion –
Today focus more on the economy - Talk about How eco-warriors will collapse the economy – a self-fulfilling prophecy 1. If you have friends who are protesting – share this episode - don’t mean to be offensive but they are being used as pawns – being manipulated by the industries/corporates who are going to profit from their activity 2. Ironically - Serving the very people the same people were protesting against in the occupy movement – the elite banking groups - they are going to benefit from their eco-activism – while the overall economy struggles 1. Art of War – Controlled opposition – gone through it but Environmental activism/societies originally funded by the Dutch Royals (Shell Oil), British Royals (BP), M Strong (Canadian Oil Billionaire), backed by Standard Oil (Rockefellers) – why would the oligarch’s band together to put themselves out of business? 1. Control your opposition – you create a paper tiger to push the narrative in your direction 2. Most have divested from oil and are in solar/wind and making a killing of tax-funded subsidies 2. Sciences used for their purposes – like peak oil predictions in the late 50s – Marion Hubbert was a geologist paid by shell - world was running out of oil and would be empty – more oil now than ever – but created artificial scarcity at the time – prices for oil went up
Extinction rebellion – doesn’t have anything to do with climate change – not my words - 1. Co-founder – Extinction rebellion is not about the climate – it is about dismantling White European civilisations, ending the patriarchy and demolishing the heteronormativity (that heterosexual relationships are normal) 2. What is it all about? The Founder – “we are going to force the Governments to act, and is they don’t, we will bring them down and create a democracy fit for purpose, and yes, some may die in the process”
The thing is – the demands are so extreme that we can’t achieve them – no more plane flights, be 100% renewable with 0 CO2 emissions by 2050 – well, we exhale out CO2 greater than the intake of breath – over 3bn tons of CO2 a year – estimate for us breathing
- Can’t be achieved – so it comes down to overthrowing governments and western civilisation
- Phycological effect from bombardment of the ‘day after tomorrow’ event predictions – Eco-anxiety – yet 100 years ago 500k people killed by weather-related events each year, today 20k p.a. = 96% reduction – yet more anxiety due to availability heuristics – more something is mentioned, we think that they are very common
- It is sad to see – people being be petrified by the fear of the end of the world – why have kids or do anything productive then? You put all energy into protesting for climate rather than building something yourself
- But the Science is settled – need 0 emissions by 2050 to avoid climate catastrophe - even though climate gate scandal shows that scientists are changing the data to hide cooling temperatures –
- let’s say the science is settled – then no need to fund climate scientists anymore?
- Would there be any disagreement at that suggestion – why is more money is needed – even though the science is settled
People protesting – Disrupting economic activity – putting the working class people out of work and business 1. France and Holland are having protests for climate taxes and environmental regulation on agriculture 1. Yet we have people protesting for the opposite – more taxes and regulations 2. Hypocrisy – we are all hypocrites – but blocking roads to save people is killing people – making doctors late to work to save lives – few friends working in hospitals telling me about being understaffed and surgeons being late to perform emergency procedures 1. When you see them with yoga mats next time – remember they are petroleum-based – like most plastics 3. Economically – makes people late to work – blocks services, actually has the potential to kill people – emergency services 1. Yet police are not allowed to just lay a few riot hoses/dogs onto them – so they have to stand by and protect the rights of those breaking the law – infringing on the rights of those paying the Newstart allowances of those protesting 2. Also – major economic effects of having a criminal record – employer sees you have gone to court 11 times - remove their ability to earn income 4. UBI is the only way they can make a living then – hence the calls for more Government – to solve their created problems
Beyond UBI – More Gov and Carbon policy creates another indirect method of extraction on the population – higher taxes via price increases of energy and goods/services
- Tax on carbon = higher prices to you and businesses, which is a higher price needed to be charged on goods and services due to pass on costs of higher input costs – has a flow-on effect, while a marginal increase at one level, has its own form of multiplier effect
Massive financial scam – also being pushed by the massive companies or billionaires to financially benefit from it 2. Financial banks own the carbon trading mechanisms – 1. Economist Craig Mellow “the combination of global warming and growing environmental consciousness is creating a potentially huge market in the trading of pollution emission credits” 2. Blackrock Capital – the climate finance partnership – mobilising institutional investments – HSBC, JPMorgan Chase and Citi bank – going to make commissions and margins for trading carbon credits 3. It will take around $6 trillion every year to deliver the Sustainable Development Goals (SDGs) - a universal call to action to end poverty and protect the planet. 4. Investment in sustainable, climate-resilient infrastructure is arguably the single best way to achieve the SDGs. The lion’s share of this is needed in developing countries. 5. The Business Commission estimates a $12 trillion economic opportunity for the private sector over the next 10 to 15 years. 6. Blended finance taskforce - set up to mobilise private capital for the Sustainable Development Goals - 50 massive companies – Allianz, AXA, Citi, HSBC, JP, Rockefeller, - Profits to be had in climate-related sector 1. Rothschild Australia and E3 launch carbon credit investment fund 2. Are you aware that Rothschild's bought weather stations? Quote: "Evelyn de Rothschild and Lynn Forester de Rothschild said they are buying a majority stake in weather-data service Weather Central - investments into media and information." – Makes it hard to trust information when those presenting it benefit from a ‘global warming narrative’ 3. Look at ABC (in USA) – published video of the Syrian/Turkish conflict showing a civilian city under heavy fire – turns out it was a video from Kentucky shooting rage – military demonstration in 2017 – constantly lying to push their owner’s narratives – pro war to pro global warming 7. Prime example – look at the connectivity of this scam – same individuals go from banking, mining, science, mining and banking, government – jumping across all areas 1. Megan Clark – Director of Rothschild Australia while being a VP with BHP between 2003 to 2008. 1. 2009 – 2014 Chief executive of CSIRO (where climate evidence comes from) 2. 2014 – non-exec director of Rio Tinto – Sustainability and remuneration committee from May 2016 – 2. Why banks, science organisations, mining companies all lineup – all have something to gain from this
The form of the scam – What have these people been pushing - similar to the IMF – Carbon credits – latest fiscal monitor published on Friday calls on governments to introduce a carbon tax to "discourage carbon emissions from coal and other polluting fossil fuels".
- IMF says to limit global warming to 2°C or less, developed countries need to take action by introducing a carbon tax of $US75 a tonne in 2030.
- but IMF thinks that it would not be enough for Australia to meet its Paris emissions reduction targets
- Our economy is heavily reliant on coal-fired power – so even taxing a very coal reliant country won't hit our 45% pp reduction
- IMF's proposed carbon tax of $US75 by 2030 – hurt the average person massively – based on current levels = push up the price of coal by 263%, natural gas by 44%, 75% for electricity and 15% for petrol
- Fuel of $2 per litre and almost double electricity bills = yellow vest protests – but as ineffective due to militarised police capabilities
- But the IMF says that this would be more expensive and less effective in cutting emissions compared to taxing
- IMF says global warming has become a "clear and present threat" and actions from governments and business around the world to date are falling short
- Question – why is the IMF getting involved in climate change? Maybe have to benefit?
- What are other options? policies to reduce emissions such as direct government action and regulations
- But it admits that in fossil-fuel rich countries including Australia, that price would not be enough to meet the federal government's commitment to reduce greenhouse gas emissions 26–28 percent below 2005 levels by 2030.
- "Governments will need to increase the price of carbon emissions to give people and firms incentives to reduce energy use and shift to clean energy sources." – Make energy more expensive –
- "Carbon taxes are the most powerful and efficient tools, but only if they are implemented in a fair and growth-friendly way.
- "Whereas a $25 a ton price would be more than enough for some countries (for example, China, India, and Russia) to meet their Paris Agreement pledges, in other cases (for example, Australia and Canada) even the $75 a ton carbon tax falls short," the IMF notes." – What? Yes we are PP large polluters – but tiny fraction of CO2 emissions – so massive hit to us for no real reduction in global CO2
- Businesses such as BHP and energy companies want a carbon pricing –
- They say in order to give investment certainty – but they won’t cop the costs, pass on in pricing to you
- actual carbon prices worldwide average about $8 per ton, according to the OECD – So we pay $75 more
- Also- talks of policy - proposes using revenue generated by the tax in wealthy G20 nations to lower income taxes, “reduce fiscal deficits, or pay an equal dividend to the whole population” – But just a promise -
Summary – Protests are being used for the Blended Finance Taskforce to shut down the economy and siphon money 1. Useful idiots being used by large companies to push their money-making agenda – crash the economy in the process 1. Through economic distribution, sky rocking energy prices, costs of goods – we are currently not in a good sate for the economy 2. The overall economy crashes while banks make billions from carbon credits – controlled opposition helping out 3. TBTF – banks will get the bailouts and bail-ins – if system crashes banks won't really suffer long term 1. But you and I will – so to all the people out there protesting - 4. Instead of protecting - and study engineering, or something practical to help the problem of pollution – stop blocking traffic and busses which leads to more CO2, stop blocking trains – the cleanest form of mass transportation
Thanks for listening, if you want to get in contact you can here
https://financeandfury.com.au/contact/
Resources:
Rothschild: www.freestatevoice.com.au/politics/item/768-rothschild-australia-behind-the-push-for-carbon-trading
www.rothschild.com/gfa/our_clients/governments
Are you aware that Rothschild's bought weather stations? An article from the respected Wall Street Journal:
blogs.wsj.com/deals/2011/01/31/rothschilds-buy-majority-stake-in-weather-central/
Welcome to Finance and Fury, The Say What Wednesday Edition
This week the question is from Dan
I am 21 and have about 70k in a term deposit and 5k in VHY and VGS ETFs. I am wondering whether over a period of 20~50 years I would be better diversifying into VAE or VGE and VAP or whether you'd stick to VAS and ETFs which have a franked dividend and not just potential capital gains. You have mentioned in previous podcasts bubbles, though these ETFs have much larger market caps and therefore are less likely to default.
Thanks for the great question – Break down investing in ETFs, diversification issues with ETFs – Feedback loops and self-fulfilling prophecy –
Global asset managers, Vanguard and iShares continue to dominate the ETF market in Australia. 1. Account about 56% of all money invested in ETFs - BetaShares is the third-largest 2. Low-cost passive vehicles have gained popularity on Main Street. 3. Passive investments have now taken over nearly half of the stock market as more investors shun stock pickers and flock to index funds, according to Bank of America Merrill Lynch. Equity passive funds alone have ballooned to a more than $3 trillion market in less than 10 years, according to Morningstar
Aus – largest is Vanguard – can't tell you what to invest in – but can give a breakdown and comments on them
Vanguard ETFs – six mentioned in the email and Start date for each:
- VHY - Vanguard Australian Shares High Yield Fund – 62 shares – May 2011 - Higher FF divs
- VAS - Vanguard Australian Shares Index Fund – 296 shares – May 2009 – ASX300 whole index, good FF shares
- VGS - Vanguard International Shares Index Fund – 1,590 shares – Nov 2014 – International market access – 14% top 10
- VAE - Vanguard FTSE Asia ex Japan Shares Index – 1,176 shares – Dec 2015 – 28% top 10
- VGE - Vanguard Emerging Markets Shares Index Fund – 4,729 shares – Nov 2013 – still has 24% top 10
- VAP – Vanguard Australian Property Securities Index Fund – 28 shares - October 2010 – 84% in top 10, large loss potential
All very new investment vehicles
VAS won’t provide much additional diversification if you are already invested in VHY:
VAP – Doesn’t provide much diversification - 10 companies make up over 80% of the index - in it and the index lost over 70% in 2009 –
VAE and VGE – almost the same investments as well except one has 3000 more companies which make up a tiny allocation
- Some of the largest holdings are in Communist Party run banks – China Construction Bank, industrial & commercial bank of china, etc.
If you are looking for the most diversified version of Vanguard funds, they have the multi-asset ETFs available now such as the following: Vanguard Diversified Growth Index ETF (VDGR) – or Vanguard Diversified High Growth Index ETF (VDHG) -
The bubble topic is about the nature of buying ETFs and how Central Banks are buying these, as they are price taking and not price making.
Index Funds and Price Discovery 1. Firstly - Central banks and Basel III have more or less removed price discovery from the credit markets 1. Risk does not have an accurate pricing mechanism in interest rates anymore 2. On top of this - now passive investing has removed price discovery from the equity markets 2. If it is in the index – it is purchased – bubble in markets - due to the rise of inflows into ETFs – pushing the shares at the top in the index up further regardless of the performance of companies – 1. Example - the bubble in synthetic asset-backed CDOs before the GFC 2. Price-setting in that market was not done by fundamental security-level analysis - but massive capital flows based on Nobel-approved models of risk created a similar ‘if everyone is doing it’ mentality 3. The Rise of ETFs and Market Distortion 1. Index funds are only relatively new – 2009 to 2017 created - growth in index funds is creating a valuation distortion in the market. 2. In one of the longest bull markets – I think a lot due to the technology platforms and apps making index investing easier and cheaper than ever - 3. Passive phenomena is being viewed by rating agencies like Moody’s as the adoption of a new technology 4. Investor adoption of passive low-cost investment products will continue irrespective of market environments 4. The ETF industry has attracted almost US$3trn in new business since the start of 2009 - coinciding with one of the longest bull markets in US history 1. Among Professional investors - Record surge into ETFs fuels fears of stock price bubble - Michael Burry, one of the first investors to call and profit from the subprime mortgage crisis started talking about this just last month 2. Personal Example – NWH – saw the price go up by about 12% - checked the news and it was a 3.8m share purchase by vanguard as it made the ASX200 index – no other news
Liquidity Risk – Further Explanation Needed 1. The dirty secret of passive index funds -- whether open-end, closed-end or ETF -- is the distribution of daily dollar value traded among the securities within the indexes they mimic
Daily Turnover and volumes 2. In the US - Russell 2000 Index has better data on it as an example – 1. Vast majority of shares are lower volume shares – of the 2000, 1,049 shares trade less than $5 million per day 1. 456 shares traded less than $1 million during the day 2. But through indexation and passive investing, hundreds of billions are linked to these shares 3. The S&P 500 is no different -- the index contains the world’s largest shares – but 266 shares (over half) - trade under $150 million per day 1. $150m sounds like a lot – but trillions of dollars globally are indexed to these shares 2. Analogy of a theatre – packing more and more people into one - keeps getting more crowded, but the exit door is the same as it always was
Concentration risks – fuelling bubble 4. ASX one of the most concentrated indexed - Large-cap – 1. Purchasing an index = 65% of funds to the top 20 shares and 40% to the top 8 shares – 8% of ASX300 is CBA alone – every purchase of the index (super funds, Raiz, etc.) = 8% inflow into CBA pushing price up 2. The fear is that there is the potential for a liquidity squeeze in the event of a market correction or crash which will start within the Financial sector – 3. GFC – banks lost 68% of values without the outflows of index funds -
Exit door – Selling and NAV 5. An ETF is listed on the ASX and its price will be determined by a number of factors – 1. In theory, will always trade at it's reported net asset value adjusted for tax and dividends 2. So the net asset value is the value of the fund - take the assets and the liabilities, and you compute a per share price – But the market price is where you're able to transact in the marketplace for the ETF. 3. And ETFs are really structured so that the market price can be very close to the net asset value, but it could deviate a little bit over short periods of time given certain supply and demand characteristics. 4. The reality is that an ETF, LIC etc can trade at either a premium or discount to valuation. 6. In the event of a market correction or crash an ETF will likely trade at a steep discount to valuation as investors run for the exits – but we don’t know as ETFs haven’t gone through a mass selloff – simply working of human behaviours and myopic risk aversion – well documented 1. The market maker will probably step in to ensure liquidity but it won’t stem the flow. The market maker, after all, has to fund the purchase by selling the ETF assets. 7. Sale process - 1. First NAV is the weighted average price of all the shares – but is worked out at close of trade 2. ETF purchases have to be closed out intraday – if you do a price limit and doesn’t trade – order cancelled 3. Example – if everyone is selling ETF – have to sell at market price to sell – take what you get – might be big discount to the actual NAV which you will find out after 4pm 4. The concern is the untested potential for a liquidity crunch. If the market is falling and you are selling assets to fund the exit of investors then who is buying the underlying shares? Well probably the underperforming high fee active manager who is seeking to take advantage of the misallocation of price and the eventual normalisation of the market price for the assets. 8. It Won’t End Well – passive investments are the same story again and again – very easy to sell 1. Become a self-fulfilling prophecy (prices go up the more people buy, so people buy more) – also algorithm trading kicks in for buys - also money managers are pushing Funds into ETFs 2. What makes it worse? the impossibility of unwinding the derivatives and naked buy/sell strategies used as part of ETFs 1. Fundamental concept is the same one that resulted in the market meltdowns in 2008 3. Nobody knows what the timeline looks like – but like most bubbles, the longer it goes on, the worse the crash can be
So what does work? 9. Warren Buffet has told us all to go and buy index funds - Yet his portfolio of assets is nothing like an index fund 1. Buffet and most wealthy investors are high conviction investor – don’t just buy shares but buys the whole company 2. The active managers who have actually managed to outperform over longer periods of time you will probably find them to be high conviction managers with concentrated portfolios – Such as Magellan
Summary 10. An index manager will buy everything in the reference index – those shares go up 1. It isn’t an asset allocation decision based on your own investment goals and tolerance to investment risk 2. Michael Burry - called it a “herding behaviour” and it has reached “mania status” in price misallocation 11. Nothing wrong with ETFs as a part of an investment portfolio – but diversification is not just the number of shares held – 1. I use index funds as a core – but only about 20-30% - replacement of large-cap active managers who buy 50-60 shares 2. Active Vs passive – active managers are underperforming on the large-cap side of things – 12. Investing in active has to have a purpose – in the next correction there will be widespread deep value that has arisen with the sell-off
Welcome to Finance and Fury
Talked about the inflation targets, interest rates and monetary policy over the past few weeks – Today – go further into looking at a completely controlled economy by Central Banks –
To start – look back to an RBA paper from 1975 – this was where a thing called Goodhart's law originated – from economist Charles Goodhart –
- Phrased as "When a measure becomes a target, it ceases to be a good measure."
- Applied in economics – based on the economic idea of rational expectations
- Entities who are aware of a system - rewards and punishments - will aim to optimise their actions to achieve their desired results
- E.g. employees whose performance in a company is measured by some known quantitative measure (cars sold in a month etc.) will attempt to optimise with respect to that measure regardless of whether or not their behaviour is profit-maximising – Sell all the cars at $100 – looks good for your performance but sends the company bankrupt – now your performance doesn’t matter as you don’t have a job
- Example of central planning (top down) policy – similar to socialism where measurement by weight in output leads to massive unusable nails – like the Soviet Union
- Example – signals from banks to lower interest – may increase prices of assets or be a bad sign for the economy = People may invest or start saving = less spending to policy to control inflation results in opposite direction –
- Individuals adapt – homoecnomicus doesn’t exist – the rational man that economic modelling relies upon
- Goodhart's law explains - when a feature of the economy is picked as an indicator of the economy, then it inexorably ceases to function as that indicator because people start to game it – but relies on everyone being rational
- Rational – depends on knowing how to act in response – most people don’t except those who know how to
- Big part of the widening wealth gaps (not income inequality) – I think it is between those in the past 25 years – or at least benefited through rising house prices and markets
- For central banks – also occurs when individuals and investors know the policy decisions and then take actions that that can result in different outcomes on the target
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When the target is set – central banks aim to achieve the inflation rates regardless of consequences – They are set on their path to get back to 2.5% inflation while keeping economic stability –
- No secrets when it comes to how central banks are likely to respond – look at the trend – they ever increase their intervention into the economy to control it – all in an effort to hit their precious inflation target – to keep banks (central and commercial) and governments both happy – last Wednesday's episode https://financeandfury.com.au/why-do-central-banks-target-2-3-inflation-and-what-are-they-trying-to-accomplish-by-having-it-in-that-range/
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What will they do to achieve it – requires total control and increased monetary control and intervention into markets – following the trend – but it wont work long term – so more control and intervention is needed – central banks think of themselves as all powerful – to admit they don’t know what they are doing and have at ever step done more damage than good since 1913 – that isn’t what something all powerful would admit to – shows they aren’t all powerful and not needed in their current function
- While original statement of Goodhart’s law fast saw light when Charles delivered it to a conference in July 1975 to the RBA
- General phrase - "When a measure becomes a target, it ceases to be a good measure."
- But the original formulation was: Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes
- has profound implications for the selection of high-level targets in organizations – across both risk and reward.
- Jón Danı́elsson quotes the law as "Any statistical relationship will break down when used for policy purposes"
- In financial risk modelling - "A risk model breaks down when used for regulatory purposes."
- All metrics of scientific evaluation are bound to be abused – even those of citations in scientific papers – or Wikipedia
- Where to from here? – what will central banks start doing? – then what will they continue to try and do? 4 steps
- Permanent QE – will start to become a way to keep markets dropping – soak out additional supply
- Lowering rates and moving towards cashless economy to avoid BOJ situation
- Fiscal expansion – Government spending – and redistribution in the form of Helicopter money
- Abandon the dollar – IMF SDR – new reserve digital currency
- GO through one and two now – next Monday go through last 2 stages -
Policy 1: Permanent Quantitative Easing 8. Gone through QE – printing money to buy assets – bonds, ETFs – aim to create inflation through the wealth effect 1. Since 2009 - Monetary printing failed to inflate away our debts – there is diminishing marginal effectiveness the more is printed 2. Doesn’t mean that it will likely be discontinued anytime soon –announcement last week that the Fed was resuming Permanent QE OMO after a 5-year hiatus 3. Aim was to kick-off inflation (via the money multiplier and the velocity of money) – Didn’t work – 1. What it has done is debase the currency all along – creating inflation in developing countries for food 2. Has become a race to the bottom between currency debasement and structural global deflationary trends 3. Japan example - monetary base moved from 60% of US monetary base in 2014 to 100% today - economy two thirds smaller – same money for 1/3rd economy size - BoJ will eventually own most JGBs 1. Japanese Government will need to issue new bonds just for the purposes of buying out maturing bonds 2. BoJ already owns approx. 50% of all eligible equity ETFs in Japan – buying $30bn p.a.
- Hasn’t worked – expansion of monetary policy alone is not enough - There are a few limitations with it:
- Failure of the transmission channel - Central Banks gives money to commercial banks – not much is lent to the real economy - burdened by legacy non-performing loans and capital constraints – low-risk high collateral housing markets
- Also, in a deflationary economy, demand for loans is anaemic – who wants to borrow to pay more real value back?
- Keynes - “you can lead a horse to water but you can’t make him drink” – If there are no real expected returns anywhere in the economy – this dampens new investments by companies (hiring plans, plant & machinery, and related borrowing) – makes for a worse economic situation
- QE has capacity issues – QE done through buying bonds or shares - at some point there may not be enough bonds out there
- Also – when Central Banks buy bonds – removed from the market which negatively impacts the liquidity of the market itself – same with ETFs
- Example: Europe - liquidity on corporate bonds is now dreadful, and where a chunk of bonds now trade at yields to maturity below -40bps – makes them useless for QE purposes
- Failure of the transmission channel - Central Banks gives money to commercial banks – not much is lent to the real economy - burdened by legacy non-performing loans and capital constraints – low-risk high collateral housing markets
Policy 2: By-product of the increase in money supply - Negative Interest Rates requiring and Cashless Economy
- We have seen negative rates across the globe in small economies - Switzerland, Denmark, Sweden - and large ones - Japan, Germany, ECB.
- All have different reasons why - ranging from preventing the currency from appreciating, to de-incentivizing cash hoarding for banks while trying to incentivise borrowing - assume negative rates are here to stay in these economics – thanks to the global economy, it puts pressure on other countries to follow suit
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With negative rates comes the need for a cashless society - a consequence and a necessary complement of QE programs – The banning of cash seems to already be in the works with bits of legislation – currency restriction bill
- Not science fiction – 1933 - Executive Order 6102 was issued by Roosevelt - forbid gold hoarding
- Hoarding of Gold was blamed for constraining the money supply - safe deposit boxes in the county were seized and searched for Gold
- Today - Money supply is somewhat already constrained today by hoarding - substitution of cash in the bank accounts with banknotes under the mattress
- Similar issues, similar remedies: a modern version Executive Order may one day be imagined for banning the possession of cash.
- Not science fiction – 1933 - Executive Order 6102 was issued by Roosevelt - forbid gold hoarding
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There are a few reasons for cash to be discontinued and replaced by digital transactions alone.
- Banks cannot cover the cost of negative rates forever – start having to charge depositors like Switzerland
- Cash hoarding would itself be deflationary and self-defeating to the policy of dropping rates – to have people spend instead of save – also create possibility of bank runs and serial defaults
- Only way to avoid that is a cashless economy – central banks will be arguing that better control is exerted on inflation risks down the line through doing this - Central Bank will claim to have more control over the quantity and the velocity of money
- Banks cannot cover the cost of negative rates forever – start having to charge depositors like Switzerland
- The first steps come from Capital controls - discontinued production of large bank notes - 500 EUR banknotes, while Larry Summers in the US discusses the case for discontinuing the $100 bills.
Summary 1. First two steps will be further involvement in financial markets and aiming to hold up housing prices 1. Central banks entering the QE and asset purchase markets in perpetuity 2. Rates continue to drop if inflation doesn’t materialise - 2. Aim to take capital controls over physical cash – will get to the point if the economy doesn’t turn around to push rates negative 3. Next steps – next week 1. Fiscal expansion – Government spending – and redistribution in the form of Helicopter money 2. Abandon the dollar – IMF SDR – new reserve digital currency
Thanks for listening to today's episode. If you want to get in ontact you can here https://financeandfury.com.au/contact/
Welcome to Finance and Fury, The Furious Friday Edition.
The final episode in the mini-series for the SDGs - Covered a lot – today - Summary wrap up and piece together next step 1. One sentence – UN's Agenda 2030 wants us giving up sovereignty to a global unelected socialist government – 1. Went through the 3 Founders – Roosevelt praised fascism, thought it was the best kind of Gov and acted like it in USA, Stalin - loves him some communism and mass genocide, then Churchill – Not a fan of Indian’s ‘beastly people’ – 1943 Bengali Famine for 3m people starved to death thanks to his policies to take all the food out of the area 2. This sort of thing can’t happen today unless we want this – hard to hide true crimes like the past 1. The founders of the UN weren’t good leaders, they loved Authoritarian rule – 3. Why would anyone want to live under a Nazi, Communist or Fascist? What if it is done in the name of climate change? 1. That is the propaganda - SDG4 -method of building international socialism – the aim has always started by targeting the next generation - now with global-socialist propaganda 1. All of SDG4 is devoted to ensuring that all children, everywhere, are transformed into what the UN calls “agents of change,” – pushing what the UN wants – Agenda 2030 agreement states the aim is to do this - “Children and young women and men are critical agents of change and will find in the new Goals a platform to channel their infinite capacities for activism into the creation of a better world,” – all the protests been concocted up as part of Agenda 2030 – through the UN 4. 'Extinction Rebellion' protests – bringing cities to a standstill as protestors demand government officials take immediate action to combat climate change. 1. 60 major cities across the world through late October – two days in a row – clients/staff late from protests 2. These protestors have already taken over streets, blocked roadways, and disrupted public transportation in London, Sydney, Paris, and Berlin. 3. Their message is that climate change is an emergency that requires drastic and immediate action 1. Looking to force significant policy change is to shut down parts of major infrastructure, like roads, bridges, highways, rail, airports, and ports – basically acting like fascists or Stalin’s useful idiots 1. From what I see it is about crashing the global economy to install a new economic model - Modern Money Theory (MMT) 2. Agenda 2030 is a pretty clear roadmap to global socialism and corporatism/fascism – using activists as the new Brown shirts 5. And what's the reason behind climate change protestors shutting down cities and causing economic shocks across the world? 6. U.N. Secretary General Ban Ki-Moon spoke of ‘a dream of a world of peace and dignity for all’ this is no different than when the Communists promised the people a ‘worker’s paradise.’” – to give them mass starvation and Gulag prison camps 1. History is littered with examples - in a similar manner – Mussolini – Fascism: Doctrines and Institutions - 1923 2. “State intervention in economic production arises when private initiative is insufficient or when the interests of the state are involved. This intervention may take the form of control.” – Take control of the economy to serve the state, not the people 3. Speech in 1933 – “Fascism establishes the real equality of individuals before the nations. The object of the regime in the economic field is to ensure higher social justice for the whole of the Italian people. What does social justice mean? It means work guaranteed, fair wages, decent homes, it means the possibility of continuous evolution and improvement.” – almost impossible to tell the people history calls evil to the rulers of the UN today 7. Another example - Nazis – National Socialists – Hitler’s party mandate: 1. “We demand the nationalisation of all trusts and demand profit-sharing in large industries. The first duty of every citizen must be to work mentally or physically. No individual shall do any work that offends against the interest of the community to the benefit of all.” – UN has the circular economy to get to the same outcome – all what is in the state's interest 1. Governments deciding what to be produced/consumed, what the price is and who is employed never ended well – but yet people are keen to repeat? The similarities between what the UN wants and what the Nazi’s wanted keeps going on 2. Nazis - First political party in the world to pass laws protecting the environment in 1935 1. two years after the Nazis rose to power - passed a Reich law for the protection of the natural environment 2. scope was unprecedented at the time and while the stated goal was to protect and care for the environment – saving the planet not high on the list 3. Think about Wars and the CO2 emissions form bombs – Obama dropped 26k bombs in 2016 alone – lots of environmental destruction and waste emission there – but meets with Greta for a photo op 8. UN acts like fascists - That is why the 2030 Agenda is universal, applying to all countries and actors – 1. Un states: “requires all nations to take climate action, reduce unemployment, strengthen gender equality and promote peaceful societies, to name a few, if the world is to eradicate poverty and shift into a more sustainable development” – Follows similar fascist policies of enforcement and punishment rather than incentives like a free market - 1. Everything is an inversion – promote peaceful societies- carried out using violence/enforcement – make a tweet or FB post gets you arrested in the UK if it is offensive – Words have been equated to violence – so to keep a peaceful society nobody can do anything – let alone speak their mind – 2. Irony here is that offence is taken, not given – but this is ignored to protect the faux offended – moral outrage parade 1. Two-fold – Economics side of thing, and population control measure – 2. Population is key for CO2 emissions - industrialising countries creates more CO2, create more people as well = more CO2 3. Agenda 2030 at the core – to reduce individuals’ ability to create families and prosper – through economic and environmental control 9. What is a clue that the UN doesn’t want to solve climate change and instead grab control over your lives? 10. The fact they wish to send billions off our shores to develop other countries – but in reality – goes to Green Climate fund which sends it off to HSBC and other banks to do who knows what with it – but if they actually develop these countries then more C02 will occur – but I think it will just be more lost money 1. Truth - Most developed or rich nations have higher emissions – so by making us poor through extraction and laws that the developing nations don’t have to follow - then lowers our consumptions and life quality 11. Another clue is the immigration - wanting to increase immigration through the Global Migration Compact – NGOs 1. Also - Increase in labour does drop wages – and wages aren’t representing in the economy – transfer out is same as selling local currency – flooding and devaluing over time – equality – use the strong for the benefit of the weak, so everyone becomes the sum of all averages. 12. All inversions - Another core feature of the SDGs is their focus on means of implementation, or the mobilization of financial resources, along with capacity building and technology. Mobilisation – Stalin was great at that 1. SDG10 - which calls on the UN, national governments, and every person on Earth to “reduce inequality within and among countries.” 1. agreement continues, will “only be possible if wealth is shared and income inequality is addressed.” 2. Needs to be international socialism/communism – agreement states: national socialism to “combat inequality” domestically is not enough — international socialism is needed to battle inequality even “among” countries. 1. “By 2030, ensure that all men and women, in particular the poor and the vulnerable, have equal rights to economic resources,” 3. Wealth redistribution alone, however, will not be enough. Governments must also seize control of the means of production — either directly or through fascist-style mandates – Like Stalin, Hitler, Mussolini, pick any dictator 4. Agenda 2030 - “We commit to making fundamental changes in the way that our societies produce and consume goods and services,” and “governments, international organizations, the business sector and other non-state actors and individuals must contribute to changing unsustainable consumption and production patterns … to move towards more sustainable patterns of consumption and production.” 13. Agenda 2030 document is claiming that today’s “consumption and production” patterns are unsustainable, so we’ll need to get by with less. How much less? 1. 1992 Earth Summit - Maurice Strong – Oil Billionaire founder of UNEP - “It is clear that current lifestyles and consumption patterns of the affluent middle-class … involving high meat intake, consumption of large amounts of frozen and ‘convenience’ foods, ownership of motor vehicles, numerous electrical appliances, home and workplace air-conditioning ... expensive suburban housing … are not sustainable.” – Sustainable development goals aim to remove these things for sustainability = lower quality of life 2. In truth, such “lifestyles and consumption patterns” aresustainable, so long as the freedom that makes prosperity possible is not destroyed in the name of achieving “sustainability.” 1. The UN and the environmental lobby claim that we must get by with less because there are now too many people on the planet consuming too many resources. But this rationale for accepting UN-imposed scarcity is patently false 2. Read just a bit of history and see this has been the same message for 200 years - All had same message back in the 1920s- running out of food when we hit 3bn people – the planet would be destroyed by the 70s, and so on 3. What solved it? Free markets – but if markets aren’t allowed to solve problems as they are closed from UN polices – these predictions may come true – so the only solution is less people
Which is what this all boiled down to - populations level controls 14. Little unknown fact – the root of climate organisation was from individuals involved with eugenicists – mission success – population reduction is turning into the answer – not the first time it has happened – 15. A history lesson time – 1. British PM Margaret Thatcher - the first world leader to voice alarm over global warming in 1988 2. the same year, the UN Environment Programme (UNEP) and World Meteorological Organisation (WMO) established the Intergovernmental Panel on Climate Change (IPCC) – mandate to only look for human-induced climate change 3. launch of the IPCC was not driven by science, but by eugenics - the “race science” made infamous by Adolf Hitler 4. Thatcher got her marching orders from Sir Crispin Tickell - cousin Sir Julian Huxley the President of the British Eugenics Society in 1959-62 – Brother Aldus wrote Brave New World – design for the UNs ideals of how to run society in class 1. Eugenics society Renamed the Galton Institute in 1989 – after Francis Galton who founded eugenics - had to rebrand after a few decades of bad press – Hitler, 60k forced sterilisations in California, 2. New solution - beyond direct - how else could you have control over populations – control the environment they live 5. Ideal or bad climates/environments can increase or decrease population size of animals in zoos – are we different? 6. Decrease fertility rates and population goes down, reduce access to water or food, or to change their environment to adapt 16. Sir Julian Huxley co-founded the World Wide Fund for Nature (WWF) with Prince Philip and former Nazi SS officer Prince Bernhard of the Netherlands - Tickell and cousin Huxley are both direct descendants of Thomas Henry Huxley, a.k.a. “Darwin’s Bulldog” for his aggressive advocacy of Charles Darwin – Galton’s half cousin – 1. No wonder Nazi’s loved Galton - he proclaimed that “Jews are parasites”, that “the worth of an individual should be calculated at birth, by his class”, and that the “unfit” should simply be eliminated; 2. he was knighted by King Edward VII in 1909 for founding eugenics as a new ruling British imperial doctrine 17. No surprise that Queen Elizabeth II’s father King George VI and his wife supported Hitler right up until WWII. 1. support is evident in a 1933 film in which the seven-year-old current Queen is giving the “Heil Hitler” salute along with her uncle the Prince of Wales, the future King Edward VIII 18. WWF founder Prince Philip has well-documented Nazi connections - his sister Sophie married a colonel in the SS on Himmler’s personal staff 1. Prince Philip has infamously desired to “return as a deadly virus, in order to contribute something to solve overpopulation”. 19. The UNEP was founded by oil and mineral businessman Maurice Strong in 1972 - An ardent population control advocate 1. member of the Club of Rome – same place UN getting its recommendations till this day – back in the 70’s and 80s when this was starting - a haven for eugenicists - Garrett Hardin who has argued for brutal population control policies, such as denying medical and nutritional assistance that would condemn millions to die of starvation and disease 20. From the horses mouth - 1989 Thatcher’s speech to the UN General Assembly - “Put in its bluntest form: the main threat to our environment is more and more people, and their activities…. Mr President, the environmental challenge which confronts the whole world demands an equivalent response from the whole world. Every country will be affected and no one can opt out.” - Eugenics and population control is the barely-hidden agenda as part of the UN – google it though and ‘conspiracy’ 1. Go further and learn about Margaret sanger – planned parenthood founder – big fan of eugenics – read some letters 21. Think about the SDGs gone through so far – the only way to get environmental damage down to nothing is if humans don’t exist – Under current technology – not possible to go 100% renewables like solar, wind - Possible to go nuclear or thorium
Nature of the UN is totally undemocratic and it relies on our passive, ill-informed acceptance of ‘authorities’ – what the founders wanted 22. As this plan is covertly implemented by Governments on the behest of the UN - none of us had been informed about it or have voted for it in any way; it basically leads to the loss of personal freedom and sovereignty worldwide. 1. Which is why I wanted to do this series – provide some clarity to the issue – that the people striking and disrupting are useful idiots - don’t be afraid – just say no to being forced into this 23. As a country, shouldn’t we get a say on what laws should be adopted? Especially when it comes from other unelected international individuals who have been linked to ‘racial cleansing’? 1. Doesn’t it disqualify you to be a politician if you have duel citizenship? Cause you may act in the interest of the other country – how is that different from acting on behalf a foreign Governments? 24. The aim of being sustainable is to collapse the economy – usher in UBI and other forms of population control 1. Control the environment – control the finances (incomes with UBI), control the lifestyles, control the living situations 25. In the end – don’t fall for the UN’s promises of absolution of guilt and solving the climate changing 1. When they can change the Spring turning to summer, I may listen – but to give over everything to a group individuals who meet in secret, all have 4 houses, take private jets everywhere and tell us we are the problem - no thank you
To close – If you are worried about the climate changing due to human activity – then do what you can control – change your behaviours – but don’t ask for global socialism and repeating the horrors of history – but on a global scale –
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Welcome to Finance and Fury, The Say What Wednesday edition – Every week answering your questions –
Hi Louis, thank you for the great content and the research you put in! I have another question you might be able to tackle: why do central banks target 2-3% inflation? what are they trying to accomplish by having it in that range? And in a world where inflation is less than 2% and interest rates are around 0%, what happens to people who rely on defensive assets (fixed income) like retirees? It seems like this would be a world where UBI (universal basic income) would have a place. What are your thoughts on this? Thanks, Gab
Great question – break this down into two parts
- Why does the RBA have an inflation target, why it is set the target to 2-3% p.a.
- Looking at retirees/savers
RBA - The Reserve Bank of Australia's – RBA - central bank that conducts monetary policy 1. Purpose is providing stability in the financial system and promoting efficiency and competition in the payments system – indirect functions through having an inflation target 1. Direct functions: issues Australia's banknotes and provides banking services to the Australian Government. 2. What Is the Inflation Target? Officially: “keep annual consumer price inflation between 2-3% on average, over time”. 1. The measure of inflation is the percentage change in the Consumer Price Index (CPI) 2. Run through this in a previous ep – ABS gathers data on the price change between a basket of goods – fuel, eggs, building materials, etc. – aims to capture goods and services that households buy 3. Why they need this - An inflation target provides the framework to monetary policy decisions – 1. guides a central bank’s in its management of the economy 2. The Reserve Bank uses an inflation target to help achieve its goals of price stability, full employment, and prosperity and welfare of the Australian people. This is because price stability – which means low and stable inflation – contributes to sustainable economic growth. 3. RBA adopted the inflation target in the early 1990s - round 1993 – did this independently to the Government - 1996 the Government agreed on the importance of the inflation target and formalised this agreement in the Statement on the Conduct of Monetary Policy 1. This is updated following a change of government or Reserve Bank Governor – adjust the agreements internally 4. Why between 2-3% - official justification: 1. Avoids the many costs to the economy from inflation that is too high or too low – Goldie locks ratios 1. Based around an equilibrium model – When has the economy performed well, and how people respond? 2. Looked at the data and worked out that around 2.5% was a good level – but the causes of inflation are not made equally 1. One can be created by economic boom – free trade and increase in supply and consumption of goods – leads to a lot of inflation 2. One can be created through pushing money into the economy with debt backing it 2. 2 to 3% is determined to be low enough to not significantly influence people’s economic decisions 1. Based on the target range set in the early 1990s when inflation of around 2 to 3 percent had already been achieved. It was decided that inflation should be kept at around that rate, given the fact that the lowest average inflation rate experienced by other countries had, over many years, been a little over 2 percent. 2. At these levels of inflation, an economy can achieve sustainable growth in output and employment. 1. A higher inflation target could increase uncertainty and costs in the economy. 2. A lower inflation target, on the other hand, is costly to achieve - lower output growth and increase unemployment 1. Limit Monetary Policy options to stimulate demand 5. Economic theory also backing this: 1. If inflation is too high 1. Consumers’ purchasing power – the real value of money – is reduced. If prices are increasing faster than people’s nominal incomes, they will be able to afford fewer goods and services than before. 2. Workers may seek wage increases to compensate for the effects of higher inflation = raises firms’ costs, which may lead firms to raise prices further and/or reduce the number of workers they employ. 3. Spending and investment decisions may be distorted - expect higher inflation, they may make purchases sooner 4. Returns on investment may be lower – real returns lower if inflation higher 1. real interest paid by borrowers to lenders – inflation goes high - the lender will get less 5. Menu Pricing - Businesses need to update their prices more frequently and consumers spend more time comparing prices – other reasons like loss of competitiveness internationally 2. If inflation is too low: 1. Consumers may delay purchases if they expect prices to fall. As a result, falling prices – a situation called ‘deflation’ – can lead to lower spending. Businesses could respond by laying off workers or reducing wages which, in turn, places further downward pressure on demand and prices. 2. The worst thing for an economy which has a lot of debt (like Aus in the housing market or USA and Japan on the Government side of things) is debt-deflation, where the inflation rate goes into negative territory and makes the real value of debt go up. Hence why inflation targets are so important for Central banks, aiming to avoid the above. 1. Debt to GDP – If GDP grows above deflation, real size of Debt to GDP grows 2. Lack of tax revenues – if goods get cheaper and wages stay same = same costs of living but gov debts lower
How Does the Inflation Target Work? 1. Set one is running the numbers - Assessing the current and expected rate of inflation 1. monetary policy – bases rate decisions on levels of inflation now and expected inflation in the future 2. If you put $1bn into the economy – effects won’t show up until later – if ever - 2. The cash rate is then used to dampen or stimulate economic activity so that inflation is consistent with the target. 1. When inflation is above the target, this can be a sign that the economy is overheating- increase rates 2. When inflation is below the target, this can be a sign that there is spare capacity in the economy – cut rates 3. Open Market Operations – Bidding for cash by the banks where RBA injects newly created funds to banks 1. Differ from QE – as this is where the cash is used to purchase bonds in the bank 4. That is why the Reserve Bank looks to what inflation is forecast to be in the future when deciding on the level of the cash rate today
The reasoning behind the target is I believe - twofold: Agreements between governments and Central banks 1. Reason 1 - Provides a justification to increase the money supply based around Monetarist theory of Friedman 1. But money hasn’t been going where it has been - Where has the money been going? 2. What isn’t measured by CPI – Hard asset price increases – property, shares, etc. 1. i.e. inflated hard asset prices through compounding growth – from increase of money supply - 3. Why is inflation good for Governments – who else can borrow billions of dollars at low rates and let inflation eat away repayments? No need for fiscal restraint if you can let inflation eat away your debt on a 70 year bond. 2. At 2.5% $1bn turns to $177m over that time – interest is covered by tax payers – or another bond 4. But with money supply going up and up in ‘uncollateralised debt’ – Governments may not be able to afford the increased interest repayments if rates do go back up 5. What the target does is switch the old models from a simple interest outcome, to a compounding one – has drastic exponential factors the longer it goes on 6. Analogy of after big night of drinking – Wake up and on the verge of a hangover 1. I’ll admit there has been one or two times I have woken up hungover and kept drinking 2. What happens the next day when the party is over? Hangover is worse than normal – 3. We should have had a hangover by now – there is a backup plan the IMF is looking into to increase global inflation – trying to escape the true horrors of a 2 day hangover, or in this case debt collapse 4. How to avoid a hangover from a credit crunch? Work towards that answer in the next FF ep. 7. This is why inflation is great for Governments – If you have no real assets but are cash rich from income each year from tax payers – You need to either budget well or borrow for funding shortfalls – Every nation in the G20 is in debt – to who? 2. Reason 2 – Central banks and commercial banks doesn’t want it too high – they are the ones that lend the money 1. If inflation is high – real returns of banks go down 2. They don’t want it too low either – if debt-deflation then borrowers might default – so bad loans go up 1. Financial system collapse on the commercial banking side of things
Will giving money directly to the masses though a program like UBI (universal basic income) work better than what they're doing at the moment? Money would go into the masses but hard to control where money goes
- transition in monetary policy - UBI comes from a new form of monetary policy called Modern Monetary Theory (or MMT)
- treats currency as a monopolistic tool of the state to redistribute where it sees fit - where the concept of UBI has it's roots, in helicopter money style fiscal policy of the government
- the backing of QE from the central banks to fund the deficit spending that comes along with UBI. This is in an effort to increase the velocity of money, consumption and eventually inflation.....but it is starting to look like wishful thinking in the short term – need confidence
- RBA - it may be the case that monetary policy should be set such that real interest rates become negative
- very low inflation target (so that actual inflation is close to zero) makes it more difficult to reduce real interest rates to such levels – hence why inflation targets are needed
- Trying to control people’s behaviour –
- What if people use UBI to pay down mortgage? Just more debt at governmental level for not outcome
- Using debts to pay debts –
- What if everyone spends money -
- What if people use UBI to pay down mortgage? Just more debt at governmental level for not outcome
- This is where – ‘be careful what you wish for’ comes true –
- Give every Adult in Aus $10k p.a. = $200bn a year – 50% increase to Gov spending
- Issue with percentage targets - Compounding – Compounding is a very powerful tool
- Depends what is compounding – Returns (growth), interest, or inflation
- Returns - Investor – own assets or cash – good
- interest – owe money – bad
- Inflation – Investor, individual/consumers – bad – owe money – very good
Defensive investments like Fixed Interest – Low income yields at the moment – but less real values eaten away from inflation 1. Fixed interest is a form of debt – Real values bigger – may be the unfortunate case to sell them down to fund income 1. Yields are driven down with QE – prices pushed up – so sell high values 2. Retirees I see fund a lot off super/pensions - Mostly have a decent allocation to shares – for dividends and FC – 3. Best way is to work out volatility losses – set up allocations to income paying shares for a portion with years worth of income in cash/other defensive funds 4. Retirees – Get Age Pension if not self-funded – 1. Joint fully AP is $40,560 p.a. 2. Levels of UBI won't go to replacing this – pension payment rates grow faster than inflation
Thank you for listening to Finance and Fury, if you want to get in touch you can here https://financeandfury.com.au/contact/
Welcome to Finance and Fury
We live through transformational times – new environment for finance and investing
- We are fast reaching the limits of monetary printing - markets are still trying to work out how to price that in
- Past model – print money
- Get GDP growth through aggregate demand increase – mainly consumption
- Therefore – due to velocity of money (turnover) – get multiplier effect – more times money changes hands the bigger the effect = $1 might lead to $3.2
- Trouble is that turns out inflation is mostly driven by behaviours/psychological phenomenon
- GDP growth, inflation, productivity are all missing in action despite 9 years of declining rates and 6 years of monetary doping and financial engineering the world over.
- If you increase money supply – money needs to go somewhere – sometimes through existing off investment managers or pension funds or new bonds issued from the bank
- RBA will give CBA $1bn of newly printed money – in return gets CBA Bond to the value of $1bn with a coupon
- Bank uses new money as deposits to fund further lending – leading to more economic growth through increased consumption – then we are meant to get inflation –
- Found to be very ineffective – UK QE = £375 billion of new money just to create £23-28bn billion of extra spending in the real economy
- Over time reduces growth if money went into mortgages – lowers spending due to larger loans to repay as borrowing capacities rise as rates drop due to this policy
- If you increase money supply – money needs to go somewhere – sometimes through existing off investment managers or pension funds or new bonds issued from the bank
- No positive outcomes have led to falling credibility of Central Bankers, as they ran out of policy space
- Falling credibility is typical precursor to imbalances compounding (including bubbles)
- Creates a lack of confidence – and becomes its own tipping point for a financial crisis.
- Yet - Australia – Lowering rates – calls for QE – Quantitative easing – printing money for liquidity
- Officially - known as large-scale asset purchases through using newly created money
- Type of monetary policy– an extreme one – where a central bank creates a policy to buy predetermined amounts of government bonds or other financial assets in order to inject liquidity directly into the economy
- Purchase of bonds and assets (life ETFs) –
- To inject liquidity – money to be spent – money terminology very similar to maritime/water –
- Trouble is that there is a lot of evidence that this policy type won’t work – just leave with money to pay back
What this means for the market 1. Without growth and inflation from here - future for market economies looks very different – want to spend a few episodes to run through 1. Looking at the past – economic change has occurred a lot – financial system has had its resets 2. 1920’s - structural deflation led to Keynes revolution in economics 3. 1940’s –world fully abandon gold standard to a semi- gold backed system 4. 1970’s - chronic inflation led to Milton Friedman counter-revolution, and governments like Thatcher or Reagan 2. Market-based economies survived these – what has changed – we are in a new form of global capitalism 1. Entangled things – Financial System is Global – no longer is it nationally important – look at GFC (US banks) = 68% loss on the big 4 here 2. Accelerated things - the industrial revolution took years to equate to growing productivity and wealth, while it went through its implementation phase. Industrial and aggregate productivity growth slowed down markedly in the years 1890 to 1913, as we moved towards the second industrial revolution 3. What has been true in every case - Deflation is like a death penalty for debt-laden economies 1. Low rates decrease service costs on debt, but negative inflation rates increase its real burden, leading into more debt-deflation. 2. Now that interest rates and inflation are below zero, the economy is cornered and time is running out. 4. From here – Central banks hope to see GDP reverting to the mean, inflation to spring back up – wishful thinking 1. Debt overhangs, bad demographics, chronic oversupply, technological disruption all conspire to the deficient aggregate demand, the structural deflation and the liquidity trap we see the world over. 2. If inflation and nominal GDP cannot be resurrected soon enough - the bubble in markets will eventually bust 1. Asset prices drop, economy stagnates, and discontent will trigger a change of regime into populists’ parties, for them to try what current politics could not. 3. Major issue in a lot of countries – France and yellow vests, china/HK, India people protesting over banks
Existing examples for an economy with years of QE 1. Japan: living laboratory for the Great Policy Experiment - One such place where experimental policymaking may be tested is Japan. 1. Japan is likely to be the laboratory where new forms of crisis policymaking are implemented. 2. Japan is likely to lead the way. It is the pinnacle of desperation after 26-year long unfruitful attempts at re-igniting growth and inflation.
There are a few reasons why Japan is desperate enough to be forced into pioneering innovative policymaking: 1. Exhausted effectiveness of monetary printing - QE - printed almost $800bn p.a. since mid-2013 1. monetary base having grown to be as large as in the US – with an economy of 1/3rd the size - 0.5% real GDP growth in first three years but contracted by 0.3% in the last year 2. money multiplier and velocity of money have been on free-falls - new lows = Inflation was negative in April at -0.3%. 2. Currency headwinds - JPY strengthened by 10% against the USD and other trade partners = lower exports = lower GDP 3. Cash hoarding problem - negative rates and new tax regulation = households are stashing cash under the mattress 1. a 17% increase for physical cash year-on-year - demand for cash is deflationary – when demanded for savings = lower velocity of money – lower multiplier effects and less GDP growth 2. Hence why governments are slowly working towards cashless societies – avoid Japan example
The Market Economy going forward: an illustration exercise 1. Big disclaimer - transformational markets are something that cannot be 100% predicted – no way to know where it will end up 2. But will look at possible outcomes – look at what is out there – what the economics are advising Gov to do 3. A new evolutionary phase of combining QE, deficit spending, and ‘helicopter money’ - the nuclear fusion of monetary and fiscal policies – might well be the next stop for policymakers, as they move from price setting to direct resource allocation, in certain markets more than others, in certain places sooner than in others 1. Helicopter drop is an expansionary fiscal policy that is financed by an increase in a economy's money supply. It could be an increase in spending or a tax cut, but it involves printing large sums of money and distributing it to the public in order to stimulate the economy 2. Funded through deficit spending – so Gov issues bonds to fund spending – more debt every year 3. Money to spend/buyers of bonds are the Central Banks by more QE – in perpetuity 4. Economic theory will change as well – flavour of the day to guess again what is best 1. New economic paradigms (a new Keynes coming up? A new Friedman?) - Modern Monetary Theory or Modern Money Theory is a heterodox macroeconomic theory that describes currency as a public monopoly for the government and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires 1. This is where the concept of UBI has its roots – helicopter money through printing money 2. accidents along the way (deep deflation, hyperinflation, default events etc) 3. political shifts (populist parties winning over, from the US down) – need Govs to promise this 5. Want to explore what the market economy going forward may look like - plausible scenarios based around current trajectory 1. Work off a trend of what has occurred so far in policy – attempt to piece it together in a coherent manner 2. No timelines on this – may happen in 12 months, few years, or never 6. Doesn’t take a genius to see that unless inflation and growth are resurrected - bad things happen -
To get that – run through main components of the market economy going forward 1. Permanent QE 2. Lowering rates and moving towards cashless economy to avoid BOJ situation 3. Fiscal expansion – Government spending – redistribution 4. Helicopter money 5. Abandon the dollar – IMF SDR – new reserve digital currency
Start breaking this down in the next ep on Monday
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Welcome to Finance and Fury, The Furious Friday edition
Today – cover Resource control over an economy/society – Energy, food, water – Many SDGs – 7, 13, 15, 16 – Mainly focus on 7 and 13 – this is the core of most SDGs – justifications for them anyway
Goal 13: Climate action - "Take urgent action to combat climate change and its impacts by regulating emissions and promoting developments in renewable energy."
- Started in 2015 - climate deal Paris Agreement – tool used for countries to meet the sustainable development goals
- UN states that tackling climate change will only be possible if all SDGs are met = climate action needed – SDGs plan
- Official “economic development and climate change are inextricably linked, particularly around poverty, gender equality, and energy” – Okay?
- Economic climate change and Gender equality just thrown in there
- The UN encourages the public sector to take initiative in this effort – Government policy
- UN states that tackling climate change will only be possible if all SDGs are met = climate action needed – SDGs plan
- 2018 - International Panel of Climate Change (IPCC) - UN body for assessing climate change
- published a special report "Global Warming of 1.5°C" - outlined the impacts of a 1.5°C temperature rise
- require global net human-caused emissions of carbon dioxide (CO2) to fall by about 45% by 2030 to 0% in 2050
- Climate is the most misunderstood topic – listen to honest scientist – they say they don’t know what is happening – listen to UN – 1.5 degree so give all the energy regulation and money to them
- Changing CO2 in atmosphere and controlling the temperature is actually laughable - Why?
- Greenhouse effect – idea is more CO2 and then more energy flow and warm climate
- Greenhouse effect rose from 1980 to 1993 – flat from 1994 to 2015 – but the co2 has been going up – which is true – but illustrates that what we are told – co2 up greenhouse effect goes up doesn’t add up based around the science from all sources and not just one outlier –
- CO2 – do you think the most greenhouse gas in the climate is Co2?
- Answer - H2O -it is water vapour in all forms – ice, snow, water – vapour coming out of power plants is water vapor – like a cloud – what we can see – we cant see co2 – why does water come out of power? Power is produced by turbines – boiling water – evaporation of water
- Easy example – where is it hottest – humid areas – makes it feel hotter –
- Global energy balance diagrams – but in every element from absorbed sunlight, temperature, outgoing radiation, latent heat flux and potential energy flux – most important element is H20 – biggest impact on all –
- CO2 only relates to atmospheric composition – as it is a small part, one of thousands of elements –
- If you want to fully understand – put up a 1.5-hour lecture to explain how it works from independent institute
- Also – good scientists are happy when people critic their work – ‘how am I wrong’ – scientific question – but if you question the theories of climate scientists with the IPCC – they have ‘deniers’ removed from the conversation –
- If you are an engineer and designing a bridge – someone says it is off and will fall down – that is helpful – instead if they worked in the IPCC they would fire the person pointing out the design flaws
So why CO2 used? 1. Why? And Why silence the counter view and put the blame at CO2 – fits the mould of authoritarians 2. All for Energy and resource control – helps as well to siphon trillions of dollars out of people into the UNs pockets as well – Control of money, control over our lives – 3. Finances – Paris Agreement - Article 9 – Deals with the Finance Transfer – projects towards low greenhouse gas emissions and development 1. P1- Developed countries shall provide financial resources to assist developing countries 2. P3 - mobilizing climate finance from a wide variety of sources, instruments and channels, noting the significant role of public funds 1. The agreement builds on the financial commitments of the 2009 Copenhagen Accord, which aimed to scale up public and private climate finance for developing nations to $100 billion a year by 2020 3. The Copenhagen pact also created the Green Climate Fund to help mobilize finance using targeted public dollars. 1. The Paris Agreement established the expectation for a higher annual goal by 2025 - put mechanisms in place to achieve that scaling up from $100bn. 4. Green Climate Fund – Collects money (Country taxes) – Give it to accredited entitles – they spend on projects 1. Entities – HSBC Holdings, Africa Finance Corp, European Central Bank, mainly gov or private banks 5. Also - Energy is a big business – Lots of money – billions – not only does oil back the USD under the petro dollar system – makes a lot of money – OPEC nations – when managed well – countries boom – like Saudi – when centralised Government control comes in – goes poorly – 4. Venezuela – took a very profitable oil companies – one of the largest in world – socialised it – started hiring people to work in Government run businesses – was run like a government - now complete shadow and can’t even keep up with domestic demands let alone a major exporter 1. Lessons are that not only does socialised companies often lead to worst services for the people – costs go up – 2. And that resource rich countries shouldn’t destroy their golden goose – which Brings to the next point -
SDG 7 - Affordable and Clean Energy - "Ensure access to affordable, reliable, sustainable and modern energy for all”
- involve improving energy efficiency and enhancing international cooperation to facilitate more open access to clean energy technology and more investment in clean energy infrastructure.
- Solutions provided – Continue developing Solar/Wind as the way forward, and tax CO2 emissions to price it out of competition - Australia Target – Emission reduction of 50% p.p. – May as well be a tax
- Main intention is to not just deal with heavy polluters (that is a policy that is working)
- This target is completely different - outcomes here is the target - 45% emission reduction target – not policy of how – but what - Gov demanding almost half the emissions go - going to cost a lot – indirect through taxes and pass on costs to make green energy more cost competitive
- independent modelling - impact of $9,000 a year for the average Australian worker, 360,000 jobs or more, assuming the carryover is used.
There are so many first order consequences there – not even going to bother going beyond the second order 1. Finance Transfer – Helps increase quality of life of 3rd world nations – clean accessible energy, food, etc – Make it a paradise utopia – Their populations would explode (not birth rates but reduced death) – CO2 will go up 2. What we have to work with? look at France up until 5 years ago - served as a model country 1. One of the few developed countries in the world to decarbonise electricity production - while still providing a high standard of living – 58 reactors – but Gov policy to reduce to 50% by 2035 – as they increase solar at massive cost – 2. How? Nuclear Energy – 75% of electricity and Hydro – 12% and coal/gas only 8%– worlds largest net exporter of electricity – 3bn euros gained - why spend money to undo this? Worse power and more expensive – increases gov spending and helps solar buddies 3. Currently their electricity pricing is largely tax – the policies that this agreement is built around – while cost is 25ckwh – 10tax (40%) but Petrol is worse –Yellow Vests Still protesting 46 weeks in – last time mentioned was in 20th week 1. But now police are joining in – not long until the thing boils over 2. SA costs 47c KWH, rest of Aus between 35-45KWH – and only GST is a tax on ours currently 1. Already rising inflation in developing countries – mainly USD expansion of money supply – so debt grows 3. Massive loans from IMF provided – in SDRs (basked of currency) – but Who pays it back? Often not a gift loan – debt to be paid but in other currencies. China in island nations and Africa – what happens to your house if you cant pay your mortgage? 4. As of 2017, only 57 percent of the global population relies primarily on clean fuels and technology, falling short of the 95 percent target – which is where infrastructure comes into it -but for solar and to decommission coal power 1. Want to increase clean fuels – which is also Natural fuel (such as compressed natural gas or liquified petroleum gas,) or a blend (such as gasohol) used as a substitute for fossil fuels - produces less pollution than the alternatives. 2. Aus is a massive natural gas reserve – why not start producing more of that? Why are so few houses run on gas when it could be very cheap and available compare to currently? 5. Solution shouldn’t be to put financial strain on the population (tax and removal of cheaper energy sources), 1. Simple solution – Divert all the funding to Thorium reactor technology and roll those out 1. We need more energy for the future- solar cant keep up – even spending billions wont help 2. Thorium is a radioactive element that can be used in a new generation of nuclear reactors as an alternative source of fuel for the generation of electricity - Safer than conventional uranium-based reactors – 1. still a degree of risk – you can get burnt – if you watched Galen Windsor – see him holding radioactive materials and only issue was burning his hand if he were to hold it too long – but no contamination 3. Thorium is abundant in Australia 18% of world supply 6. Environmentalism in the name of climate change is stopping this - environmental concerns in the mining, handling and storage of radioactive materials
Don’t be fooled by statements of good intentions - The UN wants further control over all resources – providing more regulations over the oceans and land
- SDG14 - Life Below Water and SDG15 - Life On Land – noble causes – but extreme conservationism –
- For the past 200 years there have always been saying the world is overpopulated – would starve after 3bn people – what happened?
- Technology got better – we adapted and innovated as people found better ways – no thanks to regulations
- Rather than humans spread out and have more agrarian existences – skewed to high density urbanised environments built on consumption
- Better solutions than extreme measures of giving away your choices and that of kids
- My kids will suffer consequences of Lima Dec – just as most of us have since 1975-
- Don’t be afraid of climate change, nuclear meltdowns – only thing is to not live in fear of some end of the world climate event –
- What is worse – solar storms – like in 1859 (Carrington Event) was a powerful geomagnetic storm
- solar coronal mass ejection (CME) hit Earth wrought havoc with telegraph systems
- A solar storm of this magnitude occurring today would cause widespread electrical disruptions, blackoutsand damage due to extended outages of the electrical grid – months if not years to get back – satellites, internet, running water, heating, starvation
- The solar storm of 2012 was of similar magnitude, but it passed Earth's orbit without striking the planet, missing by nine days
- Why do we hear instead about climate change? Can’t tax or control the sun
Brings an end to each individual SDG – next week will be a wrap up summary
Thank you for listening, if you want to get in contact you can do so here https://financeandfury.com.au/contact/
Resources:
https://www.zerohedge.com/health/what-would-you-eat-save-earth
Lecture - https://www.youtube.com/watch?v=1zrejG-WI3U&fbclid=IwAR2q7gNTox66J0-7ZTPuNq-s34oteT6KIJk76aCGvJSV5_h52J2jThUx2XA
Welcome to Finance and Fury, the Say What Wednesday Edition
Back to answering individual questions - Two questions this week – follow up to recent eps on gold and economy
First from Mario – just a quick one - I listened to a recent podcast you made about gold and wanted to understand why people would own gold outright and keep in their possession? Is it purely because they don't trust keeping in a vault? Also with Gold ETFs in the case of a crisis gold ETF doesn't really mean much do they.
Why hold gold personally over a vault? 1. The major reason to hold gold personally would come down to personal preferences and insurability, rather than not trusting a physical storage vault. 1. The gold can be hard to personally insure and requires special additions to a standard home contents policy. 2. The issue can come back to the valuation of gold, as the insurance policy might value up to $10,000 but the price of gold changes and might be higher than the insured value. 3. people would need to constantly be updating their policy and paying additional premiums. When purchasing through a vault, this along with the storage is taken care of by the company (at a cost). 2. The thing to watch out for is purchasing physical gold through a financial institution, as this can be expropriated (such as the FDR gold buy backs in the USA). That is why most gold companies as non-banks. 3. Gold ETFs viability all depends on how bad a crisis gets. A market collapse like in the GFC is okay for a Gold ETF, as the price fluctuations/volatility are where losses can occur (or gains historically when looking at a share correction). If the financial system was to collapse and the financial institutions (such as HSBC) were to default and become bankrupt, then the risk of the gold held on your behalf may be at risk. 1. This is known as counterparty risk -
Second part – Adam’s question - I was listening to your episode about gold and precious metals just recently and it got me researching. Like you and many others have indicated there will be a correction soon and I am considering changing my super from high growth to conservative for a few years, so it's mainly in cash and bonds as well as selling half my ETFs to keep in cash. Not asking personal advice but general advice is it a bit drastic to protect my super for a few years while the market is overheating at the moment?
It depends on what allocation is considered conservative – Balanced portfolios have overvaluations (Twin peaks)
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Cash and Bonds, in my opinion, won’t be the best assets, mainly due to lowering interest rates and the potential risks now associated with 'Bonds'.
- Cash – Obvious – real returns aren’t good – mostly negative once inflation or tax is taken out
- Bonds - A lot of Industry super funds have a bit of a disingenuous description when it comes to their 'Bond' Allocations. These Bonds are actually invested throughout fixed interest investments that contain assets that are not considered bonds or, that conservative.
- Example - QSuper have the following descriptions for what their Bond fund invests in, as this investment is managed by QIC and invested in the QIC Diversified Fixed Interest Fund: Fixed interest is defined as any interest-bearing security or equivalent derivative instrument – Not just bonds
- Lack of transparency to where they actually invest the funds (outside of 44% to Corporate Fixed Interest), I believe that a lot of the fixed interest allocations are in Corporate Capital notes, the same ones covered in the 'Where not to Invest' episodes covering the bail-in legislations.
- There is also the increased risks of default on Semi-Government Bonds
- Think about the size of Debt – 315% to global GDP – US will never be able to pay back $20trn debt
- Options for debt – default! So bonds are worthless
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Share allocations in indexes - Personally, I am sticking clear of ETFs, do have smaller allocations to MF index – Aus index issue is allocation of shares in the Banks/Financials - assets that I think may not survive another large correction too well
- Think about GFC – USA banks ran into issues – narrative our banks were solid thanks to Basel 3 – but still lost 68%
- NAB $41 to $17, CBA $61 to $26 – Back when banks could make money on major assets = loans – now lowering rates doesn’t help that at all
- Compare to WOW - $33 to $24 = 27% loss, CSL $41 to $38 = 7% loss = much lower – our index dropped due to banks
- Also - Now Central banks have little printing power left to Bail Out of banks – hence Bail Ins
- This all being said, there is no way to really time the market and if Australia enters QE territory, our share market may rally to 7,000 in which case you would miss out on gains if you held all your assets in cash.
- I always have some allocation of surplus cash inside my super to dump into the markets if they go down, while being allocated to shares and funds which invest in business that should remain in business if a crisis were to hit.
- Higher Growth investments will experience volatility but the major consideration to take is 'what are the chances of 100% losses?'.
- Think about GFC – USA banks ran into issues – narrative our banks were solid thanks to Basel 3 – but still lost 68%
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Superannuation specific - If you have a long timeframe and will be getting employer contributions along the way, additional volatility on the downside means that you are purchasing these investments cheaply.
- The issue with Industry Funds is that they don’t provide specialised investments outside of mostly index funds, which in Australia has an overweight position to Financials.
- Option – I do this – hold a reserve of allocation in cash like investments in super – buy into higher growth funds if the market has a larger correction in a short timeframe.
Ask yourself the questions - What assets will survive a financial correction – it will be those that people still have confidence in and those without massive counterparty risks -
Confidence is key – Confidence in any asset is what is needed – but also confidence in the counterparty
Why is confidence important? If a lack of confidence/panic is what causes prices on assets to drop heavily –
- Then the solution is to be in assets that while may be impacted in prices (short term volatility) – will not go to zero
- Asset goes down in value – so what if you have a long time horizon
- Depends on type of asset and what you do, and what those investments are to you
- But - Never sell after the fact - Shares go down in value -
- You sell – crystallise losses
- Also, an issue for selling before – Losing 22.5% in tax on the gain is no worse than shares going down by the same values
- Worst case - shares keep going to zero – which is why confidence is important – but also diversification
- You sell – crystallise losses
Solution – Step 1 - Buy good companies, diverse business models, diverse markets and lot of different companies – diversification. Step 2 – Don’t panic sell and have enough cash (not all) to survive market corrections – easier longer your investment timeframe is
If you are worries - Buy alternative asset classes –
- Gold/Silver/Palladium/Platinum
Types of assets to watch out for 1. Shares in Financials or FAANG/Passive index funds - 1. Financials - Been reducing my allocation to Financials over past few weeks – NAB and WBC at $30 2. Any Shares with Margin Loans – higher LVR levels 3. Run up of leverage causes a lot of bubbles, then corrections 2. Property that is highly leveraged 1. Not PPR – not forced to sell that hopefully 2. But if people are losing jobs, rents may come down or be non-existent – your cash flow needs to cover repayments 3. ‘debt instruments’ – MBS, Managed funds marketed as ‘Income Funds’ – massive counterparty risks here - CDOs 1. Corporate notes/hybrid securities 2. Derivative exposure on these as hedging or absolute return funds won’t hold up if counterparties providing the hedge also default
Summary – Assets that while not retaining value like you could want (drop in price) – if you hold you can survive 1. Have a range of investments (not just bank shares or passive funds) 1. Some physical assets – Gold, metals 2. Shares in companies that people will still use – not fad companies or ones build on people’s discretionary spending 3. Land values – That you can hold and not need to sell 2. Make sure they are quality assets and hold some cash reserves 1. Cover expenses and not at margins meaning you need to sell 2. Take advantage of market losses -
Thanks for listening – eps are for you all – if you have questions – let me know at FF.com.au on the contact page
Welcome to Finance and Fury
Passive Investing is the Flavour of the day – Central banks entered the markets to provide a feedback loop 1. Central banks Trying to create the wealth effect - Bernanke’s easy money policy was intended to boost economic growth by boosting shares as well - November 2010 he argued: “Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.” 2. Think of a financial market as a forest – Aus seen some fires recently – arson can be a cause – but if the Greens won’t let burn offs, then throw fertilizers around and forests grow out of control – enter a dry period – small spark leads to massive fire that can destroy everything in its path – 1. Tell-tale sign - lower volatility and the unprecedented magnitude of Central Banks’ interference in markets 2. Peak Quantitative Easing - never before this high: $300bn+ monthly asset purchases, or annualized passive flows for $3.7trn globally - the ensuing rising mania for passive investment vehicles: the tulips of ETFs and passive
Where has a lot of the money has been going? 1. Index funds, Risk Parity funds - two-thirds of which are trend-chasing - close to $8trn globally * the ensuing capitulation of active investors who default to chase passive ones, as they fall prey to mental loops like ‘recency bias’ and ‘induction trap’ * The Positive Feedback Loop between Fake Markets and investors creates System Instability, and Divergence from Equilibrium
Many fashionable investment strategies these days are based on the easiest option – ETFs Creates a feedback loop - they successfully profit from an artificial set of variables – people buying ETFs pushes the market up - derives an artificial signal of future prices movements -
- In circular reference, artificial markets feed, and are fed, by a crowding effect in high-beta long-bias in disguise.
- However - a downturn, they may likely play as hot money or weak-hands, exacerbating a down-move
- 90% of inflows are passive strategies – creating a bubble in some companies over others – if it is in the index, it is bought regardless of if it should be or not
- Weak hands are investors who are brought to like an investments by certain characteristics which are uncommon to the specific investment itself, such as its featuring a low volatility, diversification, and liquidity
ETFs - their meteoritic rise - ETFs oftentimes oversell liquidity and diversification, attracting swathes of unaware, unfitting investors in the process.
- Investors who are unlikely to stomach bouts of volatility, and who will likely exit prematurely upon them, thus exacerbating volatility. Furthermore, a growing body of research blames ETFs for reducing markets efficiency, creating stock markets that are both ‘mindless’ and too expensive.
- ETFs themselves represent a great financial innovation – became popular after 2009 in AUs - What one must consider though, is their implications for price discovery (do they make bubble/bust cycles more extreme?), liquidity (is liquidity overstated?), market responsiveness (is volatility depressed but tail risks – extreme drops - bigger?).
- Specifically to this market cycle, it is also worth asking what happens when the liquidity tide turns on QE ending, or when markets dive.
- Until then, the positive feedback loop implies that markets are helped rising by ETFs themselves, who are then rewarded with further inflows with which they can buy more. The more expensive valuations get, the more they disconnect from fundamentals, the more divergence from equilibrium occurs, the larger fat-tail risks become.
- To protect fees and in a bid for survival, many active investors capitulated and started pricing risk out of portfolios. A higher-beta, longer-bias ensued. As they are still rationally sensitive to valuations and risks in the macro outlook, they stand ready to switch when the moment comes.
The current state of markets - Twin Bubble – thanks to Quantitative Easing – The major risk is central bank tightening 1. Twin Bubble - Bonds and Shares simultaneously- Markets have forgotten how much of current valuation is due to Quantitative Easing – around a time over the next few years QE in the US may be phased out 1. The episode on bonds v shares - https://financeandfury.com.au/bullish-shares-versus-bearish-bonds-which-one-is-correct/ 2. The ‘wealth effect’ failed – Printing money – making people feel rich and spend more - QE did not spur consumer spending, corporate profits, real wages, and inflation 1. But did for financial assets – hard asset pricing in house and shares 2. QE for risky assets: the liquidity tsunami that lifts all boats 3. Central Banks, differently than in the past, may be less keen to save the day for financial markets, or less keen to do so for mild sell-offs (within -20%). They may even use a weaker stock market as a top-down rebalancing act. Market participants believing that Central Banks have their back may be mistaken. 3. Biggest assets that have been risen – property and Passive/Index ETFs 4. ‘Fake Markets’ are defined as markets where the magnitude and duration of artificial flows from global Central Banks or passive investment vehicles managed to overwhelm and narcotize data-dependency and macro factors. Artificial money flows. 1. Central Banks flows, we live through Peak QE this year -> Passive Vehicles trade on Central Banks flows, outperforming active managers in the process -> More inflows for passive vehicles (mania) -> Active managers capitulating and joining in -> Retail joining in. All around, fitting economic narratives are formed to justify the dynamics of artificial markets: chasing yield (financial repression) -> chasing growth -> chasing earnings. 2. If QE is the sea all around town, QE Tapering or Quantitative Tightening (‘normalisation’) is like navigating the sea towards the horizon. We know how that ends. We know it ends.
The Positive Feedback Loop between Fake Markets and Investors creates System Instability and Divergence from Equilibrium 1. Central Banks flows, markets are helped rise by certain classes of investors, which are then rewarded with further inflows, with which they can then buy more. The more expensive valuations get, the more they disconnect from fundamentals, the more divergence from equilibrium occurs, the larger fat-tail risks become. 2. Many fashionable investment strategies these days are not un-contingent to the Fake Markets they operate within: ETFs - they successfully profit from an artificial set of variables, they cannot but derive as artificial a signal from it, and are bound to a life-cycle which is no longer, no shorter than the life-cycle of the Fake Markets themselves. * Markets and investors then enter into a positive feedback loop, which increases the system instability, no different than what happens for positive feedback loops in cybernetics, chemistry, biology. The day artificial markets end, we can assume a reasonable chance that some or all of such strategies will face rough waves, and exacerbate a market downfall in the process. 3. Take an upward trending market in low and decreasing volatility, as passive flows from Central Banks progressively crowd out active ones and interfere with price discovery. * Price Discovery in markets is from active decisions to buy or sell based around company fundamentals – if everyone is buying the index – all companies in the index rise * A long-bias on risky assets is a winner, so long that a major Central Bank commits to bail them out endlessly and supports them every single week with hard cash. A short-bias on volatility is also a sure winner, so long as such passive flows are sustained for. 4. Crowding effect of high-beta long-bias in markets these days, hidden in plain sight. As this bias is both passive and not presented as a long-only investment, we can safely assume for it to be comparable to ‘hot money’ flows and ‘weak hands’. When the tide turns, it will move along fast, helping markets overshoot.
Liquidity – two-fold
- Passive investors have no cash buffers
- Cumulative flows into passive investments – selling ETFs very hard - Finding a seller
Signs of complacency and disconnect from fundamentals abound. So to sanity check, it may still be helpful to periodically remind ourselves of a few recent ones. In no particular order:
- Argentina uses defaults as a recurrent macro-prudential policy, to tackle debt overloads from time to time. Most recently in 2014, 2001, 1989. Yet, this year, the country issued a 100-year bond for 7.9% yield. Red-hot demand. It was oversubscribed 3.5x.
- Similar levels of complacency and expensiveness are not uncommon in financial history. Amongst others, 1999 and 2007 come to mind, where expensive valuations match raced with low levels of realised volatility. In both instances, complacency was breeding an unstable market environment, where gap risks eventually materialised.
- Across financial history, complacency and Zero Volatility bring about expensive valuations. In terms of Price/Earnings multiples (Shiller CAPE, adjusted for the cycle and inflation over a 10-year period), the US equity market is only cheaper than the markets of 1929 and 2000: in both instances, large downside loomed ahead.
- The Bank of Japan now owns almost 75% of the entire Japanese ETF equity market. As a result, the BoJ will likely be the major shareholder in 55 companies by the end of 2017 - To entrench firm buy-the-dip reflex in the investment community (and their algos), “the BOJ’s ETF purchases help provide resistance to selling pressure against Japanese stocks,” says Rieko Otsuka of the Mizuho Research Institute
- The Swiss National Bank bought $100bn between US and European stocks. It now owns 26 million Microsoft shares (read).
- Leverage to buy stocks at the NYSE (margin debt) hit an all-time record of $549bn this year - doubled up since 2009.
Easy monetary policy and bubble valuation in risky assets may similarly be at their endgame. A few more moves are left possible, but the degrees of freedom imploded, all the while as system pressures mounted on fragile markets.
Thanks for listening, if you want to get in contact you can do so here https://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Furious Friday edition
Last week - went over partnership programs and potentials for coercive monopolies – today – implementation of policies in the circular economy – SDG12
Today’s ep – go through google and the largest companies on earth will determine how we produce and consume – or how they want us to produce and consume – all to benefit their own pockets and the global government they back – under the climate change guise
- These companies are the ones in charge of providing the recommendations for pilot programs for the ‘circular economy’
- Circular economy will destroy the modern economy – it is built on consumption – Economists like Krugman can't have it both ways – they say consumption is the key driver – I say it is innovation and supply-side
- They say this will create growth – but this will do the opposite – reduce innovation
- Stop and pause for a minute – want to ask if hypocrisy exists in climate strikes and proponents of warming
Honest question- are you terrified of the future? If so, why? 1. I am super hopeful – never been a better time to be alive – but listen to the media or Gretta with the UN and you will think that you will die in 10 years. 1. If you think that – what is the point to anything? You might happily let google take over your life and dictate to you how to live – or not save or invest for your future, have kids, look after your own lives 2. As I am hopeful – I do these episodes as a warning about the other angle that Google won’t tell you – that these prophecies are what google is wanting for your future – the fear of it becomes a self-fulfilling prophecy – why? 1. You are afraid – want security - the same people who made you afraid come along and say ‘we can protect you’ and give you the easy way out – the Faustian deal – that is why I do these eps – not to pile on to the fear - but show how the so-called solutions are the Faustian deal that will guarantee us the future that everyone is so afraid of – don’t fall for the fear trap 2. If you are newer to the podcast – covered climate ad nauseam – links to episodes where the science is covered and arguments in the show notes on the website 3. This is a socialist political movement – like all watermelons – wrapped in green but red on the inside – control of the economy under any guise has been the MO – the climate is the new angle 1. Greta's parents – Swedish singer and author – out wearing antifa shirts – where the self-labelled anti-fascists act like the brown shirt fascists of the 20th century – Dad wrote two books about climate change – parents profiting and using kids 2. Greta filed a legal complaint accusing five countries of inaction on global warming in violation of the 30-year-old UN Convention on the Rights of a Child. Germany, France, Brazil, Argentina and Turkey - Suing France and Western nations (for climate change, but not China or India?) Why? It is politically motivated 4. Today’s kids – one's protesting – first ones with constant screen time as entertainment – don’t ride bikes or get bus to school, but are dropped off in cars (making traffic worse), every classroom has to have aircon and computers, wanting the new iPhone every year or laptops in every class to stay trendy 1. For the protests - making signs using cardboard and wood, using toxic paints and markers that when disposed are damaging to the environment, look at the photos of the aftermaths of the protests – litter and rubbish everywhere – they can't even clean up after themselves – given away agency to a higher power – daddy Gov and companies 1. Anti-antiestablishment – the counter-counter-revolutionaries wanting bigger governments and socialism 2. Rather than striking, I remember as a kid going out and planting trees and doing world rubbish pickup days every year – actually doing something rather than just yelling at others to do it for me while sitting in aircon, eating processed fast food and watching a movie with all the lights on in the house 5. These same kids under the circular economy – monopolistic competition - won’t be so happy – level of conspicuous consumption will go down – costs go up, so either parent's cop it putting further strain on family budgets, or kids go without – either unacceptable for the screechers – like in NSW – one of the child organisers is the kids of labours head speechwriters – ABC didn’t report that
What is it? - A circular economy is an economic system aimed at minimizing waste and making the most of resources Sounds awesome – how? An economy that feeds the top companies and makes any new entrant impossible – you have to be in the club to produce and sell – called a closed-loop system – completely demand-side driven
- 2019 World Economic Forum Annual Meeting in Davos estimates that only 9% of the global economy is circular today
- They admit that the problem is they cannot know in advance what will work and what will not for the circular economy
- At least they admit it – unlike central banks working off models back when gold-backed money
- Instead, have to try out different solutions and scale up what works – this is what they call innovation
- Innovation - does not only mean scientific research and shiny new technologies: just the ways they set the rules of the game – instead of looking to create the right incentives – pilot programs will focus on enforcement
- They admit that the problem is they cannot know in advance what will work and what will not for the circular economy
- Whenever you hear innovation – they are talking about changing policy – coercive policy to produce the desired outcome
- “The circular economy is a compulsory choice for a sustainable world” said UNECE Executive Secretary – done by “speaking the language of the people we want to convince” – hence under the guise of climate change – for economic control
- Global business has a key role to play in moving from a global economy based upon ‘take-make-dispose’ to one based on designing waste out of systems. Google believes in the democratising effect of putting knowledge in the hands of everyone - so they're organising the world's information and making it universally accessible.
A circular economy - an economic system aimed at eliminating waste and the continual use of resources. Circular systems employ reuse, sharing, repair, refurbishment, remanufacturing and recycling to create a closed system
- Proponents of the circular economy suggest that a sustainable world does not mean a drop in the quality of life for consumers, and can be achieved without loss of revenue or extra costs for manufacturers – but don’t look for evidence – none out there to find – so just trust them
- These companies say that the circular business models can be as profitable as linear models, allowing us to keep enjoying similar products and services – but under monopolistic markets with reduced competition and innovation
- True for the likes of Google and Unilever – but not for mom and pops store or any other small business
- Costs to companies will go up – so wage growth will experience downward pressure -
- Project mainstream – Name of the Circular economy implementation – wants to gain commitment from key stakeholders, establish proof of concept of the economic and environmental benefits of a circular economy through targeted programmes, and reach tipping points that will accelerate the transition, thereby establishing the circular economy as the new norm.
- The circular economy includes products, infrastructure, equipment and services, and applies to every industry sector.
- 'technical' resources (metals, minerals, energy resources)
- 'biological' resources (food, fibres, timber, etc) - Circular economy on food – eco-cannibalism – organ donor your body for food consumption
- Major circular economy model is the implementation of renting models in over traditional ownership
- Why own your own electronics, clothes, furniture, transportation – just rent these same products
- This is where the revenues to the monopoly providers increase - manufacturers can increase revenues per unit, thus decreasing the need to produce more to increase revenues (this is from Project mainstream)
- Recycling initiatives are often described as a circular economy and are likely to be the most widespread models
- Includes discussion of the role of money and finance as part of the wider debate -needs a revamp of economic performance measurement tools
- Outcome – better be worth it - Claims this could help multinationals save US$ 500 million in materials and prevent 100 million tonnes of waste globally – sounds like a lot
- Current is over 2bn tons of waste – Only 1/3 in high-income countries - so save 5% of global waste in return for coercive state-sanctioned/sponsored monopolies – this is only a promise – not a guarantee that the waste will be reduced
- They admit they don’t know what the outcome will be – but will let the state take over the economy hoping for this outcome
- But it sounds like every socialists work program – massive industrialisation - It is a global socialist initiate – really think about it – Even current relying models run by the state/companies – no transparency
- Current is over 2bn tons of waste – Only 1/3 in high-income countries - so save 5% of global waste in return for coercive state-sanctioned/sponsored monopolies – this is only a promise – not a guarantee that the waste will be reduced
- Implementation – Punitive, not incentive – Carbon tax etc. – what happens when you are punished rather than incentivised? You leave – companies more to other nations without the punishment
- Truth is – this is in the benefit for the massive companies who can participate in this
- For you – Limit your choices – to consume and who you are employed by –
- Reduce the new innovation for everyone else – not currently in power to control the economy
Google’s role – One of the major parties working with the UN for the circular economy – the job is to push group think on subjects like circular economy 1. What this means for the future – an enclosed controlled system – determined by Google and their ilk - that makes Skynet looks amateur in comparison 1. Google has come a long way from “don’t be evil” as their motto - monopoly over technology, wholly dedicated to the suppression of human knowledge through censorship, demonetization and de-platforming of any information sources they don’t like. 1. Blocked nearly all websites offering information on natural health and holistic medicine while blocking all videos and web pages that question the scientific topics like climate change, pesticides and GMOs - Google is a front for Big Pharma and communist China and has already demonstrated the ability to manipulate elections to install the politicians they want – like Facebook – said they can be trusted with your data – that turned out to be a lie 2. Recent news – have quantum processor - took 200 seconds to complete a computing task that would normally require 10,000 years on a supercomputer - Bitcoin’s 256-bit encryption is vulnerable – might be why prices dropped in past few days - has the technology to break all cryptography and achieve “omniscience” in our modern technological society – be everywhere at once – even their initial seed funding came from an offshoot of in-q tel – DARPA/CIA funding arm
Other companies – 10 in total - one major player in each area in the economy – Clothing, packaging, food, chemicals, medical, transport, construction, etc. * Clothing - H&M Group - Exploring solutions to create a closed-loop for textiles, where unwanted clothes can be recycled into new ones. 1. Setting sustainability targets for a circular fashion industry within planetary boundaries using a science-based approach. 2. Applying circular economy principles to its sustainability strategies, both for commercial and non-commercial goods, such as packaging. * Finance and Modelling - Intesa Sanpaolo – “intend to foster and disseminate the circular economy principles not only for the international corporates and large companies but also for the small and medium-sized enterprises – which is the main focus of our commitment - enhancing companies’ resilience and changing their business models” 1. Talking to a friend about this – he said doesn’t the banking system already have this – Reserve banks and barriers to entry to start your own bank like back in the day where there was a family owned bank on every corner – I said yes – and look at the mess of the global financial system – now imagine that in 50 years in the whole economy/goods/services * We can all agree that pollution is bad -we want to help work towards a cleaner’s future and be more energy efficient * If people are worried about energy – tune in for next episode – think it may blow your minds – Talk about the control of resources – and why nuclear is so demonised and dismissed – has nothing to do with radiation – what one of the leading nuclear scientists has lectured about – Galen Windsor - live on stage eaten Uranium oxide – used in nuclear fuel rods in nuclear reactors – has done it in every lecture for years – never had cancer or radiation poisoning – watch videos of him with a giga counter – it is mind gravy stuff – may be hard to accept – but can watch him do it on youtube 1. I spent about 20 hours over the past few weeks researching this further – let alone hundreds over past few years 2. We could have 0 CO2 emissions years ago if not for Government regulations – rather than go for the easy option of Nuclear – they want more regulations in the opposite direction – all about control * My role is just to provide you the info – what you do is up to you – I'll leave a link to an hour and a half lecture he gives on this in show notes, and page to the partnership programs for the circular economy
Climate Change episodes –
https://financeandfury.com.au/say-what-wednesday-is-this-the-solution-for-pollution/
https://financeandfury.com.au/say-what-wednesday-what-is-the-real-danger-behind-climate-change/
https://financeandfury.com.au/what-will-the-paris-climate-change-agreement-do/
https://financeandfury.com.au/say-what-wednesday-why-is-it-unlikely-the-world-economy-will-move-away-from-oil/
https://financeandfury.com.au/adani-coal-mine-pros-and-cons/
Galen Windsor - https://www.youtube.com/watch?v=rMqHTbXm3rs&t=4427s
Project Mainstream - https://www.ellenmacarthurfoundation.org/our-story/partners
Thank you for listening today, if you want to get in contact you can here https://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday Edition
Today's episode is about building wealth and getting ready for retirement
- Keeping with the Theme – Solving the economic problems
- Using the resources you have (income, savings, equity, etc.) to get what you want
- Today – run through considerations to take when looking at accumulating wealth for retirement
- Like last few episodes – doesn’t have to deal so much with age – but you own situation
- Some want to retire at 50, others 70 if ever
First step – What are your retirement lifestyle costs like? Types of expenses to account for 1. Essential costs – Food, bills, - what your basic budget looks like 2. Discretionary costs – Holidays, dinners out – enjoying the good life 1. What will this cost you? 3. Asic money smart – has benchmarks – But work it out for yourself 1. What do you spend today on the essentials and what would you like to spend? 2. By the time you become FI – probably won't have a mortgage – so can neglect this cashflow requirement if paying it off can be managed
How much will you need invested to fund this? 1. Asset levels and types are Income-based – work off 4 to 5% p.a. income yields as a rule of thumb 1. Rule of 20 to 25 – What is the income that you need times by 20 or 25 – depends on the yields of the investment 2. 4% = 25 times or 5% = 20 times – This is for the ability to not deplete capital in retirement 3. $100k income = $2m in today's funds at 5% p.a. or $2.5m at 4% p.a. 4. Might see figures of $300k in super – but that is assuming you draw it down to $0 and die exactly when you forecast – better to have an income source in perpetuity to avoid longevity risk
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Types of investments Yields and amounts Depends on what assets are held and the net incomes after tax
- Super – After 60 = Tax free income – no need to account for tax
- Accounts do have costs – may be a fraction of a % though
- Also – Min income drawdowns – 55-64 4%, 65-74 5%, 6%, etc
- Property – Net incomes need to be taken – after agents fees
- If personally held or in a trust – Tax may be payable as well
- Assuming all debts have been repaid as well – otherwise interest expenses
- Shares – Aussie shares – Franking credits can offset
- Earn about $100k of Dividends FF and with the FF of $42k on that – offset your $42k of tax
- Super – After 60 = Tax free income – no need to account for tax
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Example - $1m of Aussie shares in Super – Paying a 5% FF div versus 2 properties for $500k each - renting at $450per week - Super - $71,428 versus Property – $34k p.a. = More than double income
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Monday Ep this week – GBI – Rather than traditional assets, will your investments generate enough income to maintain your expenses
- Property may be a good way to generate equity/value through leverage – but do the calculations to see if you can repay the debts and the gross incomes are enough – same with super – need income paying assets – not just $1m sitting in cash paying 1%
When will you need it by? 1. Working out when you need it by determines future values 2. Example – Inflation of 2.5% p.a. in 20 years turns that $1m into $1.64m (1.025^20) 2. Also important – how much you need to put away to hit this future value? 1. Monthly investing – put some away each month – either SS or personal investing 2. Need a help? Calculators on members section available – rough guide to how much to invest each month to hit the goals – doesn’t take into account super/tax/etc – just rough guideline 3. If you want to retire before super preservation – Better to focus on personal investing
Other considerations 1. Debts – paying those down in time to alleviate cashflows – 1. Personal debts/mortgages or investment debt – One will be deductible, but both eat into cashflow 2. Personal should be the main focus – at least tax reduction is MTR for every $1 spent – but still spend $1 for cents back 2. Supers – Are you already on track with your super? Do you need to adjust the asset allocations 1. Higher growth – long timeframes 2. Close to retirement – want the right asset mix in super – ability to have cash accounts to fund incomes/lump sums 3. Lump Sums at retirement – either renovation costs, buying a new home 1. Comes back to lifestyle – become a grey nomad – need a lump sum to buy the caravan – don’t want to borrow for this ideally – so have additional savings targets to meet goals/needs 4. Investments – where they are held and are they providing enough income? 1. Property/investment debts – No point having 20 properties if your net cashflow if $30k p.a. due to debt repayments – just need to work longer to pay back the debt then – can ruin retirement plans 2. Shares or managed funds – Again – depends on your goals and level of income needed to if you need emergency cash funds if markets crash – share incomes can go down – same with MF distributions 3. Other investments – business etc. – Strategies to take such as small business concessions
Leading into Retirement – while you might be physically decaying, your finances don’t have to – threshold on funds needed is important to know - whole part of the journey
Calculators and resources available in the members section on the website here https://financeandfury.com.au/member/
Back to answering questions from next week – so if you have anything you would like covered – https://financeandfury.com.au/contact/ on the contact page
Thanks for listening,
Welcome to Finance and Fury
Today – Talk about goals based investment – setting up buckets of investment allocations to meet needs
Approaches to portfolio construction three common approaches in building the framework of a client’s investment solution:
- traditional (asset-only) or liability approach,
- Today - goals-based investment (GBI) approach.
The traditional, asset-only approach to investing is based on the seminal work of modern portfolio theory (MPT) - 1952
- most common approach - build optimal asset allocations for investors based on their aversion to risk (as measured by investment return volatility).
- Liability driven – Governments or Insurance companies – meet large payment obligations – need immunised investments for short term funding
- cash inflows are likely to match and cover their obligated cash out flows
Goals-based ‘bucket’ approach 1. People have many complex and competing funding needs (e.g. living expenses, children’s education, health costs, holidays) 2. To aim to achieve these - GBI shares traits with both LDI and MPT 1. LDI, which seeks to ‘match’ the characteristics of liabilities (e.g. interest and principal repayments, inflation-linked payments) with a portfolio of investments with similar cash flows, goals-based buckets are established to ‘match’ the characteristics of particular lifestyle objectives with suitable portfolios of investments. 2. These investments might have similar cash flows as that of the investor’s goals, or they might have correlated risks. As with a traditional approach, which is focused on optimising the risk/return characteristics of a portfolio, the GBI approach can also incorporate mean-variance efficiency at the bucket level. 3. Behavioural factors affecting investors 1. Traditional investing relies a lot on the rationality of investors – People want to maximise gain while minimising pain 1. But short-term market corrections can erase all memory of long-term gains = panic sell 2. regret aversion can lead to pain from not investing more in outperforming asset classes = afraid to invest 2. GBI lies in trying to account for the non-rationality that occurs as a result of emotional biases and cognitive limitations. In particular, GBI addresses two types of behaviours: (1) loss aversion (emotional) and (2) mental accounting (cognitive). 1. Loss aversion is the behavioural issue that reveals itself in the risk taking of investors 2. Mental accounting - investors will create cognitive shortcuts to assist in investing decisions 1. investor separates and connects different assets with different criteria (e.g. term deposit = emergency fund; CBA shares = child’s university funding), which can lead to irrational decision making
Goal tolerance versus investment risk tolerance 1. Traditional investment theory sets the volatility of investment returns as the key measure of risk 1. willingness and ability to take on investment risk (or risk aversion) with the expected volatility of diversified portfolios – High vs Low volatility 2. Goal-based investing – the risk tolerance measures are linked to goal characteristics – this is your willingness and ability to take on risk 1. Tolerance levels are the risk of failing to achieve each of your goals – not the volatility of the investments 2. Aim of GBI is to maximise your ability to reach your goal – all about having maximum allowable probability meeting goals 3. volatility of returns is still an important component of portfolio construction, as the risk of not achieving a goal is likely to increase with more volatile investments – but mismatches often occur 3. Examples – see this in risk profiling with clients – some say they are defensive – don’t want loss – but then need to get 8% p.a. plus to get to end FI targets – what is more important? Reaching goals or not seeing short term losses?
The investment process – Setting up Buckets 1. Setting goals – have clear outline of needs for investments 1. Articulate goals: What is it you want to achieve? 2. Characterise goals: Clarify the factors - SMART goals – what, when, amounts, etc. 3. Quantify goals: One you know amounts and timeframes – use characteristics of risk probabilities (e.g. financial security success = 100%) when looking at timeframes 1. Cash v Shares – Fund renos with shares? 4. Prioritise goals: Understanding the importance of each goal – rank each in order of importance – don’t take too much risk with short term if it is important 5. Moderate goals: Solving the economic problems - Limited resources compared to goals can make it impossible to achieve any – look at what you have to work with and where it should go 2. Set goal tolerances and amounts: Once you know the amounts and the timeframes and resources 1. Set tolerance to loss/risks for each – look at regular commitments or a future one-off funding requirement 2. The tolerance level might best be expressed as an acceptable level of failure – what is the chance of not achieving goal over the timeframe – 1. Short term – e.g. Deposit – trying to fund from a few ASX shares to get quick short term gains not a great idea 2. Long term – FI – Chance of not meeting it goes up if investing that basket in cash assets 3. Examples - Non-negotiable commitments (ongoing living expenses or holidays) - loss tolerance of 0% (i.e. no acceptable level of failure), versus funding a child’s education might have a 20% loss tolerance in a 3 to 5 year period
Establishing buckets – different investments for each goal 1. About selecting the right investments that will be used to fund each of your goals 2. each distinct goal is assigned its own bucket of investments 3. The size of each bucket allocation is based on: 1. the size of the goal 2. overall goal tolerance (prob. Of meeting goal) 4. Priorities - The portfolio bucket with the highest priority (lowest tolerance) goal will be constructed first 1. level of assets based on the size of the goal, timing of goal, goal tolerance and expected returns 2. After that is set – go to next priority and so on 5. Bucket types – Short to surplus -> 6. Over time - Review goals: portfolios should be reviewed to assess whether any goal tolerances are likely to be at risk – 1. Long term goals become short term – Example – super account set up for 25 year goal of FI – may be higher growth today but 3 years out from retirement – High growth may not be acceptable
Bucket asset allocation and investment selection 1. How to select the investments that will be used to fund each goal? 2. size of each bucket allocation is based on both the size of the goal, the overall goal tolerance 1. But other important goal characteristics need to be accounted for - (e.g. liquidity needs, volatility, timeframe, etc). 3. Short to Mid term – Cash and defensive assets – Probability of meeting goals in short term can be luck if invested in volatile investments – short term crash can wipe out your chances 4. Long to surplus – Growth assets like shares and property help to maximise your chances of meeting end targets
From a practical point of view, asset segregation can be either physical (separate accounts for separate buckets) or paper-based (the single account that is segregated for reporting and analysis only).
- Physical - useful where separate tax-effective accounts are used for different goals (e.g. superannuation for retirement goals, cash account for short-term spending, investment bond for children’s education goals).
- Paper - similar to SMSFs assets - administered between members and accumulation/pension phases – Pooled
- “paper” account might require separate portfolios based on differing risk profiles and liquidity needs.
A bucket approach: pros and cons 1. Bucket approach views Risk aversion as not achieving certain goals, rather than aversion to the volatility of returns. 1. Risk tolerance is defined in a more objective, quantitative way – but Risk and return are separate elements. 2. Advantages of a bucket approach to investing 1. Behaviourally aware - GBI’s focus on mental accounting and loss aversion can increase investor satisfaction and comfort, especially during times of market stress – Education around accepting losses for long term gains 2. Reduced turnover - The cyclical nature of markets can create a feedback loop on risk tolerance in MPT. 1. Avoids panic sells and can help to reduce turnover or following the crowd
The suitability question 1. Everyone has different life stages, goal funding size, knowledge and experience, existing investments and so on 2. But once you have definable goals - investment objectives can individually be managed through bucket-style approach to investing 3. But if you are only really interested in the long-term performance of their portfolio might be better suited to the traditional approach – but at the risk of not meeting short term goals if you pump all deposit funds into markets – that comes down to short term luck
Thank you for listening, if you want to get in contact you can do so here.
Welcome to Finance and Fury, The Furious Friday Edition
Today – Run through SDG Goal 17 – Sneaky side to the SDGs along with the method of creating global monopolies – part 1 of two – today 17, next week 12 – they go hand in hand
- SDG17: “seeks to strengthen global partnerships to support and achieve the targets of the 2030 Agenda - bringing together national governments, the international community, civil society and the private sector”
The partnership programs for the UN – Who are these actors? 1. National Governments – self-explanatory – The bringing together of Aus, China, Belgium, etc – every nation 2. The international community – used in geopolitical terms to refer to everyone in the world – global citizens is another term 3. Civil Society – NGOs and activist groups 4. Private Sector - Companies – but only the giant multinationals this will benefit – I know I didn’t get an invite 1. I originally thought that the private sector would say no to these policies – they are meant to make profits 2. But a lot of the largest are enthusiastically backed the new goals 3. Example - mega-corporations backing the scheme are the world’s top three search engines: Google, Microsoft’s Bing, and Yahoo – 4. If you look it up online – everything positive – how it can restore trust in companies, how it can harness growth in the modern economy – all to preserve global resources 5. If these corporations’ support for the UN agenda, do you think this may affect the supposed impartiality of search results? If you are interested, try duckduckgo compared to the same google searches
Have a question: Ask myself this - Do we live in a plutocracy? – billionaires, multinational companies and unelected global governments telling us how to live –
- They fly in private jets and consume far more than the average joe = produce more CO2 than us – but there are only a few of them – so okay, right? They can act as hypocrites –
- Part of the UN strategy - Recs have to come from others – if the UN says to do it, people may be sceptical
- But what If google says to do it? Or CEOs like Bill Gates say to do it? They have good public images
- Why should we trust Someone who was giving millions for research to the recently suicided Jeffrey Epstein, like Gates?
- Michael Cannon-Brookes – company partaking – but didn’t he just fork out over $100m for property at Point Piper? Don’t know about you – I find this Interesting– why if we are going to be underwater in 10 years?
- Look around - Billionaire property developers putting up massive projects on coast lines around the world – Florida
- Would banks lend to finance these projects on the coast? 30-year mortgage for a costal property? No – banks don’t want to lose money – Developments on the coast wouldn’t be lent to as they would be 5m underwater
- Use logic – ignore the science that is funded to look for climate change (p.s. if cant find no more money) –
- if the financial system and ‘ultra-wealthy' are either lending or buying property on the beaches – while also telling us to change behaviours in the name of climate, along with taxing future generations more to save the planet – is it real or just a scare tactic to control people choices and extract more resources?
What if we don’t want these SDGs? Do we get a vote? No - When you pay close attention – becomes one rule for me and one rule for thee
- Reading the UN literature on this, as well as from the horse’s mouth – UN Economic Commission secretary said that these policies (especially circular economy – details more in next week) – “compulsory choice for a sustainable world”
- A lot of politicians pretend that the SDGs are binding – they aren’t so these agreements should have no force
- But as UN Agenda 21 previously showed - the people must demand these changes through their elected representatives – that is where the power of the UN comes from – Companies, activist groups acting on behalf of UN
- UN. Agenda 21 was heavily pushed by an NGO called ICLEI - none of us had been informed about it or have voted for it in any way; it basically leads to the loss of personal freedom and sovereignty worldwide
That is why the 2030 Agenda is universal – ‘applying to all countries and actors’ - nations to take climate action – but the social pressure has to come from everywhere – Companies, activist groups like getup, Even schooling with global citizenship programs
The day this is released – climate strikes occurring across the world – taking the afternoon off to glue yourself to a road will really tell the earth to stop rotating on its axis leading to changes in climate
- The focus has been pushed on CO2 emissions – said a while back that this – I wish this was an onion article – but is the sort of thing that creating Co2 as the enemy leads to after CO2 gas was rebranded as ‘carbon’ – we are carbon based lifeforms – why not eat our ways out of the problems?
- Global warming – Sweden – scientist introduced eco-cannibalism – eating people – I don’t want to do this – but if UN gets its way – legislate that we have to – come back to this in future SDG eps
- Let’s just assume that we are doomed – not that climate change is real – as the climate changes – changes 4 times a year where I live - estimates at 10k years ago, the Sahara Desert had the largest inland lake – Lake Chad, along with being a forest – obviously the climate changes –
- Why not invest into something that can help us adapt to this? What is policy response instead? To control climate, have to control what people buy, where they work, what they eat – Control the economy, control our lives, in the promise that the world will be saved – Government promises – that no government can deliver on
This is part of the Sustainable Development Goals of the 2030 Agenda – but it is a mess – not my words 1. A commentary in The Economist in 2015 said that the SDGs are "a mess" compared to the eight MDGs 1. MDGs were about development while the SDGs are about sustainable development plus the SDGs have a level of inter-connectedness to all of their perceived problems 2. Whilst the MDGs were strongly criticized by many NGOs as only dealing with the problems – not going far enough 1. The SDGs deal with the causes of the problems – What problems? Education? Energy? Inequality?
What do they need partnership programs, activists and companies for? Beyond the blanket marketing – help implement 1. Goals - Strengthen domestic resource mobilization - through support to developing countries for them to improve domestic capacity for tax and other revenue collection 1. Total government revenue as a proportion of GDP – Developed 23% of GDP while developing at 18% - Want to get developing up to increase global taxation base 2. Goal - Developed countries to implement official development assistance commitments 1. Target of 0.7% of ODA/GNI to developing countries and 0.20% of ODA/GNI to least developed countries 2. GNI – Gross national incomes - Official development assistance(ODA) - government aid designed to promote the economic development of developing countries 1. Remember – Govs gets income from tax – taxing us to send money overseas – setting targets of sending money overseas based around 1% of our Gross national income each year - $18bn per year – money has to come from somewhere – meant to help with aid – but only when it goes to the right place and not Development banks 2. Also How well does giving aid to African nations run by dictators go when massive corruption exists? It doesn’t - 3. Goal - Mobilize additional financial resources for developing countries from multiple sources 1. Sources - Foreign direct investments (FDI) as a proportion of domestic budget and remittances as a proportion of total GDP 2. Eradicating poverty – by making everyone poor – One thing in it is about remittances (money on sending cash back overseas) – want to cap to 3% fees - enforce on banks on money transfer companies – Mastercard is on board 1. Why would large companies want to cap their costs? Another barrier to entry for all – Mastercard survives but smaller companies may not be able to make profits 2. In 2019, annual remittance flows to low- and middle-income countries are projected to reach $550 billion 3. Makes remittance flows larger than FDI – Remittances are growing 9% p.a. – as this grows, less money spent domestically hurts economic growth and also puts downwards pressure on AUD due to outflows
Remember – a lot of this policy is being pushed under climate change and equality as justification - Scam – two-fold – 1. Firstly - people are constantly bombarded – being made afraid as well so it shuts down logical thought and makes it easy to control 1. Fear, information overload – all shuts down our ability to rationally think 2. Government is positioned as the only ones to help – moral puritans and pearl clutches telling others to change behaviours 2. Secondly – allows Governments to let companies take over – monopolise the production and consumption – Circular economy – next week 1. Companies pandering to social pressure – Nike, Gillette, Monopoly with Ms monopoly – if I identify as a woman can I get more money from the start like the rules say? 2. If they don’t pander – they aren’t invited to the UN party – Sadly for shareholders – they are punished as these companies suffer in profits from public backlash – 3. This should be a market sign to just stick to providing products and services – not lecturing us
Leading into next weeks ep – the Companies on the list – 1. H&M group – great history of cheap child labour 2. SC Johnson - 1997, S. C. - taken advantage of audit errors and filed fraudulent tax returns, underpaying its taxes by millions of dollars More recently – was fined for Price Fixing on hygiene products – 1. Greenlist process - settled a lawsuit that alleged the company's Greenlist label misled consumers into believing the products were reviewed by a third party and given a seal of approval – they gave it to themselves 3. Renault – Owns Nissan – Massive producer of EV – major beneficiary from banning petrol cars 4. Banks – going to make billions from issuing the green bonds and other financial products in raising capital 1. Or making money from lending to green projects which tax funds go towards paying off
These examples aren’t to single out companies - just the nature of companies and What happens with monopolies and government backing – regulators mostly turn a blind eye – until whistle-blowers or public hold them to account
- Companies act in self-interest- normally to make a profit but most of these act in anti-competitive behaviours
- Illegal practices – price-fixing, pushing for legislation to create barriers to entry
- Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another and hence are not perfect substitutes – why there is one or two large multi-national from each industry
- When you introduce coercive government policies on the market - monopolistic competition will fall into government-granted monopolies
- and the monopoly to be served under government is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service; potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement. As a form of coercive monopoly, government-granted monopoly is contrasted with a coercive monopoly or an efficiency monopoly, where there is no competition but it is not forcibly excluded
- Advocates for government-granted monopolies often claim that they ensure a degree of public control over essential industries - without having those industries actually run by the state
- Easy way to control the production and consumption options for goods and services
- Just make it so hard for anyone else to complete they go out of business
- Causes inefficiencies in the market place = higher prices to consumers for the good or service being supplied
- Solutions given are government-imposed price caps = rent control and power prices = derelict apartments and rolling blackouts when tried – so will this time be any different?
- Allows companies to set prices and production policies without fear of breeding potential competition
- Why would politicians let this happen? Well, who pays their bills and provides the campaign financing?
- That is where we leave this – part two going further into the circular economy in next ep
Thanks for listening today, if you want to get in contact you can do so here.
Welcome to Finance and Fury, The Say What Wednesday Edition
special series – running through the catalogue of questions and concerns
The series is broken down into three stages – 50 years or so timeline – last week was basics and the first stage
https://financeandfury.com.au/how-do-i-start-my-journey-to-financial-independence/
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Teenage to young adults (16-25): 10y - The focus of these years is to learn the basics of money
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- finish schooling/education - next step is setting up the basics in last weeks ep
- Family and home (25-45): 20y - Whether your goals are to buy a house, start a family, education costs or anything else - the biggest part of this stage is preparing for the financial responsibility that comes along with each goal – this week
- Accumulating to Retire (45-65): 20y – Normally have larger disposable incomes – set sights on accumulating more to fund rest of life – next week
What is life normally like before the 20s? 1. Up until this point – have been a consumer – younger people are naturally socialist 1. Rely on family – living at home, parents provide for you, go through school – have been told what to do mostly up until early adulthood 2. After this – time to take charge – Finish school and likely have first income – going forward in life 3. Ages differ – but principles stay the same 1. The last ep – went through some of the basics – principles of solving the economic problem 2. Prioritise around the economic problem – Finite resources (money) – so where is it best put? 1. Setting out your own goals/needs – building a plan based around where to put each dollar to meet goals 2. Make your own target ratio – budgeting to pay yourself first – why prioritising helps – sets clear goals 3. Invest in yourself – continue to gain experience and knowledge – this doesn’t change 4. What are the economic problems at this stage? – Today – Start looking at events that tend to occur over time - First home, mortgage, starting a family – all about balancing finite resources to maximise your gains (utility) 1. This stage is mostly defined by debt or expenses – can mean limited room for wealth accumulation which is why these first stages are important – covered in the last episode –
Firstly - Likely in debt or about to get into debt – personal, mortgage or education debt – there are also two stages of either preparing for upcoming events (family, home, etc.) or already gone through them
- Defining stages – Preparation – Preparation for buying a home, getting a mortgage, starting a family
- Considerations that need to be accounted for
- Debt and expenses normally take charge over wealth accumulation
- Wealth protection strategies – insurances to cover debts and family
- Or – you are currently in that position of having a mortgage and having a young family
For each one of these things – we have done plenty of eps on each individual thing – so we put links to each in the show notes
Everything here is about asking yourself the important questions – you are your own boss in personal finances – look to your own situation to answer these
Preparation for events – does require sacrifice 1. First home, mortgage 1. Deposits and getting financing – tools to use to solve the economic problems 2. How much will you need? Look at the type of property you want to buy? Can you afford it? Wants v needs 3. Tools to use 1. FHSSS - personal savings – aim these to be enough of hitting your targets for deposits 2. Hint - Avoiding LMI if you can – over leverage can be a killer of personal finances 1. Kids Education costs – probably not a while off if you haven’t had your first kid – cover in a second 2. More important – Budgetary issues - Single income/maternity leave 1. This is why the basics of having your budget in place is important 2. What will your finances look like on a single income or mat leave income? 2. Starting a family - 3. Protection – Getting into debts – make sure protected and have adequate covers to make sure if something happens to income-producing ability – 1. Different levels of lump sums – the level of debts, or sole income provider leaving leftover life covers 2. Ongoing income replacement – is it needed? In most cases it is likely - 4. All about having your goals written down – working out how to solve the economic problem – no single correct way – 1. Figures, strategies, timelines – all depends on your personal situation
Now – if you have already bought a home, had kids, etc. – not preparing for these events but in the middle of it 1. First home and got a mortgage – do you know what your rate it? Know how long until paid off? Know how much interest over life of loan? 1. Deposits and getting financing – aren’t the issue here 2. The repayments of debt have to be balanced with lifestyle costs – 1. Economic problem – Cost benefit analysis 2. Where compounding comes into it again – compounding of interest on your mortgage debt versus investing into growth investment for long term or education costsThe low interest rate environment make it easier to answer that question – but the size of mortgages is forgotten about - $680k today vs $70k 20ish years ago – low rates on massive mortgage still means lots of interest paid – just slowly over time
- Have a young family – few kids -
- Education costs – either from savings/cashflow
- Private schooling – might need to get up education funds – previous episode links
- Cashflow and another lifestyle expense
- Might be on part time income – lower budgets can be accounted for – might have to sacrifice
- Getting kids involved in finances – school won't educate them on this – how value of money works to them
- Education costs – either from savings/cashflow
- This is all about looking at your cashflow – sorting out where funds should go – solving the economic problem
- Look at $1 into debt versus $1 into super or an investment – what is interest saved over 20 years v value gained?
- Later often doesn’t get looked at – the long term isn’t as pressing – but remember the rule of 72 and compounding – little bits now can help a lot in the long term –
- Again – the first stage of goal planning is important – all workbooks available through members at FF
- Create priorities and allows you to have certainty – less stress
Thanks for listening, if you want to get in contact you can do so here.
Previous episode links - Deposits
https://financeandfury.com.au/say-what-wednesday-first-home-super-saver-scheme/
https://financeandfury.com.au/what-is-the-first-home-loan-deposit-scheme-and-how-to-use-it/
Obtaining Loans
https://financeandfury.com.au/9-reasons-your-loan-may-have-been-rejected/
Education
https://financeandfury.com.au/say-what-wednesdays-whats-an-education-fund-and-what-are-the-tax-benefits/
Insurance
https://financeandfury.com.au/say-what-wednesdays-insurance-how-it-works-what-to-look-for-and-how-much-you-need/
Stress
https://financeandfury.com.au/financial-stress-a-major-issue-for-many-australians/
Welcome to Finance and Fury,
Today – next gold rush – Final part of capital preservation –
- Allocation as a hedge for a financial meltdown - should preserve capital, withstand market volatility, and provide diversification across a portfolio
- Gold – an asset which is virtually permanent, with no significant erosion of quality over time, could arguably be considered a safe haven – good evidence that Gold has provided a hedge against collapse – limited supply at about 1.5% p.a. increase
What is Gold's true role? – Capital preservation – but also Money – Base money for most of history - 1912 when J.P. Morgan was called to testify before Congress.
- Congressman - I want to ask you a few questions bearing on the subject that you have touched upon this morning, as to the control of money. The control of credit involves a control of money, does it not?
- JP - A control of credit? No. – Congressman: But the basis of banking is credit, is it not?
- JP - Not always. That [credit] is an evidence of banking, but it [credit] is not the money itself. Money is gold, and nothing else.
- This is very interesting – our money now is credit – Fiat – not backed by gold
This is why people buy Gold – protect from these outcomes 1. There are many uses including jewellery, electronics, dentistry, medical and other industrial use – and of course investment. 1. Jewellery is the single-largest individual source of demand – 2. 40% is investment purposes – bars, central bank reserves, ETFs 2. Reasons for buying gold – Seen as safe haven when economy tanks 1. Fear of an economic crisis or inflation outbreak fuelling public demand; 1. Gold has historically served as a hedge against a declining US dollar and rising inflation 2. Price of gold often moves in the opposite direction to the US dollar - reflecting the fact that many regard the yellow metal as an alternative currency 2. A change in the sovereign wealth funds asset composition, such as demand from China, to diversify their holdings; and 3. Negative bond yields losing their appeal as an effective hedge against equities. 1. If Aus starts QE – gold goes well
Financial System - “Race to the bottom” fuels global demand for gold Several fundamental drivers that enabled gold to break out - The gold price broke through the significant US$1,400 per ounce in June with several fundamental drivers:
- Continued tension between the US and China;
- US Federal Reserve (Fed) officials voicing concerns over the economy; and
- The weaker outlook globally – looks to be entering into another bull market
- A steady stream of weakening manufacturing data, beginning with falls in the Institute for Supply Management (ISM) Purchasing Managers’ Index (PMI) in the US and German industrial production sectors.
- Chinese authorities were also reported to be trying to contain the fallout from the failure of Baoshang Bank, as brokerages and asset managers were looking to restrict trading due to possible counterparty risks.
- Then the European Central Bank (ECB) indicated rate cuts are likely in the absence of any improvement in the economy
The economy can have a sort of Hard landing Heading into 2020, we see one of two scenarios playing out across the markets:
- Soft landing – Manufacturing has been weak and on the verge of recession in China, Europe and now the US. A soft landing would occur if the global stimulus widely expected from central banks is able to keep a manufacturing recession from morphing into a broader recession across the entire economy.
-
- Averting a recession would be bullish for the stock market, interest rates would find a bottom, and the dollar would likely stabilise or strengthen. This might limit the upside for gold. In this scenario, we might see gold establish a new price range, supported by geopolitical risks and central bank demand.
- Hard landing – A hard landing occurs if the current manufacturing recession transitions into a broader economic recession, causing central banks to suffer a loss of confidence. US rates would likely fall to zero or less, and the stock market might enter a correction, while financial risks escalate. Central banks may restart quantitative easing (QE) or initiate other more radical policies. In this scenario, gold would probably form a positive price trend as a safe haven investment.
- Gold could gain from dangerous debt levels -
- Debt or overleverage is usually the culprit, as was seen with subprime mortgages in 2008.
- Global Gov debt surged following the financial crisis – Global gov funding is at Trillion-dollar shortfalls
- Expected next year and beyond – plus if a recession hits - tax receipts decline and expenses increase
- So the shortfall grows further with no way out - investors would no longer buy Treasuries = rates rise, credit may get downgraded and the US dollar may collapse.
- The second potential debt problem is corporate - As a percentage of GDP - corporate debt has now surpassed the peak of the last cycle in 2009
- Major risk in this cycle is lower credit standards - the amount of BBB rated corporate debt – the lowest category of investment grade – has more than doubled since 2009 - accounts for 55% of the investment-grade market - US$1 trillion of US debt is at risk of being downgraded to junk status
- Forces investment managers to sell – have to dumb debt as below investment grade – creates self-fulfilling decline
- Should a hard landing eventuate demand for gold and its miners is likely to increase. Despite the recent gold miners rally, gold stocks are historically cheap relative to the price of the metal.
How to gain exposure – 3 major ways 1. Gold ETFs – Through ASX – Few to choose from
1. Gain exposure to gold pricing – buy ETF share, then represents an ownership in gold - not same as direct
2. Physical Gold – done through dealers or private companies
1. Storage - Hiding it under the mattress or arrange for secure storage - comes with its own associated costs
2. Bonus of this – hold an asset you can store outside of the banking system with a private company
1. Best way to preserve wealth during times of financial turmoil.
3. Holding physical bullion risky — and it can be - stolen or even melt in a house fire - requires adequate insurance
1. Can purchase and store physical gold bullion using automated platforms
3. Gold mining companies/ETFs
1. Another way of getting exposure is to invest in listed companies with exposure to gold.
Australian-listed companies include large, long-life gold miner Newcrest Mining (ASX: NCM), and mid-size gold producer Regis Resources (ASX: RRL) – both of which currently screen as overvalued by Morningstar senior equity analyst Mathew Hodge.
2. Unlike other vehicles, stocks can provide a dividend income, but naturally introduce other variables, including the quality of the mine life, the cost of getting the metal out of the ground, company earnings and other balance sheet considerations.
3. With one trade on ASX GDX (VanEck) gives investors instant access to 44 of the largest and most liquid global gold mining companies.
1. GDX is the world’s largest gold miners ETF with around A$15 billion in assets under management.
The Downsides – 1. Gold itself as an asset class – not an income-producing asset – Costs for bullion storage 2. ETFs – Counterparty risks at many levels – talked about this in previous ep – crisis assets 1. Counterparty risk is present when another party in an agreement can default or fail to live up to their obligations 2. Gold is meant to provide protection in collapse – but what if banks are collapsing – they are the counterparty 3. Example – Buy ETF and gain exposure to the price of gold – Buying ETF through a large financial institution 1. Responsible for obtaining the underlying assets necessary to create ETF shares – Gold 2. Purchase gold as a trustee – then this trustee uses a custodian to source and store this – Custodian major counterparty – trustee is minor counter party 4. If you buy gold as portfolio insurance against a systemic failure in the financial system – ETFs are intertwined with the world’s largest banks - doesn’t fit purpose well 1. HSBC is the custodian for most ETFs in Gold - HSBC use sub-custodians, such as the Bank of England, to source and store gold. So, in addition to carrying custodian risk, investors also have sub-custodian risk. 5. Technically – you are a shareholder of the Trust – access gold pricing – paper claim to gold 1. The real irony is the price of gold could be skyrocketing and the ETFs could be going bankrupt at the same time. 6. As such – if you are worried about a collapse of the financial system – direct gold would be better
Me – Have some gold mining – but only tiny allocation – risky model as costs involved with mining – so if prices drop 30% - likely lose more – Have Precious metals ETFs – Little more – but slowly buying more direct gold
Thank you for listening,
If you want to get in contact you can visit www.financeandfury.com.au and head to the contact page
Welcome to Finance and Fury, The Furious Friday Edition
Today – SDG9 - How infrastructure spending helps an economy -
Anyone who knows basic economic and GDP has learnt that Infrastructure spending leads to GDP growth – so the theory says – Very hard to measure benefits/gains – Direct through spending in GDP equation – flow on effects
Go through Economic theory backing this – stimulus spending for GDP growth – First – estimates Research provided from McKinsey and UN – MK established the Global Infrastructure Initiative (GII) in 2012
- MK Two reports – 2015 to 2016 – World spent $9.5trn (14% GDP) $9.6trn follow year
- Transport, power, water, telcom – $2.5trn, Social infrastructure, oil and gas, mining – $2.4trn, Real estate - $4.65trn
- Spending trajectory points to a shortfall of about $350 billion a year to what we are told we need –
- but triples when including funds needed to meet the UN Sustainable Development Goals
- Report states – meeting is critical for the future of undersupplied regions such as Africa – remember Africa
- Emerging economies account for some 60% of that need
- Projects – no idea – broken into categories – power, water, etc – but on what, who knows – Have programs going – but go to each and it is just another rabbit hole trying to find each individual thing
- This ep - Focus of policy and recommendations to provide grease to the wheels of bureaucracy:
- Helping Financial System out through Governments
- Talk about the theory as justification and also the
Governments hand in this - Regulations/Legislation - Basel III, Solvency II, pension fund allocation rules
- Basel III and Solvency II mandate classifying infrastructure as high-risk capital allocations
- Also - pension funds have allocation rules that specifically limit their exposure to asset classes and countries
- Recognizing infrastructure as an asset class with a lower risk profile – Infrastructure can be low or high risk
- Low upon completion and proof of profitability – In developing – high risk – many infrastructure projects don’t meet forecasts – known as ‘white elephants’
- To avoid low return investments – governments need more oversight and analysis before a decision in made –
- More regulations for infrastructure works –
- Question: If there was a special equation to perfectly predict profitability – Gov wouldn’t be ones who have it
- Sadly – no tool exists – only outcome from involvement in assessment is higher costs and more delays due to layers of legislation and checklists before approval
- More regulations for infrastructure works –
Governments will also take an active role beyond changing the laws – Want to make money back off it 3. Road pricing and other fees 1. toll roads, bridges, and tunnels are increasingly common around the world. 2. Taxes and fees - Cities including London have introduced congestion pricing on urban roads. 4. Property value capture - Governments acquire land around an infrastructure project - profit once the project is completed through lease or sale - using the resulting funds for new infrastructure investment - Spain added this to its constitution. 1. Other methods – more traditional – increase general or specific property taxes and fees from owners/developers 5. Changes in public accounting and budgeting frameworks 1. Treating infrastructure as an asset on a public balance sheet and depreciating it over time rather than adding the entire cost of a project to the fiscal deficit up front 1. mirrors corporate accounting practice - helpful to Gov – gets around limits on deficits and debt. 2. Example – 3y $6bn project is being constructed and will take 6 years – one payment upfront now and one in 3 years 1. Current – Adds $6bn onto deficit now - although the government is actually paying money only in years one and three, it books spending of $2 billion in each of the three years. However, the roads will be operational for the next 20 years. It would make just as much sense for the government to book an expense of $300 million every year for 20 years as the public asset is consumed. 2. But many public assets, unlike private assets, do not have corresponding revenue streams attached to them – no accountability – as a new office block will have a life of who knows – 40, 50 y – hides real spending onto future books 3. Socioeconomic rates of return on public investment is meant to exceed the government’s cost of capital—and substantially increase the future tax base in a way that makes the project self-funding over the long run 1. important caveat is that this accounting approach could undermine the productivity of public investment 2. Report notes - risk that government leaders, freed from the responsibility of having projects appear in their fiscal expenses during their tenure, might decide to spend ineffectually – 1. Very politically useful in the short term – spend away on your voting demographic — boosting particular constituencies such as construction workers and the unemployed—costs passed to future generations. 2. Why they want to introduce a powerful oversight body – 4. Issue is that a Government doesn’t run itself like a company – if it did – transparency and getting willing transfer of cash rather than by force- fine – but if they keep GDP measurements the same – instant bonus compared to depreciation costs 1. A great deal of infrastructure development fails at the outset – Corporate accepts risks – Gov just take and don’t let you know 1. Report states – Many issues - Land rights may need to be obtained from many owners, political support and funding may need to be secured from multiple jurisdictions, or business models may depend on a large number of co-investors for ancillary revenue generation
What will it cost? – Just on economic – Transport, power, water, telco – the $2.5trn current spent criteria
- Will require $3.3 trillion annually through 2030 without SDG – but with well over $4 to $5trn
Where will the money come from? 1. Financial System – Hard to attract investors – barriers and lack of interest from most investors 1. Recs to help - governments need to develop their project pipelines, remove regulatory and structural barriers, and build stronger markets for infrastructure spending 2. Public-private partnerships have assumed a greater role in infrastructure, although there is continued controversy about whether they deliver higher efficiency and lower costs. 3. Govs have eyes on financial system Funding - number of sources – combined have $120trn under management by institutional investors 1. Banks and insurance – $66trn, Investment companies, private equity Special development banks – $40trn 2. Super funds and pensions - $11trn 1. Early 2019 – World Pensions council – had meetings with G20 – 2. executives and board members confirmed they were in the process of adopting or developing SDG-informed investment processes, with more ambitious investment governance requirements – notably when it comes to Climate Action, Gender Equity and Social Fairness – okay? 3. Capital stewardshipis expected to play a crucial part in the progressive advancement of the SDG agenda: 1. "pension fundtrustees have started to exercise more forcefully their governance prerogatives across the boardrooms, coming together through the establishment of engaged pressure groups [...] to shift the [whole economic] system towards sustainable investment" - by using the SDG framework across all asset classes 4. In the end – mostly comes from us – ep last week – robin hood 1. Private and institutional investors (mostly your money) – have $120trn under management 1. 60% or $73trn from America and EU – want to get down to 50% and use other nations 2. 87% of funds in High income countries – demand in middle to low income countries 3. Mostly come from us – Similar to last week with Comparative advantage 2. Policy aims to match these investors with projects – but requires solid cross border investment principles
Financial - Standardization of terms and risk categories, risk-return reviews, development of indexes 1. Project pooling. Another way to reduce transaction costs for investors is by pooling projects, including the development of respective funds, indexes, and securitization vehicles. 2. Development of securities exchanges. Governments can significantly increase private investment in infrastructure assets by adding liquidity to securities exchanges. 1. Gov issue equity and debt on government-owned infrastructure projects and infrastructure operators to encourage private investment. Governments should play the role of market maker and encourage multilateral development banks to sell their investments as individual or bundled assets to increase liquidity. 3. Development banks – special financial pools to accept funding and lend out money for project financing 1. Aus – Quote “The Asian Development Bank has signalled it will inject more cash into high-quality projects aimed at dealing with climate change and tourism and less on infrastructure "white elephants" as it battles pressure to counter the growing influence of China across the Pacific” 2. China - Asian Infrastructure Investment Bank – US major supporter – last year $22 billion worth of loans and grants to projects across the region, with another $14 billion leveraged from the private sector 1. Pushing framework for us to join - allow “Australia to lead the region in mobilising the trillions of dollars required to respond to specific strategic challenges that threaten to push vast numbers of people back into poverty, such as climate adaptation across the Asia Pacific”, Flow - estimated (in 2017) at up to $429 billion annually needed by 2050. 2. Approach to climate finance is in keeping with the Australian Government’s 2017 Foreign Policy White Paper, which has named climate diplomacy as an essential strand - Recommendation - allow Australia to leverage investment from multiple sources to achieve the SDGs – mostly pooling funds from super accounts and investment funds
Will it help? – Estimates – more spending could add about 0.6% to global GDP. 3. infrastructure construction immediately creates jobs – Report estimate - one percentage point of GDP could generate an additional 3.4m potential jobs in India, 1.5m in the United States, 1.3m in Brazil, and 700,000 in Indonesia 4. Forget that spending has to come from somewhere – expense of future growth in economy – stimulate now for the comedown later – 1. In Australia – we are a large country – infrastructure lacking – why city planners like concentrations/urbanisation 1. Create further urbanisation – cities grow while rural shrink (% of population) – 2. Other side of Growth – Governmental policy 1. population growth from immigration 2. Also helping to fuel growth through marginal increases in consumption 5. UNs publications talk about how manufacturing and industrialisation increases incomes, stimulates growth through increased production and consumption – greater supply, cheaper goods, more people spend – true – But only evidence of this working long term is with free market deciding – Every example of Gov trying mass reindustrialisation’s in 20th century didn’t end so well – Governments were responsible for the deaths of 250m in that time period through ‘miss management’ – Uni of Hawaii – not including wars – 1. Don’t have a lot of faith in Gov ability to match plans – Especially if accounting methods change - 2. Beyond this - Issue with current state of financial system – too much debt already – stimulus – like stimulant -less effective the more that it is used – Gives gov less bang for buck 3. Obama’s economic experiment of Keynesian economics on steroids was a failure - stimulus plan, bailouts, ObamaCare, tax hikes, minimum-wage hikes and regulations – doubled national debt in eight years 1. In 2015, the Joint Economic Committee of Congress found that compared to the eight previous post-recession events, “the Obama recovery was the weakest on record.” 4. Why? Too much debt already – doesn’t continue to grow through stimulus once debts hit thresholds 1. World indebted – then lower than forecasts growth very likely 2. Been trying to get out of debt – govs have a lot 1. Helping out developing nations is a noble thing to do – but access to infrastructure will increase CO2 emissions – even renewables – developing the 3rd worlds has opposite outcomes to CO2 reductions – consumption etc leads to more – especially in process – no way to get energy needed clean under current tech 2. Also – Aus - we have one of highest emissions PP in world in Aus – Due to our lifestyles – cars, large houses, lighting and inability to adopt nuclear or thorium power– also export a lot of our LNG – 1. rely on coal or renewables – which are costly to run compared to coal measured in Kw/pHr 2. So if they really wanted to lower our emissions in the name of climate as one of the biggest culprits – 3. Spend $30bn and put in 4 nuc plants to power the nation – 6. Solution has been to get inflation out of the money flow increase - IMF needs spending though and not happening - needs inflation back – mass infrastructure spending is the next ditch effort to restart the economy – climate change is the reason to have people want it 7. In short – don’t expect to see a lot of thing money being spent to boost our struggling economy – 1. Hard enough to get a Coal mine in QLD, let alone a dam or large scale infrastructure (E/W tunnel) 2. Wont see our CO2 go down from the infrasturcutre spend – as it is in the name of climate but done for growth
Thanks for listening, if you want to get in contact you can do so here.
Resources to check out:
https://www.mckinsey.com/~/media/McKinsey/Industries/Capital%20Projects%20and%20Infrastructure/Our%20Insights/Bridging%20global%20infrastructure%20gaps/Bridging-Global-Infrastructure-Gaps-Full-report-June-2016.ashx
https://www.mckinsey.com/~/media/mckinsey/industries/capital%20projects%20and%20infrastructure/our%20insights/improving%20the%20delivery%20of%20road%20infrastructure%20across%20the%20world/a-better-road-to-the-future-web-final.ashx
https://www.mckinsey.com/~/media/mckinsey/industries/capital%20projects%20and%20infrastructure/our%20insights/bridging%20infrastructure%20gaps%20has%20the%20world%20made%20progress/bridging%20infrastructure%20gaps%20how%20has%20the%20world%20made%20progress%20v2/mgi-bridging-infrastructure-gaps-discussion-paper.ashx
https://sustainabledevelopment.un.org/content/documents/2537IDR2018_FULL_REPORT_1.pdf
Welcome to Finance and Fury, The Say What Wednesday Edition
Series to cover a number of questions asked – FAQ on stages of life 1. Hard to get through all questions – from questions compiled – put together run through of steps 1. Go through 3 or 4 – stages of life – cover the process from start to finish – considerations to take, give an outline 2. Process – Stage, typical situation, goals, focus, and tips – priorities and strategies – pros and cons 2. Get the planning books – access through the member's section - https://financeandfury.com.au/member/ 1. Investing in yourself episodes at the start of the year as well – purpose careers
Today – First part - Starting out – run through the basic stage of setting the foundations – 1. The first part is very important – 1. even if feel like you have gone through it, know someone who this can benefit – please share to help them 2. This part, not really age/situation-specific - regardless of ages/circumstances finances can be difference from decisions
What does the Starting stage look like? - either before full-time job (at uni/working part-time) or stating your first job, or well into your work life but want to better financial position
- Different for everyone – different ages, amounts, etc – don’t want to beat around the bush – earlier the better
- But never too late – more effort can be needed to catch up – where is the fun in something not challenging?
- Generally – to build something start with base/foundation – most foundations work off a basic framework – weight/loads
- Engineering – square-cube law – as you double the size the volumes/mass cubed
- Example – cube with 1 mass – double the size and mass 8 – double again (4x4x4) and mass 64
- Limits all design – planes with wing sizes, tall buildings (taper in) –
- Limits nature – trees, animals – reason blue whale biggest creature – max under this law of what
- No different in personal finances and becoming financially independent – design a foundation around governing principles
- Example – Winning $200m – make you FI – but what if financially illiterate with a gambling habit? Remain FI?
- What makes a good gambler? They aren’t technically gambling – not slot machines, but poker –
- Game of probability – beyond counting cards (chance of cards being in play) – chip stack management – a line of the song ‘when to hold 'em and fold em’
- Engineering – square-cube law – as you double the size the volumes/mass cubed
- Just like a professional poker player – playing smart in life with your finances are the core – Some Principles of personal finances – probably 100 more – but good starting place
- Prioritise around the economic problem – Finite resources (money) – so where is it best put?
- Setting out your own goals/needs – building a plan based around where to put each dollar to meet goals
- Make your own target ratio – budgeting to pay yourself first – why prioritising helps – sets clear goals
- Compounding – the rule of 72 –
- Invest in yourself – continue to gain experience and knowledge -
- Prioritise around the economic problem – Finite resources (money) – so where is it best put?
Prioritise - While each individual will have different needs, situations, etc – initial stage of financial journey is the clean-up phase - before transition into working on the foundations – like going for a road trip and forgetting your mix tape and to fuel up the car
- Goals - Planning with the End Goal in mind – Never too early to start
- Where to invest? What to invest in? How to access?
- Something that is well-diversified for lower investment funds and doesn’t cost you a lot in transaction costs
- Budgeting – Cashflow is king – method of accumulating wealth – a common practice – work, get the deposit (minus tax) into account, transfer to pay other people (or companies/online) -
- First step – How much do you earn and what are you spending money on?
- Next – Categorise – musts (essentials), nice things (discretionary), and surplus (savings)
- Are you happy with how it looks? How much do you need?
- Compounding – pretty self-explanatory – Investing into growth and reinvesting income compounds over time
- Rule of 72 – rule of thumb – 10% doubles every 7.2 y, or 7.2% every 10 years doubles –
- $10k at 10% p.a. - $20, $40, $80, $160, $320, $640 – 43.2y – but $320k less than 36y –
- Make it to 50y – just under $1.3m
- Golden ratios – Works in conjunction really with goals and compounding (next) – but having a plan/outline and goals around
- Planning and setting targets of how much you need to have invested and by when – times in life you won't be able to invest – cash flow being used for debt, family, life
- Important not to forget about is super – hidden beneficiary of compounding - as cant access till 60 –
- Example - 4 super accounts with $2k each – admin $78 + 0.1% p.a. insurance of $2.9p.w.– Returns 8% p.a. = $0 in 16y
- Gets rolled into lost super now before this happens – but still, suffer in performances – 10y 5.7% for ones like Ausfund
- Roll all into one account - $8k with same admin and returns = 40 years is just under $110k
- If you are around 20 now and have a number of accounts – might be worthwhile to look into if consolidating is an option – not advice – a general statement of obvious
- Example - 4 super accounts with $2k each – admin $78 + 0.1% p.a. insurance of $2.9p.w.– Returns 8% p.a. = $0 in 16y
- Rule of 72 – rule of thumb – 10% doubles every 7.2 y, or 7.2% every 10 years doubles –
Investing in yourself – Experience and knowledge
- Practice investing in yourself – Sounds like a weird concept but you invest to gain something – income, growth, etc.
- Investing in yourself – with the aim of gaining something – growing as a person and reducing financial stress –
- Discussed a bit of this in investing in yourself series - purpose/vision statement – part of it is finances – way of funding it
- Tangible Benefits - Ways of increasing your income-producing ability and financial stability
- Earning more in your career – formal or informal learning to increase value to get paid more
- Growing wealth and increase passive income – investment income gains over time
- Intangible benefits - Less stress –
- What can cause stress? Not knowing what you are doing, or if it is through right thing, or procrastinating putting it off – even if it is just because it is new –
- Knowing that you are financially secure is good -
- The knowledge needed is very easy to get – with very little cost –
- Informal - consuming more career-specific content, books, audiobooks, podcasts, internet courses – All in your spare time around work –
- Investing in yourself – with the aim of gaining something – growing as a person and reducing financial stress –
- This is where Experience comes in – practical side to knowledge – plenty to learn and now have a track record
- I think the best form of education is a practical application of skills over theoretical testing – happens in personal finances – Can know a lot about shares – doesn’t mean that you will benefit from that knowledge –
- Afraid of buying shares? – start small – normally sooner rather than later
- I was sweating purchasing first shares – was 16 and just about to go into year 12 -
- Once you are invested – daily events will occur and it will go up or down –
- If it goes up – reinforcing factor that you are correct – nothing more to know
- If it goes down – reinforcing factor that investments are risky and to avoid, or that there is a lesson here and to try again – but in a different approach
- Compounding losses – don’t just offset future CGT – but
- Learn as much as you can to keep improving your ability – finance is a second language in a way – learning a language is easier when younger – brain pathways still forming – if you are young – forming good financial habit now benefits in life
- Professional/formal – go to uni, degrees etc. or outsource to other professionals who can help
- Afraid of buying shares? – start small – normally sooner rather than later
- The more mistakes you make – the more experience you get with areas of personal finance – the easier it becomes – you don’t even have to think or worry about it – helps to build certainty
- If you haven’t made any investing mistakes – start small –
- Hard to get tricked in investing – mind field with scams, losses, etc.
- Sometimes you just don’t know enough to see that something is off – almost like how a really smelly cheese might just be assumed to be 6 years past expiry and throw it out – I would find it hard to tell – like a small bit of Roquefort cheese versus a mouldy cheddar – if you don’t know much about cheese then can be tricked
- Sometimes it is really well hidden - Choice architecture in economics =
- Super forms and choice of super – why a lot of people end up with 3 funds (me too)
- Supermarkets – perishables at the front with sales as you walk in (100% traffic) – behavioural trait of ‘invariant right’ – most people will turn right when entering a store – structure the layouts to lead to spend longer in store
- Watch out for path of least resistance – apathy can cost and is manipulated – financial/behavioural psychology
- I think the best form of education is a practical application of skills over theoretical testing – happens in personal finances – Can know a lot about shares – doesn’t mean that you will benefit from that knowledge –
You can have goals, priorities, knowledge - foundation – Process starts when your income-producing/investing capacity increases - When things really pick up – when your income-producing capacity starts –
- Part-time at school/uni – or First Full-time job out of school or after graduating uni – doesn’t matter where it comes from
- The question through life – where should Income Capacity be redirected? – Goals – solve the problem of what to do with your finite resources
- Your goals will change through life – but the template to achieve them is the same
Initial Template – questions that need to be answered – based around what is appropriate - 1. Deciding what to do with larger disposable income? Where should it go? Planning and what the first stages are – 3. Example - earning $80,000 per annum and expect to work for another 25 years, receiving average wage growth of 3.5% per annum, that is worth slightly under $2.2 million in present value (after 2.5% inflation) 2. Structure for goals – 1. How much by when – budget – Goals like deposit 2. Aim to stay out of personal debts – CC or car loans – focus cash flow to repay 3. Surplus funds use 3. Investments and supers 1. Basics – super account – mandatory – make sure consolidated 1. Things to look at: investment option, insurances, costs ($ & %) 2. Goal of wealth accumulation – 1. Ongoing investment plan – ad hoc investments 3. Other Foundations in place – things to account for 1. Place to accumulate wealth – platform/broker 2. Protection – Income-producing potentials
Next week – Start looking at events that tend to occur over time - First home, mortgage, starting a family –
Mostly defined by debt or expenses – can mean limited room for wealth accumulation which is why these first stages are important -
Either way – It doesn’t matter how much income you earn if you don’t use it diversify your wealth and other income sources
What is one of the more important things is that at least some of your lifetime's earnings are put towards things that will inevitably replace it
Thank you for listening, if you want to ask a question you can do so at the contact page here.
Welcome to Finance and Fury -
This Episode – Look at Where to not invest in negative rates world – if it comes to that – other options
First – what does the world in negative rates look like? – dive further into this to start – look at other countries, Japan, Denmark and how this affects an economy –
- Also - what sort of investments won't fare well - run through alternative assets
- Going to be 2 parts – go further into alternatives next week
What asset classes may be at risk – financial sector Negative interest rates are terrible for banks - They destroy the business model for banks.
- Put further pressures on banks margin (profits) - make future bank collapses more likely because banks cannot build capital to absorb losses
- Commercial banks act as streams in the modern economy – Glacier (Central Bank) melts and the money flows through commercial banks and financial systems
- No ice – no flow – but no rivers – water nowhere to go – a dam that breaks and floods everything
- European banks are looking to be in poor shape – have negative yields but getting the exact opposite of what they need – Growth from stimulus spending and inflation
- Japan - same thing - used QE strategy to lower rates back before the term QE was muttered – originals – how well did it work long term?
- Japan has had near-zero or below zero interest rates for 20 years – stuck in liquidity trap
- How well has financial sector performed – 1980s - in Japan’s bubble years
- TOPIX Banks Index – Peak 1989 at 1,500 – now it is about 130 – loss of 91% over 30 years
- If this spreads to the rest of the worlds financial sector – financial sector suffers - by extension – the economy suffers as low-risk decisions are required – lower business lending
- Banks make money from the difference between the interest rates they charge on loans and costs on deposits (liability as a reserve to lend out) – you get interest due to risk – also issue FI -
- Rates go negative = ability to make a profit gets thinner - but risks get larger on the assets loans collateralised against – i.e. property for mortgages
- Remember - pieces of the assets used as collateral have been inflated by these low-interest rates –
- Seen that play out with Japan back in the late 80s
- borrowers will make repayment as usual – but the amount still outstanding will be reduced each month by the negative interest
- but savers see nothing paid in interest on their deposits – and may also suffer as they go negative
- Denmark currently – 3rd largest bank offering 10-year mortgage rates at -0.5% - 20year fixed at 0% -
- Switzerland - UBS a few weeks ago sent a memo to HNW clients -introduce 0.6% p.a. charge on deposits more than €500,000 –
- Bank of England at 0.75%, ECB at 0%, Denmark (not ECB based) -0.4% cash rates
- Lower savings rates across Europe - Commercial banks need to take deposits and extend loans. That’s their primary function. This credit intermediation, as it’s called, is like a financial utility. One bank can be allowed to fail. But the banking system overall cannot be allowed to fail – why capital notes are being used as ‘reserve capital’ – replace lower deposits
- How banking meant to work - profit motive needs to make them aggressive on lending, and the fear of loss needs to make them prudent.
- Those two forces are supposed to balance each other out over time, with banks swinging too far in one direction and then too far in the other direction as part of the normal business cycle.
- Generally worked through history – when back with gold or other currencies - some hiccups, as long as banks can do this profitably – meaning they make enough money and set aside enough capital during good times to be able to eat the losses during bad times without collapsing.
- This sort of event created Central Banks – lender of last resort to provide liquidity – today – manage insolvency as fiat is debt-based
- Negative interest rates make banks start losing money on their assets – need to chase yield to make some kind of profit
- Have to do risky investments – sometimes will come with inadequate returns or compound systems risks
- ECB, the BoJ, and Swiss National Bank have admitted that negative interest rates weaken banks – not speculating here - The ECB has even been talking about a strategy to “mitigate” the destructive effects its policies have on the bank – cash bans
- The real economy - negative interest rates have an even more profoundly destructive impact: They distort or eliminate the single-most-important factor in economic decision making – the pricing of risk.
- Bit of a guess - Similarly, portfolio management tools like Capital Asset Pricing Model (CAPM), Modern Portfolio Theory (MPT), Value At Risk (VAR), Risk Parity are all ill-equipped to handle a world of lasting negative interest rates
- Risk is priced via the cost of capital. If capital is invested in a risky enterprise, investors demand a larger return to compensate them for the risk. And the cost of capital for the risky company is higher. If capital is invested in a low-risk activity, the return for the investor and the cost of capital for the company should both be lower. And the market decides how that pans out.
- But if central banks push interest rates below zero, this essential function of an economy doesn’t function anymore. Now risk cannot be priced anymore. The perfect example of this: Certain junk bonds in Europe are now trading with a negative yield. This shows that the risk-pricing system in Europe is kaput.
- World where risks cannot be priced correctly anymore - consequences – probably going to be bad over the longer term for the real economy – creates misallocation - malinvestment and bad decision making
- Means overproduction and overcapacity - asset bubbles of where borrowings flow
- Load the entire financial system up with huge risks because these assets are used as collateral, and their value has been inflated by negative yields.
- Or Aus – Syd, Melb – Not much wage growth, slowing GDP growth - misallocation of lending – bubble in consumption (demand side) without supply (businesses/overall economy, wages, etc.) catching up
- Monetary Policy remedy to this situation caused in part by negative interest rates – more of the same thing
- Longer negative interest rates continue - more upside down and unpredictable our economic system will become
- Harder for us to reverse course – without financial system throwing their hands up, bailing and starting afresh – Nothing new
- The observable outcome from these policies - strange combinations – massive housing bubbles in cities while slowing economy – Germany - Berlin and Munich while they look to be about in a recession –
- And a major reset is of course precisely what every central bank fears the most - How will this end?
- No one knows because this size of a reset has never occurred before - some idea: When there is no reward for saving and bonus to borrow - the economy stops functioning properly – slow decline before being abandoned
- What this all shows – that the financial system is pretty sick – the cost of its money is so low –
- Financial reset is likely needed –Few options the IMF have been publishing about - with SDRs, or Crypto backed by gold or SDRs
- Over the next few years – may see a dollar-denominated asset collapse due to the USD going through replacement speculation
- A lot of the Debt in the global financial system is back by USD – so if you can collapse the value – you collapse the size of the debt owed
- If rates continue to go down – if they go Negative in Aus would be bad for ASX index investments – 25% in Financials – mostly big 4 banks – crash to index from a handful of shares triggers wider panics and sell offs
- Passive investments (indexes) along with the FAANG shares – may not fare so well
- A lot of factors look to be pointing towards systemic risks –
- Passive/Index ETFs – liquidity risks – not selling underlying shares but selling the ETF – need a buyer – May be hard to find in a panic -
Few different alternatives next week - 1. Inverse ETFs (BBOZ and BBUS) - various assets and derivatives, like options, used to create profits when the underlying index declines in value. Basically, it's an index ETF that gains value when its correlating index falls 2. Versus - the "old money" strategy - about capital preservation - gold, land or art ETF 3. Both have pros and cons -
Thanks for listening, if you want to get in contact, you can do so here.
Welcome to Finance and Fury, The Furious Friday edition
Continuing SDGs – today we are covering Economics or SDG 8
First, look at the economics of the UN itself – something never talked about
- Who pays for the UN – Member states - A complex formula - US pays most at 22%-28% of the UN's different budgets
- Aus - Regular budget for AUD - $86m (rough estimate) in 2016 - $58m USD – not too much
- But the official budget doesn’t include other donations – Gov agency voluntary contributions (specified or unspecified) – all revenues from government donors – Total was $747m p.a. USD ($1.1bn) – across 21 UN organisations
- A lot of money being shipped to UN when we have a desperate need to more infrastructure and helping create more liveable areas outside of Cities – Up from $601m in 2014 – massively increased - UN revenues massively increased –
- What does the UN spend money on? 2016, the organisation's total expenditures was nearly $50 billion, with the US financing about $10 billion, or one fifth, of that.
- Even with costs surging fourfold in the last 20 years – expenditures have been compounding at 7.8% p.a. since 1976
- UN plans - Economic growth and decent work – SDG 8
- Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all.
- World Pensions Council (WPC) development economists have argued that the twin considerations of long-term economic growth and infrastructure investment weren’t prioritized enough – Plan is growth through full employment on infrastructure projections
- 2020 Target - to reduce youth unemployment and operationalise a global strategy for youth employment. Implementing the Global Jobs Pact of the International Labour Organization is also mentioned.
- 2030 target - to establish policies for sustainable tourism that will create jobs. Strengthening domestic financial institutions and increasing Aid for Trade support for developing countries is considered essential to economic development (not for us though, but other nations).
- Implementing an Enhanced Integrated Framework for Trade-Related Technical Assistance to Least Developed Countries is their method for achieving sustainable economic development
- UN say that $5trn a year is needed – mobilise a lot more than currently being spent – essentially mass redistribution
At this economic model’s core - Global redistribution of GDP – push out lower-paying jobs to be outsourced by AI or by globalisation 1. Built around David Ricardo's Comparative advantage theory from 1817 – Spent 4.5y doing Commerce – Finance also Economics – International Trade and Finance – Knew the right answers on the tests – That comparative advantage should benefit both parties if done right 2. How the theory works – which argued that countries should specialise in the production of goods in which they have a relative advantage over other countries in production - promoting benefits of international trade 1. Example – Back then a mutual trade benefit would be realised between China and the United Kingdom from China specialising in the production of porcelain and tea and the United Kingdom concentrating on machine parts. 2. Makes sense right? In the 90s China for low wages in manufacturing/production and west for Service-based economy 3. But what the theory doesn’t account for – Not 1817 – Capital (money) is easy to transfer across borders – Technology as well – With Capital comes technology (FDI) – 1. China as an example – FDI and increase in tech – outproduce across board – but slowly wages rise in china – so do costs – so production leapfrogs to another country with lower wages – so previous country stagnates in wages and growth – then new country goes through the same cycle - so on – race to the bottom – takes a while – 2. Has been happening since 1975 – Lima Accord – set the framework for the movement of capital and technology to developing nations – which are the labour cost in comparative countries 3. Modern Robin Hood – But you are the rich when compared to the third world 4. UN has engineered the decline of the Comparative Advantage efficiency – simply a beggar thy neighbour policy now that creates downward pressures on wages globally – Name of Globalism 1. The offshoring of jobs has reduced Australian (USA, UK, other 1st world nations) manufacturing and industrial capability and associated innovation, research, development, supply chains, consumer purchasing power, and tax base of state and local governments – technology comes from engineering and not science (especially climate science) 2. Comparative advantage Creates a Focus of Multi-national companies on short-term profits at the expense of these long-term costs – Effect of moving our economies to the developing world 3. Currency and taxes come into this – Today Media calling tariffs a trade war - There is no trade war – simply the US trying to protect their industries by placing tariff barriers on the import of cheaper products from foreign countries 4. The irony is half of the imports from China are imports from US companies – US at war with US companies – go figure 5. Evident that our economies are in decline – GDP growth slowing as over decades our manufacturing/industrial/engineering capability has been transferred abroad. 1. Our demise is what is fuelling countries like China - owes it faster than expected rise as a world power to the transfer of jobs, capital, technology, and business know-how to China 2. Jobs have been declining for years in terms of value-added and pay – creates aggregate demand decline (lower GDP growth) 3. Proof from listed companies using profits not for investment in new plant and equipment, but to buy back their own shares or make once-off dividend payments 6. Economic growth comes from a rising labour force participation rate and engineering innovation – More people earning more money – better productivity than more money on top - 1. Governments tried Aggregate demand model of redistribution (UBI proposed) – more likely Government work programs (infrastructure projects) – 1. Gov projects force minimum wages – offer $15 in USA – employees have to now compete with gov – unfair as they are contributing through taxes to fund their own demise – What if the work isn’t worth $15 USA an hour? 2. In USA – offer insurances and benefits – making it even harder for small businesses to complete 2. But this wage capped and unaffordable –has to come from taxes – and would also be taxed – making it an inefficient redistribution – but does increase size and importance/reliance on Gov 1. Perfect socialist world we would all get $100k p.a. for not working – but resources aren’t infinite 3. As costs of labour increase in developing countries (i.e. china wage rises) – to maximise profits – wage regulations in developed countries further compound the decline in employment and wages 7. Which is where it gets worse when combined with the implementation of recommended policies within the higher labour cost countries 1. Decent work – the work that is funded by the Gov- limits free-market choices when Government competes – 2. Almost like having a Communist Nation and fee market operating at the same time -
From the club of Rome – Watched their online lectures – available on the LinkedIn learning centres – not hiding it – just have to look 8. Shorten the length of the work year and raise the retirement ages 9. Redefine ‘paid work’ to cover those who care for others at home and Increase unemployment benefits 10. Increase the taxation to redistribute profits – introduce death taxes 1. Tax fossil energy to make low-carbon energy more competitive – higher prices (no different to tariffs) 2. Shift taxes from employment to emissions and resource 3. Increase death taxes to reduce inequality and philanthropy while boosting government income 11. Expand the use of green stimulus packages by printing money or raising taxes to help governments respond to climate change and the need for redistribution 12. Encourage unionization and restrict trade and business where necessary
With no employment or wage growth – where will growth come from? Same as last 30 years - Mostly debt – 1. Some UN current donations from Governments – Also have infrastructure spending access from Supers, tax – next ep 2. Mostly debt fuel growth through massive government infrastructure spending – employ people in the employment plans at higher than market wages with insurances and benefits (higher super counts) – all at additional costs to Gov budgets 3. Plus more and more regulation – John Stossel did a great interview with entrepreneurs in Africa – 1. Inequality they face is competition from the West through free stuff (can't compete with free) and Government regulations – which leads to corruption – only way to get things done is through bribes or having millions to get around regulations/paying the fines 4. The whole of Economic growth in 21st century is expansion through Government spending and debt – cheap credit 1. but consumer income has not kept pace and consumer debt expansion has reached its limits – at 120%
The core is to try and keep the debt-based economy going – 1. IMF SDRs spending massive amounts of money on the next great social program – some referred to it as the great leap forward – create higher inflation again, then inflate the current debts away over time – also is the next step in a one-world currency – if they gain legitimacy and become the global reserve currency like China and Russia want 1. Governments try to increase asset prices through printing money 2. But this doesn’t increase production, as jobs and economic activity don’t exist anymore 3. Just makes the property and other assets more expensive for us – while pushing up costs of living 2. Next is to drive growth through reindustrialisation – global infrastructure works and climate change action – 1. Growth driven by debt – FDR style – Great Society programs of mass Gov employment – at expense of population and companies paying for those wages – Gov spending comes form you or borrowing in your name 3. Last next part is to merge Governments and companies – Fascism 101 – but only approved companies – create a completely controlled economy 1. Through the consumption and production outlines in the circular economy
Take away – Governments have proved to only be economic destruction houses – long history of getting it wrong and creating economic decline slowly over time with equilibrium policies –
So why give them even more control and power over the economy and our lives?
Other take away – Policies to fuel world GDP growth through more ‘beggar they neighbour’ policy –
Take advantage through investing in Asian/developing markets and infrastructure companies – more on this next Friday
Thanks for listening – Next week – go through infrastructures and the inequality angle
If you want to get in contact, you can here.
UN Revenue by Gov data –
https://www.unsystem.org/content/FS-D00-02
https://www.unsystem.org/content/FS-D03-01
Welcome to Finance and Fury, the Say What Wednesday edition
Today's Question is from Gabriel
With the latest news around trade wars, inverted yield curve and EU collapse, I would love to hear your thoughts on how to protect a portfolio, is it worth using hedging instruments or changing the assets mix? Do you use options? What do you think about using them as a hedge?
Wealth Preservation – 1. Concerns to account for – Most asset classes aren’t looking good 1. Share market collapse – many things that can trigger it - Hyper Synchronicity – Event occurs all at the same time without any apparent event - herd behaviour – governing dynamic which underlies the whole of human experience and history — social, emotional, psychological, and spiritual - probability transitions between emergent states of order and nonlocality –thought of long bull run makes people for different reasons sell off assets to profit and reinvest - 1. If the EU breaks apart – I think is inevitable – when? No idea - Covered EU in 3 ep series Nov last year - Brexit over another few eps in April this year – go back to the eps then go into a lot of detail – ramifications – not the biggest concern by itself – but given the debt/financial systems interconnection – may cause a spark – in a sane world it wouldn’t 2. Trade wars – This is already weighing on markets in my opinion – Things could get worse if things that aren’t expected occur – 3. Bank failures – fragility of financial system – gets worse with lowering interest rates
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Fixed Interest – Inverted yield curve - which occurs when the coupon rates on short-term bonds are higher than the rates paid by long-term bonds – shows investors are so worried about the near-term future that they are piling into safer long-term investments – Switching out of 5 year into 10, or 15
- Government Bonds – high price and low yields due to that – risks if rates rise –
- Corporate Credit – Catch provisions of bail-ins – for banks
- Seems to be a trend for most countries where 5 year bonds are lower yields than 2 years – except Germany and Japan – negatives
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Cash – Low interest returns – if any – plus if negative rates come
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Property as well – in most capital cities Aus is one of the most expensive fuelled by credit expansion and concentration of urbanisation
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Can’t invest in shares, property, FI or cash – basically all asset classes
But are alternative Options - 3. Options (no pun) – used in Hedging – if you own shares – use it to reduce portfolio risk by lock in the right to sell the market at a certain price – shares you hold crash, then you can exercise the option and sell shares at the strike price. These securities are intended to move in a different direction than the rest of the portfolio. They tend to appreciate when other investments decline. 1. A put option on a share or index is a classic hedging instrument – if your shares decline – your put can help cover losses – 2. I don’t – personally not a fan of them – something that is far too hands on and risky for me – Unless you are constantly monitoring – can lead to ruin – say market goes up a bit – and doesn’t move much – paying premiums 3. Relies a lot on timing – Everyone can see that a volcano is likely to erupt – but anyone’s guess on the time and day when it will happen – Or avalanche – Talk about investment options a bit more in next Monday episode about negative rates and investing or holding cash
First - Lessons from conservation – listening to book from James Rickards 1. Talks about Conversations with family members and representatives - what it takes to preserve wealth over centuries and not just short-term cycles - frequent reply is "a third, a third, and a third." 1. Stands for dividing one's wealth into one-third land, one-third gold, and one-third fine art 2. Obviously some liquidity (cash) is needed for day-to-day expenses – along with allocations to speculative portfolios 3. Not about gains with capital reserves – but that the investment will be around in 100 years – 1. Looking at centuries timeframes for investments - land, gold, and art outperform riskier assets such as shares, bonds, and cash - sound weird but a viewed from the perspective of centuries and not just years or decades 4. Objections/issues – 1. Share and bonds can perform well for long periods – but they and also cash all involve some claim on a third party 1. Contain credit risk in addition to the underlying market risk – volatility 2. Credit risk is what ruins a lot of investments - investor is always at the mercy of the issuer 1. Shares – Company go bankrupt and Bonds can default (no money to return for your loan) 2. Paper currency in the history of the world has eventually proved worthless eventually – so why is it different this time? 3. No income or yield - Warren Buffett disparages gold because it has no yield. The reason it has no yield is that it has no risk. Yield is what you earn when you take risk. Gold has no credit risk, no currency risk, no maturity risk, indeed no risk of any kind. It is just gold. 1. In contrast, Buffett's Berkshire Hathaway stock when priced not in dollars but in ounces of gold has declined in value by about 75 percent since 2000 from 280 ounces per share to 70 ounces per share. 2. someone who bought gold rather than Berkshire in 2000 could today buy four times as much Berkshire stock using the same gold. 3. There has been similar appreciation in the value of fine art. Admittedly this is a selective example. 4. Yet it is true that over centuries it is the hard assets not the paper assets that retain value through collapse and catastrophe. The old money knows this—they have seen it all before.
- Alternatives - value of land, gold, and art is intrinsic – beyond valuations - If you own it, you own it
- no issuer who can suddenly make your land disappear or turn your gold into confetti
- Possible that a totalitarian regime or an invading army might confiscate tangible wealth – why I don’t like legislation
- Gold can also be confiscated if in bank institutions – held personally stuffed in a saddlebag or sewn into the lining of a coat and moved. Art can be removed from frames, rolled up, and carried in one's luggage –
- Admittedly land cannot be moved, but with good title and patience a family can reassert its claim even generations later once interlopers have been ousted
- no issuer who can suddenly make your land disappear or turn your gold into confetti
- No portfolio is perfect or without risk - too often we think of risk narrowly and ignore the greatest risks of all
- Due to short term focus – normally only happen once in a lifetime, if that – but looking through history – do happen
- In the form of monetary collapse, social disorder, regime change, and emergency edicts
- The question comes back to – how much of your wealth do you need to preserve – and at what cost?
- Depends on how big the next crash will be – who knows?
Lessons to take away – 1. Intrinsic Values – Wealth preservation – 1. Shares are fine to invest in – especially after the market collapses – but only if you have confidence in them – would you use their products in a recession? Intrinsic values can become zero 2. Gold – physical metals – silver as well 2. Investing in fine art – can't be done by everyone? Well not really – ETFs available 1. Personally – I am a not suggesting this – but greater lesson – that alternative assets that have confidence in a crisis may be a place to start 2. Have to do some research and look at this further – there are fine art ETFs available – haven’t properly researched and backtested their place in portfolios – if there is something to this – do a separate ep 3. Monday ep – finish running through investing in Gold, precious metals and other alternative asset classes
Thanks Gabriel for the question!
If you want to get in contact you can at financeandfury.com.au on the contact page
episodes mentioned in this podcast:
What Happens if the EU collapses? - https://financeandfury.com.au/furious-fridays-what-happens-if-the-eu-collapses/
Will the EU fall apart? - https://financeandfury.com.au/furious-friday-will-the-eu-fall-apart/
Tax scams and the Brexit mess - https://financeandfury.com.au/tax-scams-and-the-brexit-mess/
Bullish Shares vs Bearish Bonds - https://financeandfury.com.au/bullish-shares-versus-bearish-bonds-which-one-is-correct/
Where to invest in preparation for the next financial collapse? - https://financeandfury.com.au/where-to-invest-in-preparation-for-the-next-financial-collapse/
Welcome to Finance and Fury
Last Monday ep – Cash Restrictions Bill – Went through black economy and outline of regulations
Today – Go further into implications of this – along with other considerations such as bail-ins and negative rates why bill needed – not for the black market
- Case for black market is a guesstimate – 3% of GDP — roughly $50 billion - recommendations given by KPMG, along with the guesstimate showing the 65% increase in black market economy over past 3 years
- This figure, it said, was a qualitative estimate (guess), based on a wide definition of what activities make up the black economy - activities including underpaying wages or paying for work cash-in-hand, under-reporting income, sham contracting, ABN and GST fraud, illicit tobacco, money laundering, unregulated gambling, criminal acts, counterfeit goods and illegal drugs -
- Proper modeling on the economic and social costs is work has not yet been done - Yet the Government is moving ahead with proposed laws that could make people criminals — with the threat of two years in jail — for spending more than $10,000 in cash.
- Opposition assistant treasury spokesman Stephen Jones has also indicated that he wants to see the ban apply to Bitcoin — a move that would send the Bitcoin industry into disarray given its repeated public campaigns to invest in the digital currency to avoid the proposed cash ban.
- Treasury is looking into giving the ATO even more powers to hunt down whomever it deems to be a 'black economy' criminal - changing the law to reverse the onus of proof for "serious black economy offences" –
- Rather than them proving crimes – you have to prove a negative (that no crime has been committed) – much harder
What is the real long-term purpose of this? 1. Reason Given – Black market – underpaying wages, illegal cigarettes, money laundering, illegal gambling, etc – 1. How will banning cash payments above $10k stop these? One way is to arrest criminals – enforcing existing laws –banning cash completely would limit this – crypto may be used instead, why Govs likely next target 2. Instead – legislation which can be updated by the minister ($10k becomes $1k, or transfers no longer excluded) 1. other countries have already imposed limits — France above 1,000 euros; Spain above 2,500 euros; Italy above 3,000 euros 2. Along with large denominations being banned – India, EU – with inflation, should increase, not be banned – issued in 1984 – inflation of 2.6% over 35 years – worth about $40 today in real terms 3. Think the $100 AUD is safe for a few years – economists recommending for few years to ban to starve black market – 3. Plus new powers for ATO – Guilty until proven innocent – power economically ruin lives – even if not guilty – cost/time spent on meeting claims/regulation
- What I think - to give authorities greater control over your choices and economy –
- Control of your choices and therefore behaviours during economic recessions or panics - Ties back into the Bail-ins, IMF, SDR and interest rate episodes I have been doing over the past few months
- In panics the Gov/Central banks take two likely actions to stop contagion of fear spreading – props up banks and provides stimulus spending and lower cost of cash – monetarist theory
- Control of your choices and therefore behaviours during economic recessions or panics - Ties back into the Bail-ins, IMF, SDR and interest rate episodes I have been doing over the past few months
- Issue - a financial crisis is mostly behavioural in response to one starting event
- The policy response aims to effect human behaviours – better to be seen to do something
- central banks reduced interest rates – for Severe recessions - required 3 to 6% points cut in policy rates – if a crisis happens – few countries have left in rate cuts – or low Gov Debts to GDP to run up a budget
- to get around this problem - recent IMF staff study looked at how it could bring in a system that would make deeply negative interest rates an options – Still drop rates by 4%, but down from 1% = -3%
- Likely not get that low -just example -
- The success of the system relies on confidence – the limitation on the ability to withdraw cash shores up bank balance sheets – no bank runs and no liquidity issues due to no reserves
- But if deposits will lose money – people don’t want to hold cash at a loss – so would withdraw
- Create a form of a bank run – which is unacceptable in a complexly fragile economy –
- But people buy investments/spend the money instead – which is part of the aim to control behaviour and get economic growth going
- Past the point of return for this working – most of the money being lent through stimulus goes to Wall Street and not Main street (you and I) – But the same policy response is still repeated – low rates
- This started out as a short-term emergency experiment – but now this short-term emergency experiment is the normal = more and more then needs to be done for an effect
- Bail-In laws – talked about them about while back in the where to invest and not invest in a crash episode
- Under the provisions – cash deposits remaining in banks is essential
- To avoid bank runs of mass withdrawals = bank collapse – capital reserves now coming from capital notes – not depositors fund solely – having the liability in debt instruments and not deposits
- To have funds to help ‘restructure capital’ through turning these notes into shares in the bank or writing them off for liquidity
- Other potential - your deposited cash as the legislation is so loosely worded
- The cycle of legislation – more and more – has to become more extreme – diminishing marginal returns of effects – one input leaves to a less than one and eventually negative output
- Similar to an addict – drug tolerance grows so need more and more for the same effect – takes a toll on the body over time
- Here – Money is the drug – and the body is the economy (which is us in financial transactions)
- Think people forget – without us – no economy – without Gov, still economy – people adapt and restructure – even currency – confidence is all that is needed – empires fall and people restore
- Modern Economy - money is created through central banks and lent out to Governments/Banks at the cash rates –
- As cash rates get lower – Interest payments on Gov debt gets lower – if you haven’t noticed, Gov’s globally are in debt
- But so are the populations – Aus is number 2 in the world for Household debt to GDP – 120% (Swiss 128%, EU 57%, US 76%) – So we have a lot of debt – but what do we have to show for it? More expensive property
- The effects of interest rate drops have been reduced (diminishing returns) – population adapted – similar to an addict – we aren’t as impressed the second time, let along 10th
- In the 90s - interest rate drops lead to people running off to the bank to borrow more to spend – property, renovations
- Today – people are more likely to pay back their mortgage more quickly instead of increasing loan size
- Most money isn’t spent in the economy so no aggregate demand boost to create growth
- If no GDP growth = higher Debt to GDP – if GDP went up 10% p.a. and debt does, no problem
- Plus - Estimates of QE – 90% stays within financial system – not going to the main street but wall street
- Negative interest rates – as time goes on – this looks to be a bit of an inevitability
- Bank runs avoidance due to cash restrictions - Forces people into holding cash in Banks
- Or Forces cash to be invested to avoid negative rates – push up hard prices and fuel GDP growth
- central banks reduced interest rates – for Severe recessions - required 3 to 6% points cut in policy rates – if a crisis happens – few countries have left in rate cuts – or low Gov Debts to GDP to run up a budget
Negative rates – they may become a thing in Australia – already exist Japan and Europe 1. There is now about $17 trillion – trillion with a T – in negative-yielding debt in the world, government and corporate debt combined – 1. European CB rumour mill - hyped possibility of a stimulus package - namely negative interest rates, liquidity facilities, and QE – on top of already demand-side driven policies of free easy money 2. The entire German government bond market, even 30-year bonds have negative yields 1. Germany booming? economy shrank in the last quarter – negative interest rates from the ECB, negative yields on corporate and government bonds – didn’t help growth – why do it? 3. Pretty easy to see where this is coming from – the IMF is promoting implementing negative rates - public papers and statements with this all in it 1. IMF blog - "Cashing In: How to Make Negative Interest Rates Work" explains its motive in wanting negative interest rates — a situation where instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank.
Just another move in the plan to phase out cash 8. Printing cash can be expensive when you start ‘printing money’ – but through QE and double entry accounting – no need – So the powers that be have no need for cash anymore – actually a liability for them 9. When cash is available - cutting interest rates into negative territory becomes a risk – uncertainty on withdrawals 1. Cash acts as "an interest rate floor" as people hold cash when bank deposit interest rates are at zero. 2. The thought of paying the major banks to hold your money isn't one that most consumers would jump at 3. The alternative — as risky as it may be — is hoarding cash, or making investments in tangible commodities like gold. 10. The end game outlined in the IMF's post – their ideal world — one without cash and to change human behaviours financially to act as ‘homoeconomicus’ – the rational individual that the models require to work – by rational – what they think is the best decision to maximise utility – how most economics works – what would an economist do – most people aren’t economics and don’t do this – nor should they – hard to measure utility across individuals – different values 11. What behaviours are they trying to promote with negative rates and cash bans 1. if depositors have to pay the negative interest rate to keep their money with the bank = consumption and investments are more attractive – economic theory says that GDP should go up – jolt lending, demand, etc. 2. But if rates go lower = people borrow more, and have less cashflow due to paying debts = no consumption occurs 3. Negative rates then free up cashflow – as your principal repayments start to reduce – spend in economy 4. Banks don’t need depositors funds as much – savings rates are about 2.8% anyway – due to notes issued as replacements – ones that can be controlled through legislation – easier than stopping people doing a bank run 1. Just in case – still want to make sure that this reduces in the chance of occurring – cash restriction bill 12. The central banks get greater control to influence your behaviour and economic outcomes. 1. For those who have faith in monetary policy and central banks, this is no problem - one year on from the banking royal commission, faith in our financial institutions — and the regulators who failed to police the banks' bad behaviour — isn't exactly at an all-time high 2. Creating a weird world where savers are penalised — and borrowers get paid — upside down
Next Monday – look at negative rates and how an economy and financial system operates under negative rates – How to allocate investments based around this
Few examples to go through along with what are some potential long term outcomes
Thanks for listening, if you want to get in contact you can do so over at www.financeandfury.com.au at the contact page
Welcome to Finance and Fury, The Furious Friday edition
Today we start discussing the SDGs in relation to The economy – few SDGs this relates to
- Go through each in detail in separate episodes – but this ep is an overview into how deep this goes. UN goals as part of Agenda 2030 – Quick list of these -
- SDG 8 – Decent Work and Economic Growth
- SDG 9 – Industry, Innovation and Infrastructure
- SDG 10 – Reducing Inequality
- SDG 12 – Responsible consumption and production
- SDG 17 – Partnerships for the Goals – Companies come into it
Before we start breaking down each of these next episodes - Question: what do Smart Criminals do?
Answer: never commit more than one major crime at a time
- Why? Chance of getting caught for both goes up exponentially – Similar for Gov Policy
- if change is made at once – if you saw the true end game of these policies – hint – another forced reindustrialisation like each of the programs done by Stalin and Mao – nobody would want this –
- But do it bit by bit, by bit, all through legislation that isn’t reported on –
- One day you wake up and even if you are a stay at home parent, you now fall under labour laws as ‘paid work’ – actually, one of the recommendations run through in another ep –
- Forced to work for one of the big companies as no small businesses will be left to remain as they can't compete under the circular economic models designed by the likes of Google (who is also helping design the cities as part of SDG 11) –
- Implementation of these – all being done separately at different times over the next 10 years – along with last 20 (MDGs)
- All done to change behaviours – make cultures adapt through media and education (people first)
- Then politically and economically
The questions that nobody asks – in a Democracy – where are the things people are asking for coming from? 1. Does everyone wake up one day with no influences and vote for one thing? Or are our wants influenced by external forces? Listened to the last few FF eps, you know where I lean – likely on the side of influence – statistically – the probability of other is low – Historically true as well – when propaganda isn’t present – hard to have population think same things in mass 1. Modern democracy – places like the UN are influencing people on what they want – Who doesn’t want free money? But they never then ask where does it come from? Or what is the cost? 2. The question nobody is asking – why are we (Australia) responsible for reducing inequality in Indonesia? That is what SDG 10 wants – Global inequality 3. Why is the UN with the IMF printing trillions per year, along with taxing Australians and using Industry super fund money in the hundreds of billions to give to counties for them to combat climate change – Foreign aid programs as well 4. Now – under true democracy – those who don’t want Australia to suffer lower wage growth, higher taxes and higher costs of livings (energy prices) may not want these policies to fight a boogy man – with no projected outcomes for the impact on climate change or the impacts of how this will help the economy 1. If the Greens really want to fight climate change – set up a charity – take donations to do it – 2. My guess is that it wouldn’t get much in the way of funding needed – always wanting to use other people's money and not their own – the irony of socialist policies – needing the Government to control and enforce laws on people based around perceived moral hierarchy 5. But the perception here is that money is unlimited – Aus has all the money in the world 1. Only reason that people don’t want to help is they are mean and want to hurt others – 2. The way our country and most first-world nations has been run for a while now – not working out so well - due to the frivolous government spending and getting into more debts – they need to keep interest rates low as well – while we suffer for some Global Government's agenda – 3. Nobody voted in the UN to fix our economy – as that has to be done locally 4. Especially when their way of fixing our economy is by reducing inequality between countries – part of SDG 10 – ‘Reduce income inequality within and among countries’ 6. Those saying it is unfair that AUS has higher standards of living than other developing countries will have their wish come true – they will too be living on a few dollars a day if the UN gets their wish 1. Only way to reduce inequality is through cutting everyone’s incomes down and through redistribution within borders but also across them now – Has to be done through behavioral controls and treating everyone like ants – all a cog in the wheel
We aren’t insects though - Humans are mammals – like all mammals, they work in a hierarchy – very complex one compared to other mammal groups – social-sexual hierarchy – alpha, delta, gamma, sigmas, omegas, etc.
- structures always going to be inequality – physically, mentally, financially – through choices within the hierarchy
- People think Alpha is coolest – well in tribal times – not a long-life span – died a lot protecting the group
- Alpha in monkeys or wolves – not just the biggest but those who care for those under them – 2 mid apes beat one big one
Our apparent alphas or leaders of society – Apparently the UN and politicians tell us they are – to trust them
- Do politicians care? We know about getting re-elected – and enriching themselves from taking cash in paper bags from Chinese Gov like we are seeing what seems like almost every month another politician is found out for this
- Would they fight for our best interest? Die like an alpha in a wolf pack? Or in tribal times? Normally send others to fight wars in their stead – so haven’t got good track records – some have provided services – some I have met I think do care – but minority and getting smaller
- But back to the question - How well does equality work among wolves/dog packs? Doesn’t work well as it isn’t natural
- But Insects are different – ants, bees – hive creates a class system – where one million deaths is a statistic
- Differences between classical liberalism and free markets, to communism and socialism – how humans are viewed
- Global Governments (communist design back in the 60s – world commie revolution) – Tried to turn a wolf pack into a colony of ants split between the queen, soldiers and then worker ants – class society
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We are very adaptive – so it worked – and Think we are evolved way beyond animals? We are better? What is the most popular media? Action movie – lots of violence- movies like Saw –
- Fake pain – what was the most popular form of entertainment just a few hundred years ago? Public executions and torture – biggest in history was mid-18th century in Paris – hundreds of thousands in 1757 – wasn’t beheading – full works – Robert-François Damiens – google paris executions 1757 if you want to know – puts game of thrones to shame
- people weren’t afraid by now – conditioned culturally – took popcorn - go back to Roman Days – gladiators – we just have a thin vial – just fakes – same part of brain is engaged – some cultures – public beheadings still occurring- seems normal to them – are we so different deep down?
- One of the most popular books and subsequent movie series – Hunger Games - kids killing each other – rip off of Japanese Battle Royal – even Arnie classic of Running man – all depict future societies where this is done –
- If we were born in those times – we would likely be trying to push our way to fronts of crowds like the 10s of thousands
- Humans are very adaptive – especially culturally – the state was doing the executions – made a spectacle – put fear into others but also make it entertaining – If society slowly shifted to hunger games- un as the capital – while the resource-based UN economic of the districts exist – we would adapt
- What makes us so culturally adaptable - Difference – linguistics – Storytelling – also lying and false information
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Animals have emotions – see my dog sulk when she gets scolded for dragging pot plants around and chewing on the trees
- We can be emotionally manipulated through linguistics – what separates us from animals can put us back to insects –
- Economically – controlled through emotions and rhetorical statements – fairness – well – politicians take life long pensions of salary from taxpayers – is that fair? Julia Gillard gets about $500k a year on top of whatever salary she is getting - is that fair?
- Important to remember – government shouldn’t be involved in economics to the extent there are – beyond any rational controls – it is just population and behaviours controls disguised as economics
- Thaler and Sunstein – Behaviours economics – coined ‘choice architecture’ – like book title of Nudge – know how to manipulate people through choice architecture = get people to join 401k plans in the USA from 30% to over 90% from opting in to opting out – same thing can be done on masses to the population without you knowing it
- We are social creates – want to fit in – so when everyone is crying for equality (or we think that they are) as the media misrepresents the masses – we will follow the minority and that becomes a voting majority after a while – things take times
- Trouble is with humans – are adaptive – adapt to behavioural controls and revolt – UN tries to treat people like ants - but we aren’t –
- But they still try – but very slowly – still - while they can never be truly successful long term – still annoying keep trying and what society looks like when one controlling government gets the way – look at the socialism/communism eps I have gone through for how that happens and the situations that create cannibalism
- Still, they try – one bit of legislation over time – Never commit more than one criminal act at a time if you are smart – dumb criminals go rob a car, steal more stuff, go on a crime spree and are caught – and charged for all
Why it is so hard to actually put this series together? - so much to research and try to fit into episodes – thanks for having patience
- But the plan for the UN in regards to reforming and reindustrialising the world economy is to create a class of insects
- All class based – but very clearly disguised in pages of legislation –
- Why race is being so popularised – to distract from the classes – but eventually people adapt – the term nazi or racist or fascist lose their power –
- Middle class is shrinking – American middle class is now the minority – amazing stat – same around 1st world countries
- You know the one thing that every society that has had torture and executions on display has to do with one another? Worked under Monachal/dictator societies with classes – where people are treated like ants
- Even Rome – wasn’t until under empire rule and dictators like Nero or Caligula that things got crazy
- But giving the people what they grew accustom too – when the last guy has 300 lions in one day, you want 400
- But the more control – quicker until society and empires collapse – humans are hierarchical – break out of the ant models eventually
- What allowed people to watch these events? Dehumanisation – when a group is dehumanised/made the enemy – people justify atrocities being carried out
- UN today - Told where to live, what they can eat, what they can buy and at what price, where they work, how many kids they have – that is exactly what is in the SDGs
- Groups that don’t do it – dehumanised – anyone who has read how Pol Pot, or any other dictator like Stalin and his 25,000ers acted towards the others – know what I am talking about
- But UN SDGs - These are all population control mechanisms – people are adaptive and change behaviours to legislative policy –
- Due to enforcement or coercion – also – chance in a group to dehumanise another
- Even Rome – wasn’t until under empire rule and dictators like Nero or Caligula that things got crazy
What we will look at over the next few eps – The methods of legislation that leave little choice in anything you can do
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Episodes to run through over next few weeks in FF
- SDG 8 – Decent Work and Economic Growth
- core is to try keep the debt-based economy going – SDRs spending massive amounts of money on the next great social program – some referred to it as the great leap forward – create higher inflation again, then inflate the current debts away over time – also is the next step in a one-world currency – if they gain legitimacy and become the global reserve currency like China and Russia want
- Growth driven by debt – FDR style Also helping to fuel growth through marginal increases in consumption and property growth
- SDG 8 – Decent Work and Economic Growth
-
Also - Create further urbanisation – cities grow while rural shrink (% of population) – population growth from immigration
- Joins up with SDG11 – go through in next section on cities, mobility, and energy
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SDG 9 – Industry, Innovation and Infrastructure
- Next is to drive growth through reindustrialisation – global infrastructure works and climate change action –
- Run through the use of pension funds for infrastructure spending and the mass employment for the reindustrialisation
- Build to rent is part of this
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SDG 10 – Reducing Inequality
- Look at how increasing ‘aid’ for trade – sending money from Australia to developing countries so they can start to outcompete us – go through how David Ricardo theory of comparative advantage fails when tech and capital move to labour countries = they have complete advantages – we used to have Tech and Cap, but not in global economy
- SDG 12 – Responsible consumption and production
- Circular economy – how what we are allowed to buy and who can produce it will be controlled by meeting quotas and standards set by the UN – Ties into the last part of the economy of Partnerships
- SDG 17 – Partnerships for the Goals – Companies come into it – ones providing these recommendations – e.g. KPMG cashless
- The next part is to merge Governments and companies – Fascism 101 – but only approved companies – create a completely controlled economy –
- Then look at how this would destroy domestic competition to smaller companies – Especially in developing or 3rd world countries – interesting transition of any economy out of poverty – that is cloth and textile production – big claim – so deserves its own ep – but all 1st world or developing nations have followed similar trends over past 500 years – China/Vietnam more recently – so having the ability to limit this with ‘flooding Africa’ with our good will bins put them out of any chance of economic upwards mobility
- I know that if you personally haven’t read the SDGs in a lot of detail - is a big claim – May think this is a cynical outlook – only cynical cause what has been done isn’t working, so different approach is needed – MDGs now SDGs
- Im Actually optimistic – more this becomes part of the public knowledge the sooner as a population Politician’s capitulate to the voters and move away from the track they are on – which will be covered in upcoming eps
- Appreciate it if you could share this around – help to at least see another side to this plan – like what was people were sold in Das Capital – sounds good in theory but the application and how of the what can truly turn out to be hell
Thanks for listening, if you want to get in contact you can here.
Welcome to Finance and Fury, The Say What Wednesday Edition
This week's question comes from Cameron
"One small question we have been pondering. Our parents are gifting a small amount of money monthly to our 1yr old son (their grandchild). Rather than let in mature in a bank account we are interested in some sort of passive asx investment considering this could grow until he was at least 18. Any thoughts or commentary around this would be great to hear!"
Today – Talk about family investing options – either for your kids or if grandparents are wanting to gift money to kids
There are a number of different considerations needing to be taken (mainly whose name the investments should be made in, along with the end purpose of the investments)
First - Funds for your Kids – What is the purpose? 1. Something they can access at 21 to put towards buying house, holding still, etc.
Considerations – Are the funds being invested or not? 1. No – Less to worry about 1. Banks are happy to open accounts in kids names – take money from anyone 2. Setting up any savings or investment accounts in your child's name for taxation purposes wouldn’t make a difference for quite some time. 3. The ATO determine who needs to declare the income or gains by looking at who has 'control' over the account (i.e. if you are depositing/withdrawing money from the account, you would have to declare the income even if the account was in your child's name).
- Yes – Normally the best option that people look for – the long term for kids/grandkids -
- Which helps to grow the balance over the long term – Options – Either by grandparents or parents for kids
- Index funds, shares, managed funds or other types of investments.
- ASX listed funds or direct shares – brokerage costs on monthly transactions can eat up returns
- Managed funds/index funds have buy sells – provide more diversification and lower transactions costs
- education bonds (another ep), investment bonds,
- Index funds, shares, managed funds or other types of investments.
- Considerations with investing funds for minors
- The aim is to try and minimise any CGT or transfer costs upon your child turning 21
- any transfer of ownership of investments triggers a capital gains event (along with selling them),
- there are problems with setting any investments up in your child's name.
- You may also run into some issues with income tax rules
- For those under 18 years old if it is deemed that the child is making the investment decisions. After earning above $416 (the tax-free threshold for non-exempt minor income), income is taxed at 66% until reaching $1,307, with all remaining income being taxed at 45%.
- Whose name to invest in?
- Unlike bank accounts - most fund managers refuse to accept direct applications from minors
- Legal issues - share trust units fell in a market crash - the child could argue that he or she did not have the understanding to participate in this investment and ask for a refund.
- Stockbrokers are generally prepared to buy shares in the names of children – but most companies expressly prohibit ownership by people under 18 for the same reason
- The aim is to try and minimise any CGT or transfer costs upon your child turning 21
Three options: General in nature – not taking into account your personal consideration 1. Investing by the grandparents as trustee 1. This is the most common strategy, but most people have no idea of the possible consequences of doing it. It does not get you around the punitive children's tax rates because the trustee will be assessed at 66 percent and there is a major difficulty in that the parent must at all times act as a bona fide trustee and not intermingle trust money with their own. 2. Example - in a leading tax case a couple accumulated a substantial sum in a trustee bank account and then withdrew it to buy a unit for the use of their children while they were at university. The parents decided to put the unit in their own name and not the children's name – the Tax Office successfully claimed the money was, in fact, the parents' money and assessed them for five years' back interest. 2. Investing directly by the grandparents or parents 1. invest in the name of the lowest-earning parent – i.e. earns less than $37,000 a year, the maximum rate of tax is 21% and all income 1. With franking – can get away with little to no tax 2. It also reduces the possibility of the Tax Office disputing the ownership because parents are free to give money to their children whenever they wish. 3. Cons - capital gains tax will apply if the parent transfers the asset to the child at a later date. 4. Hard to set up investments with you as the owner if you intend to gift – have to pay CGT/transfer costs 5. Can be caught out with Trustee as well 1. Know personally – bought first shares at 16 – under 18 – mum but me as account designation – Mum owner on my behalf 2. Issues – Grandparents passing away 1. Or Grandparents on Centrelink – Gifting rules or investing in their names will be asset tested 3. Investing in investment bonds 1. Investment/insurance bonds are one of the simplest and most tax-effective investments 1. Covered these in a previous episode 2. All you have to do is make an investment into the bond and sit back and watch it grow. Then, after you have owned the bond for 10 years, you can withdraw all or part of the proceeds free of tax. However, there is no obligation to withdraw your money and you can leave it in the low tax bond area for as long as you wish. 2. The ability to access the investment at any time in the first 10 years is a feature – but tax penalties apply 1. the profits will be fully taxable, but you will be entitled to a 30% rebate to compensate for the tax already paid by the fund 3. Cons – Higher fees, 125% rule, Limited investment options 4. Investing in Education Bonds/Funds – 1. Similar to Investment bonds – but have tax benefits if funds used for education purposes – 2. Number of different kids can be added onto the one portfolio – number of people can be the owners – 1. Parents and grandparents can contribute all into the one pool 3. Tax benefit – internally – 30% tax paid – but this, when paid, goes towards a tax credit – 1. If funds used for Education – this can be claimed back for education costs 2. E.g. – Investment of $10k earns 10% = $1k taxable and $300 paid in tax – sits there as a credit to be claimed – claim $1k of education expenses and get the $300 back
Other Considerations: 1. The final thing to consider is the investments themselves and the return you expect, versus the level of volatility (or speculative risk) of the investments. 1. Investment bonds – limited but still viable when making a portfolio 2. If you would be making regular investments, then trying to minimise transaction costs can be achieved through some well-diversified index (or active) managed funds over the direct shares that they invest in. 2. Normally when I look at these strategies – Education Bonds with a good range of index funds and managed funds works 1. Can be withdrawn for non-educational expenses after 10 years tax-free – but you lose the Tax Credits 2. Or use for educational funds along the way so kids don’t have HECS or can fund high school 3. Monthly investing - managed funds can work well due to diversification and lower transaction costs 4. General advice only obviously – but something to look into further
Thanks again for the great question Cameron and speak to you soon.
If you want to get in contact with us, you can do so over on the contact page at financeandfury.com.au or click here
Welcome to Finance and Fury
In today's episode, I thought it was important to cover Currency Bill - Might have seen in the news – headlines about the $10k transaction –
- Currency (Restrictions on the Use of Cash) Bill 2019 – what we are talking about – had first round through Parliament
- Goes deeper - Talked about this topic last year in October – Cashless Society episode – link to episode
- Policy is trying to control behaviour – by making the undesirable activity illegal – regardless of validity or effect
- Gov wants all money accounted for – which is far easier when it is electronic rather than cash based –
- A lot to unpack in this – you might have seen this reported on in the news – give a quick recap on the bill –
- Then go through why these extreme measures are needed to help get out ‘black market’ economy under control – outrageously high when compared to 0% of GDP, at around 2%-3% of GDP - being satirical (later)
Quick overview of the bill – 1. Now - people could be jailed for two years and fined $25,200 – if you make a purchase or sale for more than $10,000 in cash in one transaction. 1. Read most of the draft legislation - called the Currency (Restrictions on the Use of Cash) Bill 2019 if you are interested in reading the full thing
Under the proposed law - all cash transactions between businesses and individuals would be limited to $10,000 1. Any amount over this would be considered criminal – the same proposed changes announced in the 2018-19 budget we quickly ran through in an episode briefly a while back now – but now we have more details –
1. Penalties = jail time and fines would apply to both the individual and the business part of the transaction.
2. There are a couple of exemptions to the cash ban.
3. The $10,000 cash limit would not apply to individual-to-individual transactions, such as the private sale of a second-hand car.
4. The limit also wouldn’t apply when depositing or withdrawing money from a bank.
2. The reason given for this bill is to crack down on the black market economy - The argument for doing so is based on the numbers provided by the 2017 Black Economy taskforce report, which say as much as 3% of Australia's GDP – some $50 billion – could be getting lost to the black economy
3. But these numbers don't stand up to any serious scrutiny - the taskforce itself plainly says the 3% figure is just a guess - "We acknowledge that this conclusion is a qualitative one" and the figures "should be taken as indicative only" - no actual evidence on the size of Australia's black economy - $50bn is a guess – when Look at OECD countries – no 3rd word African countries – we are well below average of just above 5% to GDP – Aus is about 2-3% - but this figure is essentially a guess – if the Gov knows about it, it isn’t black market –
4. Where did the recommendations for this Cash Act come from?
1. Came from the 2017 Black Economy Taskforce report – same KPMG report where the estimated size of the black market economy came from – which increased by 65% from 2012 (OECD report) to 2015 (KPMG report)
2. this cash ban is a recommendation is part of this report – provided by one of the big four global accounting firms – KPMG – which also has conducted research to provide supporting evidence for their recommendations
1. Interesting – company recommending the policy that will profit them, along within their industry – If this goes through, I’m sure that Mastercard and Visa, banks, etc will be very happy and might choose to choose KPMG to do more consulting or accounting work for them – I might be paranoid but that seems suspicious
3. Irony of this report - KPMG and probably most major financial institutions (even our Big 4 banks in Aus) are the biggest perpetrators of facilitating tax evasion and money laundering - perpetrated by their clients in multinational banks, corporations – along with the billionaires who own/run each of the banks or companies
1. There are a lot of cases in the past few years of illegal activity by banks, in most cases knowingly and just turning a blind eye – they pay the fines – say sorry – gov gets a bit more money to grow – shareholders suffer – CEO pays seem to not be affected – GFC – too much risk and straw breaking back – CEO bonus after bailouts using government funds – which can only be paid back through taxing the population
2. Exposes the subtle expropriation the socialise loses, which privatising the profits
4. The outcome of the recommendation is so that the individual to small business cash transfers are eliminated overtime to start implementing a cashless society – death by 1,000 cuts
5. If this cash restriction is placed into law - it has been drafted so that the exemptions to the ban, such as for withdrawing cash from a bank, can be removed by the Minister at any time – therefore, at any point once this is in place the government can decide to ban cash transfers between individuals above $10k, or placing restrictions on the ability of Australians to access their own cash through withdrawals or transfers
1. While our cap is at $10k based around older report – KPMG are already lobbying for the limit to be reduced to $2,000 – putting new legislation into law can be a lot harder than minor amendments to one detail within the other 200 pages.
2. We seem to have another situation a policy being entered into parliament by either pay is essentially a template forwarded to them by one of the companies that the legislation is meant to regulate
3. If you are Microsoft – Massive company, diverse revenue streams, brand, etc. – plus profits after R&D – hard for some tech companies to achieve – it actually helps you long term to have AI employment taxed like Bill Gates said that he might be for. They can afford it, they would have fired people in the process anyway, so wages might not go down by much – put if productivity goes up and no other companies who are competitors can afford the AI employees to compete – keep moving in the same direction we have been for over 100 years – the consolidation in size and market share of a few companies.
4. There does need to be a speed limit to this though – Gov in the US did a decent job of this via the Sherman Anti Trust act – monopoly busting of the ‘oligarchs’ like Standard Oil. But they only reason this legislation worked is that it was enforced – it is still law – so why does Google have a much higher market share and monopoly powers than almost any company since the Dutch East India Trading company
1. Can't pronounce in Dutch – VOC for short – in today’s terms – just under $8trn value – to this day no other company has been as big or powerful – owned nations and armies – 70k employees
2. Not to mention the 10s of thousands of slaves – perspective – Apple, Alphabet (Google), Microsoft, Amazon, FB, Exon Mob, Bank of America, plus the next 12 behemoth companies come to about $8trn in valuations
5. How can one company get so big? Form of Mercantilism that was used a lot under colonial days – Companies are given barriers of protection or monopoly contracts of trade or sale, exemption from tax, etc.
1. Honestly – looking at it – Globalisation is similar however now we have the internet and don’t have sail ships and cannons – multinational company which help to provide direction to the politician in return for either donation, future job, whatever nepotistic arrangement can be thought of
1. Human behaviours change to adapt to the environment – Centrelink with Gifting – If you gift $10,001 p.a. for 3 years it will be counted towards assets still – but do $9,999 for 3, technically below the thresholds – a difference of $2 p.a. If it goes down to $2 transactions, start investing in a lot of Dollar Stores to laundry the illegal cash – criminals by nature adapt to get around the laws – while the vast majority of the population is law-abiding – don’t want to be a criminal so will follow new laws – regardless of how absurd
2. Every new law creates a new class of criminal
6. The real outcome of this will be to punish those who are doing the right thing and not involved with the black market, and then those that are will just start billing at $9,999 a pop – Criminals are called criminals for a reason – they aren’t doing what the laws say already – so what is capping the transaction limits on businesses going to do in the grand scheme of things when the black market will change one small thing, might cost 30% margins to launder money but still around same rates as companies are meant to pay
7. Not only will this have very little effect on the black market – the justifications don’t stack up to this level of measure – the Black market economy –
1. Funny thing is – looking back in history – every time there is a black market in anything, some people are making money out of it – the more money the better the economy – but only if it is locally spent – Miami during the 80s with the Cocaine boom – mass inflow of untaxed cash – more than dealers could spend – as they spent at legitimate businesses – cars, clothes, houses, etc. – Mini economic boom due to local illegal cash velocity – modern – global transfers to lower tax environment – so illegal activities domestically lead to money disappearing, not being laundered and spent back into the economy –
2. Don’t take this as an endorsement of illegal tax evasion, money laundering, etc. – but how different is it to spending $25m on lawyers, structures and offshore conduits or sink letter box offices in other countries to do it ‘within the regulations’ – versus money laundering at a cost of $25m in handling fees – no tax either way for Gov – who this bill is for
8. How is this going to help? Thankfully the reports from Gov have calculated the potential benefits of the bill
5. The "closest thing" to calculable benefits is a speech where it was said that implementing the recommendations of the black economy taskforce "could bring in $5.3 billion over the next four years" he points out.
6. take the yearly average - equates to about $1.325 billion per year in additional taxes on GST, stamp duty, etc. Mostly Government transaction costs avoided
7. Australians use credit cards to purchase $1bn of G&S every single day – approx. $365bn p.a.
8. Something that probably isn’t taking into consideration is that for each dollar transacted via credit card – there are merchant fees charged by the financial institutions = 0.87 cents for every dollar on average – as a rough estimate – we are paying just under $9m per day in credit card transaction fees = $3.5bn p.a.
9. This bill does a similar thing to most regulation post 1960 - granting monopoly protection through additional barriers - for banks this is their revenue stream through fees on transaction options being limited and they happen to provide the remaining legal options – economic term for this is ‘rent seeking’ or extracting from the economy for no positive output.
10. I remember once upon a time when all credit card charges were added on top of the purchase amount – go into a store and cash or card are the same (except AMEX) - Businesses made the decision to price everything at the CC level to avoid the arguments with customers over why they have to pay extra –
11. More regulation = unintentionally cementing a bank monopoly on transactions and economy gets very lopsided = all for the sake of a $1.3 billion annual increase in the Government's tax take? Or even to try and swat at a non-existent black economy problem?
1. Just another layer on the price control policies for the economy – setting caps or floors
2. But the gains for Banks in fees, that the billions in CC fees each year isn’t even scratching the surface on the total volume of financial leverage behind the scene –
1. Modern economy has innovated to continually scale up the value that flows through the financial system - Foreign remittances, derivatives, securities, loans, structured financial products –these are just the tip of an iceberg.
1. I know that most people may be thinking to buy BTC now – blockchain has great potential in emerging as a competitive threat to financial institutions – I think the Gov also thought of that:
2. This policy is in an effort to crack down on the "black economy" -may be extended to cryptocurrency
1. First version of the bill specifically excluded cryptocurrencies from this limit, but now shadow assistant treasurer Stephen Jones has said the law should be extended to cryptocurrencies – "If the motivation is genuinely looking at addressing fraud, tax avoidance, terrorism, and criminal activities then we should look at all of the currencies that are likely to be subject of that,"
1. said there is bipartisan support for this – in politics – bipartisan support is a scary word – means they all mostly support, regardless of party – Have the power to regulate crypto as well – AUSTRAC– regulation terrorism and money laundering/tax avoidance
12. Banning cash transactions over $10,000 will not end the tax evasion and money laundering of the “black economy”
1. The known outcome is removing the right to privacy in financial affairs through reporting regulations, reducing you available of cash transfers along with future limits on withdrawals, creating a situation limiting any escape to policies such as “bail-in” and negative interest rates
13. This is a big topic – and Two big things I haven’t really seen mentioned – but come into play
1. Next Monday – go into how the Bail-in laws fit in, along with negative interest rates –
1. This policy controls behaviour of forcing larger amounts of cash to be transferred/stored by banks
2. If you cant withdraw cash – then it is sitting there either getting taken to bail out a companies debt or now the bank is charging you to deposit money (not to mention inflation)
2. Also, run through options to preserve capital – look at other forms of money – historical money – due to this legislation having the capacity to be a sign of identity regulation on Crypto markets, won't be BTC or others sorry.
3. Also, talk on how to fix the real black market economy going on by not some clandestine secret society, but the brands that you see or use every day – might take 2 or 4 eps to do
Thanks for listening to today's episode.
If you want to get in touch you can visit financeandfury.com.au or go to the contact page here.
Welcome to Finance and Fury, The Furious Friday edition.
This is part 4 of the series around the UN's Sustainable Development Goals.
Going through the first SDG today – SDG4 – Education If you haven’t listened to the first 3 – Maybe go back and check it out as today – finish the first part on people –
So far gone through the UN, media, and trauma-based society
Previous episodes:
Part 1 UN
Part 2 Media
Part 3 Trauma-based society
Today –
- Do a quick overview on SDG 4 - Education - Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all
- Run through the history of education – look at education model today –
- Look at current formal education as part of the SDG4 – how it is being implemented and by who within Australia
Education for sustainable development (ESD) is explicitly recognized in the SDGs as part of Target 4.7 of the SDG on education
- UN hopes to educate children on the importance of the SDGs - “By 2030, ensure that all learners acquire the knowledge and skills needed to promote sustainable development, including, among others, through education for sustainable development and sustainable lifestyles, human rights, gender equality, promotion of a culture of peace and non-violence, global citizenship and appreciation of cultural diversity and of culture’s contribution to sustainable development,” – Long statement – lets break this down
- This job is given to UNESCO promotes the Global Citizenship Education (GCED) as a complementary approach
- They State that it is important to emphasize the importance for this in relation to the other 16 SDGs
- Why? Where does education fit in with climate change, how we live, sustainable economy, and the rest?
- UN says it enable individuals to contribute to sustainable development by promoting societal, economic and political change as well as by transforming their own behaviour
- Remember from the first episode in the series on Julian Huxley - Quote from founder about changing public minds – again it starts with the people – people need to willingly do this
- Global citizenship education(GCE) is a form of civic learning that involves students' active participation in projects that address global issues of a social, political, economic, or environmental nature
- Civic Learning - the study of the theoretical, political and practical aspects of citizenship,
- the study of government with attention to the role of citizens―as opposed to external factors―in the operation and oversight of government – political action through advocacy - The two main elements –
- 'global consciousness'; the moral or ethical aspect of global issues,
- 'global competencies', or skills meant to enable learners to participate in changing and developing the world
Definitions mean a lot
– words have different meanings to them – Whether and weather – sounds the same but spelt differently – but what skills are needed to change the world?
- Protest or advance engineering? – Both have a chance of changing the world – to what end?
- The UN admits they don’t know – as progress is difficult to track: 75 percent of countries have no (or insufficient data) to track progress towards SDG4
- Which are targets for learning outcomes (target 1), early childhood education (target 2), and effective learning environments.
- Data on learning outcomes and pre-primary school are particularly scarce; 70 percent and 40 percent of countries lack adequate data for these targets, respectively - This makes it hard to analyse and identify the children at greatest risk of being left behind.
- Left behind – No Child Left Behind Act (NCLB) brought test-based school accountability to scale across the United States
- Maths and Reading – 71% of schools spending more time on these neglecting other subjects –
- Doing more tests – focused repetitive leaving on reading and maths – not learning outside of repetition
- Whatever the government teaches kids can either be good for the kids or good for the Government –
- Kids - where they become independent strong capable people ready to conquer the world and form a network of friend’s family and neighbours to provide support.
- But this heavily reduces the reliance of the individuals and by extensions communities on the Government, as if everyone was out following what they discovered how to do on their own to provide value, versus a system that at the core was no different to the slave/peasantry class in Rome, or factory workers in the 19th century provide an education system in a way where
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Stop and think about the education system – 12 years of schooling – choose a career or to go to uni -
- Go to uni – select one degree – Probably get a HECS debt – so by the time you come out – one career path then to follow – spending years to pay back debt at reduced income - or go back to uni – more debt
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Let’s go back a little way to the late 1940s China – Mao – needed to create people with new loyalties, new motivations, and new concepts of individual and group life
- Education was recognized as playing a strategic role in achieving this
- Used to create revolutionaries ready to fight against the old society and establish a new order and, at the same time, to bring up a new generation of workers to take up the multitudinous tasks of development and modernization – in the form of collectivisation farming/factory work
- The People’s Republic of China generally makes no distinction between education and propaganda or indoctrination - share the common task of changing people
- Under this system - the schools constitute only a small part of the educational program – TV, news, movies – all were used –
- remoulding the behaviour, emotions, attitudes, and outlook of the people
- But this new Chinese Government had no education experience – so borrowed from their Northern neighbours – Soviets
- The Soviet model was the Sino-Soviet Friendship Association (SSFA), inaugurated in October 1949
- Stalin – Education is a weapon whose effects depend on who holds it in his hands and at whom it is aimed.
The real struggle here is between what is education, and what is propaganda. 7. Biggest influences on the education models were based on the fascist/communist states at the time – Socialist states where education was mandatory, free and you only taught what the government told you to. Why?
The education programs – global citizenship programs – not taught how to think but what to think – Rise and repeat programming how to become social advocates – or tools used to subvert democracy - First is Education or re-education
- Pretty simple when you break down the core drivers – promoting problems to solve through global advocacy – inequality between developed and developing countries, social unrest, fears of melting alive from global warming –
- Lots of education is needed to achieve the 17 SDGs –– isn’t on the fringe – regardless about however hearing about it - policies are signed on to implement by 193 countries almost 4 years ago
In Australia High Resolves is a secondary school educational initiative - implemented by the Foundation for Young Australians
- Consisting of a Global Citizenship Programme for Year 8 students and a Global Leadership Programme for Year 9 and 10 students.
- It aims to enable students to consider their personal role in developing their society as a global community through workshops, simulations, leadership skills training and hands-on action projects – bussing to protests against Adani
- From their website - High Resolves designs and delivers award-winning learning experience – break down this
- ‘fuel a powerful personal transformation that inspires an individual to think, feel and act in the long-term collective interest, more and more often’
- collective interests = someone doesn’t share views – not in a group – social control through isolation
- ‘reframe their long-term memory through an immersive peak experience, which is reinforced through repeated practice and application in the real world over time’
- which over time contributes to our collective transformation towards a more just, equitable and inclusive world thanks to a growing generation of global citizens who think, feel and act in the long-term collective interest of humanity, and leaders who inspire others to do the same
- ‘fuel a powerful personal transformation that inspires an individual to think, feel and act in the long-term collective interest, more and more often’
Sounds nice – but is Describing brainwashing and social control? 1. The process by which individual or collective freedom of choice and action is compromised by agents or agencies that modify or distort perception, motivation, affect, cognition or behavioural outcomes 1. All human being is susceptible to such manipulation – not a process that is directly observable – doesn’t work if you can see what is going on 2. But repetition is an integral part of these techniques because connections between neurons become stronger when exposed to incoming signals of frequency and intensity
Heuristics – makes life easier – way to survive 8. See a hot pan you know not to touch it – hear someone’s name you don’t like through repeated experiences or stories told by others 1. Through education – the association between free markets and greedy bourgeoise middle class can be made 9. This type of Formal education – not how to think but what to think – 10. One thing that I never really thought about – in this podcast – hope to inform you on things – education – run through what, how, where, etc. – never tell you what to do – in finance especially – would be sued if I did – 1. I don’t believe education should tell you what to do – but give you skills to think for yourself 2. I talk about finance, economic, policy, politics, etc – the question of ‘how does this affect me’ is something that I can’t answer – Everyone is different – so depends on where you sit and what your goals are – 3. But the reason that it is hard to take useful information and apply it into your own life to make decisions is due to the education you are provided – I was provided – we are all taught in this way – waiting to be given the right answer 11. Science, maths, models – given models and then need to use them to get X – know how the models work? 12. English – based around what the educators think Shakespeare or other poets meant – if it was personal interpretation = everyone should get an A+
What to do – if you have kids in school? Pay attention to what they are taught – not the same as you
- Check it isn’t creating trauma – someone who I work with – Black Crow book – fiction about time travel – but frames white Australians as evil and not something to live up to – one girl in the class said they are ashamed to be white –
- This is collectivised guilt – by-product of false memories and trauma induced guilt for something these kids haven’t done
That is a summary of SDG 4 – and bring a wrap to the people side of SDGs – Next episode – Start on the Economy - Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all
Explore SDG 8,9,10
Thanks for listening – if you liking content – let me know – review on iTunes – if you have any questions or want to get in contact you can do so here.
Resources: Theory of change - https://highresolves.org/our-theory-of-change/
Welcome to Finance and Fury, the Say What Wednesday edition
Today's question comes from Jessica.
Jessica – Hey Louis, You mentioned something about a Yuan devaluation in the Tech Share episode. I’m just wondering what this is and why a country would do this?
Thanks Jessica – Does sound weird – a country choosing Devaluation - an official lowering of the value of a country's currency within a fixed exchange-rate system
- China's monetary authority formally sets a lower exchange rate of the national currency in relation to a foreign reference currency or currency basket (USD) – Beggar thy neighbour policy
Exchange Rates – Fixed v Floating 2. Floating exchange rates system — when exchange rates are determined by market forces and not by government or central bank policy actions – what we are used to in Aud, Usd, Eur – while note controlled influenced by MP 1. The decrease in a currency's value relative to other major currency benchmarks is called depreciation 2. increase in the currency’s value it is called appreciation 3. A fixed exchange rate - pegged exchange rate - is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies, or another measure of value, such as gold. 1. Benefits - used to stabilize the value of a currency by directly fixing its value in a predetermined ratio to a different, more stable, or more internationally prevalent currency (or currencies) to which the value is pegged. 1. Does not change based on market conditions, unlike in a floating (flexible) exchange regime. 2. Makes trade and investments between the two currency areas easier and more predictable 3. Useful for small economies that borrow primarily in foreign currency and in which external trade forms a large part of their GDP – Also gives confidence in stability – African countries that use USD rather than their own 4. control the behaviour of a currency - limiting rates of inflation
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Risks - the pegged currency is then controlled by its reference value
- when the reference value rises or falls, it then follows that the value(s) of any currencies pegged to it will also rise and fall in relation to other currencies and commodities with which the pegged currency can be traded.
- dependent on its reference value to dictate how its current worth is defined at any given time. In addition, according to the Mundell–Fleming model, with perfect capitalmobility, a fixed exchange rate prevents a government from using domestic monetary policy to achieve macroeconomic stability.
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Downsides - Increasing the price of imports protects domestic industries, but they may become less efficient without the pressure of competition.
- Higher exports relative to imports can also increase aggregate demand, which can lead to higher gross domestic product and inflation.
- Inflation can occur because imports are more expensive than they were.
- Aggregate demand causes demand-pull inflation, and manufacturers may have less incentive to cut costs because exports are cheaper, increasing the cost of products and services over time.
Reasons Behind Devaluation and effects 1. One reason a country may devalue its currency is to combat a trade imbalance. 1. reduces the cost of a country's exports, rendering them more competitive in the global market 2. But increases the cost of imports, so domestic consumers are less likely to purchase them, further strengthening domestic businesses. 3. Because exports increase and imports decrease, it favours a better balance of payments by shrinking trade deficits – GDP includes net exports – so boosts GDP by skewing the exports higher than imports 4. country that devalues its currency can reduce its deficit because of the strong demand for cheaper exports. 2. Devaluation usually takes place when a government notices regular capital outflows (or capital flight) from a country 3. or if there is a significant trade deficit (where the total value of imports outweighs the total value of exports)
Example Devaluation and Currency Wars 1. 2010 - Brazil's Finance Minister, alerted the world to the potential of currency wars – Talked about this a few weeks ago - conflict between countries like China and the U.S. over the valuation of the yuan. 1. US monetary policy has the same effect as a currency devaluation on China – QE – mass printing of money 2. You are China – have an unofficial peg to USD – USD increases money base - to remain competitive in the global marketplace for trade, and also to encourage investment, drawing in foreign investors into (cheaper) assets like the stock market – China needed to devalue their currency - 2. China has been accused of practicing a quiet currency devaluation, trying to make itself a more dominant force in the trade market. 8. Was fixed up until 2005, slowly devalued to 2008 from 8.5 yuan to dollar to 6.8 – flat until 2010 when QE 9. The process of devaluation itself is related with the increase of the amount of money circulating by just printing more if your currency or by selling the reserves (mainly USD, but maybe not for long with SDRs) – China can’t dump US treasury – hurt them as well 3. 2016 - after assuming office, U.S. President Trump threatened to impose tariffs on cheaper Chinese goods partly in response to the country's position on its currency 1. The renminbi lost about 10 per cent of its value against the dollar last year, as the first rounds of US tariffs took effect. 4. Why china downgraded - US trade wars 1. A depreciation would boost trade at the margin - but stability in the currency was far more important to Chinese policymakers - concerns are to contain capital flight, avoid a domestic debt crisis and pursue a rebalancing of the economy from exports to consumption. 2. But using the exchange rate as a tool can backfire and hurt both the US and China 1. a Yuan devaluation could trigger defaults on domestic dollar-denominated debt, especially in the property sector - not a high proportion of total Chinese debt but doesn’t take much for bank runs 1. Went through China bank runs currently in the Dominos ep 2. A bigger concern is capital flight – Foreign investors taking money out – which is part of China’s massive growth – foreign inflows of money for investment – pushes up GDP as well 3. last came under sustained pressure in 2016 net capital outflows over the year reached $725bn, and although China held foreign exchange reserves of more than $3tn USD, it depleted them at an alarming rate to stem the tide. 4. China is a fairly controlled economy - outflows are more manageable – Creates less panic in households and companies and lower speculation on markets when you aren’t allowed to speculate
- The main problem is that a weaker renminbi would hurt Chinese consumers — who would pay higher prices for imported goods — more than it could help exporters
- This is China’s biggest fear IMO – tens of Millions of disenfranchised young men, cant find jobs or wives (one child policy) – Hong Kong protests may kick off an internal revolt
- If China cant print more money and fund the consumption for population = slowly lose control
Summary - * Devaluation is the deliberate downward adjustment of a country's currency value. * The government issuing the currency decides to devalue a currency. * Devaluing a currency reduces the cost of a country's exports and can help shrink trade deficits.
Thanks Jessica for the question, If anyone else has a question go to the contact page at Financeandfury.com.au
Welcome to Finance and Fury,
Inflation and interest rate – real rates
RBA update – Inflation and interest rates 1. RBA - cash rate unchanged at 1% - following two consecutive rate cuts – past ep, talked about loans and property pieces 2. Today – Look at the hidden wealth killer – inflation – loss of real values in relation to loans – 1. Low rates with low inflation can be worse than higher rates with higher inflation 3. saying it will take longer than earlier expected for inflation to return to the 2% target while economic growth has been lower than previously forecast 1. The RBA is seen cutting interest rates later in the year as escalating US-China trade war tensions would pose a mounting risk to the economy – Make currency cheaper for exports 4. Quick update - Excerpt from the statement by the governor Philip Lowe: 1. Economic growth over the first half of this year has been lower than earlier expected 1. household consumption weighed down by a protracted period of low-income growth and declining housing prices, higher levels of income needed to meet debt 2. Looking forward, growth in Australia is expected to strengthen gradually from here- around 2½% over 2019 and 2¾% over 2020. 2. The recent inflation data were broadly as expected and confirmed that inflation pressures remain subdued across much of the economy. Over the year to the June quarter, inflation was 1.6 percent in both headline and underlying terms. The central scenario remains for inflation to increase gradually, but it is likely to take longer than earlier expected for inflation to return to 2 percent. In both headline and underlying terms, inflation is expected to be a little under 2 percent over 2020 and a little above 2 percent over 2021. 3. It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target 4. But to what effect? Low interest rates with low inflation creates a mass misallocation of resources 1. The outlook is being supported by the low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some housing markets and a brighter outlook for the resources sector. 2. The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income and a stabilisation of the housing market are expected to support spending.
Talk about the difference in property markets over time – different environments 1. Higher average interest rates - with higher inflation – pre-90s 2. Lower average interest rates – with lower inflation – post-90s 3. Not going to do the generational debate – Boomer v Millennials - creates tribalism
Why choose 1990 - monetary policy in Australia since the early 1990s changed - inflation target of 2-3% –
- Reason for change –1960s-70 – 5% - then USD 1971 – 1983 rates started going up 5-13% in 13 years – inflation on lots of currencies previously backed to USD, and by proxy gold – lead to higher cash rates which needed to curb
- With the floating dollar – rates in 1983 went up over the next 7 years to 17% - 1989 to 1990 – 2 to 3 years it was expensive
- By 1997 – 7% rates were back – 10% lower – so borrowings went up massively
- Inflation – 1976 – 14%, inflation dropped to 7% by 1990
- Inflation today – 1.6%, been trending lower since the 1970s
Early 1990s to 2019 -
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Interest rates in the late 1980s did not stay high for long
- home buyer back then got to enjoy the benefit of a massive drop in mortgage rates over subsequent years and a corresponding massive rise in house prices.
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Average income growth is expected to be the weakest in at least 60 years over the coming decade – paying off a larger mortgage much harder
- Drop in annual income from terms of trade – interest rates
- Labour utilisation down – working less - underemployment
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Average levels of mortgage size and initial repayments
- Mortgage Size - At 20% - $94k vs $520k
- Price values v wages – 5 to 10
- Repayment as part of household income –
- Average wages $24k v $64k – compounding 5.6% p.a.
- Average prices $117k to $648k - compounding 10% p.a.
Contribution to annual income growth
Adjusted for inflation – This is important with Debt –
- If interest rates are 10% p.a., but inflation is 20%, the real value of mortgage drops a lot over time
- Also - real mortgage rates would be -10%
- Currently Above levels that existed prior to the 1980s
- Example – 6% vs 2% - $520k in 30 years
- $293k to $92k in real value assuming IO over that time
- Previous example - Average wages down to 3.5% and prices to 8% compounding in real terms
Purchaser in the 70s 80s and 90s - fortunate position to have had their debts inflated away via high inflation
- Centrally indexed wage rises that outpaced the cost of credit. That versus today’s mass immigration wage crushing future which means none of the loan principles will get inflated away.
- The important thing to remember – making additional repayments required to pay off the debt in real terms
- Especially with larger mortgages – make sure you can afford
- From here – Built to rent, high population growth through immigration, low rates = property won’t be likely to drop – but don’t expect same growth as seen over past 20 years for a little while until conditions normalise to sustainable
Summary – 1. Don’t forget inflation -
Graphs - https://www.macrobusiness.com.au/2019/06/another-idiotic-boomer-versus-millennial-housing-debate/
Thanks for listening, we hoped you enjoyed the episode.
If you want to get in contact, you can do so here.
Welcome to Finance and Fury, the Furious Friday Edition
Today's episode is number 3 in this series – check out last 2 FF eps
episode 1
episode 2
Last ep – talked about media and the realities that they create – but they are not consistent – and massive hypocrites
- Talked about conspiracies a bit in the past 2 eps – the media labels anyone who questions the official narrative as a conspiracy theorist
- But wait – didn’t they have their own conspiracy theory on how Trump was a Russian agent? Putin and he had secret deals to overthrow the US? 3 years every day there were constant stories of reports of sources from an overheard conversation – blah blah – nothing –
- They not only were conspiracy theorists – but promoted that - and in a treasonous way – turning the people of the world against one person – US media lying about their leader to have him removed
- But when someone else questions what they say – conspiracy theorist!!!!! – If you question their conspiracy you are the crazy one
- It might take a little while to let that set in if you haven’t thought about it before
That is where this all has to start
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Start with the people - and next week will be formal education system and implementation –
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want to explain how through using what is known about psychology and human behaviour is being used against you –
- How do you control what people do? Control what they see, what they read, what they see and what they learn.
Behaviours are based around heuristics – If the news ran a story about the danger of one Suburb over and over – each day, a news story about crime in one Town – you may think that the place is incredibly dangerous –
- How the media has been instrumental in turning conspiracies on a global scale – Information is passed along at all levels –
- Affects what we see, read and hear through media/tv/etc, provides only certain bits of information as confirmation bias, repeated it over and over = very influential over time – a lie repeated enough becomes the truth
- Point of this series – don’t get tricked – don’t get distracted by all the rubbish about fear – build your own life
- That way you won't need to be afraid – a person with everything to be self-sufficient doesn’t need the Gov
- Don’t miss your time – go and do – to stop worrying about signs that don’t matter
- Don’t be unprepared – Don’t look for the government to solve your problems – that is what the UN promises – solution to the global problems that they tell you are problems -
- Want to spend time to go through each of the policies – why they use fear to trick you, or how they convince you it is in your best interest to stop trying – avoid getting tricked into a Faustian Agreement
How are people psychologically affected by the media and politicians – cognitive biases that hamper critical thinking -
- Availability bias – a mental shortcut that relies on immediate examples that come to a given person's mind when evaluating a specific topic, concept, method or decision - the more a message is repeated – the more we use that to make a decision
- Shark attacks, plane crashes, shootings, etc.
- Climate change – This end of the world prediction has been going on since the 60s, so almost 60 years now
- Lots of availability bias when people make decisions about this – as we hear the world is getting warmer – sea levels rising – but when physically measured – like in Syd harbour – no records of a rise
- Countries like Guatemala and other are seen as very violent with higher death – but Detroit ranks higher than most in shootings -
- Confirmation bias – search for, interpret, favour, and recall information in a way that affirms one's prior beliefs or hypotheses - systematic error of inductive reasoning
- something consistent - Conformity providing comfort – tune in and see that Trump is still a racist – fits into world beliefs set out by the media – I have tried very very hard – but cant find an actual racist thing – things interpreted by media as racist – e.g.
- “Baltimore, under the leadership of Elijah Cummings, has the worst Crime Statistics in the Nation. 25 years of all talk, no action! So tired of listening to the same old Bull...Next, Reverend Al will show up to complain & protest. Nothing will get done for the people in need. Sad!”
- Nothing racist about it – but the media said that because Elijah is black, he was being racist for calling out the squalid conditions – Bernie Sanders compared it to 3rd World nation, the Mayor took a tour (who is black) and said she could smell the dead rats – they aren’t racist – but Trump is
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Long term Psychological effects – most damaging in IMO
- Gas lighting – making people think crazy – see one thing but told another – 1984 – John Hurt – how many fingers
- Oven example – take away agency – self ability - as no longer trust self
- Disassociate personality disorders – experiencing trauma – especially young
- Not developed to handle it = create a new personality as a coping mechanism to survive
- TV is war, violence, shows in Netflix promoting suicide – horror movies – all mini spikes in trauma levels
- Gas lighting – making people think crazy – see one thing but told another – 1984 – John Hurt – how many fingers
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Kids go to school and hear about the guilt they should have based around ancestors’ action – portrayed in functional stories like Roots.
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Creates a trauma-based society – feeling too guilty or fragile – look at the Democratic Socialist videos
- Aren’t allowed to clap – hold signs up, use gendered language – trigger peoples trauma
- Actually really sad – see a room full of people that this sort of system has created
- People wouldn’t last 15 minutes without power – aren’t allowed to wear aggressive scents in the 3 panic rooms they had set up at the convention – not joking, google democratic socialist convention 2019 – watch the videos – people can't even organise a vote in an hour so many ‘points of personal privilege’ brought up
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Not worried about these people directly – but they are used – Stalin called them ‘useful idiots’
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Built a world on victim mentality – everyone who has been a victim, therefore, has a right to speak
- The trouble with playing the victim – excuses awful behaviours that they commit – provides justification
- How every genocide starts – that one group is victimised by another so in the revolution they are taken out in retaliation – whether it be ‘middle-class bourgeoise’ or today, white men
- It is the media and Hollywood that is responsible to psychologically damage people – news doesn’t inform but mislead (with puff pieces about the royal wedding or celebrity breakups) or promoting a position
Department of UN responsible for ideas – Education and the Media/Hollywood 1. Hollywood – false memories – watch enough movies on Rome or Greece, you will start to think that is how life was 1. Brain starts making connections and assumptions – forms a false image and idea based around the fantasy that you take into reality 2. Scientists in the 40s, 50s, 60s, were meeting with TV executives to do this – understand the power of this medium 2. Framing and education and partnerships – like google that controls 98% of the search functions people do 1. Me too movements – men being misogynistic – patriarchy – all that stuff most of you would have seen on TV 1. How prevalent has it been in your own life? Not in a madmen episode – but day to day? 2. May be just my inner male bigot – only time I have ever seen sexist behaviours – are on TV shows and movies – produced by Hollywood or one of 6 companies that control all of the movies or TV channels – 3. The objectification of woman – men not showing woman respect – treating them like meat – in reality is awful 4. Remind me – who glorified the pin up girl? Makeup? Boobjobs, plastic surgery? Making both sexes insecure 1. Unattainable images of perfection – social media/twitter people breaking down over likes being removed 2. That is mental illness – created by the partners like FB, Google, etc that team up with the UN for policy 5. Hollywood pushed that on the population – subconscious education – to either mimic or admire – authority by association – see someone on TV or movies, or even listen to people on podcasts – positions of authority 3. Minority of people push this, paint every person in stereotypes, then turns around and acts morally superior and chastises the population if they now act and do the way actors have been portraying fictional characters for years - 1. Separating reality from fiction – they are the ones doing this then blame the population they push this onto 4. Grooming – normalisation over a period of time to avoid a shock factor 1. Look back 20 years ago, think of yourself back then and imagine if you heard – male breaks woman’s weight lifting world record – think it was an onion headline but it is phrased ‘transgender athlete’ 2. Boiling the frog - Grooming the next generation to take part in this – so in 10 years they are starting their careers they will be the ones boiling the water for the next generation 5. This is where education will come into it next week - All this education system does is not prepare kids, but scare them and control, them – 1. The equivalent of rather than taking kids to swimming lessons – dropping them in the ocean where they can drown or get back onto the boat – but they never learn to swim on their own – become too scared to ever go out on their own as they will drown 2. Just teach them how to swim!
Considering what the UN means by “sustainable development” — 1. Policies to change human behaviours – how we consume, where we work, live, how we think ‘as global citizens’ 2. Carried out by central planning, global governance – even the very term sustainable – able to be upheld/maintained 1. Only way to do this is with complete control and unlimited resources – which the world doesn’t have 3. How much will Agenda 2030 cost? Various figures have been thrown around by UN bureaucrats 1. Range of costs of the plan = $3 trillion and $5 trillion per year. 2. Trillions a year - “From Billions to Trillions” report released by the World Bank in July 2015 3. “To meet the investment needs of the Sustainable Development Goals, the global community needs to move the discussion from ‘Billions’ in Official Development Assistance to ‘Trillions’ in investments of all kinds: public and private, national and global, in both capital and capacity.” 1. But the money needed to implement Agenda 2030 and other UN schemes is only part of the cost. 4. Other parts include the loss of our national independence and freedom that the rise of global governance 1. Which is actually global socialism/corporatism 5. Revealingly - document states, “We recommit to broadening and strengthening the voice and participation of developing countries [the regimes ruling those countries] — including African countries, least developed countries, land-locked developing countries, small-island developing States and middle-income countries — in international economic decision-making, norm-setting and global economic governance.” 1. Those countries are ruled by dictators – should show you the mentality of teaming up 6. “Sustainable” children for global citizenship in the new order will be accomplished via what the UN refers to as “education.” 1. UN document the word “education” alone is mentioned more than 20 times. 2. throughout the agreement, the UN openly advocates the use of schools to indoctrinate all of humanity into a new set of values, attitudes, and beliefs in preparation for the new “green” and “sustainable” world order. The UN’s education agenda also puts sex “education” front and center. “By 2030, ensure universal access to sexual and reproductive health-care services [abortion and contraception], including for family planning, information, and education,” the document explains.
Known that this is going on – once you are aware – the lies don’t work –
The UN needs your consent to do this – Faustian deal – won't drop a ton on gold on you – unless you ask for it
thanks for listening, if you want to get in contact with us you can do so here.
Welcome to Finance and Fury, the Say What Wednesday edition.
Today's question comes from Mike -
"Hey Louis, Wondering if you think buying Tech shares are worthwhile"
We have the FANG and the WAAAX – 1. US – FANG - Facebook, Amazon, Netflix and Google 2. Aus – WAAAX - Wisetech, Afterpay, Altium, Appen, and Xero (known collectively as the WAAAX stocks)
Intro 1. Find that the nature of investments is very binary – some are very for it, some against it – like BTC 2. True with tech companies - some with no earnings profile - so polarised the local investment community 1. Those buying into the company brand, then those buying based around values and trends
Factors – Valuations and Fundamentals – Are they a bubble or good long term holds?
- forward price-to-earnings ratios – Growth shares normally about 25 to 30 in AUS, USA lower at about 15-25 – for tech different
- FANG share - average is a 50 PE
- WAAAX - over 100 times forecast earnings to almost 170 times earnings for the 2019 FY
- The valuation premium for growth is elevated today relative to history; software in particular now carries the highest multiples since the Tech Bubble – Back 2000 just before the bubble burst
- When valuations are this stretched it doesn't take much for the bubble to burst – shock to confidence
- investors are still licking their wounds after a Yuan-induced rout that dragged their financial universe from record highs – By product of trade war and currency war – had to devalue Yuan
Interest rates - ultra-low interest rate environment.
- Investors are still coming to grips with a world where - more than a decade after the financial crisis - there is around $US12.5 trillion of global debt with negative yields.
- lenders are paying borrowers for the privilege of handing over their money - It has driven money out of the banks and into anything with a decent yield – shares are the dumping ground
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It has also had a major impact on the technical valuations of stocks in a world where interest rates are not going up for a long time to come.
- Appen, Afterpay and Altium which have been bid up significantly year to date as bond yields have collapsed.
- lower discount rate increases the PV of future cash flows, justifying higher valuations as interest rates fall, and fuelling multiple expansion driving gains to date = reason why the Pes on shares look sky high
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Example - rates drop from 10% to 5% = a 40% increase in the dollar value of earnings in five years’ time, but a 420 per cent increase in the value of a dollar earned in 20 years’ time.
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Leading to very high prices for profitless companies, because there is almost a religious belief that all of these companies will make lots of money in the future and therein lies the error
Hype and market concentrations – comparisons to other companies and markets
- profitless companies are back in vogue and sometimes valued in the tens of billions of dollars
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80 per cent of US initial public offerings in the first three quarters of last year had negative earnings.
- Wisetech, a logistics software company - worth as much as Qantas with a $8.5 billion market cap.
- Qantas reported revenue totalling $16.6 billion in 2018 and a net profit of $1.14 billion. Wisetech recorded revenue of $221 million and a net profit of $40.8 million.
- Altium is worth a billion dollars more than JB Hi-FI - a profit roughly one-seventh that of JB Hi-Fi's $234 million.
- Wisetech, a logistics software company - worth as much as Qantas with a $8.5 billion market cap.
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Atlassian - revenue had finally exceeded $US1 billion for the financial year just ended at $US33 billion
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The major reason for the jump in value has been the astounding re-rating of the earnings which has meant the market is ascribing a much higher value to each dollar of earnings for this group than traditional stocks.
- He prefers Google and Facebook which, as the Australian consumer watchdog reported last month, have unprecedented market dominance when it comes to their monopoly on the personal data of billions of people.
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The two companies are also unrivalled exponents of the network effect: Where the value of a service increases with every additional user.
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Thematic and risks to these companies
- When you compare prices to values, they are so divorced from each other
- at the end stages where dumb money is willing to pay anything for a piece of this growth.
- WAAAX companies – have something over local companies – world wide consumer bases – reach
- huge potential for Afterpay, or the ability of these companies to scale so quickly.
- You need to make sure that the adoption curve is playing out, because if the acceleration slows then that’s a real risk given a discounted cash flow valuation is based on a multi-year time period
- Who are the consumers of these companies – some of world's most valuable consumers - the Millennial and Gen-Z generations – spend a lot and don’t have the money, but are aware of Credit cards
- This is a signal to me – growing spending, not saving, historically = occurs before the burst
- Competition -
- The news comes just days after the Commonwealth Bank announced it had invested $US100 million in Afterpay's US rival Klarna, and unveiled plans to bring its service to Australia and New Zealand.
- Afterpay risks – Needs to find finance for every new customer – needs to access capital to grow
- When you compare prices to values, they are so divorced from each other
Thanks for the question – may do a deeper dive into each of the shares in the future -
If you want to get in contact, you can do so here.
Welcome to Finance and Fury,
Past few Monday eps on Share concentration – and the holdings and influence that super funds have
Today – talk about the legislation put into place and the plans going on now where you might end up renting an apartment from your super fund or bank
The plan to help increase apartment supply – decline in prices = lower incentive for developers as a build to sell model – from slumping demand for apartment building
New residential product: “build-to-rent”
Won’t help Australia’s housing affordability stress, may make it worse, but it helps to achieve public policy objectives -
- widened housing diversity – for affordable housing close to city centres
- enhanced build standards – Avoid develop to sell disasters like Opal towers
- better-managed and secure form of rental housing – economies of scale from LCLs – which we will run through
Look into other areas this has been implemented to see how well objectives met
What is it? This refers to apartment blocks built specifically to be rented, at market rates or ‘affordable rates’, and held in single ownership as long-term income-generating assets
- Policy came to public attention when Labor reforms to taxation around build-to-rent leading up to the election
- Aim - to increase the supply of rental dwellings through developing a ‘build to rent’ and a large corporate landlord (LCL) sector - While these two sectors may share similarities, there is a subtle difference between them.
Build to rent - developers and their financiers build multi-unit buildings and, instead of selling the units, retain them to rent to tenant households. Rents may be set at market rents or, for affordable housing, an appropriate discount to market rents could be offered with appropriate government support to make up the funding gap.
‘Build to rent’ is an established practice in both the UK and USA but it has not been taken up in Australia -
- Australia’s tax settings, which were designed for a ‘build to sell’ model, as a major impediment, in particular land taxes and the inability to defer GST costs on construction materials makes retaining dwellings unprofitable.
- AHURI research identified a number of barriers for institutional investment in the Australian market, reducing the attractiveness of 'build to rent' for investment by the large banks, insurance companies and the superannuation funds.
- In a nutshell – large financial companies will become the driver of investment in inner city apartments
- QLD – We have a program open for bids in May within 10km of CBD.
- Goldman Sachs is a major investor in one of the biggest build to rent companies in USA.
Large Corporate Landlords –
Buy to rent model - financial institutions that acquire large numbers of dwellings and make them available to the rental market, or potentially at a discount to market rents for low-income tenants if appropriate government support is provided.
- LCLs don’t necessarily build new housing stock, they can purchase properties in the market or through mergers and amalgamations with other LCLs. Indeed the largest LCL in the USA, Mid-America Apartments, (99,939 apartments in 2017)
- LCLs can merge with build to rent developers who can help manage rental dwellings
Proponents claim LCLs and ‘build to rent’ schemes offer greater supply of rental housing, greater security of tenure for tenants, and better professionalism in tenancy management than small scale 'mum and dad' landlords.
- These models have also been criticised in other countries for maximising rent increases and for evicting tenants
- In one case, 60 families were threatened with eviction in Ireland in 2016 when the LCL that owned the residential complex had to sell over 200 houses to an internationally based financial institution in order to repay debts
- From an international flow of money – part of the profit shifting scheme which caused the Ireland property bubbe
- QLD - Deputy Premier and Treasurer Jackie Trad today invited industry to register their ideas on how to deliver a large-scale Build-to-Rent development within 10kms of the Brisbane CBD. “Delivering these affordable rentals will contribute to the Government’s Queensland Housing Strategy 2017-2027 target of over 1000 affordable homes by 2022” – says homes but means high-density high-rises
Why hasn’t it taken off here yet?
- the tax treatment and returns in Australia make build-to-rent less viable.
- cost-effective variations of the build-to-rent model are being trialled, including student accommodation, co-living arrangements, or build-to-rent accommodation where the tenant has an option to buy their unit after a few years of renting – talked about in another ep
- constant rental income from tenants is a particularly appealing investment for institutions that seek reliable income, like super funds
What do the people implementing this want: 1. under current conditions, even market-rate build-to-rent projects are barely viable – at least in Sydney. Australia’s urban housing markets are expensive to purchase land. 2. a housing policy perspective – 1. limitations on foreign purchases of residential property 2. “withholding tax” decision that treats overseas-based institutional investment in rental property less favourably than investment in commercial property – Morrison doubled 3. Since such global funds would likely lead the establishment of a new Australian build-to-rent asset class, revisiting the withholding tax changes could be a significant step in making build-to-rent a reality in Australia.
Will build-to-rent make housing more affordable? 1. No – at least not in the short term. While Labor has offered separate affordable housing initiatives, build-to-rent developments themselves will not necessarily deliver affordable housing. 2. evidence from existing build-to-rent developments suggest that rent will be more expensive than traditional renting arrangements. 1. JLL research based in the UK found that on average, the premiums on build-to-rent accommodation were 11 percent over the respective local rental markets.
Who will be doing this - The enduring owner might be, for instance, an insurance company, an Australian super fund, a foreign sovereign wealth fund, a private equity firm, or the building’s developer.
- Although new in Australia, build-to-rent is quite common in many other countries. Under its North American name, “multi-family housing” – 6.3m new apartments since 1992
- A scattering of build-to-rent schemes is already underway or completed, mainly in inner Sydney and Melbourne. And they may prove to be the forerunners of a new Australian residential property sector – but that is far from guaranteed.
- In Australia, our private rental market is almost entirely owned by small-scale mum-and-dad investors, so this kind of housing would be a largely new departure from typical Australian real estate
- Another property bubble – main access from massive financial companies – now you are competing for the property with financial institutions
Potential benefits – 1. Done to manage the economy and help stimulate economic growth, expand the money supply through borrowings to help keep rates low 2. May get better building standards – MAY – building to own long term versus build to sell – skip forward 100 years of this trend where companies own most buildings 3. Increase demand for buying high-density residential property – Australians long term don’t want this (80%)
Proposal for policy - to enable an affordable housing element the government is looking at allocating sections of federal or state-owned redevelopment sites to community housing providers at discounted rates.
- this strategy was recently advocated by newly designated federal housing minister Michael Sukkar.
- urban renewal projects like Sydney’s Central-to-Eveleigh and Rozelle Bays – a pretty big chunk of Syd –
- fulfill the widely voiced demand that 30% of these developments should be affordable housing
- Being implemented to fulfil several important public policy objectives.
- This comes from recommendations/policies laid out in UNs SDG (sustainable development goal) 11.1 and 11.3, along with SDG9 and SDG17, which is about increasing global partnership of multinational companies’ cooperation with Governments.
- The IMF needs somewhere to pump their SDRs into so they are using the SDGs of the UN which will cost trillions in funding, along with side private companies like Goldman sacs buying all the residential property here (which they have been doing in the programs in the USA).
- So end game of this build to rent is that we now have to compete with the largest companies in the world when wanting to buy any new residential stock coming onto the market.
Who will live in this? – come back to this 9Global migration compact
Thank you for listening, if you want to get in contact you can do so here
Welcome to Finance and Fury, The Furious Friday edition.
Episode 2 in this larger series - The last episode – Talked about historical events – resulted from people acting out their conspiracy – act of making plans with a counterparty to commit an unlawful or harmful act – if it would be a crime to do, known as a criminal conspiracy –
- Conspiracy = Planning to commit a crime in most cases – but people who today are pointing out historical evidence surrounding events are now labelled a ‘conspiracy theorist’ based around what is outside of the consensus –
- Some might call that curious – doesn’t mean that they are correct – but interested enough to gather their own information and see what is there – and does it stack up to what other sources have said?
- This is where the media is damaging – not only polarising but it creates two different realities for people
- People act based around what they believe to be true – from heuristics, learning, history, etc.
- Use CNN and Fox as examples, or Sky vs ABC in Aus – both have their readers/viewers – team blue and team red
- Have different information presented across channels – channels caught framing shots/faking stories – fake reality
- You create division between the masses – I think that the vast majority of people are good and want the best – but there are always some psycho mass murderers or UN co-founding members, like Stalin.
- Brings into the question of truth – don’t want to create any mental breakdowns, crisis of consensus – but how do you know what you know to be true?
- Team blue v red – both play opposite stories – so people believe different things about same events
- I know that this is the case when it comes to the UN – a lot of people like what the UN is trying to achieve
- Have people who disagree on the methods, or that there is even a problem to solve in the first place
- How well can people work together when they don’t trust other people, based around what other people believe is true – truth and trust
- Justice system – blind justice or Lady Justice – comes from the Greek mythology – Dike and Themis, then Lusitania from Romans – never got why someone whose job it was is to weigh up the scale of justice was blindfolded – did some digging – Romans weren’t that dumb, only added first time in Switzerland in 1543 – used a mockery of the legal system where the rich got away – took off I guess – but we are all told she has a blindfold to be impartial – impossible to do if you are blind to everything going on – just don’t be a bigot
- I know that this is the case when it comes to the UN – a lot of people like what the UN is trying to achieve
- Here we enter labels and tribal nature of people – can be blinding – tribal nature of just doing what is implied by the tribe
- Those who like the UN – Call those that don’t Conspiracy theorists, get called globalists or rubes back, others just walk away
- Labels and language can be very deceptive – Ended the last ep talking about UNESCO –
- United Nations Educational, Scientific and Cultural Organization – our education system, ‘science’ and cultures have been influenced by the UN for 4 generations now
- Each of these will be broken down into an individual episode – help explain how two realities are created – statement v outcome
- Education, Science – Climate Change – When did climate change become a thing?
- Culture – TV, music, language, beliefs – how people are affected by information – and influenced
- All the information from this series will be directly from UN, Subs, or affiliate groups, WEF, IMF, WB, etc.
Keep this in mind whenever taking info in First – These SDGs are anything new when it comes to the UN – Central planning isn’t great when it comes to achieving goals
- Millennium Development Goals (MDGs) - principle that no one should suffer extreme poverty – started in 2000 – target date of 2015 - poverty not eliminated – has been a decline – in 1990 (the reference year for measuring improvement), the number of people living in extreme poverty has fallen by 33 percent from 1.9 billion to 836 million worldwide, with most of that progress coming after the MDGs entered into effect.
- But from world bank from 1820 – 94% in poverty to 24% in 1990 – to 10% approx. in 2015
- The world went through a massive shift in early 90s – Communism economics was failing – China and Russia
- The SDGs – started in 2015 - build on the MDGs’ - adding a new dimension: sustainability.
The sustainability dimension brings a universality across all areas of life that MDGs didn’t have – From WEF 1. Developed countries are no longer just enablers of progress, earmarking a percentage of their GDP to support the efforts of developing countries to reduce poverty, improve health and raise living standards. 1. Pause – developing countries (Aus, US, NZ, etc.) earmarking a percentage of GDP to develop other countries – not good enough, moving on: 2. Instead, they must be committed and active participants in the effort to achieve the agreed goals, in some cases even modifying their own domestic policies. In this sense, the SDGs more clearly reflect the conviction, upheld by the UN, that all of us are global citizens. 3. This conviction lies behind the establishment of international humanitarian law and the supranational courts that address violations of it. – Global laws to subvert a legal system of a nation - 4. And it underpinned the adoption of the “responsibility to protect” principle, which demands that the international community defend a country’s people from mass-atrocity crimes when their own government fails to do so. 1. Pause – Back to how do you know what you are seeing is true? You don’t live there, don’t know anyone – small little village in Syria the media reports of gas attacks – done by a country leader, criminal – so go to war – 1. Recent history – 1990 - Nayirah stated that after the Iraqi invasion of Kuwait she had witnessed Iraqi soldiers take babies out of incubators in a Kuwaiti hospital, take the incubators, and leave the babies to die – thankfully it was a total lie and she was reading a script from her father who was the Kuwait US ambassador - 2. Played around the world – helped get people on the side of the Gulf War – US entered on Kuwait’s side was a war waged by coalition forces from 35 nations led by the United States against Iraq in response to Iraq's invasion and annexation of Kuwait arising from oil pricing and production disputes. 2. not adopting a human rights law of the UN would be a breach of international law = country gets bullied – called inhumane
So what exactly is on the SDG agenda? Contains 17 goals — including ending poverty in all its forms, achieving food security, promoting sustainable agriculture, providing quality education to all, ensuring access to energy and clean water, and adopting urgent measures to combat climate change — backed by 169 targets.
Agenda 2030 was adopted at the 70th annual UN General Assembly 2015 - ushered in with a “thunderous standing ovation,” the UN Department of Public Information reported – Global PR firm - 193 UN member governments on the planet
- Lot of countries – Shows unity right? And all those 193 countries leaders have great track records - OECD, but also murderous communist and dictatorships — vowed to help impose the UN’s controversial goals on their populations - “This agenda promises a brave new world, a new world which we have to consciously construct, a new world that calls for the creation of a new global citizen,” dictator Robert Mugabe – was only in power 2 years after this – removed by military
- Venezuelan strongman Nicolas Maduro and other tyrants to impose the UN goals on their victims, too — all with financing from Western taxpayers.
- China - the regime boasted it played a “crucial role” in developing the SDGs – good track record on policy
- China promised to spend $2 billion in foreign countries to meet the UN goals in “education” and “health,” with its funding increasing to $12 billion by 2030.
- EU and NATO globalist Javier Solana said, “With a sustained commitment from all countries, developed and developing alike, the world can ensure that it celebrates another great leap forward in 2030.”
- The last “Great Leap Forward,” presided over by Chairman Mao Tse-tung between 1958 and 1963, resulted in the murder of an estimated 45 million Chinese who were worked, starved, or beaten to death.
- Most Authoritarian countries will be able to enforce this – get loans from IMF – SDRs, financing, all the goods to fund it and hitting the targets through socialist policy – i.e. remove peoples choices – one by one remove all choice
The Sustainable Development Goals (SDGs) are a collection of 17 global g by the United Nations General Assembly in 2015 for the year 2030: 1. No Poverty, Zero Hunger, Good Health and Well-being, Quality Education, Gender Equality 2. Clean Water and Sanitation, Affordable and Clean Energy, Decent Work and Economic Growth 3. Industry, Innovation, Infrastructure, Reducing Inequality, Sustainable Cities and Communities 4. Responsible Consumption and Production, Climate Action, Life Below Water, Life On Land 5. Peace, Justice, and Strong Institutions, Partnerships for the Goals.
Areas to cover – While there are 17 goals – broken down into some marco groups 1. The economy – circular economy, emission quotas, employment quotas, Food, water, nature 2. Cities and transport – policies that focus on increasing development high-density residential units –banks and super funds own to hold as long-term rentals 1. Someone has to provide demand – now large corporate landlord (LCL) – keep people renting as prices rise 3. Energy and resource management 4. People – This one where it all starts – people need to willingly want these policies – UN helps with this as well 1. UNESCO - United Nations Educational, Scientific and Cultural Organization - Dr. Julian Huxleyto Director-General 5. Redefining value – start with this – all starts with this slowly over time – UNESCO has been doing this for years 6. Partnership - Google- 98% of global search market – Decides what you see – team up with Governments for monopoly – mercantilism of the 21st century – digital mercantilism - Mercantilism led to the creation of monopolistic trading companies, such as the East India Company and the French East India Company 1. Google Motto – don’t be evil – sounds like a good reminder – but takes a different view on tone – crazed killer repeating it walking the streets at night – cover this in the partnership episode – on which companies are backing this financially, and who is providing the policy advice 2. Take it with a grain of salt – if you google something about A2030, or SDGs – you will get the positive spin – google won't rat themselves out
Massive gaols – only way to make work is to force everyone to do it – and under the assumption of ‘ends justifying means’ Wish list – but we have been educated in a way where a list of goals is going to be the outcome – 1. Works in our every day lives – set a goal to save money, so you do and you get your goal, buy a house, whatever – set goals that even if you might not achieve, others have – 2. But that thought carries into that if something is too big to solve – you cant do it and must make the large governments do it – so a government comes up with their goal of ‘end poverty’ and project own experiences in achieving things and that it is just as simple – your part done, helped towards ending poverty? 3. What I hope to do in this series is to help you to spot BS- reasoning – like the scam ep on weds
Ground rules for interpreting SDGs 1. These SDGs are statements – they are not goals, but Faustian deals – deal with the devil – sell soul in return - 1. Don’t see much in movies anymore – used to be part of the story arch = Joseph Campbell's heroes journey 2. You wish for a Ferrari – but the world runs out of petrol, a ton of money, that falls from sky and crushes you, irresistible to the opposite (or same) sex, but you end up being trapped inside as you get mobbed in public 3. Doesn’t even have to be deals with the devil – many examples of changing things with good intentions, but making things worse 4. But when it comes to the FD – the counterparty always has to inform you in the fine print of the downside to the deal – but the focus is on the ton of money – so forget to read that 1t of gold will be airdropped for delivery 2. Why do these wishes turn out bad in most cases? Is it just the wording? 1. Change wording slightly – ask for $1bn in your bank account to be added 2. Wish to Win the lotto – probably be the safest wish – but who knows if it will improve your life, and not just wallet size 3. What about if you just checked the fine print? Wish for what you want and just make sure no funny business? 1. What if it is in Latin, or vague global legal speak – and you have 500,000 pages of fine print to go to – good luck 2. To be honest – really hard to interpret most of the SDGs policy implementation recommendations 4. One thing is clear - They are policing behaviour- not improving conditions through increasing freedom and prosperity – 1. The only solution they have is to control the way we do things – what we buy, consume, energy used, etc. 2. Once you go through every possible solution – only one is blanket control to meet goals 5. Unlike previous goals which applied only to developing countries, the SDGs apply to all countries equally. 1. means that Australia must find ways of aligning our domestic policies with the SDGs and set up systems and processes to coordinate action across all levels of government, as well as business and civil society. 2. Australia’s region is home to many developing countries who continue to struggle with unacceptably high rates of poverty, violence, and instability. 1. ‘As a technologically sophisticated, educated and compassionate nation, Australia’s task is not just to implement the SDGs for its own people, but to help achieve the SDGs for people across our region’
Risks – while ‘totally not binding’ – our politicians act like it is – mostly without public say, or if it is, the public are only saying yes from a documentary that they saw – Educated under the ‘global citizenship programs’ in schools – grade 8, 9, 10
Model of education is exactly the same as brainwashing – social pressure, repeat information over and over so at a young age kids are formed in world view – in line with the global good
Un – Agenda 2030 is a collection of initiatives – build policy to achieve targets – have member countries implement these – but need the public on their side – redefine values allows people to willingly adopt that which works against them
All starts with the people – cover people, culture and education to look at how programming and presentation of information has been weaponised before going into the specific areas
Just remember that news is not reality – really divisive - open views and not go red v blue team
Binary thinking is a trap – black and white – if you aren’t for this you are against it – don’t agree you are my enemy
As when you are bombarded with information how you will burn alive if action isn’t taken, obviously those not wanting to take action are going to result in your own death, and must be removed to progress can be made
Thanks for listening, if you would like to get in contact with us you can at the contact page on the website
Welcome to Finance and Fury, The say What Wednesday edition where we answer your questions, and sometimes questions from people from the gym – such as today
Is this a scam –
moneysmart have a page on this – which is good resource – give a quick summary of this –
- but trouble is that while you can read it and research the sort of things to look out for - so can the scammers.
- Scammers adapt to get around the warnings or rebrand to avoid public scrutiny.
- Imagine if you got a call from a Nigerian Price who just needs you CC number to buy a taxi ride home, but he will give you $100k in return.
- Works? Not today – we are all aware of this trick – but back in the 80s to 90s it was slightly more plausible –
- no smartphones to order uber, or mobile phones to call the people he needs, so you would be talking to him on your landline – assuming that he is at a payphone calling random numbers as he doesn’t know right number to call and just spent his last 50c on this call –
- hence why this did actually work at one point of time – thankfully in a vast majority of cases people were wary –
- but today don’t as many people would give CC details to someone who looks like Eddie Murphy in coming to America if they came up to you on the street.
Today’s ep will be focused on how to avoid a scam through not just a list of things to tick off – but logic and reasoning –
- The methods of scammers are always going to adapt as we do – but the method to working out if it is a scam doesn’t change
- Process of knowing it is a scam before it lands on the ASIC or money smart list as a scam, and the tips list
Normal list from MoneySmart – Investment scams and tips to recognise
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First warning bell - get a phone call, email or letter from a stranger asking if you would like to invest in a company
- Scammers often make the company look 'real' - there may be a website and documents that look official but are completely fake. Their tips on questions to ask to find out if it is real:
- What is your name and what company do you represent?
- Who owns your company?
- Scammers often make the company look 'real' - there may be a website and documents that look official but are completely fake. Their tips on questions to ask to find out if it is real:
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Does your company have an Australian Financial Services licence?
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What is your address?
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If they avoid these – probably a scam – hang up, ignore all calls and walk away – but who and what questions – very easily answered – What is a good place to start, asking who is better, but why and how are more important when it comes to fully reasoning out a scam, or anything
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The reward seems too good to be true - 'get rich quick' schemes might look good but in reality, only the scammer makes money
- You need to sign up right away - pressure you by saying you have to decide on the spot - Never agree to this.
- Tip - Always ask for documents and read them thoroughly before you make a decision.
- All good information and tips – what does a scammer do to avoid looking like a scammer?
- Probably still call – but they can use a legitimate companies details, or well-rehearsed story/pitch
- Long term profitable investment – so not massive instant returns, but higher than the overall market to be enticing – have a reasonable pitch
- No pressure to invest – just an introduction call – send you an email with an information pack with historical data, reports, and the companies website – has ABN, list of testimonials, investment information, past performance – slow burn strategy –
- At the start of the year – got a pretty irate call to the office from one or two people – some scammers were calling random numbers and saying they were from another company that has a similar name to mine, and that we were offering loan refinancing services and wanted to ask for details – people asked for company info and due to the difficulty in understanding what the person on the phone said –
- they googled the wrong thing and called our office – so got a few calls through wrong google searches, cant imagine how many the actual company got – Be aware of any random person calling from a legitimate company and asking for information, especially if you have never dealt with that company
One Case – from friend at gym - Call from random company that appeared to have everything, website, performance history, being in the UK as well
- promise of trading algorithm that has performed at 12% per month on average –
- historical data proves it – this sort of return does seem too good to be true – but how do you know for sure -
- Hard when emotions take over - put in $2k now and get $34k in 2 years – Very tempting – FOMO versus TGTPT – fear of missing out can be bigger
- Number one rule in looking at a scam – Don’t ask the salesman any questions, but ask yourself ones to reason this out
- Previous example - This compounding return doesn’t really happen consistently when it comes to shares –
- How do we know this is true though? Might happen somewhere? Are there any trillionaires?
- Richest person from investments – warren buffet – at 12%pm ROR, $20k today would be $14.5trn in 15 years – then the next year would be $56trn – compounding is amazing –
- Question to ask – what are the chances that a person who called me out of the blue can offer me an investment strategy that can make me the richest person to ever live within 15 years? You have your answer
Reasoning Rules to look for a scam – Reason through at every stage – focus on why and how
Research – don’t go to their website only – probably going to have little useful information on it – just misdirection
- Only time their website useful is for information about who put together their trading template, or manages/operates this behind the scenes and what they say they invest in - non of which scream scam or not – but important to question
- Investments themselves –
- Promised returns –
- Track record of investment managers -
- Very easy for a company to hide history or just create new entities – Go through ASICs business lookup to see when the company was established, and who owns that company – individual or corporate, or trustee
- If there is no ABN – best to avoid – if they have no AFSL – avoid – But if they are there with no complaints – dig through history – went through the one for previous scam – started in Feb 2019, few months ago
- Questions to ask – why would a company change names/restructure every few years? Why can’t I find the AFSL number on asics look up?
- Locations and contact details – previous example of the share returns – have all the contact details – phone hotline, office addresses, mailing, etc. –
- Did some digging and their offices are in based in a month-to-month serviced office facility, that is just very discrete in its online marketing as agents take care of finding the clients – Look at records of address in sales or leases/rental – if you can see the location is long term lease contract that is more than a month old it makes it more legitimate – when the listing for the past few years have all been for individual office spaces with reception services – suspicious
- Question – Why would a company that has been around for 2 years and is managing money successfully for clients have at best an office cubicle, and at worst letterbox office with virtual receptionists?
- Fake reviews - The only reviews I could find were in forums - few of the same sort of copy paste scenarios – someone asks a question, saying they were contacted and think it is a scam – then one or two other people jump in saying that their brothers cousin or friend of a friend swears by it – And another is doing it and first week has gone well, etc.
- All one person, from separate accounts – clever narrative – media do it – control the question and control the answers – lays out all fears that the average people would have, and people come in as social proof that it is legit –
- Question – when are each of the posts made? Do they follow the same script/outline structures?
- If you have ever read a real comment section, hopefully you will be able to tell the difference
If it looks legitimate – who has Custody of the investments/funds – who has ownership of funds and which bank account is it linked to –
- Give me $50k to invest for you, versus receiving advice on how to invest or facilitated on your behalf –
- Buy managed fund – you own the shares managers buy – why regulated and monitored – avoid managers investing in new yachts and your investment going to $0 – But you are the owner of the investment still
- If you are asked to ever transfer money to their account to invest in something that could be set up inside of an account that you own and they can transact on as third party
- There will be legitimate cases when this might need to happen – however, if a financial adviser wants you to transfer the cash for an investment to them for them to then invest for you – warning bell
- Question to ask – why isn’t the investment being set up in my name and therefore, I can make the contribution into the investment instead of a bank account of someone else?
- Guarantees on money back – for upfront costs of losses - The wording for the full refund of the purchase price allows them to pretty easily get out of the repayment.
- All of these are impossible to prove incorrect, as based around the back testing of their software it works, and that the information on share prices can be verified by looking it up on the ASX.
- Going forward though, there is no guarantee of returns based around original deposits and targets being met. Also, even if the information is incorrect, they can always just claim that the brochures had printing errors and not pay the refund.
I hope this helps - please let me know if you have related questions -
- Unfortunately, it can be hard to sort out scams from legitimate investment strategies –
- but using some reasoning and asking yourself the questions to tease out the answers based on what is real – what you can see and understand
- having no AFSL and promising guaranteed returns is normally the biggest give away that it is a scam
- But easy to fake – so ask yourself the questions with why or how, instead of what
Hope you enjoyed it
If you want to get in contact, you can do so here.
Welcome to Finance and Fury
Today we are discussing the concentration risk
Last week – how the modern banking system acts like dominos failing– Due to their liabilities and obligations to one another
- this week – look at the other side of the balance sheet – Which is the Equity Holders – Shareholders – who owns the shares of banks
- Also – the concentration risk that just a handful of companies have in the overall size/weight of the Aus Share Market.
- Plus – Look at two events that every bank just did as this is a real-world example
Concentration in the index – Complex with lots of elements – break down major ones Remember – Big 4 banks – including Macquarie = 5 of the top 8 companies on ASX by market cap
- Australian bank shares – ownership and connectivity – beyond the derivative concentration
- representing 23% of ASX300 - IMF report in 2012: big four controlled 88% of residential mortgages and 80% of deposits.
- biggest six American banks held 30% of total deposits
- not just banking: the big four own 53% of life insurance premiums, 57.3% of retail investment funds through bank-owned platforms –
- Insurance and investment sides to banks also purchase shares on the ASX – of which they make up a large chunk
- This can just further increase the concentration risk of markets – if an investment manager owns 5% of a share and sells, that moves the prices down – a lot – average daily volume is about 0.15% - both buys and sells -
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Beyond banks owning their own shares directly – Subsidiaries – Investments,
- Banks – through super funds, investment managers, insurance companies – either buy them through own subsidiary or another bank –
- Super funds (investment managers) – Industry/index funds – hold shares on the ASX -
- Example – Aus Super – Balanced fund has $100bn in it – 22% allocation – range of 10-45%
- ASX market cap – $1.6-$2trn depending on the market cycle – $2trn now, but $1.8trn middle ground
- What can easily lead to a downturn in the share market? What if you have $2.8tn across all super funds – plus $100bn inflow p.a. – and super investment managers decide to dump the ASX? –strategic ‘rebalancing’ or ‘profit-taking’
- If the target is 25% to AS – a drop in exposure by 10% down from 35% - selling shares/index –
- ASX $2trn – a sale of a super fund in Aus shares by 10%, sale of 14% of shares held on the ASX –
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that is a lot of power to move a market – top 20 super funds have around $1.3trn of the super investments
- also a lot of power in the property market - cover more in another episode
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Names on the list – Broken up between Public Sector, Industry or Retail (banks) – Pretty equally split in % of top 20
- Of the retail funds – about $420bn in 8 – Bank Subs or non-bank financial services
- MLC Super (NAB), CFS Super (CBA), Retirement Wrap (BT), OnePath super – ANZ
- AMP super – 2 funds, IOOF super, and Mercer (owned by USA insurance company – Marsh & McLennan)
- Bank Major holdings – Blackrock entities – 3 of the top 10 for every bank but NAB – ‘Advisors, Management, UK’
- Macquarie has about 7% of its shares
- But this is who the owners are – banks use custodial holding companies – HSBC, JPM, CitiGroup – 40-55% between 3
- Of the retail funds – about $420bn in 8 – Bank Subs or non-bank financial services
Beyond just being investors in one another and Concentration through connectivity and custodial power –
Banks are Counterparty to each other – either a lender/borrower to one another – derivatives last week example of one side
- But big 4 banks are highly interconnected - each other’s largest counterparties – nobody else is big enough
- the connection is far from direct ownership of shares – but banks borrowing from each other, rather than owning large parts of each other – Balance sheet has assets and liabilities – Under lending laws – lenders get paid back before investors
- If a bank borrows another money, and one bank goes out of business – banks get any money first – shareholders probably get $0 – when you look at the size of the loans to overall ‘equity’
- Thankfully for them – the global markets and companies are just as easily reached as domestic ones – financial services can fall under free trade
- Not so good for us – as when a banking crisis happens in USA – we get hit just as bad
- Requiring each other – as there is so much money needed only one of the other big four can normally help
- Banks fund costs through short term debt securities – why hold cash – when you can use it to lend at 3.5% and borrow at 1.5% interest – like funding your lifestyle on CC and investing the rest of the money – then trying to repay the debt using your investment earnings – doesn’t work unless you can consistently get over 22% p.a. returns on an investment to outpace the accumulation of debt – but if you got 22% investing, and card was 2% - who wouldn’t do that?
- When there is a crash in the banking system – hard to fund expenses as nobody wants to lend to you – GFC –
- Called liquidity crisis – but in reality, was an insolvency crisis – two different things – as banks don’t even have the assets to fund any ‘bank runs’
- Further hastens the decline in share values due to cashflow losses – rule of business: cant meet expenses = bankrupt
- If you look at a banks balance sheet – almost worthless – Shares themselves in Banks are insolvent in values –
- DB had total assets of 1.541 trillion dollars and total liabilities of 1.469 trillion dollars – difference of $72bn is in shareholder equity
- CBA – Total assets $975bn – liabilities at $907bn – What is lest is shareholder equity – 7% of assets
- WBC - Total assets $880bn – liabilities at $815bn – $64.5bn left or 7.3% of assets
- Most banks run on this margin - Hsbc – massive value of assets - $2.56 trillion total assets -
- Remember – Loans to you are assets to banks – if you borrow = liability
- Banks values come from the ability to make money – Price is What we will pay for shares
- Bank shares – Total equity or market cap – or what shares are worth on market prices
- CBA - $146.5bn – 7.4% - Shareholder Equity (book value) - $67bn – Banks assets minus liabilities
- WBC - $99bn – 5%, ANZ - $80bn – 4%, NAB - $75bn – 4%, MQG - $42.7bn – 2%
- But if they lose a small margin in assets = no equity left – Regulators aware – hence the recent issues of debt and equity
These are becoming heavily controlled – legislated – APRA forcing banks to increase their reserve capital – money against loans * This is done through issuing ‘Subordinated notes’ - this is part of the Bail-in regulations that are being put into place + Issue debt – they call it bonds – but notes with provisions of write off if APRA determines it is necessary * Reason for doing this? Banks liquidity - Issue equity – raise money from creating new shares and converting them * Balance sheet 101 – if someone buys your debt (i.e. you borrow money) – if your assets don’t go up to match it = negative + This is where the balance sheet of a bank best maximises its profits when it gets as close to 0% net assets reflect + But if they issue debt, they need equity to balance the books – this is where shares are issued to counteract * major Banks are doing both – creating new shares and selling them in chunks – to other banks/financial companies – issuing billions of $ in shares to the other – SIBs or SIFIs (terms in the big to fail eps – where to invest and where not to) + Issuing shares where the trading can be legislated – ban sales – easier to do than the unpopular approach of shutting the market down - - But newly created Common Equity Tier 1 capital to offset the increased liabilities – which are used as capital reserves – but dilutes the number of shares – unless profits grow by more, dividends suffer
Where value comes from? – Future cash flows and profits – Based on debts and leverage – Profit from both ends –
Investment firms buy bank shares – Or new corporate debt in banks if they are fixed interest managers –
- Odd thing – Banks were told by APRA to raise $500m (approx.) in reserves – But they seem to be quadrupling
- Debt in USD – by CBA, NAB -, $1.5bn - WBC - $2.25bn USD,
- ANZ – strangely has in AUD floating – well issues new FPO shares and the buyers were themselves and JP Morgan
- NAB – Just Citigroup Global Markets alone - 38m shares - $26.28 = $1bn to offset the notes
Probably going to be costly – Interest payments on this – dilution of profits for dividends to existing shareholders
The solution to holding more on the balance sheet as ‘capital reserves’ = fund it with debt that can be traded away in the future - Does this make sense?
- Remember – you are giving them $1,000 upfront – so if the notes go to $200, or are converted at that value, or not honoured – which is allowed if 5 days pass without the conversions occurring upon APRA notifying a bank -
- The complex connections don’t end there – a lot of these conversion laws are regulated in US laws – USD face values
At this stage, looks to be a similar lead up to pre-GFC – * Instead of MBS – debt products with mortgages as backing assets - Now with bail-ins you take investor money for debt, which can then be written off if APRA determines a bank may become non-viable * While you may not directly own these notes – A lot of the retail and industry Investment managers are the largest holders of banks – and also banknotes – through super or some index funds, you are indirectly invested in these * Ongoing protection racket – protection that is provided isn’t for the individual investors - if it works once, may as well give it another go
Lead into next episode – what are super funds doing with your money?
Holdings - https://www.marketscreener.com/COMMONWEALTH-BANK-OF-AUST-6492243/company/
Thanks for listening to today's episode. If you want to get in contact you can do so here.
Welcome to Finance and Fury, The furious Friday edition
Intro ep to a new FF series – probably going to be the biggest
- Today – episode to give the bird's eye view of the overall topic - massive topic - ranges from education, energy, transportation, medicine prices, along with 1,000 other things
- Spend a number of episodes on each of these elements - look at finer details – may seem unrelated –
- Everything in this series - form part of the 17 SDGs set out by the UN in Agenda 2030
- This may be a bit long – lots to initially unpack - but very important ep – side to history most people don’t know about – that still affects us to this day
What is Agenda 2030? 1. Most people haven’t probably heard about this – that is okay – not discussed/addressed often – but it exists 1. 193 countries signed on to this almost 4 years ago – we were one of them (Australia) 2. If you are one of the few who have heard of this – probably had one of two reactions, 1. First thought of the conspiracy theories that are brought up in relation to this topic or 2. You were thinking about the plans for a one-world government – ‘new world order’ - conspiring to provide top-down legislation to all individual governments – 3. Term Conspiracy theory – Conspire – make secret plans jointly to commit an unlawful or harmful act – 1. People are charged for committing conspiracy in criminal law – if you agreed with your friends to sneak out of the house when you were a kid, you conspired with them against your parents' ‘laws’ 2. Important to not be dismissive of the label of conspiracy theory – as some of the biggest atrocities in history were committed through conspiracy theory turned into action – conspiring is theorising with another party/making plans – then if you go through with the action – it turns into another crime – conspiracy to rob a bank versus armed robbery of a bank – only individuals are charged with conspiracy – 3. Who is in charge of governments or unelected groups like the UN? Individuals – a lot of history showing lots of conspiracies
Quick history of some conspiracies – on the Governmental/global level * It was a Conspiracy that sparked USA entry into WW1 – prolonging the war for 2-3 years – millions more dead – and set up the treaty of Versailles – most historians attribute conditions of this to the aftermath in Germany and rise of the Third Reich – which lead to WW2 – This was the sinking of the Lusitania - 1. WW1 breaks out – all know story - assassination of Archduke Francis Ferdinand of Austria-Hungary by a Serbian nationalist in 1914 - hardly sufficient reason to plunge the world war - claim over ten million lives and twenty million wounded – let alone the generation suffering from shell shock 2. Well – if you listened to the Fiat rise – with the initial financing model of the 5 Rothschild brothers – this was around 100 years into use by now – and nations took advantage – finance trade, colonial territories, expansion 3. An arms race had been in progress for many years; large, standing armies had been recruited and trained; military alliances had been hammered together; all in preparation for war – but once it broke out they needed more money – EU banks had no money left – to turn to USA 4. selected the House of Morgan-acting as partners of the Rothschilds-to act as sales agent for their bonds - money began to flow in January of 1915 when the House of Morgan signed a contract with the British Army Council and the Admiralty - Also loaned to French and Russians * By end of 1915 - Germany looked like they would win the war– France and Brittan on ropes – Germany offered peace in 1916 – basis of status quo – pre-war frontiers – but Franco Prussian wars of 1871 – turned down – * the conspiracy was already in action – JP and other bankers would lose a lot of money if England and France lost and couldn’t pay debts back – How to save their interests? US needs to enter 1. Through the whole war – German Uboats (form of early sub) devastating military – but couldn’t fire on civilian ships – so allies used civilian ships but outfitted them with weapons and used them to ship war supplies 2. Lusitania was one – and Germans knew it – treaty that they can ‘arrest’ and search – but allies opened fire as soon as UBoat rose – so they started just sinking every ship civilian or military – most were the same thing 3. Germany tried to warn the population not to get on the ship – send warnings to be printed to US newspapers - 4. JPM – also had control over international shipping – German and England – largest lines – English competitor had the Lusitania as one of flagships - British passenger liner that sailed regularly between Liverpool and New York – But retrofitted with 12 guns on the decks – and carry munitions 5. Left NY on May 1 1915 – sunk 6 days later – 1,195 dead – 195 Americans - event that turned US public into pro-war 1. JP Morgan had 1000 journalists on payroll – and strong control over media through ownerships/investments 2. Financial records show through ‘New Haven Railroads’ – Cost $400k p.a. in 1915 – Held bonds in Boston Herald and hundreds of other companies * Warnings Never got published – Needed something to turn the public pro war – as 90% didn’t want to go, and the rest were split on backing the allies, or Germans as a lot were German immigrants – Elected Wilson as he promised no war – but his campaign financers wanted differently – guess who
- 1916, Woodrow Wilson formally sanctioned the undertaking in negotiations for war - conversations between Colonel House and the leaders of England and France – secret to public – so once public convinced all they have to do is pass the act of war
- Morgan with Newspapers pushed hard on war narrative – Covered up that Lusitania was military
- in 1917 – USA joined – JP was saved
- Around same time - Conspiracy which sparked the Soviet Union – Lenin - After the outbreak of the February Revolution, German authorities allowed Lenin and his lieutenants to cross Germany en route from Switzerland to Sweden in a sealed railway car.
- German leaders hoped, correctly, that the return of the anti-war socialists to Russia would undermine the Russian war effort, which was continuing under the provisional government – with the US entry – needed Russia out – so they conspired to smuggle Lenin into Russia –
- Long and short – Morgan saved his billions – made much more – all through conspiring to withhold real news, drive public policy through the newspapers and have the politicians ready to act – Real conspiracy – all documented – look at first hand sources of testimonies in congress
Could go on and on – but acts of conspiracy exist – individuals do it – but the level of power they have to commit action on conspiracy matters – bank robber versus the power to spark a war –
The whole point of this series – not look at conspiracies - but will be to look into each of the SDGs set out in Agenda 2030 –
- Will be using the information provided from the UN and the corporate sponsors/partners – explain it in detail
- Look at policy decisions, who they partner with, who has financial interests in these policies, what primary source materials provide as fact.
- Any news article or Wikipedia page about history can be changed at will, but if you can find information on the event from the words of someone who was there in a format that remains unchained and in full (so not a sentence out of context)
- Going to be using historical events as illustration throughout the episodes – helps to provide an example of what happens down the road from certain policy decisions
- Agenda 2030 is rarely ever mentioned – but you would likely hear about one of the initiatives every day, just don’t know it is part of the UNs Global Initiative
Before we get into each of the SDGs and overview of topics next ep – look at Who the UN is, and where it came from - 1. "Declaration of United Nations" drafted by U.S. President Franklin D. Roosevelt (call him FDR), British Prime Minister Winston Churchill, and Roosevelt aide Harry Hopkins in 29 December 1941 - UN was FDR's highest postwar priority. 1. incorporated Soviet suggestions - but left no role for France 2. term "United Nations" was on January 1942 - 26 Governments signed the Declaration. One major change from the Atlantic Charter was the addition of a provision for religious freedom, which Stalin approved after Roosevelt insisted. 3. agreed to the basic structure of the new body at the Dumbarton Oaks Conference in 1944. At Yalta, Roosevelt, Churchill, and Stalin agreed to the establishment of the United Nations, as well as the structure of the United Nations Security Council. Stalin insisted on having a veto and FDR finally agreed. 4. By early 1945 it had been signed by 21 more countries (Aus) - Big Four of the United States, Britain, Soviet Union and China would make the major decisions 2. UN– a global diplomatic and political organization dedicated to international peace and stability – their words 1. It is the dream of all authoritarians – mass control of global population brings peace and stability – they have to do what you say - 3. Stalin and Roosevelt were some strange bedfellows – pretty good friends by political standards – Both believed in a fascist society – 1. Roosevelt and Stalin - shared the same outlook for the postwar world - formed a friendship to shape the global stage 2. Roosevelt worked hard to win Stalin - Stalin initially unconvinced that FDRs planned world organization with police powers would stop one nation from breaking away to start a war - Stalin’s opinion evolved -view FDR as key to peace 3. Odd that Stalin – mass-murdering authoritarian would be so keen on the concept of the UN – Rings alarm bells 4. UN Scandals – Conspiracy theory – International Paedophile ring is run through the UN – 1. 2017 - UN Secretary General admitted to 145 incidents involving 311 victims in 2016 alone – most in peace operations 1. startling admission at a high-level meeting on the wings of the UN General Assembly meeting. 2. Antonio Guterres said “sexual exploitation and abuse is not a problem of peacekeeping, it is a problem of the entire United Nations. Contrary to the information spreading that this is a question related to our peacekeeping operations, it is necessary to say that the majority of the cases of sexual exploitation and abuse are done by the civilian organisations of the United Nations, and not in peacekeeping operations.” 1. If the admitted 311 cases in peace operations are a minority – at least double cases occurred 3. All happened in the wake of the Oxfam scandal which was very similar to this. And individuals in Clinton foundation that were caught trying to traffic kids out of Haiti. 5. These are the same organisation that leaders of nations are taking their marching orders from – but what happens? 1. Go into nations as a ‘peace keeping mission’ and committing such atrocities – someone who says they are a plumber turning up at your house and forcing their way in to fix the pipes, but then ripping some out for copper and running away – If it just happened once, shame on them, but twice, let alone hundreds 6. This is a perfect conspiracy though – at the minimum, a massive number of people are conspiring to commit one of the greatest atrocities on those in society who are the most vulnerable – At the extreme level it was the Illuminati doing it for child sacrifices and adrenochrome – either way – the outcome is the same regardless of conspiracy in intentions –
The UN doesn’t work as a collective – policy the same – usually get given ‘ideas’ for policy from Non for profits or corporate think tanks. Many different individuals working through independent departments – but with the same goal
- Individuals can do bad things - especially when no accountability – absolute power and all – only thing that keeps politicians in line (sometimes barely) - stops a lot of authoritarian powers = the balance of power of the people – but if that slowly gets eroded over time from those already immune from the eyes of the wrathful public - easy strategy
- Use social pressure as coercion tactic – everyone is doing it mentality – getting all nations to sign on or else – shows conformity – look at what happens to a country when they don’t go along with it – media dumps on them as the black sheep – and the people by extension for having such non-progressive politicians – social shame tactics – so we then elect the people wanting to put these policies in place and do the bidding of the UN
- Very subtle – happens over years and years – but look at comedy shows now – not comedy anymore but political tools of disinformation
- Disarm with comedy and paint a narrative – all step in lock and march to the same thing as what the UN want
- Massive claims – But it is very complex – as to do this needs to be so complex and implemented over a long time and different stages which seem unrelated but really serve the same outcome
- To end – quickly look at one element of the SDGs in next weeks ep – that is people
- I want to do the best job in fully laying this out - there are lots of different bits to go through
But – something to think about over the next week – UNESCO - United Nations Educational, Scientific and Cultural Organization 1. People – This one where it all starts – people need to willingly want these policies – UN helps with this as well 2. UNESCO - first General Conference took place from 19 November to 10 December 1946, and elected Dr. Julian Huxley to Director-General 3. British evolutionary biologist, eugenicist, and internationalist - Huxley was a prominent member of the British Eugenics Society and was its president from 1959 to 1962. In 1959 he received a Special Award of the Lasker Foundation in the category Planned Parenthood – World Population. 4. Huxley's dream was the same as Aldous Huxleys – Brave new world – where only those set fit to breed could do so 5. Founding of UNESCO 1946 – ‘This even though it is quite true that any radical eugenic policy will be for many years politically and psychologically impossible, it will be important for UNESCO to see that the eugenic problem is examined with the greatest care, and that the public mind is informed of the issues at stake, so that much that now is unthinkable may at lease become thinkable’ – 6. "...taking the techniques of persuasion and information and true propaganda that we have learnt to apply nationally in war, and deliberately bending them to the international tasks of peace, if necessary utilizing them -- as Lenin envisaged - to 'overcome the resistance of millions' to desirable change. 7. "Using drama to reveal reality and art as the method by which, in Sir Stephen Tallent's works, 'truth becomes impressive and a living principle of action,' and aiming to produce concerted effort, which -- top quote Grierson once more -- needs a background of faith and a sense of destiny. This must be a mass philosophy, a mass creed, and it can never be achieved without the use of the media and of mass communication. Unesco, in the press of its detailed work, must never forget this enormous feat." 8. "There are thus two tasks for the Mass Media division of Unesco; the one general; the other special. The special one is to enlist the press and the radio and the cinema to the fullest extent in the service of formal and adult education, of science and learning, of art and culture. The general one is to see that these agencies are used both to contribute to mutual comprehension between nations and cultures, and also to promote the growth of a common outlook shared by all nations and cultures." p. 60 9. Think on that while you ponder the irony of statements like ‘abortions save lives’ – or why you wont see the UNs policies discussed in anything more than a soundbite or positive light – where only idiots wouldn’t do as the UN policies want
Covered a lot – and jumped around a bit between historical conspiracies – Take away – Conspiracies happen – and the UN shouldn’t be blindly trusted – That what you see from the media or politicians shouldn’t be blindly trusted either if pushing for policy from UN – Carrying out wishes of UN rather than national population –
Representative democracy stops representing the people - going to look into this further in next ep
References from today:
JP Morgan Loans to England and France
https://seekingalpha.com/instablog/25783813-peter-palms/4550806-role-j-p-morgan-providing-loans-england-france-world-war-souring-loans-became-apparent
Huxley quotes - https://www.crossroad.to/Quotes/globalism/julian-huxley.htm
Thanks for listening, if you enjoyed the episode and want to get in contact please do so here https://financeandfury.com.au/contact/
Welcome to Finance and Fury, the Say What Wednesday edition
Hi Louis, My wife and I a looking for ways to buy a home, given some credit history and income stability challenges.
I was hoping to get your thoughts on Rent-to-own arrangements. I really enjoy your podcasts, thanks for doing it.
Thanks Cameron!
What you need to know about rent-to-own home schemes 1. Rose out of current market conditions - A perfect storm of rising living costs, “low and slow” wage growth and increasing house prices – 1. task of saving for a deposit for a $800k place takes longer than $200k place 2. alternatives - rent-to-own schemes is becoming a choice for people looking to buy a place
What is rent-to-own? 1. Rent-to-own schemes - leasing agreements that afford renters the right to buy a home at the end of a pre-determined rental period, at a price agreed prior to signing the agreement 1. Sets in stone the future sale price - means you may potentially buy a home for a cheaper price 1. can also work against the buyer, if the market experiences a downturn during the rental period 2. You don’t own any part of the home until you made the final payment 1. Then still need to apply for a home loan when the time comes to buy the property at the end of the rental agreement
How do rent-to-own schemes work? 2. Rent-to-own schemes have two components: a standard rental agreement and an option to buy. 1. Option – if you wish to purchase the property - sign a contract with a vendor that affords the right to buy the property at the end of an agreed rental period - usually runs anywhere from two to five years. 2. Still normally require a deposit – can be secured by applying for the First Home Owners Grant – or your own funds 3. During the rental period - pay rent that is usually above the market average – plus ongoing fee for the ‘option’ to buy 1. Some contracts also require the participant to cover additional outgoings (maintenance, stamp duty and insurance) 1. The money paid as the premium for the option is deducted from final sale price
The costs of rent-to-own schemes can vary wildly 1. required to pay well above the market rent, as well as an additional ‘option’ to buy the property at the end of the tenancy agreement - exact amount of rent and the premium for the option vary from house to house 2. Examples – 3 year rent to own – Contract price of $450,000 – pay a $28,000 deposit, $20,000 from FHOG 1. $600 rent plus $100 a week for the option to buy the property at the end of the three-year agreement 2. This would mean you would shell out a $109,200 over the initial three-year period 1. $8k for deposit, but FHOG was $20k, including premiums total deposit = $43,600 3. if ‘option’ for reduced sale value in the house (which is not a given) = $406,400 home loan needed 4. Home with a value of $450,000 would end up costing you $543,6000 ($450,000 plus $93,6000 rent 15. But would likely be renting elsewhere – but for cheaper – say it is $100 above market = $15.6k total
A lot can go wrong – 4. not on the title - if you’re unable to make a payment, you can lose whatever equity you have built up 1. missing a single rental payment could result in termination of the contract, leaving you out of pocket and without a home 2. Sounds pretty similar to one part of the Whitewater scandal 5. May not be able to buy – what happens if you can’t get a loan? 1. Lose the money you have spent on premiums/as deposits 6. you also might end up paying an inflated price for the property if the market drops – or lose the money you have already paid 7. Any event where you can meet your repayments falls over lending laws – like vendor failing to meet their repayments – then you would lose rights to continue making repayments and property ownership
Can I rent-to-own with bad credit? 1. Yes – sellers have little risk of you defaulting on payments – can actually benefit them financially 2. Sellers are far more likely to enter into a rent-to-own agreement with a prospective buyer who has bad credit than a bank is likely to offer them a mortgage based around servicing 3. Watch out for this – if you still cant get the loan when the contract expires – bad outcome
How the process works - 1. Step one: Find a property – have to be a pack of a company stock already - may take longer than a traditional house hunt. 2. Step two: Research the home – look to see if it is worthwhile – building and pest, builder, valuer – 3. Step three: Research the seller - agreement ties your ability to own the property to the seller’s financial circumstances 1. ask for documents that prove their financial security 4. Step four: Seek legal advice - help draft a contract, and make sure that they include a clause that clearly outlines details 5. Step five: Keep up with your rental payments - budget and stick to it – or be left worse off than before 6. Step six: Secure a home loan 7. Step seven: Buy the home
Thanks for the question
If you want to get in contact, you can do so here.
Welcome to Finance and Fury
snuck this episode in ahead of time – only reading about news yesterday – need to do some further digging – but is it Time to sell shares in anticipation of a crash?
Today – run through some news that you might not have seen – financial troubles of DB, but also China’s bank runs
First - A lot of elements to it – financial crashes are never due to just one event – chain of events – 1. think of it as an avalanche – snow builds up – eventually, there is too much – large vibration (sound, contact) = slow rumble at first, but as it takes off and wipes out most of what is in its path – 2. Share market crash is similar is there is often a run-up in value – if it has come from debt, derivatives, expansion of money supply, further driving irrational exuberance – 3. Then there is an event that requires a contraction in the money supply – i.e. how much is invested versus how much debt is owed on it 4. How connected they are is also a factor - 1. Banks Largest shareholders are other banks or financial institutions, investment managers – probably cover next week 5. But the current concentration risk to the market comes from counterparties to financial obligations – i.e. derivatives - and what happens if banks default – and What would trigger a GFC domino effect –
What share are the most at risk – Banks and financials – 1. Not saying to run and sell bank shares – no idea if a crash is coming soon – but pay attention to events – 1. individual isolated events – a massive increase in counterparty obligations since GFC, low-profit environments with banks due to low rates, further driving ‘innovated’ profit-making within banks (leveraging and speculating) 2. now banks laying people off, China bank run (seized by CCP for bailout) – run through these step by step – 3. these alone won’t be enough to trigger the avalanche – one bank becomes insolvent and goes into resolution proceeding – through bail-in and out strategy – may work to minimise the crash – but only if 1 or 2 banks need help 4. what happens to the banks that have lent them money, or have created derivatives on that same loan = expansion of money stops due to derivative bubble popping – chain of events I’m worried about 2. The system is chaotic though – chaos theory 1. butterfly effect describes how a small change in one state of a deterministic nonlinear system can result in large differences in a later state 2. Markets and legislation work in this way – 1 policy is very deterministic – sets out with one set of patterns with its intended goals – but change a different law – also deterministic – this has an impact on the first due to complexity and connectivity 3. If you understand how this relates to the risk in the system – understand why markets are so volatile 4. More complex and more connected, greater the chaotic potential becomes – exponential
Quick backstory on recent events – and what the financial risk/connectivity look like 1. Rise of Derivatives – talked about this in some past eps – but what are they? 1. Tell the truth – took me a long time to understand these – Uni - Derivatives and Risk Management (FINM3405) – I am a very literal thinker – don’t get sarcasm well - took me months to fully understand how derivatives were used – understood the theory, but didn’t understand how it could actually work 2. one party could agree with another to write a contract where they promise to exchange one thing for the other in the future, at a certain price, rates – when you don’t own that thing even though the contract derives it value from it - 3. Used as Tool for banks – either to hedge risks or make profits through leverage and speculations 1. Won't go too deep into it – but as an example – BHP and Chinese company – 2. BHP things coal price will decline, so wants to lock in the price now on their coal exports – but they will be delivered in 2 years from – write a derivative – based on the market of coal – if you have to sell at a lower price, you can cash in your option as you bet again the price for a small premium or just counterparty contract – still derivative 4. Banks usually derivatives because they can be highly leveraged – normally borrowing funds for the purchase of assets 1. In derivatives – you can control a large number of shares for little upfront cost – Contract for shares worth $20 may cost you a $0.3 outlay but now have contractual ownership on assets that you technically don’t own 2. Now – rather than having to outlay $2m it is $30k – profit potentials are huge through betting on the market -but so are the risks 3. Also more efficient versions of trading the underlying instruments from which they are “derived.” – no reporting 1. Example - a bank thinks the market will crash – may want to go short – but buy back in 12months – doesn’t have to sell shares then if you use derivatives – just flip from long to short – get into a new contract and reverse position 4. Needed something to make some good profits on – plus – heavily deregulated in the early 2000s - Commodity Futures Modernization Act of 2000 – allowed banks to hold these off the books 1. Massively increases risks – without anyone knowing – who was the counterparty to who – the value of contracts 2. danger – a lot of derivatives are ‘marked to market’ - users have to put up cash to cover short term losses 1. Form of margin call which is the leading cause of death for derivatives, and the death of the economy by derivatives
Deutsche bank in trouble 1. biggest quarterly loss in four years - a €3.1bn net loss – follows a €201m profit in the first quarter of 2019 2. but revenues and profits been declining for a while – trouble in 2008, 2015 – now slowly declining 1. plans to reduce its global workforce by 18,000 and also massively restructure – about 1/5th of employees to 2022 1. New business division – corporate bank – Global transaction and commercial banking business 2. Existing the Equities Sales and Trading business – reducing capital used by Fixed-Income department 2. turnaround strategy to cost a total of €7.4bn and is aiming to return to profit next year. 1. Exiting the Equities Sales & Trading business and reducing the amount of capital used by the Fixed-Income Sales & Trading business, in particular Rates. 2. Returning 5 billion euros of capital to shareholders starting in 2022 – But it is broke? 3. Funds from their new Capital Release Unit (CRU) - transfer approximately 288 billion euros (20% DBs leverage exposure) and 74 billion euros of risk-weighted assets (RWA - derivative contracts) for wind-down or disposal 43. but a bank with the €43.5 trillion in gross derivatives notional value and also risk 44. Where regulators only measure RWA – uses the net value of derivatives – but no good if everyone is demanding the nominal values be paid - 4. Bad sign - James Simons one of the world's best performing hedge fund managers pulled account with DB – 1. spots a trend or had inside information (likely the latter) – pulled just a few days before the restructure announcement 2. it won't be insolvent overnight – but there is no equity value there - everyone else has decided to cut their counterparty risk with - €45 trillion in derivatives – reports of a bank run, but by hedge funds, on DB - about $1 billion per day being pulled from the bank - not depositors but counterparties now with derivatives 3. Cant force broker counterparties to stay with DB – massive pressure for a deal – bailout from other banks or Gov 5. So far – BNP (other bank) - publicly telegraphing that they are providing “continuity of service” to DBs prime-brokerage 1. the ultimate goal of the talks is for BNP to take over the vast majority of client balances, which are slightly less than $200 billion currently - BNP executives are meeting with European and U.S. hedge-fund clients to convince them to stay 2. If the market found out they were about to go bankrupt and default – not good – so taking a gambit 3. DB may just transfer its assets tied to the prime finance division into the newly formed Capital Release Unit 4. Trouble is that almost every large bank in the world is a counterparty to a derivative 6. failure of Deutsche Bank is viewed as unlikely - particularly since it is considered central to Germany’s banking system and will get bailed in and out – but those counterparty to DB may lose money in the process
What is more concerning - Bank runs in china - 1. Beijing has quietly had its hands full avoiding a bank run over the past few weeks – all in aftermath of Baoshang Bank's failure 1. While been hearing about Trump and China trade wars – Back in May - failure of China's Baoshang Bank (BSB) - seizure by the government – putting a massive dent in the security of the Chinese financial system 1. the first takeover of a commercial bank since the Hainan Development Bank 20 years ago 2. the PBOC panicked and injected a whopping 250 billion yuan via an open-market operation - keeping the interbank market - which has been on the verge of collapsing – Had to keep up with the expansion of USA money supply – 3. too little too late - Certificates of Deposit (NCD) and repo rates soaring (in some occult cases as high as 1000%) 1. it looked to be a matter of time before another major Chinese bank collapses. 4. Very recently - Bank of Jinzhou looks to be following Baoshang's fate - may get seized by the government 5. A common factor between both of these companies - delayed publishing their latest annual reports 1. red flag suggesting an upcoming solvency event across some of china’s biggest banks – 2. Ranking in asset list CYN bn - Hengfeng Bank 1,420, Bank of Jinzhou 723 (currently troubled), Chengdu Rural commercial bank 706, Baoshang Bank 576 (gone), Bank of Jilin 392 – 2 of the top 5 – time will tell for rest 6. the PBOC - Beijing working fast to avoid panic- Siezing a bank is a Pandora box event for a system that relies on confidence 1. replay of what happened with Bear Stearns back in 2008 - JPMorgan was gifted at cents on the dollar 2. Assumption for banks backstopped by the government – where they "absorb" the bank - effectively nationalizing it = confidence – at least in one failure – but only so many that can be bailed out 7. Chinese share market – banks are listed, but the biggest are technically already owned by Gov anyway – put a ban on selling shares 8. But governments around the world want this – stem the flow of panic selling by shutting down exchanges, or blocking sales
Indirect manner of doing this – through the SIB and SIFI regulation covered in the bail in eps 7. they want to have banks (or SIBs) owned by Financial institutions like insurance companies or investment banks – These are SIFIs – both are heavily regulated 8. Gov will just ban the sale of the investments – so the SIFIs won’t sell the SIBS 9. Rules for higher margins or collateral for funds that use over-the-counter derivatives are already being phased in – but where will banks get this collateral from? The final stage of the implementation of these rules, which impact smaller funds, has been extended by a year to September 2021 – trouble is - 10. Interesting – really anyone’s guess where to from here – if I see another interesting event – will do an ep on the current concentration of ownership in share, and super fund investments
But in summary – 1. Banks around the world seem to have ramped up risk since GFC – size of debt and debt obligations to make money in a low interest rate environment 2. DB is running into troubles – trying to sell its derivatives and other debt instruments in a bundle to other banks 3. China banks are needing help – And China hold a lot of derivative obligations with DB – hard to get actual numbers, but ICBC, Bank of China, Construction Bank, and others are counter party 1. ICBC taking on 11% of Bank of Jinzhou and these banks hold lower capital reserve ratios (if even accurate) – 12% 4. That is the connection – the butterfly flapping its wings – one spark in Germany – puts financial pressure on top of an already fragile China banking system, when then flows on to other massive banks, insurance companies
Nothing to be massively worried about unless something further happens from here – but will keep a closer eye on bits and pieces and do updates
Just isn’t a great idea to hold investments in mostly banks/financial companies -
Thanks for listening guys, if you want to get in contact you can do so here.
Welcome to Finance and Fury, The Furious Friday edition.
In money system – need a reserve – gold, currency – gives a floor value which gives confidence 1. Doesn’t provide much stability – Most central bankers use the same terms when talking about current international financial system – Incoherent – 1. You have the AUD to USD drop, gold moves one direction, - completely disjointed – based around the models of international finance – not what they predict will happen – but still trying to manage 2. Floating currencies are not stable - financial war easier – There has been a currency war going on since 2010 1. Remember QE – US dollars and treasury issues – what happens if your currency is pegged to USD? 2. China – had to massively increase their money supply as well to keep currency exchange low – 3. US growth from consumption, while China growth from exports – Yuan goes up, exports down 4. But printing a lot of Yuan created inflation in china, along with the rest of the world – food, oil, commodities, USD is a form of global currency that assets are priced in 5. If domestically you are experiencing inflation (or real devaluation of your currency) – price of food goes up 3. Think about any financial asset – shares, property, bonds, gold, cash 1. Each behaves differently in crash – shares go down, bonds gold go up, etc – but they are all priced in AUD 2. If you crash AUD – our international buying power and wealth goes down – global system very fragile 3. Very controlled - One country can devalue its currency to make it more competitive – has to be done slowly over time 4. Think that is what the RBA is trying as well – based on theory – interest rates drop = carry trade = exchange rates change and drop due to interest levels here – but over time – demand for goods (now cheaper) go back up bringing currency with it 5. Theory doesn’t work out so well – due to incoherent natures of currencies – Confidence – and that currencies of other countries are used as reserves
What solution does the IMF see for its Reserves and stability of financial system problems? 1. Gold? – but the price of gold would need to be pegged to USD$10k per ounce to form a currency reserve 1. Hard to get enough – been trying – mining ramped up, China and Russia massively buying up gold 1. Has every bar melted into new bullion to avoid fakes – fake gold going around 2. But IMF have SDRs – China needed to hold a lot of gold to be accepted into the currency basket of Special Drawing Rights (SDRs)
Special drawing rights are supplementary foreign-exchange reserve assets – IMF wants it as an international reserve asset 1. SDR is the unit of account for the IMF – “The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members.” – what does that even mean? 2. SDRs represent a claim to currency held by IMF member countries for which they may be exchanged – but only within the Financial System – There is no secondary market – unlike other forms of reserves/assets – bond etc 3. SDRs originally a part of the monetary system - Bretton Woods arrangement post WW2. 1. USA had almost all of the gold reserves of the world at that time – other countries left with little 4. SDRs were intended as a supra-national currency that could be used instead of gold, thereby reducing dependence on gold (essentially the USA) – IMF first issued in 1969 to supplement its member countries’ official reserves (i.e. gold) 5. Today - SDR 204.2 billion (equivalent to about US$291 billion) have been allocated to members, including 6. 2009 - SDR 182.6 billion allocated in the wake of the global financial crisis - to "provide liquidity to the global economic system and supplement member countries’ official reserves". 7. The SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system, the SDR was redefined as a basket of currencies – floating currencies in the end 1. China and Russia are storing Gold and urging the IMF to replace USD as the global currency reserve with SDRs 2. Don’t like the reliance on USD as China and Russia have been on the raw end of the US Fed and Treasury 8. Price based on a combination (weighted average) of multiple currencies – The IMF has its own reserve which has multiple currencies 1. basket is reviewed every five years - reflect the relative importance of currencies in the world’s trading and financial systems - currency weights remain fixed over the five-year SDR valuation – but values with cross-exchange movements daily 2. United States Dollar – 41.73%, Euro – 30.93%, Japanese Yen – 8.33%, Pound Sterling – 8.09%, China – 10.92% 9. Interest rates - weighted average of all the currencies
Why are Special Drawing Rights (SDR’s) Required? 1. to move away from the United States dollar-based system – which has already way too much debt – $22trn debt 1. If the USD collapses (as it isn’t money but built on $22trn of debt and agreements) – world suffers 2. Large consumer but wouldn’t be able to buy – 3. would require monetary restrictions – leading to global liquidity issues 4. Just the value drop – We buy US shares – Share values drop – purely based on AUD versus valued in USD 1. USD to AUD $1 – own a share worth $100USD – USD goes to $2 per AUD – shares worth $50 5. These rumours suggest that these countries propose that Special Drawing Rights (SDRs) become the de-facto reserve currency of the world – avoid this risk 6. Due to the USD being a global currency reserve – countries forced to hold it as part of their reserves – more risk
China – During the last review concluded in November 2015, the Board decided that the Chinese renminbi (RMB) met the criteria for inclusion in the SDR basket. Criteria:
- Exports – one of the top five exports in the world and member of the IMF
- Freely usable currency by the IMF- widely traded to make payments for international transfers
- fully aware of the fragile economic condition in which the United States economy stands
- forced to buy more and more United States treasury debt if it wants to keep its own economy afloat
- A lot of excess USD in their trillions or reserves – Hope to solve these problems with SDRs – still buy 41%
Benefits of the Special Drawing Rights (SDR’s) System – These are based around if the model actually works 1. Reduced United States Dependence - no longer have to depend on the currency of United States to trade with each other 2. More Stable System - Since essential commodities such as gold, oil and food grains will no longer be exclusively traded in dollars, the United States government will not be able to exert an undue influence on their prices by increasing and decreasing the money supply of dollars as much - minimalizes their effect 3. Balance of Payment Issues: If the world were to go off a dollar-based system it would resolve a lot of balance of payment issues that are being faced. The United States is running a perpetual trade deficit with countries like China.
Disadvantages of the Special Drawing Rights (SDR’s) System 1. Money Supply Becomes An Administrative Decision: If Special Drawing Rights (SDRs) become the reserve currency of the world, then the IMF would be in charge of regulating the money supply – for the whole world – 1. would not have an open market of their own, the decision regarding whether the money supply should be expanded or contracted would end up becoming an administrative decision - 2. The fact that all other economic parameters are extremely sensitive to changes in money supply, this is a dangerous situation to be in. 3. Under the Articles of Agreement, when certain conditions are met, the IMF may allocate SDRs to members participating in the SDR Department in proportion to their quotas (known as a general allocation). A special one-time allocation in 2009 enabled countries that joined the IMF after 1981 (i.e., after previous allocations) to participate in the SDR system on an equitable basis. 4. Members can buy and sell SDRs in the voluntary market. If required, the IMF can also designate members to buy SDRs. 2. Abstract Nature: The Special Drawing Rights (SDRs) are an abstract weighted average. They are not an actual currency that can be used by people. As such, Special Drawing Rights (SDRs) will be extremely difficult to implement and manage, if they are ever introduced at the microeconomic level. 1. The SDR mechanism is self-financing and levies charges on allocations which are then used to pay interest on SDR holdings – so IMF creates SDRs based on deposit currencies, loans them to a country and then the country needs to pay it back 2. This is the current reserve system on crack 3. Still have currency backing it: replacing dollars with Special Drawing Rights (SDRs) would be like replacing one unstable system with another slightly less unstable system 1. Nothing to stop the expansion of debt to fund projects 4. SDRs serve as the premier mode of transfer for IMF loans to member nations in need of financial assistance 1. SDRs are allocated via endowment or credit at the discretion of IMF authority while adhering the governing Articles of Agreement. The cost of borrowing, or yield to depositing, from the IMF is determined via the SDR Interest Rate (SDRi) – they will become the payday lenders of the world – predatory lending 2. the IMF increased lending capacity to 690 billion SDR – in anticipation of global spending projects 3. There are already agreements in place to dish out the loans - money created from the issue of SDRs – infrastructure projects across the world 5. What projects going on? UN and their sustainable development goals – SDRs fit into this – need a global boost in the money supply to fund projects 6. Studies and papers published on the benefits of issuing special drawing rights to low-income countries – part of infrastructure spending by the Governments 1. Come back to this in the series on the UN Sustainable development goals – one part of the pie
The Bottom Line 1. Special drawing rights are a form of world reserve asset - value is based on a basket international currencies 2. SDRs are used by the IMF to make emergency loans and are used by developing nations to shore up their currency reserves without the need to run current account surpluses at the detriment of economic growth – 1. Real part of the design – to make sure the high export countries don’t experience currency appreciation due to demand for goods 2. Allows for a country to boost reserves (from a loan) to then increase their money supply and remain competitive 3. German in EU example – strong exporter but EUR doesn’t reflect this - but on larger scale than just EU 3. can only be accessed by members of the IMF- Central banks or nations who are members and play by rules 4. Trouble is – I think most countries want this – 1. China – still remains an exporter through lower inflation and still able to increase money supply to keep up with US increases 2. Euro – China and USA are big trading partners – to make sure the Euro doesn’t collapse 3. USA – want to avoid a currency collapse – as long as they stay the major economy still have largest weight of SDR – keep the game going 4. Japan – Had no growth and inflation over a long time- been printing trillions of Yen – pumping into hard asset prices – but not enough inflation to start eroding their 240% debt to GDP
Studies and papers published on the benefits of issuing special drawing rights to low-income countries – part of infrastructure spending by the Governments
https://link.springer.com/article/10.1007/s11079-011-9232-2
https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR
Thanks for listening, if you would like to get in contact you can do so here.
Welcome to Finance and Fury, the ‘Say What Wednesday’ Edition.
We recently had an awesome email from Zoe about a potential market solution following the ‘Solution for pollution’ episode last week;
“We sort our cans from our mixed recycling in our Sydney CBD office building to donate the 10c return to charity. We collect 50 cans per week on our floor which is on level 22 of a 23-level building.
Staff are incentivised to sort their waste through the small charitable 10c donation. However, it is difficult to return cans in the city as there is no spare space to hold sorted recycling. This could be fixed if we could hold sorted recycling in our office buildings. Rather than sending mixed and often contaminated waste to large holding areas outside of the CBD, we could send clean product directly to appropriate recycling facilities.
There are hundreds of office building across the country holding contaminated recycling then paying waste companies to remove their rubbish. With a small 10c donation to charity for each recyclable product we have a great incentive for our office buildings in the country to hold sorted recycling in their basements which can be sent directly to the correct recycling avenue.
I’m a long-time listener, first time writer. Thank you for such an interesting podcast.”
That sounds like a great program that you are all participating in! Really awesome to hear and is definitely a great effort to help the pollution problem.
How can this become a more popular thing? not just with cans – with bottles, paper, food, plastics.
In today’s episode we will go deeper into this topic
- Talk about policy decision making – how to expand this sort of program and also, why policy makers are likely to stuff it up
- We have to operate this way due to the influencing factors such as share values, costs, Government intervention, etc.
- All incentives based – you can lead a horse to water but you can’t make it drink. Policy may end up drowning it.
- Then also we’ll run through why simply regulating that companies have to be a part of the supply chain would result in a pretty bad outcome, not only for companies but also us as the consumer.
First, I want to explain a few concepts behind policy decision making and issues I see with the current regulatory environment
- Common practice - Things defined by ‘hoped-for’ results, rather than the actual mechanics of decision making
- ‘Profit making’ businesses often fail to make a profit and become extinct – economist Thomas Sowell calls them ‘residual claimants to the company’s income’ – they get what is left.
- There’s no more reason to expect a drug prevention program to reduce drug use, or public interest law firms to serve public interest, than there is to expect a company make a profit.
- You have to look at what they do – not what they intend to do. This is the trouble with regulation and legislation – set out with what you intend to do, but regulations aren’t a dynamic system and the information feedback loop is almost non-existent
- Government makes a blunder with regulations and it takes a while for them to concede (if ever)
- Do you ever hear them turn around and say ‘we got it wrong’ – instead they say, ‘this policy will work, if we have more money’
- Doubling down. It’s politicians’ jobs to stay in power – saying you are wrong doesn’t give voters confidence and you may not get re-elected – could be career suicide if they try to correct something that they have done wrong
- It takes years to have the studies conducted on the effects anyway – there’s time to ride it out and still retire
- Let’s compare this to a company – Can a company afford to double down if it is wrong? If it does, it is no longer a company. This is part of an instant (quick) feedback of information about your decisions. Not making a profit shows that you’re doing something wrong (sales, costs, consumer wants) – need to find out ASAP and correct the model.
- Government makes a blunder with regulations and it takes a while for them to concede (if ever)
- That is where the incentives lie – how effective they are is based around the level of consequences – pros and cons
- But still need the information feedback loop as part of the system – allows to adjust course midstream – rather than just wait and crash – incentives aren’t worth anything if you have no information on what is working, and what isn’t
- Policy has to have two key components – correct incentives – quality information feedback loop
- Issues – how do you collect all of the information needed to enforce regulations? – use Recycling as example
- Gov – how does it know best how to collect rubbish – or transport, store, process, recycle, price, get it to the companies – this is the main issue of any centrally planned system –
- information is limited and inability to adjust decisions to the individual level, rather than collective – farms under economic authoritarians like Stalin, Mao – weather and crop differences couldn’t be managed –
- people forced into collective farming – people starved, even though you had a massive increase in number of workers in one project, if you don’t know what you are doing or only are able to use what you are given, hard to farm well
- This is why I am not a massive fan of a lot of regulations – not built in incentives but enforcement, and no feedback loop
- Throwing darts blindfolded and hoping you don’t hit anyone
Example - Banking regulations – we will be back to another royal commission in 3-4 years on banks
If I was a betting man - derivative transaction reporting not being fulfilled – so APRA and ASIC just double down on similar policy - Could go on and on – but back to the core of designing a policy – never leaves the method up to companies, punishes them if they don’t meet the quotas
- Incentives are incredibly important – any policy should be designed to provide incentives to achieve the intended outcome – not a policy designed to enforce the intended quotas
- The name of a policy means nothing – Think about any company that is run privately and for a profit
- ‘for profit company’ – what if it is running at a loss? Still call it a for profit as that is the intention
- Problem – when things are named and designed around the intended outcome we are more willing to accept it
- Policy to remove all inequalities in the world – only way it can be done is to remove every choice you have
- When there are freedoms, there tends to be ranges of inequality due to choices – distributions over ranges
- With the right incentives, companies would willing adopt programs – but the collection/storage/transport of recycled goods is a costly process, companies would need to be incentivised to participate in these activities beyond it just being the right thing to do.
- What incentives will get companies attention?
- nature of any company in a modern economy requires incentives to be a financial incentive
- Even efforts that are taken for 'good will' are still financially motivated - doing these activities is intended to provide marketing and awareness of the company and the products/services they sell – social media posts
- How the 'brand' of a company is viewed by potential consumers is one of the biggest factors in determining their long term success. If they are seen to be doing good, consumer are more willing to support them and therefore, profits will go up. On the other side, when consumers find out that they have been doing the wrong thing companies get heavily punished.
- A recent example is Volkswagen emissions scandal back in 2015 where their share price halved, going from over €200 to €100 in a month
- world's largest automaker by sales – installed software to deceive the CO2 emissions tracking software – people bought the cars thinking they were helping – but then the market punished them. As it should – it is a market of regulations and consumers that drives business decisions
- We are consumers – why can’t we just force companies to do this? Boycotts etc. – we are myopic, and cost sensitive (cost in time, effort, money, all factors)
- Boycott may last a few days, weeks, months – but will 100% of consumers participate? And how long?
- May have a minimal effect if company does capitulate – as long as they are seen to do something – minimal
- What about our short-term natures? Another barrier in having a company adopt an ongoing recycling model
- Events of providing 'good will' are short lived benefits to the brand - consumers soon forget
- We are bombarded with information constantly - companies need to constantly come up with a new campaign to grab public attention again
- Implementing an ongoing program that would increase their operating costs isn’t an attractive option
- Brand goes up, but effects of activity fades over time – we adapt or forget – but costs remain
- Boycott may last a few days, weeks, months – but will 100% of consumers participate? And how long?
What may make companies willing adopt the responsibility of being part of the recycling supply chain
- Incentive for them - either tax credits or other form of regulatory benefit would need to be provided
- on the surface this sort of policy wouldn’t look popular - giving the fat cat companies tax cuts –
- But if the Gov can cease doing this, then the costs they incur goes down, meaning less tax needed
- Worried about those large multi-national companies avoiding more tax still?
- They are only paying the level of tax that they view as 'socially acceptable', again to preserve the brand.
- Massive banks like Citi-group, they could all pay 0% of tax using profit shifting but choose not to as that would decrease their brands value in the eyes of the consumer.
- This isn’t true for any small to medium sized business though - don’t have access to the same profit shifting schemes
- SME's are also where almost half of the population is employed
- providing incentives to companies based around what will best incentivise them would be needed
- also allow the greatest range of benefits to be provided when compared to blanket regulations enforcing the participation in the same activities
- large companies could absorb the costs while SME's would struggle to keep up with these over time
- No idea what the right level of incentive would need to be – don’t think it should be a blanket – something to meet each industry needs
- Let them figure it out over time – thousands of companies trying different things – some will stick, become adopted – different things will work in smaller business, compared to large – allows for flexibility
- Know that it cant be a blanket enforcement – speaking of which
- Still reading through the UNs Circular Economy – holy moly there is a lot of additional proposals that massively increase global regulations – Global price controls, quotes, enforcement of methods – conjunction with non-profits: part of project mainstream (actual name) – Looking at the list of partners –
- Danone – food processing multinational – Google – Unilever - H&M Group –
- Intesa Sanpaolo – massive bank – 800bn euros – 25% bigger than CBA
- They are taking care of the money (5bn euro credit facility) plus designing lots of legislation:
- Quote - circular economy principles not only for the international corporates and large companies but also for the small and medium-sized enterprises - the main focus of our Group commitment. The circular economy is one of the most important new development frameworks, enhancing companies’ resilience and changing their business models.
- This is who the circular economy would really benefit – either absorb the cost of participating (they are designing it based on what works for them), or pay the fines for breaking the new regulations that they championed into the market place
- SMEs suffer – can’t source (access to supply chain), afford (increased cost of goods), sell (restrictions on what product reused content is, or not legal to sell) etc under the new regulations
- All massive companies – revenues in the billions –
- This form of enforcement style policy just ends up digging the consumer into a hole
- The circular economy does sound good though – it sounds like a great thing to work towards – but that is because they are stating the intended goals again – but mechanisms are more important than the stated goal – Say I am going to lose weight, but if I super size myself, I wont be successful
- This will be part of a bigger series - companies backing the circular economy and why will be part of the series
Thanks again for the question Zoe! And if you have a question or a topic you'd like to explore on the podcast, hit me up on the Finance and Fury contact page!
Welcome to Finance and Fury
The ASX is sitting around a high mark.
But there is a lot of talk about recessions, analysis talking about share corrections, not a lot of optimism – Has there ever been?
Don’t really see many articles with positive outlook on the economy
- Important to remember – Don’t trust journalists to make investment calls
- Bad track record- European debt crisis, Brexit, Trump getting elected, trade wars, actual wars – GFC?
- Paying attention to the media yields some of the worst investment returns – emotions and fall into crowd
- Today ep – want to look at share market corrections, what signs are pointing towards, then how to not get stung
- If you have been listening – eps at the moment might come across as doom and gloom as well
- Apologise if it comes off that way – only intention is to inform but also provide ways out
- Not prophesising - Point of those episode is to let you know what can happen – not when or the magnitude
- If you have been listening – eps at the moment might come across as doom and gloom as well
Are we going to crash?
- Might surprise you after what I just said – but we will 100% have another share market crash – but Who knows when it will occur!
- Investing in shares – you are 100% guaranteed to see a downturn in the portfolio value
- But from high point – not original capital invested – what goes up, comes down –
- Important point is to try and avoid losing the value of what you originally invest
- Investing in shares – you are 100% guaranteed to see a downturn in the portfolio value
major stock market correction is possible
- Levels – looking back – 10-25% range potential - for whatever reason – that would be a significant decline
- Can be scary
- Riding out the decline –
- Buying companies – shares = ownership in a business – either domestically or OS
- Make sure the companies you buy are good – doesn’t matter what short term valuations say then
- own quality investments and ride out the correction – confidence – will the company go out of business
- Not – will my share price go to zero – that is hard to comprehend – but will the company go out of business – that is the important part
Where is our share market in relations to economy -
- Australian shares are near record highs while interest rates are near record lows
- RBA - Lowe admitted - did not understand why bond market priced in for a recession while the sharemarket was screaming boom times ahead
- disconnect between the two usually means that one market will be "spectacularly wrong"
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Bond market – due to rates dropping, yields are also dropping – especially future yield spreads
- What does this mean – Bonds have a maturity date – buying debt – has a date when you get the money back
- If something has a 2 year timeframe with a 1% yield versus 10 years with 1.5% = .5% spread
- Shows that the interest rates will be increasing over the next 10 years
- What has happened – Compare now, 1 month ago, 6 months ago
- Short term – 2y and 4y – same now and 1m – 1% - but 6m 1.8%
- Medium term – 10y – 1.4%, 1.3% and 2.3%
- What does this mean – Bonds have a maturity date – buying debt – has a date when you get the money back
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Long term – 30y – 2%, 2%, 2.8%
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Share market
- Australian share market not heavily overvalued – PE Ratios
- Our share market is doing well in growth
- But share markets normally improve with the economy, but it is rising as the RBA is lowering interest rates to help the economy along (opposite signal)
12 month forward PE
Either Bonds, shares, or nobody is correct
- no-one can predict with certainty what will happen to the sharemarket next.
- If business growth continues to slow, share markets will be the incorrect ones – and the market will take a downturn
- market analysts look at charts of the ups and downs of share price movements to gauge trends
- Relative Strength Index (RSI) rises above a critical line - trading above the RSI looks like it has some room to run – but after a peak there is a decline – sometimes 3%, sometimes 10-20% - recently went through 10%
- PEs aren’t outside of range of normal – little above
- May be the case People are buying based around future expected growth – get in before it is gone
Few scenarios – hypothetical -
- We see no growth in a few months to years – event RBA has no room to drop rates – share market panics as the predictions weren’t true and tries to be the first to sell
- Fed – holding off raising rates now – but need a 4% buffer
- We see an uptick in growth – RBA does except this in the next 6 to 12 months – Share market doesn’t charge ahead, but keeps growing steadily
- Collapse of derivative debt bubble – would be worst case – no signs – counter party obligations are huge though
So if I’m saying we can’t predict market crashes, what can you do? Buy quality shares or funds – what is quality
- What do they do?
- Something people will still use, or something that is almost impossible to shake people’s confidence on
- Diverse models for income – products, services – Amazon vs corner store
- Have low expenses – or if high, most is capex
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Are they consistently able to provide growth and dividend returns?
- Dividends are important part of a share – makes up a large chunk of return – Growth plus Income = Return
- Why? Companies with good divs has to come from profits and not too much of those as a percentage
- This is where comparing the earnings yield as well is important – the companies may be above average yield on Div, making market look cheap – but if the earnings are lower than what is paid out – only time until the divs drop back and the yields correct back in line with average, or lower.
- Also – as a market average, good sign of if market is overvalued – especially when compared to earnings
- ASX Dividend Yields – 4.2% average since 1980 – we are about there – 4-4.2%
- Signs of an overpriced market? Low Div yeidls – From start of 1984 to Aug 1987 – 4% to 2.5%
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From October to end of 1990 – rose to almost 7% - same peak reached at bottom of GFC
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Healthy dividends are a great measures of a company that survives collapses
- By healthy – mean they have growing profits – from diverse sources – the can afford to pay tax + FC – DPR isn’t too high – Telstra
- Pre GFC – grew quickly – hits 40c in 2006 – special cash payments back – but GFC hits and they cut to Div of 28c p.a. - .14 a pop – back to similar levels of early 2000s to 2005 – but set a message to the market – set dividend rate – poor decision as what if the EPS is less that 28c
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Become 85%, 90, 108% - banking off the NBN – then chose to increase Divs – 90% DPR – how can a company grow with only 10% earnings are retained – limited capital investments
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Debt levels are important- interest coverage –
- Issues with some companies – total capital is made up of equity (what shareholders have) and Debt
- Debtors get money first – and the debt doesn’t decline – unlike equity if price drops
- i.e. too much debt and price drops – nothing left for shareholders
- Other things – watch out for companies spending all their retained profits in share buybacks
- Share buybacks are a sign of either companies thinking their price is cheap, or they have nothing better to spend money on, so reduce supply and price goes up – but at cost of future growth if miss opportunities
- When companies favour this – especially using leverage due to low rates – sign the company may be in for a tumble if the market goes down a bit
Looking at most companies – they look healthy enough
- Remember one thing – shares are volatile – but are the highest returning investments over the ultra-long-term – 20 to 30 years or so.
- even better than property, cash, gold, timber, silver and tulips
- has the unlimited potential of decades you’re
- But as long as there are more businesses while also providing more and better services/goods to people.
- Break up the risk through investing consistently - cash set aside for financial emergencies is important
- dollar-cost averaging – breaking up cash if holding a lot – or natural form from surplus cash
- Do it from cashflow - Spend less than you earn – invest the rest – regardless of what your fears or greed
If you would like to get in contact you can do so here.
Returns if dividends are reinvested
Welcome to Finance and Fury, the Furious Friday edition
Been talking about monetary system – today dive into Crypto currency
Crypto currency – means nothing - has to do with individual coins/tokens/whatever –
Preface – Don’t have as deep an understanding on the overall crypto market as I do on the fiat money system, and especially blockchain
- I do know enough about BTC to know one thing – I wouldn’t buy BTC personally – You may love it – good
- If I get something technical incorrect – let me know – But ill be talking from fundamental POV – helps to explain where I come from –
We all know the story –
- In 2008 - Bitcoin was proposed by unknown author/s - pseudonym of Satoshi Nakamoto
- At the heart of blockchain is the distributed ledger. In its simplest terms, a distributed network is a shared database. Rather than one central entity holding the information, it’s spread through a network of millions of sites or nodes. This decentralization offers many benefits over traditional, centralized systems: increased security and transparency, for starters.
- use of a trustless, fungible and tamper resistant distributed ledger called a blockchain
- Ironic it is called a decentralised currency, when you need power and the internet to access
- Since Bitcoin's inception, thousands of other cryptocurrencies have been introduced – no limit or requirement to join
cryptography allowed the currency to have:
- Reading summary here - Trustless system allows you to trust in the system without needing to trust in the parties with which you’re transacting. Computers verify each transaction with sophisticated algorithms to confirm the transfer of value and create a historical ledger of all activity. The computers that form the network that are processing the transactions are located throughout the world and importantly are not owned or controlled by any single entity. The process is real-time, and much more secure than relying on a central authority to verify a transaction.
- In a shared ledger system, every transaction is recorded and verified in a transparent manner, and the system creates the trust by default – doesn’t show who is behind the ledger though
- Trustless technology — meaning you don’t have to know, like, or trust the person or entity you’re doing business with —
- Trust in the system versus not needing to trust – but this only refers to trust in transactions going through
- Fungibility
- fungibility is the property of a good or a commodity whose individual units are essentially interchangeable, and each of its parts is indistinguishable from another part – same as AUD
- tamper resistant – tamper how?
- Unregulated – does this mean tamper with prices? Or just tamper with transactions?
- Been hacking cases - hackers steak API keys and get into wallets
- Or just destruction of blocks or theft – simplification - done on mining through forcing incorrect verification codes – change a c for a d in the chain – block is lost – range of 17%-23% lost for good of BTC
Going deeper is bitcoin an option?
- what do you value BTC in? Is it AUD? Or USD? Think about that –
- is it really a new form of money if it is still valued in current currency – not in relation to good themselves
- Fractal version of fiat currency – you need fiat money to start with to purchase under current economy
- Currencies need reserves to lower chance of going to zero – without something backing it (other currencies, gold, etc.) – no perceived floor in panic
- How do we value currencies? Subjective theory of value – what is the value? What we will pay –confidence
- Reserves and Gov decree - provide lots of subjective value in Fiat – lots of confidence – until there isn’t
- Seen currencies suffer massively under this – even with safety measures
- Subjective value – when btc goes 11k, is seen as subjective value – speculation in further prices
- Has a form of floor value mechanism – cost of mining versus price – if price goes to $2k, nobody mine – supply stop
- Confidence - When it is lost – depending on how bad - impossible to regain –requires confidence – or short memory
- The fact that BTC doesn’t have an Intrinsic value doesn’t matter as much as how resilient it is to confidence shocks– BTC never been through a financial collapse – created around 2009 –
- We know how other asset classes will perform – never seen BTC performance in panic – who knows?
-
Unregulated leads to fraud and manipulation – or regulation being introduced
- Future regulations are a worry – for the most part left alone – easy to regulate – Requires internet –
- Aus providers easily block IPs – what if access through internet is blocked – can’t verify without internet connection
- May have a base value purely due to the areas it is most useful for – tax evasion, laundering, terrorism, illegal stuff – North Korea blocked in cash transfers, but could trade in crypto - utility token until use taken
- the supply of it also being snapped up by Governments – China, seized all of the citizens BTC, while on the surface against it, they likely have the largest control over the mining and ownership of BTC – come back to this in a sec
- Have been money seizures in the past 100 years – gold by FDR – made it illegal to own more than allowed
- Forced buyback at $20.5USD ounce, then went on buying spree and eventually pushed price to $35 by Nixon -
- Doesn’t escape concentrations in control/supply – cheapest power or deepest pockets – China has both
- June 2018, over 80% of Bitcoin mining is performed by six mining pools - five of those six pools are managed by individuals or organizations located in China. Other is in Iceland.
- First – why concentration in china? Cheap power – mining takes a lot of Electricity power requirements
- Why Iceland or China – mining Using as much as Nigeria – 90m people – soon as much as japan
- No way it can be allowed if environmentalists get wind – but that is what you need to increase mining incentives – higher prices – current cost of mining 1BTC = $4k USD
- Future regulations are a worry – for the most part left alone – easy to regulate – Requires internet –
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If prices are low - Then you hit a wall in the mining incentives – chain creation dries up
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Second – control of mining production and supply allows price manipulations – unregulated
- Painting the tape - a form of market manipulation whereby players attempt to influence the price of a security - buying and selling it among themselves
- create the appearance of substantial trading activity. ... Painting the tape is an illegal activity that is prohibited – but only in markets that are regulated
-
We are both BTC miners – we both trade the same coins back and forward – slowly increasing the
-
Also Called a ramp – old trick – think boiler room – painting the tape
- Price action is going up – who would have most influence on this?
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Could go to $50k - Looks to be having a second wind bubble – Remember the first Massive bubble
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Sceptical of price transactions - Over time there are studies being published – may start to show Evidence of fraud - nothing new Every market has this
- Why markets have regulators - Believe that BTC not manipulated? Magnet due to it
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The trustless system is helping reduce any exposure of fraud – that would create a confidence Collapse –
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Confidence – how confident you are that others will still be confident?
- Computers trust as long as the trade transaction clears the key – watchdogs in markets see something up and investigate
- Also important – creates a new class of accidental criminals – have to declare it on returns, - Govs will track down using powers from AUSTRAC and ATO -
Summary -
- What do you think in terms of value when you think BTC – what can you trade it for/exchange it?
- Terms of currency conversion – as long as there is dollars – another form of digital monetary expansion
- Most money in existence is in 1s and 0s – fracking banking reserve in modern economy
- Crypto - Allows for more money to be traded away into 1s and 0s
- Don’t have a good feeling about it – further into the rabbit hole - Removal of value further from a dollar – at least you can hold it in your hand if the system is crashing
- Think about it – how decentralised is it when you need power and the internet to access it? And when it has an infinite supply – if there is no confidence that the unit will retain value over longer term – not adopted as monetary system –
- How would the global economy operate if as a country you could just create a new Crypto currency and bail on your existing one
- No country would trade or trust you to repay your debts/not just bail on a currency once it runs out of supply
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If fully adopted it would be a hybrid system of what is currently known – Still by governments/central banks –
- Back to being centralised – but now what would back this? And money completely out of your hands –
- No physical money then
- System that is more centralised –control the cost of money and supply completely – non held outside of the system like cash of gold
- Back to being centralised – but now what would back this? And money completely out of your hands –
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Don’t own any, don’t recommend it – if you want – go ahead, I like the potential blockchain has
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Fan of the free market and new tech – but don’t see it as anything to invest in and hold
- Personally – capital preservation is more important to me – if BTC came out when I was 16 – would have
Next ep – look at another type of mining - Gold - Gold and bitcoin are both a form of money – one has been around for recorded history – interesting that Symbols for crypto always resembles gold or silver coins
Thanks for listening, if you'd like to get in contact you can do so here.
Welcome to Finance & Fury, the ‘Say What Wednesday’ edition. I recently received a great email from Nick, on a fantastic topic. So, I’ll read most of the email as background to today’s discussion;
“Hey Louis, I’ve recently be thinking about an issue that I think should be at the forefront of people’s minds a lot more than climate change, and that’s waste pollution.
The issue of waste pollution in both the ocean and land seems to get a lot less coverage than the issue of climate change, even though the issue has a far greater capability to affect us in a dire manner, as pollution can undeniably kill life. Now, what does this have to do with finance?
I recently attended Groove in the Moo, and they had this system where they overcharged all cans by $1, but gave you a $1 cash refund for every can you brought back to the purchasing station. Me and my friend being thrifty got to work and collected over 200 cans that we saw just lying on the floor to make some money over the day. This concept got me thinking though. What if the government began a program similar to this, whereby if they overcharge particular items and offer cash refunds for their return to a recycling centre?
Having a system like this would act as a disincentive for people wanting to buy single use plastics (as it would then cost more) but could also effectively stimulate the GIG economy, where a government doesn’t have to pay for as many workers to clean up streets and so forth, and also allow people who are short on cash to earn extra money for recycling and doing the right thing by the environment (This is of course if people actually took to the idea of cleaning up rubbish they saw on the street).
I do understand that you get something like $0.05 for every aluminium can take to a recycling centre, but the incentive isn’t promoted in any way by the government. Do you think a system like this could actively help reduce the amount of waste produced, rather than legislating bans on particular goods (similar to the ban of single use plastics)? Thanks again for all your content, and hope to talk soon. Nick”
Awesome Question – and a great way to make some money, nice work! To start, I think it would be a great thing. I am a big fan of incentives to recycle and reuse. This program, and different forms of it, have been in use for a long time.
From what I have seen of this first hand, it does work well when implemented well;
- I lived in Austria/Germany and while they have few bins, there isn’t much rubbish around.
- That is due to them having rebates on bottles/other goods that can be reused. We used to take a carton of bottles back to the supermarket to get a discount on the next slab
- Even out in parks or concerts, people would walk around and collect a bottle as soon as it was put down anywhere and come up to you to ask to take your rubbish away. This was mostly thrifty people, like Nick, but I noticed it also outside of music events randomly on the streets – it was the homeless that would go around and collect bottles – and earn income for themselves.
As mentioned in Nick’s email, some states do have a few cents reward per can/bottle. It’s not that popular though.
- The issue is a very limited distribution chain – except in reverse.
- For example; imagine Amazon, what happens if they didn’t have drones or employed delivery drivers, but relied on delivery people who come and go at random. Who have to find their own transport, go grab the item from the storage house and then drop it off to the person? Good luck getting next day delivery!
- The same problem is in reverse – getting the millions of recycling items back to the place they are best suited is an issue especially with the collection method.
- Think about your recycling habits; You may be the best – tear off labels, rinse out products, remove lids, etc. put it in the bin, then it gets collected and thrown in with everyone else’s rubbish, bottles smash, combined with actual rubbish put into the wrong bin… and it becomes the sum of averages and what basically becomes rubbish anyway as it can’t be processed or sorted.
- Doing it manually isn’t practical; there’s labour costs – shipped to Asia – which uses a lot of CO2 in transport
- Due to low environmental regulations overseas, the rubbish was mostly being burnt or dumped upon arrival anyway.
- The countries that suffer; Indonesia, Vietnam and, in particular, Malaysia, which received more than 71,000 tonnes of our plastic in the last year alone – so all that rubbish you see in pictures of beaches in Bali and Thailand – chance it has come from our recycling.
- Normally I’d have a bit of a chuckle at government incompetency and them somehow getting the exact opposite result than intended – but this situation is really and massively impacts lives – policy allowed to continue, with opposite to intended effect – wouldn’t they stop?
- If it was a company – like Amazon and their delivery model, if the packages are burnt instead how long would they stay in business?
What can be done?
Give incentives to individuals and also companies to participate – a free market solution!
- There are two parties here – those producing the goods, and polluting in the process, and those consuming the goods, and polluting in the process.
- Recycling policy focuses on us – how to recycle our waste, but controls the process – a monopoly on supply goods at the government level. The supply chain is broken, there’s very limited supply due to everything being sent to Asia
- The policy to put this into force does require the supplies of goods (i.e. producers and sellers) to willingly adopting the collection of their rubbish;
- Without an incentive for them to do this, it is hard to enforce the adoption of this system
- They are instead punished for polluting (but, we will get back to this topic!)
- The current methods in Australia are state by state. Rubbish needs to be returned to recycling plants and the homeless don’t have any method of getting the goods there (as there’s no public transport close either).
- A lot of the producers aren’t exactly local - supply chains are normally across many countries
- May be more costly for the producers / large suppliers to adopt
- To solve this the Government mandates that companies must only use recycled goods = price rise and undersupply
Where the recycling chain really comes unstuck unfortunately, is in the process of recycling itself.
- This is a very labour and CO2 heavy industry, so the nature of trying to reuse goods actually leads to more pollution with the current methods and technology (like us shipping it overseas to be done).
- Collection methods are inefficient and costly – is all bundled and broken up into one pile at great expense to tax payers
- All based on enforcement rather than encouragement
This opens up a very interesting point in economics – behavioural economics. When people are incentivised and not punished, they tend to work better, and systems that provide incentives work better than punishments – in any economy, environment, etc.
- For example; Two options – one is to make 10 items for your boss or you get beaten, the other is to make 10 items and you keep the rest on top to trade – what environment would you have more items? Items = Food, goods, money
- Worried about pollution? Give companies tax breaks, not fines – Profits are more effective than fines
- Punishment – there’s a risk you won’t get caught (corruption, nepotism, government inefficiency)
- Limitations – there may be loop holes or result in opposite to intended outcomes – forcing one thing but resulting in a worse outcome
- There’s no instant feedback loop – and it doesn’t stop the damage – all fines are in the end are an additional government revenue. Companies continue to pay and the Government continues to collect (and they’re happy with that arrangement)
- Sometimes the regulations get so green that the companies go out of business. Then everyone suffers – Government lose the revenues from the taxes and fines, workers lose incomes (government loses further tax revenue), consumers lose a good or service, less competition or options can lead to price increases, and so on.
- Legislating requirements at the individual level isn’t entirely effective on its own either – littering fines, or having garbage in your recycling bin – another form of government revenue
- Have the ability to remove the middle-managed system – allowing consumer and companies trade trash for treasure
- The complexity of modern society is in orders of magnitude greater than anything humans have experiences based on recorded history
- In a simple system you can be pretty sure if you do A, then B will happen – a piece of paper and a drawer
- 1 piece of paper, one drawer – 100% chance of knowing that if you take paper and store it, will be in that one drawer
- 1 piece – 2 drawers – now there’s a 50/50 chance, 1 piece – 3 draws – now 1/3, so on – this is a simple system. It’s linear.
- However, when you introduce a second step (order of consequence) the probability jumps when guessing
- 2 pieces – 2 drawers – goes from 50/50 to 25%, 2 pieces – 3 drawers = 9 options from 3
- 5 pieces – 8 drawers – 32,768 outcomes – add one more bit of paper – 262,144 outcomes
- Complexity in outcomes increases exponentially – paper and drawers are no comparison to people, companies, governments, and all of society.
- We live in an incredibly complex system that nobody truly understands or can predict the effects of actions
So why try? There is a solution to get the best outcomes (over time). Not a wish list, but one that actually works, unlike wishes coming true – let’s go back to the example from Austria
- Austria/Germany – Pick up a case from the supermarket. When you’re done, take the label off (polite) and return with crate to supermarket, put it into a mini conveyer belt, hit the pad and it disappears and you get a docket printout to scan next time you spend to reduce the bill.
- This is just one example – but it can and is extended to other goods and items.
Incentives work better than punishments
- Incentives provide growth in new economic activity – like Nick said, the gig economy and collecting rubbish – Uber Rubbish
- Due to opening up new opportunities – not taking away choices and freedoms which have the opposite effect
- At the company level – set bonus benchmarks as an incentives system
- Hit reduction of CO2 targets, use of recycled goods, helping collect rubbish, etc they may be incentives with tax reductions
- Way to truly unlock some of the social good that companies can do – leverage the people as well
- Day off work to go clean up trees – might cost the company $40k in wages, but save $60k in tax
- Individual incentives
- Money back/money off goods next time you buy – makes you value garbage
- Help out with cleaning through company programs – get tax credits, or tax-free bonus from company tax savings
- There are a lot of options – we can work it out based around how to maximise the system to benefit us
Circular economies (I’ll can do another episode if you guys) – I was doing CPD points a while back and the study was focusing on circular economies - an economic system aimed at minimizing waste and making the most of resources. ... This regenerative approach is in contrast to the traditional linear economy, which has a 'take, make, dispose' model of production.
This sounds good on the surface but this sadly is just more of the same on a global level promoted by places like the UN. Governments adopt policy to force the reuse of goods.
If you are interested – let me know – www.financeandfury.com.au
Thanks Nick! If anyone else has a topic to discuss or a question to ask, hit me up via our contact page.
Hey guys and welcome to Finance and Fury! Today we’re joined again by Jayden to talk about whether property prices will keep declining due to higher mortgage arrears.
The RBA’s cookie cutter approach to rates will continue to try and help reduce chances of mortgage default and ease burden on household cashflow.
Why is it that an increasing share of housing borrowers are behind in their mortgage repayments?
- Points to a rising risk to the financial system as housing loans are 40% of banks assets directly
- This is in addition to trillions sitting in derivative style instruments which use these mortgages as their underlying assets
- When the property backing the loan exceeds the value of the loan then arrears aren’t a big deal for banks. They take the deed of your home and take back their loan (plus unpaid interest/costs).
- With falling housing prices however, the potential for banks to experience losses increases.
Where are arrears at
- While it is increasing, the rate of arrears in Australia is still relatively low compared to internationally. In Australia is should be noted that over 99 per cent of housing loans are on time, or ahead of schedule.
- Making loans involves risk - banks are used to managing this risk.
- But when arrears rates are persistently very low, that would suggest that lenders were being too cautious in lending
- Part of the problem with our economy is that loans aren’t going to businesses (real growth drivers like wages) they go into houses. Our loans are fully recourse, unlike the U.S. for example.
Why borrowers fall into arrears; there’s no single one cause, but often a combination.
- A fall in income or a rise in expenses, or both.
- Personal misfortune, such as unemployment, ill health or a relationship breakdown, which is unrelated to economic conditions or the quality of their loan
- Clear pattern of more loans going into arrears in locations where the unemployment rate is higher
- Increases in interest rates
- Personal misfortune, such as unemployment, ill health or a relationship breakdown, which is unrelated to economic conditions or the quality of their loan
- Weak economic conditions
- Borrowers can struggle to make their payments if their income falls.
- Weak conditions in housing markets make it hard for borrowers to get out of arrears by selling their property.
- Rate of income growth
- Nominal income is rising strongly, over time, mortgage payments take up a declining share of a borrower’s income.
- Nominal income growth has been around half its longer-run average
- Banks’ lending standards also play a role in arrears.
- Poorer quality loans might continue to perform well in good economic conditions, and only fall into arrears with an economic downturn.
- Assessment and size of lending adds risks
- Drives prices up as well - if rates go up, it’s a worse scenario
Summary
- Housing arrears have risen but by no means to a level that poses a risk to financial stability
- Weak income growth, housing price falls and rising unemployment in some areas have all contributed.
- Australians amassed one of the world’s highest levels of household debt in a five-year property boom amid a combination of low interest rates, lax lending standards and supply shortage.
- Prices have since tumbled, with Sydney’s down about 15% from the 2017 peak – People just aren’t selling their property as nobody is buying – so people who are in arreras wont want to sell at a loss – nor would the banks
How to “Arrears-Proof” yourself
- Accumulated buffers of prepayments of their mortgage, and some others have other assets outside of property. Households with financial buffers can withstand some period of unemployment, but if that extends too long and depletes their savings, they risk falling into arrears
- Budget and know your numbers – stress test whether you can afford a 2% rise in rates, or if you lost your job for 2 months
- Get insurances in case you are injured and can’t work
Links
https://www.bloomberg.com/news/articles/2019-06-17/australia-mortgage-arrears-rise-to-2010-highs-rba-s-kearns-says
https://www.macrobusiness.com.au/2019/06/sp-mortgage-arrears-keep-climbing/
https://www.macrobusiness.com.au/2019/06/lunatic-rba-surging-mortgage-arrears-no-risk/
Welcome to Finance and Fury, the Furious Friday edition!
I’ve been thinking a lot about what we are taught in economics, the basic ‘101’. Specifically, if you print a lot of money you get hyper-inflation.
There are plenty of stories to back this up
- Germany Weimar republic, and Venezuela right now – there are plenty of countries with hyperinflation
- Central banks around the world (and at home) are trying for more inflation, and have increased their money supply over time.
- But we’re ending up with lowering inflation. This is puzzling on the surface, though it has a pretty simple answer.
- Inflation and CPI – What we’re told they are - quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time.
- Rise in the level of prices – why a $1 today is worth more than $1 in 1 year, let alone 100 years
- CPI is what is used to measure the basket of goods
- RBA monetary policy – Try to keep between 2-3% inflation through influence on money supply.
The issue with percentage targets is Compounding
- Compounding is a very powerful tool, it can be your friend or your foe, it really depends what is compounding – Returns (growth), interest, or inflation
- Returns – for an Investor who owns assets or cash, it’s good.
- Interest – if you owe money it’s bad
- Inflation – for an Investor or individuals/consumers it’s bad, but if you owe money it’s actually very good
Inflation is bad for us – especially when it’s compounding and is controlled.
We want things to be cheaper. But unless our wages keep up (which is determined by the economy) we suffer pricing squeezes.
Plus, unless you have massive amounts of debt your savings and investments give lower real returns.
This is why inflation is great for Governments! If you have no real assets but are cash rich from income each year from tax payers – You need to either budget well or borrow for funding shortfalls – Every nation in the G20 is in debt – to who?
Debt goes one level further in relationship to currency/fiat monetary system – When you get shut off (ex-communicated) – nobody will buy the debt off you to print money – currency collapse – creates additional inflation due to the relative cost of imported goods
Can cripple a country that has their debt valued in another currency – impossible to pay back
- Example - Germany with war reparations - Gold or other peoples’ currencies
- Crippled them – First - Currency is backed to your supply of gold back then – so lost supply of what backed currency
- If you have to pay reparations in someone else’s currency, or give up your gold supply that is backing your currency, what will happen to the price?
- Today – IMF is the bail out bank for nations – But bail them out in debt based on USD
- International debt (government or private bonds) dates back a way – The 5 Rothschild brothers (Salomon – Austria, Nathan – England, Calmann – Italy, Jacob – France, Amschel – Germany) opened their banks up to international markets – increasing connectivity through lending capacity across boarders – Governments of the day welcomed it
- Quote – Revolutions are generally triggered of by deficiency of money. By preventing such deficiencies, the Rothchild system may serve to preserve peace in Europe. This system or rather Nathan Rothschild its inventor is still providing for such peace. It does not inhibit one state from making war on another exactly as before, but it does make it difficult for people to overthrow the established authority.” - Heinrich Heine – German Journalist wrote in 1830– he goes on for a while, gets deep about how religion can be replaced by money. Unfortunately, though – as this system grew, the magnitude of war exponentially increased – whoever has the most money in war wins – most kingdoms of the past eventually ran out when fighting prolonged wars
- But still faced a problem. These bonds were valued in Sterling which in turn was backed by gold, while there was an increase in money supply from fractal banking reserve – still limited to the finite level of gold/sterling to back it. There was almost no inflation under the gold standard – debts had to be paid – no inflating them away
But the biggest debtors were the Governments of the day (mostly monarchy’s)
- Napoleonic war 1815 – almost £10 million pounds lent out
- Rebuild - 1818 £5 million loan to the Prussiangovernment and the issuing of bonds for government loans- collateral
- Continued on like that until Governments got their own way of producing funding
- Had central banks already – but still limited by gold. Not anymore, they print as much as they want
Theory of money supply
- Increase money, you get inflation. It makes sense – the more of something you have the less valuable it is
- Inflation – devalue of the dollar in real terms - $100 stays $100 – but can’t buy as much (hidden tax)
Why don’t we see this today? Money supply has increased massively since we went to the Fiat system – to achieve the target of 2.5% p.a.
- M0: includes bank reserves, so M0 is referred to as the monetary base, or narrow money.
- M3: M1 Money base plus substitutes (M2) plus large and long-term deposits.
Money Supply – M0 – 2000 – 30bn – 2019 – 110bn – 7.5% growth p.a. - M3 – 400bn to 2.2trn over same time – 10% p.a.
Very consistent – looking back to 1976 - around when we started adopting Fiat – been 10% growth p.a.
Comparing Inflation over this time – 2.4% since 2000 – been trending down – since 1975 – peak of 16% - trend down to 1.8% - RBA done well to keep it within the band of around 2.5% since late 1990s when it was introduced.
Thanks to the interconnective nature of the monetary system there’s no shortages of banks and governments willing to demand the level of debt, bonds to meet the increased supply of money. But also, this gets directed into ‘hard asset prices’ and compounds the price of everything massively.
- Property prices, due to every increasing borrowing capacity.
- As the flow on effect of money supply is that you have low interest – at least this supply/demand relationship seems to work.
In the past – before early 90s inflation got a bit wild – some years it was up.
Why are the same things tried over and over again, does this go on and on with a different result?
Imagine that you put your whole life into a theory/assumption – how easy is it to admit you are wrong when presented with new/conflicting evidence?
- If you can be paid
- Not when you make money off teaching that theory based around expertise
- But now imagine that a new theory came out, or you ignored evidence that contradicted major assumptions – and one of your students wanted to write their thesis on this – never get accepted
- What happens when over a 70-year period this cycle continues – the same theory is incentivised to be regurgitated regardless of if it outdated
- A lot of economic theory is based around a world without globalisation and instant transactions, some even electricity – no wonder the models have a hard time predicting if they cant adapt
- Dad Joke – What do economists and Major League baseball hitters have in common? Both get paid regardless of if they strike out 70% of the time.
But those declines were correction years to help with affordability and the large increased were normally due to an economic shock – like a WW.
Where an average target is dangerous if back testing data to fit a model (talked about in last ep)
What average would you prefer as a return
- 10% or 5% average? 10% obviously – but what if now – prob of 50/50 either 20%, or 0%, versus compounding of 10% - compounding of 10% every day –
- Sometimes you might want the scenario of an average of 5% over 10%
- Took an average rate as a target that worked well when the economy was growing – but this was back testing
- And neglected to look at the importance of corrections – price drops/low inflation
- Example – low inflation when Rockefeller (Standard Oil) flooded the market with cheap oil – and saved the whales (unintended consequence) – This was a massive benefit to any countries lucky to participate in this early through having free markets to adopt this technology –
- Issue with inflation – doesn’t just create a strain on household spending if wage growth cant also keep up
Business side of things – Their prices are what inflation measures -
- Are businesses borrowing? Not so much here -
- Inflation in their costs of inputs – Not from money supply but increased regulations and taxes
- Taxes – like GST – companies had to put up their prices by 10% - companies do get to claim back some of the GST on expenses – but not on all expenses – like wages – instead they not only cover the PAYG for the employee, but also pay around 4-5% depending on state in tax on wages if they are paying their employees too much
- Creates an artificial strain on businesses to keep up with increasing costs of their own while not being able to pay additional costs of employing people – there is nothing wrong with high inflation – as long as it can be allowed to correct and that the inflation being outstripped by wage growth – coming from company profits
Where has the money been going?
- What isn’t measured by CPI – Hard asset price increases – property, shares, etc.
- e. inflated hard asset prices through compounding growth – from increase of money supply -
- Why is inflation good? The Government – who else can borrow billions of dollars at low rates and let inflation eat away repayments? No need for fiscal restraint if you can let inflation eat away your debt on a 70 year bond.
- At 2.5% $1bn turns to $177m over that time – interest is covered by tax payers – or another bond
- But with money supply going up and up in ‘uncollateralised debt’ – Governments may not be able to afford the increased interest repayments if rates do go back up
- What the target does is switch the old models from a simple interest outcome, to a compounding one – has drastic exponential factors the longer it goes on
- Analogy of after big night of drinking – Wake up and on the verge of a hangover
- I’ll admit there has been one or two times I have woken up hungover and kept drinking
- What happens the next day when the party is over? Hangover is worse than normal –
- We should have had a hangover by now – there is a backup plan the IMF is looking into to increase global inflation – trying to escape the true horrors of a 2 day hangover, or in this case debt collapse
- How to avoid a hangover from a credit crunch? Work towards that answer in the next FF ep.
https://www.rba.gov.au/education/resources/explainers/inflation-and-its-measurement.html
https://www.abs.gov.au/websitedbs/d3310114.nsf/home/abs+chief+economist+-+70+years+of+inflation+in+australia
Welcome to Finance and Fury, the ‘Say What Wednesday’ edition. Today I’m here with Jayden!
Today’s question comes from Gavin,
“Is there anything to be considered when looking at refinancing mortgages with smaller lenders that run their business online like reducehomeloans.com.au with rates of 3.19%, versus the larger lenders?”
Great Question!
Types of Lenders
- Large lenders – ‘Big 4’ banks; ANZ, Commonwealth Bank, NAB, and Westpac
- Small lenders – almost any financial institution other than the Big 4 banks
- Credit unions, building societies
- Non-bank lenders – what most online lenders fall under
What are non-bank mortgage lenders?
A non-bank mortgage lender is a financial institution that offers home loans but is not a bank
Is a mortgage with a small lender better due to being cheaper?
- It can be, depending on what you’re looking for in a home loan. As with anything else, smaller lenders have their pros (possibly lower interest rates, possibly better customer service, etc.) and their cons (possibly fewer resources, possibly more limited loan options, etc.). We’ve discussed some of these pros and cons in more detail below.
- Some smaller lenders are able to provide more competitive interest rates or fees, while still offering all the same features as loans from the big banks, such as an offset account or redraw facility, the ability to make extra repayments, and more.
How it Works
- The company presented as the lender aren’t the ones who own the mortgages, instead the provider of the deposit funds would have the ownership of the mortgage.
- In the event the lender was in a defaulting position, the recall of their assets (the mortgages people have borrowed) in a liquidation process is unlikely as the ownership of the loan would be transferred to another entity.
- Smaller lenders may be online only, so therefore they have fewer overheads than the traditional “bricks and mortar” bank branches.
Watch out for these red flags
- Non-bank lenders that are online only. If the website is all you have to work with make sure all the information you need is available
- The major things to watch out for with online lenders like Reduce Home Loans is that they are not a Bank.
- Therefore, they don’t actually accept deposits for savings accounts which is what a Bank would normally use as it’s source of funding for their mortgage lending objectives.
- They do instead source funding from other means (sometimes from the banks themselves) however, it does add an additional layer of risk
Can be confusing – so see what Laws apply to small lenders to see where they fit
- ASIC – Australian Credit Licence - National Consumer Protection Act 2009 (Cth) (NCCP) – This is at least a minimum
- provide a certain standard of information to every potential borrower
- assess whether a potential borrower can realistically service the loan
- Same criteria as all other lenders – ASIC regulated
- APRA - an additional set of criteria for lending risk for the banks – but non-bank lenders are not deposit-taking institutions, so they are not regulated by APRA
- Some smaller lenders are regulated by APRA, but those who are not carry additional risks
- Dispute resolution schemes - whether a big or small or non-bank you have an ombudsman who can help resolve issues.
- AFCA
Are small lenders likely to fail or collapse?
- Government guarantee for deposits up to $250,000 doesn’t apply if non-deposit taking lenders
- If your lender is failing, there are several likely scenarios that protect you as a borrower:
- The smaller lender is bought (acquired) by a larger lender.
- A larger institution buys your mortgage from the smaller lender.
- The government provides assistance via the deposit guarantee.
- Nothing really changes for you as a borrower, except that you may get a new lender
- Always compare your options for switching your home loan to another lender.
- Smaller lenders may in general be more vulnerable to economic conditions
- Risk comes from their source of funding - larger lenders or other large companies/investors
- But there are pros and cons to this as well, as this funding means they are able to offer flexibility that the big banks may not be able to offer.
Summary
Borrowers should look for a lender that is regulated by APRA as well as the usual credit laws, is not connected with recent bank failures, and doesn’t raise any red flags when you’re researching their loan options.
Make sure they have an Australian Credit Licence, External Dispute Resolution Scheme (AFCA) and are reputable.
Welcome to Finance and Fury. Today’s we’ll be talking about what assets will survive a financial correction. The assets that that people still have confidence in. Confidence is key! In any asset, confidence is what is required.
Why is confidence important? If a lack of confidence/panic is what causes prices on assets to drop heavily then the solution is in assets that, while their prices may be impacted (short term volatility) they will not go to zero.
Human behaviours/emotions pay a significant role 1. Bubbles (and FOMO) – you see the price going up, you jump in because you fear missing out. This can create overpricing. 2. Works in both directions – Crash – when people fear a share crash, they sell their shares in a panic, and the crowd follows dropping the price quickly 3. The fundamentals/intrinsic values of things don’t matter in a financial collapse. People aren’t looking at Fair Value when all they can focus on is 40% losses – they only see the losses 4. Subjective values – do people value it regardless of intrinsic values
Never sell after the fact * Hubris to think you can sell out before the market crashes – ‘timing the market’ * You have to own assets that will survive or become more valuable
Asset goes down in value – so what? Depends on type of asset and what you do, and what those investments are to you
I think of TLS, bank shares are volatile term deposits – not expecting great growth off them, the valuations are almost like a Utility company – but decent dividends
When shares do go down in value 1. If you sell, you crystallise or realise the loss 2. They keep going to zero
The Solution Avoid selling early and crystallising losses or losing 100% of the investments that you have
- Step 1 - Buy good companies, diverse business models, diverse markets and lot of different companies, across asset classes (Diversification)
- Step 2 - Don’t panic sell
Buy alternative asset classes 1. Gold/Silver/Palladium/Platinum * Not on futures contracts or derivatives, but one that holds the underlying asset + Not enough gold/silver etc. in world to cover size of ETFs/funds with positions in gold * Water + I’m looking into this one, I just find it interesting + 1lr of petrol is cheaper than buying a bottle of water from the gas station + Don’t collect too much – The Government might tax you
The Worst Case – you are in a position that you have to sell 1. Most common cause is leverage /debt – this applies across asset classes 2. Two-fold * The lender wants their money back – they may have someone else to pay, or have lost confidence themselves in getting money back * Cashflows – The cost of the debt is too great compared to what you can cover
Types of assets to watch out for * Shares with Margin Loans + LVR levels + Run up of leverage causes a lot of bubbles, then corrections * Property that is highly leveraged + Not PPR – not forced to sell that hopefully + But if people are losing jobs, rents may come down or be non-existent * Mortgages – MBS, Managed funds marketed as ‘Income Funds’ * Other ‘debt instruments’ + Corporate notes/hybrid securities + Credit – short term 90-day bank bills – used for short term funding + Derivative exposure - Warrants (do play some part)
Summary – There are assets that, while not retaining the value like you might want (drop in price), if you hold them you can survive 1. Have a range of investments (not just bank shares) * Some physical assets – Gold * Shares in companies that people will still use – not fad companies or ones built on people’s discretionary spending * Property – ensure that you can hold this long term and not need to sell 2. Make sure they are quality assets 3. Don’t sell 4. It sounds easy – though it’s not easy seeing the value of your assets drop – but it is better than selling out and missing the rebounds due to emotions
Hi everyone and welcome to Finance and Fury! Today we’re going to look at our current monetary system; what is considered money, and also the future of our monetary system.
Today’s episode will be a fairly quick episode, and will be an introduction to a series of Furious Friday episodes that we’ll be doing over the coming weeks.
Our current monetary system is actually debt-based fiat currency. This means that every dollar that you have is a debt obligation by a central bank to eventually repay.
This is pretty important to look at, because unfortunately this won’t last forever. It’s only been around for 40 years, and we can already see the signs of this system struggling to keep up with the never-ending ability to create ‘money’ out of thin air.
Money is created with 1s and 0s – for every $1 there is a debt obligation to the central bank to repay this. Every dollar that you have is backed by some form of debt, whether it be debt created from a commercial bank (fractal banking reserve) or when it is issued and bonds are created and traded in exchange.
The three functions of money 1. Store of value – can I hold on to the money and spend it at a later date knowing that it will hold its value until tomorrow, next week, or even next year? 2. Unit of account – You can think of money as a yardstick; the device we use to measure value in economic transactions. 3. Medium of exchange – Is widely accepted as a method of payment
Major characteristics of money These vary between options and are why some forms of currency are adopted preferably over others.
- Durability – Will it last? Can it be stored easily?
- Technically cash durability isn’t as good as gold – Pablo Escobar and his money eating rats
- Portability – can you carry it around easily? Gold bars are pretty heavy.
- Divisibility – Similar to unit of account where you can break the units down into smaller levels
- Uniformity – is every unit the same?
- Can it be debased/devalued?
- Coins are not immune
- Limited Supply –
- Counterfeiting
- Who is creating it? Gold is better than fiat currency from this perspective
- Acceptability –
- Barter is hard
- Fiat became easier and became a legal tender by decree
The combination of all of these characteristics + how we value it = what we adopt as money. This comes back to a thing called ‘subjective value’. Do we think we will be able to use it in the future? (Money riots of the past)
Money may take a physical form, as in coins and notes, or may exist as a written or electronic account. It may have intrinsic value (commodity money), be legally exchangeable for something with intrinsic value (representative money), or only have nominal value (fiat money).
The Mesopotamian civilization developed a large-scale economy based on commodity money. The shekel was the unit of weight and currency, first recorded c. 3000 BC, referring to a specific weight of barley, and equivalent amounts of silver, bronze, copper etc. The Babylonians and their neighbouring city states later developed the earliest system of economics as we think of it today, in terms of rules on debt, legal contracts and law codes relating to business practices and private property. Money was not only an emergence; it was a necessity.
Money can be a number of things 1. Cows, sheep, grain – used in barter economy 2. Shells – Ancient China, Africa, and India 3. Golden coins – Goldsmith bankers 4. Paper with gold/silk backing it 5. Debt based Fiat
Some of the things we’ll be looking at in the upcoming episodes; 1. The way we currently do it (debt-based fiat) and inflationary targets 2. Bitcoin, and also crypto currency in general 3. Gold – the old school way 4. What will happen once the debt bubble breaks, and the rise of SDRs (Special Drawing Rights) which I believe will be a form of global reserve currency in the future. They have been around since 1969, and are used as a global currency reserve, but you can’t own them – only the IMF can! This is going to be a VERY interesting topic so stay tuned!
Hi Guys and welcome to Finance and Fury’s ‘Say What Wednesday’ Episode. Today we’re joined again by Nick.
Our question today comes from Justin who asks,
“Our building company recently went through issues with its cashflow, so as directors we halved our wages to help…I was wondering if you could talk about the importance of, and the correct way to complete a cash flow forecast. Up until recently we had never completed a budget or cashflow forecast yet we have a turnover of 5 million. Yet, it was the lack of cash flow forecast that nearly brought us down.”
Good question!
Today’s episode we’ll run through;
- What are cashflow forecasts
- The different ways of achieving these
- How to plan to build your cashflow
- Major issues you may run in to
Business cashflow As a business owner the company revenues are yours after all costs are paid for
- Costs of business - What is typically the biggest expense for a business?
- What is the average profit margin? How does it differ between types of companies?
- Profits - Used to pay director salaries, dividends, etc
- How volatile do you see these being? Do most Directors’ incomes vary year to year?
How can a business plan for cashflow forecasts over a 12 month to 3-year period? * What are the steps to look at in preparing a forecast? + How to know what your costs are? + How to work out an estimated revenue?
Types of cashflow forecasts – depending on stage of business: * Starting up – what is important? What are your upfront starting costs? + How do you forecast something that you haven’t event started yet? - Working out prices on goods/service sold - Multiply by the number of people you expect to buy your offering – this can be hard + Calculating upfront and ongoing start up costs - What are some costs people forget about? Bond, insurances, GST/BAS? + Do people tend to overestimate their initial forecasts? Is it important to review these upon the first few months of business? * Growing – What are the important things to focus on once you are out of the weeds? + What are some ways to continue growing the revenues – but not rely on it in forecasts? * Mature – What would you consider to be a mature business for cashflow purposes? + Is cost reduction important here? Increasing profit margins? + Is continuing growth important instead? * What are some major issues that you see with some company cashflows at each stage? + Do they underestimate costs? Overestimate revenues? + How do you plan to go through volatile times? Downwards trend in the business cycle?
Types of business cashflow planning – What are the different methods used across industry sectors? 1. Professional Services based 2. Manufacturing/Trades/Construction/etc. 3. Retail/Hospitality
Avoiding issues in cashflow planning: 1. What are some key rules to follow in cashflow forecasting? 2. How often should you review them and adjust the forecasts? 3. How do you plan provide buffer margins for any inconsistencies between action and estimated?
Hi everyone and welcome to Finance and Fury. If you missed last Monday’s episode on bank bail in laws, you might want to go back and catch up as this week’s episode follows on from that one.
Today we’ll look at what to avoid holding as investment in the future, based around the updates to these laws. Knowing what investments can be taken by banks in the next financial collapse, to allow them to bail themselves out is a great place to start, as these are going to be pretty risky going forward.
According to an IMF paper titled “From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions”:
- Bail ins - a statutory power of a resolution to restructure the liabilities of a distressed financial institution by writing down its unsecured debt and/or converting it to equity
- The language is a bit obscure, but here are some points to note:
- What was formerly called a “bankruptcy” is now a “resolution proceeding.”
- Bank’s insolvency is “resolved” by turning its liabilities into capital. Insolvent ‘too-big-to-fail’ banks are to be “promptly recapitalized” with their “unsecured debt” so that they can go on with business as usual.
- “Unsecured debt” includes deposits, the largest class of unsecured debt of any bank. The insolvent bank is to be made solvent by turning our money into their equity – bank stock that could become worthless on the market or be tied up for years in resolution proceedings.
- This power is statutory. Cyprus-style confiscations are to become the law. Some countries can already take funds from depositors – Australia is a bit of a grey zone
- Rather than closing their doors - “zombie” banks are to be kept alive and open for business at all costs, and the costs are to be to borne by us at some point – even if you don’t hold bank shares, the market would go down
- A lot of the recommendations have come from the Financial Stability Board (FSB) – Reformed in 2009
- Mario Draghi – ex Goldman Sachs
- Current ECB president - member of the ‘Group of Thirty’founded by the Rockefeller Foundation (the Group of Thirty is a private group of lobbyists in the finance sector)
- His son - Giacomo worked as an interest-rate derivativetrader at investment bank Morgan Stanley until 2017, a time overlapping with Draghi's presidency of the ECB
- Current Chair is a former partner of Carlyle Group, the last chair had 30 years’ experience at Goldman Sachs
- Mario Draghi – ex Goldman Sachs
- FSB – recommended that banks raise a “buffer” of securities to be sacrificed before deposits in a bankruptcy
- ‘Too-big-to-fail’ banks are required to keep a buffer equal to 16-20% of their risk-weighted assets in the form of equity or bonds convertible to equity in the event of insolvency - Called “contingent capital bonds”, or “bail-in bonds”, or “corporate notes”.
- The fine print that the bondholders agree contractually (rather than being forced statutorily) that if certain conditions occur (notably the bank’s insolvency), the lender’s money will be turned into bank capital.
- Just know that most banks alone aren’t able to do that much damage – but when the people working for banks get the authority and executive powers of Governments to socialise the losses and privatise the gains there is a bad outcome for us
- This system is a socialist policy – not free market economics – technically closest to fascist system of Government and business merging/restricted, but without the central planning
- Either way the result are recommendations for policy which incentivises risk taking, then privatises profits but socialises losses
Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 (“the Act”) creates a power of bail-in by Australia’s banks of customers’ deposits.
- The Act empowers APRA to bail in anything that is on the banks’ balance sheet that can be written off or converted
- Liability limited by a scheme, approved under Professional Standards Legislation
- Hybrid Securities – special high-interest bonds evidenced by instruments which by their terms can be written off or converted into potentially worthless shares in a crisis
- Interesting – there was a massive push from APRA to have banks provide funding for capital requirements from Corporate notes – CBA, WBC, NAB, etc.
- Hybrid Securities issued by banks; “a generic term used to describe a security that combines elements of debt securities and equity securities.” - securities issued by banks which permit the amounts secured by the security to be converted into shares or written off at the option of the bank in certain circumstances
- Under the Basel Accord, a bank’s capital consists of Tier 1 capital and Tier 2 capital which includes Hybrid Securities - they’ll be bailed in.
- The big issue with these securities is the risk of being wiped out – there’s no default; just through the stroke of a pen they can be written off. For retail investors in the tier 1 securities – they’re principally retail investors, some investing as little as $50,000 – these are very worrying.
- The comments of Graeme Thompson of APRA in an address on 10 May 1999 when he said: “… APRA will have powers under proposed Commonwealth legislation to mandate a transfer of assets and liabilities from a weak institution to a healthier one
- However, even 20% of risk-weighted assets may not be enough to prop up a megabank in a major derivatives collapse.
- Propping Up the Derivatives Casino: Don’t Count on the FDIC
- American banks have nearly $280 trillion of derivatives on their books, and they earn some of their biggest profits from trading in them.
- AUS Banks - $36 trillion in derivatives
- Kept inviolate and untouched in all this are the banks’ liabilities on their derivative bets, which represent by far the largest exposure of TBTF banks.
- Both the Bankruptcy Reform Act of 2005 and the Dodd Frank Act provide special protections for derivative counterparties, giving them the legal right to demand collateral to cover losses in the event of insolvency.
- They get first dibs, even before the secured deposits of state and local governments; and that first bite could consume the whole apple - Banks are much bigger now than back in 2008 (failure of Washington Mutual in 2008 $307bn was small compared with the $2.5trn at JPMorgan Chase, $2.2 trillion at Bank of America or the $1.9 trillion at Citigroup)
- Propping Up the Derivatives Casino: Don’t Count on the FDIC
- Bail ins but also bail outs will still be likely not to cover the total amount
Who holds these types of assets? 1. Banks are specifically excluded as buyers of bail-in bonds, due to the “fear of contagion” 2. Who holds these types of assets? Super funds were struggling with commitments made when returns were good, and getting those high returns now generally means taking on risk. * It wouldn’t be the first time “public pension funds were some of the most frequently targeted suckers upon whom Wall Street dumped its fraud-riddled mortgage-backed securities in the pre-crash years.”
Will deposits get taken? 1. Can technically occur without a Government grab through negative interest rates – or real rates 2. What happens in negative interest rate environment? Cash held outside of the banks becomes more valuable * Think – If you have $100k sitting in the bank – at 1% rates - $101k in 12 months, but -1% = $99k in 12 months * But if you have that cash under the mattress, it’s still $100k, minus inflation (which is still no different if it’s in the bank) * What if a society was cashless and we entered this world of negative interest rates? Any cash in the bank would be taken from you 3. The bank is allowed to convert its debt into equity for the purpose of increasing its capital requirements * A bank can undergo a bail-in quickly through a resolution proceeding, which provides immediate relief to the bank. The obvious risk to bank depositors is the possibility of losing a portion of their deposits. However, depositors have the protection of the Federal Deposit Insurance Corporation (FDIC), which insures each bank account for up to $250,000. (Banks are required to use only those deposits in excess of the $250,000 protection and there’s no way around it for these assets due to the legislation) * As unsecured creditors, depositors and bondholders are subordinated to derivative claims. Derivatives are the investments that banks make among each other, which are supposed to be used to hedge their portfolios. However, the 25 largest banks hold more than $247 trillion in derivatives, which poses a tremendous amount of risk to the financial system – GDP is $20 trillion. To avoid a potential calamity, the Dodd-Frank Act gives preference to derivative claims. 4. Deposits are now “just part of commercial banks’ capital structure.”
What types of assets, instruments are these? Act update includes write-off and conversion powers in respect of “any other instrument”. 1. Government has contended that is doesn’t include deposits – as deposits don’t include a write off provision, however saying “any other instrument” is unnecessary if only applied to instruments with conversion or write-off provisions 2. Also, banks are able to change the terms and conditions of deposit accounts at any time and for any reason, including on directions from APRA to insert conversion or write-off provisions. * This could be resolved by Government passing amendment - exclude deposits from a bail in. * Something to watch out for – if banks start changing their T&As to include a write off or conversion provision – might be time to start digging holes in the backyard! (This is just a joke, not advice!) 3. The central issue is the wording - “any other instrument” * “Instrument” is not defined in the Act but a “financial instrument” is defined by Australian Accounting Standard AASB132 as “any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.” * RBA confirmed - a deposit with an ADI bank comes under such a definition – it is a contract with terms and conditions as to the deposit being set by a bank, accepted by a depositor on making a deposit and creating a financial asset (a right of repayment) and a financial liability in the bank (the obligation to repay). * Deposits are created by “instruments” and are governed by the terms and conditions of those instruments. * But this can easily change, by their own admission, “leaving room for future changes to APRA’s prudential standards, including changes that might refer to instruments that are not currently considered capital under the prudential standards”. These provisions extend to “any other instrument” by sub-section (b) definition - other than “Additional Tier 1 and Tier 2 capital” 4. APRA already has a power to prohibit the repayment of deposits by ADIs, this verges on the writing off of those deposits. The Banking Act Section 11CA provides for this. They can also limit how much you can withdraw from your cash account every day. It is a relatively small step to then convert or write-off what the ADI has been prohibited from repaying or paying out.
There are a number of unusual and concerning aspects to its introduction, passing and intentions.
- The issue could be resolved by the Government passing a simple amendment to the Act to explicitly exclude deposits
- Rather than reining in the massive and risky derivatives market, the new rules prioritize the payment of banks’ derivatives obligations to each other, ahead of everyone else. That includes not only depositors, public and private, but the pension funds that are the target market for the latest bail-in play, called “bail-in-able” bonds.
- That means they can be “bailed in” or confiscated to save the megabanks from derivative bets gone wrong – Last time was tax payers, now it is depositors
- Check super fund investment options – most look okay but if they have credit or corporate notes with the banks – if there are held and converted into shares work a fraction of the original value – this is a bad situation
- Holding large amount of cash in the bank, even in an offset account, this runs the risk of being bailed in by banks in the next financial collapse. Cash is no longer king, especially due to the intangible nature of currency and interest rates heading towards negative rates
Welcome to Finance and Fury, the Furious Friday edition
Going to run through the last part of the Lucky country – and that is how we can best turn our luck around
Through – innovation, freedom of choice, and ignoring narratives based on assumptions
Going to skip through Innovation and freedom of choice –to not repeat the same thing over and over – check out the other eps on this – links on the website – Quick summary of how they fit into todays topic though
- Growth through Innovation – these two-go hand in hand – Creating new businesses and technologies, products and services
- which drives innovation – profit incentive – Innovation efficiency is a market force
- Innovation is a chain – single inventor, drive to improve, idea used to make product, then others improve
- Without companies we never get tech improvements – Chain between Gov tech and population
- What accelerates this - Freedom of choice and equality of opportunity – After researching this for years – assume it to be correct – but others have different views based around their assumptions
- I also believe that freedom of choice extends to what we allow as a population – due to the decisions we make based on assumptions
- Taxation policy is based around assumptions – but regardless of low or high rates – collect average tax to GDP%
- But when the very assumptions that we are basing a decision off is incorrect – it isn’t surprising we don’t get the outcome expected
- which drives innovation – profit incentive – Innovation efficiency is a market force
What Today's episode will cover - What we assume is good for us, or will work – may have the opposite effect
Also – how to know what we are told to assume is actually good for us
Assumptions and models – Our lives are built on assumptions – heuristics – this is good, saves mental capacity for mundane tasks in decision making –
- System 1 and 2 – but something repeated enough moves from us thinking about it – to an automatic action
- I see this with investing all the time – If it is something I already own or understand well – investing becomes an automatic action – but if it is a fund I haven’t seen before, i wouldn’t just assume it is the same as all of the ones I currently hold
- If you are told something over and over again – you just assume it is true – repetition is a powerful tool
- Good and bad habits also form this way – if you hear the same thing over and over from different sources – must be true?
- Example – Who do you assume is smarter/provided greater benefit to our lives? Einstein or Tesla? Person – not company
- Based around assumptions – I’m assuming most of you have to stop and think about it for a second or have Einstein as a default answer – he is more commonly discussed/known – But I might be wrong – I am just assuming that based on personal experience, few people truly know the benefit to our lives Tesla provided
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Einstein was once asked how being the smartest man alive was – ‘I don’t know, you’ll have to ask Nikola Tesla’
- What did Tesla invent? Beyond the power in your home – 300 patents – a lot of them helped develop most tech we have
- First Electro-Magnetic motor patent in 1888 – Why Musk named the company after him
- Radio – Marconi credited – when asked ‘Marconi is a good fellow, let him continue, he is using 17 of my patents’
- What did Tesla invent? Beyond the power in your home – 300 patents – a lot of them helped develop most tech we have
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Wireless, remote control, Radar, Xrays, Hydroelectricity, the resonant frequency of earth – earthquake machine, speedometers or electricity frequency or flow meter
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The list goes on– but didn’t care about money or credit, gave what patents away worth billions back then
- we assume that he had nothing to do with it anything outside of electricity – was an obscure fellow who had some beef with Edison –
- Instead – developed free wireless electricity for public use – His backers weren’t happy – JP Morgan and Oilmen
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The only man that was willing to fund him was John Astor, who died on the Titanic, a boat the JP Morgan owned
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He ran out of funding – and was smeared by the press of the time to destroy his reputation so nobody would take him seriously – Story of him wanting to marry a Pidgeon – actually not true – I assumed it was as I read it online
- It was a dream he had - he became fascinated by them - can sense the resonant frequency of earth better than almost any animal – then he had a dream about one and was talking about that – fake news is nothing new – just thanks to the internet and phone cameras, it is hard to completely cover up the truth
- What did Einstein leave us? theories of relativity with little application outside of the metaphysical/purely theoretical
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Tesla quote – ‘Einstein’s relativity work is a magnificent mathematical garb which fascinates, dazzles and makes people blind to the underlying errors. The theory is like a beggar clothed in purple whom ignorant people take for a king….its exponents are brilliant men but they are metaphysicists rather than scientists’.
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Moral of this story - Be aware of things that dazzle to blind – things that cannot be explained to you – too good to be true
- Don’t trust something that sounds too good to be true – promises and assumptions – political game used to win votes
This is where Narratives comes in – Due to repetition and overexposure – these can become a commonly held assumption
- narrative or story is an account of a series of related events, experiences, or the like, whether true or fictitious
- has one purpose – to entertain through storytelling to entertain, motivate or educate
- The best narrative has all three – motivates people through educating them of something to fear – while being entertaining
- Built around distractions or to drive public opinion – which drives policy decision
Mediums which form narratives 1. Television Programming – it is in the name - a very effective tool in the past – control the flow of information 1. Remember The News isn’t responsible for providing you factual information – they are responsible to make a profit 2. But that is through delivering stories to the public – like a lot of stories, they are based around real-world events 1. Ignoring the accuracy of any CNN reporting – the coverage is negative of Trump – gives an image that they suffer under him 2. But CNN – Admits that Trump getting elected was the best thing to ever happen to them – MSM dying – leaked recordings
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nobody watching except airports, nursing homes – Youtube news channels get more views than them –
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What gets people’s attention? Fear or scandal – why 92% of all coverage of Trump is negative – their viewers dropping under Obama to record lows – needed to up the scandal meter
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Problem with most of these stories? Conclusions are based around assumptions – or reading a headline
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What to do? - News websites are a great source of some current events occurring, but not what actually happened -
- But just know that most of what you read and see online – about our politicians –policy, climate change, everything being pushed is for a purpose – to make you click – it is what makes money - what makes people click?
- Doom and Gloom – but also – these companies track what people online are looking at and commenting on –
- Creates an echo chamber of information – room of people by lunch looking at what has the most amount of clicks
- No wonder we are nihilistic in the west –
- Doom and Gloom – but also – these companies track what people online are looking at and commenting on –
- But just know that most of what you read and see online – about our politicians –policy, climate change, everything being pushed is for a purpose – to make you click – it is what makes money - what makes people click?
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Creates pessimism – unwillingness to move beyond the worst – why? Cause we can’t move beyond something if we can’t solve it, or take action to help mitigate the worst
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Example – what is more relevant to your life – that the Government has the power to seize your money to bail out a mess they helped create? Or the off chance that for the first time ever, predictions on Climate change will be even close to accurate and things get a little warmer over the next 100 years?
- Depends on what your assumptions about the world are – first - the Gov would never do that, latter - warmer earth is bad
- Looking back over records - 18000bc – average temp was 23 degrees – so about -4 from average over 50 years
- 12500 years ago – a spike in a hundred years of about 3 degrees – about -1 from a 50-year average
- 9500 bc – spike again – by about 3 degrees from where it was – then continued to go up
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9000bc to 1500bc – temps were above or the same as now – were people dying? Or did agriculture get easier?
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From 1400bc up until last 100 years, went through a drop in average temps – decline in temps correlated with disease and famines in the colder parts of the world – like Europe
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There is little evidence that a warmer world is bad – especially compared to a colder earth –
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Why doesn’t the news cover long term trends of the Earth’s rotational axis –
- oscillates between 22.1 and 24.5 degrees on a 41,000-year cycle – by 2.4 degrees wobble – very slowly
- currently 23.44 degrees and decreasing at a rate of about 0.013° per century
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this model predicts that the long-term cooling trend that began some 6,000 years ago will continue for the next 23,000 years - Global temp peaked in 7500bc – stayed there for a while – but since 4000bc started dropping
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Imagine that you had been alive for 20000 years – seen all a lot of different earth climates – (link to graph on the website)
- Current models for temp increase have massive variances - error margins – 1 - 4.5 degrees increase in temperature
- How are they predicting this – when not even a 2-week forecast in temperature is accurate? Assume correct
- damaging thing to focus on – mostly outside of anyone’s control! made scared of the weather changing
- This can potentially be a damaging narrative - carbon is what is creating this right? Well we are carbon-based lifeforms – if people keep following that narrative once they implement all of their changes but it doesn’t help anything – they keep looking for more solutions – already are where celebrities are talking about how having less kids can help – while wanting more immigrations
- This sort of focus is based on one thing - Making people focus on the elements/topics that polarise– us versus them mentality
- So the narrative changes our interaction with each other – rather than accepting we have shared common goals, but different ways of achieving these – it is portrayed as if we don’t agree on how, you are against me and my enemy - Loss of freedom of speech –
- Introduces The assumption that someone is evil for not wanting to do the same thing as you
- Funny that the views of a lot of our grandfathers and great grandfathers would be called the Nazis they fought today
- Sleight of hand Government and media combined play– creates a concern to worry about and focus attention, resources on – then the population demand change – the government capitulates, or loses power
- While little attention is given to the things that will actually affect us day to day
- So the narrative changes our interaction with each other – rather than accepting we have shared common goals, but different ways of achieving these – it is portrayed as if we don’t agree on how, you are against me and my enemy - Loss of freedom of speech –
What to do – What is the source of your assumptions – and the accuracy
- someone is telling you the truth is okay when they are
- Someone thinks they are telling you the truth – hit or miss
- Someone is telling you a half truth for a purpose – not great
- Stop assuming –
- this is the simplest thing that we can do as a society to help drive growth, innovation, basically a better future where we keep moving forwards – rather than backwards
- Don’t let overtons window close – While some ideas are awful – they shouldn’t be scielened from them –
- The Socratic method, also known as method of Elenchus, elenctic method, or Socratic debate, is a form of cooperative argumentative dialogue between individuals, based on asking and answering questions to stimulate critical thinking and to draw out ideas and underlying presuppositions
- But when talking to the other side is demonised – as the attacks become personalised/polarised – triggers automatic hatred for the individual more than ideas
- Having emotional connection to politics – have to remove and focus on what you can do
Don’t let the media or politicians decide what you should think - 1. Remember Media uses a lot of subconscious imagery as framing – is someone evil? Montage of threatening music and suggestive descriptions, mention someone else who is publicly hated 1. Also – selective choice of what to publicise or broadcast/edit interviews – try to get a number of different sources on a story – but not all just from companies that use a copy paste template on each story 2. Once the media have created a problem by incorrect assumptions and are found out – how much accountability is there - Can never admit that they are wrong – they just shift the narrative without any culpability for their actions 1. And so that you don’t pick up on the fact that they are the most reliable for facts 2. US (extension global) Media ran with a narrative that Trump (elected president) committed treason, working with Putin 1. Trump took office and said Obama Administration, DOJ, authorised wire taps and survailce on Trump and staffers 2. Called crazy, but turns out it was true – based on a manufactured report – approval given by DOJ
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Question – If there was evidence Trump was a spy/committing treason – Taps started well before he won the election
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Why wouldn’t anyone come forward with actual evidence
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Start letting what the media say fall on deaf ears – everyone is too worried about climate change as there is a report a day about it – then some major story once a month to peak interest again
- Think for yourself –
- Luck can be undone – get 21 in blackjack and ask to hit – you blew some luck
- We each got 21 living in this country – either born or moved here – don’t blow it
- Don’t just assume – assumptions are the mother of all F ups – if you are demanding for action/change – you better be able to teach the theory as to why and how it will help – instead – people assume what they are told will work
If you want to get in contact you can do so here.
Resources: Temperature graph
https://wattsupwiththat.com/2016/09/29/earths-obliquity-and-temperature-over-the-last-20000-years/
Welcome to Finance and Fury, the Say What Wednesday edition
John’s Question:
I thought a useful topic could be about pros and cons off starting a business and starting your own business vs buying a franchise system etc. and using a business to achieve financial freedom.
Personally, I have been looking into options to start a business both online and franchises. I have found that starting an online business can have a very low startup and ongoing costs, which is attractive but finding something that can be worthwhile is difficult. So far I have been leaning towards buying a franchise due to the systems already in place and there service or product already being tried and tested. But obviously, this incurs a higher startup cost and ongoing franchise fees etc.
But I am not a skilled tradesman or professional such as a website developer or marketing expert etc. with a unique selling proposition, so therefore a franchise system is most likely a better option for me to pursue.
Starting an online business or franchise
First – Check out the Episode towards the start of the year about figuring out what type of business to get into – Won’t cover that part – but say that you have an idea in mind about the type of company:
How do you start a business?
- What you need: idea, clients, cashflow, capital
- What types of business have high upfront capital requirements? I.e. higher barriers to entry
- First key steps – what do you need to have planned out?
- What are the most important things to have ready before starting?
- What are the most important things to focus on in the first 6 months?
- Problems will happen along the way – what are some major ones that you have seen, and how could these be avoided?
What if you don’t know what type of business to get into, or don’t have a selling proposition? – Purchase a Franchise
How does the purchase of a franchise work?
- What are the costs, and how much support is provided?
- Can you get financing to buy a franchise? If so, what LVRs?
- Have you seen any types of franchises which are the most profitable?
What are the best ways to structure each?
- Best way to structure a franchise (Trust, company, sole-trader etc.).
- By yourself
- Partnership
- Best way to structure a business (Trust, company, sole-trader etc.).
- By yourself
- Partnership
Which has better cashflow potentials?
- Any type of franchises that have more consistent earnings than others?
How do the valuations work on a franchise compared to a company?
- Which industry/types receive the best valuations?
- How easy is it to find someone to buy your company/franchise if you are looking to step back?
Summary of pros and cons of starting a business vs buying a franchise system
- Pros of a Business – When would you want to start a business?
- Does it give more control over service offering?
- Pros of Franchise – When would you want to buy a franchise?
- Are they more successful than starting your own?
- Cons of Business – When would you not want to start a business?
- Any horror stories you have
- Cons of Franchise – When would you not want to buy a franchise?
- Any horror stories you have
Thanks for listening,
If you want to get in contact, you can do so here.
Welcome to Finance and Fury
Today – Want to start looking at what would likely survive another financial correction or worse, collapse
Been thinking a lot recently about the structure of the modern economy – This episode is probably more like a FF ep, but this topic will have a massive impact on each of our lives at some point – where to have your money in preparation for the next crash
- Heavy topic - so a few things need to be explained before diving into what to look for in what will occur in the next collapse.
- If you listen regularly, you might have noticed a lot of topics have revolved around monetary policy lately – rate cuts, effects, etc. – Been looking for an answer to what the best investment would be in the event of a financial collapse
- As the current financial system of uncollateralised debt will be the cause
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This doesn’t mean that the Next Financial collapse is imminent and that you should rush and sell everything – but it is important to still pay attention to certain signals –
- Are people buying more or less luxury items, are they going on more or fewer holidays, what products are being marketed, how much are companies reinvesting profits, or paying it out as a dividend, and how much people are saving?
- These paint a thematic trend of the ‘mood’ of the economy – the economy collapsing is a financial collapse
- An economy can exist without money – i.e. barter – but two issues in modern economy without money
- Limited in wealth – people don’t have much in the way of physical goods – chickens, sheep, etc
- Very ineffective – imagine your own life – income from job in the form of food, you pay rent in tvs, which you get from trading away cookies you make
- The economy is a number of things, all bundled into one concept though – The invention of currency did revolutionise though – But at the core, the economy is between two players
- You have consumers – which are a major driver of growth – Demand
- Nobody to sell to – no companies
- If people can’t afford what you sell – no companies
- You have consumers – which are a major driver of growth – Demand
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If people don’t want what you have – no companies
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You have producers – Those that provide the supply
- Nobody to buy from – you starve or have a low quality of life
The cycle of the economy 1. There is a flow between consumers and producers – exchange of money for good or service 1. All agree that the more that is being exchanged and if the growth of how much is being produced, consumed is going up, the economy would also grow 2. Most people think of companies are producers – but they are also consumers 3. Consumers can also be producers – I consume, but also produce at the company end – I am a bad consumer personally, but the company makes up a massive difference, and flow on effects of what people you receive an income from the company go on to consume. 2. In the extreme example – this would be a ‘free market’ - system in which the prices for goods and services are determined by the open market and by consumers 1. Producers are free to make what they want, sell at what they want and at the quality that they want – but what they want is what the consumer wants – the customer is always right – remember – company goes out of business if you have nobody buying your goods because someone else does it better. 2. Individuals would be free to then dictate to the producers what they want with their wallet. 3. Currency/money and the modern financial system allowed the economy to boom – connected billions of suppliers/consumers 4. What gets in the way? Laws, taxes and regulations –to protect us, or provide growth in the government (expand capacity or revenues) 5. I used to think that if we got rid of taxes, regulations, etc, we would have a free market 1. Forgot the fact that the very cost of money is controlled (interest rates) – along with the supply of money 2. At the higher level – this probably has more impact on the economy running inefficiently – a massive build-up of debt of nations and slowing growth 6. There is no true free market - That was a quick overview of the nature of an economy and concept of the free market – 1. Why is it important to know this? 7. Looking at How to prepare crash revolves around looking at the interaction between these elements 1. Goes beyond just human behaviours now with Government and regulators – as the outcome is based around what is allowed and what can be done – 8. There is no way to be able to exactly call when where how on a crash – almost like predicting the weather – condition changes 1. Start – most crashes are behaviour triggered, but system created 1. Allows people to do what the system allows
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So behaviours create it in the system of the economy
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A much better idea about what would happen after based around looking at the system – Government – what can they do?
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Crashes of the past – panic selling - Most of crashes is behaviours – Governments step in to try to stop panics – showing action –
- Why govs banned short selling in GFC – otherwise it becomes a race to the bottom
- Also why the ‘bailouts’ occurred – action by gov to stop panic of banks/insurers going out of business
- The Gov has to show action – otherwise people may panic more making it worse –
- While action in the short term can reduce the panic – can lead to a massive problem down the road
- The actions the Government can take have to be legal though – laws/regulations tells us exactly how governments will act – just have to pay attention – so what can Governments do now that they couldn’t pre-2005?
- What if it blocked us from selling shares, or withdrawing money? Or take our deposits, or bank notes to bail out the economy?
- Take the cash out of your bank and freeze you selling any investments? Along with telling investment manager, stock exchanges, super funds to not trade a thing?
- It sounds like an impossibility, right? But sadly, Govs of the world think it can remove individual behaviours through similar policies
- nothing really new after all – just a massive increase in scope that they are slowly working towards
- Where to invest if the Gov can freeze bank accounts, convert or write off money invested/deposited with them?
What do the laws say is up for grabs in the next crash? Brings us to what are called Bail in laws – looking at these shows what to avoid investing in going forward
- Story to tell here – Cyprus, USA, Brisbane 2014, EU and AUS/NZ today – as bail in laws have been a decade in the making -
- There are one of the 3 alternative actions which can be taken in respect of a distressed bank
- Bankruptcy and liquidation of the bank, Bail-out, Bail-in
- Let a company fail, or find capital to provide liquidity (i.e. cash to pay off their debt obligations – debt>value)
- Why are bail in/outs needed? Economy is reliant on companies to run – producers – Letting them go bankrupt can be bad for the economy (which we are a part off)
- but sometimes one company gets so big that if one goes, they all go – house of cards - the concept of ‘too big to fail’
- We saw bail outs in 2008 – large banks and insurance companies given funds as part of a securities purchase program of MBS or other debt instruments/derivatives – i.e. Given face value on an asset that’s prices are cents on the dollar
- injected $700 billion into some of the biggest financial institutions in the country
- Bank of America Corp. Citigroup, AIG
- But the government doesn't have its own money, so it must use taxpayer funds in such cases
- But that is limited to access based around the ire of the population
Enter Bail in (like a bailout) Still provides relief to a financial institution on the brink of failure through a resolution scheme used in distressed situations – list of what to do
- A bail-in is the opposite of a bailout – funds don’t come from external parties (i.e. governments using taxpayers’ money)
- With a bank bail-in - money of unsecured creditors (depositors and bondholders, hybrid securities, etc.) is used to restructure a banks capital to remain solvent – i.e. use certain liabilities on their book and convert them into worthless assets, essentially turning what was a debt into nothing - restructure the books
- Imagine that someone loaned you money to start a business – but the business is now bankrupt, so you tell your friend that you will give them some shares in your business to repay the loan
- bail-in and a bailout are both designed to prevent the complete collapse of a failing bank. The difference lies primarily in who bears the financial burden of rescuing the bank.
- Bailouts help to keep creditors from losses while bail-ins mandate creditors take losses
Bail-ins are becoming popular Bail-in schemes are being more broadly considered across the globe as a first phase resolution to help mitigate the number of taxpayers’ funds used in supporting distressed entities – Timeline – going back
- USA - The financial crisis of 2008 ushered in the term "too big to fail,"
- Good phrasing for regulators and politicians – gives a rationale for rescuing some of the country's largest financial institutions with taxpayer-funded bailouts
- Public wasn’t happy – Occupy wallstreet - Congress passed the Dodd-Frank Wall Street Reform and Consumer Act of January 2010
- eliminated the option of bank bailouts but opened the door for bank bail-ins
- modelled after a cross-border framework and requirements set forth in Basel III International Reforms 2 for the banking system of the European Union
- creates statutory bail-ins - Fed, the FDIC and SEC (alphabet soups) authority over companies in receivership
- But expanded the net of what companies fall under this legislation – now they can control non-banking institutions
- systemically important bank (SIB) - is a bank whose failure might trigger a financial crisis, or
- systemically important financial institution (SIFI) - insurance company, or other financial institution
- Insurances – Allianz, AIG, AXA, MetLife (few)
- Cyprus 2013 - uninsured depositors (defined in the EU as people with deposits larger than 100,000 euros) in the Bank of Cyprus lost a substantial portion of their deposits
- depositors received bank stock – but the value of the shares was at a fraction of the cashes
- Brisbane 2014 - Financial Stability Board (2009) and the International Organization of Securities Commissions
- mandate from the G20 and the Financial Stability board and the implementation of bail in regulations
- EU - In 2018 - incorporating bail-ins into its resolution framework
- the banking systems in EU distressed - low or negative interest rates, more bank bail-ins are a strong possibility.
- Today - Deposit Bail-In -overt example now in New Zealand under the Open Banking Resolution
- Australia – passed a mini version of this at start of 2018 - Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018
- Treasury and politicians say there is no intent to bail-in deposits to rescue a failing bank
- Can’t comment on their intent – but had a fun weekend diving into this legislation – true that doesn’t say they can
- But doesn’t say they can’t either –in conjunction with other legislation though – Banks T&C - not impossible
- Actually – relatively easy – banks just need to reclassify deposits, can do without your consent
- What is definitely in there at this stage? - certain instruments and unsecured debts (deposits are this to a bank) to convert into shares – cover this and more in another ep
- Cover Types of assets to watch out for further – at some point in time – economy will take another tumble – who knows what bit of white noise will eventually trigger it
- But what types to avoid investing in is a start to protect your financial security – Run through this in another ep
Thanks for listening! Sorry it was a heavy topic – thought I would share it though as there hasn’t been much discussion on this topic – why? Cover this in this Friday’s ep – and the investments next week.
If you want to get in contact you can do so here
Welcome to Finance and Fury, The Furious Friday Edition
In this ep, we continue looking at the lucky country
look at a downward spiral in growth – low growth traps – and how it is created by what is meant to help growth?
Low growth trap – The big problem comes from just looking at the numbers – and basing policy around models
- Major part of the modern economy – looking at the numbers – I do it as well
- Numbers can be inaccurate, or misinterpreted – sometimes the models being used for numbers don’t get the answers that were expected
- Such as the RBA and rates – lowering them to boost the economy
Nothing new as to why the RBA wants to drop rates – major banks think it will go down to 0.75% -
- Looking to take action to help stimulate Australian economic growth, employment, wage growth, etc.
- The question really is if this will work as the equilibrium models suggest – based around neo-Keynesian
- We should be seeing a pick up in inflation (CPI) rates – which is the trick – focus on a percentage which is ever compounding under the current system – another episode
- At least – why aren’t we seeing GDP growth, improvement in productivity or wages and employment?
- Big puzzle which almost every first world nation is trying to solve at the moment – and economists
- First – look at Productivity – this measures the quantity of the economy’s (or just a particular business’s) output of goods and services relative to its inputs of raw materials, labour and capital equipment – this is theory
- Productivity improves when a given quantity of inputs to the production process is able to produce a greater quantity of goods and services than before. It’s most commonly measured by reference to just one of the inputs, labour. So, it’s output per unit of labour, usually per hour worked.
- Main way to make workers more productive is to give them more or better machines and structures to work with. That is, to invest in more physical capital.
- Increasing workers’ education and training – “human capital” – also makes them more productive: better able to work with more sophisticated machines, to think of ways to make machines do better tricks, and think of more efficient ways to organise the work that’s done in a mine, farm, factory, office or shop.
- The main way to make workers more productive is to give them more or better machines and structures to work with – this is what theory says anyway – having something to measure
- In the present information and communication technology revolution isn’t transforming the economy to the extent that earlier general-purpose technologies – such as electricity, the internal combustion engine, the automated production line, and even running water and indoor toilets – did
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Why doesn’t the modern-day economy show the same levels of productivity or growth as in the past?
- partial explanation - that much of the benefits coming from the digital revolution are going unrecognised by a system of national accounts (gross domestic product) designed to measure the industrial economy
- Also - low population replacement rates – birth rates not keeping up with the aging population
- If it keeps up - future of weaker growth in consumer spending = lower incentive for firms to invest
- The increased complexity of a system requires a greater input to receive the same result
- Example – some of the smartest people finding new ways to get around laws/taxes – not picked up in GDP growth
- but for the most part – due to Modern economy – focus on economies of scale for cost reduction – not massive R&D projects
- (synergy between companies – merge) – creates very large companies over time
- Apple – Jobs was an innovator – but just took existing technology and made it much better for us to use – First smartphone was by IBM more than 15 years before Apple released the iPhone
- partial explanation - that much of the benefits coming from the digital revolution are going unrecognised by a system of national accounts (gross domestic product) designed to measure the industrial economy
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Can see this in the share buybacks occurring – UBS and Macquarie predicted Australian companies to do more share buybacks in 2019 – if Labor won the federal election – Franking credits, higher taxes – Dividends not valuable
- Not only doesn’t investor get that money to spend/invest – it just inflates the share price of the company
- US businesses have been using their profits not to reinvest but to pay big dividends and to buy back their shares on the stock market, hoping to boost their price
What gets us out of this – Innovation – continue to increase our ability to create and we will be fine – new ideas, more people creating things that work to provide value to others lives -
- This is where some policies have had dramatic effects on our lives – the policy decision is working from an equilibrium model that is long past it’s used by date
- I think for the worse- house prices as an example – thanks to the compounding positive inflation rate target – very short-sighted policy
- Theory: key to productivity improvement is investment – particularly investment by businesses
- But to spur business investment – you need economic growth and the expectation it will continue
- But it can’t include a thing like innovation into an equilibrium model – could in a complex equation
- What the models are picking up –
- Innovation is fine, but the main way some new technology is “diffused” throughout the economy is by firms replacing their old machines and structures with new ones that incorporate the latest advances.
- Business demand for new and better things spurs innovation – it isn’t just big companies that innovate – it is small startups that then get bought out by the big players – look at Alphabet, FB, etc. – why innovate if you can buy?
- Innovation cant be forced – often accidents, or trying for one thing and getting something else –
- But if you are aimed at one goal and don’t get the result you want, you start again and disregard the by-product of the failed attempt –
- The government doesn’t directly invent anything – they find independent scientists and contract them to fund their research – researchers dream – recruiting people to continue doing what they were doing, but for you
- Investment is also an essential part of the continuous process of change in the industry structure of the economy, where changes in consumers’ preferences and other developments cause some industries to contract while others expand and new industries emerge.
- If firms are reluctant to invest, you don’t get enough expansion to offset the contraction.
But what is businesses’ main motive for investing? Their expectations of increased demand for whatever they’re selling – marketing, higher production
- What happens to business investment when a recession/depression occurs, or they think it might?
- The recovery has been particularly weak in the 2007/8 crash compared to the great depression though
- Some of our GDP growth is the product of fiscal stimulus from governments – either liquidity or spending packages
- Low unemployment conceals a marked fall in the proportion of the population (particularly less-skilled middle-aged men) participating in the labour force - given up looking for another one - skills “atrophied” – loss of human capital to the Aus economy
Get it? Weak economic growth in the advanced economies is discouraging businesses from investing. Weak investment means weak productivity improvement and skills atrophy. But weak productivity means more weak growth.
- Business investment in physical capital, and growth in human capital are key drivers of the economy’s “potential” growth rate in future years.
- Neglect them and the economy loses its ability to grow – starts to decline and go backwards –
- Or remain in a low-growth trap
What stops drive for innovation? 6. No demand from companies for new and better products – 1. Either no money to afford it – costs/taxes high or low revenues = low profits 2. Limited access – barriers to entry through regulations 3. Short term focus on maximising GDP and shareholder values - 7. What compounds this - Protectionist policies – fight against creative destruction 1. Example - The invention of electricity – a much bigger event in our human history than the internet – 1. People were freaking out seeing Tesla use his body as a conductive material to power a light bulb 2. It also created unrest in labour markets – the reason why we don’t see the leary’s dancing in the street going from gas lamp to gas lamp (like Mary Poppins) – they were made redundant
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Think about it – 100% of our jobs today are vastly different to the past – almost all don’t exist, but those that do are very different looking – unless your job is to dress up like a historical recreation
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Theory – if an economy is weak, you must help protect it through subsidies or benefits
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These elements together just add to stagnation of the economy
Summary – low growth trap requires innovation – attracting the best and brightest
Sadly – innovation is stagnated when so are the individuals who would otherwise be innovating – through the choice
Why do you think Communist/socialists countries crumble in every case – hard to innovate on a new engine you are working on when you are moved to a collectivised farm and given one farm animal to plough fields with – but you have to eat it as you don’t know anything about farming –
Next episode will dive deeper into the concept of an inflation trap – and policies to get out of it
Thanks for listening, if you want to get in contact, you can do so here.
Welcome to FF – SWW- answer questions from each of you – this week from Sebastian
Hey Louis. I've been thinking about the pro's and con's of Managed Funds vs LICs/LITs. It occurs to me that one of the main disadvantages of managed funds is their open-ended nature.
In a crash, A manager of a fund is disadvantaged in this situation because they are having to redeem fund units as panicked investors sell out at a time they should be deploying cash into the market. Closed-ended LICs and LITs don't have this problem.
What do you think about this - and should it impact our choice of investment vehicles? Thanks, loving the podcast as always!
Great question! WARNING: No advice, just providing general examples of when things work, when they don’t – on with it
Few things to clear up – have to run through open/close ended funds, what are MFs/LICs/LITs, the risks/benefits of each and which one experiences the worst outcome in a ‘bank run’ on an investment – people wanting their money back all at once
First – Quickly run through Managed Funds, LICs, LITs These are the structures that hold the underlying assets
- Managed Funds – Trust structure – therefore, open ended structure
- Buy – Buy units with the manager – they then create these, pool your money in line with other investors money – Sell – tell manager, they sell your allocation to shares, you get the cash, units are no more
- This is called open ended – as many units that are needed are created, or sold
- Income – Distributions – Trust structure, so they pay no tax and pass on all income, or gains to you
- =Dividends, Franking Credits, Realised capital gains (that isn’t reinvested)
- Listed investment companies - LICs are incorporated as companies - closed-ended funds
- Like any share – you need to cap supply - issue a fixed number of shares on initial public offering (IPO)
- Buy – Have to buy off someone who holds shares and wants to sell –
- This means they do not regularly issue new shares or cancel shares as investors join and leave the fund. Instead, they , and investors must buy and sell those shares on ASX.
- This closed-ended structure allows the fund manager to concentrate on selecting investments without having to factor in money coming into or leaving the fund. This stability can be of assistance to managers who take a long-term approach to investing.
- As companies, LICs have the ability to pay franked dividends.
- Listed investment trusts - LITs are incorporated as trusts, rather than as companies - also closed-ended vehicles
- investors buy and sell existing units on ASX – hybrid between the two – buying managed funds from someone else – not manager
- Listed investment companies (LICs) and listed investment trusts (LITs) make up the majority of the listed managed funds on ASX
- Focus on Managed Funds and LICs/LITs – open versus closed
- Buy – Buy units with the manager – they then create these, pool your money in line with other investors money – Sell – tell manager, they sell your allocation to shares, you get the cash, units are no more
Pricing of each investment option – Unit price versus share price – differs in how they are priced and what is the value
- Managed funds and ETFs are priced at (or near for ETFs) the net asset value (NAV)
- NAV - total market value of the fund's investments, cash and cash equivalents, receivables and accrued income.
- The market value of the fund is computed once per day based on the closing prices of the securities held in the fund's portfolio
- Unit Value = net value/number of units in fund
- Example – MFA currently holds 10 shares (nothing else – just one company) – each share = $10 = $100, then If there are 10 units – Unit price would be $10
- Someone buys 10 more units – does the price go up? No – Use your money to buy 10 more shares – Now the NAV is $200, but unit price is still $10
- If the shares MFA holds go up in value – to say $20 – NAV = $400, Price = $20
- Close ended funds – trade at a discount or premium to their NAVs based on the demand from investors
- premiums - result of a greater number of buyers than sellers in the market
- discount - results from more sellers than buyers – supply and demand for the share
- What we get here is where like any share – people will pay more for it if they think it will go up
- Some of the best LIC managers have traded at 20% above NAV – due to good past performance
- But then long term investors take their profits and the price drops – not the NAV
- LICs and LITs are closed-ended funds that normally trade at a discount or premium to their net tangible asset (NTA) backing
- market determines the price around the supply and demand of the share itself – Open ended prices are set by the value of the underlying assets – which is a much broader supply and demand – between all of the assets they hold, rather than the demand for their units
- A lot of this comes from Fund Transparency Difference and supply/demand of investments
- The greatest difference between ETFs and CEFs is how transparent each fund is to the investor. ETFs are highly transparent because ETF fund managerssimply purchase securities that are listed on a specific index. Stocks, bonds and commodities held in an ETF can be quickly and easily identified by reviewing the index to which the fund is linked. However, the underlying securities held within a CEF are not as easy to find because they are actively managed and more frequently traded.
- Supply V Demand – if you are focused on the price of the asset more than what is underlying it, get mismatch in prices
- Some of the best LIC managers have traded at 20% above NAV – due to good past performance
- NAV - total market value of the fund's investments, cash and cash equivalents, receivables and accrued income.
These are all structures
– You can get a Managed Fund that loses all of its value while an LIC does well -
What matters more are the Investments, and their styles - broad categories: 1. Investments 1. Australian shares funds invest principally in ASX-listed shares. 2. International shares funds invest principally in shares listed on international stock exchanges. 3. Australian or International Bonds, or other debt instruments 4. Alternatives – Commodities, 5. Private equity funds invest in Australian or international unlisted companies. 6. Specialist funds invest in special assets or investment sectors such as wineries, technology companies, resources businesses or telecommunications providers. 2. Investment approaches in some specialist, private equity, or unlisted funds are the cause for redemption concerns 1. If new units are created and the investments are easily purchasable and liquid – low risk 2. If new units are created but the investment is in an illiquid asset – wait times for cash out 1. REIT – Can be open or closed-ended – something to watch out for 3. Example – property crash occurs – 1. Open ended – People want cash back from manager – managers have to sell property to keep up with redemption demands – so they freeze fund – do a firesale and give the unit holders whatever is left – 1. Seen mortgage funds with 2 cents back from $1, and property trusts with 20 cents back per $1. 2. Closed ended – people want cash back, people sell to those willing to buy – prices drop 1. Listed REITS – people sold back in 2008-2010 – prices of assets dropped 85% 2. Direct shares – Stockland - $8.50 to $2.20 from end of 07 to start of 09 3. Performance in a downwards market – share funds can retain cash and invest it for you, other funds, cant, so cant capitalise and survive and correction – make sure whatever you are buying in these structures doesn’t have a large allocation to illiquid investments – or ones that can go down massively in prices
What is the risk Are managed funds (open ended) as a greater redemption risk compared to closed ended
- Depends on the circumstances and types of investments held
- Always check the mandates/PDS – how long does it take to get your cash out?
- Where the redemption risks are depends on the type of investment that is held in the Managed Fund structure
- the underlying asset are in direct property or mortgages, then the funds sometimes need to freeze redemptions and do a fire sale of the underlying assets to meet the investments withdrawal requirements. Unfortunately though, this is often at a fraction of the original unit price.
- It is slightly different for listed investments that are easily redeemable, such as shares. The redemption process of managed funds for shares simply requires the manager to sell your parcel of shares per unit and then the funds are withdrawn to you in a 3-5 business day timeframe (for Australian shares). As they are open ended funds, new units are created when someone invests money and more of their underlying holdings are purchased.
- The real risk is that the price of the units is only updated at the end of the day at which point they can be sold or purchased. So the risk isn’t so much from redemptions reducing the value, but from not being able to sell at any other price than that of the market close prices.
- For Closed ended funds, these can often be very volatile because their value can greatly fluctuate based around market demand (unlike the Net tangible asset price for open ended funds). Shares can trade at a deep discount, and it can often be difficult to realize the true value of the LIC structures are they don’t have the same pricing mechanics. I.e. for LICs, as their prices are determined by the demand for the share, they can move much more in price regardless of their underlying asset values.
Thanks again for the great question and speak to you soon.
If you want to get in contact you can do so here.
Welcome to FF –
RBA cash Rates are lower now – talk about flow on effects
Today – Will you get mortgage cuts, how your savings will be affected, effects on the job market and wages.
Mortgage cuts * Don’t expect the banks to pass on the Reserve Bank’s rate cuts in full + don’t assume your mortgage won’t become more expensive outside any official rate movements. * That’s the lesson to be learned from a “fascinating” graph that compares how the big four banks have manipulated variable rates against the official interest rate over the last three years. + ANZ and Westpac refused demands from both sides of politics to pass on the full 0.25 per cent cut announced by RBA governor Philip Lowe last week. + NAB and Commonwealth Bank customers will get the full reduction in their mortgage interest payments - but the comparison shouldn’t expect further savings if another expected cut comes later this year. + when the Reserve Bank moves down so do the banks but not always by the full amount – the gap is getting wider
each announced they would lower interest rates on mortgages by 0.18 and 0.20 per cent respectively when 0.25% reduction
Bank subsidiaries and second tier banks - St George, Bank of Melbourne, Bank SA and RAMS will pass on a 0.20 per cent cut to their owner-occupier customers.
They are, however, cutting investor interest-only rates above and beyond the RBA by 0.35 per cent.
Suncorp Bank has also announced it will cut all variable home loan interest rates by 0.20 per cent, effective June 21.
Band of Queensland is only passing on 0.15 per cent, and Virgin Money is passing on 0.22 per cent.
ING, Australia’s fifth largest home loan lender, chose to pass the full 0.25 per cent cut on to their variable rate customers, effective June 25, 2019.
Why? * The cash rate reducing cycle went all the way back from November 2011 to August 2016 * the banks to find themselves under a lot of margin pressure when there have been multiple changes in cash rate * “When the next rate cut comes, it’s going to be harder again for the banks to pass on the full amount, in particular for the banks that passed on the full amount this time around.” * Also – have multiple sources of funding – it doesn’t all come from Aus – so if money from USA – and their rates go up + Doesn’t mean banks can reduce rates
Potential savings 4.32% to 4.07% 1. 25% rate cute – 1. $400k mortgage – 58 savings per month - $21k saved over 30 years 2. $500k mortgage – 78 savings per month - $26k saved over 30 years
How to get – have to shop around – new rates and introductory offers * best things about being on a variable rate is that you’re well within your rights to take your business elsewhere * competition – compare what others are offering because ultimately the effective rates of existing loans may not go down much + Reduce Home Loans is offering 3.19 per cent, Homestar 3.24 per cent, Mortgage House 3.29 per cent and Athena 3.34 per cent. + Do another episode on these online lenders – some are not banks and what to watch out for * Cheeky banks – even ones making a full cut like CBA and NAB – wait 3 weeks to get + Make $108.8 million by delaying the effective date of the cut
Deposit rates – other side of the story - * Commonwealth Bank and NAB have penalised savers a week after passing on the RBA’s full interest rate cut to borrowers. + Both banks have reduced the base rate on their online savings accounts by 0.20 percentage points, leaving them at 0.30 per cent. + This leaves savings rates at rock bottom levels, and will put the banks under intense pressure of funding + This is due to lower savings if lower rates around being paid - Human incentive to want higher returns + Also - potential to squeeze profit margins of the banks - will be keeping bank executives awake at night – how to meet shareholder demands + the prospect of negative interest rates - as seen in other countries is starting to look more likely - Where you have to pay the bank to put money into the account - See it in either booming black market economies (so much cash not on books, like Miami in 80s) - Or in deflationary economies – ones like Japan + Unfortunately for savers and in particular self-funded retirees – increased longevity risk – thanks to lower returns on cash - Need people to plan out retirements more in advance now
Economy and employment * Share market - The wider financial sector was trading 1.0 per cent lower – thanks to the banks + Westpac led the losses with a 1.24 per cent share price decline to $27.78. * Does this mean the overall market is going to go down? One of two scenarios + Money see monkey do – banks lead the market down – so people sell in fear – but unlikely to last long + Signs of a struggling economy – lower consumer spending so lower business profits * After all, the Reserve Bank was just forced to cut interest rates to record lows + do that because the economy is going poorly, not because it is going well. + Economic growth has been pitiful recently — under 2 per cent for the past year. + Wages growth is just 2.4 per cent and if inflation wasn’t so low, wages would be falling in real terms. + and the latest job ads plunge confirms that narrative - ANZ job ads series, though, is to find out what hints it contains for the vitally important labour force data — the job ads down about 8% - May be flow on effect of things stopping in anticipation of the election – wait and see if pick up - decline in the job ads series can give us a bit more certainty that the good times in the unemployment market are behind us + the unemployment rate up about 0.3% since low in December + underemployment rate - risen due to a surge in part-time work. * Not good signs - the general atmosphere of gloom around the Australian economy + The retail sector is already in recession, according to the NAB business survey. And the positive post-election vibes around the housing market seem to be wearing off too, with clearance rates slumping back down in the most recent weekend. + The labour market is clearly worsening – don’t think it was ever as good as they believed, economists just weren’t paying enough attention to wages and underemployment + The RBA used employment as an excuse not to cut rates earlier – but recent developments in the labour market now make them have to change their minds * Problem with the monetary policy - You want to make rate cuts in advance of the problems cropping up – but it is always done afterwards, because they take time to have their effect. * Leaves the RBA spending their time catch up by cutting interest rates at least one more time – but may be too little too late + If drops of 3% haven’t helped, what will 0.25% do?
Summary and what to do: * Good – slightly cheaper mortgages – slightly more to spend on consumption (or paying loan down) + One is good for the economy, while the other is good for the household * Bad – lower savings, lower margins for the financial sector, signs of slowing growth on * Shift on the demand for buying higher income payment assets + Very low savings – so ‘safe’ blue chip shares are a preference for some * Credit contraction in the markets is the major risk to a decline in the short term – + Banks taking away loans or RBA increasing rates and contracting the money supply
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Welcome to FInance and Fury, the Furious Friday Edition.
Following the series of the Lucky Country – You don’t need to have listened to the last few FF eps for this one – rare event – but will be talking about a few related factors, like GDP growth, Interest Rates, Housing – all in relation to the share market –
Today – episode will be looking at how the share market is related to all of these factors
- Help focus on how to create a rising share market – as it has become more volatile over time, and growth has slowed
What factors affect the share market? – Millions 2. Due to the nature of a market -built up of millions of people – so millions of factors, between 10s of thousands of companies, between millions of people – why markets are almost impossible to predict day to day -
First – let's start with What is the ASX – Australian Securities Exchange
- 2,319 listed companies, $2.21trn market cap, the average company is worth $1bn (just shy)
What factors affect the market? Interest rate - What are the flow on effects – from the announcements and policy decisions
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Movements in the cash rate are quickly passed through to other capital market interest rates
- such as money market rates and bond yields - influenced by the risk tolerance of investors and preferences for holding funds in a form that are readily redeemable
- then feed through to the whole structure of deposit and lending rates.
- Share valuation – use risk-free assets – Gov 10y bond yields – but as they drop – the risk premium in relations to shares goes down –
- so the cost of equity declines, so does a company's weighted average cost of capital – so the returns for the share market don’t have to be as large to compete with investors’ money –
- then – the companies themselves don’t need to compete that much either – things become easier – as the returns they need to provide decline – so innovation goes out the window –
- such as money market rates and bond yields - influenced by the risk tolerance of investors and preferences for holding funds in a form that are readily redeemable
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just solidify market share and sink into GDP like returns over the long term – going to break down the top 20 companies over the past few years –
This got me thinking Why did a fall in share prices lead to a collapse of GDP back in 1929 but not 2008?
- Confidence – people who are invested in markets (those with larger consumption capacity) stop spending
- Housing – peoples wealth is in housing as well – most Australian wealth is in housing on average
- 2018 Australia became the country with the largest median wealth per adult – thanks to housing
- This build confidence – when we feel rich, people act rich – investing or spending more – boost to economy
Looking back in history Share Markets and GDP are very very related
- A countries GDP was close to their share market capitalisation
- Today – Globalisation = Global GDP to Global share market capitalisation (valuations)
- Free movement of capital + companies are able to list anywhere in the world (as long as meet requirements)
- A lot of companies chose to leave based around listing restrictions/confidence- reason Alibaba (bigger than amazon technically, thanks to dominating China market) listed in USA, not many people trust Shanghai exchange
Growth of GDP with Market cap The differences in them – does it provide a sign?
- What Is the Stock Market Capitalization-to-GDP Ratio? - The stock market capitalization-to-GDP ratio is a ratio used to determine whether an overall market is undervalued or overvalued compared to a historical average. The ratio can be used to focus on specific markets, such as the U.S. market, or it can be applied to the global market, depending on what values are used in the calculation. It is calculated simply as stock market cap divided by gross domestic product.
- Typically, a result that is greater than 100% is said to show that the market is overvalued, while a value of around 50%, which is near the historical average for the U.S. market, is said to show undervaluation. If the valuation ratio falls between 50 and 75%, the market can be said to be modestly undervalued.
- Also, the market may be fair valued if the ratio falls between 75 and 90%, and modestly overvalued if it falls within the range of 90 and 115%. In recent years, however, determining what percentage level is accurate in showing undervaluation and overvaluation has been hotly debated, given that the ratio has been trending higher over a long period of time.
- The market cap to global GDP ratio can also be calculated instead of the ratio for a specific market. The World Bank releases data annually on the Stock Market Capitalization to GDP for World which was 55.2% at the end of 2015.
- This market cap to GDP ratio is impacted by trends in initial public offerings (IPOs) and the percentage of companies that are publicly traded compared to those that are private. All else being equal, if there was a large increase in the percentage of companies that are public vs. private, the market cap to GDP ratio would go up, even though nothing has changed from a valuation perspective.
Where is Aus At – 115%
Where is US at – 141% - one of most innovated market – valued at expected
Switzerland – 248%
Australia is fairly unique – concentration -
ASX300 vs ASX20 – breakdown over 10 years
- Growth (excluding dividends)
- ASX20 – 48% gain – 4.4% annualised
- ASX300 – 58% gain – 5.2% annualised
- Dividends –
- ASX20 – 6.26%, ASX300 – 4.2%
- PE – reflects the price to earnings – shows the price based on people expectations for future cashflow (large=big FCF)
- ASX20 – 17.96, ASX300 – 16.29
- Summary – Top 20 are Cash cows – don’t get much growth, but have better dividends -
Top 20 have limited growth potential – but the lower market caps – rely on new companies listing
Requires innovation and entrepreneurs - Human innovation always beats fear – we just need confidence in the system
How to create a rising share market 1. More companies = more market goes up 2. Better companies are doing (in value add) – more market goes up
Need policies to help AUS market increase number of companies doing well –
- Low taxes, low regulations, highly competitive in the global economy
- Low barrier to entry
- Cultural as well – innovation and number of small companies being started – and allowed to grow
- A nation of problem solvers – nobody starts a company unless for two reasons
- Think they can offer product or service at a lower price (while at profit), or
- Think they can offer a better good/service – something market isn’t doing already
- A nation of problem solvers – nobody starts a company unless for two reasons
A lot of the ASX gains are from new businesses - the value gain comes from the bottom of the market –
– but when weighted by market cap –the cash cows provide the largest returns from dividend – due to concentration from the top – these have a large weight on the success of our market
Distortion in the market – returns look the same, but most of it comes from cash returns to investors – not at growth
Isn’t anything wrong with this – as long as you reinvest the funds.
Have ASX listings gone down in line with ASX average returns
What's the criteria for listing on the ASX? – IPO process
The minimum admission criteria require a company to meet three things: 1. Number of Shareholders - minimum of 300 non-affiliated investors at $2,000 AUD each. 2. Free Float - 20% or greater of the company is on offer 3. Company Size - The company must meet one of three criteria: 1. $1m AUD aggregated profit from continuing operations over past 3 years + A$500,000 consolidated profit from continuing operations over the last 12 months. 2. $4m AUD net tangible assets 3. $15m AUD market capitalisation
Need innovation not easy credit
Just helps existing business when lending is increased -
How can we avoid going into a Recession? Are we making the same mistakes? Is a recession inevitable due to making the same mistakes?
Tax cuts help markets – companies want to operate in the zone that has lowest rates of tax, plus provides more confidence to investors
If you liked this episode and want to get in contact, you can do so by clicking here.
Welcome to Finance and Fury, the Say What Wednesday Edition
This week’s question comes from Adam
Hey Louis, learning lots from your podcast its been good value. My question is now the coalition are remaining in power i want to take advantage of the proposed first home deposit scheme. Can you explain more about this and if its good or bad and what to watch out for, and how we can be good candidates. Cheers
Today: * Talk about coalition proposals * First home deposit scheme * How can you use it? * What to look out for?
What is it? First Home Loan Deposit Scheme 1. The Coalition -FHLD Scheme - support up to 10,000 first home buyer loans each year 1. 5% deposit with a government guarantee for 15% of the loan – 2. not having to pay lenders mortgage insurance as there is 20% of loan guaranteed – your equity and Gov 3. proposal was modelled after a similar scheme in New Zealand called Welcome Home Loan - established in 2003 2. Eligibility 1. will be available to eligible first home buyers who have been able to save for a deposit of at least 5% up to 20% 2. only be available to first home buyers below a certain capped income level which is $125,000, or $200,000 combined income for a couple who are both first home buyers. The income test would be based on the previous year’s taxable income to provide certainty 3. The value of homes that can be purchased under the Scheme will be determined on a regional basis, reflecting the different property markets across Australia. 4. allowing them to access a loan offered under the Scheme by a participating financial institution 3. Lending institution – they will give you a 95% loan 1. The lender would still undertake the full normal credit check process on the borrower (meeting all their legal obligations) to ensure that the borrower is in a position to be able to afford the repayments. 2. But estimates show – reduce the time taken to save for a deposit by more than five years for people living in Sydney, four years in Melbourne and three years in Brisbane 4. The National Housing Finance and Investment Corporation will partner with private lenders to deliver the First Home Loan Deposit Scheme, prioritising smaller lenders to boost competition 5. The Scheme will commence on 1 January 2020 and will be operated by NHFIC – what is this? Also Establishing the National Housing Finance and Investment Corporation (NHFIC) – team to meddle with housing policy 1. First Home Loan Deposit Scheme will offer even more support with up to $500 million in the form of equity through the National Housing Finance and Investment Corporation 6. If the borrower refinances or the loan comes to an end the Commonwealth support will terminate. 7. Still have access to FHSSS and state stamp duty/FHO grants - superannuation to save for a deposit - Just 2,800 people so far have used that scheme – hasn’t been that effective – as it is a complicated way to save for a deposit
What is the point of it? 8. To help Australian get into the property market – the limited capacity for first homeowners to fund deposits for high prices 1. 110,000 Australians bought their first home in 2018 - the highest level in nine years – but were coming out of GFC and drop in Syd/Melb property in 2018 2. roughly one-in-10 of the 110,000 Australians each year will get the Gov guarantee 9. They don’t want to undermine the investment or residential property markets – through changes in taxation policy 1. Taking away things from people is bad optics in politics – that is probably a major reason for Labor’s loss 2. Smart by the Gov for optics - doesn't cost very much (unless there are unexpected losses) 3. But is it good for us? First home buyers, or not?
Look at potential Effects First - notice something with most policies to help affordability?
- They are almost all demand side driven – looking at helping increase demand – for small pockets of people
- They have other policy to look at supply issues -
- Looking to increase housing supply – releasing suitable commonwealth land (mostly defence land) for housing development – but high residential
- Investing $1bn in infrastructure – National Housing Infrastructure Facility – these are good
- But land can be held by developers – land is released – developers buy it up – hold it and only develop when prices are up to maximise profits – so doesn’t help as much as would hope to
- Also – types of developments – high profits with high residential
- Risks to the Government – which are passed onto tax payer
- lenders “will still do all the normal checks on the borrowers to make sure they can meet their repayments”.
- But - in the event of a default the bank would need to get its money before the government –
- That is the way guaranteed deposits work – otherwise Gov would be a creditor of lender to you
- Opens up to quite a lot of risk, especially in a falling market – Gov bail outs of property prices now
- Risks to the buyers -
- Long term – cost more interest – as we will run through soon
- Also – chance of having negative equity in a property increases – risks of default
Will it work? 1. Looking at first homebuyers entering the market – I think it may be ineffective or actually work against FHBs 1. Policy like most are focused on helping demand – but what occurs when demand is artificially stimulated without supply keeping up? – prices go up – so the barrier for entry is higher for the other 9 in 10 FHB 2. Limit of 10k people – simply brings forward their purchases – it isn’t like these peple wouldn’t inevitably be able to buy – so it may cause an additional 10% p.a. to bring forward their purchases – but most of those people 2. Real question – why did APRA put pressure on the banks to stop lending 5% to 10% deposits? The leverage risk to the economy 1. Now the Gov steps in and is going to provide Guarantee for 15% of loan – why? 2. The RBA is lowering rates – but needs to increase the supply of money – so something needs to soak this up to avoid hyperinflation – solution is increased borrowings attached to low risk collateral
Long term Effects - This policy is a double long term outcome 1. Further downwards economic decline – Been talking for the past few weeks about that when household debt to GDP is too large – GDP growth suffers 1. Through diversion of your personal income to repaying interest and personal debts 2. Having an 18.75% additional loan (remember loan of 80% to 95% is almost a 20% increase) - 3. Example - $500,000 property with a 5% deposit instead of 20% will cost an extra $58,774 over 30-year loan. 1. the difference between a 5 and 20% deposit effects occur over 30 years 4. On a $500,000 property - $100k deposit compared to $25k deposit - $400,000 or $475,000 mortgage 1. $400k - a 30 year loan - pay $304,000 in interest with monthly repayments of $1956 at current rates. 2. $475,000 – pay $363k in interest - monthly repayment of $2327, or $371 more 5. Create a drag on the economic growth for a generation to come 2. Potential control of the banking industry – policy that is setting up the possibility for a Government takeover of the financial system – 1. Back in start of 2018 – had the Bail In laws – where APRA can go in and take over management of a defaulting bank 2. Now – Lending limits for banks go up to 95% LVR for a portion of the population 3. SECOND TEAR BANKS - Selected as they are the most susceptible - allows the gov to take over smaller banks and then to have a gov release program to the big 4 – policy of concentration of risks unto the small banks that haven’t got the capital to compete – also have lower profits as they have to offer lowest rates to compete with the big 4 3. Don’t see any benefit in affordability though – which is the real problem - helping price reduce – but that is bad for those with existing property – and the overall economy 1. Nobody wants to be responsible for the drop in house prices 2. So the solutions are to fuel demand – compounding the problem – 3. Example – Very simple one – but hope it helps – Remember a number of years ago – Bananas were $14 a KG, cyclones, disease, ravaged banana supply – prices went up massively – 1. What caused price drop? Increase in supply – but instead – what if Gov had put in a policy to refund 20% of your banana prices if supply couldn’t increase? Prices would be $16, $20, $25 per KG over time 2. But there are other fruits that are close enough substitutes – not perfect – but little to substitute a home
Summary 4. The first-home loan deposit scheme is likely to be popular with people on the cusp of buying their first home – competition – 1. Golden ticket mentality – without thinking if it is right for you – Make sure you are holding the property for a while 2. Make sure that you can afford additional interest – and are focused on paying down the loan more so than have 20% deposit 3. as the fundamentals of borrowing are unchanged: smaller deposits mean bigger interest payments over time. 5. Also - Good for banks - pay tens of thousands of dollars in extra interest and face larger monthly repayments
Sadly - Everything in place to help our property bubble along - look at the Barriers to property
- Deposit size reducing – increase leverage risks
- Loan sizes – going up with APRAs changes,
- Affordability – Having a 95% loan with higher repayments, but lower rates –
- Risks – rates go up, prices go up beyond wages, unemployment occurs – puts households and overall economy at risk
This is the trifecta of plugging a dam – but at some point – you run out of fingers
- the only solution to ending the affordability crisis is by boosting the supply of housing - is that it tries to fix the housing affordability problem by adding to demand for housing.
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Welcome to Finance & Fury, today we’re going to be looking at what stops people from investing.
The common reasons I see;
- Fear and misconceptions
- Not knowing what to invest in
- Not knowing how to invest
- Not knowing the benefit
- Not having enough to invest
The last one is a self-determinant from the previous 4 reasons. A form of financial procrastination creeps in;
- If you fear, don’t know, what, how or why, then you won’t allocate any resources (money) to it
- If you don’t know what to do, or how to do it, then you aren’t likely to bother
- If you don’t know the benefit – of realising that at some point – you will need to give up working
Or – if you think something is a long time period off, or too large a value, you may procrastinate as well
- Why invest for retirement in 30 years? What is the point of trying to save a $110k deposit for a home?
- Most things that become larger (time periods, or their size in monetary terms) also become harder for us to achieve - $110k seems like a lot but $70 per day for 4 years
- Procrastinating is a part of being human, and creeps into our lives without really consciously thinking about it. One of the worst parts about procrastinating is that we justify this behaviour, using some very clever tricks:
- Avoidance and distractions – Looking for other tasks to do instead of taking action on what we need to.
- Blaming – We blame external events for why we delayed doing a task.
- Denial – We can tell ourselves that what we are doing now is more important than what we need to do tomorrow.
- Comparisons – Other people haven’t gotten around to do this, so why should we?
Sadly, while these may make us feel better in the short term, all that they do is delay the inevitable pain we will feel
- We end up beating ourselves up mentally because we didn’t get to where we wanted
- We retire with very limited options regarding income, wealth and essentially our financial independence
What is investment procrastination? Same as any normal procrastination and it has been around for as long as humans have been alive, and can be in relation to everything we have ever needed to do;
- Socrates and Aristotle wrote about this in Ancient Greece, describing it as a state of acting against your better judgement.
- Put a little simpler, it is delaying doing important tasks for less important ones. It is much easier for us to still feel productive by getting through easy non-urgent tasks in preference of doing demanding ones. Also, it is much easier to do something fun compared to something hard. Therefore, if we are given a choice, we will often choose the fun thing over the hard thing, even if the hard thing will benefit us.
- With long term investments we don’t see any immediate benefit - your future self (once retired, or in a few years) is not you today so it’s hard to stay motivated and benefit your future self
Why do we procrastinate? Behavioural psychologists have a term called ‘time inconsistency’ which helps to explain why we procrastinate. This refers to us as individuals valuing short term rewards more highly than future rewards, even if these may be greater in the future.
- All goals and plans are for your future self. So, based on this, you sabotage your future self by seeking rewards for your present self, even if it is not really that great a reward.
- This internal battle between your future self and present self can be said to be the key cause for procrastinating. The fact that your present self is the one that needs to take action and it can be hard to make your present ‘self’ take action.
- As you cannot rely on long term rewards or consequences to provide motivation, you need to implement strategies to either provide some immediate reward or consequence for procrastinating.
Achieving any tasks comes in two phases as well. The first is procrastinating and the second is taking action.
- Acting first saves pain – this is why an action plan is important.
- Create an action plan today (go to the Members’ Area on the Finance & Fury website, we have a lot of free resources, workbooks, calculators that will help)
- The longer we delay, the greater the pain we feel from procrastinating. However, the longer the time is away until we absolutely must take action, the less pain we feel delaying. It is funny however, as generally as soon as you go over the break even point you will see that taking action isn’t that painful at all.
Have you ever had a small task to complete, delayed it for a few weeks and then, when you actually got around to doing it, it only took you 10 minutes? The act of delaying causes more mental pain in most cases than just taking action.
How to get over any hurdle for investing?
- Fear and misconceptions. Are you afraid of making a bad investment, like it’s a ‘double or nothing’ investment? That’s gambling, not investing. If you have been listening to this podcast long enough, or been doing your own research this hopefully isn’t an issue. You know the real difference between what is an investment and what is not, and you have few misconceptions.
- Not seeing the benefit of investing – well, this is pretty easy to overcome. Imagine if you had to retire today.
- Not knowing how to invest, or what to invest in? Have someone help you or ask someone who has done it… or check out the resources on Finance and Fury (what to invest in) – or even check out youtube
Not having enough to invest
This is normally due to having a large target to hit, or it being too far off
Option 1 – Follow your action plan without thinking or delaying – plus reward your action immediately through ‘temptation bundling’.
- Sounds fairly easy to just ‘follow the plan’ however it takes some habits to form around this
- Give yourself an instant reward – something to build a habit loop. The concept behind this option is to only do what you love while doing what you are procrastinating about. The reason this has been proven to be so effective is that you are rewarding your present self for taking action to benefit your future self.
- This reward can also be something more tangible, such as giving yourself a treat for completing a task
- Opportunity cost – what would have you done with the money saved? Bought clothing? Gone out? Reward yourself with this once your target is met
Option 2 – Make the consequences of procrastination more immediate. This helps to keep you on track.
- This relies on having a system in place where there are real consequences for not taking action for your present self.
- This is similar to following through with goals, where having someone or something to keep you accountable drastically increases your chances of succeeding.
- You can either have a ‘bet’ with someone or with yourself where if you don’t complete what you need to by a certain time, some negative consequence comes into play.
- This may be in the form of money or not allowing yourself to do something else you really enjoy.
- Make it a competition
How to make this stick?
- Make an action plan – Again, check out the Members’ Area of the website where you’ll find workbooks, and calculators to help
- Once you have your action plan in place, see what works for you - implementing either rewards or consequences.
- From there, habits need to be formed around this as part of your daily routine. Habits are formed because your brain has a lot to think about, so if we do an activity for a little while, our brain wires it to become a habit so we don’t think about it anymore. However bad things creep in, like procrastination over time.
Welcome to Finance and Fury, the Furious Friday edition. Today we have a pretty good episode! (I find this interesting at least, so I hope you do too) – We’re talking about the Australia Property market, specifically the property bubble.
- How monetary policy has affected house prices over the last decades
- Most people my age born in the 80s to 90s, even 2000s have only seen property go up
- This makes it seem like a safe bet – so I want to look at this and the reasons for the meteoric rise, then look deep into whether or not we’re in a bubble.
- Just quickly before I get started, speaking about property (or lack thereof) I’m participating in the upcoming Vinnies CEO Sleepout to raise funds for the homelessness problem in Australia.
- If you have been enjoying the content and finding it valuable, I’d really appreciate if you could help me out by giving back. We’re raising funds for rehabilitation and counselling to help homeless people, crisis centres for victims of domestic violence.
- Go to Finance and Fury and click on the banner on the home page to help
A Recap Over the last couple of episodes we have covered a lot about property and monetary policy – because a lot has been happening!
- Just in the past 12 months
- ASIC end of 2018 updated consumer credit rules and set the requirement for banks to look at people’s actual expenses when assessing lending
- APRA with removal of 7% benchmark for assessing serviceability on home loans – lowering to 6% or so, and potentially lower as rates drop
- RBA – we saw RBA drop rates to historical lows this week – 1.25%
- Foreign buyers’ restrictions as well
- All had either positive or negative effects on demand, but nothing about supply. And this is the major issue in our property bubble problems.
Market forces * Prices are set from two points of supply and demand + Supply is available purchases – people selling their house, or new houses on the market. + Demand is much more complicated as it comes back to a number of factors - Incomes/demographics – working age population, immigration, concentration around employment/ where people want to live. - Availability and cost of credit – if you can borrow a lot, and at low cost it increases demand + We have had a lot of demand but little supply increase to meet the growing demand
Where we have come from: Property market history If you’ve been listening for a while you will have heard me touch on a few of these points
- Reasons for property prices increases – Demand side – rates and availability of credit
- Below 6% until 1971 – the Brenton woods system was abandoned and our interest rate rose to 13.75% in 1983
- AUD floated in 1983 and rates kept rising. Up to 17% by 1991. Then, there was a drop to 9%, before going up a bit to 10% in 1993
- By 1997 rates had dropped to hit 6.7%, which is more than a 10% drop in less than 6 years
- We can see how the market responded to this (price reaction) by looking at the property price history from 1997 on wards (sky high!)
- To break it down, in 1973, median house prices across Australia’s capital cities looked something like this:
- But, back in 1973, the average weekly wage was $111.80 (accounting for both full and part-time workers)
- Today, a full-time worker makes on average $1,453.90 weekly (before tax)
- Our wage growth and median income growth has helped to fuel the demand for property
- Side note on income growth; Taken as an average, not individual. If we measure the individual it’s much more than 2% p.a. (changing jobs, or don’t ever receive a promotion etc)
- Inflation matters! So, we need to compare real values, in today’s dollars and normalise for inflation.
- In 1971 the median house price was $190k in today’s dollars, by 1991 the median price was $260k – that’s real growth of 1.6% p.a. approx. over 20 years.
- In 1997 the median price was about $300k, by 2017 the median price was $700k – in real terms 4.3%p.a.
Every step of the way there has been an interest rate reduction in the price boom 1. Level of affordability can vary cyclically. House-price to income data suggest a structural affordability problem in Australia over the past 20 years. 2. Average wages going up since 1997 3. There’s also been growing concern about the low levels of first-home buyers entering the market in recent years. 4. Also, the demand for bigger buildings also went up which creates a problem – cheap money incentivises people to spend more than they would otherwise – for renovations etc 5. But most of the price of residential property in Australia reflects the value of land, rather than the cost of construction or the value of buildings. * 3% p.a. increased from improvements since 1990 * 6% p.a. increase from land value since 1990 6. This is another problem - Australia has an abundance of land, there is a limited supply of well-located land, particularly close to the centre of our major cities * Lots of apartments went up into the city to stimulate supply of housing without releasing land – but Australians overwhelmingly want to eventually live in a house with a backyard (80% estimated demand over the long term) * With limited demand for apartments beyond foreign investors, large property price drops have been seen from the reduction of prices in units/apartments, due to oversupply without foreign investors
We’re seeing a correction. The current drop in prices to date has been big compared to historical drops.
It’s now one of the largest on record in Australia, only surpassed by a handful of periods in the late 1800s and the first half of the 20th century
- Estimates regarding net housing wealth (the value of homes minus mortgage debt) has fallen 12% in real terms from the record peak seen at the end of 2017 – mostly in Sydney
- NAB have predicted that this decline in housing wealth is the second-largest on record in the past half century, only surpassed by the 13% drop seen in the early 1990s, when Australia last fell into recession.
- GDP growth is slowing, so is inflation, with both less than 2%. This deceleration reflects weaker household spending, which is the largest part of the economy at around 55%.
- Spending slowdown will keep Australian economic growth slow in the years ahead – but this doesn’t necessarily mean recession
- Spending is related to wealth psychology – The Wealth Effect – you feel rich, so you are more likely to spend more. A decline in house prices with no offset from household income increases will result in reduced spending
- Capital Economics said the downturn could see total housing wealth decline by $800 billion over the next few years
- This decline in housing wealth would likely drag on household spending, counteracting a continued improvement in Australian labour market conditions.
- The likelihood of continued sluggish economic growth, will eventually see unemployment start to drift higher as hiring levels slow, making it harder for the RBA to lift underlying inflation back to within its 2-3% target
- So, they will be forced to drop rates even further and hoping that it isn’t just digging the hole deeper with the money markets. There’s a predicted 1 to 2 more rate-cuts likely in the future.
How do we get ourselves out of this hole? 1. Housing-market activity will continue to decline as affordable housing falls, joblessness increases and consumer confidence wavers. 2. How to solve the problem? – requires good governance * Require local councils to rezone – Federal Government to implement policy aimed at spreading out population * Tax zones – People move where work is – companies get lower taxes to move and they will move – then employees go there, especially if they have lower taxes * But it isn’t likely – the Government knows that if our property prices drop, we are screwed 3. Australian wealth and economic success rests on the back of the property market now – sadly due to Gov fiscal policy, and also Monetary policy 4. What you can do – remember, set appropriate price limits, don’t get into too much debt, have enough equity in the property to survive declines in property value. 5. We’ll talk about investing overseas in the next episode – looking at share market and how it responds to these sort of events 6. Diversification is important
https://www.loansense.com.au/historical-rates.html
Welcome to Finance and Fury, the Say What Wednesday Edition
Today we have a question from Luke.
Hi Louis, I listen to you often. Very informative and interesting episodes.
My question is regarding super/pensions. I lived and worked in the U.K. for about 10 years - and still have a pension there. I also have Super here in Australia.
I heard I could bring my U.K. pension back to Australia, then I heard they stopped it, and then I heard I still could. I was hoping you could clarify this for me.
Great question! This was a big change to expats retirement planning a couple of years ago that seemed to go pretty unnoticed, so thanks for bringing the topic up.
Created issues The issue with the UK Pension transfers to Australia occurred with changes to UK legislation back in 2015.
This was due to the UK pensions prohibiting people from transferring their pension funds before they have reached the minimum UK pension age of 55, due to changes in accessibility laws between the two countries (i.e. the UK didn’t want people transferring their Pension accounts to Australia and being able to access the funds at an earlier date).
Anyone who has worked in the UK will normally have built up some form of UK pension benefits. It is now compulsory by law for all employers in the UK to enroll their employees into a workplace pension scheme.
This means when people leave the UK, they will need to decide what to do with the pension fund they have built up.
You can transfer your UK pension to an Australian Superannuation as long as the Superannuation has QROPS status.
A qualifying recognised overseas pension scheme or QROPS for short, is an overseas pension scheme that the UK recognises as eligible to receive transfers from registered pension schemes in the UK.
To qualify as a QROPS the scheme must meet the requirements set by UK tax law. To check if a pension is a QROPS you can check the list of schemes that have told HM Revenue and Customs (HMRC) that they meet the conditions to be a recognised overseas pension scheme (ROPS).
From 2015 only people who are over 55 and either have an SMSF, or have a complying APRA super fund (i.e. regular super funds like an industry or for profit fund) are eligible.
Anyone who meets these requirements is eligible to transfers their UK pension funds through following the non-concessional contribution rules.
These are separate rules to UK pension transfers - These are as follows:
- The transfer amount has to be within the non-concessional contribution cap of $100,000 per annum. A bring forward rule applies to members under age 65, allowing an amount of $300,000 in one lump sum through using the contribution limit over a three-year period. However, for anyone aged over 65 but under 75, they need to meet a work test too contribute funds to super, along with being limited to $100,000 p.a. as the bring forward rule is no longer available after 65. Upon turning 75, no further contributions can be made.
- A lifetime contribution limit of $1.6 million will also apply. If your total super balance is over $1.6 million, you won’t be able to make any further non-concessional contributions.
- Introduced with a different round of super reforms
- Part of balance transfer caps - $1.6m in Pension environment – cap amount in super
- Was going to be a lifetime cap of $500k retrospectively.
The Non-Concessional If the transfer is made within 6 months of moving to Australia, then the whole transfer is treated as a non-concessional contribution and therefore subject to the NCC limits and rules.
If the transfer is made after 6 months of moving to Australia, then the rules are slightly different. The value of your UK pension on the date you arrived in Australia is treated as a non-concessional contribution. The growth in the value of your fund between the date you arrived in Australia and the date your transfer is treated as fund earnings and therefore subject to tax in Australia. This part of the transfer is neither treated as a concessional contribution or NCC.
There is only one retail superannuation with QROPS status, the Australian Expatriate Superannuation Fund, the rest are all self-managed superannuation funds (SMSF).
Once you transfer your pension to a QROPS in Australia then it becomes subject to normal Superannuation rules, as well as being subject to UK rules for 10 years after the transfer.
Few practical examples of how this works and explain the process of transfer further
You are 45 – No go
You are 55 and super of $1.7m – no go
You are 60, super of $900k and UK pension work $280k – Okay to transfer (if super fund complies)
You are 67, not working – No go, cant transfer into super here
Side note – lots of other pension funds (like RSA) can be transferred into super in Aus, but they do have their own laws and tax treatments with withdrawn early – just make you aware
Thanks for listening, if you want to get in contact you can do so here.
The ability to get more achieved - learn how to control your time, not just manage it. This is what this episode will focus on, or put bluntly, it’s about Getting Shit Done!
- What is time? Time is the indefinite continued progress of existence and events that occur in apparently irreversible succession from the past, through the present, to the future.
- The reason this is important is that time is limited – it eventually runs out for all of us.
- While our total years alive may differ – each day we are all limited to the same amount of time.
- Whether you are a CEO or retired, we each have 24 hours a day. So how do some people seem to get so much done working with the same time constraints?
- They do this by creating and controlling time. When I first heard this it took me a while to fully comprehend. How do you create time?
- Easily, you can either free up tasks or get through them quicker, however focus is the key.
- I believe that the 9-5 work day has killed productivity. Most people - if they really wanted - could get what might take a full eight-hour day in far less time – some look busy for 5 hours, then get what needs to be done before 5:30pm.
- This has led to habits in the workforce that have flown through in to lives.
- Reduces urgency as there is always more time -
- Even if you are at work and there are tasks to get done which someone else is providing to you, you control how you do these.
- The more you control time, the more you will get done - This then leads to a greater output and greater chance of pay raises and promotions. Success – is achieving something – more you achieve = more ‘success’
- Plus, you will have more free time!
The two ways to get more done – manage time and 100% focus – means stopping procrastination
- Heard ‘work smarter, not harder’ - It is about what you get done, not how long you spend doing it –
- Think it isn’t a great saying – as working smart is hard – it requires self control, good habits, time management – which aren’t easy to do
- put in the effort – where the working hard comes in – as initially it is hard – Discipline
- Discipline is interesting
- If you have discipline – you have self-control
- When you discipline someone else – it is punishing someone to teach them (current definition)
- The Latin disciplinameant "teaching, learning."
- The Old English version referred to a branch of knowledge or field of study (so if you're really good at word origins, you might want to make etymology your discipline). Developing discipline as a form of training is a military concept that's more than 500 years old.
- Then we started using the Old French ‘descepline’ – means to punish
- Self-control is important – either way you will be disciplined through
- You don’t get what you need to do done – someone else may discipline you, or you will do it yourself with negative self talk – or a modern-day equivalent of self-flagellation to punish ourselves for not getting something done
- Think most people would agree – like to have the first kind of discipline in our lives
- Think it isn’t a great saying – as working smart is hard – it requires self control, good habits, time management – which aren’t easy to do
- To get through more – need to be disciplined and give 100% focus to what you are doing.
So how do you get started? Implement the ‘time management loop’!
- Start your day with a clear focus.
This starts the night before with a review of your tasks the next day. I used to waste so much time figuring out what the plan for the day was when I would arrive at the office. I used to get in to the office, spend the first 20 minutes organising tasks and reading emails, then go get coffee.
To do this, organise your time by chunking up your day into blocks. This helps to set limits on how long you have to finish something, helping to reduce the overall time spent on the task. A book called Deep Work explores flow and productivity that recommends exactly this. Having chunks of time set for one task and one task only leads to much more being produced.
But focusing on the important tasks should be your priority. There is no point in chunking your time to spend on tasks that make you feel busy but achieve little.
- Focus on high-value activities.
What is a high-value activity? It is simply something that will move you towards your goals more so than any other activity.
To determine what is of the highest value, you need to align these tasks with your goals and priorities. It helps to focus on outcomes more so than the individual tasks. So, ask yourself ‘what must be done now to get to my end goal?’. Becoming goal orientated when deciding on what to spend your time on will give you the clear focus you need to become as productive as possible.
But what happens to other tasks that you don’t get around to? There is a concept called comparative advantage. This works in economic terms where if one country can produce something at a lower cost (or better) than another, it should do this task and then trade for the other goods it foregoes producing. We can do this as individuals through outsourcing by getting someone else to do what you aren’t great at or don’t enjoy doing.
To help with this, try to complete an ‘Activity Audit’. List what your weekly tasks include and
what takes most time each week. This helps to determine how you spend your time and on what. Then you can potentially look at what can be outsourced and what can you only do to increase your income or free time.
Say your goals is to start a side business, then you need to focus on the tasks that will achieve this. So, if there is the option between watching TV or working on setting up the business (website, registering, marketing) then the choice should be clear. However, there are some things that you cannot outsource such as spending time with family or friends. Sure, you could hire someone to take your partner out to dinner but you get little enjoyment from this.
Focusing on your highest priority tasks helps to redefine time so you can control how it is spent and is the basis of the 80/20 rule.
- Minimize interruptions and unimportant things.
Minimising interruptions is between external interruption and also then ones you create through multi-tasking. Just focus on one thing at a time, don’t let things distract you from your priority.
Trying to perform too many things at once is the best way to reduce your overall productivity. This usually comes in the form of switching from one task to another without completing the first task. We’ve all been right in the middle of focused work when an urgent task demands our attention; this is one of the most frustrating kinds of multitasking, and often the hardest to avoid. It almost doesn’t seem like multitasking at all, but our minds need time to change gears in order to work efficiently.
This then leads to taking longer to complete all of your tasks and makes you more prone to errors. If the tasks are complex then these time and error penalties increase further.
Each task switch might waste only 1/10th of a second, but if you do a lot of switching in a day it can add up to a loss of 40% of your productivity.
Also, removing unimportant decisions from your life will reduce Decision fatigue.
Decision fatigue refers to the deteriorating quality of decisions made by an individual after a long session of decision making. It is estimated that average amount of remotely conscious decisions an adult makes each day equals about 35,000. I find that hard to believe and there is no way to accurately measure, but even if it is 10%, then that is still 3,500 a day!
The less you have to think, the more brain power you will be left with. Most people spend more time thinking about what to eat for dinner than their goals so by the time it comes to do something of value they are already depleted. You have a finite amount of brain power, so use it on important things.
- Review your day.
The only way to improve this whole process is to see what you actually spent time on versus your daily activity schedule. I was surprised with how much time I wasted every day on switching between tasks, not focusing enough and doing mundane tasks. The first week is the hardest, it initially takes some time and effort. Then, you should plan out your next day and complete the loop.
To keep this loop going, you need to make a habit around this. It takes 30 days to create a habit, but good habits make your life easier. With good habits in place you don’t have to make as many hard decisions, thus you are less likely to make unproductive ones such as talking yourself out of doing what you had planned.
Jocko Willink, a former navy seal who wrote the book Extreme Ownership has a great saying; Discipline equals Freedom. It is true, the more disciplined you are with this will give you more freedom of time in life!
Want to hear more like this – eps on procrastinating, if you are newer – Archive eps – from an older podcast I did – steps to success series contains much more
But for now, go and control your time!
Have a good one
Get in contact with us here
Welcome to Furious Friday – Today – Continue with the Lucky Country Australia – Today – want to run through how a lot of our luck – especially if you have owned property, comes from the design of Australia’s monetary system since the early 90s. But diminishing marginal returns are a real thing – especially when it comes to money. In this episode we break this down to set the stage for the next two episodes – on Australian property and share markets and their potential returns for next few years.
The heart of every monetary system - money can only be created by a central authority – for guarantee of value – most of human history:
- Genghis Khan - established paper money in Yuan Dynasty- currency fully backed by silk and precious metals
- behead those found guilty of counterfeiting – in Before in Song Dynasty just tattoo their faces
- But this is when the paper money was fully backed by valuable goods
- When it comes to fiat currency (our current monetary system) – need to have one central Authority to make sure that the intrinsic value placed on it sticks – in the form of a Government guarantee
- Imagine if we all viewed monopoly money was worth the value of the note – if we all believe it and accept the backing of the value – we will use it – but why is monopoly money worthless? Because it can be made by almost anyone at will with a colour printer
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A central authority is needed – to not only produce the currency (that cant be faked easily), but be protected by law as the country having one single currency – capping the supply to be controlled by one entity
- but it can’t be the Government – having Gov over supply of money is bad – they can enforce law – ATO, or laundering/counterfeiting
- Policy - Separate Central Banks – this central authority then grants the right to create money through fractional reserve banking to commercial banks - the right to further create money through lending
- banks do not have to keep all of its deposits in the bank – they create money by lending out a certain proportion of its deposits to others - who of course had to deposit the loan into a commercial bank to use it – as it has Authority granted by the regulators
- Deposit $1,000 – Bank lends out $800 – someone uses it, give it to someone for service = $1,800 = creating more money.
- And this also means that commercial banks are generally profitable as the money supply grows –
- 1993 - $81.5k mortgage, 8% rates, $6,500 p.a. – 2018 - $388k national average, 3.9% rates, $15,136 p.a.
- except of course when they stretch too far - like in 2008–9 = which thanks to the Government having authority over the money – they got a bailout of freshly printed money
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First made them make risky loans, secondly guaranteeing the loans/deposits – incentive to gamble, thirdly printing more money to buy back defaulted debt so the banks losses will be covered by future debt obligations in tax over 30-50 years
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The system has evolved with Central Banks no longer having currency backed by anything - Floating of the Dollar in western world – USA 1971, AUS early 80s –That is really what fiat means – authority by decree
- but the key principle of the system in creating money is the monopoly of the central bank – but Now the supply simply doesn’t need a backing asset to provide a reference point
- But the issue with this is that the traditional way of wealth creation has been hijacked – being artificially controlled
- Two ways - The supply of money is now based on a whim rather than market forces – control of bread prices in USSR
- And natural incentives are being artificially manipulated – Like putting quotas in production based on weight
- Again – like USSR – nails would be produced too big to be usable – to reach quotas with less work
- You are incentivised to deposit funds into the bank when interest rates are high – bank can then lends money out = more money is created – but limited to the overall wealth of the population – 1) what they can afford in interest payments, and 2) rates depends on the level of deposits which relies on more people having more money in the bank
- And natural incentives are being artificially manipulated – Like putting quotas in production based on weight
- Two ways - The supply of money is now based on a whim rather than market forces – control of bread prices in USSR
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Look over Aus savings rates – 1950s – fairly constant band – had lows of 10%, high of 20%, but mostly 15% -
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1983 – 1998 – 15 years – slow decline from 15% to 0% or negative – stayed there until about 2008 – then spiked
- Went back to 10% for a bit - Economic collapses can scare people to save more – but declined to 2.5% since
- When we reflect on this, I don’t think it is too much to say whoever controls the creation of money controls the world …
- Of course, being able to create money is a wonderful – we all need to be able to create our own wealth –but when we the incentive to save, and the incentive to borrow are controlled by a central authority-
- It creates a system of uncertainty and often not an optimal outcome – as there is no instant feedback loops – like in every other financial market – apply this principle to anything
- You have a company that sets the price of power – it has a complete monopoly on Australian power – even the mining side of things – from resource to the power point – how well do you think we would be serviced?
- Would we have higher prices with worse access to power if there was a monopoly on power?
- I don’t see how this is any different to what each Central Bank does of every nation on earth
- They set the cash rates – or interest costs – they produce the cash
- But they are only one piece of the Authority – in Australia: Council of Financial Regulators Working Group
- APRA, ASIC, RBA - Then - Treasury department - The department is focused on developing Australian taxation system, land and income tax and economic policies.
These Things are all related – and all over pretty incredible control over the economy
- Treasury department – Do all the economic modelling, projections based around assumptions, come up with policy to help rectify projections that are off the set targets –GDP growth, government revenues, taxation policy
- RBA – controls money supply –monetary policy -
- Bases their decisions around economic reports and their own modelling - determines the cost of accessing credit is – borrowing
- Commercial Banks also source deposits (from individuals), money overseas, lend this money out based around a ratio of how much you are putting down – but the money all has to be AUD, or other approved currency
- APRA and ASIC – Regulate the flow of the process – at the banks and consumer level
Back to Central Banks - Have a lot of control - RBA has a lot of power – central bankers have a lot of power –
- one word from a Chairman of a central bank makes markets spook and drop, or charge – if they say they are going to do something in 2 weeks, then the market responds today in anticipation – based around their monetary policy changes
Monetary policy creators have a lot of power – This is what the RBA is responsible for -
- The Reserve Bank Board sets interest rates so as to achieve the objectives set out in the Reserve Bank Act 1959
- the stability of the currency of Australia;
- the maintenance of full employment in Australia; and
- the economic prosperity and welfare of the people of Australia.
- Since 1992 - these objectives have have managed through a target for consumer price inflation, of 2–3% p.a.
- Monetary policy aims to achieve this over the medium term so as to encourage strong and sustainable growth in the economy.
- Controlling inflation preserves the value of money. In the long run, this is the principal way in which monetary policy can help to form a sound basis for long-term growth in the economy.
- How is this done? RBA policy - objective of monetary policy is to control inflation -target is the centrepiece of the monetary policy framework
- The Governor and the Treasurer have agreed on the 2-3% inflation each year is best
- sufficiently low that it does not materially distort economic decisions in the community – or a free market
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The inflation target is defined as a medium-term average rather than as a rate (or band of rates)
- Between 2 and 3 due to inevitable uncertainties involved in forecasting, and lags in the effects of monetary policy on the economy - inflation is difficult to fine-tune within a narrow band –
- The inflation target is also forward-looking – Guess what the inflation rate will be in response to current conditions and the increase in money supply
- Ever been cooking something and not following the recipe 100% - Pancakes - Add too much milk, now it is runny, so put flour in, but too much, so add more milk, and then need to add a bit more sugar and egg to fix up the ratios, but now it is too runny again, but you are out of flour -
- Decision making process –The Board meets eleven times each year - the first Tuesday of the month except January
- For each meeting - the Bank's staff prepare a detailed account of developments in the Australian and international economies, and in domestic and international financial markets.
- The papers contain a recommendation for the policy decision. Senior staff attend the meeting and give presentations.
- Then policy decision is either to drop rates, raise them, or keep them the same – Then public told
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This approach to monetary policy in Australia since early 1990s - Policies that they have set are all about low inflation –
- Reason for change –1960s-70 – 5% - then USD 1971 – 1983 rates started going up 5-13% in 13 years – inflation on lots of currencies previously backed to USD, and by proxy gold – lead to higher cash rates which needed to curb
- with floating dollar – rates in 1983 went up over next 7 years to 17% - 1989 to 1990 – two years it was expensive
- By 1997 – 7% rates were back – 10% lower – so borrowings went up massively
- What actually creates inflation – or CPI technically here – cost of living going up – is it from people spending money on goods when there is more money, and then businesses being able to increase their prices over time to keep up with more demand – but thing called menu prices – this occurs slowly – fairly natural process – bit of an effort for companies to go through increases in prices – restaurants as example – printing new menus –
- and if you set prices too high – people stop buying and therefore – prices don’t go up so no inflation beyond the market demand for a good and thus pushing the price up in the process.
- When this is trying to be set through demand side economics – thinks more money – more people spend – businesses get to increase prices? Well – not when the increase in the money they get gets diverted into a home – loans are small, no problem – as you still have money to spend – now – more money can leave with no actual increase in what you have to spend after the debts interest and repayments
- When credit can be controlled – and printed at will – the allocation of the funds becomes distorted compared to the overall demand for it –
- Increase in prices comes from demand versus supply – but with technology making things cheaper, to artificially keep CPI up on average, more money needed, but different with certain assets people demand more compared to the supply – especially things like property – so when there is high demand and increasing access to credit – prices go up -
- Debt growth averaged 15% per annum compounding (1998–2009). During the same period national economic growth was less than 3% with debt stripped out.
- Between 1998 and 2008 inflation was about 36% and property prices increased by more than 300% in all capital cities except Melbourne (up 280%) and Sydney (up 180%)
- No wonder we are experiencing low CPI – Existing businesses are in a price war – as disposable incomes go down after debt costs are paid for – people have less to spend – so as an existing business – compete by reducing your costs to lower prices –
- Nature of the modern company – focused on the profit margins more so than the revenues
- Why the small corner stores can’t compete anymore - not to the economies of scale that Woolworths, WES have to have the lowest prices – while still making a profit due to lowest costs
- Issues with cheap money – and the focus on low inflation being manipulated – with no guarantee that the move up or down in cash rates will have the desired effects on economy – especially in a global economy – where models work in isolation – but add millions of other factors and the probability that it will work get very, very low
- No incentive to save – reduces growth – as savings are typically used for investments – either others or your own
- As rates go lower – amount of money increases – needs to – so cheap credit – the result? Artificial allocation of resources
- Housing prices sky rocketing around the world since the 80s – Rates go lower, growth goes lower as well – people are spending less as they are trying to pay back massive loans
- Don’t think it is a massive coincidence that
Revisit the effects of this policy on the housing market and share markets over the next two Furious Friday Episodes –
- Property market – bubble or not?
- Share market – lower growth environments, and dividends – run through Telstra as an example
- Run through how to still build wealth in this environment
Get in contact with us here
Resources:
Global Trends Interest Rates - https://voxeu.org/article/global-trends-interest-rates
Welcome to Finance and Fury, the Say What Wednesday edition
Today’s question is from Robbie, Hi, and thanks so much for the podcast. Both Mum and Dad are retired however Mum is eligible for the pension before my Father reaches 65 (approx 5 years) however Their combined assets puts them over the threshold to claim the pension. Is it possible for them to transfer money/assets to a trust, or gift money to a sibling to reduce their combined assets below the Centerlink threshold.
Relating this to a non-specific question - is it possible to transfer assets/money that a retiree owns, so as to be under the threshold to be eligible for the Centerlink Pension, and if so, is there a time this would have to be done by (does Centerlink look at the last 5 years or so of assets?)
Today: * Run through maximizing pension incomes * Little can be done to reduce assessable/deemable assets * Asset limit tests, gifting rules and transfer costs
Assets and Income tests: * Assessable assets over $387,500 for a couple starts to reduce fortnightly pension * Full reduction occurs when the total is $853,000 * Non-assessable assets are superannuation accounts while below pension age and their own home * Investments are included net the loans * Income test is either what you get directly or deem you to be paid * Deemed is assumed percentage on investments * If investments get assessed, why not give it to someone else?
Gifting rules: * Treat transferring assets as a gift * Gift $10,000 a year before it is treated like an asset * There is a 30,000 cap over 5 years * So if someone is 5 years or so out, gifting a sum more than $30k, then in years 5 years out, or during AP – less than $10k p.a.
Other structures? * Can you set up assets ahead of time and build wealth there? No * Trusts don’t get around this * Centrelink would have a look to who has access to the trust * As long as anyone is connected to a trust, it is counted as theirs
The costs: * Transferring assets means you might incur costs * Depending on the level of growth – might have CGT * If you leave the direct shares in your estate, can transfer to children without CGT * These shares would still carry their original cost base * Payout super, but run into the gifting rules
Depending on the level you need to reduce your assets by to get the age pension, you can end up being in a worse position
Examples – General illustration purposes 1. superannuation of $1.2M, 2x investment properties ($600k) and principle place of residence, cash $30k, cars and contents - $70k 2. Total Assets - $2.5m in assets – Well off the $853k max limit 3. Transfer property? CGT on the sale, whatever the gain is, halved, added to income + stamp duty (likely) 4. Maximum age pension is $37k for a couple on the pension – Between the two properties and 5% incomes from super, talking about $90k p.a. 2. Couple – One 65 and other 55, have cash of $50k, home contents and car - $50k, two supers, 65yo $550,000 and 55yo $200k – Assets of $650k now, 55yo super non assessed - $394Fn reduction - $10k p.a. – left with $7900p.a. 1. Withdraw $300k from super, put it into 55yos – 3 year bring forward for NCC – after tax into super - $100k over three years 2. Note – tax may be payable if you withdraw this early though – so won’t want to have to access before 60 3. Now assets $350k, so under test – Full AP. 4. Almost same net income – Except now most of it isn’t coming from your own account - $35,414 from AP and Income from $550k, or $35,651 p.a. from $350k and full AP – both over AP age, pensions gone, but at least $300k could sit away and grow over that time period
Tips on what to do to boost income in retirement 1. Fully franked shares – boost retirement income 2. Transferring superannuation into income stream phase 3. Good way to get 42% more income from every dollar of franked dividend 4. Be wary of death taxes, we have it on super but not personal assets 5. Why do other countries have it?
Summary: * Age pension – if you aren’t eligible due to assets, you’ve probably paid a decent amount of tax along the way * Best not to rely on it if you have time to accumulate wealth * Some ways are in preparation, gift assets
Thanks for listening everyone, if you want to get in contact you can do so here.
Welcome to Finance and Fury
Looks like borrowing for property purchase is going to be easier. APRA is looking to make some changes to lending criteria enforced onto the banks.
Today:
- Run through what these changes are
- Why they are occurring
- What the lending environment looks like over the next few years
What is happening with the RBA and borrowing restrictions from APRA? * Interest rates are strongly related to the interbank cash rate * Made it clear that they are cutting rates in 2 weeks’ time from 1.5% to 1.25% * Banks lend at a margin slightly above the cash rate that covers their expenses, makes a profit and pays the deposit levy * The cash rate of 1.5% and variable lending rates of around 3.75% leaves a 2.25% buffer * But banks assess your borrowing capacity at an interest rate of 7% * This is set by APRA, and they are going to remove the serviceability assessment at 7%
Government plans: * APRA has removed its quantitative guidance on the level of the serviceability floor rate at 7% * Authorised Deposit-taking Institutions or banks use to assess home loan applications * December 2014 is when the assessment of serviceability floor was imposed as 2% on top of variable loan product rate * At the time variable rates were around 5% * A single person on $80,000 would be able to borrow nearly $100,000 more under proposed changes * Lower cash rates = lower interest rates on loans * Lower hurdle rate of assessment in what you can afford = you can borrow and afford a larger loan
Why are these changes being proposed? * Property prices are outside of peoples’ borrowing capacity * Banks were forced to start looking at borrowers’ actual expense, forced by ASIC * Introduced changes to the national consumer credit protection Act RG 209 * Responsible lending conduct was introduced and reasonable inquiries into all other expenses * The old approach was the HEM Benchmark which wasn’t very accurate * It looked at where you lived and some other statistics, form here it estimated your expenses * Since last year, household lending has decreased by 30% due to these new requirements * Because the banks are lending less, the regulatory body’s solution is lower the interest assessment criteria
What does this mean for you? * Access a larger loan * Access a cheaper loan * Help property prices, as people can get access to funds * These are good if you own property, are looking to refinance or are looking to buy * But what about the long term?
This isn’t the only side to lending * Credit regulations – assessment by banks onto customers * Requirements set by APRA and ASIC * Prudential regulations – assessment on the allocation of lending for risk control * Prudential regulation requires controlling the risk by lending to low risk, high collateral borrowers * The banks need to hold adequate capital as defined by capital requirements * This is why housing is so popular as it is safe and sound
One side of lending is easier, the other side of risk control is increasing * Business and self-employed lending – previous episode link * Household debt to GDP in Australia is at an all-time high, going into non-value adding activities * While it is easier for salaried individuals to get loans, it is harder for self-employed people
This policy will increase what is dragging our economy backward * Household disposable incomes have increased by about 2.5% p.a. * The previous decade was about 6% p.a. * The misallocation of spending is going towards a company but not adding new economic activity * People are not spending on services, goods, and other non-financial businesses * People are too busy paying down their massive loans * Business revenues then can decline, as nicer things in life get cut * Any company impacted by reduced revenue, it is harder for them to get funding * Those companies are forced to close and people lose jobs
The misallocation of lending * Increased residential cost = excessive lending to the residential housing sector * This is at the expense of businesses * Regulations and risk control incentivise lending to one borrower over another * Banking system to allocate lending away from the most productive areas of the economy * The logic of cutting rates it to make it easier for businesses to borrow and invest and households having a higher disposable income to increase consumption * This has not worked to date
Summary: * High household debt leaves the economy vulnerable to economic shocks * Australia has slowed down in economic growth and rates have only decreased since 2012 * If you are looking to borrow to buy + Can you afford higher rates? + What are the cash flow requirements now and in the long term? + Don’t get in a position where you are forced to sell, have some buffer prepared * There are limitations to monetary policy from the RBA * The government can provide additional fiscal support * We will cover more monetary policy in Friday’s episode * How one person can send a market up or tank
Also please consider making a donation to my fundraising efforts for CEO sleepout
If you want to get in contact you can do so here.
Welcome to Finance and Fury, the Furious Friday edition
Last week: Being grateful for what we have, where Australia started and where we have come
Today: * Luck truly running out * How it can be manipulated
What is luck? * Success or failure apparently brought by chance rather than through one's own actions’ * The saying that ‘we make our own luck’ * What are the outcomes of being lucky? * The difference between success and failure * If you were born in a Western Country, you were born lucky * We have a great upwards mobility of wealth * The real luck is being given the ability of choice * Have a look at the freedom indexes, they show higher levels of quality of life * Where does freedom come from?
There is a very strong correlation between free nations (economically and legally) and prosperity/quality of life
What exactly makes a nation free, and gives the population every opportunity to build their own success instead of luck?
I have been getting into the key figures in the Founding Fathers * Not often do you get to see the people stand up to a governing system and establish their own * Happened in Rome in 509BC * 13 colonies voted to join forces against King George * In 1787 they formed the ‘constitutional Federal Republic’ not a democracy * Dictatorial powers, what are they? * Freedom from tyranny – sunlight is the best disinfectant * Should we ban people from speaking because some people find it offensive? * You can have pure garbage or allow expressing legitimate issues for people * The second amendment – a well-regulated Militia and the right of people to bear arms * Jurisprudence is the context along with the amendment or law
Australia the Federal Parliamentary Constitutional monarchy * Not a true democracy either * There are 2 types: the direct democracy and the representative democracy * We are a constitutional monarchy * The governor general answers to the Queen * Australia ranks high on the freedom index – but retaining this is up to us * The US started free however it has dropped massively * The supply of money has a big influence over our life and we don’t vote for the members of the RBA
From an ABC article * Link to the article here * People were surprised where they sat for income or wealth compared to the average * Issues from the control of information from the government or media * When censorship is legislated from the government it leads to corruption * Australia has 180 bits of legislation passed every year, can you name one? * Stalin quote “Education is a weapon whose effects depend on who controls it and at whom it is aimed” * Misdirection leads people to vote away their liberties
Comes from both ends: * It is nice to think that politicians are to blame * It is also up to us, who we vote for and what we allow? * Notice that by the time you hear about a law, it is already too late * To what extent do new driving laws relate to impairment of driving and not straight forward punishment?
Another thing barely reported on * Have you heard about the government in Darwin and their social credit score system? * We did an episode a while back on the social credit score – link is here * How is this possible? * Branded as the “smart city” * What type of activity will sound an alarm? * How should we react to this new level of control? * How the Chinese Communist party rolls out infrastructure and software abroad * Any Australian governing body implementing totalitarian social control is a major concern
Moral of the story, regardless of how it is positioned, don’t give up freedoms or the luck of being born into a society with a lot of potential
But what if the news doesn’t want to inform us?
Monetary side messing with the economy and the lack of information around this from the media. The need to sensationalise everything for revenue instead of informing people of current affairs
Next episode: How a few individuals around the world control all of the economies at the top level due to the supply of money
Thanks for listening, if you want to get in contact you can do so here.
Welcome to Finance and Fury, The Say What Wednesday edition. Where every week we answer your questions.
Question from Anton - In your recent podcast you mention countries that have more millionaires and billionaires have more gdp and a higher quality of life. I am interested if you have research that shows the relationship of quality of life for the lower quartile of the population (by net total worth) against the number of millionaires in a Country.
Today:
- Research on quality of life
- More millionaires per capita helps
- For the lower quartile also
St Vinnies CEO Sleepout on the 20th of June – Donation Link
Recap of what I said in that ep “countries with the highest number of millionaires/billionaires per capita, have higher levels of GDP per capital and higher quality of life scores, even for the poor“
- Per capita is important – shows output
- Concentration of millionaires per capita
- There really isn’t a lot published about quality of life and number of wealthy people
- Little research showing benefits in anything
- Took some time to compile the research
Resources will be shared to subscribers
Where would you prefer to be in the lowest quartile? * Where would you get a better pension income, social support, infrastructure/transport, healthcare? * What about an OECD country instead – Live in India, or China? * Where does government support come from? Taxpayers. Who pays the most in taxes? Millionaires and high-income earners. * The more millionaires there are per capita – the more money the Gov can collect * Millionaire’s money is more volatile due to deriving income from companies * From 2007 and 2011, the income of the bottom 10% increased by 2% while incomes at the top declined by 1%
Who has the most millionaires per capita? * Switzerland (8.5%), Taiwan, US, Aus, Belgium, UK, Canada, France, Norway * What about in regards to relative poverty lines?
What about other countries with millionaires? But not per capita * China, India, how do they compare? * How do their qualities of life compare?
How do you measure quality of life? * Standard of living? * No universally objective measurement * Rising global incomes? Rising disposable income? * What about India’s costs of living? * Main source of income of lower income earnings is government support
I haven’t gone over other indexes, but all point towards more millionaires per capita being a good thing
- These statistics change all the time
- Look at my example for perspective
- Equality of opportunity is a good measurement of quality of life
- Freedom index is a great indicator
- They show the mobility of income potential
I will be compiling the research and sending it out to subscribers
If you want to get in touch, you can do so here.
Graphic representations:
Welcome to Finance and Fury
A plan for structural reforms to help increase Australians’ ability for upward mobility.
The coalition will likely have enough seats to squeeze through a lot of reforms.
Today:
- Income axes going up aren’t much of a concern
- What about the taxes you don’t see directly?
- The effect of these taxes on the economy growth or decline
- How to reduce your taxable incomes?
Taxes – Government revenue source 1. Number of taxes – do you know how may taxes you pay each year? 2. The average Australians pay at least 125 different taxes each year, 99 to Federal, 25 to State and 1 to Local 3. Total tax collected is approximately $528.5 Bn 1. Most tax comes from incomes of individuals and businesses – 59% or $312 Bn 4. Consumption tax like GST makes up 26.8% was supposed to replace state’s stamp duty 5. Business payroll tax makes up 4.7% or $24.7 Bn charged to companies if they have above a threshold employees/wages 6. Excises on specific goods – normally ones on top of GST at Government discretion 7. Sin taxes – consumption tax on goods which are harmful to society 1. Alcohol – the social cost from loss of labour, healthcare, accidents and crime costs 2. Tobacco – the effects of smoking are estimated to cost $320 million but the revenue raised is $12 Bn 8. Does the additional money go back in to addiction treatment programs to help? Or the general spending budget?
Consumption vs Income Taxes * Both can’t be kept high * If consumption tax increases the cost of living, income tax should be lower * Consuming becomes more costly with consumption tax, putting a strain on upwards wealth mobility
Statistics on Taxpayers * Individuals and income tax reduction plan for 2022 and 2024 * Helping reduce the burden GST placed onto families from 2001 onwards * Original plan to protect works from bracket creeps * With wage growth and inflation going up, if the marginal tax brackets don’t increase too you get bracket creeps * Abolishing the entire tax bracket 90k – 180k incentivises hard work * Despite these changes you will still see the top 5% of workers paying a 3rd of all income tax collected * Someone earning $200,000 pays 10 times more tax than someone earning $45,000 per year
How to reduce certain types of tax? * GST? Stop spending so much. Further excises on your spending only reduce with less spending * Income tax? Deductions or salary sacrifice + Salary sacrifice puts money into super up to $25,000 cap taxed at 15% rather than marginal tax rate + Deductions give back the costs of investments or work related expenses and donations to reduce your assessable income
Give to charity – Donate to my CEO Sleepout https://www.ceosleepout.org.au/fundraisers/louisstrange/brisbane
Negative gearing * when you spend more on investments than you earn * Borrow to invest – home equity * Get your marginal tax rate back and for a lot of people the amount back will decline from 2024 * Lower marginal tax rates for those earning between $40k-$200k
Franking credits – Shares * Tax offsets on dividend income * Buy fully franked dividend yielding shares, but gets added to gross income * Own 1,000 CBA shares. They pay $4.30 per share in dividend so you get $4,300 of income. * Plus the franking credit, of $1,843 so total income is $6,143 * Earning a salary of 100k, assessed at 39% the tax would be $2,396 minus the franking credit of $1,843 so net tax is now $523. * Therefore, the marginal tax rate is now 13% instead of 39% * But, you will simply pay no tax on dividends if your assessable income is all the way up to 200k, as franking credits offset tax on franked income with a 30% tax rate
Family trusts – No changes to distribution rules * Still allows flexibility and asset protection * Own assets and distribute income to the lower marginal tax rate individual
Capital Gains/Losses * Gains still get the discount for assets owned longer than 12 months * Losses, claim against future gains
If you enjoyed this episode leave a rating, if you want to get in contact you can do so here.
Resources: Individuals taxation statistics - https://data.gov.au/data/dataset/taxation-statistics-2016-17/resource/4161d1b8-f9e3-4f36-b21d-d5d06b43ed2e
Australian taxes - http://taxreview.treasury.gov.au/content/paper.aspx?doc=html/publications/papers/report/section_2-03.htm
Welcome to Finance and Fury, the Furious Friday edition
A reminder of how lucky we are and why we are called the lucky country. Also, what we have to lose if we neglect to remember this
Some perspective: * You don’t know what you have until you have lost it * Taking things for granted like our power, because blackouts suck * What about the billions of people who don’t have power or deal with rolling blackouts daily? * Who would value having power more? * The hatred of the rich shows the lack of gratitude by those who do it * Countries with the highest number of millionaires/billionaires per capita have the highest GDP per capita and quality of life + They are wealthy (some exceptions) because they provide more value to our lives * We are lucky to have “rich people
But why are we called the lucky country? * First used in 1964 by Donald Horne – The Lucky Country * The origin of the phrase was negative in the context of the book * “Australia is a lucky country run by second rate people who share its luck”
Where did we come from? * Few places on earth better suited for middle-class prosperity than Australia * British convicts and free settlers – first government in 1788 were autocratically governed by a British Governor (mini-dictatorship) * Considerable unhappiness with the way some colonies were run * The monopoly of Rum used as currency and Australia has a history of a beer economy * English common law was introduced, the rights of Magna Carta and the Bill of Rights 1689 were introduced. * The number of settlers increased and they were given resources and land from the government. Convicts were used as Laborers * Land assigned back then as “Liberty Plains” is now Homebush and Strathfield in Sydney * Then had the gold rush and entrepreneurs came flocking in * Given the freedom and vast resource-rich country Australia is, it provides an ideal environment for upward mobility * From the pioneering ranches of the nineteenth century to the middle-class suburbs of the late twentieth
Has our luck actually changed? * Or did we change our luck? * Became a socially divided society like most first world countries * The political influence will either make it or break it * Bob Hawke – Legendary figure for Labour, 1983 – 1991. Did you know the Hawke Government implemented financial deregulation and reform? * Australian dollar float, dismantled the tariff system, privatized state sector industries, ended the subsidisation of loss-making industries and introduced full dividend imputation. * Did also have some popular ALP policies, with tax system reforms and introduction of Fringe benefits tax as well as capital gains tax * He would be considered moderate these days, if not closer to the LNP * A political party for the working class is now dominated by those operating outside the tangible economy * Some people are focused on achieving one thing and will do whatever it takes to do it * Pushing for climate change mitigation programs will further deindustrialise Australia * What about all of the people who will lose their jobs? Or those in other countries that rely on our Coal for energy?
What has changed our economy? * Gradual deindistrialisation stems directly from policies imposed by local governments in NSW, VIC, and QLD * Sydney’s manufacturing employment is down 50% in the last 2 decades * Politics was slowly transformed into an instrument of the bureaucracy and “progressive” gentry * Why are the yellow vests protesting? * We are sabotaging our economy, dependent on resources sales to China * Our commitment to renewable energy dwarfs EU, US, and China. Per capita, we have 5 times the number of renewables * Our energy costs are now among the highest in the world * ALP want to boost renewables from 20% to 50% in 2030 and the Greens want 100% * Ironically just as Australia is to replace Qatar as the world’s largest producer of natural gas, industrial enterprises in Australia are under pressure from high energy prices * Imports are replacing the closing Australian producers * With more taxes, energy prices, fuel, and super payments, there is less disposable income to you * OECD households were considered middle class, but this has dropped 1% per decade since the 1980s and now ranks below the OECD average
How policy affects our market? * How our luck may have run out? * Decline in Australia’s middle class resulting in the regulation of land and expenditure to promote urban density * 1981 to 2016 - property-ownership rates fell from 60% to 45% for 25 - 34-year-olds * UK has only 6% of the land urbanised * US has 3% and Canada has 2.1% urbanised * 3% of Australia is urbanised * Major cities in the first world have a “smart growth” model * Helping turn once affordable cities into some of the world’s costliest * According to the RBA, planning regulations are a major addition to this cost * Inner core of Brisbane, Sydney, and Melbourne represents 11%, 7% and 13% of the greater metro population (31%) * More than four-fifths of families living in single-family homes in suburban areas * Market manipulation can leave limited choices * Not enough supply to keep up with the demand adds to increased prices * Projections show 50% of Sydney’s dwellings will be apartments by 2050 * 40% of Sydney 35-49 year old’s live in townhomes or apartments, which is double the rest of Australia * This is a market-distorting approach that doesn’t let supply free and restricts demand choices * The threat of a financial meltdown as urban-core property prices decline is real
This process is not unstoppable: * The issues reflect policy decisions and not our economic or social fundamentals * Unless something changes, we may have a bleak future * Urged to settle where supply is allowed, making it unaffordable and congested * An ever-increasing demand for government revenues * With a little direction, this can be undone which is what will be tackled in next Friday’s episode
Be honest about what got us into this problem: * We are a lucky country, but luck can run out when you take it for granted * Next episode will talk about some cautionary tales
Thanks for listening, if you want to get in contact you can do so here.
Also, I am doing the St Vinnies CEO sleepout in June. If you could help support that would be greatly appreciated.
Welcome to Finance and Fury, the Say What Wednesday Edition
Today’s question comes from Octav
Hi Louie,
My question is how the universities are functioning in Australia, especially the one that are governmental managed. How do they make the advertisement for casual and part time positions available? From my experience, the positions are given to students and acquaintances without a selection process.
Today we will talk about universities in Australia
- An overview
- The nepotism
Overview: * 43 universities in Australia * The department of education has the responsibility for administering funding and policy * A hybrid model with funding from government and tuition fees * The universities adhere to government rules and regulations * Funding comes from commonwealth schemes, scholarships, and grants. * HECS/HELP debt covers 2.2 million Australian’s debt at around $40.2 billion in total * Takes an average of 8.8 years to pay off * Uni is set to become more expensive as the government starts covering less of the cost upfront
How well are they functioning? * Rankings in the top 100 Uni’s in the world * Quality of education (30%) – comes down to alumni and staff winning prizes * Quality of faculty (40%) – highly cited researchers and papers published * Research output (20%) – papers indexed * Per capita performance academically (10%) of an institution
Australian Uni rankings * 7 in the top 100 * What other methods show the functioning of a university? * Any focus on preparing people for the real world? * Last year 73% of people found a job after graduating and 27% are still looking * Pharmacy graduates had the highest change of employment * Creative arts graduates only 52% were in full time employment after graduating * Science and mathematics graduates had 64% employment 4 months after graduating * Only 57% of graduates who were employed full time after graduating believe their qualification was important for their current employment * Only 39% of undergraduates in fulltime and part time jobs reported that their skills and education were not fully utilised * And they have HECS debt to repay * The degree should improve your employment prospects * Look at a career with a wide range of job prospects I was interested in * Another important factor is about building resilience * Makes it hard to educate on topics if people get offended * Are universities functioning well based on how much it will cost you? * Previous episode link here on the political tool used to get votes and should you go to university * What is the incentive for universities to keep their prices low?
Second part of Casual and part time employment * Internally hire through the ranks * Universities don’t hire many casual or part time workers, 70% are full time
Thanks for the question, if you want to get in touch you can do so here.
Resources:
https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/FlagPost/2018/May/HELP-debt-statistics
Welcome to Finance and Fury
There is a saying that goes hoping for the best but planning for the worst. With the election around the corner, for those wanting to make it for themselves and create financial security may be in for a bit of a shake up
Today I want to recap proposed policies, breakdown of the economy and strategies to avoid pitfalls from election results.
Recap of policies: * Minimum wages and penalty rates reintroduction has an impact on small business sector * Taxes has one of the biggest effects + Income tax – more tax from the average income tax payer + Capital gains – reducing the discount to 25% from 50% impacts risk/return ratio for those investing in capital growth investments + Negative gearing – only on new properties impacts investing decisions + Family trusts – higher tax on distributions at minimum of 30% rather than the beneficiaries marginal tax rate + Franking credits – still in place, but the rebates will go. This still helps to offset tax, but lower incomes for self-funded retirees
State of the economy * Retail and hospitality – restoring penalty rates will force small business to cut staff or go out of business + Australian Retail Association – competing with online retailers means lower profit margins + Higher wages – leads to costs of running a business and administration bankruptcy - Why you see surcharges on holidays or reduced hours + Retailers and hospitality going out of business, retail employs 10% and hospitality 8% of the working population * Business – they just want stability + Frequent PM changes are bad for consumer spending and confidence + Fears of looming uncertainty increase the longing for political continuity and stability + Market Focus showed 77% of small businesses expect to be adversely affected by the results of the federal election + What do you do if you think something bad will occur? * Taxpayers – Bill Shorten uses “top end of town” to defend additional tax on income earners, investors and self-funded retirees + 10% of taxpayers to pay $32 billion more + 400,000 voters earning more than $180,000 a year + Policy suite will hit medium to high income earners * Individuals – reversing $285 billion in tax cuts proposed by the Morrison government will deliver $13.6 billion extra revenue by 2022 + 1 million workers earning more than $120,000 paying 45% of Australia’s tax + Earners of more than $90,000 a year MTR 5% higher by 2022 - This group accounts for 88% of net income paid already and 52% of Australians don’t pay any net tax + Inequality won’t change – Gini index – Labor’s is 0.36, and Coalition is 0.37 + 5% of taxpayers will pay 30% on superannuation contributions rather than 15% like the rest of Australia * Family trusts – tax on distributions goes to 30% is the next part of Labor’s plans to redistribute wealth + ABS says 93.2% of the value of trusts is held by the wealthiest 20% of households + Holding wealth isn’t the only thing Family trusts are used for + 1 million family trusts in Australian, 250,000 small businesses operate using trusts + Used to distribute income to beneficiaries and asset protection * What about big business? They will make up 5% of the extra tax from $32 billion of increased tax over 4 years + Small businesses will feel the squeeze further, impossible to compete with higher wages and higher tax + Plus additional regulation costs, $25k of licensing costs is a lot for small business
The issues: * Low growth economy leads to an underperforming share market * People’s perception has a lot to do with marker performance * RBA slashed its forecasts for economic growth as subdued household income and real estate price corrections * Weakening household consumption is a key risk to the economy * RBA slashes the GDP growth forecast for the year to June to 1.7% from 3.25% just 6 months ago * Our exports are mostly owned by foreign companies, so it doesn’t help the economy very much * Lower disposable incomes for a few million Australians * Household consumption is forecasted to grow at nearly 2% this year, and it represents nearly 60% of the economy * Investment in building new homes is expected to be down 6.7% this year, and construction accounts for nearly 10% of jobs. It is expected to create more job losses.
Where to invest? * Salary sacrifice becomes more attractive if taxes increase and investing for the future + Can bolster your retirement savings, save more in tax on investments too + You won’t be able to access funds until the preservation age of 60 * An investment strategy can be passive and are long term holds + Risk reward will go down but doesn’t matter if less than 12 months + Midterm sell strategies may not be worth it * Unit trusts may be an option to replace family trusts but aren’t an exact replacement + Still provides asset protection and won’t attract the same 30% minimum tax + Won’t have the flexibility of distributions as units are fixed to members
Types of Assets * This is all speculative * International shares and looking for growing markets + Countries like Indonesia, India, China, Thailand + USA country direction, the largest companies in the world + Brazil and Bolsonaro is turning the country around after his recent election + Australian Shares avoiding retail and property and some near future pain and slow market growth + Property only new properties can get negatively geared, and prices bottoming out in a lot of major cities
I will do a full breakdown of each of these after the election: * One on the property market – apartments and houses and their locations * One on the share market compared to other markets * And one on the state of the economy
Thank you for listening, if you want to get in touch you can do so here.
Welcome to Finance and Fury, the Furious Friday edition
This is a continuation from this week’s Say What Wednesday episode, in part one on Who to vote for? Check it out here.
Part 1: * Political culture * Tribalism * 3 main parties policies and promises
Today: * How to tell the difference between promises and policies? * Break down how votes tend to end up with 2 parties
How to tell a promise from a policy? * Every promise focuses only on the outcome * Look at if the policy proposal is stating an outcome versus how it will be done * Example: “Uni should be free” – how is this achieved? * The breakdown is the difference between dialectic and rhetoric + Rhetoric - language designed to have a persuasive or impressive effect, but which is often regarded as lacking in sincerity or meaningful content. + Dialectic - discourse between two or more people holding different points of view about a subject but wishing to establish the truth through reasoned arguments – but truth requires facts/information * Social media and the spread of disinformation makes rhetorical very powerful * Look at the Russian collusion of the election in the US * Scott Morison targeted by social media accounts affiliated with the Chinese Communist Party * Comedy is used as a subversive tactic
Subversive tactics are used to pass policies with positive rights: * Previous episode on positive rights * Negative rights make it illegal to do something to you, positive rights make it legal to force you to do something * Healthcare as an example: Nobody can stop you from seeking medical treatment vs medical treatment is covered by the taxpayers. Someone is forced to pay for it, falling into the positive right territory. * Rhetorical statements get used in regards to something being free or human rights * Labor website * Liberal website * One relies on policies and the other relies on rhetorical statements * The how or focus to achieve an outcome is very important
What are the polls saying? * Polling in Australia is more accurate, as it is compulsory to vote * Current polls suggest Labor will win, but now not so much * But what about the Primary Vote? Why can a party with more votes end up losing?
Preferential voting: * Does your vote count? * What you think about your vote is important * The number of formal votes a party needs is 50% + * 2 systems of preferential voting * House of representatives – box with a number in order of preference * Senate – above the line and below the line voting + Above the line: preference a party + Below the line: number all individual candidates * How does preferential voting work? * The full distribution of preferences is used to calculate the two-party-preferred statistics * Your vote isn’t wasted
How do we vote for our PM? * We don’t, we vote for a member of a party and they chose the PM
Summary: * Break down of messaging used in campaigns * Evoking emotional responses versus focusing on outcomes * Every vote is important and does actually count
Thanks for listening, if you have any questions you can ask them here.
Welcome to Finance and Fury, the Say What Wednesday edition
Had a few questions recently which is topical. Mostly from friends and family. They know I take interest in politics and policy, and asked me “Who should I vote for?” Can’t tell you that, nor I did them
Today: * Discuss 2 things to help make an informed decision * Policy, what each party proposes and where they stand on the political and economic spectrum
Next week: Where your vote is going with preferences
Our political culture: * Us vs Them mentality * Voting tribalism * Creates a dangerous element in any organisation * Hate and violence towards the other * Personal disclaimer: whoever provides more freedom in their policies * Cost benefit and Pros and Cons
Parties: * 3 main parties: ALP, LNP and The Greens * Most people are voting for 1 or 2 main issues + For Labor voters, the environment was the top issue (40 percent), followed by the economy and health care (each 11 percent). + For Coalition voters, the economy was the top issue (44 percent), followed by the environment and superannuation (each 10 percent). + Among Greens voters, not surprisingly, the environment was overwhelmingly the major issue (63 percent) * Run through each parties stance on the major issues and next episode we will go through healthcare and some minor issues
Tax: * Coalition – 10 year income tax cut package + immediately doubling the low and middle-income tax offset - benefit 10m taxpayers + raise the threshold for the 19% tax rate from $41,000 to $45,000 in July 2022; + flatten tax brackets so everyone earning between $40,000 to $200,000 pays a marginal rate of 30% from 2024. + No changes to negative gearing, capital gains tax or Franking Credit rebates * Labor – tax cuts for people earning less than $48,000 + Abolish negative gearing for existing properties + Halve the capital gains tax discount and end the franking credit rebate – grandfathered for Age pension and existing investments * Greens – Support Coalition low-income tax offsets, but block everything else + Make Deficit Levy permanent, Remove all negative gearing and capital gains tax concessions + Remove fossil fuel subsidies to raise approximately $21bn, increase Company tax rate back to 30%
Climate Change: 1. Coalition - reduce emissions and ensuring grid stability in the electricity sector - the national energy guarantee 1. $2bn “climate solutions fund” to reduce emissions, with funding to be rolled out over 15 years 2. Look at subsidising the mining and coal industry – based around an emissions study 2. Labor - propose to regulate the electricity sector - set a higher emissions reduction target of 45%, 1. beef up regulations to drive more rapid emissions reduction – but if these don’t pass 2. plan B - $10bn for Clean Energy Finance Corporation - $5bn fund to modernise aging transmission infrastructure to retire coal stations over time. 3. Introduce vehicle emissions standards - 105g of CO2/km - imposed on car retailers (not manufacturers) 4. Wish to review a carbon emission tax – reduced scope compared to the 2013 tax 3. Greens - proposing a carbon price (tax) – shut down coal exports by 2030 along with coal power 1. create a new public authority, Renew Australia - a new government-owned energy retailer 2. ban on new internal combustion vehicles by 2030 – lower EV tax, but raise Luxury taxes on fossil fuel cars 1. $0 funding if fossil fuel cars are no longer allowed to be sold
Industrial Relations and Economy 1. Coalition - Stop employees who were misclassified as casuals from being back-paid entitlements, preventing them “double-dipping” and accessing both the casual loading and entitlements of permanent workers. 1. Create a right for casual workers to request permanent full-time or part-time work 2. Give the Federal Court power to deregister unions or disqualify officials for repeated or serious breaches of law and introduce a public interest test for union amalgamations 3. Prevent enterprise agreements mandating which fund to pay workers’ superannuation into 2. Labor - Change the rules the Fair Work Commission uses to set the minimum wage, reverse Sunday and public penalty rate cuts for retail and hospitality workers and prevent labour hire setting their own wages 1. Introduce a new gender pay equity objective and lower the bar for making an equal pay order to boost women’s pay 2. Amend laws to “improve access to collective bargaining, including where appropriate through multi-employer collective bargaining” 3. Abolish specialist union regulators, the Registered Organisations Commission and the Australian Building and Construction Commission 3. Greens - Legislate a minimum wage of “at least 60% of the adult median wage” 1. Change the Fair Work Act so workers are free to bargain “at whatever level they consider appropriate and with whoever has real control over their work, whether at a workplace, industry or other levels” – increasing unions scopes massively
Will it work? * It is impossible to answer * Voting is based on rhetorical over dialectic * Tax - Lower taxes vs the government having money to spend * Climate – Slow and steady to not impact our economy vs cut CO2 regardless of 2nd, 3rd, and so on consequences * Economy/industrial relations – Giving Employers and employees ability to negotiate between themselves vs increasing the scope of unions and removing any oversight bodies into their actions * Fiscal policy is one side of economy management
Summary: * Voting preferences show what people care about * Most parties focus on 1 or 2 * Actually breaks down communication and sharing of ideas * How do some policies go after you play them out? * Be considerate of what policy issues you are voting for
Next episode: How you may end up unknowing voting against your major concern/issue. Doing a break down of polling and how preferences will affect the ultimate winner.
Thanks for listening, if you want to get in touch you can do so here.
Welcome to Finance and Fury
Have you ever thought about What would you do if you won the lotto?
What would you do with it? This depends on many things: the size, type of lifestyle, and how much you value money now.
Today:
- Talk about how winners end up with no money
- The tricks and psychology used to make people buy tickets
Who plays the lotto? * 11 million participate in gambling * 6 million have bought a lotto ticket or scratchie * 1 million spend more than 10% of their annual earnings gambling
What happens when you win the lotto? * It can turn out well or not * It takes time to learn about money beyond how to spend it * You hear many famous cases of how winners lose their winnings * These are great cautionary tales * How should you spend it
Why doesn’t everyone do this? * Value – not worked for and there is a lot of it. It depends on mind frames. * Not planned for – it is a lot of money in one go, it’s an oversupply or marginal utility. * Knowing yourself with money, having self-control and knowing the value of it * There is a difference between dreaming and planning * This is how the lotto gets marketed
How to value every dollar? * Everything has an expected return * What is an extrinsic value? * We can calculate the expected return of lotto * Lotto makes money from keeping people focused on the short term * The losses are long term * What if you looked at investing that $60 each week? + 10y - $47,743 - $31,200 of own money - $16,542 growth - 53% gain + 20y - $153,931 - $64,400 of own money - $91,531 growth - 147% gain + 30y - $390,112 - $93,600 of own money - $296,512 growth - 317% gain
Why isn’t this popular? * Investing is too long of a time frame * How does dopamine change things? * What is the expected value for investing? * How do you get the same feeling of the payoff from long term investing? * This is about generating your own wealth where the odds are in your favour * What would you do once you win the lotto?
Thanks for listening, if you want to get in contact you can do so here.
Welcome to Finance and Fury, The Furious Friday edition
Today We will go through how the share market changes with economic theory, particularly the theory of Milton Friedman in regards to shareholder value and certain volatility
- The share market behaviour changes as the thoughts of investors change
- It is based around Game Theory
To start: * What is the predominant thought of today * The returns of a company drive demand, people want shares that are doing well * Quarterly reports have a short term focus * This can take priority over long term health * What is the fiduciary duty of directors?
Where does this view come from? * Who is Milton Friedman * 1962 collection of essays “Capitalism and Freedom”
“there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.”
- Prices can respond quicker with information being readily available
How does this all work? * Projected versus actual financial reporting * Value is not price, it is what people think the price should be * Technically pursuing short term value should maximise long term value * Sometimes short-term gains come at a loss of long-term potential * What is another view of economic good? * Public companies are always exposed to short term investors or speculators who have a clear goal * Slight misallocation started to occur * The drive for CEO’s to be held accountable with shares as payment, came with an incentive to manipulate share prices
This is the sort of market we have to work with * Companies with good managers is the number one measurement * Long term performances
One of the most important parts * Don’t panic sell * If the company is good, it should recover long term * Selling the shares just crystalises the loss * Slow and steady wins the race * Next best things “in fashion shares” * When to get out? * Buy and hold well managed companies * I looked at the difference between large cap and small cap active managers * I outsourced the guessing to people who do this professionally
Thanks for listening, if you want to get in contact you can do so here.
Welcome to Finance and Fury, The Say What Wednesday Edition
Today’s question came from Matt and Lucas
Labor’s plan for 50% of new cars to be electric by 2030 plus introduce a carbon emissions target for new cars. The Greens have one-upped this.
Today we break down the EV market
- Why they are doing it?
- Talk about the platitudes and promises
- What it will cost?
Why are they doing it? * Paris agreement to reduce CO2 emissions by 46% per person * Australia has a growing demand for fuel * Most Australians travel to work via car * We don’t have the greatest public transport * What is EV range anxiety? * How much are EVs? * Other countries are banning petrol cars * What are the charge times for these vehicles?
How well do these cars work? * Transport takes up 18% of greenhouse gas pollution in Australia * Where does electricity in Australia come from? * How much CO2 is emitted? * How much do these electric cars cost?
How will this be done? * Labor’s plan was making car dealers responsible for this * The majority of cars produce more than 105g of CO2 per kilometer * What are the savings? * $200 million investment across Australia * How is this going to reduce the sales of petrol cars?
Potential pitfalls? * Introducing a new tax on road usage * Additional burden on the power grid * What is the additional cost to Australians for these EVs? * How much will solar panels help?
Take a step back: * Naturally, EVs will predictably make up about 50% of car sales in 2030 anyways * It is an easy election promise to fulfil * On Monday’s episode we went through promises versus policy
Never thought I’d say this: * Bill Shorten is right about making Australia a manufacturing country again * But he has contradictory policies * We aren’t competitive because of Lima accords * What happened with XXXX? * What are the massive taxes on alcohol? * I think going towards clean energy production is important * I think they are focusing on the worst forms of technology * Why don’t we use nuclear? * The fears around nuclear are greatly exaggerated
Might help to lower emissions: * Only wealthy people can afford EVs * Will they be subsidized by the poor? * How will lower income earners afford EVs?
Summary: * Great idea, won’t be good in practice * Just another government policy to increase control on your life * I wish we were done with this topic * We already mine uranium and thorium for other countries * I don’t see protests for the lithium mines
Thank for listening, if you want to get in contact you can do so here.
Welcome to Finance and Fury
The election has been set for the 18th of May
The marketing has been coming in and it has been pretty forward with the smear campaigns
It seems like a lot of it preys off people not understanding how the economy works, and there is nothing wrong with this as it is a complicated topic. But its abhorrent that its used to win votes, without providing policy on how a party will run things.
Today
- See through the political messaging used
- The messages used
- The tactics used
An election promise is not a policy * There are 2 sides to every policy
‘those who would give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety’
- Under governmental policy, it is a trade off
- Liberty is the state of being free within society from oppressive restrictions imposed by authority on one's way of life, behaviour, or political views
- Safety is a state where you are not in danger or risk
- We have a relative safety measure, economic, terrorism, climate change etc.
- You need to give up liberty. For example, climate change = additional taxes, restrictions on choice of power
- What were the TSA introduced for?
- DHS found a 95% failure rate in detecting weapons or explosives in their undercover operations
- In Australia, we had the Gun buyback laws in 1996 after the massacre at Port Author
- There was already a downward trend in gun-related deaths before these laws
- But what about deaths overall, were they decreased?
- Is society becoming less violent overall?
- What isn’t mentioned is armed robberies increasing
- Policies don’t seem to be needed
- Is there a political message here to make you just feel unsafe?
- Fearing something evokes a stronger emotional emotion than gaining something. Called loss aversion
- The political message gets you to operate out of fear
Each side of politics has a starting point: * On the left side – the starting point is that things are unfair and a vote for us gets a solution to the problem * On the right side – the starting point is that things are good and not to give it up, a vote for us avoids a problem * So what has changed? Our perception of how good we have it? * What do you want in life? What about your neighbour? What about some random 3 blocks away? * Why do you want to increase freedoms? What does it do for the country? * Mao’s great leap forward and the enemy within * If you think that you are doomed to begin with, would you ever even try bothering? * Can the problems in Australia really be solved with 1 vote? * How is our health care? * The message of a fair go? * Democracy is two wolves voting to eat the sheep * A lot of this caters to envy and greed another power emotion next to fear
Summary: * A major issue for politics today * Not a win for the country, but a win for the party * Watch out for any government policies that rely on you giving up your liberty for promises of more * How they will make it easier for my efforts to work? * It is better for you to choose your own path
Thank you for listening. If you want to get in contact you can do so here.
Welcome to Finance and Fury the Furious Friday Edition
On the last episode we talked about the City of London Corporation, a mini plutocracy
Today we are exploring at what point does a financial sector state to crowd out real economic growth? Referred to as the ‘financial curse’
I have found some contradictions to my previous beliefs – research shows a tipping point
Why is finance important? * We all use it * Each economy has stages with a financial system * Reaches an optimal size * Beyond this point a financial system starts to inflict damage * Profitable techniques start to impact the creation of wealth * There is a limit to useful roles of a financial system
The Tipping Point: * Financial crisis * Supporting the creation of wealth vs extracting it from other parts of the economy * Shaping laws, rules, thinktanks and culture * The damage it does
Measurable impact: link to database * Finance becomes a net drag on GDP growth and productivity – misallocation of resources * Negative relationships between rate of financial sector growth and rate of productivity growth * Bank incentives shift after GDP to debt reaches a certain size * What do credit booms do? * The ratio of household debt reflects what? * What does the IMF study show?
Real life examples: * Britain and the City of London corporation + What kind of hit has it put on the UK economy? + Lost economic output and misallocation costs + No longer lending into new business, mostly each other, housing and commercial real estate * USA + The cost of the 2008 financial crisis * Australia + Credit to the private sector surpassing 100% of GDP makes financial sector contribution to economic growth negative + When interest rates are lower there is less incentive to save and more incentive to borrow
The Unmeasurable * Finance curse inflict damage in many areas * Economic, cultural, democratic and social effects
Summary: * With too little and too much financial sector, we would be doomed * Resources are being misallocated * How some investments come at the expense of other investments I own? * Next week we will dive deeper into the share market and Milton Freedman
Thank you for listening, if you want to get in contact you can do so here.
Welcome to Finance and Fury, the Say What Wednesday Edition
Today’s question from Zed “I recently noticed that Australia seems to be opening lots of lithium mines as the demand for Electric Vehicles rises and we turn away from oil. Is Australia at risk of their lithium mines being undercut by competition from South America in the near to medium future?”
Today: 1. Demand for Lithium 2. Who is providing it?
What is Lithium? * Alkali metal * Used in rechargeable batteries * The supply is increasing
Where Lithium comes from? * Lithium from brine (70%) * It can take over a year to extract the Lithium through evaporation * Lithium from hard rock (30%) * Hard rock drilling and extraction through traditional methods * Lithium can potentially be recycled
Who are the producers? * Bolivia, Argentina, Brazil, and Chile * South America produces a lot of the Lithium * Australia holds more than 2.7 million MT of identified lithium reserves * Chinese companies own more than half of the world’s production
What are the Issues? * Oversupply dropping prices * Australia has a low cost of production * Perhaps there is lithium hoarding happening? * Long-term issue is the alternatives to lithium-ion batteries * The Ryden dual carbon battery, sand battery, and sodium ion battery
Looking to invest in companies in this space: * They lack the circle of competence * Price takers rather than price makers * Lithium miners have dropped by 50% in prices * A look at 3 ASX companies – Pilbara minerals, Galaxy Resources, and Orocobre Limited * Price is based around fair values
Summary: * Australian mining of Lithium isn’t in too much risk from South America * Long-term risk for Lithium is the global demand dropping from alternatives * Very speculative – prices determined from supply and demand
If you want to get in contact you can do so here at the contact page.
Welcome to Finance and Fury
- Everyone has heard of more money, more problems – it is a bit of a contradictory statement
- It is false as money can cover bills and be used in emergencies
- It is true as not valuing money can lead to problems
How to value money? * What is conspicuous consumption? * Why does this occur? * The display of economic power is a means of their social status * What is Affluenza? * What did Oliver James say? * What does it matter if someone has more stuff than you? * Seeing wealthy individuals online can help contribute to the affluenza problem
Where it comes from? * Marketing triggers your spending habits * What does wealth really look like? * Societies can remove the negative consumerist effects * Price versus value * What leads to overconsumption? * What creates a society of individualistic consumers?
What are downshifting spending habits? * The realignment of spending priorities * Identify the need for an alternative political philosophy * What are the long-term effects of downshifting?
What are the elements that help? * Regaining control of your finances * What is the endowment effect? * Putting a premium on your spending habits helps you to downshift * What is the opportunity cost of parting with your money?
Start by looking at timeframes: * Short, medium and long term * What can you do right now? * Get disciplined, pay yourself first (check out the calculator), the hard truth * How stressful would it be to get to 65 years old and not have enough to retire? * If you planned ahead, these stresses could have been avoided
Summary: * Know that most of what you see on social media is a lie * Don’t try to live up to anyone else * Know the value versus the price
Thank you for listening, if you want to get in contact you can do so here
Welcome to Finance and Fury, the Furious Friday edition
Today we will talk about democracy never really existing in The City of London
We are continuing on with the series of Brexit – nothing really new to report as the vote has been pushed back until October
- The first episode was on the neo-cons
- The second episode was on Brexit
- Today will be a combination of those 2 episodes – subverting democracy and economies
The City of London: * Government is The City of London Corporation * It is not the greater London region, it is the major financial services district of the UK * It is technically not a part of England * The city has it’s own police force * They have their own power grid
The History of The City of London * It dates back to the Romans * They have operated in the same manner since Medieval times – enshrined the Magna Carta’s clause 9 – 1215 * The companies get votes here – an example of a plutocracy * There are 4 layers of elected representatives * What are the livery companies? * Who is the remembrancer? * This has made regulation of global finance nearly impossible
This leads back to Brexit * The corporation possesses a large pool of cash * What is the Lord Mayor’s role? * Extensive partnership work with who? * Protest groups in the great UK are funded by who? * Intellectual property and tax erosion practices * There are conduit OFC’s and sink OFCs (Offshore financial centres) * Multi-national companies do not care about increased regulation
What do you think? * Who benefits from being a part of the EU? * What is the growing trend of first world economies? * We will finish this off in the next episode + When the financial sector turns away from supporting the creation of wealth we are doomed to repeat past mistakes
Thank you for listening, if you want o get in contact you can do so here.
Welcome to Finance and Fury, The Say What Wednesday edition
Today is a special episode – we have another resource page excel tool
Question from Nick “I’m sure as a Financial Advisor you are quite aware of the Financially Independent Retire Early concept, but I want to ask this question as it may be applicable to a lot of younger listeners. I wonder how achievable is a FIRE lifestyle? And what other investments exist for long term growth with high yields?”
We will go through both parts: 1. Investments to use 2. Working out how much you will need
Start: * FIRE: Financial Independence Retire Early * I believe that it is achievable – but how committed is the individual? * You probably won’t have access to Superannuation so there is a 2 prong strategy * You’d need to accumulate funds personally
Types of Investments: * The way I would do it * ETFS, Managed Funds, and LICS * Steer clear of Large Cap active managers * What to do with property? * What is the problem with property? * Low transaction costs * Why investing beats savings with the FIRE strategy? * Getting income from your investments * I tend to aim for investments that pay around 5% income yields and have high growth potential
How much to save? * I have built a calculator in excel * It is similar to Goals Workbook * How much monthly investments you will need to make to generate the passive income
How to use it? 1. Enter in the passive income level you are after (in today’s dollars) 2. The number of years you have to achieve this by 3. The current level of investments you have (excluding super as that won’t be accessible by 60) and 4. The income yield 5. Total returns you are after
- Gives a rough idea about the amount needed to invest every month
- What is important to you?
- What do you need to cut spending on?
- You must use the calculator reasonably
- Enjoy your life with great experiences
Summary: * If you are subscribed, you will get it emailed to you * If you not, visit the resource page linked here * Work out the investments you will choose * How much will you need to cut on spending to make this strategy work?
Thank you for listening today, if you want to get in touch you can do so here.
Welcome to Finance and Fury
Today we are going to talk about relationships and money, and some strategies to start working as a financial powerhouse couple
We all spend money and we all have relationships
- Doesn’t mean romantic relationships
- How has your relationship with money been developed?
- Did your parents talk about money around you?
- A lot of your foundations are through things you picked up as a kid
- Did you notice your parents ever fight about money?
- Based on what you observed you might try and avoid conflict about money
- What I was exposed to made a huge difference in my development
- It initially was uncomfortable talking to others about money, but with time you get used to it
Relationships & Money 101 * Compatibility helps a lot. Some similar goals and visions. * As a couple, you are meant to be greater than the sum of its parts * That means something bigger/better than you would expect from the individual parts * Think about a relationship in terms of an equation 1 + 1 = 3 * If you have 2 people leading towards the same goals, you get a much better return. * Your finances allow you to live a certain lifestyle * What happens if you have differing values?
First step: * Work out your own personal inventory and your values * Get to know yourself a little better and use one of our workbooks * Look at your financial habits and how they are impacted in a relationship * Is there anything influencing your behaviour? * What is my personal experience?
Getting on the same page – What you can do? * Have you had a meaningful chat with your partner about money? * Talked about spending habits, savings habits and shared goals? * It needs to be a pretty focused chat around your goals * What gets in the way? * If uncomfortable, you might find it’s not as bad as you thought * Important to get all the baggage out of the way at the start * Create a list of shared financial goals * Accountability buddy - Helping each other keep on track of these goals
The most important part: * Talking about money with your partner * Delaying this will do you no favours * Relationships alone are a significant investment * The more you invest, the better the relationship gets * Are you both working towards your end financial goals?
Thanks for listening. If you liked it let us know with a rating or tell us over on the contact page.
Welcome to Finance and Fury, the Furious Friday edition.
Today we are discussing what is happening with Brexit?
At the time of the release of this episode, we will be approaching the 11th hour of the 2nd deadline to negotiate a deal for the UK to leave the EU. Why would it be grim and awful as they put it?
Today: * Want to give a timeline of events * Look at the massive tax scheme that is going on * Check out the series on the EU – What happens if the EU collapses? and Will the EU fall apart?
Start at the beginning: * The referendum to leave the EU 23rd June 2016 * Between then and March of 2017 it was business as usual, and then the UK served their withdrawal notice * Invoked article 50 of the Treaty on European Union which sets out a 2 year plan to leave the EU * That negotiation period expires on the 12th of April 2019 * The leaving agreement must set out arrangements for withdrawal * The agreement must then go through a few bureaucratic systems
So what is behind all the mess? * UK conservative party lead by Terresa May * They established the department for International Trade (DIT) * There has been a lot of back and forth between the UK and the EU * The UK is being made an example of * 2 years down the track, where are we now? * The EU has been the better negotiators even though the UK is in the position of power * The contents of this agreement are only that it sets up a transitional period of further deliberation to be in the EU until December 31st, 2020 * This is essentially the UK still being apart of the EU but without a vote * How has the deal been going in UK parliament?
Failure to negotiate: * Article 50 provides for a negotiated withdrawal * If there is no deal, The EU treaties cease to apply * The EU technically can’t block them from leaving * If there is no agreement, then trade falls back onto the world trade organization rules on tariffs and trade * The EU operates similarly to a cartel * What is Gibraltar? * The financial sector seems to benefit more from being a part of the EU * Why is it so beneficial for Financial services to be a part of the EU? * The UK is now ranked the 2nd largest global conduit for corporate tax haven policies
Summary of the racket: * Firms will set up a letterbox office in the City of London * Then there will be subsidiaries in other EU countries * One charges the other for intellectual property, and you essentially write off profits * You have other countries wanting to do trade deals with the UK, without going through the EU
Next Friday: * Finish off the series * How the tax racket works * Who is behind the “grass roots” remain protest organisations
Thank you for listening, if you want to get into contact you can do so here.
Welcome to Finance and Fury, the Say What Wednesday Edition
This week’s question comes from John. Hey Louis, Really enjoying your latest episodes, thanks again for the great content.
I saw recently there was a question raised around superannuation reform that TPD insurance within a superfund my now be unnecessary as funding is available under the NDIS for people who are, or become disabled, and therefore might be unethical for super funds to be selling this insurance (assuming it is indeed unnecessary).
My question to you is, generally speaking of course, should i be paying for TPD insurance through my superfund, or will I be adequately covered under the NDIS if I suffer an injury that leaves me disabled and unable to work?
First off: * What is the NDIS? And How is it different to TPD insurance? * What are the issues with relying on the NDIS?
What is the NDIS? * In 2016, the National Disability Insurance Scheme (NDIS) started * It is a system to provide support to those with disability * It is not replacing a disability support pension * It is additional funding to support specific needs or “reasonable necessary supports” * There is an eligibility to receive the NDIS support * The average individual allocation to date has been around $39,600 per year * The payment must not include any day-to-day living cost not related to your disability support needs * It should take into account other support payments
What is the real issue? * You have to reach a level of disability and you only receive funding for costs in relation to that disability * It becomes income and asset tested, which will change your disability support pension payments * TPD insurance – depending on the definition, pays around your eligibility to work or not 1. Types of TPD insurance link 2. ADL – Feed self, cloth self, mobility, toilet, shower – Probably close to NDIS definitions 3. Any – Any occupation you are trained for 4. Own occupation – Specialised occupation generally * If you meet a definition of disability, TPD would be easier to claim on
Scenario: Married couple – Both working full-time for $80,000 p.a. each – 2 kids aged 13 & 14 and a mortgage of $550,000
- NDIS and DSP
- DSP - $698.10 FN maximum payment but asset/income tested
- Reduction after $304 FN by 50c per dollar – Remaining partner earns $80,000 = $3,076FN = $0 DSP
- Left with NDIS – and it will cover costs of disability
- DSP - $698.10 FN maximum payment but asset/income tested
- TPD and IP (owned personally)
- You would receive a lump sum payment with TPD to pay off mortgages or cover lump sum costs
- Income Protection (if owned personally) would pay you up until the benefit period for the whole time you were disabled (which can be nominated on policies up to the age of 65 to 70)
- IP of $60k (at 75%) – lower but no mortgage now
- If Income Protection is owned in superannuation however, it wouldn’t provide the same double up of benefits
- This allows you to fully protect your finances and to maintain a certain lifestyle if you were disabled and unable to work
- The best forms of protection against disability is a combination of TPD cover and Income Protection Covers
What is the longevity of the NDIS? * Not all Australians considered disable will receive the NDIS * This program might become unaffordable for the government * The productivity commission has updated its estimates on people helped and the cost * Into the future, the program is estimated to cost 1.3% of the GDP in 2044/45 – whereas it currently costs 0.12% of GDP
Summary: * Probably not the best idea to rely on it * You would need to find another form of income to cover living expenses
If you want to get in contact, you can do so here.
Welcome to Finance and Fury
Today will be a quick update for the upcoming election and policies in response to the budget plans released last week. This election is becoming a battle for votes among salary earners.
In the past we have talked about class warfare strategy – it’s a tactic being used by both major parties.
Breakdown: * Where is each party is hanging their hats with incomes and taxes? * Liberals announced tax cuts at the last budget last year * Frydenberg’s affirming even more tax cuts for individuals and businesses, spending on education and infrastructure * A reward for effort, aspiration, and enterprise, upholding personal responsibility and providing a helping hand where needed * Next generation does not have to pick up the tab for the last generation * Liberals are promising other things too like a budget surplus of $7.1bn which is a massive turnaround from 6 years ago when they took office
Tax original plan under Liberals: 1. Provide immediate relief by increasing tax offset 2. Protect income earners from bracket creep – wage growth with no threshold increase pushes people into higher tax brackets 3. Abolishing an entire tax bracket – incentivising hard work 4. Doubling the low and middle-income tax offset from 2018 – 19 5. Structural reform by lowering the marginal tax rate to 30% for earners of $45k to $200k 6. Limit the amount of tax as a share of the economy 7. Being in surplus now means the government can reduce their revenue 8. The previous episode explaining Reagan’s approach 9. Someone earning $300k was paying 10 times more tax than someone no $45k 10. What is Shorten’s response? Calling the budget radical right wing?
Exposing shorten * Claiming tax reductions are the same as giveaways. A giveaway to let people keep what they work for? * What is Shorten’s background and what he represents vs what he has? * Morrison summed it up best – why would you work hard under the Labor government?
Labor’s budget plans: 1. Alternative tax cuts and relief from bracket creep 2. Said that 4.5 million workers earning between $48k and $90k will be better off under their plan, but are yet to release the details. 3. ANU centre for social research has said under Labor there will be an increase in tax revenues of $39 bn over the years until 2024, which is a 5% increase from current revenues 4. Analysts and professors say Labor’s plan will modestly lower income inequality but Liberal’s plan will modestly increase it because they pay more tax 5. Let's have a look at some statistics 6. FT Employed – 6.7m and PT employed – 3.9m – about 10.6m people 7. 5m people shorten referred to are mainly PT or entry working positions 8. Median Income (middle) for full-time workers - $78,268 p.a. 9. Average Income of FT worker - $90,300 10. Average earnings of all workers (Pt and FT) - $67,243
What does this mean? The good side * Simplified tax codes – this is a good thing * Global confidence reaffirming the AAA rating * Being on par with taxes in a global economy
What is bad? * Other bits of regulations, you need less regulation in conjunction with lower taxes to benefit * Abhorrent material on platforms tax * Encryption laws to get around privacy breaches * ISPs banning sites
Summary: * Some very good things here with tax cuts * Tax cuts are good, especially when they benefit low-income taxes * Income taxpayers fund the government, so its good to incentivise them to work
Thank you for listening today. If you want to get in touch you can do so here. Please don’t forget to review us and share us with your friends and family.
Resources:
Welcome to Finance and Fury, the Furious Friday edition
Today we will be talking about conservatives and why they are not conserving anything anymore. In particular, the new form of conservatives the neo-con conservatives and the noble lie or the big lie.
Remember the Occupy Wall St movements? And the population protesting the 1%? Some perspective is you were likely in the world’s 1%. The anger should have been directed towards the political systems that facilitated the behaviour that led to the GFC.
Wrap up: * Neocon Political ideology is framing policy to influence banking * GFC initiated by past policies, like the Housing Urban Development Act in 1992 * Federal Home Loan Mortgage Corp (Freddie Mac) loans 30% of loans to low income households * Glass Steagall episode link * Clinton Cash book
Why am I talking about all this? * Clear up some conceptions, which is the point of Friday episodes * When people talk about today’s conservative politicians, there is a good chance they are neoconservatives
What is conservatism? * Political philosophy promotion traditional institutions in the context of culture and civilisation * Who was Quinton Hogg? * “Conservatism is not so much a philosophy as an attitude, a constant force, performing a timeless function in the development of a free society, and corresponding to a deep and permanent requirement of human nature itself" * Conservatives morphed out of classical liberalism * Neocon is named appropriately – the new con * Trotsky and Stalin’s relationship and how communism operated in Russia * The bitter infighting between socialists and communists * Revolutions in feudal countries lead to capitalism * What did Leo Strauss write in regards to Plato and the noble lie * Plato turned the mythologies into a class system * Introduce the neoconservatives in the 1960s, Irving Kristol the godfather of neoconservatism * How does this change conservative values?
What are the 2 Major Concerns? * The neocapitalist and interventionalist foreign policy * Neocapitalism – characterized by correcting the excesses by means of application of measures that guard over social well-being. This is part of the big lie * High representation of Keynesian economists around politics * What is Irving Kristol take on capitalism? * It becomes a state monopoly capitalism – more money in politics means more influence in politics * This policy just creates a concentration of companies resulting in monopolies * There used to be 50 companies (1960s) that determined the distribution of information, now there are only 6 * Interventionalist approach with international policy and war * Permanent revolutions and pre-emptive war to achieve desired ends * Protection of currency – the petrodollar episode link * Occupation of other nations through military might and bases – this opposes neutrality
History is a struggle for power: * Any political organization the pursuit of power is the priority * Principals of the party soon give way to principals of power * Social life cannot dispense without organization * In terms of representative democracy – how much participation do you have in the laws going into place? * What is the totalitarian mill? * Only power restrains power
It seems like the power dynamic is increasing over time. The representative political system gives the people an illusion of control.
This has been an explanation as to why supposed conservatives don’t act like it or use supply side economics.
We will touch on this again next week when I cover Brexit, where the conservative party keeps pushing the British independence off.
If you liked the episode, please review it and share it around. It helps others see it as well.
If you want to get in contact you can do so here.
Resources: Irving Kristol’s Neoconservatism - https://archive.org/stream/IRVINGKRISTOLTHEAMERICANREVOLUTIONASASUCCESSFULREVOLUTION28/Neoconservative%20Persuasion%20S%20e%20l%20e%20c%20t%20e%20d%20%20E%20s%20s%20a%20y%20s%20%2C%20%201%209%204%202%20-%202%200%200%209%20by%20Irving%20Kristol-42_djvu.txt
Welcome to Finance and Fury the Say What Wednesday edition.
Today we are continuing on from last week’s episode about climate change, so if you haven’t heard it, check out last week’s episode here.
Today I will run through the Paris Climate Agreement, and their proposed solutions.
How is policy made? * What are second-order effects? * An example is capping electricity prices – what’s the first consequence? The second? The third? * It sounds a bit far-fetched, but it happens a lot when prices are capped * The outcome was the opposite of the original intended policy * This is what is dangerous about government policy – check out the episode on positive rights here
Making changes in a complex system: * What you get may be the opposite of what you want * What are the aims of the UNFCCC Paris Climate change agreement? * Reducing the increase in temperature * Link to the UNFCCC Paris Climate Change agreement * Lots of bazaar language * What is a climate fund? * What is the financial target? * What is the Green Climate Fund? * What are the accredited entities? * This sounds innocent, but what is it really doing? * Who are in the committees?
What is it at the core? * How will countries manage their CO2 reduction? * What are the solutions for developing nations?
There are so many first-order consequences
- Finance transfers – might lead to more CO2
- France is the model country – one of the few developed countries with reliance on renewable energy
- Why is their electricity price so expensive?
- Why is there so much civil dispute in France?
- How are countries going to afford the Paris Climate Agreement?
- What is greenwashing? What happens with this?
Australian Emission reduction target * 50% reduction per person * This target doesn’t penalise heavy polluters * What is the impact on the average Australian worker? * Solutions shouldn’t be to put a financial strain on the population * How can thorium reactor technology help? * What is cleaner than nuclear power? * How does it compare to solar panels? * We need more power capacity
Thanks for listening. If you want to get in contact you can do so here.
Resources:
Climate accord - https://unfccc.int/files/meetings/paris_nov_2015/application/pdf/paris_agreement_english_.pdf
Workbooks - https://financeandfury.com.au/resources/
Welcome to Finance and Fury
Today we have Jayden with us, and we will be talking about Interest rates. The first Tuesday of every month, the RBA releases the updates on the cash rate.
The markets currently appear to be going down, and the cash rate reflects a negative trend. The markets show that it will gradually reduce from 1.5% to 1.25% in August and in 2020 down to 1%.
Fixed Interest Rates are HUGELY popular right now. And they’re only going to become more popular if interest rates continue to go up.
The question is: How do you know if fixed rates are for you? Or if now is a good time to fix?
Fixed Rate Basics 1. Fixed interest rates (also known as fixed rate home loans) are interest rates that will not change for a period of time, usually between one to five years. 2. Variable rates can move up, and down depending on a range of factors – fixed interest rates remain static, giving you certainty on the repayment of your loan.
Why you might Need Fixed Interest Rates 1. Fixed interest rates are a way to reduce the risk of your loan repayments increasing 2. During the fixed rate period your repayment cannot change for the period set for 1. Regardless of the bank, market or RBA interest rate movements. 2. Great for budgeting future payments
When Fixed Rates might not suit you 1. The flip side is also true, so if interest rates decrease in the market the lower rate is not passed onto you, but that’s just the start. 2. Fixed home loans do come with a few limitations when compared to variable home loans. 1. Australian lenders severely limit how much you can make in additional repayments per year. 2. If you got paid a large bonus, received a tax refund or wanted to make additional repayments over the set ones – you will have to pay a penalty. 3. Penalties – break costs: why would you want to break a loan? 1. Interest rates have come down significantly, sold a property and need to pay back the loan 2. Break Cost = Loan amount prepaid * (Interest Rate Differential) * Remaining Term. 3. $500,000 is fixed for 5 years and then is entirely repaid by the customer with 2.5 years 4. The loan was fixed was 5.50% p.a. - current 2.5-year bank rate 3.50% p.a (2% difference) = $25,000 5. If you sell the property, you could violate the loan contract and have to pay the break cost 4. Extra repayments limited 1. Depending on the bank or lender, it is possible to pay extra on your fixed rate loan. 2. Amounts – they range from $5-20k p.a. or $30k over the life of the loan 5. No offset accounts - if you have cash saved up, it won't offset interest
Things to consider * Economists sometimes don’t get it right, with certainty they will suggest markets will go up, but in our time we have seen this not to be the case a few times * It all depends on international markets
Options for fixing your rates 1. 1 year fixed rate - don’t like committing for too long a period for all the reasons outlined above 1. Interest rates could drop over the medium term, you might want to make additional repayments or look at selling your home in the next few years. 2. The benefit is that you will be able to budget around your loan payments over the next 12 months, 3. Rates - The fixed rate market is constantly changing and depends on the money and bond market. 1. Markets think rates will go up, 1 year less than 5 years - RBA indicator – drop of 0.25% 6 months, 0.25% early 2020 2. If markets think rates will go down, 5 years less than 1 - 4. 3 and 5 year fixed rates most popular. 1. Help avoid any volatility in the money markets. 2. Get more benefit from fixing for 3 years 1. Similar to variable rates 3. A 5 year fixed rate will give you the highest amount of certainty of your mortgage repayments. 4. Banks can be negotiable longer-term fixed rates 1. Longer-term fixed rates are not suitable for everyone –additional repayments, sell the property or need extra flexibility on your loan like an offset account – it might not be a good idea. 5. As the market has become more competitive banks have brought their interest rate offers closer to one another.
Other considerations: 1. The cheapest rate does not mean paying the lowest amount of interest 2. Application and ongoing fees - Cheap doesn’t always mean good with fixed rates 3. Larger banks will be a bit cheeky and in a bid to make a little extra money when your fixed rate period expires 4. Redraw facilities – Similar making extra repayments, some fixed rate lenders will allow you to take out the funds as redraw. A word of warning here, while some lenders will let you make extra repayments – some will consider withdrawing the funds as redraw ‘breaking’ the fixed rate contract, and charge you LARGE fees to access your own funds! 5. Interest In Advanced– This is a terrific product for property investors and allows you to make bulk tax deductions by pre-paying your interest before 30th June. It can be beneficial from a cash flow and interest rate discount perspective, with some lenders giving you discounts of up to 0.20% off their regular fixed rates. 6. Split loans - Best of Both Worlds – Diversify risk across portions of the total loan
A quick word of warning I’ve said it once, and I’ll say it again – a fixed rate isn’t for everyone.
I fixed my rates a few years ago worrying that interest rates were going to shoot up. And they did, for a few months.
Thank you for listening. If you want to get in contact jump onto the contact page here.
Resources: Resources page – https://financeandfury.com.au/resources/
Bonds and fixed Interest rates – https://financeandfury.com.au/say-what-wednesday-the-skinny-on-bonds-and-fixed-interest/
Property – https://financeandfury.com.au/archive/property/
Interest rates – https://financeandfury.com.au/archive/interest-rates/
Investing in 2019 – https://financeandfury.com.au/archive/investing-in-2019-miniseries/
Welcome to Finance and Fury, the Furious Friday edition
I have identified a thread through history in the emergence of demand side democratic societies. Where there is a centralized authority, there is a need for ever increasing demand of the mobs and its path towards the downfall.
Rome is a good example: * Centralized authority and the need for increasing demand of the mobs lead to the downfall of Rome * It was a kingdom, then a democratic republic, and then a dictatorship * During Sulla’s rule, there was a civil war, which made him strip Julia Caesar’s family of their influences * Caesar was the High Priest of Jupiter and went into hiding to save his life * Caesar joined the army and rose through the ranks, he also knew how to gain public support back in Rome * Caesar was kidnapped and ransomed for 20 talents * He then came back and had the pirates crucified * By 60BC Caesar was elected consul however used this position to gain further power * To build favour, he redistributed a lot of land to the poor and the soldiers of his wars * The downfall of Rome and the Slave economy – remember that slavery was everywhere in the ancient world * The import of free labour destabilised the economy * Through the conquest of wars and territory, there were a lot of slaves * This introduction of free labour replaced those in paid labour positions * Caesar needed to keep slavery around but also keep himself popular with the Roman people, hence the land redistribution tactic. This was funded by his very wealthy friends * The Senate then sent Caesar to the border of Gaul for a governorship – so he couldn’t get up to much * Caesar has 4 legions under his command and ventured into the unconquered Gallic territory * Some Gallic allies were defeated in a battle, so Caesar stepped up and hunted down the tribe * As a response, some tribes unifying and arming up – Caesar took that as a sign of aggression and invaded without senate authority * At one point, Caesar sold 53,000 people captured into slavery * The number of senators that didn’t like him was growing, they thought he was a war criminal, but the Roman army loved him and so did the people * The Senate wanted his resignation as governor, however, Caesar knew he would be prosecuted without his immunity as governor * Caesar then pursued Pompey and ignited a civil war, eventually capturing Pompey * Caesar is then appointed as a dictator for approximately 1 year * He saw a need to bring the power back into a central authority * The revolt of Italian tribes who wanted Roman citizenship, Caesar defeated them and gave the allies access to citizenship to avoid further wars * Caesar had now gained supreme power through the mobilisation of the masses * A new constitution was established to accomplish 3 goals * To gain the right of citizenship you had to ‘live as the Romans did’ * Caesar needed more money, so he opened the treasury * Magistrates were no longer representatives of the people, they were representatives of the dictator * The senators were involved in their communities and often held accountable for their actions by the people they represent and other senators
The Economic side: * Rome switched from Supply to Demand slowly over 40 years, everything changed from 1AD onwards * Citizens were only really taxed during times of war * The wealthy ones got citizenship because they were the ones doing the fighting and could afford the weapons, armour, and horses * Each province has to pay a certain amount, someone would pay taxes up front and then go to the people to collect it back * When Rome went to an Empire, the leaders need more money for increased spending and more men for the army * The tax system was transformed into a system of individual income tax * This increased spending led to an economic downturn of Rome * The emperors made it illegal to leave Rome, and forced people to work * Established family occupations * This was the birth of feudalism and a monarchy again * The ever spending of the state and increase of taxes led to the decline of Rome
Moral of the story? * Fueling demand through authoritarian controls never works * Indentured servitude is started * In the pursuit to stop more civil wars, Caesar ended up creating more * They lost what made them great * When you have a system that rewards popularity by demand, you fail * Supply side isn’t some uncaring process, it gives the people choice * The market decides, based around our wants and demands. Until regulation and controls influences come about, then there are unfair competition increases * The emperors of Rome couldn’t afford not to spend money, their power was amassed by making the people happy
Thank you for listening today. If you would like to get in contact, you can do so here.
Resources:
https://www.researchgate.net/figure/The-rise-and-fall-of-the-Roman-Empire-in-observed-numbers-The-depletion-of-silver-in_fig59_283440121
Welcome to Finance and Fury, the Say What Wednesday edition.
Today we are going to cover off on Climate Change. This may be a bit weird. But, the majority of proposed solutions are political/economic.
Firstly, the taxation on CO2 emissions. What is this going to do to the economy overall, with additional costs of business? Furthermore, capping of production of emissions.
In this episode, we will discuss climate change in terms of the narrative that it is presented as. This is around rising temperatures and the world being doomed in a few years’ time. I won’t be talking about environmental destruction. Is global warming man made? How will the solutions help?
The common theme of Fear:
- Different predictions over the last few decades
- A similar theme is fear
- Most people fear catastrophic events
- Predictions by experts on climate change keeps turning out to be incorrect
- From predictions, there was supposed to be a lot of misery in the world due to climate change caused events
- Policy changes due to global hysteria
- The climate change direction changed
- We look at an overview of predictions and temperature claims.
- We should be fearful of these events, right?
The issue with acting out of Fear:
- Opt for any solution we think will work
- Even if it is against our own self-interest
- How does this affect the brain?
- Social learning and context can be tools to help fears or make fears worse
- There is a potential to influence the way we experience fear
- Social isolation is another thing people are afraid of
- Climate change has religious elements to it
- This comes down to ideological subversion
The message is in our face every day:
- 97 movies since 2010 depicting the end of the world
- The irony of Hollywood around actions towards fighting climate change
- The hypocrisy of politicians surrounding climate change
- Paid to pretend to be someone else for a living
- Our climate does change, it’s the only consistent thing about it
The climate definitely changes, there is no clear consensus on why or how:
- 97% of climate scientists agree that humans are the leading cause of climate change
- Do they really? Christopher Monckton criticised John Cook’s findings
- These are unscientific findings
- UQ is now proving a free climate change course
- These claims can be broken down in the resources below
- Why don’t other scientists speak out about it?
- How well can weathermen predict the temperatures?
Saying that it is human-induced through CO2 emissions is why I have an issue with this
- The mathematical modelling and their numeric assumptions
- What is the relationship between CO2 and temperatures?
- When do the records of temperature begin?
- What are the mathematical models and how do scientists come to their conclusions?
- Joseph Postma wrote A Climate of Sophistry, which covers the modelling and math involved
- The same modelling shows the increases in CO2 help boost plant life
- Milankovitch cycles describe Earth’s movements and the climate changes
- The debunking always goes in both directions
- Financially, who has the most to gain? Politicians, climate scientists, and the media.
Summary:
- I am not denying that the climate does not change
- There is no measurable increase in temperature anomaly in 18 years
- Focusing on clean energy is a good idea, but following advice on voting for policy change doesn’t help long term
- How does the Paris Climate agreement help?
- Let's come up with some long term plans to help produce cleaner energy
Thanks for listening today. If you want to get in contact you can at the contact page here.
Resources:
Models - https://www.climatechangeinaustralia.gov.au/en/climate-projections/explore-data/threshold-calculator/
‘climategate’ email scandal. If you want some light reading (180 pages or so), here is the publication on this: https://www.lavoisier.com.au/articles/greenhouse-science/climate-change/climategate-emails.pdf
Milankovitch Cycles - https://en.wikipedia.org/wiki/Milankovitch_cycles
Climate Conscious – UQ Emails - UQ Emails - http://www.galileomovement.com.au/docs/UQcorrespondence.pdf
Welcome to Finance and Fury
Today we have Jayden here, and we will be talking about using your home for as an investment and as a forced savings account. You can start turning the bad debt into good debt. Through paying down the loan quicker, and then redrawing on the equity. You can save interest along the way and the redraw for investment is now deductible.
What is home equity? * Simply put, it’s the difference between the value of your home and the value of your home loan * But you can’t borrow all of the equity in the property * If the value of your property increases so does your equity
How to create home equity faster? * Get another bank valuation, sometimes the valuers themselves put value in different things. + Bank valuations and market valuations are different * Get a shorter loan term, creating some forced savings + There are larger monthly repayments for a shorter mortgage term + You end up paying less interest with a shorter mortgage term + See table below assuming a loan of 450k with 4% p.a.
- Fix up your property
- They are comparing your home to other homes in the area. Simple renovations can add a lot of value.
- Make sure your renovation plan has council approval
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Pay more on your repayments
- Over the life of your loan, you can save thousands in interest
- Switch to fortnightly or weekly repayments
- Small extra amounts periodically make a huge difference over time
- See table below assuming a loan of 450k with 4% p.a.
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Use your bonuses and tax refunds
- Using lump sums as they hit your account and put them into your offset account or home loan
- This will reduce your loan principal
- Use one partner’s income
- Living on 1 partner’s income, and dedicating the other person’s entire income to paying down the home loan
- You may need to cut back on spending and have a reasonable budget
- A young couple looking to start a family in the next few years
Summary: * Forced savings for yourself and turning the debt into something to be used for investments + The ability to saving cash and reduce your repayments + Also paying down debt to refinance for deductible debt * The risk is that you may not get the home valuation you were looking for
Thanks for listening today. If you want to get in touch you can on the contact page here.
Visit https://financeandfury.com.au/
Other links:
Guide to Maternity leave - https://financeandfury.com.au/baby-on-board-the-ultimate-guide-to-maternity-leave/
Check out our Workbook resources - https://financeandfury.com.au/resources/
Want to learn more about finance? Check out the course! https://learnfinance.com.au/personal-finance-course/
Welcome to Finance and Fury the Furious Friday edition
Today we are continuing the discussion around supply-side economics
We will talk about the best ways to avoid declining into a recession as an economy and some solutions for economic growth.
Last Friday we talked about the great depression and some of the factors that caused it. Large escalations of money supply in a short period of time. This leads to excessive debt in a system.
Today we will explore the modern economy and alternative solutions to depressions or an underperforming economy.
Analogy: “you have a leaky pipe” * You can get a repairman to fix your broken pipe * You can provide a temporary solution, but the symptoms persist until failure
This relates to the modern economy because: * Our problems are very distinctive but they have happened in the same pattern * Western economies have started recessions/depressions due to asset price bubbles * Roman Empire: A.D. 33 existence of quasi-capitalistic financial markets – a busted real estate and lending bubble led to the sudden crash in asset prices * Public spending requires more money supply, high inflation rates destroyed the value of the currency. * Emperors couldn’t afford not to keep increasing the money supply in a popularity contest
What are the solutions? * What are the structural causes of underperformance of western economies right now? * Uncertainty and lack of confidence – how do they play a part? * Serious competition from the Asian end of the world – what are unskilled workers to do? * The solutions are structural: fix the structures that hinder growth and nurture the structures that work * How do we get people to spend more?
Increase how much money people have: 3 fold solution * Reduce taxes: helps increase the amount of cash in everyone’s pockets + Considered to be more of a transactional cost to do things + Taxes increase the cost of living + Taxes don’t necessarily contribute to aggregate demand * Increase wages: helps put more money in employee’s pockets to consume more + Can’t achieve this if the money isn’t there to pay employees more + Lose incentives to pay employees if businesses are taxed for doing so + Specialised labour helps contribute to wage increases, through the demand for more specialised labour + Increase the amount of companies in circulation to provide jobs * Increase purchasing parity power: goods that cost less over time + Not a devaluation of goods, just a maintenance of costs + Does not work for everything, houses go up when there is more money supply
Confidence and increased investment: * Increased confidence leads to increased investment and more production * Uncertainty is the worst thing for any market * Boost aggregate demand, create jobs, improve business and consumer confidence * Personal investments form part of the “savings” component in GDP
Increase productivity: * We are competing for jobs and the production of goods and service with everyone else in the world * “bang for your buck” for how much gets done * Losing industries or subsidising them? How long can this last? * Forcing regulation for labour laws hurts – collective bargaining is great, to an extent * If you require subsidies to survive, you’re not providing increasing value to the market
Other considerations: * Regulation and governance is required to some degree in the free market * However, the more regulation introduced the more monopolizing will occur for the sake of survival * Levels of government spending, needs to be within the budget * No problems with regulation and planning for infrastructure * Debt and borrowing levels, we cannot keep borrowing to increase GDP
Example of semi-supply side: 1. Reaganomics and the 4 pillars 1. Reduce the growth of government spending 2. Reduce the federal income tax and capital gains tax 3. Reduce government regulation 2. The results are up for debate 1. Supporters enjoy the end of stagflation 2. Critics point to the widening income gap
Tax cuts have always been picked apart: * These disproportionately help the wealthy, but these are the people disproportionately contributing to the overall increase in quality of life for everyone * This benefit aids everyone, especially in the long term, not just the wealthy
These issues are at the fiscal level: * The solution isn’t monetary policy solely * Monetary policy is meant to match what the economy needs, not play god with the money supply * Monetary policy, I believe, is a major part of the problem * Supply-side policies and liquidity traps, supply-side policies can help improve long-term expectations * Help encourage investment and spending
You know what is better to spend your money on than anybody else. Individuals are the best judge for what activity will improve their lives. Learning from mistakes is important and part of the process.
Thanks for listening today, if you want any questions you can get in contact with us over at the contact page here.
Resources: The 4 cons to supply-side economics - https://financeandfury.com.au/what-are-the-4-cons-for-supply-side-economics/
The great depression - https://financeandfury.com.au/the-great-depression-are-the-solutions-actually-what-created-it/
Welcome to Say What Wednesdays, where every week we answer questions from you guys, the listeners.
This week the question comes from Mary;
“Hey guys, love the show. Just wondering about what entitlements, I can receive if I go on maternity leave? I’m currently pregnant and me and my husband are looking to purchase our home soon. We were wondering if there was anything we need to watch out for when it comes to getting a loan while on maternity leave? Are there any other things we should be looking out for?”
Congratulations Mary!
The Ultimate Guide to Maternity Leave Maternity Leave Letter * Need to give your employer written confirmation that you intend to take some personal time off to have your baby. * At least 10 weeks before your due date, and in a lot of cases happens much earlier * Must confirm your parental leave dates at least 4 weeks before taking your leave. * A Maternity Leave Letter in Australia needs to contain + Your full name and address + The expected date for leaving work, and when you plan to return. + The expected date of birth for your bub – can include a medical certificate confirming your pregnancy + An email copy of the Maternity Leave Letter to your Manager or HR team should be acceptable. * Template available on the website
Paid Parental Leave Scheme * Entitled to 18 weeks paid leave for eligible working mums (primary carers). Dads/partners (including same-sex partners) get 2 weeks paternity paid at the national minimum wage. * Employer is required to provide 12 months of unpaid leave, providing you are. + Permanent employee who has worked for at least 12 months before taking parental leave * What are the criteria for Paid Parental Leave? + In paid work, having received an income of $150,000 or less in the previous financial year + Having worked continuously for at least 10, of the 13 months before the birth + Worked at least 330 hours in that 10-month period + The Paid Parental Leave scheme covers casual workers, contractors and self-employed * How much do I receive from Paid Parental Leave? + Paid the minimum wage of $719.35 per week (before tax) for up to 18 weeks. + Your partner could also be eligible under Dad and Partner Pay for up to 2 weeks, meaning you could receive a total of 20 weeks being $14,387.
Buying a Home while pregnant, or on maternity leave * There are actually some lenders out there who will approve a home loan for you even if you’re not actually making an income - And the even better news is that a Maternity Leave Home Loan is one example of this + Under the terms of a maternity leave home loan you can borrow up to 80 per cent of the property price + Unpaid maternity leave – you’ll need to have some money set aside to be used for making repayments. * Applying for a Home Loan during Pregnancy + Best to apply for a home loan when you are pregnant and are still working. + Can be a lot harder for you to secure a home loan whilst on maternity leave. + Sit down and create a clear financial plan before the baby arrives so that you’re prepared + Remember that you’ll need a bit of extra money to move and for the unexpected expenses + Which banks will offer Maternity Leave home loans? - Majority of the banks reject this type of loan application - Why? Because they consider it risky – based on the idea that you may be able to not return to your job while lending policies for this type of home loan are stricter a number of banks still loans * While lending policies for this type of home loan are stricter a number of banks still loans – Just need: + Evidence of income or employment - group certificate, or PAYG summary showing your previous years income. + A letter from your employer, states that you are on maternity leave along with all the details + Statements showing your savings held in your accounts, loans or investments. + Details of any government entitlements you are currently receiving, like Paid Parental Leave or Family Tax Benefits
Unpaid or Paid Maternity Leave: Does it make a difference? 1. Compared to unpaid maternity leave, a paid maternity leave is viewed positively by banks – obviously 2. But most employers only pay half of your salary on maternity leave so lenders don’t evaluate it based on a normal salary.
Is it possible to put my mortgage payments on hold? * If you’re a bit further down the track than applying for a home loan and have actually already started paying your loan off then you may have a bit of equity in your home. * One option is to look at putting your Mortgage Repayments on hold until you go back to work. This is sometimes called a Repayment Holiday, Mortgage Safety Net or Repayment Pause. * Options for Repayment Holidays? + Equity in your home is release to help you with a portion of repayments - Up to 50% reduction in personal repayments for 12 months + Some banks will allow you to increase your loan to cover the additional costs while you are off work - In this case, you cannot pause the payments but it is another option… + While this could be a good option if you feel financially squeezed while on Parental Leave, you are just delaying making the payments until when you return back to work, so some caution needs to be exercised.
Summary - Options regarding mortgages and maternity leave: 1. If you have an existing property (and meet certain criteria) taking a repayment holiday using your equity if you already have a home loan is an option 2. New loan - Speaking to the right lender to take out a loan during maternity leave 3. New loan - Taking out a loan during pregnancy which will make it easier
Jayden loves to talk about this stuff… here’s where he discusses maternity leave and borrowing on the Hunter Galloway website. The Maternity Leave Letter Template can be found there too
Thanks again for your question, Mary! If any other listeners have any questions or topics for discussion, head to www.financeandfury.com.au and head to the contact page.
Welcome to Finance and Fury
Today we will be going through the workbook itself
- How to put the goals and risk profiles together
- How to work out the investment philosophy and strategy
- How to put together the investment plan and checklist
Three downloads - Found on the website
- Goals and Risk Tolerance
- Philosophy and Strategy
- Investment Plan
You can also get it by subscribing on the website,
We want your feedback, it is not set in stone – we need your help to make this better for everyone.
Goals and Risk tolerance:
- Fact find about yourself
- What frustrates you?
- What do you want to improve?
- What are goals? What are financial goals?
- How do we separate them into short term, medium term and long term goals?
- Give an example of what you want to achieve
-
This helps clarify what’s important to you, and gives 4 options
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Home
- Family
- Wealth
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Lifestyle
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Ranking these in order of priority to you, to help focus on what is important now
- A matrix about you: what is currently frustrating for you? What is holding you back?
- What are the 5 things that you would spend your time doing if you weren’t working?
- What are the things you enjoy doing, that are practical?
- What is the value of these things?
- What are you working towards? What will you be sacrificing for?
- Goal planning: why is each one important? How much will you need?
- Target amounts and target dates are required, check out the workbook!
Getting to know your Risk tolerance:
- Personal situations and what kind of investor are you?
- What are your personal experiences?
- How confident are you? This can hinder your financial development
- What are your investment expectations and behaviours?
- How do you respond to market volatility?
- If I want a greater annual return I need to be consistent with my tolerance of volatility
- What is your experience and what are you comfortable with?
- What does your risk profile say about you?
- Some example allocations mentioned in the workbook!
Investment Philosophy:
- What is it?
- Set out your beliefs to generate your investment strategy
- Investment beliefs – what do you believe investments are? What has your relationship been with investments?
- What is the purpose for investing?
- Combine your beliefs and purposes to form an investment philosophy
Investment Strategy:
- What are your goals and timelines?
- These will impact the next stage of your strategy
- Work towards becoming more financially literate
- What is your tolerance of volatility? How do you react to volatility?
Investment Plan
- Figure out what you want you need first - Hardest part for some people to answer
- Look at your expenses: What your ideal lifestyle costs?
- Also, when do you want it by? Time matters thanks to inflation - $1 today is not $1 in 10 years
- Reverse engineer your targets
- Just do it – Action is more important than planning
- Checklist – go through each option to implement
This has been an overview of the first 2 workbooks. Start working through them, and let me know if you have any issues with them.
We are expecting you to let us know how to improve this workbook, and all other workbooks we make
Visit financeandfury.com.au to leave feedback over on the contact page.
Resources:
Invest in yourself - https://financeandfury.com.au/one-of-the-best-places-to-invest-in-2019-is-to-invest-in-yourself/
Goals – https://financeandfury.com.au/goals-for-the-new-year/
Risk tolerance – https://financeandfury.com.au/risky-business/
Investment mix - https://financeandfury.com.au/perfect-investment-mix/
Investment philosophy – https://financeandfury.com.au/how-do-i-make-an-investment-philosophy/
How to build an investment strategy – https://financeandfury.com.au/how-do-i-make-an-investment-strategy/
Investment strategy to fit your goals – https://financeandfury.com.au/building-a-strategy-to-fit-your-goals/
Welcome to Finance and Fury the Furious Friday edition
If you have been paying attention to the news then you would know about the current GDP per capita recession.
Today we will look at recessions and different policies to help boost the economy. It is all apart of this miniseries on supply and demand side economics.
There are lots of different views to avoid recessions and get out of them.
What is a recession? What is a GDP per capita recession? * A period of temporary economic decline and negative GDP growth for 2 consecutive quarters. * The GDP per person is declining, we haven’t had a recession under this definition since June 1991 * If this keeps happening for 2 years, that’s when we get a depression.
GDP? * The measurement of what we are marked against * An aggregate measure of production equal to the sum of the gross values added of all residents and institutions engaged in production
The four components to GDP? * Consumption, usually the largest component of GDP. The value of consuming by individuals in the economy. * Investment, it is business investments in new equipment and services. Buying things for the business to operate, this gets included in investments. * Government spending, the sum of government expenditure on final goods and services. * Net exports, this is our exports minus our imports. In addition, the services we produce that are used by other countries.
Economics textbooks will admit GDP is flawed when it comes to measuring production in an economy.
How do we boost GDP? 1. Supply side: boost domestic demand through cutting taxes and reducing regulation 2. Demand side: boost domestic demand through expansionary monetary policy, or expansionary fiscal policy
The Great Depression: * Started in 1929 and lasted until the late 1930s * What was the result? * What triggered this? Well a major fall in the US share market * Worldwide GDP fell by 15% and it lasted over 2 years
What was the cause? * Keynesian theory – demand driven theory. Loss of confidence from the market crash led to a reduction in consumption and investment spending * Why didn’t the massive spending help? * What are the issues with increasing the money supply? * What if there is no confidence? * Monetarists – believe the great depression occurred normally but the shrinking of the money supply exacerbated the economic situation * It was caused by a banking crisis * A vicious cycle started and a downward spiral accelerated * What are the criticisms? * What is the lack of spending or lack of money supply? * Why was there a crash in the first place?
Australian school and Debt Deflation * Friedrich Hayek and Murray Rothbard - wrote America's Great Depression (1963) * Expansion of the money supply in the 1920s, leading to an unsustainable credit-driven boom * It was the inflation of the money supply that led to an unsustainable boom in asset prices and capital goods * What was the chain of events that proceeded? * Credit expansion cannot increase the supply of real goods * Who is Hans Sennholz? * Why were there protectionist trade policies? * Why were the income tax rates raised? * See any problems with demand side and monetarist solutions?
What happened in 2008? * Massive debt increases to fuel demand as well * Monetary stimulus has very little effect * Central banks print money for the sake of putting it into the economy
Summary: * Keynesian theory is really only effective for relatively closed off economies * The multiplier has been small * If we keep trying a failing solution, why should we expect a different result? * What is the solution? We will cover this next Friday
If you go to financeandfury.com now, you can subscribe to the mailing list and receive the workbook on Monday when it released, to go along with Monday’s episode.
We won’t send any spam content, it will just be workbooks, attachments, and info to go along with some episodes.
If you want to get in touch, you can do so here over at the contact page.
Thanks for listening, and have a great day.
Welcome to Finance and Fury, The Say What Wednesday edition, where we answer your questions.
Today we have a question from Nick - Watching the Leonardo Di Caprio documentary about global warming, which touched on how the large oil corporations used bribes to corrupt politicians into slamming down new legislation to move towards a greener earth.
My question is: Have Politicians been holding off implementing renewable energy in the fear that it would stagnate the economy by interrupting the multi-billion dollar industry? And if we moved completely from Oil to Renewable Energy, what sort of effects would take place on the economy? Would it be smooth sailing and all good?
We will cover this in a 3 part series, but may not be back to back.
- Today will focus on oil and why it is unlikely we will move away from it anytime soon
- Then the climate change debate, and come back to Leo and Al Gore
- The final episode, look at the solutions at work and how they work
Today: * What happens if they do? * I think the reluctance to move to renewable energies, away from oil, is 5 fold
- What oil is used in
- The technology for renewables
- Political donations
- Can’t tax renewable emissions
- The petrodollar
History lesson: “there is nothing new in the world, except for the history you do not know” 1. In 1944 global leaders got together and created a new world economic order after the world wars 2. The US was now the world’s leading economic power 3. Why would 44 countries allow the value of their currencies to be dependent upon the US dollar? 4. By the 1960s the US hadn’t lived within their means 5. By 1971 the trade deficits increased and domestic spending increased 6. Growing demand for countries’ gold back 7. What could they do?
President Richard Nixon Shocked the Global Economy, August 15, 1971 1. The gold standard was abandoned, now a FIAT system 2. Now the currency is a floating currency, based on market forces 3. The federal reserve now is maintaining the currency 4. They have never been audited either 5. Federal income tax goes towards paying back the federal reserve 6. Kennedy tried to change this, execute order 11110 7. Reagan tried to bring in his election promised tax cuts, and there was an attempt on his life 8. Henry Kissinger and the Petro Dollar 9. The OPEC nations agreed to price oil in USD 10. Artificial demand for USD 11. The Axis of evil? 12. There are problems for countries when they try and move away from the Petro Dollar
As more countries move away from the Petro Dollar, the US will experience inflationary pressures: * What happens if this system ends? * What actions can they take to avoid collapse? * How would the world be affected?
Summary: * Backing the currency to provide demand to allow increased supply * The forces of the oil market, and the result of a big government * Renewable energy, climate change, and greenhouse emissions is a different topic for another episode
Thank you for listening to today’s episode. If you want to get in contact you can do so here.
Welcome to Finance and Fury Today we are continuing from last week, and going through strategies to fit your goals.
Some bad news… The workbook will be released next week because there are a few pieces missing, as it doesn’t achieve what I wanted it to. So as a DIY template, I didn’t want to put out something that could be misinterpreted.
There will be a special episode for the workbook and putting all of these episodes together. So look forward to that.
Today we will cover the strategies that form part of a plan
Factors that influence each: 1. Goals – long term and short term 2. Risk profiles – target asset allocations 3. We have done a few episodes on these
Investment plan – short term: 1. Cashflow – the building block for achieving short term goals and long term wealth 2. Strategies for this? Reduce spending, monthly savings plan, repaying personal debt, home deposit, and reducing tax. These are specific to you.
Investment plan – long term: 1. Some hybrid options - building wealth, reducing tax and leverage 2. Some overlaps between categories/outcomes
Building Wealth: 1. Monthly investing – is for the long term if you have a financial independence goal 2. What do I need to focus on? 3. Lump sum investments – Property, Shares and Managed Funds 4. What are the considerations? What are the costs? 5. Leveraging for non-property investments – Equity borrowing and Margin loans 6. What is dollar cost averaging? 7. Superannuation strategies – consolidation, growth asset allocation, reducing asset allocation closer to retirement, making salary sacrifice, non-concessional contributions 8. What do your insurances within superannuation cost? 9. What do you do if you’re within 5 years of retirement? 10. What is a co-contribution? 11. Debt repayment – Mortgage and Investment debt 12. What are the opportunity costs?
These will be run through in the strategy workbook next week – today was a quick run through
Investment plan example – Mine: Cashflow: 1. Paying myself first 2. Spending vs investing – opportunity costs considered today 3. Holding reserves in cash for when I need it, for when the market is down and so I don’t need to sell investments
Wealth Accumulation: 1. Investing in long term growth investments – 30% index funds and 70% active funds 2. Making monthly investments – superannuation and personal investments
Thanks for listening today, sorry about not having the workbook today but it will be ready by next week. Where we will run through it and wrap up the last few weeks of Monday episodes.
If you liked the episode, let me know on iTunes with a review or send me a message on the website here.
Episodes to check out: How do I make an Investment Philosophy? - https://financeandfury.com.au/how-do-i-make-an-investment-philosophy/
How do I make an Investment Strategy? - https://financeandfury.com.au/how-do-i-make-an-investment-strategy/
Find and Forge your own path - https://financeandfury.com.au/say-what-wednesdays-want-to-know-how-to-make-the-most-of-your-money-find-and-forge-your-own-path/
The Perfect Investment mix - https://financeandfury.com.au/perfect-investment-mix/
Goals for the New Year - https://financeandfury.com.au/goals-for-the-new-year/
Welcome to Finance and Fury, the Furious Friday edition.
We are continuing the series on supply-side economics. Today we will focus on the down-side of supply-side economics. Remember, supply-side economics believes that governments should remove barriers to production.
How is this done? * Lowering taxation and decreasing regulation * The aims of the policies? * What are the 4 major downsides?
Income Inequality: * Those that supply more also accumulate more wealth * Results in a disproportionate amount of the tax savings going to those on the highest incomes * More wealthy people is a good thing * More supply means lower inflation and cheaper goods * The billionaires of Australia own companies that supply jobs, they don’t sit on piles of cash * Countries with more billionaires have lower rates of poverty * We are very well off despite what you might think
Deregulation will Destroy the Environment and Public Safety * Experts do agree, lower regulation leads to increases in profits and increased GDP * Deregulating coal mining will lead to more destruction of the environment? Really? Cheaper and cleaner power isn’t appealing to you? * It's about opening the door to new ideas and new creation of those ideas * Using the private sector to achieve the creation of new ideas, the government never innovates, just adopt it * Deregulation can lead to more competition within free markets for better ideas to replace old ideas * Who have higher safety rules? The government or companies internally? * Deregulation from the US about the railroad industry * There will be mistakes in deregulation, but compare that to mistakes in increased regulation
These first two strawman arguments highlight misconceptions, the next two arguments are real potential downsides
Budget Deficits * This comes from a reduction in tax revenue but maintained levels of spending * Lowering the tax rate increases wealth, so the pie to take taxes from is larger * Critics say under president Reagan, there were decreased tax revenues. However, there was a recession just before this. * Demand side economics increases deficits
Volatile Economy * Deregulation can make the economy more volatile * Like investments, volatility is your friend * The slow down in GDP growth is from the increased size of government, spending, debts, regulation increase, and increased taxes or introducing new taxes * When you look at a lassie-faire economy, it can be more volatile than a centrally planned one * When you look at the regulation of the taxi industry, it created an industry that needed protection from Uber. Because the regulation of taxies was inefficient. * Recessions occur when there are 2 or more consecutive quarters of negative gross domestic product growth. We are in a per capita recession as of this week. * Creative destruction – innovation is destructive * No government bailouts – recessions can be a forest fire, and bailouts incentivise moral hazardous behaviour * Deregulations and lending guarantees leads to the banks taking on additional risks if it is backed by the governments * No government stimulus, if there was a stimulus from the government – where did it come from? Do people actually spend it? Australia had a slow rebound from the GFC * Industries that require protection from the government lead to inefficient workforces. Look at the prior example of railroads and inefficient rail tracks. * Flying industries, the airline deregulation act of 1978 eased controls on fares * We will run through the policies of Thatcher in a few weeks. Lead to a massive loss of jobs in manufacturing. * Creative destruction does happen – this is what the government should focus on
In Summary: * We have explored the 4 criticisms of supply-side economics * It leads to inequality, deregulation causing a destruction of the environment and worker safety, deficits and recessions
Next episode: We will look more into recessions and some real-world examples of recessions. And we will break down supply side theory and a demand side theory for dealing with recessions.
Thanks for listening, if you enjoyed the episode please leave it a review on iTunes.
If you want to get in contact, you can do so here.
Welcome to Finance and Fury’s ‘Say What Wednesday’ edition, where every week we answer questions from you guys. This week the question comes from Effy;
“I am a Chinese migrant living in Melbourne.
I do not recall if your podcast has covered insurance, such as life/accidental insurances. After some online research, I noticed that the variety and content of the insurances vary geographically. I am aware that many main land Chinese purchase insurance policies in Hong Kong as it is much more attractive. What is your understanding of the Australian insurance industry and what are the must-haves for everyday Australians?
I am trying to improve my financial intelligence by upgrading my skills to increase my earning capacity and learning to use financial products (property, shares, etc) to sustain and generate more passive income. It is not easy work, I have certainly made several mistakes and I feel I need more guidance.
Can you share some of your personal experiences on how you come to where you are today?
Looking forward to hearing anything from you and learning from you.
Sincerely, Effy”
Awesome question!
Insurance – What is it?
- Simply an arrangement where a company, or the state, provides a guarantee of compensation for specified loss, illness, or death, in return for payment of a specified premium. It’s a contract that allows you to pass your liability (loss potential/risk) to a third party for a price (called a premium).
Personal (wealth) protection
- Insurance differs from country to country, including the types of covers available.
- Mainland China has been going through massive push on insurances lately. Most insurance companies are actually state/party owned (in part), with the industry still considered in its infancy stage.
- When it comes to insurance, you should look for a reputable provider regarding payout rates and levels
Investment policies – the main objective of these policies is to facilitate the growth of capital by regular or single premiums. These are common in the U.S., China, RSA, and Australia 30 years ago, and referred to as “whole of life”. They have both an insurance component and an investment component (or, ‘surrender value’).
The cash value refers to the refund you’d receive for a portion of your paid premiums, paid as a lump sum if you cancelled your policy. However, because Whole Life includes both an insurance and cash value component it has become too expensive for many customers and was thus replaced with Term Life. Whole of Life Insurance is no longer available in Australia though it was really popular until 1991 when superannuation came into existence and started replacing the cover.
Protection policies – the most common form of insurance in Australia, protection policies are designed to provide a benefit, typically a lump sum payment, in the event of a specified occurrence. Typically called ‘term insurance’ in professional circles, they have as the name suggests, a term limit to them.
- Example – Total and Permanent Disability (TPD) policy is designed to provide lump sum if you’re unable to ever work again. These typically expire between age 60-65 depending on the policy – as this is ‘retirement’ age – and the term of the policy.
Core questions when looking at insurance
What type of policy do you need? That is to say, what events would you need to cover? For example, home insurance covers a house fire. But if you get hit by a car and are unable to work for 6 months what type of cover do you need?
The other question is, how much will you need if the event were to occur?
- Depends on event type and duration of the impact
- Your financial situation
- Will you be able to ever go back to work? If not, how does this impact your future financial security
When trying to determine what types of covers you may need, consider the four common occurrences that might put you out of work or create financial stress in your life. These tend to be referred to in insurance contracts as ‘Conditions of payment’;
- Passing away (the most obvious one) - Life Insurance covers this. A lump sum is paid to your beneficiaries.
-
Becoming disabled (permanently) – Total Permanent Disability (TPD) Insurance covers this.
- Breaking a foot doesn’t make you permanently disabled
- There are different types of cover definitions
- ADL - Permanently unable to perform two of the 'Activities of Daily Living’: Bathing and showering, Dressing and undressing, Eating and drinking, Using a toilet
- ‘Any’ occupation - defined by likelihood to return to any form of full-time work for which you are reasonably trained. You may be injured enough to never work, even if you don’t meet the ADL definition.
- ‘Own’ Occupation - can look at insuring your specific occupation which is typically something specialised.
-
Being injured – This is considered temporary disability. So, if you break your foot you might make you eligible here (only if it puts you out of work) - Income Protection covers this.
- Income protection provides replacement of lost income due to illness or injury. You generally have to exhaust the waiting period (including sometimes your existing employer sick leave) and is paid up until benefit period expires.
- Suffering from an illness – Trauma insurance.
- Trauma Insurance is designed primarily as a lump sum to assist in covering the medical costs of a significant medical event in addition to providing a level of capital to cover lost incomes. Trauma Insurance policies can offer as little as 5 critical illness events and on average cover around 40 critical events such as cancers, heart attacks, strokes, loss of limbs and adult onset diabetes. Typically, lower levels of cover as there are fairly high costs. Designed to cover medical costs and maybe 1 to 2 years of income (if you don’t have income protection)
Do you need the funds now, or do you need them ongoing?
Each type of event will require different forms of payments due to duration of events and also, what you may need to cover.
- Now - Lump Sum Payments.
- Life, TPD, Trauma – All based around the sum insured (the level you tell the insurance company you need). This might be a default amount if automatically established within superannuation.
- Into the future - Ongoing insurance funds to cover your future costs
- Income protection payments are generally a monthly benefit that pays you up to 75% of your income and covers you for accidents, illnesses or major traumas.
- It pays you up until you return to work (after your waiting period), or if you can’t return, pays up until the benefit period ends.
- The 'waiting period' is the time between becoming unable to work and receiving your first income protection payment - you can generally choose a waiting period from fourteen days and two years with a shorter waiting period usually meaning a higher premium.
- The benefit period is the period during which you receive your income protection payments. You can generally choose between a two- or five-year benefit period or up to age 70 for some occupations.
How much insurance do you need?
The goal of life insurance is to provide a measure of financial security for your family if something happens. So, consider your financial situation and the standard of living you need to insure for in each event.
- Passing away
- Do you have dependents?
- Mortgage, funeral costs, education funds – any lump sum expenses
- Becoming permanently disabled (TPD)
- Medical bills, rehab, reno costs or costs to modify your home
- Would your family have to relocate?
- Will there be adequate funds for future or ongoing expenses such as daily living expenses, day-care, mortgage payments and education for kids? You’ll need something to provide an income if you can’t
- Ongoing Income Replacement
- If you’re considered totally and permanently disabled it would provide a benefit to you long term, or if you’re simply injured, it will provide a benefit short term until you return to work. If you pass away this insurance would not provide a benefit payment.
- Ongoing income of up to 75% of your pre-disability income (this is taxable, but the premiums are tax deductible if paid personally)
- Income is one of the biggest wealth building tools and the present value of all future income is huge. As an example, we’ll look at the difference in foregone earnings for an individual aged 30 on an income of $80,000 per annum, who becomes disabled. If they have a Benefit Period of 2 years, they’ll receive around $120,000 (75% of $80,000 over 2 years) … but having a Benefit Period to Age 65, the present value is worth $1,289,233.
- How much income do you need? Can you live off 25% of your current income? Just insure that. Or, what if you work out that 75% of income isn’t enough? Or what if you pass away and the income is lost to dependents? This is where lumps sum covers come in.
- Lump sum covers – Life or TPD Cover.
- Work out the income you need – and additional sums to provide this
- Invest the funds; How much would need to be invested to provide adequate funding/drawdown for dependents?
- For example – you have an insurance payout/benefit of $1M. You have no debt so the $1M can be invested. This could generate $50k ongoing passive income without drawing down on the capital. An alternative scenario may be that your spouse needs more - $94k of income can be drawn down if it is drawn down over 20 years (capital sold for income)
- Work out the income you need – and additional sums to provide this
The Elephant in the room – Insurance Premiums
- Nobody like paying for insurance and we try to get our premiums down as low as possible without sacrificing the level of cover
Why it is important to not be over insured
- Over insurance is having too much cover and paying too much – Insurance is not meant to be something you want to have to claim on – what factors will affect your premiums
- What other things effect premiums – they’re calculated based around a range of factors
- The level of insurance – get the right level so you’re not over insured
- Age – if you’re young you have a high chance to claim. Between 28-35 years = lower chance, from 40 years onwards premiums increase
- Occupations – riskier jobs, more chance of claim, higher premiums
- Premium structures - Stepped v Level – Increases each year with your birthday (or pay more now for smaller increases)
- It is a question of how long covers will be in place, and how will the premium grow?
- Takes 10-20 years to reach breakeven on premiums – even if premiums are level, we’ve seen some like MLC +15% premium increase (out of cycle increases)
- Insurance type specific
- IP – Wait and benefit period
- TPD – Type of definition – ADL, Any, Own (about 30% more than ‘Any’ occupation)
- Underwriting – loadings for health and lifestyle risk factors
- Strategies
- Life / TPD inside super
- IP – Can insure 75% - but how much would you need?
- Waiting period increase on IP to 60 or 90 days if you have emergency funds
Some things to think about
- Types of covers
- Will you need lump sums? Death/TPD
- Income Replacement
- How much cover you need?
- Lump Sums – debts, etc.
- Ongoing - insure your income to the amount of your expenses,
- Where it should be owned
- Super or personal – based around tax efficiency, cashflows, and also accessibility
Thanks for the Question Effy! If anyone else has a question you’d like answered on the podcast, go to financeandfury.com.au and hit us up on the contact page.
Welcome to Finance and Fury, today’s episode is a flow on from last Monday’s Investment philosophy episode and narrow down into an Investment Strategy.
To invest properly, your investment beliefs need to expand into a strategy, an implementation plan.
So Today:
- Expand on building an investment strategy from the investment philosophy – check out the worksheet
- Look at goals and timeframes
- The types of investments you will use
- How much additional risk you can take on
Next Week:
- Investment plans and specifics of putting the strategy in place
- Implementation of said plan
- The workbook will be available
- What to actually do? And what habits you will make a part of your life?
Workbook for this:
- Spent time putting together a work book for listeners
- Questions to hep run through this exercise
- Includes a checklist
Investment strategy: * Summary of what you will do * Behaviours that are necessary * Based off of the investment philosophy * Making it into an actionable plan
How to come up with it? * Be honest and ask yourself, how you will achieve your goals? * Has to be in line with the investment philosophy * The strategy helps you keep to your philosophy * How do you view your investments? What do they mean to you? * The strategy is how you articulate your strategy throughout your life
Categories of investment strategy questions: 1. Goals and timelines 2. How much risk can you withstand? 3. Strategy to use
Outline: * Goals and timelines. We have talked about financial goals before. * Your attitude towards risk – are you a lover or hater? * Identifying a risky strategy when you see one – crystalising losses or not, will you be better off? * Avoid emotions and hard sells with the fear of missing out * Behaviours and emotions – knowing how you will react ahead of time helps avoid the worst case scenario * Mental exercises – not as good as the real thing but they help * Strategy specific – how will you look at achieving the goal? * Look at the types of investments that will help you achieve you goal
An example of mine: listen to find out details * Investment philosophy are these 2 simple statements * Investment strategy is 3 statements – how I implement my philosophy
Next episode:
- Work through some options to build wealth
- The basic building blocks to pursue financial independence
- Investment plans and specifics of putting the strategy in place
- Implementation of said plan
- What to actually do? and what habits you will make a part of your life?
Get ready for the workbook next week. It will be available on the website.
Thank you for listening. If you have any questions or want to get in touch you can do so here.
Resources: Last week’s episode - https://financeandfury.com.au/how-do-i-make-an-investment-philosophy/
My financial goals - https://financeandfury.com.au/goals-for-the-new-year/
Setting your goals, with workbook - https://financeandfury.com.au/one-of-the-best-places-to-invest-in-2019-is-to-invest-in-yourself/
Overview of risk - https://financeandfury.com.au/risky-business/
Investing in 2019 - https://financeandfury.com.au/investing-in-the-share-market-in-2019/
Welcome to Finance and Fury, the Furious Friday edition.
This is part 3 in the poverty miniseries, which is alongside the supply side economics flow on.
The first episode was supply and poverty.
The second episode was the big 5 factors of poverty.
Today we will put it all together to derive a system that can reduce overall poverty.
This system: will it be perfect?
- Just look at Utopia
- “misplaced faith in political utopias has led to ruin”
- All systems have flaws
- Having less freedom leads to more poverty
- Could technically lead to more poverty, if it’s by choice
The system has to be 2 parts:
- What system works best to reduce the big 5 factors: reduce diseases, increase knowledge, reduce apathy, reduce authoritarianism and build resilience rather than dependence.
- What provides individuals freedoms?
Disease:
- Death from chronic disorders in the first world
- Death by horrible diseases in the third world like respiratory infections, diarrheal diseases etc
- The necessities: clean water, electricity, food, and education
- Where do these factors come from? Why aren’t these a problem in Western countries?
The System:
- Corruption comes with any system
- Greater power can show more corruption
- But power is needed to provide a structure for secondary factors
- Money in politics can represent a form of corruption
- There is no sense of service working in institutions
- Any powerful system will punish you for speaking truth about their evils
- Lack of transparency within institutions, to remove this, politicians should forgo financial incentives
- The formal education of politicians and the real world experience of politicians are very slim
- Reducing the element of these factors helps to reduce poverty, by using a meritocracy
What does any system have the ability to create?
- The remaining 3 factors - dependency, apathy and authority
- The more power the government has, the worse off the population are
- The focus should be not to make the population reliant
- The battle between freedom and free stuff
- Welfare helps to a point, but after that point it keeps people in poverty
- The safety nets can either be voluntary or compulsory
- Most people don’t want to support people who want to remain in the safety nets
- These are not long term solutions
- The lack of knowledge is a responsibility of ours
- 12 years of school is not enough, Focus on practical and applicable skills. A libertarian view on education. Learn the basics
- The best and brightest from these suffering populations leave, leaving no one to help fix local issues
- Community systems that can help build self-reliance, dialectic systems help communities
Recap of the System:
- Allows for the provision of infrastructure, concentrated responsibility to provide this
- Corruption needs to be low to reduce poverty
- Lack of decision-making ability
- Provide jobs and the ability to get jobs
- Greater the economic freedom, the lower unemployment is and the lower tax is
- More freedom means less inflation and the greater price purchasing parity
- Countries at the bottom have high government expenditure to GDP %
The last 3 factors are solved by individual and Economic freedoms * Small percentage of people think that poverty has gotten better, the majority think poverty has gotten worse * Stop using a relative poverty measure, only 4% of Australians are in absolute poverty. It's not extreme poverty.
Which political party seems to be on the right track? * Listen to the podcast to find out! * Government spending is about $16,000 per person in this country * Public earnings are about $1,775 pw whereas private earnings at about $1,590 pw. * The 74 senators have interesting life experience before politics
To summarise the episode: * More economic and individual freedom, the lower the poverty rates
Next week:
Back on track next week with the pitfalls of supply-side economics. There are 2 major faults.
If you liked the episode let us know by leaving a review, or get in touch with us at the contact page here.
Welcome to Finance & Fury’s, ‘Say What Wednesday’, where each week we answer questions from you all. This week our question comes from Tara;
“Hi Louis, what do you think are some financial considerations when it comes to a relationship?
Should you have a prenuptial agreement?
Shared bank accounts
If you are looking to start a business together, what will happen if you break up?
And what are the laws in Australia in regards to this?”
Thanks Tara, that’s an awesome question because it’s really important to think about, for anyone entering into a relationship.
There’s the obvious factor; being on the same page as your partner financially is sometimes easier said than done. I’ll do a future episode to cover off on this and include strategies to work on together financially to ensure you’re on the same page. But today, let’s look at the legal / protection side. By the way, this comes with a big disclaimer – I’m not a lawyer! This is not legal advice, just general discussion around what constitutes relationship in eyes of law, what happens when you separate, and ways to protect yourself, or your business.
Let’s start with the definitions.
You have ‘De facto relationship’ or ‘Married’. And in fact, there has actually been little difference between them since approximately March 2009 as the courts deal with financial matters in much the same way.
- The law has formulated a set of factors to determine whether a couple are (or were) de facto or if it is less-serious. This takes into account:
- How long the couple have been together in their relationship, and if the relationship is sexual in nature
- Whether there’s financial dependency and mutual commitment to a shared life
- Property ownership and use;
- Care and support of children;
- In summary, a de facto relationship is a relationship in which a couple lives together on a genuine domestic basis for 2 years (without separation), however there is an exemption if there are children or substantial contributions to joint property
- This applies to same or opposite sex partnerships and we see the same laws across all states and territories in Australia.
- Also, a tip for you players - You can also be considered to be in more than one de facto relationship at a time
If you’re in a short-term relationship (under two years) and you keep your bank accounts separate, there’s no financial dependency, there’s no kids or home together, you’re okay. It’s pretty straight forward. Generally, by law you’re not considered in a relationship and therefore there’d be no separation of assets if you were to break up.
If you are already married or in de facto relationship there’s little that you can do after the fact in a lot of cases – beyond hiding money.
Protecting yourself
First, take a look at the end game – what happens in separation? You can look at each potential outcome and work backwards from there, to figure out the best way to protect your assets.
When looking at how courts would split assets, there’s actually no specific formula used to divide assets and property so no one can tell you exactly what orders a judicial officer will make.
- A decision is made after all the evidence is heard and the judicial officer decides what is just and equitable based on the unique facts of your individual case.
- The Family Law Act 1975the general principles the court considers when deciding financial disputes include;
- what you've got and what you owe – valuations and asset position (net worth)
- direct financial contributions by each party to the marriage/relationship (salary earnings, investments)
- indirect financial contributions by each party (gifts and inheritances from families)
- non-financial contributions (caring for children and homemaking)
- future requirements (age, health, financial resources, care of children and ability to earn)
- The way your assets and debts will be shared between you will depend on the individual circumstances of your family … and every settlement is different
- So, in practice, this doesn’t help very much in ‘planning to protect yourself’, which is partly my point – nothing is off the table!
- If you are already in a relationship and then start a business or accumulate wealth, it becomes harder to protect. This includes access assets in Family Trust, or in superannuation.
- As an example, we can take a look at Jeff Bezos who started Amazon in 1994, after he married his wife in 1993. She might now become the richest woman in the world as a result of their separation.
Back to Tara’s question!
The Prenup – what you can do
- In Australia they are called ‘Binding Financial Agreements’ (BFA)
- This sets out the way some or all of a couple’s assets will be divided in the event that their relationship breaks down. It can also deal with spousal maintenance.
- A BFA can be signed at any point during a relationship, but it is preferable that the agreement is put in place before getting married or entering into a de facto relationship (i.e. living together).
Protecting wealth – how does a BFA stack up?
It is important to consider a binding financial agreement when:
- you have more money, property or assets than your partner at the beginning of your relationship
- you may, at a later stage, be entitled to an inheritance or large gift
- you operate a family business or investment that you need to preserve
- you want to ensure the terms of any property division are agreed up front to avoid going to court later
- you are forming a new relationship and you have children who need to be protected financially.
Is a BFA actually binding?
- One of the key issues in executing your binding financial agreement is to ensure that it is in fact, binding.
- Binding financial agreements need to be carefully drafted to ensure they consider any structures in place, such as family trusts, companies and self-managed super funds, as well as tax implications and any other obligations.
- A BFA must be drafted to ensure it meets all of the many legal requirements and in a way that means it will be upheld in the future if challenged. If your partner has asked you to sign a binding financial agreement, you must obtain independent legal advice, preferably from a lawyer specialising in family law, before you sign.
- The intended effect of a BFA is to remove a Court’s jurisdiction to adjust a financial settlement.
- It must be carefully and accurately drafted, with full disclosure of all relevant circumstances, avoiding duress
When things go wrong
- Failure to comply with the formal requirements of section 90G (bits of legislation, I won’t read them out)
- Because it was obtained by fraud (including non-disclosure of a material matter);
- Stoddard & Stoddard - Court held the omission of material matters constituted fraud, even in the absence of deliberate deception.
- Intention to commit fraud was not necessary (slips mind) - the BFA could be set aside on this ground
- Because it was obtained under duress: One Case –
- The wife arrived in Australia on a student visa in mid-2001. The parties lived together from late 2002 until mid-2003 when the wife returned to Thailand because her visa had expired.
- The couple became engaged and the husband sponsored the wife’s return to Australia in mid-2004 on a fiancée’s visa, the terms of which required the couple to marry by January 2005.
- The wife fell pregnant in July 2004.
- The parties entered into a Binding Financial Agreement on 11 November 2004 and married on 14 November 2004. On 16 November 2004 the wife (in accordance with plans made prior to the marriage) returned to Thailand to visit her family.
- The parties separated in April 2007.
- The wife was pregnant, unmarried, and facing expulsion from the country if she was not married by January 2005. It was accepted by the Court that the husband had told the wife that ‘the marriage is off’ if she did not sign the BFA. Compounding the situation was the fact that two days after the planned wedding, the wife was scheduled to return to her family, in circumstances where she had anticipated being married, but would be returning to her family unmarried and pregnant if the marriage was cancelled.
- Court accepted that ‘pressure placed on the wife by the husband to sign was “illegitimate”.
- Because the husband’s conduct was unconscionable the BFA was set aside. Unconscionability arises where one party suffers a ‘special disadvantage’ and that disadvantage is taken advantage of by the other party. This also relates to the previous case.
- These cases highlight the pitfalls of not properly complying with the technical requirements of the Act, and of attempting to enter into a binding financial agreement with anything other than good faith and candour.
How to get a BFA
- Get one through a lawyer – it is essential that an experienced lawyer draw up a BFA for you
- Costly - $6k lowest I have seen – average $12k – And they’re not iron clad!
The other part – Starting a business
- Buy sell agreements/shareholders agreements are important
- Include in the Buy/Sell Agreements what will happen if your relationship breaks down – can you continue working together? or if you’re completely separate, what happens to the business?
- One Party would normally buy out the other party. They have an agreement on timeframes, and process, as well as valuation options.
- If you and your ex own shares in a business, the business is normally valued for the purposes of the financial settlement
- Either agree on a value if it is amicable, otherwise, use independent valuers (I have seen this cost between $4k-$12k)
- Values depend on assets (stock, property), earnings (profits or multiples of revenue), Structure (company, sole trader etc)
- If the agreement says 50/50, then you would split the shares
- Note – I don’t believe these agreements are 100% water tight
- If all your money/finances are in the business and the settlement figure is larger than what you own personally you may be required to sell or gift additional shares to cover settlement
- These agreements are important for anyone with a business partner, whether you’re in a relationship or not. They do cover things Death/Total Permanent Disability for which you can set up insurances to provide funds to buy out company shares.
Long story short
The best thing to do is to not be in a relationship with someone who will take you to the cleaners! Don’t mix finances until you are pretty certain (though it doesn’t matter after 2 years living together, or you have kids, or you’re married)
Get into a relationship with someone you trust. This seems obvious. But you’ve really got to match up, which is not a given – I encourage you to talk about money together if you are really serious about the person with whom you’re in a relationship.
Thanks for the question Tara! If anyone else has got questions, please head to financeandfury.com.au and hit us up on the Contact Page.
Until next time, have a good one!
Welcome to Finance and Fury Today we are going to talk about how to implement an investment philosophy. It is a coherent way of thinking how you fit into your investment plan. It is a mission statement to follow when investing.
It can help with understanding the types of investments you should be making, and avoid mistakes that influence your investment behaviour.
What is it: * Core beliefs for your investment strategy * Investment philosophy vs investment strategy
Why is it important? * Think about your investment strategy as your purpose * A philosophy outlines a purpose and helps you stick to it * Benefit from long term investing * Avoids making rushed decisions
How to make an Investment Philosophy: * How do you learn? * What do you know about investments? * What else do you need to know? * What are active and passive investment styles? * How capable are you to do it yourself? * How much time do you have? * Is there value with outsourcing it, and gaining a comparative advantage? * What are your goals? Why are you investing? What are the timeframes? * What do you want from investing? * What is your risk tolerance? What are you willing to invest in? * This helps you avoid emotional investing, as you have invested in alignment with your investment philosophy * What is the risk-return relationship? * Figure out which investments fit in your philosophy
How will you live by it? * Keeping it as simple as possible * Always remember you are investing in your future * What is the opportunity cost? * Think in the long term and big picture, what does the future look like? * How much will you need? The rule of 20 * Don’t try and go for big wins quickly
Things to remember: 1. Quality – don’t invest with high hopes of large gains, losing funds will destroy your future 2. Diversify – at least 15 – 30 companies 3. Remember – invest in line with the big picture
Living by your philosophy: * Negate the emotional side of investing * Daily habits and prioritisation * Be patient and be honest with yourself
Putting financial habits in place: * One small thing at a time * Good habits come from positive feedback loops of cue, action, and reward * The Pareto distribution - 80/20 rule
What is one thing that you can do to better your future self?
Summary: 1. Start with yourself - Write out what you know and how comfortable you are with investing 2. Look at your capabilities – Do you need to learn more? Or can someone do it for you? 3. What are your goals? 4. Set up one page to write out your investment statement – top-level picture/vision of your investments 5. Keep it in your habits every day
My investment philosophy: * Investing consistently in long term growth investments * I look at 30% index funds and 70% active funds * My active funds are split between small cap, emerging markets, and international shares * I reinvest all income earned * I hold reserves in cash for when markets go down * I invest in high-quality assets, diversified across the board * Looking at spending vs investing * Making regular investments split between super and personal investments * Set up automatic investments into quality assets, keeping transaction costs low
That is an example of an investment philosophy, something to live by that you can stick with. From here, you can build your investment strategy.
Set up what you want to achieve, and some simple rules to live by every day. This will help get a strategy in place.
Next week: Look at an appropriate investment strategy and the strategy side of the philosophy. Also, what to target in terms of asset allocations and investment selections.
Thanks for listening and feel free to get in touch if you have any questions or want to know how you can achieve financial goals. You can do so here.
If you liked the episode, give us a review on iTunes, and if you didn’t like the episode, let us know.
Resources: Invest in yourself and investment purpose: https://financeandfury.com.au/one-of-the-best-places-to-invest-in-2019-is-to-invest-in-yourself/
Rule of 20 in the form of taking control of your money - https://financeandfury.com.au/take-control-of-your-money-nobody-else-is-going-to-do-it-for-you/
Welcome to Finance and Fury, the Furious Friday edition
This episode is a flow on from the previous furious Friday episode question from Nick, about poverty.
Last episode we talked about how poverty is defined and the economic factors of poverty, which play only a part.
Today we will cover off on the major contributors of poverty. There will be a third part for answering the question about the types of government systems.
Poverty is a social problem: * Poverty as a lack of resources, so poverty at an individual rate * We didn’t address the social problem of poverty, communities, under-employment, lack of skills etc. * Social problems are secondary factors
Dr. Phil Bartle: * Spent time living with poor communities * Dedicated his life to the development * Much of our aid contributed to poverty * Empowerment methodology – struggle produces strength and ability * The solution is the removal of the big 5 factors * No moral judgment is intended
The Big 5 factors: 1. Lack of knowledge – people keep knowledge to themselves and a lack of skills is the result. Expose individuals to training, not general education. Ivan Illich believes schooling keeps people poor in impoverished nations. 2. Disease – absenteeism is high and productivity is low. Being healthy contributes to the eradication of poverty. Prevention is much better than treating a disease. 3. Apathy – people feel powerless to try and change their conditions. Why try if the game is against you? Jealousy brings people back to poverty. Thomas Sowell shows cultures of a community. Some cultures help a community, some degrade a community. 4. Corruption and Authoritarianism – a major cause of poverty. It is stealing from the public at a multiplier of detrimental effect. Using taxation as a way to fund the political class. Dictatorships have war, famine, and poverty. 5. Dependency – this results from receiving charity. It is a short run solution but becomes depended on. Once they know what to do and how to do it, they can get themselves out of poverty. Empowerment is the alternative to charity.
Summary: * These 5 big factors all coexist together and contribute to furthering each other. * If we fight the factors of poverty, it will contribute to the decay of those factors and ultimately poverty * Tackling all 5 Is very important to reduce poverty, with empowering communities. * I don’t want to diminish those struggling, some people have been dealt with awful hands * Don’t believe in the easy band-aid solutions
In the next episode: * We will go through what system works best to reduce the 5 factors * To build resilience rather than dependence
Thanks for listening
Give us a review on iTunes and if you want to get in contact you can do so here at the contact page.
Resources: The money multiplier effect can be learnt about in this podcast about the centralization of power and control of the economy - https://financeandfury.com.au/furious-friday-the-centralisation-of-power-and-control-of-the-economy/
Black rednecks and white liberals book - https://en.wikipedia.org/wiki/Black_Rednecks_and_White_Liberals
Welcome to Finance & Fury, the ‘Say What Wednesday’ edition where every week we answer questions from you guys.
Today’s question is from John;
“Thanks for the podcast and the content you provide. I thought a useful podcast topic could be the legislative changes Labour are proposing if they win the next election. Such as changes to franking credits, negative gearing and taxation of family trusts. I thought this could be an interesting topic considering these changes will possibly affect a lot of your listeners, especially small business owners who are operating as a trust etc - John”
Thanks John, that’s a good question, and great timing with the election between 33 days from now (if called on the day listening – min time rules) and May 2019
To start, here is a quick list of the policy changes, not including the bigger ones everyone is talking about;
- CGT Discount: Going from 50% to 25% (on new investments after 1/7/17). This applies to business as well.
- Superannuation:
- SG increase to 12%
- On one hand it’s good for people when they actually retire down the track…but not so good along the way
- Plus, open to legislation risk and provides tax surplus/infrastructure funds for the Government
- Non-concessional cap to be reduced to $75,000
- No more borrowing inside Super anymore (SMSF)
- 30% contribution tax for those earning over $200k p.a. in total income (including super contributions)
- SG increase to 12%
The Three Big Changes
Removal of Negative Gearing
- According to the ABS, 21% of households owns a second home as an Investment property
- 35% of dwellings are investment properties (rental properties)
- Property may become less valuable in investors eyes
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Check out episode Furious Friday ep 27 https://financeandfury.com.au/furious-fridays-dissecting-labors-plans-for-housing-affordability/ and Say What Wednesday ep 33 https://financeandfury.com.au/say-what-wednesdays-housing-market-history-and-lowering-property-prices-sustainably-in-the-future/
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Family Trusts – changes to distribution laws
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Implement a thirty percent (30%) floor on the taxation that applies to distributions made by discretionary trusts
- ‘Distributions cost $3.5bn to government in lost tax revenue’
- How it works – You have investments (or Business) inside of a family trust
- Assets earn income (profits) which is distributed to the adult members who have the lowest MTR
- Under 18 years of age get TFT of $416 – then 66% and down to 45%
- Can’t retain earnings
- The Income splitting example that Labour gives:
- Sam is a surgeon and is married to Melissa who doesn’t work. They have two adult children who attend university and who also don’t work.
- Sam earns $500,000 a year from his work (pays tax PAYG)
- They have a discretionary trust with investments which generates $54,000 in income from their investments.
- They attribute $18,000 to Melissa and $18,000 to each of their two children, so no tax is paid on the $54,000 distribution as Melissa and the two children are each under the tax-free threshold.
- This represents a tax saving of $14,460 compared to if the investment income been attributed to just Sam and Melissa
- Total tax Sam pays on his earned income - $208,097
- They only get to save $14,460 on investments
- If the new rules are bought in, then $224,297 will need to be paid in tax (40.5% compared to 37.6% tax on all income under the current arrangement) … They are paying a lot in tax!
- What people forget is this; “Sam” spent $200k-300k on becoming a surgeon, and delayed his earnings until his late 30s to early 40s.
- Also, being able to distribute to kids is very short lived
- $54k to Melissa = $9460 tax ($5k tax saved)
- Example 2 – A similar scenario with different earnings, and one I see more commonly;
- Sam earns $120k, Melissa earns $60k. They have 2 adult children earning $15k each while at uni. They split the $54k distribution between the kids. This results in $9,391 tax saved, compared to parents splitting the distribution 50/50
- Total income = $264k, of which the family pays $56,468 tax to redistribute under the current agreement (rather than $65,859)
- Under new system the total tax will be $62,034
- Some Issues
- Shorten admitted 200 thousand small businesses will be impacted – these are the people he is supposedly representing
- Tradies, and others, who use these structures for asset protection at no benefit to income in most cases
- Now they will pay a minimum 30% tax on their earned income rather than MTR
- Testamentary, disability and charitable trusts, deceased estates and other good will trusts will be impacted
- Shorten admitted 200 thousand small businesses will be impacted – these are the people he is supposedly representing
The removal of Franking Credits
How Franking Credits work
- You own shares in a company, and as owner you are entitled to Profits (Dividend payments)
- Gross Profits come from Revenues – Costs (interest, expenses), Net profits = Gross Profits minus Taxes
- Profits are paid out to shareholders (minus what is kept by company)
- The dividend is received by individuals. The ATO assesses the Dividend + the Franking Credit ($1.425 instead of $1)
- If over 30% MTR, you get nothing back, under 30% MRT get something back
The objective of the dividend imputation system is to eliminate double taxation of company profits - once at the corporate level and again on distribution as dividend to shareholders. More specifically, it is intended to create a "level playing field" by taxing the same activity in the same way, irrespective of the business structure being used, namely a company or trust, sole trader or partnership. This is equality.
- Removal of Franking Credits will really only affect those in the tax bracket less than 30%, that is, low income individuals and Self-Funded retirees (Super)
- Pensioner exemption
- People on Benefit Payments from the Government will be exempt (back dated to May 2018)
- The plan is for equity but you’ll have people receive lower incomes overall if they aren’t receiving the pensioner exemption
- Labour Claims; “Distributional analysis has shown that for people of retirement age more than 80 per cent of the benefit of imputation refundability goes to the wealthiest 20 per cent of households”
- But how many retirees do you think own shares? It’s actually 22% of people over the age of 65. So, 80% of the benefits go to these people … because they’re not on the Aged Pension
- 70-77% of over 65 are on support payments (Aged Pension)
- It’s this “wealthy” 20% that are funding their own retirement. The rest are on government benefits.
- Current demographics - approximately 16% of Australia’s population is over 65. This is going to increase to more than 25% in less than 30 years.
- This new agreement degrades individuals’ ability to have a self-funded retirement and generate their own income… which puts them into the government support system instead.
- Self-funded retirees
- If the Franking Credit Rebate goes, the income from Australian Shares can drop by 30% (gross)
- Remember, we’re talking not just about SMSF, individual super accounts also benefit from franking credits
- Here’s an example; a husband and wife have saved hard, and have investments of $800k in shares (inside or outside super is irrelevant). This generates (based on a 5% dividend yield) $57,142 of income off Fully Franked shares and credits
- This drops to $40k if the changes get passed – loss of 30% of income
- This also applies if individual don’t have this in super – a lot of older Australians who are self-funded don’t have superannuation
- Reduces people’s ability to be self-funded in retirement, which is going to be an issue if the Government can’t keep up increased payments required – the $5bn to $10bn forward estimates on extra tax wont cover this increase in AP payments
- Long term – opens the door for removal of Franking Credits all together. There are only 3 countries left with them (Australia, Malta, NZ). Others removed them over the years.
- Soon it won’t be fair for someone earning $100k in dividends only to pay only a few hundred in tax ($42k paid by company already). If Franking Credits are removed an individual pays $27k of tax on top of the $42k paid by company
- Change of company behaviour – what if investors no longer value dividends? Or if companies prefer to reinvest income and pay less tax?
- American model – Reinvestment of funds better than double taxation of income = Capital gains > Dividends
- Biggest companies in USA have very small profits as they don’t need to pay investors income
- Alphabet (Google) = 0% at $785bn market cap, Amazon = 0% at $805bn MC – Second year $0 tax paid
- Facebook, Microsoft, Berkshire - Warren Buffett, believes it is more beneficial to allocate the company's earnings in other ways
- Reinvestment = CAPEX cost to business – more you spend less you pay in tax – especially if you fund it off debt – don’t need to make money to pay dividends
- Typically, companies not paying tax = no dividends
- Capital gains are fine – but you will pay more tax when you sell under 25% CGT discount
- Australian Market - unfranked 6.5% dividend yield on bank stocks – gross us 8%
- 9% yield they can get on US equities – Our index is 4.4%
- EU and Asia – about 3% average – Partial franking
What these policies will really hurt (Franking Credits and Trusts) – What’s not spoken about
- Small – medium businesses – 200k+ businesses trying to make it on their own (and employ others)
- Small businesses are set up in trusts – tradies pay themselves drawings out of the trust at MTRs
- Increase to 30% tax will means they now have to pay themselves super
- Increases to 12% in SG payments = Drop in what you can draw
- Disabled, Charity trusts – All payments will be 30% rather than 0% due to nature of structures
- Low income earners – Not on Income Support – no cash back
- Self-funded retirees
Who this helps
- Large construction/trades companies
- Less competition long term – lower wages – limited to start something of your own effectively
- Industry Super Funds – Less competition in alternative choices
- More money flowing into super funds from SG increase
- No benefits from SMSF or
Love going through election budget promises – This budget is ‘fair go’ – going for equity (equalise outcomes)
Not taking you is portrayed as a ‘cost’ – ironic – Costs in government language is not charging you tax beyond that they already do
- Not taking all income earned is a Trillion-dollar cost to them
- Everything is saying the budget is in deficit – true – so stop spending –
- Every year more taxes – to cover spending – ill cover this point in the future – but spending to GDP over 100 years is confronting
All of this is just another carve out for more money based around the argument of making things equitable (one rule for me and one rule for thee)
I don’t think it will just stop with this. – further complexity = more money needed to run ATO – Billions more in costs to collect tax – almost like debt collectors who take a large clip of what they get back
Thanks for the question John. If you have any other questions head to www.financeandfurycom.au and head to the contact page
Links
https://www.charteredaccountantsanz.com/member-services/technical/tax/tax-in-focus/Australian-Labor-Party-Policies-for-2019-Federal-Election
https://www.alp.org.au/campaigns/
https://www.alp.org.au/media/1276/2018_alp_national_platform_-_consultation_draft.pdf
Share ownership stats
https://www.asx.com.au/documents/resources/australian-share-ownership-study-2014.pdf
Welcome to Finance and Fury
Today’s episode is with Jayden and we will be talking about why property might not work for you, or when you shouldn’t buy property.
We have talked about using property to build long term wealth using leverage. However, there are some reasons why you should not buy property.
The 4 reasons: 1. Getting rich quick 2. Financial literacy 3. Tax reasons 4. Your personal finances
Getting rich quick: * Property is a long term game, 20 – 30 year journey * Jumping at an opportunity due to the fear of missing out * Don’t let your emotions ruin your investment plans * Trying to time the markets * Stats show this isn’t a good way
Financial literacy: * You need to learn how property works * Not understanding your finances – just the basics * You need to know some stuff to get through property investing * The difference between lifestyle assets and investment assets * Experience really helps
Doing it for tax reasons: * Using negative gearing * Buying a property for depreciation and claiming deductions * Property should be for long-term wealth building, not loss accumulating
Personal finances: * Having enough cash for little costs * There will be times that the property isn’t rented * Make sure you can achieve the loan you need * Your ability to afford the loan is very important * What will happen if rates go up? * Know your limits on borrowing before starting to research investment properties
When do investment properties work well? * When your finances are in order * When you can afford a quality investment property * When your investment plan is long term * If you are willing to be patient to find the right investment
Thanks for listening today, if you have any questions you can reach us at the contact page here.
Another episode around property investment:
How to invest in property in 2019 - https://financeandfury.com.au/how-do-i-invest-in-property-in-2019/
Welcome to Finance and Fury, the Furious Friday edition.
This week is a flow on from last week’s episode talking about the basics of supply-side economics. But, it’s going to be applied to a question we got from Nick.
What is a solution for society that would eliminate all the poverty that exists?
This will be broken up into 2 episodes in total. The second part being which political party that seems to be on the right track to achieving this.
Poverty: * It’s an extremely deep topic to discuss * We must look at the statistics and the root causes * Humanity was born into poverty, so how did humanity get out of it? * How long ago was everyone in extreme poverty? * What is the quality of life? What are the standards of living? * How is extreme poverty defined? * What does history tell us about how many people in extreme poverty changes over time?
The poverty line: * We don’t really have extreme poverty in Australia * What about people who receive a pension or government assistance? * What is the Australian relative poverty rate? This sits at about 26% of the Australia population before tax and transfers, or half the median income level. * It’s the median, then that cut in half. That is the relative poverty rate for any group of people. * It is about $22,500 a year in Australia for a single adult, after taxes and transfers. * After redistributions, it reduces to be closer to between 10% and 14% that are in relative poverty. * See how easy it is to misrepresent these statistics? * If you have a society where some people have more than others, then there will always be people in relative poverty * If you make everyone poor, then the relative poverty disappears * Let's move on to the more absolute measure of poverty
Absolute poverty: * Currently, around 4% of people in Australia cannot afford basic goods, in the deep exclusion zone * This group gets smaller over time * People don’t stay in the deep exclusion zone, its mobile, not a lot of people stay in it * There are only some factors that limit people getting out of the deep exclusion zone * The trend of absolute poverty over time has started to decline * The world population grows, but the world’s absolute poverty population shrinks
What helps reduce absolute poverty? * Exposing people to free markets, increased purchasing power parity * Economic reform, giving people property rights * Employment opportunity and economic freedom * Stop planning the economy from a government and let people figure it out with free markets * Economic freedom helps as it reduces the costs of goods and services * The more economic freedom a population has, the more wealth the population has * Check out the mini-series on socialism where I address classical liberalism * Basics of supply-side economics * People on minimum wage in a high GDP per capita environment are better off than people in a low GDP per capita environment * It is important to focus on the standard of living and better products and services available to consume * This system is better than demand-side economics, which is less economic freedom.
The best working system: * One that supplies a great standard of living * Uses supply-side economics * Allows individuals to accumulate wealth * The countries with the richest individuals have the lowest levels of poverty * Inequality is not the enemy * Reflect on your standard of living, income distribution ends poverty but sacrifices everyone’s wealth * The Gini coefficient measures income equality * The Gini coefficient is increasing, but so is the overall wealth * Just because things aren’t equal, doesn’t mean they’re not fair
An important problem to tackle is increasing everyone’s ability to have the opportunity to earn and consume cheaply.
This is an extremely complicated issue. I believe that the solution lies in supply-side economics. We need the government to help though, so in the next episode, I will run through how government systems and cultures need to let people escape poverty.
Thanks for listening today, it was quite a long episode.
If you would like to get into contact with us you can here. And if you liked the episode, leave us a review.
Have a good day.
Welcome to Finance & Fury, the ‘Say What Wednesday’ edition. This week’s question comes from Gab;
“Hi Louis, I was looking at different asset classes and how someone could get exposure to them (outside superannuation) and got stuck on "fixed income". If I understand this asset class correctly, if you hold to maturity you get all the capital back. But if you buy ETFs or managed funds you lose this benefit (as you basically just get exposure to the secondary market). Also, I thought the fees were ridiculous, especially with active managers charging 0.5%, when the long-term return is 5-6%. What are your thoughts on this? Thanks, Gab (keep up the good work!)"
Hi Gab, Great question!
Today we’ll focus on explaining Fixed Interest in straightforward terms;
- What are Bonds, why do they exist, and how do they work?
- Price, ‘Face Value’ and coupon rate
- Buying and selling bonds
- The effects of interest rates on the value of bonds
- Bond managers – Managed funds or ETFs
- The role of Bond Managers
- Costs compared to returns
- Index bonds
- Active managers
- Why buy bonds or other fixed interest assets?
- Downside protection
- Higher yield than cash
- Middle ground to cash
- The risks and disadvantages
- Ratings system
- Maturity
- Duration
- Interest rate movements
- What I look for when buying bonds
- Franking credits on coupons
If you have a question, or want us to cover something else in more depth, let us know at the contact page https://financeandfury.com.au/contact/.
Thanks again for listening guys. Until next time!
Hello everyone, and Welcome to Finance and Fury.
The last episode was about finding the right job, from your purpose in life. In today’s episode, we will be looking at investing in a business, by creating one.
To start:
- There is lots of work in planning and having an action plan when you create a business
- If you think what you plan to provide is better than what is out there, do it
First step:
- It is an investment, there is risk and reward
- Running a business is beyond financial
- Become very emotionally invested in the business
Risk/reward: – invest for the best return
- Fulfillment + financial gain + time gained
- Fulfillment, what do you care about and enjoy doing?
- Financial gain, what are you great at?
- Don’t start one just because of financial gain, might as well earn a salary
Recap: what you care about/enjoy = industry, what you are great at = product or service
Finding something:
- What is a problem that you can solve?
- Who does it provide value to?
- People often don’t buy something with little value to them
- Solve a big problem for people or solve problems to lots of people
- So what knowledge or skill do you have?
- Look at what people are currently paying
- The quality or product is the most important part
How to get going:
- Set some goals, expansions, revenues
- What is the action plan?
- Is it viable? Who will want you to solve their problem?
- What will it cost you? What are the opportunity costs?
- Business model canvas – a great tool to start planning, you can google it
- Starting business costs money. Goals for your business compared to the costs.
- Doing your research is very important, has anyone else done what you plan to do?
What about me?
- Enjoy solving problems and finance, care about education for people, and I’m great at strategies and investments
- Solve people’s financial problems through providing education and advice
- How can I do this?
- What have my setbacks been?
Starting a business:
- 5% planning and 95% doing
- Doing is more important than planning
- Get you minimum viable product (MVP as it is known)
- Running a business is all about belief. If you back yourself, nothing can stop you.
- We are our own worst enemies, we talk ourselves out of everything.
- Planning for too long can be detrimental
- Getting yourself to a financial point to cover the necessities for 12 months
- Businesses fail for this one reason – a lack of income to cover long term costs
The important things:
- Accept your failures along the way
- You will get through
Let me know if you would like a deeper dive into this. I can get a friend on the podcast who works alongside companies with cashflow and financing.
Thanks for listening and tuning into the 209 investments miniseries
If you want something else covered as well, let us know at the contact page here.
If you like this episode, please leave us a review on iTunes or let us know on the contact page.
Have a good day.
Hey all, and Welcome to Finance and Fury, the Furious Friday edition.
Have you ever heard of trickle-down economics?
As you know, Friday episodes are here to clear up any misconceptions about economics and politics, and this is the biggest one when it comes to conservative side economics.
Today’s episode covers:
- What is trickle-down economics?
- How does it work? Who does it benefit?
- What is the misconception?
- When and Where did trickle down economics start?
- How does wealth get produced?
- What are some common examples of trickle-down economics?
- What is supply-side economics?
- How do you solve unlimited wants with finite resources?
- How can you demand anything if there is no supply?
- What does supply-side economics say?
- What is better to have? And what improves our living standards?
The benefits of supply-side economics:
- What are the benefits of supply-side economics?
- What are the aims and objectives?
- How is wealth different today compared to a caveman?
- Today, it’s those who innovate that do the best
- Compare recent product costs with past costs, which is more expensive?
- How does demand increase over time?
- What has to change for demand to increase?
- The more things that are being produced, the more the economy does well
- Where would you rather your money? What do tax breaks for the rich do?
- What does history tell us? Who invests their money?
Supply-side economics is not trickle-down:
- No wealth directly trickles from the rich to the poor when regulations and taxes are cut
- Lower costs and regulations mean higher productivity
- What are some real-life examples of this?
- How does this increase tax revenues?
We should aim to make the pie bigger, not split it into pieces. We have cheaper stuff and increased living standards through supply.
This will be the first of more episodes to come around supply side economics.
Thank you for listening, if you enjoyed it give it a review or share it around, and if you want to get in contact you can do so here.
Resources:
Supply-side economics - https://en.wikipedia.org/wiki/Supply-side_economics
Welcome to Finance & Fury, the ‘Say What Wednesday’ edition, where every week we tackle questions from you guys. This week the question comes from Jason;
“My question is about investing with an Environmental, Social and Governance (ESG) / Ethical investment focus.
Given their increasing popularity, do these types of investments have the potential to make the world a better place?
Historically how have ESG/ethical investments performed in Australia relative to the market and what factors should be considered before investing in this space?”
Today we discuss;
- What are Ethical Investments, and how do they work?
- Inclusionary v exclusionary managed funds; what types of companies are excluded when making their investment decisions, and what types of companies are included?
- The difference between ‘Supporting’ and ‘Forcing’ when it comes to the way managed funds impact the underlying investment companies’ practices and what this might mean for you as an investor.
- What to consider when buying these types of investments.
- Do they actually meet your definition of ethical? You’d be surprised at some of the companies that are actually ‘recognised as a responsible and ethical investment option’
- How diversified are you?
- The performance of these (like all ETFs/managed funds) depends on the underlying performance of the companies that they buy.
- How have ethical investments performed for the past 12 months? Over the long term?
- The impact of thematic trends
- Historical returns
We talk about how these types of investments have the potential to make the world a better place, but the pros and cons are not what you might think.
- Supply drives demand
- Investment losses due to trying to change companies ‘for the better’
https://www.canstar.com.au/investor-hub/10-top-ethical-investment-funds/
Hi Guys, and Welcome to Finance and Fury. Today we continue to talk about investing in yourself.
Think about investing in anything, you’re doing something with the aim of gaining something out of it. This is why we went through the purpose and vision statement in the last episode.
How to invest in yourself? And, how can you love your current job more?
My experience:
- What did I start out with?
- How did I find what I enjoyed?
- How to learn on the job?
- How to narrow down what you care about?
- How to design your ideal career?
- What is reasonable when planning your future?
- Don’t confuse a job with a career.
Your career:
- What can you do to get more out of your job?
- Treat your education as an investment in human capital
- Using upward mobility factors
- Making yourself more valuable to employers
- Do you need to go back to university to improve your income potential?
- Have you considered informal education pathways?
- The more you learn the more you can earn
Looking to change career?
- Thinking and knowing are different things
- Using your purpose to find the right career
- Narrow it down
The financial setbacks:
- What are the opportunity costs? What are the total costs?
- How to deal with income changes?
- How long does it take?
- Is it financially viable?
Ask yourself:
- What are your options at this point?
- What are the ways of achieving this?
- How bad will it set you back financially?
Next episode we will be covering how to start your own business.
Thank you for listening and if you have any questions let us know at the contact page here.
Resources:
AMP Education and innovation in Australia - https://www.natsem.canberra.edu.au/storage/AMP.NATSEM%2032%20Income%20and%20Wealth%20Report%20-%20Smart%20Australians.pdf
Welcome Finance and Fury the Furious Friday edition, and welcome to part 2 of Talking about the risks and the future of our economy
In the last episode, we covered the future of our economy
In this episode, we will explore economic subversion and internal reliance (threats from inside and out)
The major points addressed are:
- What is subversion? Why is this done? Who can we learn more from?
- Who is Yuri Bezmenov?
- What is demoralization? Why does it take so long? What does the process involved?
- How is the media involved? What is ideological brainwashing? What is cognitive dissonance?
- How has good and evil been redefined as rich and poor? What level of wealth is seen as immoral?
- Is tax an effective behaviour changing factor?
- How does this affect children? How do they learn to consider other people’s needs?
- How do we nurture resilience?
- What issues does the destabilisation of institutions create?
- What takes away the initiative and responsibility of individuals?
- What do unqualified politicians do for the government power structure?
- What does the welfare system do for the population?
- What are the biggest issues for Australians?
- How does the government act as a moral dividing line?
- What does normalisation look like? What does society eventually look like?
- Why is it ok to vilify small business owners? Why remove the incentive?
- What should you prioritise? Freedom or free stuff?
Share this episode with your friends. Show them the effects of the wish for a socialist state.
If you like this episode or if you didn’t feel free to let us know on the contact page here.
Resources:
Yuri Bezmenov Interview:
https://www.youtube.com/watch?v=y3qkf3bajd4
Social Welfare and Ponzi Schemes:
https://financeandfury.com.au/furious-friday-could-social-security-be-the-greatest-ponzi-scheme-ever/
Taking control of your money:
https://financeandfury.com.au/take-control-of-your-money-nobody-else-is-going-to-do-it-for-you/
Government Spending breakdown:
https://financeandfury.com.au/say-what-wednesdays-shorten-vs-morrison/
Roy Morgan Research links:
2018 - http://www.roymorgan.com/findings/7504-most-important-problems-australia-the-world-february-2018-201803051043
2017 - http://www.roymorgan.com/findings/7249-most-important-problems-facing-australia-the-world-may-2017-201706231630
Concerns by voting - http://www.roymorgan.com/findings/7424-economic-issues-facing-australia-verbatims-march-2018-201804060723
Hi Everyone, and Welcome to Finance and Fury, the Say What Wednesday edition.
Today we have a question from Daniel:
The question is around cryptocurrency; Daniel has come across a fascinating crypto called Liven. The business model seems really sound, with the consumer being rewarded (in liven coins) for dining are participating restaurants. I wanted to get your thoughts on this.
I pretty much agree with Daniel on cryptocurrency, I don’t see it as a long term investment.
In today’s episode we address:
- Cryptocurrency and what changes the price?
- What is the future of prices for crypto?
- What is Liven? Who are the users and market participants?
- How does it work? What are the risks for individuals? What are the risks for businesses?
- Why don’t governments like cryptocurrency?
- What are the main problems for Liven?
Thanks for listening to today’s episode, and thank you, Daniel, for the question.
If you have any questions or want to get in touch, you can do so at our contact page here.
Resources:
White Paper:
https://s3-ap-southeast-2.amazonaws.com/livenpay.io/LIVEN-WhitePaper(EN).pdf
Welcome to Finance and Fury! Today’s episode we continue our miniseries which looks at the best places to invest in 2019…
Turns out, one of the best places to invest in 2019 might actually be in, Yourself.
Today’s episode is the first building block for the next two episodes where we will cover off on the two routes of building wealth throughout your life; your career and starting your own business/side hustle
Either way, it all starts the same. And this is what we will be covering today; what you need to do in your own life to work out whether starting a business or developing your career is the best thing to do. It all comes back to what your purpose is and what your personal goals look like. It’s not just about making money, but also about being happy along the way.
Today’s episode will actually be somewhat of a summary of a previously archived “Steps to Success” episode. We talk about the importance of accepting responsibility, finding your purpose, building the vision of your life and then making it happen. I’ve put together a workbook too, which you can download for free to help you plot out your own purpose and goals, and start putting your action plan in place. It’s super handy. Print it out and follow along with the episode.
- Take 100% responsibility: To be successful you need to be 100% responsible for your own life. Give up all excuses and stop playing the victim. Taking 100% responsibility makes life simpler. If you accept that you have 100% responsibility, therefore control you can become the master of your own success - the world doesn’t owe you anything, you have to create it!
- Find your purpose: This is the path that will guide you along the way. This is where the workbook really comes in handy.
- Creating a vision: Get the vision right and start achieving it! Having a vision, allows you to complete a picture of your ideal life. Your vision should show you where you want to head and provide some motivation and focus to help achieve this. Life happens, there will always be setbacks but the best way of overcoming setbacks is keeping your long-term vision in mind and working towards this.
- Set your Goals: Goals are the ‘building blocks’ of your vision. Hone your Inner GPS – help fill in the gaps and reverse engineer some steps to build your ideal life
In the next episode we’ll be putting this in place through investing in your career or starting a business…but, the first step is to know you are on the right path.
Hi Guys, and Welcome to Finance and Fury, the Furious Friday edition. Today we are discussing the future of our economy.
What is the future of the Australian Economy?
Welcome
Today’s episode is on the future of the Australian economy.
In today’s episode we will cover a multitude of questions:
What is the big deal?
- Firstly, What is the economy? Why is it so important? What would we do without it?
- Also, What are some issues with the Australian economy currently?
- How strong is the Australian economy? What makes it tick? Where do we sit in comparison to the world?
What is currently going on?
- What the government is doing to fix the housing markets?
- What happened to the manufacturing sector?
- What are the warning signs of the underlying issues?
What does regulation do?
- What are the future implications from current regulations?
- What does regulation do to Australia’s economic future?
- What will the outcomes be?
- And finally, What can you do to look after yourself?
Along the way, we explore all the in’s and out’s of these questions.
In conclusion, it’s not all doom and gloom. We are at a pivotal stage and Australians need to act in their best interest.
We hope you enjoy the episode, please share this episode as much as possible. If more people hear this episode, more people will be able to act.
Unfortunately, based around the Discrimination and Disability Act we can no longer put images displaying information about the episode.
Tune in next week for more related content on the economy, focusing on economic subversion.
If you would like to get in contact or if you have any questions, you can do so at the contact page here.
Welcome to Finance & Fury’s Say What Wednesday
Today’s question is from Lucas, “Hey guess, just wondering if you think that flipping houses is a good strategy? Can you really make a living flipping houses?”
Good question! Flipping houses has become very popular but it’s not as easy as you think.
The Theory
- Find a ‘fixer up’ property at a low price
- Renovate it. Spend some money bringing it up to higher standard.
- There are people who run courses on this – you spend $1 and it should increase the value of the property by $1
- Sell it for a profit – Like magic! Sounds good right?
Finding the property
It’s the same process for any property purchase (researching, etc):
- Research property
- Values, growth history, what work needs to be done on the property?
- Your situation
- Cap your price – Know how much you can afford
- Budget – do you have surplus cash in case renovations go over budget?
- Is it worth it?
- Look at potential gains – Minus costs in and out, along with interest, stamp duty, agent fees, legal fees etc.
- Timeframes – how long will it take?
Does this work? Here are some examples.
Buy something for $450k, with a 10% deposit (so, you’ll need $45k plus other costs)
| Scenario 1 – $2 for $1 every spent | Scenario 2 – $1.50 for every $1 spent | | Property Price | $450,000 | $450,000 | | Loan | $405,000 | $405,000 | | Purchase costs | | Legal fees, registration, pest inspection, etc. | $2,500 | $2,500 | | Stamp Duty (QLD) | $14,175 | $14,175 | | LMI (10% deposit) | $7,938 | $7,938 | | Total | $24,613 | $24,613 | | Renovation & ongoing costs | | Interest expenses - 8 months | $12,150 | $12,150 | | Renovation costs | $80,000 | $80,000 | | Total | $92,150 | $92,150 | | Selling fees | | Sale Value | $610,000 | $570,000 | | Agent fees, advertising | $16,775 | $15,675 | | Assessable Gain | $67,850 | $27,850 | | Taxes - CGT (If not living in and only income) | $14,425 | $14,425 | | The Bottom Line | $57,037 | $18,137 |
When it goes right:
- Property markets climb in under 12 months (there’s no guarantees)
- You are experienced in property construction, renovations
- You’re in a trade industry, you have friends in trades, and have the time to get the work done
Risks:
-
Overcapitalisation – spending more than needed
- Profits come from ‘cosmetic’ renovations
- Structural is normally not valued by buyers. For example – Replace foundations, rotted walls, etc.
- Profits come from ‘cosmetic’ renovations
-
Your Experience and situation – there’s lots of moving parts to get it done in a timely period
- How much of the work can you do yourself to save on costs?
- Is this going to be your full-time job?
- Getting finance for the project
- External factors
- If the property market goes down, you’ll struggle to break even
- Council or Body Corporate approvals
- What if it doesn’t sell? Can you afford the loan?
Other Options
- Keep the place and rent it out for more income now
- Retain the property and refinance for more equity and invest elsewhere
In Summary
EVERYTHING needs to go right – it’s hard to make a lot of money if you don’t have much experience.
If you have any questions hit us up here at the contact page
Hi Guys, and Welcome to Finance and Fury. Today I have Jayden with me for part 2 in the Mini-Series on the best investments for 2019
Last Monday we went through Shares, and whether it is a good idea to invest in 2019.
Today we will look at investing in property in 2019
On today’s agenda we have:
- Firstly, what constitutes a bubble, based around historical price rises and income ratios?
- Also, if you can’t afford a property, how do you access property this year?
- And then, if you can afford a property, where do you go to invest?
- And finally, what is going to cause the property market to go up this year? And what’s going to cause it to go down?
Along the way we guide you through the options of what you could be doing within property.
In conclusion, property is a long term game. There is plenty of opportunity if you know where to look.
If you would like to ask a question or get in touch you can reach out through the contact page here.
Charts and tables discussed today:
The State of Property around the world:
Years to Save a 20% deposit:
Where to look for direct property in 2019:
Chinese property investment in Australia:
Resources:
Herron Todd Property Reports
Herron Todd Property Clock
Michael Matusik – Where units and houses are sitting
https://financeandfury.com.au/michael-matusik-where-houses-and-units-are-sitting-and-in-which-direction-their-prices-are-likely-to-move/
Hi Guys and welcome to Finance and Fury the Furious Friday edition. This is part 7, the last episode of the miniseries about all things politics.
- Sorry it took a while to cover, I wanted to do this topic justice and explain all the steps and outcomes instead of jumping to conclusions.
- We have covered a lot, there are many bits of the puzzle. Who, what, how, why, and potential outcomes –
- We have been through the Fabians, the political spectrum and democracy, then how a population is organised (Rules For Radicals), the fair go, then political progress for equality, then how the west got to be in such a good position, and how we may lose it.
- If you made it all the way through, awesome work. Thanks for listening to me rant on this
Final part: What should the government be involved in? What services should they be involved in?
To start: Have a quick real-world example to look at
-
US Government Shutdown: It’s been almost a month, shutdown since 22/12/18. It’s the longest in US history, everyone has called it a crisis
- Over border funding: $5.7bn for a wall, already compromised to make it steel rather than concrete
- As a comparison: US gave Israel $25bn to help build their wall
- Total Government spending (the Fed, States, Etc) is $7.56trn: this is $20.7bn spending a day
- The Wall is a 0.07% cost to the budget for the year
- Enter the blame game: Irony is Schumer and Pelosi were in favour of a wall: Until Trump came along. Showing it was mainly just talk
- More political infighting: First time I have seen Democrats oppose spending more of someone else’s money
- As a comparison: US gave Israel $25bn to help build their wall
- Over border funding: $5.7bn for a wall, already compromised to make it steel rather than concrete
-
Question: is the US still spinning? Is life going on?
- The longer that the shutdown occurs, the more people in the US are waking up to how little they need it
- But not for the Government workers and the IRS (their tax department)
- Workers aren’t being paid, but they will be. They will get back pay, for the time of the shutdown whilst they were not working. Is that a good deal?
- But private citizens are stepping in, picking up trash in parks and helping where they can
- Truth is that the Government has little to do with lives directly, unless
- It is paying you, it is taxing/regulating you, or it is arresting you
- Indirectly though, unfortunately, it affects all of our lives
Leads to the last part: What should the Government be involved with, or provide for a country?
- This differs for where you sit on the political spectrum. It’s no secret which side I sit on, I value individual freedom and empowerment rather than the group thinking that everyone should have equal outcome
- For this episode, I will try and put my bias aside. The measurement for this episode is: has there been a net positive benefit or loss to a country based on Government Intervention? Progress from betterments to our lives, more freedoms, better health, etc or does it detract?
- Excluded "moral hazards", not saving money because of the knowledge that the State will provide an age pension and subsidised housing, and over-use of "free" health services in the absence of price signals to consumers. All of which isn’t really free
- Won’t have time to do this topic justice in 30 minutes. I will give the 1,000-foot view. If you are interested in a deeper dive, let me know
- If I don’t explain something fully, or you disagree, let me know as well!
What the Government is good at: Net positives Funding: Science and R&D.
For the past 100 years, most advancement is in fields with the most money and manpower
- Technology and science: Government Funding has been great. Advancements over 100 years have been from this, like medicine, the internet etc
- Technological advancements in weaponry and nuclear science during the WWII. Government Funded
- Rocketry and telecommunications during the Space Race. This was all Government Funded
- Concentrating a large number of engineers and scientists to work together on the same project will, almost every time, produce more net advancement compared to if every member worked alone.
- DARPA (Defense Advanced Research Projects Agency) Funded things like the Internet, Google and Google maps, Windows, WWW, video conferencing, Siri, GPS, Facebook
- This is good: there is a measurable benefit, which the population adopted. Through being a demonstrable fact
- Most major developments come when the government diverts large budgets to achieve progress (rockets and planes). A vast difference in plane technology from WW1 to WW2.
- Major boost to development, with the failing of technology progress through history, boils down to individuals with no money or ability to share it
- Okay for measurable technology, like integrated circuits, they’re very competitive. If your circuits are faster and cheaper it can boost profits for your company.
- Other forms of technological progress. Less quantifiable as potential improvements, the outcomes are unknown
- If they not seen as profitable less funding from the private sector is likely
- If research and development are financed by investors, they want to see as high returns as possible
- But this is only part of the story. The acceleration of technological progress suspiciously correlates with the population growth
- A higher population creates a higher net number of scientists /engineers, who can provide more research/work
- China was advanced until the 1400s. There was a trial by error: high populations, then the EU took over with trial by experiment
- The issue: The Government mandated and Government ran research. Government bodies paid to research problems will always find a problem. What happens if there is no problem? No money, so then there is no social platform to run on
- As long as the Government doesn’t take over tech or directing the research, but acts as an investor, this could even make money. Just like universities.
- It’s a double-edged sword: The faster things change, the more creative destruction. This is not a bad thing. For example in the past with farming, too much at once is bad and it creates unrest. The Government doesn’t like it, and the population gets unhappy with them.
- Other research: $850,784 for a study of Italy’s Catherine de Medici, a noblewoman who became queen consort of King Henry II (King of France) 1519-1559. Is this needed?
National Protection and services: All good
- Police and Firefighters: Emergency services workers all help the population. They protect and keep us safe, and enforce the rule of law.
On the Fence: Positive and negatives preface Education and health are perfectly fine
But not perfect with funding models: there are no incentives to minimise costs, it’s the opposite. If you don’t use all of your budget, you won’t get more to use next year
- Infrastructure: On the fence, It is needed but at what cost?
- East West link in Melbourne: Estimated $800-900m has been spent on a road to never be built
- NBN: has cost at least $50bn to date and simply a huge high-risk mistake, no private company would ever have built it. (Rudd) The government ignored improvements in wireless technology and continuing moves away from landline. NBN will face stiff competition from 5G mobile technology and sold at a huge loss. Valuation only at $10bn
- Health: National Health is declining even though we are more advanced than ever
- Cost blowouts: Royal Adelaide Hospital is the 3rd most expensive building in the world (per square foot) it has 600 beds and cost $2.5bn
- Still teaching the food triangle that depicts that carbs are great, but stay away from healthy fats and proteins
- Where do most of the world’s advancements in medical technology and medication come from? The USA.
- If Americans didn’t have a profit system, we would not have most of the meds or medical tech we do
- Education: Is great. But, where have you learnt more? At school or on the job? If still at school, it’s hard to answer
- I am no expert, I need to learn more. I have got a few books by John Gatto and others to finish
- What I do know so far? Government Education is a new concept in past 100 years, it’s modelled around factory workers
- Education levels are higher now, looking at literacy rates. Was it government policy, or a changing world?
- When the Government took over in the early 1900s, the population needed to work, not go to school (Farmers, etc). it forced education they didn’t need, there was low attendance.
- Today there is a higher % of population in non-trade/construction/manufacturing positions
- All schools private: More competition, lower fees all around. 35% are independent/ catholic currently
- But wouldn’t work: not really private, Australia has no-profit schools (private higher education does, there are 170 of them)
- Australian Average Education is $20-30k for independent schools. One of the highest education costs in the world
- What might help: Education (Self Education focused on the individual around needs)
- I went to school in Austria for a while. The system is set up more for the kids’ interests
- There are nine years of education. Then there are a series of vocational-technical and university tracks to follow
- University, gymnasium, and Trades like the Polytechnische Schule
- Putting everyone through the same meat grinder ends up leaving everyone behind, becoming a learned helplessness
What it hurts 1. Economic: The quest for equality, where most research funded from the government or special interest groups show the need for government intervention with this * In the early-20th century: the view that progress was being stifled by vast economic inequality + The cause was minimally regulated laissez-fairecapitalism with monopolistic corporations; + Often violent conflict between workers and capitalists would erupt due to the claim, so it needed to be addressed * Sherman Antitrust Act: made it illegal for anti-competitive practices (monopolies, cartels, predatory pricing) in the 1890s + This was helpful and helped improve competition and remove monopolies + But is it obsolete? 60-80% of advertisements through Facebook and Google. Twitter and their competitor Gab just gets shut down * 21st Century: Legislation to redistribute, which is not so good. Tax people to pay for things for others, in other words, Social Democracy + Welfare state: Reliance on government also increases what revenues governments need + Tax: Mandatory financial charge imposed on the taxpayer by the Government + From 1915 to 1942 Income taxes were introduced. A relatively new concept in society as previous taxes were on wealth and land ownership - Rome had a 1-3% tax on value of wealth owned for citizens, in times of war you got a vote if you paid tax + Progress: Everyone gets a vote and can vote for more redistributions, changes voting a bit
- Equality through social organisation. A change of policy to affect the population, where we get political activism
- Question: Is it better to let people choose to adopt something or are they forced to?
- Legislate for compelled compliance in society, introduce laws to control society. Make it the way progressives want
- Governmental power of the population is increased when some of the population want it
- Issues: Speech (limits freedom) with racism and ‘speech laws’, or ‘hate speech’ who defines hate?
- Already illegal to incite violence through speech, telling people to hurt someone
- Sonja Kruger was taken to court for blasphemy for her comments 2 years ago about a ‘Muslim ban’ in the US
-
- Only from nations with links to Terrorism, not Indonesia (1# for Muslims), or Egypt (1# for Arab)
- Claimant took her to human rights tribunal, she pays costs upfront and taxpayers pay for claimant
- The individual is the extreme minority. If you don’t protect the individual’s rights you are failing at protecting minorities. Islamophobia or homophobia is incorrect terminology as a phobia is an irrational fear
- Rewriting history to suit a narrative, Australian History lesson: Labor party was the one who implemented the White Australia Policy, the ALP wanted more direct methods of exclusion than the dictation test
- Menzies and Holt (two Liberal Conservatives) were the ones to start dismantling it. Interesting how perception changes
- Environment: Is the improvement in cleanliness from Government Regulations, or from improving technology?
- Nobody wants to see pollution or to ruin the earth. But for all the taxes on climate change, what benefit is there?
- Water: Green/ALP opposition to building new water storages. State governments tried to reduce demand by increasing prices (also generating revenue). Haven’t had a dam built for a capital city since Melbourne’s Thomson Dam in 1984
- Drought reappeared from 2003 to 2010. There is little scope for further water savings
- State governments panicked and rather than build dam, they started spending on desalination plants (massively more expensive to build and operate than storage dams that can fill at virtually no cost).
- Melbourne plant cost $4 billion, Sydney cost $1.803 billion, Gold Coast cost $1.2 billion, and Adelaide plant cost $2.2 billion
- Sydney plant's costs are more than $500,000 a day, and it has not supplied any water since 2012
- Desalination also uses enormous amounts of electricity and (despite not being used) is responsible for adding $100 to $200 annually to household water bills.
- Electricity: Destroying electricity system, replacing cheap and reliable coal-based generators with wind and solar power.
- Electricity costs are double those of US and Canada. Power prices have increased 60+% in the last ten years
- Huge subsidies for renewables and a failure of regulation are the main causes.
- Subsidies paid to producers of renewable electricity are $3 billion per year, yet power is more expensive
- Coal and nuclear are the two cheapest sources of base load power
- Carbon emissions by the rest of the world. Our efforts to reduce "greenhouse" emissions won't work
- We make up about 1% of global emissions, which is high for our population
- Australia's shunning of coal or nuclear energy is the equivalent to Saudi Arabia banning the domestic use of its oil.
- While wanting to regulate prices, we can’t have both (low prices with low supply)
- Side note: immigration 3rd to 1st world, individuals use 20 times the emissions they did previously. Logically, for lower emissions, against immigration automatically as it increases emissions being produced.
- How far do we go? Currently, people want the Government to have large involvement in ‘combating climate change’
- Religious fervour about it, like modern blasphemy
- Again, nobody wants to live in a toxic environment (pollution). But, everything is relative.
- The US in 2009 gave $26.1bn to climate change, $641m was climate science
- You are a scientist, it is easy funding and good pay. But have to prove that the problem is there, just like before if there is no problem, then no money
- School kids and protesters demanding the Government drop emissions
- We are the ones that emit, but they need a parental figure to walk in a fix the problem for them
- Introducing stresses in their brain which increases cortisol. A constant confusion, fear of climate can lead to long term negative impact on brain development
To wrap up this series: 1. A lot of what the Government does can be handled by the private sector * If private companies or employees don’t perform, they get replaced. The Government never replaces itself 2. What you can do: * Talk about politics (only if you are interested). There is a stigma in society about talking about politics, why? Best way to have population avoid it altogether if it is never spoken about, and then no need to pay attention and removes the possibility of people discussing ideas * Same with money, it's impolite to talk about money? Why? 3. Opening facts into the public conversation, it makes people think for themselves, not just repeat false rhetoric 4. Most people know more about what is happening in their favourite tv shows than in politics. The tv show has very little impact on your life compared to current political events. * Opens a debate about the issue, rather than silencing one group, everyone should be heard 5. Don’t be afraid to speak your mind, learn as much as you can for what is relevant * Make your own path in life and be less reliant on external forces. This is what gives you individual liberty * Which is at the heart of financial freedom!
If you made it through, thank you very much for listening to this series. I hope it wasn’t boring and was actually interesting.
If you have any questions or want me to explore one of these topics further, you can let me know on the contact page here.
Welcome to Finance & Fury, the ‘Say What Wednesday’ edition.
Today’s question comes from Brad,
“Any chance you could do a podcast on Australian foreign debt? Is it possible to pay it off? Will paying it off have a negative effect on our economy? Are most or all countries on the path to austerity?"
Brad! Awesome questions as it will flow well into next Friday’s Furious Friday episode. We’ll tackle some of the debt issues here, which actually adds to the structural issues that our economy will face …which might cause some issues in the share market and property market.
But to start off with…What is Foreign Debt?
Foreign Debt is the total of government, financial institution, household and business debt that is borrowed overseas. Australia’s Net Foreign Debt totalled just under $1 trillion last year.
- It’s important to note that foreign debt does not equal national debt, which is the total government debt. It comprises government borrowings from overseas residents and government borrowings from Australian residents and thus excludes overseas borrowings by the private sector.
- It doesn’t equal Household Debt (which is massive as well)
- Foreign debt is distinguished from other forms of foreign investment capital inflow such as foreign ownership as it carries with it the obligation to pay interest and repay the principal.
Types of Debt
Gross foreign debt is the sum of all non-equity liabilities by Australian residents, the major component of which is the total amount of borrowings from non-residents by residents of Australia.
- It includes securities issued such as bonds as well as loans, advances, deposits, debentures and overdrafts.
- In Australia the figure is close to $2tr which is a dramatic increase since 2005 when it was close to only $500bn
Net foreign debt is equal to gross foreign debt minus lending by residents of Australia to non-residents and non-equity assets such as foreign reserves held by the Reserve Bank.
- Sitting at about $1tr at the moment
- Reserve assets held by the Reserve Bank comprises gold, foreign exchange, special drawing rights and Australia’s reserve position in the International Monetary Fund.
Where has this come from? It’s all behind the scenes.
Most of Australia’s $1 trillion dollars in net foreign debt has been borrowed through the banking system and used to increase home lending. This has helped fuel property price increases. As at June 2017, the banking sector had borrowed some $850 billion from offshore, equating to 49% of Australia’s GDP
- The Irony - Australia’s government debt is relatively low when comparing us to other countries but due to the Federal Budget being hamstrung slightly by the banks and their offshore borrowing excesses. The Government has to limit its own borrowing that it would normally spend on things like infrastructure or other projects.
- There is a fear that Australia will lose its very safe AAA credit rating. Many of the ratings agency tell a similar story.
- This would downgrade the banks credit ratings and lead to the unravelling of the private debt bubble created by the banks. This also increases the costs of lending for everyone; the Government, the banks, you and me.
With a lot of our net foreign debt tied up in the financial system (especially in home/property lending) there is going to be a bit of an issue if we lose our AAA rating and the cost of borrowing goes up. Essentially then it will be up to us to pay this debt off rather than the government, especially given the new Bail-In laws (whilst I touched on this slightly last week I will cover more thoroughly in another episode). I doubt the Government would need to do anything in regards to Austerity to pay back this debt as they can take over banking operations.
What does all this mean?
- Not many nations have accumulated $1tr in Net Foreign Debt like we have. It’s equivalent to about 56% of our GDP, and is up significantly from 8% in 1995
- Australia’s banks would never have experienced anywhere near the same degree of asset (loan) growth without the ability to borrow so much from offshore debt markets.
- The total value of Australian home loan debt would probably not have grown so strongly without this access.
- Australian house prices would be materially lower as a result – the more people can borrow the higher prices go!
- The fact that banks can borrow so much is a reflection on foreigners’ confidence in the Australian economy and our ability to repay our debts (AAA rated is seen as safe)
- The key risk is that the banking system’s ability to continue borrowing from offshore rests with foreigners’ willingness to continue extending credit to them. This is a concern if we lose our higher rating. Few countries should be as worried about the prospect of sharply higher global interest rates as Australia… if rates overseas go up then our repayments will also go up.
- Too much foreign debt is a huge risk if a financial/economic crisis occurs and foreigners are spooked. For example, if there is a collapse in the price of Australia’s commodity exports, housing market, etc. foreign lenders may think that Australia won’t have the economic capacity to repay the debts (between the banks, the government, and us)
What if this happens? What happens when nobody wants to lend anything more, or we can’t afford the repayments?
- Austerity (back to Brad’s Question) - a political-economic term referring to policies to reduce government budget deficits through spending cuts, tax increases, or both.
- Austerity measures are used by governments that find it difficult to pay their debts, particularly when a nation is in jeopardy of defaulting on its bonds (debt instruments). In Australia these include floating rate notes, Commonwealth Treasury Bonds, and other forms of credit totally about $350bn
- Interest repayments by the Government on this is approximately $17.8bn in interest per year (4% of Gov Revenue). Remember, this is just Government Debt, not including Foreign Debt.
- Doesn’t seem like too much right? But let’s put it in perspective - the spend on the schooling system (public and private) is $19.5bn a year
- Maturity of Debt Instruments, just like a mortgage, has a time period within which it needs to be paid back. For example, 10, 20, or 30-year Bonds. At maturity the lump sum borrowed amount needs to be paid otherwise, the debt defaults and we’re at the hands of other nations to be able to repay – who then impose Austerity on us.
- Greece and Germany/EU – Greece were bailed out, but they were forced to raise the retirement age, adjust pension payments, welfare spending etc.
Foreign Debt Austerity (not really relevant to this)
- Major risks – Rates rises here (or overseas on the borrowed funds by the banks) - Higher loan costs would lead to less spending, which would affect employment rates, hit the government’s budget, and plunge us into a recession
- Flow on effect – the Government has less revenue (taxation) so would need to borrow to fund costs
- It’s very hard in Australia to cut spending, and also hard to raise taxes – And easy solution is to borrow, but foreign debt is stopping this.
- The flow on effects would be huge, with no one lending to Australia, and nobody wanting to invest here, the currency will drop.
Let’s look at Government debts as this is where Austerity kicks in
What you hear all the time is, compared to other nations, we aren’t in much debt compared to GDP at the national level, so don’t worry!
- We actually have a 42% Debt to GDP ratio (Gross)
- Net includes Futures Fund of $146bn – Revenue is $15.6bn – this almost covers interest payments
- The Japanese government, the world’s most indebted, is the classic case, having borrowed almost entirely from its own citizens. Unlike Japan, Australia’s governments can’t tax foreigners more if they refuse to roll over the loans.
- This is a simplistic scenario to help break this down – it IS simplistic and doesn’t carry 100% across but helps to illustrate;
Say you are in a household, and your household net income is $100,000 (think of this as GDP)
- Some relative, friend racks up $42,000 of debt (with interest, so add another $2k)
- How easily can you pay it back?
- Relatively easy compared to Japan – $42,000 is better than Japan’s $250,000 debt but comparing bad situation to worse ones isn’t a great excuse to say we don’t have a debt/spending problem
- Another example; think of it in your own lives. Say you rack up a lot of credit card debt and need to pay it off… where do you cut your budget, or work more?
The Government paying off debt
It would be relatively easy if spending was switched back to repaying debt. It comes back to them having three options 1) Tax more, 2) Spend less, 3) Borrow to bridge the debt repayments.
This is where moralistic flavour enters the debates. People think it’s immoral to spend less in certain areas, others think it’s immoral to tax more. Unfortunately, we’ve seen a popular solution to this of taxing the ‘rich’ more. It’s clearly a popular sentiment in Australia too. But isn’t this still picking on a minority of 1-10% of the population. Morality is relative and really depends on what side of the aisle you’re sitting on.
- When it comes to policies and politics most of the debate and arguments behind this don’t have even the depth of a Niki Minaj song.
- So what spending do you cut? Health is $80bn, Education $35bn, Transport/communication $9bn?
- There’s not much you can really cut from these areas as we have seen a bit of Austerity not too long ago, in 2014/2015. Why do you think Abbot was so unpopular!
The biggest growth in spending, and easiest place to reduce spending … is Welfare!
- Welfare payments are at around $180bn a year and is going up to almost $200bn in 2 years (which is 36% of the budget)
- Technically, we could pay our national debt off in 4 years if we cut out all welfare… but what would that do to our economy?
- Less money being spent in the economy would cause a decline in some cashflows to business
- This is the danger of being reliant on the Government
- Economic Crashes going forward would be debt bubbles created by the Government. A beast of system has been created which is “too big to fail” but there’s more debt around than assets.
- The Government has the monopoly. They force you to pay more in tax to pay off the debt they have racked up, with little benefit to the population.
- When you look at the stats globally, there is no correlation between Government Debt to GPD, and personal/individual prosperity.
- I have no issue with Government debt, as long as it was spent well on things that increase infrastructure/economic growth. But this is not how it is currently being spent or accumulated.
This leads to the bigger point – Why does every nation seem to be indebted?
- Hear me out. Until 1971 money had to have a sort of fractal backing of gold (was fudged though, creating mistrust in the system) and then the Fiat system was in full force
- Since then debts gone up for every country. The debt simply represents what someone has lent you so it has to be paid back at some point in time.
- Looking at Debt to GDP for G20 – Japan, Italy, Singapore, US – All above 100% Debt to GDP
- Then there were another 10 countries with between 50% and 100%
- Sum up all debt it’s close $58 trillion USD ($80trillion AUD)… and this is just for the G20 nations!
- I ask myself, ‘when does this get paid off?’. The GPD of these nations is $65trillion USD
- This excludes foreign debt!
Total Levels of Debt
- Government Debt in Australia is $850bn in total which is pretty small compared to private debt.
- Private – Between Business and Household – almost $3trn
- This is made up of $1trn Business Debt and $2trn of Household Debt ($1.8trn of which is in housing itself!)
- The total Credit, including everything as far as borrowing in Australia is concerned, the Australian Receipt is $7trn. This represents aggregated borrowings between private (Household/Business), and Government. It’s all debt in the economy and banking system.
- Compare that to our total GDP of only $1.76 trillion. Let that sink in.
The History of Australian Debt.
Debt has risen massively and with nothing to show for it. Currently we have lower historical wage growth than what we had when we weren’t borrowing as much. GDP growth is a lot less as well.
- What is the money being spent on? Sadly, lots of unproductive activity.
- Debt to GDP of 42%. It was under 10% when Howard left office, down from about 33% when he first took office.
- It is possible to do. But, these days, unless population is wanting it, it’s political suicide!
Summary
- Is possible to pay off this debt but it requires the population’s willingness to do so. It would cause reduction in GDP if spending was redirected but pulls us out of a risky situation in the future if rates do go back up.
- When you look at the rest of the world, we’re in a much worse position at regarding Foreign debt.
- In Australia we have a huge external vulnerability via the build-up in non-productive private (mostly housing) debt. It’s a ticking time bomb for the nation – and we’ll look at these risks further next week in Friday’s episode
https://www.macrobusiness.com.au/2018/02/australias-foreign-debt-time-bomb/
http://www.australiandebtclock.com.au/
Hi guys and welcome to Finance and Fury. Today we will start off on the miniseries with the best place to invest money in 2019.
Investments to Consider in 2019 Where should you invest your money?
- Question plagues both beginning investors and established pros. We are always looking for the best place to invest money for the here and now, and beyond
- No investment is guaranteed, I wanted to share my thoughts on different investment options for 2019 and beyond. Each one of these will suit someone’s circumstances better than the other
Maybe you have built up a respectable sum of money in a high-interest savings account, but you know that saving cash isn’t enough, you want to do something with it.
The propensity to hold more money in a high-interest savings account versus stepping into the realm of risk and buying into something that can go up, and can go down. But, over the long-term has a higher return than cash but in the short-term can definitely lose more than cash.
What are the options: Break these down over 2 episodes, Today and next Monday.
Today we will break down the share market. Should you be investing in shares.
For the next Monday episodes we will look at investing in property, then yourself (education), starting a business (risk/return versus capital) and should you reduce debt?
Should you invest in shares in 2019? Shares
- If you have been paying attention lately, you’d have noticed the market lost some value. Is this a correction or will it continue through 2019?
- ASX (Australian Stock Exchange) has suffered some heavy losses. From the start of September, it started declining, with a peak in August
- S&P 500 will have lost all its 2018 gains by the end of the year and then some, and many believe that’s just the beginning of a spiral that might last years.
- First point: Breaking down the market, which is shares being bought and sold by millions of people
- CBA is down -12%, WBC also down -18%, ANZ is down -12%, and NAB is down -16%. This equals by weight of 22% of the market a total -3.26% loss on the market. But during the same time, CSL gained 38%. This goes to show the market is made up of many different shares.
- Why have the banks gone down? There has been a lot of bad press during the Royal Commissions with class action payouts, and the new bail in laws where banks lost their government backing
- Why has the market crashed? Comes back to a lot of uncertainty
- Covered some in previous episodes on shares, see resources at the bottom of the page. Is it anything new?
- Not really, it’s more of the same thing happening
- Trade wars: the Tariffs between China and America
- Allies and enemies: Xi Jinping (China’s leader) is meeting with a lot of African leaders to secure resources
- The risk to us isn’t some short-term reduction in trade, but long-term as sides are picked. This will be further explored in a later episode
- Midterms are over: Republicans kept the senate
- The Democrats won the house. Which is good for Trump. He has achieved a lot in the first 2 years with tax cuts. When you look at the state of the American economy, the rising federal reserve rate has dampened market growth, which is a correction and saves it from reaching the growth bubble territory.
- Europe: Yellow Vest Protests or "gilets jaunes". This is still going on, as Europeans are waking up finally and protesting against policies provided by the EU
- France: 84,000 across the country in the 9th week straight
- Emmanuel Macron: National debate on 15 January in response to weeks of protests by the "gilets jaunes", so we will see how that goes
- This has spread across the rest of Europe and even reached Canada
- Concerns in France are that of Macron in response wants to reduce taxes on pensioners and increase the minimum wage. Which is just more of an increase to public spending
- Will do nothing but require the government to borrow more, pushing up France’s debt
- Keep the EU Block’s interest rate low to afford the repayments
- Cause pressure on EU Bond market. Especially with Italy as well, being one of the biggest bond providers in the EU
- Brexit: I will do a follow up episode on this one in the near future as well
- By plan or by blunder, the failed negotiations may accelerate the collapse of the EU
- I personally don’t think it was some well thought out 4D chess move. But the no deal means no 40bn pound payment to the EU
- How happy will the France and Germany population be to have to cover this in additional taxes?
- What is the effect of these things? Most have little effect on the underlying health of companies here in Australia, beyond tariffs
- Cash flow on companies: The ones that dropped heavily are AMP, Banks, RFG, TLS
- These drops were specific to the company, not the economy. Not a good outlook though for some sectors
- What about the rest of the market? Profit taking caused a drop in some. The real question is will it continue?
- Cash flow on companies: The ones that dropped heavily are AMP, Banks, RFG, TLS
I like patterns and data. I spent a few hours going through all of the historical data since 1902
- Markets don’t behave like they used to
- Cumulative growth over time has slowed down
- 1902-31 = 2,507% gain, 1932-61 = 3,467%, 1962-91 = 4,323%, 1992-2018 = 893%. Only 27 years, but behind by:
- 2,141%, 1,262% & 2,409% respectively
- What has happened? There is a very deep issue, and we will cover why in next week’s Friday’s episode. After going through property as well as these topics overlap
- 1902-31 = 2,507% gain, 1932-61 = 3,467%, 1962-91 = 4,323%, 1992-2018 = 893%. Only 27 years, but behind by:
- Beyond the lower compounding growth, what are the chances we will have a negative year this year?
- Statistics since 1902: Let’s look at how markets behave when there is a 12-month loss
- There have been 21 negative years, 5 of those have been back to back
- After a negative year, there is a 70% chance of a positive year, 30% chance of a loss. 5 times in 116 years there have been 2 years in a row losses
- How much does it rebound on average?
- Gain of 20% from 17 rebound years after a loss
- Loss of 16% from 5 after a previous year loss
- Averages out to 8% p.a. the year after
- Probability: Normative distribution of having 0% or negative year = 35% chance it will go down further and 65% chance of a gain
- 3 years after a negative year: there is a 3% chance of having 0% or negative average return over 3 years after loss. This is a 50% chance of 13% growth p.a.
- 50/50 chance of 45% compounding gain over 3 years after loss
- 9% chance that the compounding returns will be 0% or less
- Statistics since 1902: Let’s look at how markets behave when there is a 12-month loss
Technical Analysis: No guarantees here!
- Will the market keep going down?
- It looks a lot like profit taking end of 2015
- Average decline of about 2.7% p.m. over 7 months
- Recovery patterns: it looks like there is a chance of a mini-correction
- Rebounded 5.6% over the last 3 weeks
- May drop back a few percentage, repeat this process, then break through back to 6,300
- But who knows, the market gets spooked very easily at the moment, and are all off future expectations
Fundamental Analysis: The economy’s current and future expectations
- Market has responded to trade, currency, rates. The economy looks like a bit of a mess at the moment
- Pretty reliant on other countries: Mostly in Asia, like China, Indonesia, and Japan
- But what about our indicators?
- GDP growth: Growth ranges are narrowing. At similar levels to 2016, but are lower than throughout most of the pre-2000s
- Debt to GDP ratio is about the same at 41%
- Unemployment is slightly lower now: 5.8% vs 5.1%
- Employed people in Australia up 600,000 over 2 years
- Labour participation rate is up from 64.8% to 65.7%
- Productivity is about the same
- Business Confidence is at a major loss from 6 to 3
- Consumer confidence is up a little from 100 to 103
The economy while not flash, isn’t any worse off now compared to a few years ago, it’s actually a little bit better according to the fundamental health of the economy. However, everyone is looking into the future and is aware of the risks associated with the financial market.
Risks to the market: What would cause a collapse in Australia? China and our economy
- We will cover this next week on Friday
- Run through some worst case scenarios like what would actually make our market tank?
- This seems like a correction at the moment. 6 years of gains in a row. That stats: 8 years, 2 losses. Which is acting in line with historical trends
What to do?
- Remember the plan
- Investing for the long haul. Ride the wave before you retire, you may not have to worry too much about short-term corrections.
- Diversify well, If you were 100% invested in banks you would have had a bad year
- If invested in a diversified growth portfolio, you would have walked away with 3% gain
- Shares should not make up 100% of the investment
- Worried things will go down further? Split the investments up
- Dollar cost averaging, where you invest the same amount of money every month to buy the average price over a period of time.
- Not comfortable trying to pick shares: Consider investing in globally diversified and low-cost index funds
- Every week it seems like some blue chip has lost 30% in a day
- Investing in ETFs, LICs, and Managed Funds removes the major risk of single holdings
- What I’ve done: Invested some lump sums
- December: Just before Christmas I put $1k in super and $1k between 4 Managed funds each
- Last week: On the 2nd, I did it again, $1k in super and $1k between 4 Managed funds each
- No guarantees with the share market. The market has the same price as for December 2016, 2 years ago
Summary: 1. Investing is for the long term 2. No crystal ball, but if you are investing for a period of longer than 5 years, the chance of having a loss over this period is very very very small 3. Nobody can time the markets, but the price seems okay to invest * If you were willing to invest 6 months ago, but not now, why? You could be getting what you wanted 6 months ago for a lot cheaper
Thanks for listening, if you want to get in touch you can over at the contact page here.
Next Monday we will run through the property side of things, and what will make our market go down.
Related episodes: Current Australian share market:
https://financeandfury.com.au/current-australian-share-market/
Why Group Think threatens your Financial Freedom
https://financeandfury.com.au/furious-fridays-austrian-economics-and-why-group-think-is-the-most-dangerous-thing-threatening-your-financial-freedom/
Property market going down
https://financeandfury.com.au/did-you-hear-the-property-market-is-going-to-drop-by-45-percent/
Regulation impacting financial crashes
https://financeandfury.com.au/history-repeats-itself-gfcs-and-how-the-banks-and-government-regulation-have-impacted-financial-crashes-in-the-past/
Leave your emotions at the door
https://financeandfury.com.au/repress-suppress-invest-check-your-emotions-at-the-door/
Financial crash-proof your share investments
https://financeandfury.com.au/financial-crash-proof-your-share-investments/
Buying property and financial crash proofing your investments
https://financeandfury.com.au/buying-property-financial-crash-proofing-your-investments-how-to-get-yourself-into-a-position-to-survive-any-market-correction/
Welcome to Finance and Fury the Furious Friday edition. This is part 6 in the series, the second last episode of the series. So this is 2 more than expected in the series, which I guess is good for me. To do the last subject justice, I have broken it into 2 episodes otherwise it is just too much information all at once.
When we started the series: How lucky we are lucky to live here and now. Today I want to start winding things up, break down what system got us here and why it works
Core question behind why there are political fights.
Different people’s beliefs in what part of progress the government should have
- Also, people have different solutions to different problems
- Socialism: Government solves all problems. Whereas in Anarchy: No Government to solve problems
- I don’t think either is good. Already gone through why on Socialism, I don’t like people starving or having no freedom
- Government policy is meant to help, but ends up hurting: China in 1958, they killed all the sparrows to spare their consumption of grain so more people could eat. As a result, locus swarms emerged because there were no sparrows naturally keeping order, and 30m people starved between 1959 – 1961. This was as a result of 70% government policy. Regardless of if the policy was in place to improve, it did the exact opposite.
- Anarchy would end up devolving into a narco-capitalism or corporatocracy. E.g. Escobar or Jeff Bezos. Starts with freedom, but maybe too much. It develops to a point where they get drug kingpins or mega-wealthy people ruling. But they would be new, possibly those who own food, water, would become wealthy and paper money would mean nothing, and the resources become valuable
- Eventually go back to feudalism where we have lords of water and wheat
- I don’t think either is good. Already gone through why on Socialism, I don’t like people starving or having no freedom
- Socialism: Government solves all problems. Whereas in Anarchy: No Government to solve problems
- Need to look for something in between these: What is the best option?
- What is a governmental system meant to do? Solve problems! Some simple problems are:
- Protection of the population: Military/States and borders to reduce predation
- Violence: Laws and people to enforce them
- What is a governmental system meant to do? Solve problems! Some simple problems are:
- What problems (or needs) do we have? Maslow’s hierarchy of needs
- Physical needs met: food, water, warmth
- Safety needs: shelter, further warmth and rest, (public housing for $100 p.w) also protection: police and law enforcement
- I know that those who favour a ‘social democracy’ mean well. It can work, for a while until the money runs out. And it always does. Spending always has to increase and if an economic crash happens it becomes a very fragile system.
- But what about the rest of our needs beyond physical and safety? Can the government provide the rest?
- Removed need for community and belongingness (social). Living in apartments, you don’t need anyone else if something goes wrong. However, with farmers in the outback, they may live kilometres away but they know each other in case something goes wrong.
- Little left to get esteem in for individual achievements, as asking for things and not earning them doesn’t give much satisfaction
- Self-actualisation through development, creativity, and happiness. Further discussed in the next episode.
- Can never achieve self-actualisation when people are always looking down the pyramid at safety and physical needs. But just for more of it, better food, shelter, and security
- This process will be different for everyone because we have differences in what makes us happy
- We all have different solutions to every problem. So does outsourcing problems to the government work?
- Typical cycle: Problem identified (what is a problem for some, isn’t for others)
- The problem is identified by some groups, sometimes these are government bodies who are funded to find problems
- This is the issue with group reform
- We all want the classical progressive dream: A good education, a safe environment and workplace, and healthcare needs met
Who provides it is the thing that has changed: How did it use to work? Where did it work the best?
Classical liberalism: Go through a few points that apply today which are more relevant
- Liberty as the primary political value, within reason. Freedom for the individual is the goal
- Rule of Law; non-aggression principle, but they still need to be enforced. But when using spying as an enforcement tool, it is a total loss of freedom of privacy
- Individualism is looking after the ultimate minority. It's these individuals that form groups. So you’re able to improve groups from individualism
- Free Markets: Economic exchange should be left to voluntary activity between individuals. That is why private property is necessary, first and foremost. We need private property to be able to do that. History shows us that leaving things to free markets rather than government planning or organisation increases prosperity, reduces poverty, increases jobs, and provides goods that people want to buy
- Taxation, regulation, restrictions: Having superannuation contribution caps, and increasing the retirement age gives a boost to the government, at a cost to you
- What is at the core of this? Freedom works. What is one way to know if freedoms lead to wealth?
- Proof? GDP per capital purchasing power parity up against economic freedom
- Government Expenditure to GDP has no effect on improving score. The last 5 countries are: 2 socialist, and 3 dictatorships
- Bail in bill, on the 14/2/18 it got passed. It’s about the government not bailing out distressed institutions, like in the GFC using tax payer’s money. Sounds good? Allows APRA to step in and run distressed banks, then use the creditors of the bank to bail itself out, which are asset holders or maybe depositors. If so, may just spark bank runs.
- I need to do a deep dive into this and do an episode in the future about going through the legislation
- What do we see now? Speech laws, on a quest for tolerance you become intolerant
- Toleration: Toleration is the belief that one should not interfere with things on which one disapproves. It’s a question of having certain moral principles (“I think this action is wrong”), but I will not try and force my opinions. For example through the government to stop the things I disapprove of.
- Scepticism about power: The individual is the best judge of their own interests, and not to be forced into it
- Limited Government: The government is needed: Law, Peace, and Infrastructure. Government intervention levels: Classical liberals argued for what they called a minimal state, limited to the following functions:
- A government to protect individual rights and to provide services that cannot be provided in a free market.
- A common national defence to provide protection against foreign invaders.
- Laws to provide protection for citizens from wrongs committed against them by other citizens, which included protection of private property, enforcement of contracts and common law.
- Building and maintaining public institutions.
- Public works that included a stable currency, standard weights and measures, and infrastructure
- Building and upkeep of roads, canals, harbors, railways, communications and postal services
What does this all provide? Let’s go back to Maslow’s needs, it doesn’t meet many needs beyond security and the framework for freedom to meet your needs how you want. But rights extend further today than what they did over history
- Lot of good work from the 1200s with Magna Carta, then in the 1600s with the Bill of Rights in England, then in the 1700s the US get their own, then Jefferson helps France with their own rights.
- What were they all based on? John Locke and the natural rights of man, freedoms from rules and oppression
- Natural rights are those that are not dependent on the laws or customs of any particular culture or government, and so are universal and inalienable (they cannot be given or taken away by human laws).
- Life, Liberty (freedom), property (private ownership)
- Legal rights are those bestowed onto a person by a given legal system (they can be modified, repealed, and restrained by human laws).
- Natural and legal rights: Require Legal Rights to uphold natural rights or ‘right to have rights’
- Not all rights are made equal. There are negative and positive right. Oblige either action (positive rights) or inaction (negative rights)
- Negative rights: are the first generation of rights. Positive rights: second and third generation rights. These were a new thing
- Negative rights: Civil and political rightslike freedom of speech, life, private property, freedom from violent crime, freedom of religion, habeas corpus or a fair trial, and freedom from slavery were not enough
- Introduce positive right: Theright to be subjected to an action or another person or group;
- Positive rights permit or oblige action. You have to do something, compared to not doing something with negative rights
- Food, housing, public education, employment, national security, military, health care, social security, internet access, and a minimum standard of living
- These frequently conflict and it's carrying out positive rights often infringe upon negative rights.
- The positive right of social welfare = government needs to provide services.
- Funding of social welfare = increasing state expenditures which requires raising taxes = infringe upon the negative right of private property
- The right not to have their money taken away from them, positive rights are generally harder to justify and require more complex ethical substantiation than negative rights.
- Rights differ on political orientation. Positive rights such as a "right to medical care" are emphasised more often by left-leaning thinkers, while right-leaning thinkers place more emphasis on negative rights such as the "right to a fair trial"
Equality Often bound to the meaning of "rights" and depends on one's political orientation as to the definition of equality
- Right (Libertarians); Free market for equality of opportunity, fair rules for all, but leads to unequal outcomes.
- Left (socialists); Identify equality by equality of outcome, as there is fairness when people have equal amounts of goods and services, and therefore think that people have a right to equal portions. Like economic assistance and housing
- See the issue? Freedom versus ‘fairness’ or negative verse positive rights. One requires taxes, which cancels out negative rights (private property and keeping what you earn)
- As freedoms are reduced, average individual wealth declines over time. As shown by the freedom index.
This is where ‘One Government to Rule them all’ fails. Individuals have different problems, removing freedoms from all to solve a small group’s problem can be very harmful in more ways than one.
Asking one powerful entity to solve all of your problems has been done throughout history in different forms time and time again. In medieval times the church was the state
- “God Wills It”. Watch movies about the Crusades and The Last Kingdom. There is no free choice. Which is what monarchs taught (no separation between church and state). It was to keep people subverted, God wills that the king rules, that their lives are all pre-planned out
- There can be no pursuit of happiness if you never make a choice. Authority is always telling you what to do.
- Thinking about the government as an entity that will solve all problems, is a modern-day determinist view. Determinism is the doctrine that all events, including human action, are ultimately determined by causes regarded as external to the will
- Implies that individual human beings have no free will and cannot be held morally responsible for their actions or circumstances
- The only way to make things equal is through some powerful entity to help those who had a worse roll of the dice
- To have the power of a god to click your fingers and make things fair. And you need a lot of power/authority.
Final issues with authority: Anything with authority/powerful entity to provide everything for you:
- Is corruptible (simple), absolute power corrupts absolutely
- "You either die a hero, or you live long enough to see yourself become the villain." – Harvey Dent
- The more power they have, the more they are fought over
- Political power: some of the population are addicted to power. Regardless of who has it, like the church as an example
- Only one religious war going on right now. Is it a coincidence that there is no separation of church and state within that religion? Those nations with absolute power over the population constantly have issues where people will fight for the absolute control, as its been set up that controllers of the country have absolute power.
- Removes accountability to individuals. As seen through the Milgram experiments, where he demonstrated that people will kill if told to by authority
- Increasing shocks to wrong questions
- Participants thought it was for the greater good, and that the scientist would take responsibility.
- That’s why you see war atrocities with any form of authoritarian government. For example, the Nazi guards were probably decent people before the war but during the war, they did terrible things.
- Causes population ‘behavioural sink’. It would be nice to have everything taken care of for us. But, what does this do?
- Mouse Utopia: Every need met (threats, food, etc) and within 2 years the population was dead. In one experiment that could have housed 3840 mice
- Only ever reached 2200 as highest population. Population turns in on itself and split up
- Males/females started fighting,
- Beautiful ones: were a group of mice who took themselves off and spent all the time grooming and not mating at all
- Not overpopulation like originally thought, giving the mice something to do (purpose) prolonged experiments
- Only ever reached 2200 as highest population. Population turns in on itself and split up
- When all your needs are lavishly met, one creates struggle for a purpose to live. That explains the real housewives TV series. Where all their fights and problems are self-made, because what else are they wanting for. compared to a kid in Africa, all these issues seem trivial
- This comes back to that concept again of the “pursuit of happiness”. Always making choices on what action will add to our well-being (make us happy)
- Choices is the pursuit of happiness. But the results of choices are not all equal. Some momentary pleasures (impulses) lead to pain (not happiness)
- Learning from these choices, means you avoid those that caused pain, and keep trying new things
- Foresight, where you can recall past experiences. Where we learn to postpone immediate gratification and see what choices are really in our interest. Thus, learning self-control based on experience is essential to happiness.
- Part of moving up Maslow’s hierarchy of needs as well
- Locke talked about the continuous process of choosing as a part of human beings’ unchangeable nature. Choices about what we believe gives us well-being
- Our right to make these choices is inalienable, and, unless our actions attack the rights of others, it is wrong for the government to interfere.
- Mouse Utopia: Every need met (threats, food, etc) and within 2 years the population was dead. In one experiment that could have housed 3840 mice
- What happens when the money runs out? House of cards falls down
- Becomes very fragile. Very much so here, we are in a position not too self-sufficient and need to give the government more power. Which would make the situation worse.
Counterbalance: Don’t know if it would work or not. My view is that it is better for people to figure out the best way to help themselves (and have the tools to do so) Which is why this show exists.
The government cannot solve your problems. They can provide small band-aids solutions. Generally the majority of Australians agree.
- Trust in government/politicians is at the lowest level since 1993. Only 5% of Australians trust the government,
- 74% exhibit a critical perspective,
- 25% trust government ministers and satisfaction with democracy in Australia is now at its lowest level since 1996
The original question of the series was what should the government be in charge of? The world has changed. So there are more elements involved, but we will cover these off in the final next episode. Like, what the government does really well and what they don’t do so well throughout history.
Thanks for listening to this episode guys, if you want to get into contact go over to the contact page here.
Resources: Trusting the government: https://theconversation.com/nowfor-the-big-question-who-do-you-trust-to-run-the-country-58723
Solution to money in politics: https://grattan.edu.au/wp-content/uploads/2018/09/908-Who-s-in-the-room-Access-and-influence-in-Australian-politics.pdf
Welcome to finance and fury, The Say What Wednesday edition, today we have a question from Mila:
Question
We are expecting our first child very very soon, so what is the best way to invest money for your children, apart from the obvious solution of having a dedicated savings account. Where can we get a better return and keeping in mind the different tax implications for having it in my name, my husband’s name, or the child’s bank account? We are looking to give it to them when they are 21.
Thank you,
Mila
Today we will explore those points:
Funds for your Kids 1. Gift: we will also do another episode on Education Funding itself. However, this episode is just looking at investing funds 2. Something they can access at 21 to put towards buying a house, holding still, etc.
The best solution would be heavily dependent on your situation
- What are your marginal tax rates, mortgage payments, etc
- What is the intended purpose of the funds will be at 21 (gifting, education, etc.)?
Considerations: 1. Are the funds being invested or not? 2. If no, you have less to worry about * Savings accounts, and mortgage offset accounts are usually for a shorter term * Banks are happy to open accounts in kid’s names, as they take money from anyone * Setting up any savings or investment accounts in your child's name for taxation purposes wouldn’t make a difference for quite some time. * The ATO determine who needs to declare the income or gains by looking at who has 'control' over the account (i.e. if you are depositing/withdrawing money from the account, you would have to declare the income even if the account was in your child's name). 3. If yes, which options help to grow the balance over the long term * Index funds, shares, managed funds or other types of investments. * Education bonds (another ep), investment bonds, 4. Considerations with investing funds for minors * The aim is to try and minimise any CGT or transfer costs upon your child turning 21 + Any transfer of ownership of investments triggers a capital gains event (along with selling them), + There are problems with setting any investments up in your child's name. * You may also run into some issues with income tax rules. + For those under 18 years old if it is deemed that the child is making the investment decisions. After earning above $416 (tax free threshold for non-exempt minor income), income is taxed at 66% until reaching $1,307, with all remaining income being taxed at 45%.
Whose name to invest in? 1. Unlike bank accounts, most fund managers refuse to accept direct applications from minors 2. Legal issues: share trust units fell in a market crash, the child could argue that he or she did not have the understanding to participate in this investment and ask for a refund. 3. Stockbrokers are generally prepared to buy shares in the names of children, and some companies expressly prohibit ownership by people under 18 for the same reason
Three options: 1. Investing by the parent as trustee * This is the most common strategy, but most people have no idea of the possible consequences of doing it. It does not get you around the punitive children's tax rates because the trustee will be assessed at 66% and there is a major difficulty in that the parent must at all times act as a bona fide trustee and not intermingle trust money with their own. * Example: in a leading tax case a couple accumulated a substantial sum in a trustee bank account and then withdrew it to buy a unit for the use of their children while they were at university. The parents decided to put the unit in their own name and not the children's name, the Tax Office successfully claimed the money was, in fact, the parents' money and assessed them for five years' back interest. 2. Investing directly by the parent * Invest in the name of the lowest-earning parent, i.e. earns less than $37,000 a year, the maximum rate of tax is 21% and all income + With franking credits, you can get away with little to no tax + It also reduces the possibility of the Tax Office disputing the ownership because parents are free to give money to their children whenever they wish. + The cons are capital gains tax will apply if the parent transfers the asset to the child at a later date. + Hard to set up investments with you as the owner if you intend to gift it, you have to pay CGT/transfer costs + Can be caught out with Trustee as well - Know the trustee personally, I bought first shares at 16, as I was under 18, my mum helped. I was the account designation, but mum was the owner on my behalf 3. Investing in investment bonds * Investment/insurance bonds are one of the simplest and most tax-effective investments + Covered these in a previous episode + All you have to do is make an investment into the bond and sit back and watch it grow. Then, after you have owned the bond for 10 years, you can withdraw all or part of the proceeds free of tax. However, there is no obligation to withdraw your money and you can leave it in the low tax bond area for as long as you wish. * The ability to access the investment at any time in the first 10 years is a feature. But, tax penalties do apply + The profits will be fully taxable, but you will be entitled to a 30% rebate to compensate for the tax already paid by the fund * The cons are: Higher fees, 125% rule, and limited investment options
Other Considerations: 1. Estate planning (i.e. wills, POA, etc) for the funds, as this can add a level of protection to the funds over the 21 years. This can be achieved without the need for a will in some cases, as investment/education bonds have these features inbuilt into them. 2. The final thing to consider is the investments themselves and the return you expect, versus the level of volatility (or speculative risk) of the investments. * Investment bonds are limited but still viable when making a portfolio * If you would be making regular investments, then trying to minimise transaction costs can be achieved through some well diversified index (or active) managed funds over the direct shares that they invest in.
Thanks again for the great question and speak to you soon.
Ask your question over on our contact page here.
Hi everyone, and welcome to Finance and Fury.
Today won’t be a full episode, unfortunately, I am a little unwell.
I am providing a bit of an overview of what the next few episodes will be about. When making investments, it’s all about considering what will be the best thing for you now and into the future. So, I will spend a few Monday episodes breaking down what investments you should actually be looking at to make now, for this year.
I’ll be breaking down all the investments and options for 2019. We will be looking at shares, property, yourself (through education), starting your own business, and reducing debt.
We will be looking at the 5 different options, and break them down in a lot of detail. We will start with shares and property, to see if they are a great investment, depending on your situation this year, what markets might do, what they are expected to do, what the long-term payoffs will be.
Then, there’ll be another episode to break down investing in yourself or other businesses. In a way, investing in yourself could be the best long-term investment return you ever get. Also, investing in your own little start-up business can be a great long-term return. And finally, covering an obvious one, reducing debt.
So, guys, I apologise for the lack of a full episode today. I just wanted to release this to let you know there will be a full episode again from next Monday, and what it’s going to cover.
But in the meantime, if anyone has any investment topics they’d like me to cover as part of the series, please let me know over at financeandfury.com over on the contact page. Then, I can include it in the series as well.
So until the next episode, enjoy the rest of your day.
Welcome everyone to Finance and Fury, the Furious Friday edition. Today’s episode is part 5 of the miniseries. The last part looked at the ‘fair go’, what is fair for some, isn’t for others.
Nearing end of series, I want to put forward a case. The constant need to make things ‘fair’ i.e. have an equal distribution of goods = destroys equality of opportunity for a nation. It destroys what makes nations great (no opportunity from authoritarian governments, we covered this in episode 2), and starts to reduce the freedoms of the nation which is the equality of opportunity.
Where does this ‘fairness’ mandate come from? Because it’s a relatively new concept in society. The cause is our progressive nature.
- Progressivism is the support for the improvement of society by reform
- A philosophy based on the idea of progress, which asserts that advancements in science, technology, economic development, and social organisation are vital to the improvement of the human condition
- Progress is what separates us from other animals, which is why we are the ‘king of the jungle’
- Our desire for never-ending improvement is great! Allows us to better our positions.
- We are hardwired to do it. However, there are not many inventions from those being coerced into creating verse those people who are passionate
- This is where reform comes into it, and I have an issue with it. The reform is a type of social movement that aims to bring a political system (in Democracy) closer to the community's ideal
- Reforms are mandated changes by the government. Reform in a democracy, politicians will pander to the crowd. This is seen across civilisations, like in Rome with Caesar and the mob rule
- At the core of progressive philosophy is the improvement of the human condition
- As the human condition is measured on the individual level, progress is great. But when you measure it in collectives (groups), that’s where you can find issues
- Measure progress: All individuals doing relatively better, but some groups did better than others
- This is when progressivisms will make any country socialist if left unchecked/or goes unnoticed. This is the focus of today’s episode.
- Swapping the focus of individual conditions to group conditions, in the nature of progress, seems to lead a nation to become socialist
Progress itself: Humans always change, nature is always progressing. Progress is fantastic, only when it benefits everyone
- Technology throughout history, with fire, the wheel, and the printing press, the internet, and telephones
- During the age of enlightenment during the 18th + 19th century lead to an explosion in knowledge sharing and technology, and wealth (free market)
- First adopters got very wealthy through the new industries like banking, oil, and railroads. These are all relatively new technologies and they built empires for the individuals who managed to corner the market
- In society, up until about the 1600s most western countries were ruled under a monarchy, which people genuinely accepted. It was understood as the monarchy having the divine right to rule. But then, people were given the freedom to do what they want.
- The feudal system then shifted to more free markets. The wealth of monarchs never helped anyone, whereas, the wealth of robber barons helped millions of individuals
- Got wealth through providing cheaper oil, heating, steel, and general goods that people use
- These resources, now available at the turn of the age of enlightenment, helped many people, but also generated a lot of wealth for the owners
- What happens when equality is now a mandate of the government? Now progressivism is about equalising economic and social conditions
- The problem? Some people have more money than others. The solution under this mandate? Something is wrong with the system, and you just need to redistribute the wealth
- Do you want to help those at the bottom? What is help?
- Give a man a fish to eat, or teach him how to fish? Which is the better solution?
- Enter in new economic theories for new inequality and how to equalise the wealth distribution. Not let anyone own anything in the first place.
- First adopters got very wealthy through the new industries like banking, oil, and railroads. These are all relatively new technologies and they built empires for the individuals who managed to corner the market
- 1900’s progressives originally thought the problems society faced could best be addressed by providing good education, a safe environment, and an efficient workplace. This all sounds brilliant, but slowly changed the focus on solutions
- In the early 20th Century, theories were put into action with ‘reform’ like communist/socialist movements (economic/eugenic)
- Socialism upbringing across a lot of nations lead to the starvation, from reform, 110 million dead
- The reforms themselves come from the legislate for compliance in society. That’s with the governmental power over the population. Increased when some of the population want it (Social organisation – One of four Core Components of Progressivism)
- This all comes back to activism: with groups campaigning for laws as votes equal change
- Question: Is it better to let people choose to adopt something for themselves, or is it better to force them into adopting it? Well, I guess it depends on the thing
- Small groups campaign for laws based around the common views, and it is what most of the population (in areas) wanted
- Plenty of examples in history, like the Jim Crow laws in the USA as racial segregation laws. These laws are why Rosa Parks was arrested for, which is where the Civil Rights movement came out of
- Put into place by Democrats, they really wanted racial segregation laws in the South. It got removed by LBJ (D) – ‘ill have those N voting democrat for 200 years’
- KKK used as the militant wing of Democratic Party. They are both on the left, the KKK, racist socialists like neo-Nazi’s, and the democratic party all have the collective ideologies. It’s just the KKK are far more vocal about their racist views
- Wanted to improve genetic breeding through extermination of blacks, which is horrible, they used reform for them to achieve this
- Question: when ‘intellectuals/experts’ do studies, and prove that they can improve the human race and that the government are the only ones who can help
- A lot of the population get behind it, the active ones anyway, wouldn’t it be great to have the government make these reforms?
- Worse example: Eugenics was a big movement pushed by intellectuals and put into place by the government – Strap yourselves in, as this is an extreme example of why the government shouldn’t have power over these reform decisions
- The project of improving the human population through a statistical understanding of heredity
- Developed by Francis Galton, closely linked to Darwinism and his theory of natural selection (cousins)
- Galton was a polymath came up with a multitude of concepts in multiple fields, like meteorology (weather maps), statistics (regression and correlation), psychology, biology (heredity), and criminology (fingerprints). He also came up with the concept of eugenics.
- Picked up interest with the progressive era in the US around the 1900s through to the 1920s or so. This is where it took a dark turn, as 60,000 (1/3 in California) people were sterilized in the United States based on eugenic laws. 32 U.S. states passed sterilization laws between 1907 and 1937
- Surgeries reached their highest numbers in the late 1930s and early 1940s. Designed to remove weak genetics from the gene pool against criteria on individuals
- Things were more direct with surgeries without consent or a person's knowledge
- Still happens today, from 2006 to 2010 in California 146 female inmates were sterilized
- Why don’t we hear of Eugenics much today? Hitler was a big fan, in Mein Kampf (My Struggle), Hitler credits American Eugenics as the inspiration for his final solution. ‘Aryan’ comes from Galton and Eugenics, Nazi’s just used the term
- Progress on the scale, the Nazi’s prefer to commit genocide. It’s horrible, but it was the German efficiency way
- Joseph Mengele (Rockefeller Foundation funded), before going to Auschwitz, he was conducting more experiments in conjunction with Californian scientists
- Word got out late in the war. These US scientists had to change marketing strategies now that Hitler had ruined the party
- Mobilisation and Destruction has also progressed, as seen in Wars
- WW1: Nobody had seen war in the ‘modern’ era. With machine guns, artillery, UBoats, basic planes, and tanks at the end
- Biggest in 100 years in EU since the Napoleonic war, where 5m people died (one other war in this period in China with more casualties), the type of fighting was trench warfare
- WW1 13-14m died in just over 4 years. There have been wars in past that killed as many, but took decades
- Everyone said ‘never again’ to world wars, until WW2 broke out
- WW2: War fought over ‘progressive’ ideas at the time, and left 84m dead in 6 years (horrible thing was mostly civilians)
- Mongols had the gold medal until this with 50m deaths but took 163 years (1206). Comparing the two, we have 200k vs 14m per year (68 times more). Hence, we have come a long way in 700 years in progressive natures of the wars. The countries with most death as a % were by authoritarian governments
- Russia (32% of war causalities translates to 13.7% of their population), Germany, (8.7% of war causalities and barely a percent of the population)
- Mongols had the gold medal until this with 50m deaths but took 163 years (1206). Comparing the two, we have 200k vs 14m per year (68 times more). Hence, we have come a long way in 700 years in progressive natures of the wars. The countries with most death as a % were by authoritarian governments
- Manhattan Project gave the ability to decimate an empire with nuke bombs
-
- End of the war with Operation Paperclip took in 1,600 Nazi Scientists, they started working on NASA with rocket technology
- Cold war (war of progress and race for more power) Russia made the Tsar bomb in 1961 which was a 50 megaton bomb (of TNT)
- Little Boy dropped on Hiroshima was 15 kilotons (of TNT) – the Tsar bomb is 3,333 bigger and was meant to be 100 megatons
- The Tsar bomb created a fireball 8km wide, mushroom cloud 65km up (planes 10.5km), and 95km wide at the top
- Village 55km away destroyed, wooden hundreds of kms, windows 900km shattered, and a shock wave 3 times around the earth’s circumference
- Imagine setting a bomb off in Brisbane and shattering windows in Sydney
- Thankfully, it was decided to be mutually assured destruction. This has kept world powers from another WW but has sparked a conflict by trying to keep them away from some countries. Still hasn’t helped stop smaller wars though
- WW1: Nobody had seen war in the ‘modern’ era. With machine guns, artillery, UBoats, basic planes, and tanks at the end
- What happened? Progress had been going well up until the turn of 20th The focus changed
- Enlightenment had been about progress for the betterment of the individual. Also, for individuals to have equal opportunity
- Classical Liberalism from the 1600s. The 10 values are: 1) Liberty as the primary political value; 2) Individualism; 3) Scepticism about power; 4) Rule of Law; 5) Civil Society; 6) Spontaneous Order; 7) Free Markets; 8) Toleration; 9) Peace; 10) Limited Government. This is where the government is needed though, for the law, creating peaceful environments and building infrastructure
- J Locke, wrote a lot on classical liberalism and is one of the major influencers for the American constitution. From 1680 – 1950: an explosion of wealth from these concepts
- End of True Monarchy (now Constitutional), this increased freedom of choices. Created a prosperous society.
- Morphed at the end of the 19th century (1860). Modern/Social Liberalism, the role of the government includes addressing economic and social issues such as poverty, health care, and education. Increasing government size and responsibility, no longer a limited government
- Changed during the 20th century as influenced by socialism: Social democracy as a progressive modification of capitalism
- Broadly defined as a project that aims to correct what it regards as the intrinsic defects of capitalism
- Reducing inequalities through government reform
- Characterised by a commitment to policies aimed at curbing inequality, oppression of underprivileged groups and poverty. The focus is on groups
- Broadly defined as a project that aims to correct what it regards as the intrinsic defects of capitalism
- View of who holds the solution changed. Used to be individuals and small communities to now it being governments (Biggest community of all)
- When you get everything you want and the problem still isn’t solved, what then? Keep pushing for the government to make it fair, rather than the people. When people are the solution, people build their own wealth and the government helps to facilitate an environment that allows us to be wealthy. But, if the government is the solution, all it has to do is take and then redistribute
- Socialism: The power of governments is embraced and expanded, we lose the free market as it’s now controlled, collectivist rule. This is the polar opposite of civil society because we lose spontaneous order. Which is the matter of individuals being able to organise themselves properly, rather than being forced to by a government. You also lose toleration, because now society is intolerant of those with wealth. You lose all the foundations, except maybe the rule of law.
- Now you have entered into reducing equality of opportunity for increased equality of outcome
- As soon as the government is seen as the solution, society is doomed
- They paint themselves as the solution. Every campaign is on what they can do for you, they need your vote so they need to sell you what they can do for you
- What do politicians have? They have power, large groups of them have a lot of power. A recent example is the Anti-Encryption Act that was recently passed
- Power is addictive, politicians tend to behave like addicts. Do and say anything short term to get what they want
- With ever-increasing demands from the population, ever-increasing power given to the government
- We went through examples of importance to limit government powers/involvement with ‘progress’
- Authority/Power of governments increased again after monarchy at the turn of the century
- Governments had conscription and Central Banks. The Fed in 1914 provided almost unlimited funding
- WW1 should have been the 1000th Balkan war. Austria and Hungary annexed land from Serbia, and the Black Hand shooting Franz Ferdinand. But, thanks to treaties between Russia, France, and the UK they created this global extent of death and destruction.
- WW2 (less avoidable, however, WW1 set it up) Hitler 1933-1939 he ruled fairly peacefully, but he was seen as the solution for German problems. Because Germany wasn’t doing so well in the 1930s, he even one times person of the year in 1938. All of a sudden, he invaded Poland 6 years later, Stalin and Hitler were to split it 50/50. Once again, all large governments (Communists were seen as the solution there) because they promised people everything. But skip forward, they don’t turn out too good, as they end with a lot of death and destruction.
The whole point of ep? That government with too much power end up destroying freedoms. We are what makes it happen
- I hope that I have been able to explain it properly: Solution = Government, going to lead to the population voting for more government
- Population driven shift on the political spectrum to authoritarian regimes
- It’s a cycle: more power (to do) they have, then they start to become the solution for more things = authoritarian
- May be a secondary consequence of the belief in government solutions for problems. Say for instance you have 2 scenarios:
- Grow up in a world where the government can’t help you, there’s no social support, or housing. It’s a harder world
- Government provides social support, the government provides solutions to your problems
- What scenario would you be more likely to make sure you don’t fail?
- I think that the more someone else says they will solve your problems, the less you will look for your own solution
- The world is a scary place, but only if you don’t learn how to prosper in it. Like when the solution is the government.
- Makes a very easily controlled population, when everyone is reliant on the government
- Why it is important to have balance, like different policies and what the government should be involved in
- You either want the government to have more, or less interference in your life. And right now there is nothing that the government isn’t involved with. For e.g. Rego (car), bike (gst, helmet), Owning an animal (getting it registered)
- The current speed on reforms, takes a lot of time to see how reforms will impact society. If too many changes are done at once, it can be the downfall of freedoms for the individual
What is another option? If the government can’t give it to you, then you won’t ask for it. Now, imagine how scary the world would be if the government wasn’t there to help?
- This is what the final episode will look at, and how would a world like that look
- What the core classical liberalism models are based on
If you want to get into contact with us, you can do so on the contact page here.
Happy New Year! Welcome to Finance & Fury’s Say What Wednesday. It’s been pretty quiet on the question front, I’m guessing with everyone away over the holidays… so today will be a quick episode covering the number 1 question I got all of 2018 but never answered – Sponsorship.
I get one or two emails a week from companies looking to promote products/services and everyone I talk to asks me why I don’t advertise? Do I make any money from sponsorship?
The quick answer is no, and I never plan to.
- Preface – I don’t have anything against advertising. Lots of people now make their living from Youtube, Podcasts, etc. I think it is great. It’s the free market in action and allows people to make a living.
- Podcasting started as a little side project.
- I get bored pretty easily, so it was something to do nights/weekends. I enjoy doing this. Helping to educate people, talk about topics that don’t get covered very much.
- I get to learn as well. Thankfully the personal finance topics don’t need be researched (otherwise I wouldn’t be good at my job), but the topics on politics, economy, history, psychology, I research because I want to make sure I know what I am talking about.
- As a bonus, I don’t have to rant about this stuff to my friends/family – so I think they enjoy me doing it to.
Reasons I don’t want to do sponsorship.
- Never intended. I don’t need the income.
- This might seem hypocritical as this whole podcast aims to teach ways of increasing your income.
- I don’t intend to stop working – I’d have to start doing 3 podcasts a day to avoid going insane.
- Wouldn’t it help to boost income? Yes, but ironically money doesn’t factor into the motivation.
- Cost/Benefit – How much would I earn, versus all the other cons.
The cons:
- Don’t know the products/use them
- Get it with professional referrals – risk to give recommendations on things if they are bad, and I don’t want the client to have bad experience
- It discredits me if product is bad. Most requests for sponsorship are for financial companies/investments/platforms.
- There are strong regulations around adviser kickbacks and I don’t want to have any conflicts in advice
- What if the product tanks? This is also why you rarely hear me talk about specific investments; they might be good today, even tomorrow, but what about 1 year from now? People listen to these episodes at different times
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If I personally don’t really believe in the product it’s not right to promote something I myself don’t use.
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Corporate interests – My content then has to be ‘advertiser friendly’
- This used to be just naughty curse words, now it goes further and can restrict what you talk about
- I want carte blanche – I want to speak my mind. If you haven’t noticed, do bash on some things sometimes.
- It’s a slippery slope – it starts with small concessions, even self-censorship. Sponsors can control what you say.
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I don’t want to do it to you guys
- Personally don’t like sitting through other podcasts constantly plugging various products and companies.
- The whole point of this is to educate you guys and sponsorship wouldn’t help with that. This is why I scratched the intro – I don’t want to waste your time.
If you have any questions from Monday’s episode – what do you want to know to help achieve your goals? Or even how to get goals in place? Hit me up on the contact page 😊
Welcome to Finance and Fury
Welcome to the new year, depending on when you listen it may be new year’s eve or the new year
- Hope you are in for a good night, or not recovering from one.
- Starting off with a question; looking back on the year, are you in a better or worse financial position?
- If not, never fear because today’s episode we will look at how to be in a better financial position (and what that really means) this time next year, and importantly how to implement some action plans to make sure you’re always moving forward.
- Plus I will share with you my goals and the process on how I came to them
- Help to illustrate my strategy, to help you put yours together and implement them
What are your financial goals for this year? Or new year resolutions? 1. Maybe you haven’t thought about them yet. By the end of this episode you should be able to think of at least 3 and something to put in place 2. Financial goals are related to ‘what you need money for’. Most will be related to other goals you have * Short term goals, this could be saving for a deposit on a home, getting out of debt, or saving for a holiday * Long term goals, these are mainly around financial independence, or things that take a long time to achieve like a passive income.
My Goals for 2019: Revolve around my longer-term goals 1. Equation: Achieve many short-term goals to achieve the larger long-term goals. Which is from the underlying purpose. If you need help, some of the archived episodes from the “self-made millennial” podcast are worth listening to. Like how to come up with purposes and goals in further detail. 2. My Long-term goal: it’s all around the concept of freedom, being able to do what I enjoy, and that’s helping people to become financially independent * My short-term goals do shift over time as I learn of new ways to achieve the long-term goals + Putting together courses, doing podcasts, advising, it’s all really what I enjoy doing * What limits this? Resources, really there are 2 forms of resources time and money, and money can buy time + Staff: You could pay someone to work full time while you do something else. E.g. $60k = 1,920 hours back to you + Frees up more time for development: making webtools, calculators, etc which all cost a decent amount to get up * A lot of my long term goals revolve around this one question: what can I do to improve other people’s lives and also be financially independent. * A by-product of this is reaching passive income needs. When 100% of your income is self-generated, you have the resources to achieve this goal, and detract from the first goal 3. My financial goals went on pause for 18 months whilst setting up the business * Starting from no income, so no staff, to a few staff, getting a premise, my own license. This all takes money.
My process 1. For me a financial goal isn’t set unless it has a yes answer to the following: * Will it put me in a better financial position? What does ‘better’ look like? It varies depending on the goals 2. Simple measurements depending on your goal * Will it move you closer to your individual goals? + For my shorter term goals, will it help my team to expand to start achieving more. Will it help me get more done. * Will it move you closer to your financial independence target? + Target: Wealth to generate Income: E.g. $100k in passive income, you’ll need $2m today. Which is $2.9m in 15 years’ time. + If you are new to all of this, have a listen to previous episodes on how to work this out. This can be found on the podcast show notes. 3. Will it close the gap (every year)? There are categories which most goals fall into which are either: * Building wealth: Investments and businesses * Increasing income: Salary, investments, and business + Break down further, like reducing taxes, reducing debts, etc. to increase income
My financial goals for this year 4. Personal: Be financially independent by 40 (same goal as when I was 20) – Smaller goals for the year * Contributing to Super: around $10,000. I haven’t been able to for a while, with starting the business up. As cashflow went into expanding company. + Didn’t want to go into debt so I funded the business from savings and business cashflow * Hitting investment targets each month, which is similar reason to super I didn’t draw much out of the company + Increase monthly investments by $1,000. So a total of $1,500 pm, on top of the reinvestment of my existing investments * Podcast/Course: Not so much of financial goals + Have a second course done by the middle of the year + Podcast: Keep pumping out 3 eps a week + Get a few calculators I’ve built into webtools as a site resource
These are a quick summary of my goals.
What are your financial goals? 1. Not many people stick to new year’s goals. There can be too many, normally people think this is good to have a lot of goals, however: * It’s hard to go from 0 to 100 overnight, it’s a lack of inertia. Something continues in its existing state (rest or in motion) unless it is changed by an external force 2. Example: say you get 10 goals down now, and they are all new things * Invest in shares, reduce my tax, buy a property, generate $50k of income in 5 years from investments, etc. Where do you start? And how? Most of these will be using resources at the sacrifice of another. * Information overload sets in and you go back to your old ways pretty quickly. It is safe, familiar and easy 3. If you are just starting out pick 3 goals for the year maximum. Are they short term or part of longer term goal? * How much do you need? By when? How are you going to do it? * Put it down for each goal that you have, the answers to those 3 questions. E.g. Save for a holiday: I need $5k in 12 months, so I’ll save $416pm
How to start? 1. Starting small, and picking one thing. What is one financial behaviour you would change? Or what is the most important goal? * Future: This is where goals come back into it. What you want to achieve needs to be defined. Plus, is the goal going to help achieve this? * With the one goal, breaking it down in the simple SMART terms. + SMART – or What is it? How do we measure it? and why? * g. Previous Example: How will you save $416pm? Enough already? Or cut spending/increase income? + Plus consider if this will this hurt another goal?
Got your goal: Looking at implementing it 1. How do you motivate yourself to invest? Finding motivation is a rubbish concept as a place to start 2. What people search for is a moment of inspiration to get the ball rolling, but, It never comes. * It’s because motivation comes from a positive feedback loop. You do something good, dopamine is released in the brain, you then want to do this again * Think about it, you don’t need to find the motivation to indulge in anything. Because your brain is wired to give positive feedback when you do these things you already like. * Part of the problem as bad things compound as well. 3. Small action = dopamine = want to do larger actions. 4. Motivation is a lie, there will always be something better to spend your money on than your future security and financial independence. Like things that achieve instant gratification
Implement it and adjust along the way. Over time (30 – 90 days depending on the goal) it will become a habit. Then implement the next goal on the list
How do you improve? One small thing at a time. That is the process of improvement.
- Financial habits are built through the positive feedback of cue, action, and reward.
- These decisions years ago have improved my position now.
- That is the relationship with good habits. Keep improving you slowly over time.
- Pareto distribution or 80/20 rule.
- 20% who have 80%, they have been able to grow good habits, that have compounding effects
- It is as simple as investing and waiting. $20k today would be $80k in 14 years at 10%
What is one thing that you can do to better the future self?
Starting sooner rather than later allows you to do a negotiation with your future. Think of it as time travelling.
Summary: 1. What are your three financial goals? How much, by when, and how will you get it done? * Will your actions help achieve the goal? What strategies do you need to implement?
Thanks for listening everyone! I hope this episode helped break down some steps
Feel free to ask any questions. If you have a question, someone else probably does as well. Feel free to let me know if you have follow up questions over on the contact page on the website here.
Episodes to check out!
What is financial independence?
From puzzle to map
Trusting yourself and learning the basics
What does your retirement look like, and why?
Welcome to Finance and Fury the Furious Friday edition. This is part 4 of the mini-series. Hope you all had a good Christmas.
In the last episode, we talked about how the population is mobilised in a political spectrum.
Today we talk about what the population is currently being mobilised for:
Australian politicians/interest groups - the idea of the “fair go” 1. Australia’s last four prime ministers have all used the term at some point. (Hard to keep track of them now) 2. Rudd used it on Howard’s WorkChoices reforms. Gillard said it in “we are the people who hold onto mateship and the fair go” 3. Turnbull used it when saying “We have a very unique culture in Australia and we have a very good mixture of capitalism and the free market, but we also have a culture of fair go, of looking after each other.” 4. What is this ‘fair go’? Well it’s impossible to associate the idea of the “fair go” with any precise meaning. * It is essentially whatever the person using the term regards as fair or just from their frame of reference.
Genius in this is it takes individual perception and weaponises it 1. Plus the government assumes a lot of responsibility for looking after each other. It’s an easy solution for us if someone else will solve the problems in society 2. Do we have a problem with fairness? What is fair? The definition: “treating people equally without favouritism or discrimination” * Does this mean the same rules for all? Or same position and outcome? It depends on the definition 3. The definition in society is using the egalitarian flavour to look at fairness and justice (Fair go) * Concepts at a basic level: egalitarians agree that all citizens have their basic needs met + Infrastructure, healthcare, education, ending extreme poverty. These are good and have beneficial social consequences. Providing everyone with equal access to these resources. 4. Equality of opportunity is also regarded as another important requirement of “Fair Go” * This means that all citizens should have the same chance to develop their natural abilities, regardless of their backgrounds, this is great. It’s shown in Western countries through the measurement of mobility of wealth * In 2007, Andrew Leigh did a study on Australia. The conclusions were that Australia has a higher level of mobility than the US, which is extremely high. The study looked at inheriting wealth vs self-made wealth. + “in the United States, the heritability of income is similar to the heritability of height. + Australia, income is only about half as heritable as height” * Housing as an issue. Housing for all, but how do you solve inequality when it comes to housing? + Bill Gates has a very nice house, so to take away his equality of opportunity, gates no longer allowed in his nice house. This is the implementation of equality of outcome. Does this sound fair? * Income distribution is another issue. If ending poverty is the goal, then we have already succeeded in that. But, is ending poverty the goal? Or equalising incomes? 5. Some take the idea further and suggest it requires an equal distribution of resources (equality of outcome) 6. Income inequality vs poverty, there will always be inequality in equal opportunity * Australian relative poverty rate is over 26% of population (before taxes and transfers), * Falls to under 13% after taxes and transfers. The relative poverty rate has been between 10% and 14% of the population since 2000 (where the poverty rate is set at 50% of median income) + Poverty is measured by the middle-income amount halved. So for 1 – 5: the middle point (median) is 3 - Halve it and get 1.5. If every quintile was the same income spit, then this would be the poverty measure - If the median is the same as average? It shows equality in distribution. The average of 1-5 = 3, 15/5 + What is the line here? The disposable income of less than $400 per week for a single adult (changes) or about $22,612 annually + You can increase poverty under this measure by using disposable income first. The more equal things get, the more the baseline measurement for poverty gets. - I had a look at the incomes and halved everyone’s income in the bottom 80% and gave it to the top 20% - This gave a median of $393 = $197 (or half) base. So as things get more equal, the relative poverty rate increases. This is ridiculous. + Stats are easy to represent nothing of meaning, which is part of the reason disposable income is used. Under these statistical representations, the greater equality in Australia produces more poverty. This is due to a higher median being used. * Absolute poverty: A Comparison from the Australian Welfare Report 2017. Those who can’t afford to buy set basics in country + This is currently 3.9% of households in Australia. Known as the “deep exclusion” zone + Decreased massively! In 2001 it was 13%, which is a 70% drop since 2001 to 3.9% of the current population - In 1973, the relative poverty mark was $62.7 p.w. That is a growth in the measurement of 4.5% p.a. but ‘absolute poverty’ has still decreased - If it had grown with inflation for 45 years at 2.5% it would = $191 in today’s money and not $400 + How long do they stay there in absolute poverty? Well, about 70% are out the next year - Those who didn’t make I out, the remaining 30%? Well, about 63% are out the next year. This shows how mobile wealth is in Australia. - Sadly it gets painted that the 4%, who seem to be a current average, struggle year on year. + Why? What they share in Common ‘disadvantages’ - It all comes down to unemployment, where half of all Australians aged 15+ in poverty 1. Health-related/disability about 11.2% 2. Highest Education Year 11 or below 3. Higher chances of dependence on government income support and public housing * Look at extreme poverty $1.9USD p.d.. in the 1950s: world population of 2.5bn, 1.8bn in extreme poverty and 700m are not + 1970, world population of 3.7bn, 1.5bn not while 2.2bn are in extreme poverty + Today, world population of 7.5bn, 700m in extreme poverty and 6.8bn not. So, over the past 50 years, extreme poverty levels dropped (as a percentage of population) by 85%. + Real reason poverty dropped so heavily is China (a fairly socialist nation) adopting some free market principles, like property rights - It was government policies to create equality that put them into poverty. Why isn’t this obvious? - Surveys from the US and Canada show only 8%, and from the UK only 12% believe extreme poverty has reduced, 60% think it has gotten worse - Comes from the narrative that things aren’t as good as they are, and that’s due to inequality * Why? Inequality and poverty have been changed in how they are represented 7. Measurement: the Gini coefficient where 0 has complete equality in incomes and 1 has complete inequality. * Measured by the Lorenz Curve: Square with a line from the corner from bottom left to top right. On the bottom line, break it into quintiles of 20% each 8. Australian disposable household income, the Gini coefficient today is 0.352. After redistributions, it’s 0.22 which is very equal * Concern: Increasing - the Gini coefficient in 1980 was 0.2 – 0.309 in 1995, 0.334 in 2010 * But what else is increasing? The overall wealth! Absolute poverty has dropped * Population ages: More people in age bracket 35-65. So there’s a general trend to earn more later in life + In 1980, 21% fewer people of prime earning age, which has shifted the stats 9. Fair is in the eye of the beholder. Are things being unequal fair? * It depends on the cause, inequality is a by-product of freedom 10. But what is being done under the Fair Go Action Plan to fight this:
Policy list and outcomes A Look at Labor and Fair Go Action Plan. Only Focus on 3 of 5 ‘campaigns’
- Ease pressure on family Budget
- Give workers a tax break of up to $1,063 each year, instead of giving handouts to the top end of town.
- Great for cutting tax, but what are the handouts to the rich? Tax cuts as well?
- Level the playing field for first home buyers by reforming tax concessions for property investors so they don’t have an unfair advantage when purchasing existing homes.
- I’ve talked about this a lot already. Check out ep 114 – 9/11/18 on Housing Policy
- ‘Existing Homes’ is still an unfair advantage for new properties
- End the Medicare Freeze and addressing rising out-of-pocket costs and keeping healthcare affordable
- Affordable for who? There is no free lunch. There are two situations – What happens when the tax runs dry?
- Force doctors to work for free (no doctors), or cap prices resulting in worse healthcare
- Over 25 years, since 1989 the cost of the system has gone up from $50.3bn to $154.6bn in 2014 (in real dollars – i.e. accounting for inflation)
- Partially due to age and size of the population, purchasing parity expenditure. Spending of 124% increase, started using more as the system is essentially free under Medicare.
- Affordable for who? There is no free lunch. There are two situations – What happens when the tax runs dry?
- Cap private health insurance premiums, with increases capped at no more than 2 percent for the next two years.
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- Fewer benefits and worse cover for people. Insurance companies won’t lose money on this, but you will
- Better regulate power prices with a new regulated capped offer protecting families and small business from price gouging by big energy companies.
- This creates a price ceiling and some rolling blackouts. Look at past ep what happens when prices capped
- Give workers a tax break of up to $1,063 each year, instead of giving handouts to the top end of town.
- Stand up for workers
- Restore penalty rates to deliver fair pay for up to 700,000 retail and hospitality workers.
- ‘fair’ pay, is when work is completed fair? Certain industries do well when people aren’t at work
- Crackdown on dodgy labour hire. Ensuring labour hire companies must provide workers the same pay and conditions as those employed directly
- Labour hire companies go out of business as they must pay temp staff the same as directly employed employees.
- Close the gender pay gap, taking action to deliver equal pay for equal work by forcing big business to report on their pay gap publicly.
- Already law to pay equal amounts and companies already have to lodge their pay gaps
- Making companies post these as well cannot do any good
- Restore penalty rates to deliver fair pay for up to 700,000 retail and hospitality workers.
- Build a stronger economy that works for us all
- Make multinationals pay their fair share and close the loopholes exploited by multinationals and stop profits being stashed away in tax havens.
- Good luck with this, if they wanted an effective way they’d lower the company tax rate and incentivise companies to pay tax here
- Wind back the excesses in dividend imputation and end cash refunds on share dividends for investors who don’t pay tax.
- This isn’t going to hurt the ‘wealthy’ but it will hurt a lot of people.
- Non-industry super (pension environment 0% tax) and Industry super already doesn’t do it
- Lower income pensioners E.g. Retired 20 years ago, no super, saved for own retirement
- No aged pension as $50k of cars and home content, $800k of investments so they fail the asset test
- Income from shares (5%) - $40k, split between the couple. Inc FC = $57k assessable
- $3,794 tax payable – Net income of $53,350
- No Franking credits - $40,000 (can vary depending on market, e.g. TLS)
- Compare to a couple with $0 - $35,916 p.a. in Aged Pension
- Income from shares (5%) - $40k, split between the couple. Inc FC = $57k assessable
- This isn’t going to hurt the ‘wealthy’ but it will hurt a lot of people.
- Cap deductions for use of accountants with a maximum $3,000 deduction for using accountants to prepare personal tax returns.
- Achieves very little as the ultra-wealthy have companies/trusts to pay for accounting
- Close loopholes used by the top end of town to stop the use of family trusts to avoid paying fair share of tax
- The ‘top end’ well who is it? It’s lots of people. They have investments for their family. But there are no loopholes, it’s just redistributions. Tax is still paid somewhere.
- Fair share is convoluted. How much should they pay? These are honest questions
- Reverse Morrison’s tax cut for millionaires, ask the top tax bracket to pay a little more so we can pay down the Liberals’ debt in a responsible way.
- Touché on the debt point: Liberals haven’t done great on this but it seems a little rich coming from Labor though
- Top Tax Brackets: About 4% of the population, next bracket down is 6%, so a total of 10% of the population
- Already paying 52% of total income tax. Plus, additional taxes for consumption (GST, Stamp Duty)
- Remember the Gini coefficient for income equality? What about tax equality?
- 0.7 when looking at tax paid, which is not very fair when income is at 0.35 – Remember 0 is pure equality
- Make multinationals pay their fair share and close the loopholes exploited by multinationals and stop profits being stashed away in tax havens.
Do these really help? Will it make things equal and fair?
I know it has been a heavy episode, so here's a quick recap
- Easing budget pressures and standing up for workers. They all help to achieve their goal, but everything has a consequence
- Destroying competition and free market forces can lead to worse off living conditions
- Does this build a stronger economy? All of these were ways of getting more money out of people
- Nothing in it that helps companies, which is heartless right? What if business was the main focus? Hear me out
- 10.6m people employed in Australia, 1.9m public service and 8.7m in companies (82%)
- More legislation won’t help wages grow long-term, forcing it doesn’t make it sustainable
- Create wage growth with an increased need. If there are lots of companies that need skilled labour and there isn’t enough supply, then wages go up
- 2.1m companies in Australia and over 97% are small business, 2.4% are medium (20-199) and 0.2% are large (200+)
- Greater competition between companies and greater services as well will lead to a stronger economy, higher wages and overall more prosperous society
- 10.6m people employed in Australia, 1.9m public service and 8.7m in companies (82%)
- Nature of government reduces ‘fairness’ in an economy: Free Market Vs Capitalism, they are not the same. The free market is the exchange of goods and services and is equal with no regulations
- Capitalism revolves around wealth creation. However, if someone controls the free market (like the government) influence can then be bought from the government
- When the free market gets hijacked by Capitalism, It will always happen. If there is something with power over this structure, by nature you get super large companies that can buy regulation and influence policy with their control.
- Company Stores where workers are the consumers
- Both sides are guilty of this, where there is money in politics, which is needed to win. Becomes a pay to play situation
- 30-40% of donations are from untraceable sources ($62m last FY) Most donations from high regulated industry
- Only 10% are clearly disclosed and the rest use some creative accounting and redistributions somehow
- Bill Shorten and Negative Gearing policies to help new construction back when he was in the Construction union AWU
- Franking credit policy helps industry super, to which he was on the board of AusSuper in 1998-2007
- Feel free to do some research on donation history of payments from AusSuper to AWU, to Shorten 2007
- If you pay more, you tend to get more meetings and typically your wishes are fulfilled
- Capitalism revolves around wealth creation. However, if someone controls the free market (like the government) influence can then be bought from the government
The reason why I talk about this so much is I actually do care I just think that the issues won't be solved through any of these policies. It will just make life harder for those actually trying to accumulate their own wealth
- Truth can hurt but it can help: If we believe that just taking more money and restricting what people can do is the solution, then it is a race to the bottom
- If we spend all time not looking at the real issue
- Nothing is fair: Examples of the fair go
- There will always be differences
- Some people are 7ft tall, others 5ft.
- Is it fair most of you would be paying a fairly hefty chunk to pay for politicians
- Salaries and expenses ($100m each year) and totals around $506m each year
Sorry, that was such a large episode, I hope you enjoy the rest of your day.
Resources:
Chapter 3 - Poverty and Inequality in Australia https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Community_Affairs/Completed_inquiries/2002-04/poverty/report/c03 Persistent disadvantage in Australia: extent, complexity and some key implications
https://www.aihw.gov.au/getmedia/9592571c-801c-46be-9c9d-75d0faffbb5b/aihw-australias-welfare-2017-chapter1-6.pdf.aspx
Australia's political parties got $62m in 'dark money' donations last year
https://www.theguardian.com/australia-news/2018/sep/03/australias-political-parties-got-62m-in-dark-money-donations-last-year
Welcome to Finance and Fury. Today we have Jayden with us, and we will be talking about negotiating with banks and refinancing.
Refinancing: Pros and Cons and how to negotiate Bank Valuations
Interest rates might go up or might go down.so this is all about asking, is my bank giving me the best rate? The difference between 4.55 and 4.5 could mean 10’s or 100’s of thousands of dollars over the life of your loan.
There are lots of reasons to refinance your home loan. If you have a home loan you are probably getting bombarded at the moment, from your next-door neighbour to the 7 o’clock news and they’re all talking about refinancing.
So is now a good time to refinance?
There are a few different situations where refinancing could make sense for you, so let’s go over a few of the main reasons to refinance your home loan in 2018.
First up, what is refinancing?
Refinancing is the process of taking out a new mortgage to repay an existing loan: often because there has been a change in your personal or financial situation, or simply because you want a better deal on your home loan.
1. I want to reduce my home loan repayments If interest rates have changed since you got your original home loan you could be able to refinance into a new loan with a lower rate.
Let’s say your current home loan interest rate is around 4.50%, you owe $500,000 on your mortgage and current repayment is $2,534 per month. You could look at refinancing your home loan to a cheaper lender who can offer an interest rate of 3.75%, your monthly repayments would reduce down to $2,315 per month, reducing your repayment by $218.
How much are home loan repayments?
| Loan amount | $ 350,000.00 | $ 400,000.00 | $ 450,000.00 | $ 500,000.00 | | 3.75% | $1,620.90 | $1,852.46 | $2,084.02 | $2,315.58 | | 4.00% | $1,670.95 | $1,909.66 | $2,148.37 | $2,387.08 | | 4.25% | $1,721.79 | $1,967.76 | $2,213.73 | $2,459.70 | | 4.50% | $1,773.40 | $2,026.74 | $2,280.08 | $2,533.43 | | 4.75% | $1,825.77 | $2,086.59 | $2,347.41 | $2,608.24 | | 5.00% | $1,878.88 | $2,147.29 | $2,415.70 | $2,684.11 |
The craziest part is the power of compounding interest.
Using the ASIC MoneySmart refinance calculator to do the numbers, if you were to switch to the new lender with an interest rate of 0.75% lower, on your mortgage of $500,000 you would not only save $218 per month but you would save $78,425 over the life of the loan! All by redirecting the extra repayment amount onto the principal.
2. My property has increased in value Broadly speaking, property prices in Australia have increased over the past 5-7 years. If your property’s value has gotten a boost, you might be able to refinance and get a better rate. These days banks give better interest rates to borrowers with more equity.
For example, if you bought your home for $500,000 and had a loan of $450,000 but the property’s value has since increased to $600,000 you have increased your home equity from 10% to 25% and lenders will be more willing to give you larger discounts to get your business, reducing your interest costs and helping you pay off your loan faster!
What if values come back lower than what you thought?
Recent Case Study: Getting another valuation [from 2018]
As you can see getting another bank valuation resulted in a $130,000 increase in the value of the property. This is the exact same property, at the same time – just by different valuers.
| Date | Valuer | Amount | Difference | | September 2018 | Bank Valuation 1 | $640,000 | – | | September 2018 | Bank Valuation 2 | $640,000 | – | | September 2018 | Bank Valuation 3 | $770,000 | $130,000 |
Challenging a Bank Valuation – Probability of Success
It is estimated that only 3 percent of clients are able to successfully challenge a valuation. However, it does not rule out the fact that bank valuations are not always correct.
Valuers can make mistakes and there are two main factors that affect the valuation of a property:
- The error made by valuers
- Their personal opinion
Effect of Valuation on Refinancing
Property valuation is crucial when it comes to refinancing. In case of a low valuation, loan to value ratio (LVR) becomes higher. High LVR requires lender’s mortgage insurance which ultimately increases the overall cost related to your home loan and decreases the equity amount that you can get access to.
Measures to Take If You Receive Low Valuation
- Find Out the Reason for Low Valuation - The primary reason for low valuation is the fact that valuers do not find any supporting evidence for comparable sales of similar properties, and are unable to find supporting evidence for the estimated value of that property.
- Look for Recent Sales of Similar Houses - You can also research yourself and find houses that have recently been sold and are similar to your house.
- Go for Independent Valuation - If a lender shows you a file that contains property valuation and you do not agree with the figures, it is better to get a private valuation. You can also go to another bank for the property valuation. In any case, banks always use the lower of the two valuations.
3. The fixed rate period on my loan is expiring It is very common in Australia to have a fixed rate term of between 1 to 5 years. When your fixed rate finishes at the end of that 1 to 5 year period (or expires in bank talk) your loan will change back to a variable rate. In most cases this is the bank’s standard variable rate which doesn’t have any discounts! You can avoid this by switching to another fixed rate, or looking at your refinance options to maximise your interest rate discount.
4. I can afford to pay more off my loan * Changing the length of your loan term can help pay off your loan quicker. If you can afford higher monthly home loan payments, maybe because you’ve had an increase in income, you could refinance to a shorter loan term. * Look at reducing your loan term from 30 years, to 25 years helping you pay your home loan off faster, saving you literally tens of thousands of dollars in interest payments over the life of the loan. * Example Before. Say you had the home loan of $500,000 and you refinanced your loan to a new interest rate of 3.75%. If you were to keep the repayments the same as what you paid with your old bank at $2,535 per month while on the lower interest rate you would save $133,229 over the life of the loan, and pay off your home loan 52 months earlier, or SLASH 4.3 years from your home loan term.
5. I want to increase my loan and take cash out A cash-out refinance allows you to use the equity you have in your home to borrow money at a lower cost. You may want to invest these funds into shares, or use as a deposit of a new investment property.
- The example above, let’s say your house is today worth $600,000 and you have $450,000 left on your current mortgage. This means you have $150,000 in home equity. You could refinance to turn $30,000 of this equity into a home loan, bringing your total lending to $480,000.
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You can potentially above an 80% LVR (loan to value ratio) but you would need to pay for lenders mortgage insurance, so it would be best to talk to your mortgage broker and understand what these numbers look like.
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I want to do some renovations * After you’ve been in your home for a few years you might feel it’s time to do some renovations. These generally fall under 2 categories: Simple renovations, like adding air-conditioning, solar panels or painting, and Structural renovations, like adding an extra level to the house, a pool or new kitchen.
- If you are doing a simple renovation, the numbers work exactly the same as taking cash out and you would rely on the equity in your home. With Structural Renovations, you can rely on the completion value of the renovated property.
- So for example, if you are adding an extra bedroom and bathroom to the property which would increase the value of the home by an additional $100,000, the bank can lend on this figure. Using the example above, if adding an extra bathroom and bedroom increased the property’s value from $600,000 to $700,000 you could then increase the lending to $560,000 meaning additional lending of $110,000 which can go towards your renovations. The bank will want to see a building contract.
7. I want to consolidate other loans (and credit cards) Lastly, you can refinance to consolidate other loans and debts into a single and possibly more affordable payment. This can be handy in situations where you have high-interest rate loans and debts like credit cards, personal loans or car loans.
A debt consolidation home loan refinance works in a similar way to a cash-out refinance, where an increased portion of the loan can be used to pay out other loans and debts. Your old home loan will be replaced by a new one that includes the amount you used to pay out those other debts.
Debt consolidation works well if you have lots of different credit cards and are paying really high-interest rates. The only downside when consolidating debts is to consider the new loan term, and what the total interest costs will be after you have consolidated everything.
If you have any questions or queries let us know at the contact page here.
Additional resources:
How to challenge a bank valuation
https://www.huntergalloway.com.au/how-to-challenge-a-bank-valuation/
Reasons to refinance your home loan
https://www.huntergalloway.com.au/reasons-to-refinance-home-loan/?fbclid=IwAR1nHO9HmYKJLh9jdj0nMjw4YL-lj5Ii8KVvHIuYfxRsOCSsJggycDbsxNQ
Hi everybody and welcome to Finance and Fury the Furious Friday edition. Today’s episode is the Stages of Socialism Part 3 – the series talking about politics.
The first episode was about the Fabians and their strategies, then we addressed the political spectrum and how nations shift along it over time
- If you haven’t listened to those episodes it may be worthwhile catching back up or if politics isn’t your thing feel free to skip because I know it can be dry
- I Feel like the basics aren’t talked about enough, especially when it comes to passing laws etc. so sorry if it is dry but I find it interesting and I hope you do too
Recap: 1. So in the last episode, we talked about democracy and the transition to socialism: Getting the power to change the rules in democracy comes from the side with the most votes, and the ability to form legislative actions. 2. In today’s episode, we will talk about how political change occurs in Australia, through legislative powers, and how to get power to legislate from numbers * Also, run through How the population gets ‘mobilised’ as a voting block and increasing the numbers of people supporting * Want to break down a few trends that are of increasing popularity in politics over the last few decades
The Basics The government has powers of control over the populace through judicial processes (Laws and the ability to enforce them)
- How are they made? This is from the Legislative Branch of Government also known as Parliament
- House of Reps or Lower house – 150 members across electoral zones by equal weight of population
- Senate or Upper House – 76 members – Each state gets 12, NT and ACT get 2 each (both increase over time)
- They meet at Parliament house, Construction began in 1981 – Wanted ready 26 Jan 1988 – 200th Anniversary of Settlement
- It was expected to cost A$220 million and be ready in May, but it actually cost more than A$1.1 billion to build (5x)
- Laws: Bills introduced into House of Reps – 2 readings, house committee, changes, and amendments, voted on
- Senate, same process, the bill gets voted on and sent to the Governor-General to sign and put into law. Who is the Queen’s representative in Australia
- PEO (Parliamentary education office): About 200 bills are introduced into Parliament each year and about 90 percent are passed into law
- Ranges from 264 (in 1992) to 12 (in 1907), and an average per year since 1901 is 108. The average has increased massively over the last 30 or so years
- 90% success rate is a pretty high success rate, there are a lot of laws
- Ranges from 264 (in 1992) to 12 (in 1907), and an average per year since 1901 is 108. The average has increased massively over the last 30 or so years
- If you want to make something a law you simply need enough votes. I.e. People voting for the Members of Parliament is how you get this done
How to Mobilise the masses Rules for Radicals (RFR) is a 1971 book by community activist and writer Saul D. Alinsky. The Rules and Tactics explain a lot of the decline in the political environment over the last 40 years with personal attacks and never-ending division
- It is essentially how to successfully run a movement for change. A direct excerpt is “create a guide for future community organizers, to use in uniting low-income communities, or "Have-Nots", in order for them to gain power.”
- The book is compiled with the lessons he had learned throughout his experiences of community organising from 1939 –1971
- Divided into ten chapters, and provides 10 lessons on how a community organisers can accomplish the goal of successfully uniting people with the power to effect change on a variety of issues
- Targeted at community organisers, the issues range from ethics, education, communication, and symbol construction
- Use of symbol construction to strengthen the unity within an organisation, based on loyalty to a particular religious affiliation
- Reason being that, symbols by which communities could identify themselves created structured organizations that were easier to mobilise in implementing direct action.
- Find a common enemy for the community to be united against, the Us vs Them mentality. We see this a lot in politics, the tribal mentality
- Use of common enemy is a major theme of Rules for Radicals, purely as a uniting element in communities
Before we start Let’s go through what Alinsky wrote at the end of his personal acknowledgments in RFR:
- ‘Lest we forget (at least an over-the-shoulder acknowledgment) to the very first radical: from all our legends, mythology, and history (and who is to know where mythology leaves off and history begins, or which is which), the first radical known to man who rebelled against the establishment and did it so effectively that he at least won his own kingdom – Lucifer.’ – A.K.A Mr Satan and his kingdom was Hell
- This perfectly sums up his rules, as socialism creates a hell on earth, from history we see plenty of evidence
- Socialism has been implemented in dozens of countries and it has never worked, we encourage you to research for yourself
- Shows a certain narcissism in people that they think it will work when they try
13 rules in the book We will go through the main themes on them, and combine some for time’s sake
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“Never go outside the expertise of your people.” It results in confusion, fear, and retreat. Feeling secure adds to the backbone of anyone.
- First step is to create an expertise, newly found field of studies and theory provides validation and allows study into what you want to change
- Few are ‘experts’ in this and then they can fall back on fictional authority
- Argument from authority: a form of defeasible argument in which a claimed authority's support is used as evidence for an argument's conclusion. If someone is an ‘expert’ you hope they are correct. But how do you know?
- A well-known fallacy, but it is used in a persuasive form even with unsound logic
- Claiming that something must be true because it is said by someone who is said to be an "authority" on the subject even though they might be wrong, or knowingly misleading. There are plenty of con-men all throughout history, all with ulterior motivations like money and fame
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- Today is it backed up by the hijacking of science as 50% of studies published can’t be replicated by their own authors, and 70% can’t be replicated by another scientist
- The issue comes from funding models: authors must publish or die. The drive to get published, even if data isn’t conclusive
- It has reversed the scientific method as instead of trying to prove you are wrong, they only prove they are right. There is no assumption of being wrong and only that of working your way towards being correct, or else you won’t be getting published.
- If you want, check out the grievance studies. Some researchers published 14 fraudulent pieces of research deliberately and they got published
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“Whenever possible, go outside the expertise of the enemy.” Look for ways to increase insecurity, anxiety and uncertainty.
- This is used to create confusion, fear, and retreat. The use of the strawman creates a false narrative outside of what person knows
- What about-ism conversation: Statement, rebuttal of facts, what about something else, all until you run out of rebuttals and become discredited. To combat this, ask them what they think and get them to explain their rationale. If they can’t verbalise it, there isn’t much of a conversation that can be had.
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“Make the enemy live up to its own book of rules.” If the rule is that every letter gets a reply, send 30,000 letters. You can kill them with this because no one can possibly obey all of their own rules.
- One rule for thee and one rule for me, and it is easy to be immoral when you have no morals or just want to play mental gymnastics
- Pro-life or Choice, under the rules of the law killing a pregnant woman is double murder, and if you cause the death of a foetus it is still considered murder
- Woman’s march + Linda Sarsour with recent news showing she may have links to the Muslim Brotherhood "The male shall have the equal of the portion of two females" Quran 4:11
- Racism redefined: a tweet from Linda saying there's no such thing as reverse racism. Racism is bigotry + power. The group that doesn't have power can't be racist.
- By the same logic, Nazi’s not racist before taking power in 1933? KKK not racist now? Estimates 5-8k members
- Moral or logical inconsistency is therefore encouraged under these rules - “Generally success or failure is a determinant of ethics.” – Saul. This is very representative in groups of “by any means necessary” in their name
- One rule for thee and one rule for me, and it is easy to be immoral when you have no morals or just want to play mental gymnastics
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“Ridicule is man’s most potent weapon.” - There is no defence. It’s irrational. It’s infuriating. It also works as a key pressure point to force the enemy into concessions.
- This is where facts and logic go out the window further, If you don’t have any way to counter a person’s argument you label them. After the ‘what about’ questions are finished, easy shut down any conversation to label them as something moral irreprehensible
- Racist, sexist or Homophobic, some of the more common ones, also Nazi’s gets used a lot
- Why call someone that? If it were true we should fight the Nazis, so to stop them violence is justified
- “Pick the target, freeze it, personalize it, and polarize it.” Cut off the support network and isolate the target from sympathy. Go after people and not institutions; people hurt faster than institutions
- Labels can turn into accusations, as seen in the Kavanaugh hearings. A supreme court judge nominee Brett Kavanaugh was accused. This opened a lot of people’s eyes about the due process system.
- 4 woman accused him, one of which, Christine Blasey Ford’s letter, released day before vote (after 45 days), with no evidence got his reputation ruined without going through the proper judicial process
- Polarisation is at the core of the strategy. The narrative: if conservative, you hate minorities, women, the poor, the environment, and probably a half dozen other groups I've forgotten.
- If you have a different opinion, you are mobbed and socially ‘executed’. Because your opinion won’t be argued, just your slandered character is more effective
- People have been losing their jobs, being kicked off the internet, not being let into countries, even going to prison in the UK over having different opinions. Because that is now a crime
- Labels can turn into accusations, as seen in the Kavanaugh hearings. A supreme court judge nominee Brett Kavanaugh was accused. This opened a lot of people’s eyes about the due process system.
- “Keep the pressure on. Never let up.” - Keep trying new things to keep the opposition off balance. As the opposition masters one approach, hit them from the flank with something new.
- “The major premise for tactics is the development of operations that will maintain a constant pressure upon the opposition.” It is this unceasing pressure that results in the reactions from the opposition that are essential for the success of the campaign.
- If you're spending all of your time refuting the charges that you're extreme, racist, hate women, and despise the poor, then you're losing. That's because some people will assume where there's smoke, there's fire, and disbelieve you no matter how good your explanation may be
- If you're busy defending yourself, you can't do much
- Scare Tactics, with online boycotts as a form of corporate compliance. Instead of having people who can freely express their opinions, you can be slandered and socially mobbed by people with differing ones.
- “The major premise for tactics is the development of operations that will maintain a constant pressure upon the opposition.” It is this unceasing pressure that results in the reactions from the opposition that are essential for the success of the campaign.
- “The threat is usually more terrifying than the thing itself.” Imagination and ego can dream up many more consequences than any activist.
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“A good tactic is one your people enjoy.” & “A tactic that drags on too long becomes a drag.” They’ll keep doing it without urging and come back to do more. They’re doing their thing, and will even suggest better ones.
- Emotionally based arguments, trying to claim the moral high ground through redefining the cause but self-interest - “Goals must be phrased in general terms like ‘Liberty, Equality, Fraternity,’ ‘Of the Common Welfare,’ ‘Pursuit of Happiness,’ or ‘Bread and Peace.'” – Saul
- Give a good feeling of virtu signalling, makes you feel good even though you have helped nobody
- Social media/internet has created occupational outrage, where you get easy dopamine hits
- Dopamine trigger from likes on posts, addiction to outrage is a vehicle to get the thing people crave now
- Notice that the majority of people offended are doing so on behalf of others? This should be a warning sign. Liking a post to end world hunger won’t do anything for the issue
- Don’t become old news, always a new campaign out there, always a new dopamine trigger. The addiction to causes
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“The price of a successful attack is a constructive alternative.” Never let the enemy score points because you’re caught without a solution to the problem.
- The problem - an inability to combat ideas with ideas
- Solution? To shut down the conversation, shutting down political opponents and attacking them with labels
- “I don’t talk to Nazi’s” – Antifa. They claim to be antifascists but if anyone is familiar with the history, they are behaving like the fascists. But rather than wearing brown they now wear black
- Stolen valour for the actually brave men who gave their lives to actually fight Fascist regimes and Nazis. If Trump were a dictator, wouldn’t the journalists be dead or in a camp now?
- Plus, he deported an actual surviving Nazi, who was 95, back to Germany
- “Power is not only what you have, but what the enemy thinks you have.” - Power is derived from 2 main sources, which are money and people. Democracy must build power from flesh and blood.
- If the organisation is small, hide your numbers in the dark and raise a din that will make everyone think you have many more people than you do. This is why the very vocal minority is effective. There are 3 layers
- Eyes; organised a vast, mass-based organisation, parade it visibly before the enemy
- Ears; organisation is small, conceal the members in the dark but make the enemy think they are numerous
- Nose; if your organisation is too tiny even for noise, stink up the place through the use of violence
- You don’t need many people if majority stay silent. That’s how these rules come together via self-censorship from fear
- “Concern with ethics increases with the number of means available and vice versa.” – Saul. Basically saying, when you are a small organisation, you don’t have to act ethically to get what you want.
- If the organisation is small, hide your numbers in the dark and raise a din that will make everyone think you have many more people than you do. This is why the very vocal minority is effective. There are 3 layers
Take away: Be very worried about ‘community organisers’. Don’t just follow the crowd, the fear of being wrong or ridiculed shouldn’t control you
- Think for yourself, if you are in the position to make up your own mind, all you need to do is learn more
- Problems shouldn’t be solved with emotions as emotions can be weaponised if misinformed
- Nature of Democracy, where emotions are a great selling tool. Especially the use of hate, it's very emotional and gets used quite a bit
- Drive hatred of others. What happens when Milo, Stefan Molyneux, and Lauren Southern come to Australia? May not agree with them but they have a right to speak still
- The connection with words and violence is used as a reason to shut them down. Their words spread hate (different ideas of what hate is)
- So violence is used to shut them down, to avoid violence. They become a self-fulfilling prophecy
- A brief overview of some elements being seen, now you are more informed. Being a good person know what you say is true and not trying to hurt anyone along the way. I may be wrong on something, but I’m not lying about it
- Don’t trust what I say is fact, go get a second opinion, just like a doctor. But something I say may be wrong, but if so, explain it instead of insult
- I want you to research for yourself. Find the truth about something, that is an absolute, can it be proven and or can it not?
- So in the next episode, we will look at a ‘Fair Go’ Australia. It’ll be a look at the policies to see if things are more equal or less. So we will go through a few reports that are coming up in these discussions and how Australia is actually equal and how legislation may change this.
Thank you for listening today, and enjoy the rest of your day.
Contact us over at the contact page here.
Welcome to Finance and Fury, the Say What Wednesday Episode, where every we answer questions from you guys!
This week’s question comes from Nelson,
“Hi mate, Love the podcast. Admittedly don't agree with some of your more conservative political opinions but that aside I think the financial education you are providing to many people including myself is amazing. I have a question for Say What Wednesdays, something probably quite close to your heart.
Can you please elaborate on the role of a financial advisor/planner. What do they do? Do you have to pay them up front? And, as a 24-year-old would it be suitable to go see a financial planner from the beginning of my journey or are they more targeted towards older people?”
Awesome questions! And thanks also for sticking with the podcast even though we may have different political points of view.
It’s really nice to see, because there seems to be a lot of people bail on others, just because there’s one thing they don’t agree with.
For anyone else – if there’s anything you disagree with please let me know! I really like to hear other points of view as I might be missing something or haven’t thought about, so any feedback would be greatly appreciated.
To the Questions: The term Financial Adviser/Planner can be fairly broad which is why there is a bit of confusion about our roles. Each firm does have different methods of providing advice, and different ways of charging fees which further complicates things.
The Focus of Advice; What Advisers Should Do Advisers SHOULD focus on helping individuals achieve their individual financial goals
- How well this is done does vary - giving the industry a pretty well-deserved bad reputation.
- Reports of ‘self-interested’ advisers. This might be inappropriate advice for customer given just so the adviser can benefit.
- The main focus should always be on how to achieve each client’s objectives
- The advice provided to younger individuals should focus on setting up some foundations for building wealth over time, and achieving lifestyle goals such as buying a house.
- For someone who is 60 and looking to retire, the advice should be around strategies for funding income passively after they finish work.
- Cookie cutter advice for everyone, regardless of their situation, has landed some advisers in trouble with ASIC as the advice is not always the most appropriate for the individual’s situation.
The Process The process and the type of advice varies between advisers
- Advisers’ process can vary but it generally involves at least 2 meetings, where one is a “Fact find” meeting, and the second is a presentation and explanation of the financial plan (called a “Statement of Advice”).
- My initial process involves meeting with clients (either in person or online) to complete a fact find, where we work out what people want to achieve financially (short and long term), looking at what they have to work with now, and then ways of achieving this.
- Research and prepare strategies that will help to achieve these goals. These strategies are discussed with the client in a second meeting.
- The advice is then finalised and presented again with the chosen strategy in a third meeting.
- Advice is then implemented and reviewed regularly – I prefer to think of it as an ongoing relationship
- This is why it is important to get along with and trust the person, which is a difficult initial step to take.
Costs In most cases, initial consultations are at no cost.
- Advisers will either charge a fixed dollar amount or a percentage of the funds invested / under management.
- Upfront initial advice costs, and then ongoing annual costs (“Upfront” and “Ongoing” Fees)
- Percentages – these advisers don’t normally want to see younger/low balance individuals
- It isn’t very profitable when there is a low or no balance to charge a percent against.
- This is how all of the industry used to charge, up until the past decade - plus product providers used to pay percentage commissions on the balance of funds invested to the adviser (up until 2014).
- This is also where the reputation came from that advisers only want to see older clients, as older clients tend to have the largest balance out of the demographics to target.
- Savvy tip: If an adviser is charging a percentage of funds invested as their upfront fee, invest a lower amount upfront and then contribute funds later - $1m to $50k, at 3% ($33k to $1,650)
- Flat Fees – Typically charge based on the level of services provided
- Strategy, product, meetings – this all depends on the specific firm as to what is charged
- Percentages are slowly dying off
- Fee Disclosure Statements (FDS) and Opt in regulations
- This is what sparked a lot of the Royal Commissions – Advice business provide letter with $ and clients have to opt in every 2 years
- People were getting a letter in the mail showing they had paid a few hundred (or thousands!) to someone you don’t know was charging you.
When to see an Adviser * In my opinion, it is always better to start thinking about setting your finances up sooner, rather than later. * At 24, you have around 36 years to work towards your retirement (assuming you want to work till 60). * Knowing what you need and what you are on track to achieve is the first step, as it gives a long time to close any gaps. The longer the time, the easier it will be to achieve. * Example: $80,000 of passive income needed = $1.6m invested earning 5% (assuming no tax, just for simplicity) + 36 years’ time = $194,602 (future value) needed = $3.9m invested * Projections + Perhaps you see you’re on track to get to $2.5m by 60: you’d prefer to know now, so you can start to invest the $545 p.m. now to begin closing the gap of $1.4m + Opposed to being 55 years old with $2m and needing to invest $18,600 p.m. to close the gap in 5 years + 7 times longer requires 5 times less in contributions due to growth
Is advice for you? – Knowing what you are trying to achieve is better * Depends on how committed you are * Depends on how time poor you are – Some people love to DIY which is great, but sometimes life takes over
Thanks again for the questions!
Welcome to Finance & Fury! Today we’re talking about five property investing myths you have to stop believing.
At the moment property has gone from being the most talked about, exciting thing… to the most talked about, negative thing.
Since 1994 there has been considerably accelerated growth in the property market. Generations have seen this, leading everyone to believe that “property always goes up”. Everyone knows someone who lost someone in the stock market especially around the time of the GFC but made money on property.
Myth one: Negative gearing is a great investment strategy (especially for the tax benefits)
Negative gearing relies on you making a loss on an investment property while speculating the capital values will increase enough over the longer term to make a profit. While it can be good for some investors, it isn’t going to be perfect for everyone, so you should consider looking at positively geared properties or reducing your overall debt position.
- Chalk this myth up to property spruikers and investment marketers who have a vested financial interest in getting you to overpay for property.
- People have made money from negative gearing in Australia, but there are better investment strategies out there than relying on negative gearings’ tax benefits.
- What’s a quick example of negative gearing?
- Simon buys an investment property, and the expenses for this property are more than the rental income he earns, resulting in a $15,000 annual loss. In other words, Simon has to contribute $1,250 each month from his cashflow to hold the property. As a result, Simon can use this $15,000 annual loss to reduce his taxable income from $110,000 to $95,000 resulting in a $5,850 tax subsidy to Simon. The property still costs Simon $9,150 per year.
- Negative gearing is a bad investment strategy for a number of reasons.
- It robs your cash flow. In Simon’s case, he needs to pay $1,250 of his income every month to hold the property.
- You can only make money by selling the property. But remember, each year Simon holds the property it costs him $9,150 after tax.
- It generally relies on you being heavily indebted and can limit the number of investments you can hold. It costs Simon $1,250 every month to hold the property which limits his borrowing capacity.
- Depreciation tax benefits reduce over time.
- It is reliant on a tax strategy that could be removed after the next federal election. Although it should be grandfathered, meaning no retrospective tax changes, so Simon may not be affected.
Myth two: The Australian property market is going to drop 40%
The media had been suggesting properties in Sydney and Melbourne were set to fall by 40%. This is VERY wrong.
Need convincing? In the same 60 Minutes episode that Martin North made this statement, 60 Minutes’ reporter Tom Steinfort incorrectly reported Australian property prices have only ever gone up.
- Australia’s property market moves in cycles, and Australia’s largest housing market Sydney has seen values fall 5.6% since their peak in July 2017. But this is nothing new.
- In the GFC we saw Sydney dwelling values fall 7% over 12 months,
- After the Sydney Olympics (downturn in 2003-2006) we saw a reduction in values of 7.1%
- So, what about that 40% fall in property prices?
- The forecaster Martin North suggested the 40% drop in house prices was not his central scenario.
- Australia’s unemployment rates would have to hit 9.5%, mortgage stress levels would need to increase above 40% and bank losses would need to increase fourfold.
- It’s important not to think of Australia as one single property market. Each individual state and city is in its own stage, within the property cycle.
- You are buying a property, you are doing just that: buying the individual property and not the market. So individual property research is key.
- The positive factors underpinning our property market include:
- Strong population growth and net migration up 27.3% year-on-year;
- Urbanisation in limited supply areas
- Low unemployment and good employment growth, with ABS reporting “trend employment increased by 303,100 persons (or 2.5 per cent), which was above the average annual growth rate over the past 20 years of 2.0 per cent”; and
- Inflation is under control, at the lower end of the RBA’s target band of 2-3%.
Myth three: Rent money is dead money
You should buy where you live, get a massive mortgage, and spend the rest of your life paying it off right?
- Rentvesting allows you to live where you want, and invest where you can afford.
- With Sydney and Melbourne median house prices nudging towards $1 million, saving a deposit seems to be getting harder for most home buyers. So rather than buy on the outskirts, why not rent where you want to live and invest where you can afford?
- Pros: For the lifestyle. You can live close to your work or in the city, and live the lifestyle you want to live.
- Get into the market quicker. In Sydney, the average place will set you back $1 million.
- You can choose where you want to invest. With rentvesting, you don’t need to buy where you want to live. You can invest in outer suburbs or different areas to give you more choice.
- If you own the house you’re living in and decide that you want to travel or move to a new city, you need to sell it.
- When renting, you can just wait until your lease runs out, instead of having mortgage worries. Instead, with rentvesting, you’ll have a property manager who will take care of it, so you have complete flexibility.
- Ability to diversify. If you’ve got a home, you want to try and pay it off as quick as you can. But if you’ve got an investment property you can make a minimum payment on your loan and focus on other things. You will be able to diversify your investments — for example in different geographical locations, different asset classes (houses, units or townhouses) or different classifications (shares or property).
Myth four: Renovations always add value to property
I’ve done my fair share of renovations but I’m sorry to say it’s not true that renovations always add value to a property.
- Might seem fairly logical spending $40,000 on a new bathroom and kitchen should add $40,000 value to your property, this might not actually be the case.
- Michael Matusik using Underwood in Brisbane as an example – two thirds of the detached houses resold across South East Queensland over the last decade have had a renovation between sales.
- One out of four cases, the renovation costs were close to half of the previous purchase price. And in 10% of cases, the cost of this renovation actually exceeded the cost of the previous total purchase price.
- So, while these property owners may have spent more than the previous purchase price on their renovations, they may not have added the same amount to the value of their property.
Now I’ll admit, there is no broad-brush approach to property renovations that will work across Australia. But, before you consider any renovation work, it’s worth taking the time to research the local area and speak with local real estate agents. Understand what appeals to local buyers — and how you can maximise the bang for your renovation buck.
Myth five: The banks aren’t approving investment loans
In August, the ABS reported investment housing commitments fell by 1.20% and the total value of dwelling financing commitments fell 2.1%. So, have the banks stopped lending?
- What about the reports from earlier in the year that up to 40% of loan applications were being rejected? Is the sky on investment lending falling? - No.
- Yes, the financial services royal commission has had an impact on the way the banks are assessing home loan applications. But in the last six months, we have found while the banks are requesting more information on 57% of applications (compared to 36% last year), the total number of home loans submitted to settled are in line with previous years. In other words, the banks are asking for more information and taking more time to assess, but still approving the right loan applications.
So, what is the secret to getting investment loans approved?
Look at other banks
- Different lenders have different policies. Where this impacts lenders today is with the banks’ serviceability benchmark rates meaning some banks will assess the loans you hold them at a higher interest rate than those held with another bank.
- Put another way, say you have an existing loan of $500,000 with bank A, and you’re looking at applying for a new loan of $250,000. Applying with that same bank will mean they assess your existing loan at 7.25% based on P&I repayments. If that $500,000 loan was held with another bank, and you were applying with Bank A for a new loan of $250,000 they would take the repayments of the $500,000 loan at the actual amount being closer to 4% increasing your borrowing capacity.
Principal and interest repayments
- What would have been considered insanity a few years ago is now a reality. After APRA’s speed limits put in place last year, investment interest-only loans attract a higher interest rate. Look at principal and interest options, it might actually work out better for you.
- According to Macquarie Bank, “using a 0.5 percentage point [interest rate] differential, Macquarie found that a bank customer in the top tax bracket with a $500,000 loan would be $6,000 better off after five years, and $12,000 better off after 10 years switching to P&I.”
Lender, lender, lender
- It used to be location, location, location but now its lender, lender, lender.
- Another policy we are finding can trip up investors is how rental income on apartments is treated.
- There are some lenders who will reduce rental income by 50% depending on the specific complex (presumably determined by the lenders total exposure to that apartment complex). Ask your mortgage broker to check ahead to make sure you don’t get caught out.
Sheesh, Jayden gets around...here is a link to where these myths appeared on the Smart Company website
Welcome to Finance and fury, the Furious Friday edition. Today’s episode is Stages to Socialism Part 2, so if you haven’t listened to last Friday’s episode it might be worthwhile doing so.
To start I want to talk about oranges. They’re a delicious fruit, they grow on trees, and then mature. Then you can eat them. They have nutrients, that helps you survive.
- Have you ever left an orange on the bench too long? It starts getting a small soft soggy area, that slowly expands
- Then that mould starts to grow, this starts eating the orange and eventually consumes the whole thing
- I always thought of the Government as mould and the orange as the economy/free market/individuals
- The free market matures and Individuals get wealthy. Then government starts growing, we ignore the orange, and it rots
- Can’t blame them, just like companies, or bacteria, every organism has one purpose to multiply and survive. This is the best tactic to last.
- Unfortunately, it is an organism which doesn’t create, it only redistributes. Spending has to come from somewhere, like the population and companies and paying tax
- Don’t get me wrong, governments are needed. But the question people disagree on is needed for what?
- Political Spectrum, it isn’t just left/right, there isn’t a simple way to look at this
- Think of this political spectrum as an X shaped chart. There are two axis
- Authoritarian to Libertarian – How much freedom do you have as an individual
- Government intervention levels/the size of government
- Rules and regulations that you must follow. On one end you have dictatorships, and the other is anarchy
- Economic Left (Communism/Socialism) and Economic Right (Capitalism)
- Control of markets and owning the means of production
- Property rights for individuals and are there many regulations to follow. Communism is on one end and the free market is on the other
- Authoritarian to Libertarian – How much freedom do you have as an individual
- Government interventions – Authoritarian to Libertarian
- Power corrupts and absolute power corrupts absolutely
- Once a government gets 100% control, the system of government doesn’t reverse that quickly
- Roll the dice every few years/decades, get a new leader. They may be worse and more corruptible than the last guy
- Leads to a slow decline in civilisations, for example, Rome with emperors, Medieval Kingdoms with monarchies
- Chop the head off the snake and the thing crumbles
- Inefficient – Become so heavy that it crushes itself, and doesn’t operate efficiently.
- Barriers to entry (Regulations) and How much tax you have to pay (Redistribution)
- Power corrupts and absolute power corrupts absolutely
- Economic Control and private property
- Creates four broad spectrums
- Economic Freedom to legislated equality
- Personal Freedom to legislate morality
- Examples
- NAZIs were authoritarian, with traces of economic left but more socialist
- Fascists like Mussolini who was very authoritarian. Decent amount of capitalism (But corruption and often nepotism that fails it)
- Stalin and Lenin were communist, with authoritarian regimes. On the economic left with no private property ownership
Our system Does Democracy Work? A government of the masses.
- Authority derived through mass expression, What most people want
- Attitude toward law is that the will of the majority shall regulate
- Based on deliberation by passion, prejudice, and impulse, without restraint to consequences.
- We are a free market, democratic country, with socialist policies
- Military, Police, Health, Public Education, Roads. These are all publicly funded.
- Doesn’t make us a socialist country, we are a free market
- This is good – Government is essential in many basic needs. It provides a platform for society to exist
- How well they do those things is a core component for the success of each country
- Protection of population
- Enforcing laws with the judicial system
- Infrastructure through Planning and contracting
- How well they do those things is a core component for the success of each country
- How much involvement is where people start disagreeing. Either more or less Government?
- How much time does anyone have to know what politicians are doing, let alone understanding each individual issue?
- George Washington once said "It is one of the evils of democratic governments, that the people, not always seeing and frequently misled, must often feel before they can act right; but then evil of this nature seldom fail to work their own cure."
- It isn’t feasible to expect every citizen to be sufficiently informed and to vote on every law
- Problems they are trying to solve are complicated and takes time to fully comprehend
- People are busy with their own lives
- Democracy can go to Monarchy/Dictator quickly
- The people tire of their involvement in the mundane processes of legislation and legal administration.
- Over time they fail to remain properly educated as issues mount and become more complex.
- The people neglect governmental affairs when times are comfortable and erupt in a firestorm of uncontrolled emotions when times are uncomfortable
- If you rely on the government and that starts failing you, what do you do? This creates unrest
- In one of any significant size, dissatisfaction and disorder erupt and the people demand leadership.
- When this becomes exhausting or dangerous, the people look for a popular, charismatic leader who can bring order and direction to the failing government.
- As populations and leaders change, the direction the Government sits can start to change
How does a state start moving along these axes?
How we go from here to Economic Left/Authoritarianism?
Preamble: There are stages to socialism. The first is capitalism and the last is communism.
Stages: 1. Stage One — Capitalism: Before any economic or political transformation to socialism there must be capitalism * Capitalism is necessary for the transformation into socialism, as only capitalism can produce the necessary vast amounts of wealth as a promise of redistribution + Quote from Manifesto of the Communist Party - The bourgeoisie, during its rule of scarce 100 years, has created more massive and more colossal productive forces than have all preceding generations together. * Capitalism comes with Freedom and only freedom can create the ‘classes’ of wealth. The proletariat and bourgeoisie + Due to freedom of choice, capitalism creates income and economic disparity (inequality) + This is the tool that the Fabians use, class warfare and misinformation. The only reason a person is poor is from someone stealing it from them. Giving people no education on how to succeed is the problem. + A necessary relationship for the emergence of support for socialism. Marx and Lenin all knew this. + Without capitalism, there is insufficient wealth for redistribution = Economies will stagnate and socialism will become unaffordable. Just like in Venezuela.
- Four Laws of Economic Freedom Prosperity - the climate of wholesome stimulation protected by law. There are four laws of economic freedom which a nation must maintain if its people are to prosper at the maximum level, there are:
- The Freedom to try. – Equal opportunity
- The Freedom to buy.
- The Freedom to sell.
- The Freedom to fail – Incentive reduction
- This creates large inequalities, however, there are higher standards of living for everyone
- People who are considered ‘poor’ would be well off in most of the rest of the world
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James Madison - "Where a majority are united by a common sentiment and have an opportunity, the rights of the minor party become insecure."
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Stage Two — Transition to Socialism: Getting the power to change the rules
- “dictatorship of the proletariat” – This is Mob Rule or a government where decisions are made by democratically elected representatives of the working class. However, once elected, the population has little say in policies made
- Side with the most votes wins. How do you win votes? Carrot, no carrot or Stick approach
- Once a Government is elected (or form majority) They can put a few policies in place, through the normal channels
- “dictatorship of the proletariat” – This is Mob Rule or a government where decisions are made by democratically elected representatives of the working class. However, once elected, the population has little say in policies made
- Stage Three — Primary & Secondary Socialism: What to do with legislative ability?
- Increase control and power of government. This includes educational, medical, or similar services. Until controlling every area of life
- Completed through legislative powers: The government will have powers to give it a necessary control over the populace through judicial processes
- Private ownership of property still exists only as long as unjust and excessive ownership is abolished.
- Progressive taxation policy: Taxation of 47% of income, total taxes of 60% (GST, FBT, rates, land taxes)
- Disincentivise those who work
- “discrimination is employed against the bourgeoisie” – Create the vanishing of upper and middle classes
- “important element of a democratic precedent” – Create policies to reduce the ability of prosperity
- Progressive taxation policy: Taxation of 47% of income, total taxes of 60% (GST, FBT, rates, land taxes)
- Need to create more people in poverty (or disenfranchised) to increase voting base
- Done by reduction of employment conditions, taxing companies (payroll tax), make it hard to operate
- While operating as a competitor for employment
- Establish security, Through redistribution via force (law and penalty)
- The goal is to centralise the means of production under the state
- Slowly reduce the productivity of the private sector, making the government and private sector competitors
- The quality of citizen’s life should have been improved, through redistribution to the majority, so the public opinion remains warm towards socialism and supports its continued development
- Done through welfare and free handouts. A short-term improvement for long-term consequences
- Play this out – Top 10% pay 52% of the tax (working age), how easy for the bottom 90% to get them to pay double?
- 80% of people to get 20% to pay double – Top 20% pay 71% of income tax collected
- 5 Quintiles or 5 Groups: The bottom 20% to 20%: Bottom 2, 40% = 0%, 3rd = 7%, 4th = 21%, 5th = 71%
- Bottom quintile benefits worth more than 320 times what they paid in tax and the second-lowest quintile achieves 10 times what they paid in tax
- Increase control and power of government. This includes educational, medical, or similar services. Until controlling every area of life
Summary: Freedom is better: Paying attention to the mold growing, the social spending, government regulations, and areas of service
- Smaller increases in spending over time aren’t noticeable. All this spending has to come from somewhere. This will be taxes or borrowing
- What works is trying to increase people’s freedom
- Freedom to try and freedom to fail, A merit-based system
- In ancient times survival was hard and those more capable tended to survive slightly better
- When we lose challenge we start to devolve and have atrophy of the skills to survive. The bar of merit to survive drops significantly
- Freedom to try and freedom to fail, A merit-based system
- Where does it cross the line for you?
- Having 1/3rd of your money taken away from you?
- Who you can marry? – Big thing recently - but why does the government need to be involved?
- What you can say? – Increasing regulation on speech
- Where your money is spent?
- What changes do you want to be made?
Thanks for listening today, and let me know what you think over at the Finance and Fury website here.
Welcome to Say What Wednesday! Today’s question is from Mark;
“Hi guys, lovin’ the show – I’m looking to buy my first place in Brisbane and I was just wondering if you have any tips on how to negotiate with the real estate agents and work out what price I should be offering first go”
Negotiation Fundamentals * As former FBI Hostage Negotiator Chris Voss (author of “Never Split the Difference”) says, our life is a series of negotiation. * Negotiate every day in our lives; with our kids to go to sleep early, a better salary, to buy a house. * Negotiation is about finding a meeting point between what the sellers want for their property and what you want to spend as the buyer. When you are buying a house, everything is negotiable…
What are the best Negotiation Techniques?
- I find I use mirroring when dealing with real estate agents…This is just repeating what the Real Estate agent said to you, helping you get more information from them.
- The more you know about them, and the less info you give about your situation, the better the position you’re going to be in.
House Price Research * To start with: what a property is worth? * When buying a house there is no hard and fast way of determining the value of a property. + The price is what the market is willing to pay. + all properties that are being sold on the market do not have a hard and fast set price * Negotiating a house price is recognising that the advertised price is NOT the final sale price (vendor discounting)
So just realise that the price your future home is being advertised for isn’t necessarily the price you will need to pay!
Action: Work out your maximum price
- Before you even submit your offer and start negotiating, you need to know what your upper spending limit is.
- research will help you determine what the property is worth, but you should also speak with your mortgage brokerto determine your borrowing limit…
- This is the maximum a lender will be willing to lend
Know the Sellers Motivations
- Knowledge is power when you negotiate.
Ask open-ended “What?” And “How?” questions
- Chris Voss recommends using calibrated questionswhen negotiating…
- These are approachable and non-threatening questions leading with “What” and “How”.
An advanced technique is to ask the same question three different ways
- What are the sellers doing after they move out
- What are the vendors plans once they sell?
- How soon are the vendors looking to sell?
Action: Questions To ask the Real Estate Agent
- What are the vendors reasons for selling the property?
- How long has the property been for sale?
- What was the original asking price?
- How negotiable are the sellers on price?
- What do you think the lower price they are willing to accept?
Consider the Real Estate Agents Motivations * They want to be able to sell the property at the best price * They want to be able to sell the property in the shortest timeframe possible. Ideally even before the property hits the market, that way they don’t even need to do an open inspection!
Get your ducks lined up Question is: How reliable is your pre-approval?
- What is a pre-approval? - A pre-approval is an indication from a bank that they are willing to consider approving your home loan once you find a property you want to buy.
- Have confidence with your finances
When you start to negotiate the house price, you want to have complete confidence in your home loan and finances.
You want to know the maximum amount you can afford.
Action: Get a pre-approval today with our expert Mortgage Brokers
Amazing Contract Terms * Don’t sleep on property contract terms.
The most important information you need is:
- Purchasing Entity: I.e. your full legal name, including middle names.
- Price
- Deposit (remember the deposit is split into 2 parts)
- Finance and building and pest terms
- Settlement Dates
- Lawyer details
What are the best terms to make my contract competitive? Really it is going to depend on the seller’s situation as to what makes the contract more competitive.
Most first home buyers will put 21 days for finance, 21 days for building & pest and 45 days for settlement.
If you want to make your offer stick out, consider putting 7, or 14 days for finance and 30 days for settlement.
Provided your mortgage broker has arranged pre-approval these terms will be very achievable.
Signed a Contract of Sale on a Home? * In some cases, the Real Estate agent will ask you to sign the contract of sale to show the sellers you are serious about your offer. * This doesn’t mean they have accepted the offer but is usually the second step in the negotiation after you’ve made your initial offer by email.
Prepare your counter offer This is the point where lots of first home buyers get disheartened…
The Real Estate agent will call you, say that the seller has reviewed the offer and not accepted it – but given you a counter!
Negotiating house price after building inspection As I have mentioned before, Building & Pest reports are the single most important thing you can do when buying a house.
And when you are buying an older property, like a Queenslander in Brisbane its common for there to be small problems around the property.
- Cracked glass, broken windows
- Wet rot to cabinets in bathroom and kitchen sink
- Insufficient drainage
Provided the problems aren’t structural you can use these to negotiate a lower house price EVEN AFTER you’ve signed a contract of sale.
Let’s look at this example…
While it might look like these are scary problems, after talking with a builder the owner found out it would only cost between $2,000 to $3,000 to fix.
They used this to go back to the real estate agent and negotiate a further $10,000 off the price!
Be ready to walk away As Benjamin Franklin said, by preparing to fail you are preparing to fail.
A list of recently sold homes in Brisbane, as you can see there is always going to be another home!
Bonus #1: Common Negotiation Mistakes I think we have covered most of the mistakes above, but to summarise –
- Remember most homes in Brisbane are discounted 5-10% off the advertised price to get to the final sale price.
- Take time to complete property market research to make sure you don’t overpay
- Work with an experienced Mortgage Broker who can help you get finance approved faster, and let you set amazing contract terms.
- Use the Building & Pest report to negotiate further discounts (even after you’ve signed the contract of sale)!
Does this episode seem familiar? Jayden has shared his tips on property negotiation on the Hunter Galloway site too, here in this article.
Welcome to Finance and Fury Shares are at almost the same price as 2 years ago in Australia – What is happening?
- Mid Dec 2016 – 5,580, Last week (3rd) – 5,667
- Today – is it a great time to buy some shares or a warning sign of things to come?
- Break down the health of the market, some reasons for the decline, and what the future may have in store
To start – clarify some things 3. When talking about Shares – Monolith of the market – ASX 300, but there are: * Financials make up a large chunk (35% approx.) - These have been declining + XXJ and XFJ = -11% over that time period = -3.6% decline in ASX * Telecommunications (TLS) – Much smaller percentage of the market + XTJ = -37% over that time period * Volatility – Shows the average movements in price from their average over a period of time + Higher levels of volatility can show that markets will rebound - Volatility is higher when markets have declined – Markets go down faster than they go up
Good time to buy? 1. Looking back through history – graphs to help communicate this 2. Since 1900 – Average return of 13.21% p.a. – Very long term average – Includes Divs – Accumulation index * 22 (19%) negative years – 12 years (-10-0%), 6 years (-20-10%), 3 years (-30-20%), 1 year (-40%) - GFC * 96 (81%) positive years – 19 years (0-10%), 48 years (10-20%), 17 years (20-30%), 3 years (30-40%), 7 years (40-50%), 1 year (50-60%), 2 years (60+) 3. Past 12 months - -5.1% - Pretty small decline, so is the market likely to have another negative year? 4. Back to back negative returns – happened 5 times throughout the last 118 years * 1915-1916 - -1.9%, -1.7% (-3.6% cumulative) – Gain of 427% before (13 positive years) * 1929-1930 – -3.6%, -28.1% (-30.7% cumulative) – Gain of 517% before (12 positive years) * 1951-1952 - -3.3%, -11.8% (-14.7% cumulative) – Gain of 285% before (9 positive years) * 1973-1974 - -23.3%, -26.9% (-44% cumulative) – Gain of 441% before (10 positive, 2 negative years) * 1981-1982 - -12.9%, -13.9% (-25% cumulative) – Gain of 584% before (6 positive years) 5. From 2009 to 2017 – 246% gain, including this year back to 234% 6. From 2012 to 2017 – 193% gain, (-11.4% in 2011) – Historically speaking we shouldn’t get a negative return 2 years in a row based around the trigger in gains
What is the health of the market? 1. Fundamentals - GDP * GDP growth is low – 2.8% this last measurement * 100% to GDP – Back to 2008 levels * Our economy isn’t going so well comparatively * High Corp tax rates and low productivity – a sign of poor performance 2. P/E - Market price today – 5720 – Leaves a PE of 15.04 = long-term average * Indicates that the markets are fairly priced * PE drops around – 2 metrics P & E * Market crashes – Prices go down * Earnings reductions – haven’t had on a massive scale – Bit below LT average 3. Dividend yields – currently sitting at 4.8% - fairly stable * Back below longer-term averages – 4.4% * Technically cheap – based on income yields
Why is it declining then? 1. Worries and lack of confidence * Political uncertainty – Election coming soon 2. Media stories – constant news cycles * The issues will be – Confidence! 3. World economy – We follow America in shocks * Sadly not on the way up over the past 2 years. We haven’t had the increase – so will we see a decrease? * Trump – Give the market confidence – Lower taxes, cutting regulations and making it easier for business * Riots (more protests) – Yellow vests – All through France, Brussels, Netherlands
Where it might be heading 1. Prices – While fundamentals look okay, the market isn’t rational * Emotions and fear – Can be rational (running from the guy with the knife), but loss aversion leads to irrational behaviour 2. Currently - 9 periods EMA is below the 21 periods EMA then you likely see the market go down further * Shares not quite oversold either
- The market looks to be bottoming out soon – But doesn’t seem to be there just yet
- However – Still a good time to buy for the long term (10+ years) – Break it up
- Self-fulfilling prophecy – not the only one who can look at a chart to see this
- Massive market crash predicted – Mathematicians claim unprecedented global disaster
- Using analysis
- More likely to happen that they are saying this
- But the timeframes are 10+ years so who knows
Summary 1. Nobody can time the market or know when a crash will occur 2. Financials have dropped in prices a lot – off royal commission and payouts * Seem to be undervalued but updates may prove they will lose a lot of future profits + Earnings have been declining * Get active funds that work outside of top 20 – These show better long term returns + Mid cap funds have average annualised returns of about 13-17% over 10 years, ASX (inc div) – 8%
References: Australia Stock Market Valuations and Expected Future Returns https://www.gurufocus.com/global-market-valuation.php?country=AUS
Mathematicians claim ‘unprecedented’ global disaster is just years away https://www.news.com.au/finance/markets/world-markets/mathematicians-claim-unprecedented-global-disaster-is-just-years-away/news-story/5351f779ce0cce6a48776e86fc15f7f0
Australian Sharemarket - 118 Years of Historical Returns https://www.marketindex.com.au/sites/default/files/statistics/historical-returns-infographic-2017.pdf
The Australian Economy and Financial Markets https://www.rba.gov.au/chart-pack/pdf/chart-pack.pdf?v=2018-12-05-14-09-41
Welcome to Finance & Fury, the Furious Friday edition. To start this episode, I want to say just how incredibly lucky we are to be born in Australia during this time, even compared to 100 years ago. Free societies are amazing – so why is there a massive shift lately in wanting to change it?
What if you think that what we have is actually broken? * What happens then? If you take for granted what you have? * The loss of historical context, and perspective relative to how others live globally, there is a loss of ability to see how good we have it. This is our demise as it is used by those in power or those seeking power. We create a non-existent problem to solve and mobilise the masses, for the benefit of those in power, or those seeking power.
This will be the first in a 5-episode series which will aim to break down the real risks of socialism in detail, and just how it infiltrates a society like ours.
- Breaking down socialism and they methods that are used including the conditions needed to be created first.
- Breaking down the stages of socialism
- Has to start with Capitalism (create wealth)
- Socialism
- Communism
- Next, breaking down the strategies used and the methods that people use to mobilise/manipulate the masses.
- Looking back through the history of Australia and where we may be heading
- Finish up by looking at the political spectrum overall, and ways to avoid a dystopian hellhole
The road to socialism is paved by those with good intentions, unfortunately just results in awful outcomes every time.
I might sound crazy but this is one of the most important eps (IMO) that I will do.
We are blinded due to our incredibly narrow view, and we forget what life is really like for the majority of people living around the world, or for tens of thousands of years through society. Things can always be better right? There are many people with a desire to install a system in Australia which has been proven in the past to fail every time, and this is worrying. Doing the same thing over and over again, and expecting the different results.
I know politics is not everyone’s cup of tea, but it forms the rules and regulations that you have to exist under. You can ignore politics, but it won’t ignore you. Every personal finance tip I give on Finance & Fury goes out the window if a system is installed that removes your ability to do it. We are seeing this increasingly over time, like the removal of negative gearing on existing properties being proposed, the increase in progressive tax…slowly chipping away at what freedoms individuals have.
From what I see in the media, it’s all a one-sided argument… so I want to present the other side for a change. Please do me a massive favour PLEASE share this episode if you don’t want to live in a country that goes down like Venezuela.
I want to create a series to provide insight into the warning signs that the country is going to hell, like warning signs for a heart attack.
What are “Socialist Ideas” 1. True socialists advocate a completely classless society - government controls all means of production and distribution of goods 2. He final stage is communism where everyone owns everything and there’s no government 3. Socialists believe this control is necessary to eliminate competition among the people and put everyone on a level playing field. 4. Socialism is also characterized by the absence of private property. * The idea is that if everyone works, everyone will reap the same benefits and prosper equally. Therefore, everyone receives equal earnings, medical care, housing and other necessities. * This sounds nice, but let’s look at an example; say you have 2 people: you get 25% of $100, or 50% of $20? Socialism shrinks the pie, removes incentives and focuses on equality of outcome. 5. Democratic Socialists believe that they can achieve this through the democratic process. * But once they have it, the ‘democratic’ part ceases to exist – Once Governments get so much power, they no longer need the population to gain power, what happens then? * Socialism can work in tribes of 100 people – Everyone carries their weight, otherwise you get an axe in the back of the head. * Today it is the opposite: Under socialism those carrying the most weight get the axe in the back of the head first – as they create the inequality (through owning the private property) and need to go to achieve the goal.
There are two ways of installing socialism 1. Marxists: in a hurry to come to power through direct confrontation with established governments – revolution. We have talked about this in previous episodes about Russia, and China, and I will look to do further episodes on other countries as well, exploring the patterns that play out with Marxism. 2. Fabians: This is something happening a little closer to home. They take their time to come to power without direct confrontation, working quietly and patiently from inside the target governments – it’s death by 1,000 cuts * Fabian Strategy: advances the principles of socialismvia gradualist and reformist effort in democracies, rather than by revolutionary overthrow. * Named after Quintus Fabius Maximus – The Roman General in the 2nd Punic war – Against Hannibal (IMO 3rd best in History). A frontal assault avoided in favour of wearing down an opponent through a war of attrition and indirection. Hannibal occupied Italy for 15 years before being recalled to Carthage. * This is how Western countries will fall to socialism/communism – through concession after concession.
Fabian Society * 1884 in the UK * The Fabian Coat of Arms was a WOLF IN SHEEPS CLOTHING. This was a tad too telling so they replaced it with the TORTOISE with the motto "When I strike, I strike hard". Slow and steady.
Australian Fabian Society * Founded in 1947 * Members: + 4 prime ministers – Gough Whitlam, Bob Hawke, Paul Keating, Julia Gillard + Other Politicians – Bill shorten, Chris Bowen, Luke Foley, Tanya Plibersek, Wayne Swan, plus 20+ APL players + Media – Eva Cox, Phillip Adams, Van Badham, plus 6 more listed on their website. * (from their website) the Australian Fabians' Statement of Purpose states: + Contributing to progressive political thinking by generating ideas that reflect a level of thinking that meets the challenges of the times. + Contributing to a progressive political culture by disseminating these ideas and getting them into the public domain. + Creating an active movement of people who identify with, are engaged in and who encourage progressive political debate and reform. + Influencing the ideas and policies of political parties, especially the Australian Labor Party. * Their policy is to focus on the advancement of socialist ideas through gradual influence and promoting socialist ideals to intellectual circles and groups with power.
How do they do this? Create the right environment * The road to socialism is paved with apathy, hopelessness, frustration, futility, and despair in the masses of people. * Equality is a dangerous word + Equality of opportunity is a free society. You can choose to work 80 hours and earn $200k, or work 40 hours and work $100k. By its nature however, freedom creates inequality because people can choose to do different things. + Even if we all started from scratch, all on the exact same level, when we have a choice how we spend our money in + Equality of outcome is socialism. Would you prefer to have $50,000 and someone else have $100,000? Or, you have $10 if everyone has $10? Psychology actually points to that you would prefer the later – even if it is against your own interests. * It is this fear and complete hopelessness on the part of the masses which ultimately makes them relinquish all control over their lives and turn the power over to a Government.
How they do this: Universities, schools, media and Governments * Universities and schools: The purpose is to create "fundamental change" and "social justice" was through a mass movement of the masses controlled over by intellectual and cultural elites. * Propaganda – Writing things out repetitively eventually changes your beliefs. Tell a group of people they’re disenfranchised enough times that they start to believe it, then they will start voting against their own self-interest. * It goes back to contributing to ‘progressive political thinking” – generating the ideas through ‘intellectuals’. + All socialist movements have been driven by the intellectuals who manipulate the working class for their own benefit. + Intellectuals live in an isolated bubble without real-world experience in the application of these ideas. + Theory versus reality: this is why socialism sounds nice, until you see it in action. - ‘But it will be different this time’ is incredibly naive and narcissistic. - Free market: When ideas are applied, you find out very quickly if idea works or not. Creative destruction. - Government: Lacks the feedback loop which ensures efficiency. Trying new things is dangerous to the status quo. + The younger you start, the better. * Media – The tool used to spread the ideas and misinformation. + 58% of young Australians have a favourable view of socialism, and 59% agree that capitalism has failed - Centre for Independent Studies. + Mixed up thinking – Capitalism hasn’t failed, people are failing to operate under capitalism. - In free market – you get out what you put in. - If you get a useless degree – all you have picked up is debt. - It is only in a wealthy country you can get a higher education, otherwise you are working from an early age to survive. + “Removing the poverty of society” - There is a difference between absolute and relative poverty. - Measurement of Poverty – the rate is based on taking 50% of the median income, as that income rises, so do the relative living standards of people living above and below the poverty line - 2.5m people below line - This is a tricky measurement, there will never be an end to relative poverty – Absolute poverty different [Single ($433 p.w.) $22.5k p.a.] - Are people's lives better than they were 10 years ago? 20 years ago? - My heart goes out to people doing it tough – Almost everyone of these people is on government assistance – the safety net of society. Sadly though, the only way out of poverty is working and participated in the free market. + The people pushing these ideas (that everyone is in poverty and we have to give them more money) are in the 1% - Bill shorten: Salary of $380k + perks = Just below 1%. + Censorship: labelling people as extremists because their views are different. - Overton Window - window of discourse, describes the range of ideas tolerated in public discourse – this is shifting and closing quickly. - Gavin McInnes – Blocked from coming here (Labelled Nazi – wife is Native American). + Why use dynamite when mass media and community manipulation through political and educational activism work so much better? + “They must feel so frustrated, so defeated, so lost, so futureless in the prevailing system that they are willing to let go of the past and change the future. This acceptance is the reformation essential to any revolution” — Saul Alinsky — Rules for Radicals, prologue.
Government * Once people want something, democracy gives it to them – who doesn’t want free things? * Policy creates the serfdom of individuals by central planning and taxation: If the government is powerful enough to promise everything, they’re powerful enough to take it away. * Friedrich von Hayek (1944) – dangers of tyranny that inevitably result from government control of economic decision-making through central planning. You can’t keep what you earn as others might not have it. + The abandonment of individualism, classical liberation and freedom inevitably leads to socialist or fascist oppression and tyranny and the “serfdom” of the individual. + Socialism, while presented as a means of assuring equality, does so through “restraint and servitude”, while democracy seeks equality in liberty. + Centralised planning is inherently undemocratic - requires “that the will of a small minority is imposed upon people…the power of these minorities to act by taking money or property in pursuit of centralized goals, destroy the Rule of Law and individual freedoms. * There is a massive disconnect here - Voting for more stuff from others gives you less freedom in the long run. * Removes incentives from others if greater redistribution occurs
Socialism No chance of establishing itself over a people who have learned to become self-reliant, and have this feeling of self-respect, and respect for their fellow men. This is actually the strongest barrier and safeguard against Socialism/Fascism which a democracy can possess.
The dream is nice, but it’s awful in practice
‘I remained a socialist for several years, even after my rejection of Marxism. If there could be such a thing as socialism combined with individual liberty, I would be a socialist still. For nothing could be better than living a modest, simple, and free life in an egalitarian society. It took some time before I recognized this as no more than a beautiful dream; that freedom is more important than equality; that the attempt to realize equality endangers freedom; and that, if freedom is lost, there will not even be equality among the unfree’ KARL R. POPPER, Unended Quest
I’ll be the first to admit how lucky I am. Growing up here, with good parents to instil the values of working hard for what you want.
In the next episode I’ll go through The Communist Manifesto – As even Marx knew you need capitalism to create the wealth first, before redistributing it. The step is to use capitalism for a communist end.
Here’s a link to an article I read, “Authoritarian Liberals and Satisfied Conservatives: New research modifies the landscape of political psychology”
Welcome to Say What Wednesday. Today's question is from our listener, Sam.
"Hi Louis, love the podcast! I’m wondering if you could do an episode on Adani. I’ve seen lots of protests over this and am just wondering what your thoughts are?
Why are people so opposed to it? Seen the school kids striking or the media saying it will be the end of the world?"
A wide range of groups are opposed to the project for different reasons – So let us go through each one in detail – not platitudes
Let's get into it! What is it? - Adani Group is an Indian multinational conglomerate – diverse businesses include energy, resources, logistics, agribusiness, real estate, financial services, and defence and aerospace.
- Carmichael Mine in QLD - Adani has said that over a 60-year lifetime, the company expects to extract 2.3bn tonnes of coal, which would make it equivalent to the biggest mine in the US.
- Six open-cut pits as well as five underground mines - area more than 30km long.
- first mine in the giant untapped Galilee coal basin - production rate of 25m tonnes a year (originally 60m)
Opposition to the mine present climate and environmental claims Climate: “Average emissions from burning the coal extracted will amount to about 77m tonnes of CO2 each year.” 1. That is the CO2 from burning it – Not the extraction – This coal will mostly be exported to India 2. But why are CO2 emissions such a big deal? - The worry is that CO2 emissions are leading to climate change and global warming – “keep less than 2C – 90% of coal reserves need to stay in the ground” 3. Question: Are CO2 emissions bad? If they are, how are they bad? * To remove all carbon – Everything dies! * Forgotten fact - inhaled air/atmosphere is 78.08% nitrogen, 20.95% oxygen, <1% argon, CO2, neon, helium, hydrogen. * But we exhaled 5% by volume of CO2 = 100-fold increase - We breath out about 1kg of CO2 a day + Aus Population breathing = 9.5m tonnes of CO2 p.a. – Almost everything we do increases CO2 * Plants need it! Randall Donohue - CSIRO: Plants build their tissues by using photosynthesis to take carbon from the air around them. + More CO2 = more vigorous plant growth - carbon dioxide fertilization effect = 11 percent increase in global foliage since 1982 (discounting rainfall and other influences). + Negative feedback - increasing levels of CO2 = extra plant growth. - Global greening trend observed by satellites, and the growing global land carbon sink which removes about one-third of all CO₂ emissions generated by human activities + Great news for biodiversity, and good news for food security: plants are the primary producers that feed all animals - tree deep roots tap groundwater and at the same time stabilize the soils. * Looking through history – Millions of years ago much higher CO2 – why everything (dinosaurs, plants) bigger + Volcanoes release around 650m tonnes of CO2 p.a. passively 4. As more plants grow - less CO2 as it is reabsorbed * Rules of thermodynamics being ignored in modelling – Why no model has ever been correct + Did basic thermodynamics at Uni (shout out to ENGG1500 UQ) – Negative feedback entropy * Went from Global Cooling (globe was cooling until the by 0.2C until the 1980s), global warming, now climate change 5. Assume the worst - the planet is warming and seas are rising (getting a larger surface area) - the natural result is MORE precipitation = the replenishment of the ice caps, glaciers plus deserts turning to tropical forests as the Sahara once was
Points to consider 6. How to solve: Carbon Capture and storage Technology - Modern day coal power plants pollute less than older designs due to new "scrubber" technologies that filter the exhaust air in smoke stacks (John Ondov, 1979) * Client – Works in Paris on this technology – reduces emissions significantly 7. This is such a complicated topic with multivariant – I will come back to it – But for now put a pin in it to get on with others * I will do a whole other episode on the history of climate change movement – agencies mandates are only allowed to explore the ‘risk of human induced climate change’ – That is why everything points to us as the problem + Massive risk – If it isn’t us, then we may be going through all of this in vain + Global Warming could have many causes – The Sun for instance! And how close we are to it changes over time * I’m not denying the climate is changing, as it has always changed and always will + Data from 400k years – Higher CO2 and Temp 325k, 240k, 125k, back there now + Only focusing on one explanation is very irresponsible – plus only using a short timeframe – when trading a share you look at historical influences and data, and not current market data + Why was everything bigger millions of years ago? More CO2 and higher temps * I’ll break down every other explanation in another episode – LOD, Solar Flares, Natural Cycles, UV waves, etc. + Talk about the economic incentives of the policies as well – no better way to get a global tax on people + Agencies doing the research (IPCC) – Mandated to assess the risk of human-induced climate change * Remember - world to gets colder, crops fail, prices rise, and economy declines. The last time - Little Ice Age in the 1600s. When the planet gets warmer, the planet tends to do better.
Water: Environmental concerns with the mine is its reliance on water. 1. Coal mining uses a lot of water - cooling cutting equipment, transporting coal as a slurry in pipelines. About 250 litres of freshwater is used for each tonne of coal produced. * Estimates – 15 to 300 Litres of water per litre of beer produced (including crops) – I guess activists like beer too much 2. QLD government granted Adani water licence to extract unlimited amounts from the underground Great Artesian Basin 3. Estimates of 12bn litres of water a year used in the mine – Sounds like a lot, but what is the Great Artesian Basin (GAB)? * The Basin underlies 22% of the continent, including most of QLD, the south-east corner of NT, the north-east part of SA, and northern parts of NSW – Formed by sediment when Aus was covered in water creating Permeable stone + Sandstone is permeable – Rains, Water drains through - Basin is formed from rainfall being absorbed * The basin is 3,000 metres deep in places and is estimated to contain 64,900 cubic kilometres + 65,000 million mega litres (mega litre = 1 million litres) - Enough to cover all the land on the planet in half a meter of water – What effect will Adani Have? + Assumption – That the reserve doesn’t ever get any more water in it - Uses 0.000018% of the reserve a year = 5.5m years to fully deplete it 4. Will it replenish? - CSIRO Study - By 2070, areas of the Basin in NSW and QLD are predicted to have increased groundwater levels. Western Basin in NT will likely have lower groundwater levels - result of very long-term natural decline. * Rates of recharge on the western side are naturally low – But aquifers are replenished by groundwater flowing from east to west 5. Even with Adani – The basin is still meant to increase in water reserves over the next 50 years * Past 120 years of use from all sources has used 0.1% of the reserve 6. It is better to use water in coal mining than not – Helps remove toxins from the coal before burning, manages dust and particles from being spread – Which would be worse for the environment
Impacts on the Great Barrier Reef: “Environmental groups have worked hard to link the development of the Carmichael mine to the destruction of the reef”
- The Claim – “Scientists have said that for coral reefs to have any chance of a future, global warming must be stopped at 1.5C”
- The concerns are about coral Bleaching - What is bleaching - corals get stressed by changes in conditions such as temperature, light, or nutrients, they expel the symbiotic algae living in their tissues, causing them to turn completely white.
- Warmer or colder water temperatures can result in coral bleaching - expel the algae living in their tissues
- When a coral bleaches, it is not dead. Corals can survive a bleaching event, but they are under more stress and are subject to mortality
- The Great Barrier Reef along the coast of Australia experienced bleaching events in 1980, 1982, 1992, 1994, 1998, 2002, 2006, Decade Gap! then 2016 and 2017 –
- Not all bleaching events are due to warm water - 2010, cold water temperatures in the Florida Keys caused a coral bleaching event
- Coral populations on the Great Barrier Reef had declined by 50.7% from 1985 to 2012, but with only about 10% of that decline attributable to bleaching, and the remaining 90% caused about equally by tropical cyclones and by predation by crown-of-thorns starfishes – Australian Institute of Marine Science, 2012
- “Development of port for export of coal which will involve dredging - problematic for coral as it stirs up sediment, which starves coral of sunlight”
- But a cause of bleaching is solar irradiance (higher UV light) – Everything contradicts
- Founder of Greenpeace – Dr Patrick Moore – left as it was hijacked by non-scientists and political activists
- Sick of non-scientists being activists – points out that a lot of coral bleached survives, if it dies, it regrows
Side note: Lower Coal Prices - Infrastructure Fund Report – (own Aus Coal Mines, grain of salt) - found coal-producing basins in NSW and SEQ would cut their production by more than a third, due to a drop in coal prices – No longer profitable
- There is the solution for reducing coal – Make it unprofitable and lower emissions?
These are the three major points against the mine – Are there any benefits? Jobs: Queensland’s unemployment rate is at 6.4% (higher in regional areas).
- 15,000 to 10,000 jobs, as Adani, Australian prime minister Malcolm Turnbull and others have said the project will provide, are a strong motivation to support the project.
- Jerome Fahrer from ACIL Allen Consulting submitted an analysis on behalf of Adani estimating the project would create just 1,464 jobs.
Economic Growth (GDP): $930 million to Mackay region’s GDP and $3bn to the Queensland p.a. for 60 years.
- the 4 billion tonnes of coal resource extracted over its lifetime would be worth $300 billion.
- In QLD we need some real economic growth – Not just from borrowing
- QLD debt to go to $83bn over next 3 years – While NSW is in $4bn surplus
Biggest: Alleviating poverty: Coal from Adani’s mine will help lift people in India out of poverty - used to generate electricity in a country where many people have no access to power
- 80m Indians don’t have power – Power is the foundation of modern-day – Economy in the stone age without it
- We forget we have gone throughout industrial revolutions
- London, NY – Back in the 1900s – Very dirty – Is the
- We were the first to dirty up the place in industrialisation
- What actually lead to having a cleaner environment? The debate between Government Regulation and Free Market
- Free Market – Incentivised
Summary: 1. We should focus on less pollution – But protesting and striking is not the answer – Renewals would be great - * Using Kids to push this political agenda is bad as well * Seems like everyone wants for other people to do things – But they had plastic/cardboard signs, water bottles, took transport to get there 2. Virtue signalling doesn’t help the issue – Plus – Forgetting the millions of people that this could actually help 3. Thanks, Sam – We will do another episode surrounding climate change. There is a lot to cover there.
More! For those who are interested in an economic analysis of the Carmichael mine the link below, from ACIL Allen Consulting, provides this.
http://envlaw.com.au/wp-content/uploads/carmichael43A.pdf
Some reading for those interested in learning more about coral bleaching, coral destruction specifically related tot eh Great Barrier reef.
https://www.aims.gov.au/docs/research/biodiversity-ecology/threats/cots.html
For those who want to get in contact with the podcast you can do so on the contact page.
Welcome to Finance & Fury. Today we’re talking about 9 reasons you may have your home loan application declined.
We have Jayden Vecchio this episode running through the 9 reasons.
As a result of the recent Royal Commission into banking, the lending criteria has become more strict to slow down the market there has been a limit set on lending.
- Small Deposit
These days you will need 8-10% of the property value as a deposit to get a home loan…BUT, there are situations where you can use a guarantor to help you borrow up to 100% of the property plus additional costs.
Best of all, you avoid paying lenders mortgage insurance which is usually payable if you have less than a 20% deposit.
- Being over 45 years old
Although there are laws (check out the Discrimination Act) to make sure banks don’t discriminate because of your age, these days it is common for the lenders to ask for an exit strategy in paying off your home loan if you are over 45 years old.
This is because a 30 year loan term structure means the loan will end when you’re 75, and the bank wants to know how you’ll be paying the loan at that age. In effect, these restrictions can limit your mortgage options because of your age.
While different banks have different policies, some common exit strategies for anyone aged over 45 years old are:
- Moving to a smaller house and downsizing once you reach retirement age
- Selling other investment properties, or shares.
- Releasing funds from your superannuation to pay down the loan.
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Recurring income received from your superannuation fund.
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Being too young
Don’t worry the young people get grief too from the banks!
You can’t apply for a home loan if you are aged under 18 years old, but did you realise that being aged under 25 can negatively affect your credit score? Being young you may have a very limited (or no credit history) at all to show you are a good borrower. Defaulting on phone bills could be the reason you get rejected.
- Spending habits
When you apply for a home loan nearly all banks will want to see your last 3 months (Suncorp Bank want to see 4 months) day to day transaction account statements.
If you spend a little too much at Zara, or at Dan Murphy’s on the weekend this could affect your home loan application.
The banks will look into your monthly living expenses to determine if you can afford to make your home loan repayments.
- Under 12 months in a job
Lots of banks will want you to be in your current job for at least 6-12 months to be able to borrow with less than a 20% deposit.
In other words, if you are borrowing more than 80% of the property value (with lenders mortgage insurance) you will get your loan declined…
Unless you work with a mortgage broker that knows which banks will lend to you if you have been in your job for less than 12 months.
We work with some lenders that will lend to you even if you have just started a new job. If you have been in the same industry for a while now and your previous roles weren’t permanent positions, this can be overcome.
- Being self-employed
In a lot of cases, the banks will decline your loan if you have been self-employed for under 2 years.
We are self-employed loan experts and work with several lenders that will consider home loan applications with people who have been self-employed for only 12 months. Same again as before, if you’ve been in the same industry for a number of years, this can help.
There are lots of Mortgage Brokers (and banks) who are generalists and just find self-employed applications too hard.
We have a team of credit experts and will help find a lender that will work with you.
Being Self-Employed for under 2 years can mean instant home loan decline with some banks and lenders.
- Buying a ‘difficult’ property
It used to be the case that buying a unique property with a helipad caused issues…
Unfortunately, the banks are being even more particular with what type of properties they will lend on.
Some banks have restrictions to lending on units, others will restrict you based on bushfires, or flooding restrictions.
In other cases, some banks will be ok with lending on apartments but have restrictions based on:
- The suburb or postcode where the unit is located, sometimes with restrictions based on high density or inner-city locations.
- How many floors the block of apartments has, sometimes with restrictions when it is higher than 4 stories.
- The total floor area inside the apartment, with restrictions if it is less than 40 square metres.
- If the bank already has too much lending in the building you are wanting to buy in.
Regardless of these limitations, you can still get your loan approved by going with the bank that is happy with that type of property.
Read More: How reliable is your pre-approval?
The Flood Awareness Map lets you know what the history of flooding is at your property.
- Bad Credit History
A bad credit history in the eyes of the banks involves small defaults, bankruptcies, and judgments on your credit file.
Defaults on your credit file as small as $100 can cause the bank to reject, or decline your home loan.
As an example we’ve recently had a first home buyer who had a small phone bill that was sent to their old address, they moved and it was never paid. This first home owner never received the bill, and wasn’t notified of it being overdue because all the mail was going to the wrong address.
As a result, the phone company put a default on their credit file for the amount owing and the first home owner didn’t become aware of this until they tried to apply for finance through their bank and got knocked back! Fortunately, they came to us, and we were able to help navigate around it and find a lender that would let them buy their dream home.
From 1 July 2018 positive credit reporting is mandatory for all of Australia’s big banks, and they need to have at least half of their customers on the platform and by 1 July 2019, they need to show comprehensive credit reporting for all customers.
- Too many loan applications
If it wasn’t enough being too young, too old, or looking for a unique property, the banks also regularly decline home loan applications because you may have had too many credit enquiries in the past 12 months.
In other words, if you have had more than 2 or 3 enquiries in the last 6 months the banks could give you a bad credit score, and reject your home loan.
Fortunately, there are banks and lenders that will consider your application provided there are fair reasons for the credit enquiries.
Our team regularly deals with these non-credit scoring lenders and can help find a deal that works for you.
This concludes the 9 reasons why home loans are getting harder. If you’d like to get in contact with us you can by heading over to the contact page or on Facebook.
Welcome to Finance & Fury, the Furious Friday edition. For the past few weeks we’ve been talking about the EU and this week we’ll finish up by looking at the flow on effects of the EU breaking up. There’s no way to be 100% sure of what will occur but having a look on a country by country basis will help to break down what the flow on effects might be.
- The EU is simply a collection of countries so looking at the individual countries and consequences of them leaving is a good place to start.
- Also, we will have a look at the collective overall and how it redistributes wealth within its budget nature, and how this will help or hurt nations if they leave.
If you haven’t already listened to the previous two Friday episodes, it might be worthwhile having a look at them here and here, as we covered a lot of the history of this topic in those episodes. If you aren’t interested, that’s fine too it won’t really hurt.
First, we’ll take a look at Britain and “Brexit” which has been a mess from the start
- Designed to fail from day one, Brexit has been nothing but poor negotiations – making nobody happy.
- The hurdle - Negotiating the treaties which would replace the existing Single Market and Customs Union.
The Single Market The Single Market seeks to guarantee the free movement of goods, capital, services, and labour – the "four freedoms"
- Goods & Services: Tariffs and the Customs Union
- All goods and services attract the same rules regardless of where they were produced.
- No customs checks during trade between members of the union and no customs duties are paid on goods moving between EU Member States (all apply a common external customs tariff for goods imported from outside the EU).
- Some argue however, that the Customs Union increases costs and undermines economic growth as some nations can’t afford to maintain the regulatory standards it imposes. This prices these nations out of the export game. At the same time a WTO study posited that the costs of conforming to the rules of origin are negligible.
- Free Trade Agreements are a viable option – NAFTA and other free trade deals work better than the Single Market. The issue is that Britain will need to negotiate new individual agreements with each of the nations within the EU. This is difficult, especially with the likes of Spain who are resistant.
- Capital: Single currency and Monetary policy
- Doesn’t have to worry about this as much as they have their own currency
- Services: Applies to people who provide services "for remuneration"
- Labour: The free movement of people between member states for work. Labour and services aren’t as much of a concern as the single markets and custom union
Payments to the EU 1. Estimated at 50bn pounds to leave – why? It was part of their agreement. Member countries have to make payments to the EU. 2. EU Budget – 158 billion Euros in 2017 paid in by the member nations. 3. This is then spent on EU policies and the EU’s 5 areas of spending.
The EU’s 5 Areas of Spending 1. Preservation and management of natural resources – 37% of the budget. Includes the common agricultural policy, common fisheries policy, rural development and environmental measures. The objectives of this: * To increase productivity, by promoting technical progress and ensuring the optimum use of the factors of production, in particular labour; to stabilise markets; to secure availability of supplies; to provide food at reasonable prices. * Common Agriculture Policy (CAP) – (Where most of the budget is spent) Works by maintaining commodity price levels within the EU and by subsidising production. The mechanisms are: + Production and Import quotas: Sets the amount of goods required to be produced, restricts goods imported to the EU and exported from the EU. + Market Controlled: CAP mandated demand for some produce is at a higher level than free market + Import levies for goods imported to the EU - set at a level to raise the world market price up to the EU target price, and this renders nations outside of the EU uncompetitive. + Prices are set at the maximum ‘desirable prices’ + Trump/US and EU trade negotiations to reduce some of the tariffs + Internal intervention prices: If the market prices fall, EU buys up goods to raise the price. 1. Spent 3 bn Euros in 2017 buying oversupplied food and on selling to other nations. 2. Incentivises producers to overproduce (they still get paid) but it floods international markets and drops international prices. 3. In a free market when producers overproduce, prices drop and/or production reduces over time. 4. At one point 70% of the EU budget was buying over produced food supplies, which they then dumped onto the world market. 5. Reduced prices hurt 3rd world producers whose costs of production are higher. For example, in 2007 3.5m hectolitres of under demanded wine (which the EU bought). In 2009 2.3m hectolitres of wine (hectolitre = 100 litres). + Subsidies to farmers – based around the area of land growing crops. Naturally the largest subsidies go to the biggest players (20 of 100 are billionaires already). This increases reliance on government handouts – but what happens when the money runs out? + Who’s getting the handouts? France – 9.7m, Germany – 6.4m, Italy – 5.9m. This hurt the UK.
- Citizenship, freedom, security and justice – 3% of Budget
- Freedom, security and justice: justice and home affairs, border protection, immigration and asylum policy.
- Citizenship: public health, consumer protection, culture, youth, information and dialogue with citizens.
- EU as global player - Covers all external action ("foreign policy") by the EU – 6%
- Administration Cost - Covers the administrative expenditure of all the European institutions, pensions and EU-run schools for staff members' children ("European Schools") – 6% of the budget
- Smart and inclusive growth – this is the biggest “spend” at 48%
- Competitiveness for growth and employment - research and innovation, education and training, trans-European networks, social policy, economic integration and accompanying policies.
- Economic, social and territorial cohesion –convergence of the least developed EU countries and regions, EU strategy for sustainable development outside the least prosperous regions, inter-regional cooperation = 34% of budget
- Mass redistribution and corruption – 6% error rate/waste
- A lot is spent on resorts and golf courses – 5.5m on Beach city, 5.1m for culture club in Luxembourg
Current state of EU: Who is looking to leave and why? 1. Looking to leave – Commonality is Poland, Hungary, Czech Republic and Slovakia. * These countries are some of the biggest receivers from the EU payments 2. The irony is that if the biggest net recipients leave the EU it kills any argument that the EU is a force for good or beneficial to a country 3. These are the next countries talking about leaving: Netherlands, France, Denmark, (Not Germany) – All the ones it is costing through flows of taxation
The breakdown of the EU: The likely result on the market 1. Fear of the unknown creates volatility 2. Share market: Movements up and down in prices due to this volatility. This can hurt in the short term. * But will it hurt the underlying companies? Well this depends on the negotiation. If there are free trade agreements put in place then no, it won’t hurt the companies, although they may lose a small percentage on currency conversion. But trading in other currencies allows free markets to take over = under performing countries currency drops making their goods competitive. 3. Bond market: 6 trillion market cap of Government borrowings that is in Euro denominations * Likely cause pressure on the bond yield and volatility in the Euro itself * Need to unwind the bonds or retain Euro for the duration of bonds. 4. Economic growth without the flow of funds: Some nations’ GDP will drop through loss of Government Spending * Removal of economic waste: GDP isn’t a great measure of economic health when it is from redistribution of payments. It’s like saying you got out of Credit Card debt by doing a balance transfer. * EU Area: GDP growth is 1.7% (low) and unemployment is over 8% (high) - all with a 0% interest rate. Policies are not working! * Interbank rate and deposit rates are negative. Consumer confidence is -4 (it hasn’t been positive in 30 years). To put this in perspective, Australia is positive, at 104 – with the worst at 65 in the early 90s
The Benefit of Diversifying Risk 1. Chance of a long-term global collapse is reduced 2. Each Country is getting more into debt 3. EU Debt to GDP ratio gone from 65% to 87% in under 10 years. 4. Lower growth and reliance/interdependence. 5. If one country collapses it pulls whole region into chaos. 6. For example – Greece was worth 2.5% of the EU’s GDP in 2008, now it’s worth 1.5%...and only 0.2% of global GDP. The ‘debt crisis’ created uncertainty, and share markets dropped due to EU worries.
Once a country collapses there is little it can do to pick itself back up under the EU system.
- Restricted on Monetary policy – no adjustment mechanisms
- Greece is over a barrel – having to accept large payments to prop up their economy
The Long and Short * I think it would be good long term + Would cause some ‘teething’ issues throughout the global markets + Comes from uncertainty and investors not wanting to lose funds, but markets do rebound * Most of the benefits can be gained through trade and other agreements + Allows individual countries to negotiate between each other and opens up more flexibility and trade + Rather than having to limit imports or do what the EU wants, each country can do what is right for their economy * Brexit - better to leave with no deal than remain and skip the 50bn pound payment * Less of a monolith where there is less competition, less free trade, less free pricing, less freedom + Less extraction from productive countries to underperforming which doesn’t actually increase growth * Insulate the global economy more. One country’s mess rather than a continental crisis + Deleverage the risk of a global recession – One country in EU can crash the EU, or stunt the growth through bailouts
http://archive.openeurope.org.uk/Content/documents/Pdfs/top50euwaste2010.pdf
https://ec.europa.eu/agriculture/sites/agriculture/files/statistics/factsheets/pdf/eu_en.pdf
https://ec.europa.eu/info/sites/info/files/food-farming-fisheries/farming/documents/fadn-fef-eu_en.pdf
https://ec.europa.eu/agriculture/statistics/factsheets_en
Welcome to Finance & Fury, the Say What Wednesday Edition, where every week we answer questions from you guys, the listeners! This week’s question comes from Gabriel;
“Hi Louis, I listened to an episode on NPR on the Chinese Social Credit System and thought I'd like to hear your thoughts on it. Is it a dystopian future? or an unavoidable path that started with the loss of privacy on the internet?"
That’s a great question, so today we’ll run through the potential downfall of China, what this is social credit system, why they are doing it, and looking at what the future holds in store as well.
The Social Credit System is a national reputation system being developed by the Chinese government. 1. Announced in 2014 with limited implementation occurring this year 2. The plan is to have this up and running fully by 2020 with the intention to standardise the assessment of citizens' and businesses' “credit”. * Credit is a combination of economic and social reputation * We have ‘credit’ scores based around lending, but this is different. 3. It’s unclear whether the system will be an 'ecosystem' of various scores and blacklists run by both government agencies and private companies, or if it will be one unified system. 4. It’s also unclear whether there will be a single system-wide social credit score for each citizen and business.
The system is a form of mass surveillance which uses big data analysis technology and AI 1. There are 200 million CCT cameras watching people day to day. My suspicion is also that every device in China is doing this as well (webcam, phone, TVs, etc.) 2. Equipped with facial recognition, body scanning and geo-tracking to cast a constant gaze over every citizen. 3. Smartphone apps will also be used to collect data and monitor online behaviour on a day-to-day basis. 4. Then, big data from more traditional sources like government records, including educational and medical, state security assessments and financial records, will be fed into individual scores. 5. Mine data that users exchange with websites and derive a full social profile, including location, friends, health records, insurance, private messages, financial position, gaming duration, smart home statistics, preferred newspapers, shopping history, and dating behaviour. 6. The outline focuses on four areas: * "Honesty in government affairs" * "Commercial integrity" * "Societal integrity" * "Judicial credibility"
How you will be scored 1. What you do: What you buy, internet browsing, littering, not obeying rules, even things like jaywalking * Financial behaviour will be an important measure for the national social credit score (defaulting on debt) * Excessive online gaming even reduces one's score. 2. What you say: If you say something negative. For example, a reporter got charged with speech crime. 3. What others do: Friends and family affect your score.
The outcomes depending on your score:
- For Individuals - “Citizen scores”
- A Good Score will give you access to VIP treatment at hotels and airports, cheap loans and a fast track to the best universities and jobs.
- A Bad Score will get you locked out of society - banned from travel and visas, banned from renting or buying a home, or barred from getting loans, bank account/credit cards, freeze assets or bar employment.
- Currently 22m people are already on the ‘blacklist’
- 9m people are already banned from domestic flights and train transport
- For Businesses – This is meant to serve as a market regulation mechanism – a self-enforcing regulatory regime
- Companies will comply with government policies and regulations
- Scores can be lowered by disgruntled employees, customers or clients
- Good credit scores will see companies enjoy benefits such as good credit conditions, lower tax rates, and more investment opportunities
- Bad credit scores will potentially face unfavourable conditions for new loans, higher tax rates, investment restrictions, and lower chances to participate in publicly-funded projects. Being a socialist state where almost everything is ‘publicly funded’ and state owned, if you get a low score, you’ll be barred from basically all funding
What is the whole point of this? 1. President Xi said, “we will be rich and democratic, cultural, harmonious and beautiful” 2. It is presented as a means to perfect the “socialist market economy” as well as strengthening and innovating societal governance – sounds beautiful, yes? * John McCarthy (Founder of AI) who was raised as a Communist said, “The difference between a contemporary liberal and a socialist is that to a liberal the most beautiful word in the English Language is ‘forbidden’, whereas to a socialist the most beautiful word is ‘compulsory’ 3. This indicates that the Chinese government views it both as a means to remove freedoms and to: * Regulate the economy at a business level * As a tool of governance to steer the behaviour of citizens * This constitute a new way of controlling both the behaviour of individuals and of businesses – compulsory compliance. If you don’t toe the line your life can change completely. 4. Socialist market economy(SME) is an economic system and model of economic development employed in the People's Republic of China. * Based on the predominance of public ownership and state-owned enterprises within a market economy - Chinese economic reforms initiated in 1978 integrated China into the global market economy, the socialist market economy represents a "primary stage" of developing socialism.
How will this help? 1. The claim: Under market economy, businesses acquire the products and services they need through trade, with trust and cooperation among individuals and businesses being the basis of successful trading. 2. China - market economy that lacks sufficient legal guarantees to ensure market integrity * Laws and punishments seem relatively weak, because at times the cost of abiding by a law is higher than violating it * Nature of Communist economies: Corruption and the black market is sometimes the most efficient method of getting things done * Lack of credibility can obstruct economic and social development * For these reasons Alibaba listed on NYSE rather than Shanghai Stock Exchange * Why don’t we need this? In Australia we have contracts and enforcement of the law, and a more transparent market. * So why doesn’t China just have better legal enforcement? + This goes against their “One rule for me and one rule for thee” mentality. + Laws have to be public whereas ‘rules’ can be private and easily adjusted to achieve a purpose * You’ve seen it on platforms like Twitter, Youtube, etc. where the ‘guidelines’ keep changing and are applied when it suits them.
Who controls the rules? 1. This is the real issue: What’s considered undesirable one group is considered desirable by another group. * You’ve seen journalists put on the black list for reporting of corruption * Once you are in the lower class, there it little you can do to get out
Let's get back to Gabriel’s question: Is it a dystopian future? Or, an unavoidable path that started with the loss of privacy on the internet?
One man’s Utopia is another man’s Dystopia 1. For Government and those in power it is a utopia. For the people being ruled over it’s closer to a dystopia. 2. A dystopian society is a community or society that is undesirable or frightening. Basically, it’s translated as "not-a-good place". It draws a stark contrast between the privileges of the ruling class and the dreary existence of the working classes. 3. Democracy/Capitalism/free markets are different. * Everyone has the legal right to the same opportunities, until you break the law, then you go to prison. * Wealth is often framed in a capitalist society as a ‘social class’ qualification + This is done by the Socialists as they see everything in class. This is a projection. + In most cases wealth in a capitalist society is merit based – it’s a voluntary exchange (of money/goods) * Technology + I think technology is being used with nefarious intent (whilst this might sound a little crazy, hear me out, there is a lot of precedence that I am basing this off) + Technology is being used as a system of sorting out class, helping to determine who should be removed from society. + In the early 1900s – The Eugenics movement, spread significantly by liberals in universities, was aimed at improving the quality of humans. - This is at the core of a lot of socialist societies – population control. - Capitalists grow wealth – Socialists redistribute it.
However, the populations tend to grow, SO the socialists need population control to continue scraping by as there is little new wealth created.
- Separate people into classes and ensure that the ‘undesirables’ cant breed through forced sterilisation
- Used as a sorting tool within society. It is a class system similar to days of feudalism where selection was based around ‘desirability’
The next step – What to do with low scorers? 1. Sterilisation * China already has a history with this whereby in 1983 China sterilized over 20 million people against their will. And, it’s still occurring today with thousands of people every year. 2. Re-education * Imprisonment in camps (there are many being built at this very moment) * Estimated that 1m Muslims have been forced into these facilities already 3. It all starts with categorising the population. This is the purpose of central planning, each person is simply a cog in the machine, a brick in the wall.
The only difference between Nazis and Communists was that Nazis saw non-Arians as resources to be used or exterminated, while Communists saw everyone as resources to be used (or exterminated).
Is this something that we need to worry about? 1. China is not alone in this, but have gone the furthest 2. Venezuela is coming out with something along the same lines through a payment card soon. China actually helped them to develop this. 3. Russia is also working on a "digital profile" by 2025, with every achievement in a person's life set to be recorded in a database 4. UK - using data from a citizen's credit score, phone usage, rent payment, etc. to filter job applications, determine access to social services 5. Germany - data from the universal credit rating system, Schufa, geolocation and health records to determine access to credit and health insurance 6. Australia – My Health Records – this is a backdoor for the Police, Centrelink, Medicare, Insurance companies or the Australian Tax Office to access your information.
History repeats itself 1. What has happened before allows the ability to see trends for the future. Will these things lead to lower growth, lower productivity? When people have no free will or property ownership, the system eventually crumbles. 2. Listener Matthew has asked to go into more historical topics like the ones on Russia and Communism * I’ll do one series looking at the history of China – it’s not the first time China has done something like this + All policies have unintended consequences, like the ‘One Child Policy’ which has caused current issues with gender gap and age gap + Pension spending rapidly rising, from 100bn yan in 2014, to 350bn in 2016. * Remember – The only power the Government has is that what we give it, but once they have it, it is hard to get it back + Politics is important – you can ignore politics but it won’t ignore you. Unfortunately, this has a massive effect on wealth/freedom. + Paying attention to this stuff is very important.
“Socialism is submission of the masochistic masses to the will of the sadistic elites.” – A.E. Samaan
Tune in next Friday - I will start with a bit of history, and then talk about a bit of a blueprint for and the warning signs of a socialist system taking over.
In today’s episode, Jayden interviews Michael Matusik, an independent housing market analyst. Michael aims to be a voice of reason amongst the distortion and in this episode, breaks down the Australian Property market explaining the property clock. He explores each capital city in Australia, discussing at which point in the cycle prices are sitting and where they head from here.
Welcome to Finance & Fury’s Furious Fridays… This week we continue looking at the EU.
If you didn’t catch last week’s episode, you might want to check it out here. It explains what the EU is, and what their role in Europe actually looks like.
This week we dive a little deeper and look at the two issues faced by the countries who are considering leaving the EU - Loss of sovereignty & Immigration. Loss of sovereignty A lot of nations (Hungary, Czech Republic, Slovakia, Poland) lived under brutal authoritarian governments – for most of the 20th
- They swapped Nazi rule, for Soviet rule and now the EU rule
- The Internet Censorship Bill is a great example of loss of sovereignty
- Article 13 – the new Copyright Directive involves the creation of a crowdsourced database of "copyrighted works". Platforms such as FB, Youtube etc must take this into account and block “copyrighted works” from being posted on their sites.
- Billions of people around the world will be able to submit anythingto the blacklists
- There is no onus to prove you actually hold the copyright, and no punishment for false submissions
- Article 11 simply gives publishers the right to ask for paid licenses when their news stories are shared on online platforms. This would destroy FB and Youtube. Good or not – this is where a lot of people get their information, updates about current events and news. It’s all shared content.
- Article 13 – the new Copyright Directive involves the creation of a crowdsourced database of "copyrighted works". Platforms such as FB, Youtube etc must take this into account and block “copyrighted works” from being posted on their sites.
- The thing that was the turning point for most was realising how little Sovereignty they have when considering the current immigration crisis
- There are two complicated issues – The Schengen Agreement and The Dublin Regulations
- These will probably cause the downfall of the EU
- Schengen Agreement- border checks on internal borders (i.e. between member states) are abolished
- Restricted border checks to external borders only – Meaning free travel for anyone inside the EU
- Some nations aren’t a part of it – UK still has customs, even on the train between France and the UK
- Almost the same as moving from QLD to NSW to Vic
- Restricted border checks to external borders only – Meaning free travel for anyone inside the EU
- The Dublin Regulation- the EU member country that an immigrant first reaches MUST process the asylum application
- Prevents asylum applicants in the EU from "asylum shopping" – moving to the country of their choice, typically the country that will provide better welfare.
- This wasn’t well enforced until 2016, but now it’s placing too much responsibility on the member states on the EU's external borders – Italy, Greece and Hungary – who receive the most immigrants on their doorsteps.
- Italy – boats from Africa,
- Hungary and Greece – Turkey
- Spain – from Morocco
The new proposal would introduce a "centralized automated system" to record the number of asylum applications across the EU and presents a "reference key" based on a Member State's GDP and population size.
- The country is essentially given a quota of how many migrants they have to accept.
- The populations of the country have no say on immigration policies
- If a Member State chooses not to accept the asylum seekers – it will have to contribute $250,000 per application as a "solidarity contribution".
- This got me thinking – that is a LOT of money per person – especially given the narrative that there is massive “economic benefit” in migration
So, what are the economic effects of migration? There are two sides to the coin, and it all depends on who is moving where.
Immigration – the words is now used as a collective term for both legal and illegal migrants entering a country, including refugees.
The “Sending” countries experience both good and bad effects off emigration.
- “Brain Drain” - the loss of trained and educated individuals to emigration – This is generally through legal immigration.
- Currently more African scientists and engineers working in the U.S. than there are in all of Africa, according to the International Organization for Migration (IOM).
- Africa only retains 1.3% of the world’s health care practitioners – UN Population Fund 2006
- With almost 17% of the world’s population and 64% of the population with HIV/AIDs
- Remittances - funds that emigrants earn abroad and send back to their home countries
- Estimates at $530bn in 2012
- Money leaving the shores of a country reducing the multiplier effect in the nation the money is being sent from because it’s not money that will be spent in that nation.
- Might have small currency pressures, and also props up the sending country with higher spending
The “Receiving” countries
-
Population growth is heightened – More people buying things, and paying taxes (that is, for the portion of immigrants who are working)
- This helps to address skills shortages but may also decrease domestic wages
- This can also add to public burden (though this is negligible for skilled migration)
- There are a lot of hidden costs of immigration; Welfare, Education, Healthcare, Infrastructure, Housing
- Increases unrest and economic inequality
- CIS study concluded that, “immigration has dramatically increased the size of the nation’s low-income population”
- Disparities between immigrants in Germany and native Germans; 49% of non-Germans falling below the poverty line compared to 23% of original native citizens.
- This is due to immigrants being less likely to be employed – 81% for natives to 66% of non-Germans.
- “The consequences are segregation, housing problems and divided cities” (Traynor, 2010)
- Who does this benefit?
- Migrant workers often fill low-wage jobs as supply of labour (e.g. agricultural and service sectors).
- Helps to lower costs for big companies and increase supply of labour at a greater rate than demand for labour …which of course means lower wage growth.
- For example: Why do celebs want to open borders in the US? Who else will clean their 12-bedroom mansions (ironically, they don’t let refugees stay with them) inside giant walls of their own.
- Migrant workers often fill low-wage jobs as supply of labour (e.g. agricultural and service sectors).
-
Economic effects – Doesn’t tell a good story
- Netherlands: Each Muslim migrant costs $1,150,000 in total over their lifetime
- Germany: Total migrant cost was $86bn over 4 years. This equates to 12 Germans needing to work to pay taxes for 1 migrant
- Italy: Spent $4.2bn on migrants in 2017 (about one seventh of Italy’s budget)
- UK: $120bn pounds over 17 years
- Sweden: $18.6bn in costs for migrants in 2017 (19% of their Government budget, and 3.2% of GDP)
- 60k Euro is spent per migrant per year, whilst the average Swedish household income is only 29k Euro. Let that sink in.
The real world effects 1. It comes back to legal immigration vs illegal/refugee intake. There is a massive distinction. 2. In 2015 the EU had 1.8m illegal immigrants in the one year * Accepting a massive number of refugees compared to rest of world + US: 38k refugees per annum + Australia: 18k refugees per annum + Italy: 150k refugees per annum + Sweden: 160k refugees per annum (2% of their population) * You hear in the media it is a “refugee crisis” but in reality, it is economic migration. A recent report showed that the reality is only 1 in 5 are coming from a ‘war zone’. * Estimates at over 8m people have migrated to the EU in the past 6 years, with a staggering 75% being young men – not woman and children like you see in the media. * System was broken – 65% of child refugees were actually found out to be adults. This number is even worse in Sweden at 85%. * This really hurts the sending countries – there’s now slavery again in Libya through human trafficking. * 78% of EU citizens want tighter control over borders and immigration.
Beyond economics – the current state of the EU Remember, these are the statistics; simply reality and the facts.
- The UK leaving the EU because the people feel the damage is already done
- Most common boys name is now Mohammed (or one of its variants)
- In London the white British people are a minority, Savile Town has 1% white: 48 out of 4,050
- Unfortunately, it has created a clash of cultures
- The UK is the acid attack capital of the world – there were 77 in 2012, and 465 in 2017
- Grooming gangs with underage girls (Oxford, Rotherham, Rochdale, Newcastle, the list goes on) has been going on for over 10 years. Not going to go into details but look it up, but be warned if you start to research this yourself. It’s horrific.
- Sweden
- In 2015 Sweden took in almost 180k refugees (2% of their population)
- This caused unrest (putting it lightly)
- Arson attacks – 100 cars were burned in a coordinated attack a few months ago
- Back in 2016 – 40 hand grenade attacks – more recently on cop stations as well
- “No go” zones (this has been rebranded to “Vulnerable Areas”)
- There were 61 ‘no go zones’ in 2017 – 23 were ‘especially vulnerable’
- This is just rebranding. Whilst it’s technically true that you can still go to these places you might end up like the reporters who have gone there. Not. Good.
- Sanandaji
- Has been a sharp increase in welfare payments, 60 percent of which go to immigrants
- Sweden expects to spend about 7 percent of its $100 billion budget next year on refugees – double what was spent in 2015
- Only 25 percent of Somali refugees (age 25–64) were employed in the formal economy in 2010
This brings us back to the EU motto from last Furious Friday episode; “United in Diversity”…but how well is that working?
There is a massive difference between Racial and Cultural diversity.
- Race means nothing, everyone should be treated the same
- Culture is the cohesion that keeps a country together and the ability to communicate and cooperate, with everyone playing by the same rules, building towards the same thing, is what keeps a country together.
- It’s like building a house – What happens if the carpenter, tiler, builder, architect all have their own ideas about what it should look like? What if they don’t pay attention to the plans and try to make it how they want it? The EU population is annoyed as their figurative houses are falling down. And, they have little say when it comes to this.
- There is a difference between legal and illegal immigration, and refugee/asylum migration.
- One has been selected to come in and one hasn’t. It’s hard to conceptualise at the global level.
- But here’s a question: do you lock your doors? Or have a fence around your place? Why?
- To protect yourself, family or stuff from other people/strangers.
- A Government has one role – look after the interest of its citizens. Almost all the time that is achieved through good relationships between countries and peace.
- Immigration policy is the same thing as locking your doors at night, or conversely, leaving them open for anyone to come in.
History of migration 1. Nations were built on immigrants? Very true – key word her is ‘were’. Migration has changed. 2. In the old days it was in reverse – People from Italy, Ireland, Greece, England were moving to places that were harder to live in than their homelands - were going to make something for themselves. * Flow of migration was from richest parts of the world to the poorest * Where would you have rather lived – London or Australia – in 1788? + Compared to today, both options don’t look great. But back then London was one of the better places to live in the world. + Things were hard: for example, almost half of the original colonists in the US starved in the first few years. But thanks to socialist policies once they were given property rights things took off. * Today the opposite is occurring. + Major net migration has reversed over the past 200 years. I am all for immigration, but not if it hurts the local population or if it hurts the immigrants (think people smuggling, slavery, human trafficking, and the dangers of actually getting themselves to the new country). + Imagine that you move to Syria, Afghanistan, Iraq. How hard would it be to integrate? Language, culture, etc. + Naturally most would isolate themselves and want things to be like home. I wouldn’t dare move to another country and try and make it like Australia – what is the point then of moving? + Anyone who wants to have a Socialist government can move to Venezuela – the UN released a report showing 3m people have left their due to their socialist economy.
In Summary – We’re looking at Death by Demographics * Bringing these facts to bear – Not only is this restricting economic growth of the EU, it is costing more through migration * We’re finishing up this topic next Friday by looking at the flow on effects of the EU breaking up; on the Share Markets, Bond markets and on economic growth.
As always, if you have a question or topic you’d like to know more about, contact us at www.financeandfury.com.au/contact
Here are some links to some of the information we’ve been looking at:
http://www.opennetwork.net/wp-content/uploads/2016/05/Tent-Open-Refugees-Work_V13.pdf
http://migrationcouncil.org.au/wp-content/uploads/2016/06/2015_EIOM.pdf
https://foreignpolicy.com/2016/02/10/the-death-of-the-most-generous-nation-on-earth-sweden-syria-refugee-europe/
http://bruegel.org/2017/01/the-economic-effects-of-migration/
Welcome to Finance & Fury, the Say What Wednesday edition, where we answer your personal finance questions each week. Today’s question comes from Tara;
“Hi Finance & Fury, love the show! I was wondering whether you would be able to provide advice on the best way to invest $1,000 - $2,000? Would love to hear your suggestions?” – Tara
Awesome question and thanks for getting in touch! Not technically allowed to provide ‘advice’ – but I can give a general outline on what to look for when starting to invest.
Starting to invest is hard - especially when you don’t have 10s or 100s of thousands of dollars.
- Hard to get diversification
- Hard to get low cost
- Hard to get in based on minimums
Where to start 1. What are your goals? * How long is it for? – Investments should be made for the long term. If you’re at a timeframe under 3 years, I probably wouldn’t suggest investing at all * Will you need to access it at any point? – If yes, how long? + If you need to access the funds in the short term (3-5 years) something more defensive would be better + If you’re looking at longer (7-10 years), it’s safer to invest in growth assets + If you’re looking at an even longer time frame, or you don’t need the funds until you’re 60, you could consider a different environment all together, like super. 2. How much risk do you want to take on? * Determines the allocation between growth to defensive 3. Will you be making further investments? * Determines what type of investment * Buy sell vs brokerage – fixed dollar transaction costs can really add up when compared to costs that are based on a percentage of the investment amount. 4. Keeping costs low * Transaction costs + Brokerage can start eating away into your capital + Buy Sell spreads * Platform costs/Brokerage accounts + Accounts charge * Getting diversification at low costs + With $1,000 your investment options are limited to get many different underlying funds + Need a range of shares across different countries. You need a range of asset classes as well.
Some scenarios Let’s look at 4 different options for investing $1,000 1. Shares * Purchase one share for $20 brokerage (2% transaction cost). This is not great. * Direct shares – One share offers no diversification and is open to high volatility * LIC – Has diversification, but in one asset class with about 20-50 holdings on average 2. Managed funds * Buying directly from the manager isn’t an option as they have minimum initial purchase amounts ranging from $10,000 to $500k 3. Platform * Purchase managed funds on a platform to get around the minimum buy-ins * Platform – Probably looking at $200 in admin costs per year = 20% of the value in this case. 4. ETF * Single ETF – you can get an index fund, which provides a fair amount of diversification within an asset class * Multi-managed ETF – Single purchase for $20 brokerage, you could pick up 7 or more other indexes 5. Superannuation * Contributing to invest inside superannuation – WARNING: won’t have access until you’re 60 years old – so this is for the very long term * Non-Concessional (Personal) Contribution (NCC) + Works well for those with a low taxable income (less than $36k including Salary Sacrifice or Fringe Benefit Tax) + Post tax contribution + No contribution tax paid going into the account (Low Income Superannuation Tax Offset). This is capped at a maximum offset of $500. + Effectively turns $1,000 into $1,500 invested – in addition this sits in a lower tax environment + Example – buy the same investment in super as a NCC vs buying an investment personally (outside of super) - Assuming 8% p.a. for 30 years - Personal - $1,000 at a 21% tax rate = $7,960 - Super - $1500 at 15% tax rate = $12,770 (60% more over a 30-year period) * Concessional (pre-tax) Contribution (CC) + Better for those with a higher taxable income, but look out for the concessional contributions cap + Contribute $1,000 and reduce your taxable income by that amount by claiming a tax deduction on it. E.g. Earning $100k = $390 of tax back personally. + Effectively turns $1k contributed into $850 invested, once super contribution tax has been taken out
In Summary 1. Look at the diversification! 2. Compare the upfront and ongoing costs 3. Make sure it lines up with your goals and investment time frames
As always, if you have a question you want answered on Finance and Fury, get in touch with us on the Finance & Fury website contact page.
Welcome to Finance & Fury. Today we’re back talking again about property…and more specifically, buying property overseas.
Some Australians have given up on the dream of buying property in Australia due to Australia’s high property prices.
- An increasing number of Australians, including Millennials, are investing abroad with the United States as the most popular destination. They’re priced out of the market here, and are looking to other areas and other countries for options.
- Property prices are still 32.4% higher compared to five years ago.
- There has been a 29% increase in Australian residents purchasing properties abroad.
Pros
- Cheaper house prices, which makes it easier to get into property based around the deposit requirements
- Better yields on property overseas
- Australia ranges from 2% - 5%
- Philippines from 6.13%
- A.E. from 5.19%
- Costa Rica from 7.48%
- Indonesia from 8.61%
- Provides diversification outside of the Australian market
Risks
- Finding the right property, knowing the area that the property is located, knowing the market and where that market is going.
- What Country?
- Where in the country?
- What type of property?
- It is typically best to see the property you are going to be buying
- Political and government risk
- Currency movements
- Buy a property for $300k overseas – if the Australian dollar appreciates by 5% compared to the US, you lose $15,000 in value
- Reduced or additional returns depending on whether the AUD appreciates or depreciates against the property’s domestic currency (i.e. The USD if the property is purchased in the US)
- Differences in tax
- In the US there are tax incentives to purchase the property that you live in, compared to Australia
- Double Taxation Agreement (DTA) – Most western countries have DTAs so that your income is not taxed by the two countries. This avoids the potential scenario of double taxation on your rental income if you were to rent the property out.
- Legislation changes – Overseas government or domestic making changes
- For example, QLD put an absentee tax on land if it is over $350k
- Banking legislation and interest rate changes
- Difficulty in Management
- The biggest challenges faced when purchasing a property overseas is not only finding a suitable property manager to protect your interests, but also understanding and monitoring the market.
- Distance and language barriers
- Example – If someone stops paying rent, the laws may be different and it may be hard to get action on it
As always thanks for listening! If you liked the episode let us know, if you didn’t, let us know that too. And, if you have a question or topic that you’d like us to discuss on the podcast, hit me up at financeandfury.com on the contact page
Here are some links to articles;
Business Insider, "The 25 best countries to buy rental property and make money on the side"
News.com.au, "The United States is the most appealing location for overseas investment, but an expert warns to do your research before entering overseas markets"
Welcome to Furious Friday where we look at misconceptions in the media about the economy
There is a lot of talk about fears that the European Union (EU) will fall apart – That this will cause a financial crisis
- Will it? A lot of people are saying that the financial markets will collapse if the EU were to break apart
- I wanted to break a few things down
- What is the EU and what does it do?
- Why are the member nations considering leaving?
- What will be the effect on financial markets and the global economy?
What is the EU? 1. The EU is a geo-political entity covering a large portion of the European continent. * It is founded upon numerous treaties and has changed quite a bit over the years 2. In 1957, six core states founded the EU's predecessor, the European Economic Community (EEC) * (Belgium, France, Italy, Luxembourg, the Netherlands and West Germany). * Trying to create a common market – European Coal and Steel Community 3. 1999 – Monetary union was established – 2002 was in full effect * 19 members at the time 4. Today – 28 members - undergone expansions that have taken it from 6 member states to 28, a majority of the states in Europe are a part of the EU.
What is the EU’s role? 7 EU bodies - EU parliament & Council, EU Commission, and European Central Bank (ECB), etc.
- Set laws and rules on almost everything for member states
- ECB - They do things like sent lending rates for banks, and combat any inflation problems that may arise
- Has its benefits
- Tax free trading among members – Tariff free for goods sold between countries
- Mobility of labour – Members can travel and live in any of the member states
- This is why many of the nations are wanting to leave – Come back to this
- Common currency – Makes doing business, traveling or moving easy for all members
- Motto: United in diversity – Everyone getting along
- NEW: They want to form their own army though – Worried a lot of people
- Can be used to keep other nations in line – German soldiers could go to Hungry to put down riots
If the EU is so good, why are people looking to leave? Effects – Practicality it has downsides for the good – 3 big ones
- Removes monetary policy for countries – Puts it in the hands of the European Central Bank
- The central bank for the euro and administers monetary policy of the Euro area, which consists of 19 EU member states
- ECB’s role - maintain price stability within the Eurozone
- are to set and implement the monetary policy for the Eurozone – Inflation targets
- conduct foreign exchange operations, to take care of the foreign reserves of the European System of Central Banks
- operation of the financial market infrastructure under the TARGET2 payments system
- Jointly owned by the member National Central Banks (NCB)
- The capital of the ECB comes from NCBs – Requirement to issue capital is based around the size of a country’s economy in GDP
- €10,825,007,069.61 currently
- Currency – Being on the same currency might not be the best thing for some nations
- Works well for Germany – Can export a lot and not experience currency appreciation pressures – Makes them more competitive
- Estimated that the Euro is undervalued at 20% compared what a local German currency should be - adding to their trade surplus
- Other countries in the EU might not able to sell goods at a profit on the Euro if their economy is struggling
- Printing money - the exclusive right to authorise the issuance of Euro banknotes. Member states can issue Euro coins, but the amount must be authorised by the ECB beforehand
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Takes power from Member Governments – One stop shop on policy
- There are 751 members of parliament in the EU parliament – That is a lot of politicians – We have 150 in the house of reps in Australia
- Aus – 1 per 100k, EU – 1 per 700k people
- Hard to get representation and is very bloated
- What do they decide on?
- Immigration policies and quotas – This is the big issue for most member states
- Mobility of migration around the EU
- Dublin Regulation
- The first member state where asylum claim is lodged is responsible for a person's asylum claim – Hasn’t been enforced well
- Countries in the EU have been given quotas to fill – This is one of the biggest objections
- Giant body choosing – Not the population
- Similar to the UN’s Global Compact for Migration
- Lots of EU nations feel they are losing their culture and national identity
- Your first reaction might be to think that they are backward racists, I’ll share some stats with you next Friday that will probably shock as to the state of things
- e. Natives are now the minority in many cities, like in Frankfurt and London
- Plus – Only 1 in 5 is from a ‘war zone’ – goes against what you hear in the media
- Regulation control – Single market regulation
- Goods and services – The EU gets to dictate regulations on food, manufacturing, services, etc.
- Makes some countries less competitive
- Environmental – Quotas and caps on trade
- Example – Common fisheries policy (CFP) – 77% of the UK fleet given rights to 3%
- Other 97% goes to just 6 companies
- One Dutch-owned super trawler has the right to catch 94%
- Worse in Scotland – Lead to many small coastal towns having high unemployment
- Goods and services – The EU gets to dictate regulations on food, manufacturing, services, etc.
- There are 751 members of parliament in the EU parliament – That is a lot of politicians – We have 150 in the house of reps in Australia
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Aims to serve the interest of the EU, not a country
- The policies, decisions, and rules set in place by the European Union are not there to protect the best interest of each individual country.
- their goal is to advance the EU as a whole. This has caused many damages in smaller countries, that are often left unheard
- Officials from the EU make policy decisions that go against the peoples’ wishes
- Greece – See mass protests? Debt is forgiven if Greece does what the EU wants
- Will spend a whole ep running through how being part of the EU helped them into their debt crisis
- Countries have to pay in and don’t decide on what the funds are used for – UK net contributed of $200 bn since joining – another reason why they are leaving
- The policies, decisions, and rules set in place by the European Union are not there to protect the best interest of each individual country.
The Problem - Central planning – Nations need different economic factors to remain competitive 1. It is very complex and slow – doesn’t allow for free market or free choice by nations 2. Power without accountability * The European Council choose the presidents and commissioners of the EU – Not the public of the EU (almost like voting on the pope) + 5 presidents currently – EU Commission, Euro Summit, Eurogroup, ECB, Parliament * Taking away voting rights from Poland and Hungry due to not towing the line 3. Leaving is hard – But the UK is the canary down the coal mine * June 2016 - UK will be a test subject – Hasn’t had a great process so far * UK market - Dropped 200 points to 6100 after the announcement – Bounced back to 6800 2 months later * 24th June 2016 – 6138 – Today 7004 – Up around 14% since Brexit * If they get their own army leaving may become harder
That is a summary of the current state of the EU Next time we will explore:
- Who is looking to leave? And Why?
- What it will cause - More bark than bite, or will it collapse the world?
If you liked the episode let us know on the contact page
How can you pay off a mortgage with debt? Velocity banking and Offset accounts This question comes from Tom a podcast listener. He asks “Just wondering if you have ever used Velocity banking at all to pay down debt quicker?”
In this article, we will explore what velocity banking is as well as some alternatives to paying off debt with other debt available in Australia.
So what is it? And why haven’t we heard about it? It’s a Strategy of Using a Line of Credit (LOC) to pay down principal on a loan. Typically used in the US.
How does velocity banking or ‘chunking’ work? The LOC becomes your income and expenses account. You put your pay into it and pay all your expenses from it, including your mortgage repayments.
You use the LOC to pay down your loan through “chunking”. What this means is if your income is greater than your expenses, the LOC should build up by the difference every month. If your household income is $8k p.m. and your expenses (inc mortgage) are $6k, the LOC should build back up by $2k p.m. Once the LOC builds up to the maximum amount, use the total chunk to pay down the home loan again. Keep repeating this process until the home loan is completely paid off.
You spend the majority amount of your time repaying interest on a home loan during the life of the loan than you do paying the principal.
Paying down a loan with more debt can be beneficial but it depends on if there is anything that works better available for you. You wouldn’t want to take action for faster repayments unless it was the best option for you to take. Everyone’s situation is different to it is important to consider alternatives, especially in Australia where we have other ways.
Does it work? It depends on the strategy and the loan requirements. An individual can save a ton on interest repayments, but they can do so in other ways too. An example of an alternative strategy that is similar to velocity banking but possesses more advantages is using an offset account.
What is an offset account? These are accounts that work similar to the LOC account, but you raise the funds through equity not borrowing. This is more common in Australia.
What does that mean and how does this work? You skip borrowing the funds for the first chunk and just use the offset account as your income account. Use a credit card to pay expenses and then pay off the credit card each month from the offset account. The difference between income and expenses will reduce the total interest repayments on the loan as the sum in your offset account gets larger. Keeping as much money in the offset account as possible helps reduce the interest repayments on the home loan, as interest is calculated daily. Hence we pay off the CC at the end of the month, optimizing the time our savings spent in the offset account.
Let’s do a comparison between traditional mortgage repayments, velocity banking and using an offset account.
The situation is as follows: a couple have a $480,000 loan at 6% for 30 years. The repayments will be made monthly.
The individuals with the home loan have the following financial situation:
The normal interest repayments come to $2,878 monthly
- Normal interest repayments would mean paying the monthly repayment for the life of the loan ($2,878 pm)
- Chunking or velocity banking would be taking a LOC and treating it as a transaction account. Putting income in and taking expenses out. In this example, the LOC will be $20,000. The LOC will be paid back in 10 months to $20,000 at which point in time the chunk will be used to pay down the home loan.
- Using an offset account will be treating the offset account as a transaction account. Putting your income in and taking expenses out. Building up the offset account over time until the loan is paid off.
Which one is better? Normal repayments appear to be the worst, you are paying $555,477 in interest over the entire life of the loan. In addition, the loan lasts a full 30 years, 19 years more than using an offset account with the case study.
With an LOC and chunking your payments, you pay $191,227 in interest on the mortgage. Plus an additional $10,339 for LOC at 8% p.a. A total of $201,566, saving the individuals $355,000 on their home loan.
With an offset account, however, you pay $175,928 in interest which is a reduction of $379,540 in interest over the life of the loan. The table demonstrates that an offset account is best. You pay the loan off in the least amount of time and as a result, you pay less in interest overall.
So what are the advantages? You can pay off the home loan faster by making additional payments sooner. This significantly improves the time it takes to completely pay off a mortgage.
Pay less in total interest repayments over the life of the loan. These savings allow you to do more with your money after the home loan is paid off.
What are the disadvantages? It requires free cash flow, as you need to have more income than expenses. All the strategies for paying off your home loan faster require the ability to build up funds against the loans. The LOC has a higher interest rate, so this will be a more expensive strategy.
An LOC requires equity in the property to be used effectively. An offset account is ready to use with savings so you can start from scratch. The LOC strategy requires capital growth on the house or waiting for the principal to be repaid a bit.
That money that you are saving each month could be deployed to purchase other properties or investments that grow, rather than helping to pay off any specific loan.
Conclusion In summary, it’s worthwhile looking into an accelerated home loan repayment strategy. The faster you pay it off the more money you save in the long run. Regular principal and interest repayments plus an offset account are useful to consider to help pay off a home loan sooner.
This question has got us thinking about another strategy as well to try and remove the opportunity cost involved with personal debt. By breaking it down into a debt recycling strategy and learning how to leverage this, can help build wealth over time.
Contact Feel free to get in contact with us at https://financeandfury.com.au/contact/
Welcome to Finance and Fury…today we have Jayden Vecchio from Hunter Galloway on the show, talking to us about 5 game changing tips for buying property especially for those who are looking to build a a decent property portfolio.
5 Tips for Building a Property Portfolio 1. Have a plan * Many property investors think buying real estate as nothing more than sticking some money into an asset that is guaranteed to go up. * ‘Just get a foot in the door and you’ll make money from property’, they say. So, what about those investors that got their foot slammed after investing in mining towns? Or bought off the plan purely for tax benefits? * Successful property investors have an investment plan in place. * Like a business plan, they take time to research the market, educate themselves and deeply understand the numbers. * Do you have a goal of building an investment portfolio? As the saying goes, a goal without a plan is just a wish.
2. Don’t Follow the Crowd – Contrarian Investment * Over the past year, it has felt like one day we are being told property is booming only to be told the next day we should start preparing for doomsday falls of up to 40%. * During the depths of the GFC, Warren Buffett said: “Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance.” * The bottom line is following the crowd, or market commentators into the latest property hotspot based on what everyone else is doing is a bad strategy, and one that generally leads to property investors losing money over the longer term. * As Buffett says, insulate yourself from popular opinion. Do your own research, form your own opinion and build from there.
3. Alternative Strategies – Rentvesting * Why can’t you live where you want, and invest where you can afford? * Example – Rent in Sydney $720 p.w. = $37,440 p.a. + Or buy for $986,497 - 80% loan-to-value ratio over a 30-year term at 4.50% P&I, repayments are $1,022 each week, or $53,144 each year - Interest $35,514 of this - Plus, insurance, body corporate, rates, etc.
- In a rentvesting scenario, you could invest this difference
- Into another property, or,
- Look at diversification in the stock market, ETFs or fractal property investments like BrickX.
Understanding the numbers
- Australia’s richest property investor, billionaire Harry Triguboff (worth $12.77 billion), still takes time to review every sale and expense line of his property business.
- Numbers to understand
- Cashflow in and out
- Banking lending/serviceability
4. Change with the times * Property values work in cycles * Harry Triguboff, who has been investing for almost 60 years. He had said: “If times are bad you buy land and by the time you have finished building times are good again.” * The same is true with the lending market. Sometimes it’s easy to get investment loans, sometimes it’s hard. * At the moment the reality is the royal commission is causing the banks to take a more conservative line on lending.
Smart investors are adapting to this by understanding the following three points
- Live credit scoring is now out. Positive credit reporting is being used by the banks, and they can now see your repayment history from the past two years. A missed repayment 14 months ago could affect your ability to borrow. Get your credit file to know where you stand.
- Reduce your monthly expenditure. Banks are looking at what you spend each month, and will reduce your borrowing capacity based on these figures. Talk with your mortgage broker about your monthly living expenses and consider working on a budget to keep them in check.
- A bank valuation is an opinion. When leveraging equity, three different valuations from three different banks helps smart investors get ahead. It’s not uncommon to see up to a 20% difference between valuations, and a good mortgage broker will help you navigate this.
5. Look at the long-term picture * Warren Buffett: “Nobody buys a farm based on whether they think it’s going to rain next year, they buy it because they think it’s a good investment over 10 or 20 years.” * Buffett decides something is worth investing in because it will last, not because it’s doing well right now. * So many property investors are just thinking two or three years into the future or buy at the top of the market when FOMO is at its peak. * This comes back to having an investment plan in place. If you have a goal of building an investment portfolio or creating passive income of $100,000 in 10 years, put together your plan and start working on it today. * Talk with your mortgage broker or financial adviser about your investment plan, understand how different investment properties can affect your borrowing capacity and ultimately hold back your goals of building an investment portfolio.
Welcome Finance and Fury’s Furious Friday episode.
Today we’re answering the question we asked on Wednesday about Labor’s polices and their promises to lower housing prices/increase affordability.
If you haven’t checkout out the episode, it’s probably worth while just to go back and have a listen as it gives a bit of a background on the history of the Australian property market, why the price increases have been happening over the last 20 years, and some alternative ways to create a solution.
Labor’s plans for housing affordability Increase financial stability, reduce homelessness and boosting jobs (this is mainly straight from their website). Both parties are running on similar issues here. They’ve done their demographic research, but they have different ways of doing things.
What Labor have proposed (8 policies in total)
- A big ones - Reform on negative gearing and capital gains tax concessions
- Limit future negative gearing concessions to new housing – you will only be allowed to negatively gear on a new build.
- Reduce the capital gains tax discount from 50 per cent to 25 per cent (existing may possibly be grandfathered)
- I’ll break these down in detail after I quickly run through the other policies first, as these two seem to be the ones that everyone is paying attention to.
The following is copied from Labor’s own website explaining the reasoning behind these policy changes. Im going to run through this with you line by line…
‘Higher income Australians are able to use these tax subsidies to reduce the income tax they pay, primarily through negatively gearing property and the capital gains discount.’
This is true – So far so good. They DID forget to mention however that anyone can access these strategies – it just takes time to build some wealth first.
‘These subsides are concentrated in the highest income deciles, as low- and middle-income Australians are more likely to spend their income on consumption, whereas higher income Australians are able to accumulate capital and use tax benefits to reduce the amount of tax they pay on their income.’
Again, very true – But this is a choice, there are many higher income earners don’t accumulate capital and they spend it on consumption, and they are likely to be paying more than double the tax of a low-income earner, even after deductions.
‘Ultimately, a dollar of tax avoided by high income Australians is an extra dollar of tax paid by all other Australians’.
This is where it started getting loopy – It is starting to make it seem the economy is run on a collective quota system, which isn’t true. Communists tried that. Australia’s tax system is progressive i.e. the more you earn the more you pay. About 80% of the income tax collected in this country comes from the top 30% of income earners.
‘Labor, believes that the tax system should be designed to boost jobs and grow the economy. The tax system acts a form of traffic lights in the economy, directing investment within the economy’.
This Central planning. The more you extract from the productive sector, the less productive they’re going to be.
‘In setting tax policy, therefore, we should be designing a system that green lights investments on activities that boost economic activity, and underpin the efficient allocation of resources. Existing policy arrangements that direct resources to unproductive investments and speculative markets should be re-considered.’
They are saying here that they want to design policies that reduce the incentive to invest for yourself and give the government more money through taxation so that they can “invest” it for you. Since they know better than you how you need to be looked after, right?
Moving onto the policies - Will any of these actually help? Who knows? There are two ways of looking at the world;
- Demand side – Looks at affecting consumers
- Making people not want to buy property to drop prices
- Supply side – Looking at affecting supply
- Number of properties increases
What are the policies:
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Limit direct borrowing by self-managed superannuation funds (SMSF)
- This might help, but may only be a drop in the ocean
- SMSFs can borrow to invest in assets on a limited recourse basis
- Loans in SMSF increase from about $2.5 billion in 2012 to more than $24 billion today.
- Worried that the growth will cause volatility in super and increase home prices
- Here’s some perspective - $21.4bn is borrowed each month just by owner occupied individuals
- SCORE: this will have little effect
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Facilitate a Council of Australian Governments (COAG) process to introduce a uniform vacant property tax across all major cities
- This is taxing a property or land being held in Australia by people that don’t live here
- Exists in QLD currently and is also being trialled in Victoria – 1% of value each year
- SCORE: Meant to punish people who are holding onto vacant property – Not sure, think this might hurt us a bit.
- Establish a bond aggregator to increase investment in affordable housing
- A Shorten Labor Government will establish a bond aggregator to help community housing providers access cheaper finance for new affordable rental housing.
- The housing bond aggregator will directly source cumulative funds from wholesale markets on behalf of community housing providers, by issuing bonds to private investors. Funds raised by bond issues can then be loaned to providers.
- Lower cost? Bonds have fixed rates – prices change as rates change.
- These also looks a lot like mortgage backed securities where low income household mortgages become the underlying asset on these bonds – if those fail then the bonds are worth nothing. This is a risk.
- The Government provides the funding on the projects the Government chooses (State planned housing)
- SCORE – Supply may increase but the quality of supply won’t – supply will be in urbanised areas. This could also be fuelling an artificial bubble here – over supplying for no demand.
- Boost homelessness support for vulnerable Australians – Same sort of policy for both Labor and Liberals – Building crisis accommodation
- SCORE: Liberals at $323m, Labor at $88m – This is for a good cause, but doesn’t play a part in the bigger picture of housing affordability
- Increased foreign investor fees and penalties
- Increase application fees - double the foreign investment application fees Liberals introduced.
- Property of <$1 m = $5,000 to $10,000, $1m - $2 m- $10,100 to $20,200, $2m - $3m - $20,300 to $40,600
- Increase financial penalties for breaches of foreign investment rules
- For foreign buyers that acquire new or existing dwellings without approval – Increase the criminal penalty to $270,000, and $1.35 million for a company.
- SCORE: Won’t slow investors down – I’m sure savvy investors may get around this – they could start an Australian Run Unit Trust/Managed Fund to hold the investment and buy units. This is just extra regulation as far as I am concerned.
- Increase application fees - double the foreign investment application fees Liberals introduced.
- Getting better results from the National Affordable Housing Agreement
- A Labor Government will work with the States and Territories to negotiate a new National Affordable Housing Agreement (NAHA)
- This “includes new performance and accountability measures” - a new approach is needed as some current targets were missed (don’t know which ones though)
- “Labor will work with the states to drive better outcomes and performance that will see real reductions in homelessness and housing disadvantage”
- Labor will also seek to strengthen measures in the current agreement across the housing affordability spectrum, including, Planning reform, Inclusionary zoning, Accelerated release of state and territory government owned land for housing development
- SCORE: No idea – Just putting more control and regulations onto the issue
- A Labor Government will work with the States and Territories to negotiate a new National Affordable Housing Agreement (NAHA)
- Re-establish the National Housing Supply Council and re-instate a Minister for Housing
- Increase control over the housing sector,
- re-instating a Minister for Housing and Homelessness whose remit will be to coordinate all aspects of Commonwealth housing policy
- re-establish the National Housing Supply Council to provide an ongoing independent advisory body on boosting housing supply.
- Provide advice on how state and national policies are tracking against housing policy objectives;
- better tracking and accountability of funds spent through the National Affordable Housing Agreement.
- Provide advice on Commonwealth land holdings and opportunities for development release to boost housing supply
- SCORE: Can’t see it doing much except creating more employment in the Government
- Increase control over the housing sector,
A recap: So far all that we have had is increasing central planning and regulations, fining people, or taxing people more. This just leads into the new reforms relating to negative gearing and reducing the CGT discount. Will this solve the problem? I’m playing the Devil’s Advocate here; If they are allowed to speculate that it will solve the problem, I can speculate that it might not!
- Negative gearing – this is a hard one to call – I’ll speculate and say it might not help out that much if anything it might hurt
- Grandfathered for existing arrangements – What will it earn in tax for the Government in the future?
- Plus, available on new builds also – Which is 100% of the supply increase going forward
- SCORE: It will change people’s behaviour – Existing property investors will likely hold their property to keep benefits of gearing
- Less stock of existing properties for sale, pushing prices for new property up further if supply doesn’t keep up
- Create another artificial bubble of overvalued new apartments for the negative gearing benefits
- Capital gains reduction – again, this is a hard one to call
- I’ll speculate that people will just hold onto their investments longer rather than incurring any CGT.
- I know personally that investments with CGT are often chosen last when selling as tax will cut into a lot of your profits. I would be much more likely to actively trade shares if there was no tax – If a share gains big I hold it even if I know (no way to know) it is likely to decline than continue rising.
- Just create another housing supply decrease – People will avoid at all costs to crystallise a gain for longer periods
It is impossible to tell. It’s doing the same thing but just more of it, along with over complicating it at the same time. I don’t think it will work as intended.
The fundamental issues of the property price increase are still an issue
- High population growth
- High concentration of Urbanisation
- Taxes already being high – Making them higher and more complex won’t help
Again, thanks for listening!
Welcome to Say What Wednesday! Today’s question is about Labor’s plans to help with housing affordability. To answer that properly, I will spend today going through some underlying factors impacting Australia’s property market, and what affects housing affordability and how it works in the long term.
I will actually answer the question about Labor’s proposed policy on Friday. At the end I’ll run through what is probably one of the only ways to lower property prices sustainably in the future – IMO anyway.
The History of Australia's Property Market Yes, a dry topic but stick with me, it’s worthwhile understanding what’s been going with property over the last 20 years or so.
The Big Three Population size and growth
- 1901 at Federation, we had a population of about 4 million - High growth from the gold rushes up until then
- Population now – 25,122,747
- Growth of 6 ¼ times over 100 years
- America – from 77 m in about 1900, to 326 m now which is growth of around 4 times
Why has our population grown by so much?
- Great place to live – High levels of immigration
- We no longer discriminate – Immigration Restriction Act 1901
- Dictation test – In a European language or English (Most, of course, were white and so it was referred to as the White Australia Policy)
- Governments progressively dismantled such policies between 1949 and 1973
- Since 1973, after the dismantling of the White Australia policy and broadening of Australia's immigration policies, new groups of migrants have been arriving from all parts of the world
- We no longer discriminate – Immigration Restriction Act 1901
- Immigration now makes up over 60% of our population growth
-
- One of the Highest growth rates in the world, behind Saudi and NZ
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- We are living longer - Decline in death rates at all ages – Improved living conditions, sanitation, food, medical improvements - 100 years ago, the median age was 22 years and 4% of the population was aged 65 or over. - Nowadays, the median age is 37 years, and 14% of the population are aged 65 and over - Timing of this is important – something interesting happened in 1994 – which we will come back to at the end of this
Population distribution
- Today, 85%-90% of Australians live in urban areas, 70+% in the cities
- 100 years ago, less than 40% of Australia’s population lived in our capital cities
- Melbourne was our largest city, with just over 500,000 people
- 1945 – Sydney hit 1.5m to overtake it (growth of 800k in 30 years). Between 1911 and 1945, Sydney’s population grew by over 800,000 people, to almost 1.5 million, basically doubling.
Interest rates
- Major increase in property price comes back to lending capacity
- 50s to 70s – 5% or so, very consistent during the gold standard, Brenton woods era
- 70s to 80s – went to 7, 8, 9, 10%
- 80s to 90s – 10 -17%
- 90s to within 2 years dropped back to 10% - going to about 7%
- 2000s – 7 to 9% (dropped to 5% in 2009) – then back to 7%
- Last 8 years been dropping - Now rates are below 5%
So why has this caused property price increases? Supply and demand!
- Supply
- Urbanisation – The nature of Australian property supply is very centralised
- Sydney 4.6m, Melb 4.2m, Bris 2.2m, Perth 1.9m, Adelaide 1.2m
- Gold Coast - 600k, Canberra - 367k, Newcastle - 308k
- 65% of population live in 5 cities
- America – big 5 – NY, LA, Chicago, Houston, Phoenix – combined 19.3m – 6% of total population
- Size of houses are also bigger – demand for bigger houses
- In fact, the average new house built in 2016/17 was 233.3 square metres, the biggest in four years and more than 11 per cent bigger than 20 years ago.
- The average house built today is over 30% bigger than 30 years ago (the 1986/87 financial year).
- Second Behind America in terms of largest homes in the world
- Demand
- Immigration
- Urbanisation – People go where the jobs are
- Natural increase and net overseas migration contributed 34% and 66% respectively to this total population growth.
- In the past 10 years - Brisbane’s population increased by 27%, making it the fastest growing of all Australia's capital cities in the 21stcentury (A lot of interstate migration)
- Demographics
- Baby boomers (1946 – 64) – Largest demographic from post WW2 boom
- In 1994 the last of the boomers turned 30 – The average property prices was fairly flat to upward sloped from 60s to 1994/1995.
- From that point and over the last 35 years, average prices have doubled - $140k to $280k (inflation adjusted)
- 1998 to 2018, the average prices went from $310k to $810k – that’s more than 2.5 times in 20 years, and double the growth rate of the previous period.
- If the growth rate had kept at the previous rate the average price would be $664k rather than being over $800K
- Low interest rates
- More loans and low interest rates – mid 90s interest rates were 10% lower than the past few years previously and 3% lower than the long-term average of 10%
- This fuelled borrowings for investments as well and we saw a rise of investment properties being purchased
- If people can access more debt, they will
- Immigration
The Outcome – 1994 to 2018
- Brisbane – Median house price $126k to $524k. Borrowed $101k at 9%, today $419k at 5% (that’s 4 times the amount of debt for half the interest cost)
- Annual repayments used to be $13k, now it’s closer to $31k
- This is an increase from 20% to 31% of median incomes being directed towards servicing mortgage debt
- Even with lower rates, we spend way more on servicing a mortgage
The Solutions These are three that I can think of based around the drivers we have already discussed
-
Lower taxes – If the Gov was committed to truly lowering house prices they would get rid of Stamp Duty
- Stamp duty on a median priced property is $35,000 in Sydney and $40,000 in Melbourne.
- This works on both ends – when developers buy land to redevelop, they pay stamp duty, so it increases the price to be passed on
- GST was meant to replace Stamp duty, but it now increases the cost more than 10% when you add it up
- Building costs go up by 10%, services for property up 10% - Agent commissions
- Both of these taxes are just accelerating the growth when looking at percentages – percentages are compounding
-
Reduce Urbanisation - Need more cities and a greater spread of population
- Invest in new business hubs outside of the major cities – People will move to new major cities for work/family
- District level tax incentives to move – Mobility of workforce leads to mobility of population
- Incentives
- People come to Australia because it is good to live
- What would make Australians and people coming to Australia move to other cities outside of the big 5?
- Remove federal policies on housing – affordability differs city to city, state to state
- Need more targeted housing policies
- Bank lending – APRA
- Allow Local councils to free up more land – remove the Commonwealth restrictions
- Sydney - $1.2m median house price = 10.8 times median family income
- Melbourne - $830k median house price = 8.4 times median family income
- Brisbane, Adelaide, Perth range at ratios of 5.4 to 4.8
- Need more targeted housing policies
- Invest in new business hubs outside of the major cities – People will move to new major cities for work/family
With this as a background we’ll next look at the policy proposals in place …which was the question for this week 😊
Just a reminder that we’re offering 50% off the course for podcast listeners – use the code faf01
We’re we get the numbers? http://www.worldometers.info/world-population/australia-population/
Welcome to Finance & Fury. Today we’ll be running through some alternative assets – precious metals, like Gold and Silver.
We’ll talk about
- How they work
- How they fit into an investment portfolio
Gold Price
Silver Price
Whilst they are very separate assets to each other, they work in a similar way. There has been increased volatility with shares in recent months, and this has led to an increase in gold and silver prices. They are considered an alternative growth investment; when other asset classes like shares, property and even bonds are doing badly, gold and silver are considered a “safer” way to invest.
History
- In between the periods of barter and modern-day credit cards and paper money, gold and silver (plus other rare commodities) were used as a medium of exchange, or currency. This however, was inefficient.
- In the past your wealth, and the government’s wealth was measured in gold, by weight.
- Gold rushes – in 1851 people flocked to the Victorian town of Ballarat
- If they found gold, they could exchange that for money
- Also used to back ‘paper money’ as the measure of intrinsic value
- Converted away from this in 1971
- Now it’s rare for people to have stacks of gold bars lying around
- Today, people buy gold ETFs, or Bullion through a few companies
- With gold, if demand increases, eventually price increases – this can work well when people are flocking to gold, away from other assets as they look for safety.
History of Price
- Rise of internet saw ability for average Joe to buy gold as well. Prior to this, access to gold was quite limited.
- The price has been more volatile since early 2000's
Why is gold and silver good?
- Limited supply – Paper money today has potentially unlimited supply – at the Central Banks discretion
- Government has debt in the trillions, Australia, the UK and most of Asia (other than China) are all up to their eyeballs in debt
- Came from getting the money printed by issuing a debt instrument (bond) for the cash – but they also have to pay the interest back as well
- Over printing creates pressure on the currency, increasing volatility.
- Demand – If people buy gold, the price goes up
- Supply is limited – you have to actually go and find the metals, and get them out of the ground, there are not many new sites being found. This is why they are considered ‘inflation proof’, retaining real value compared to fiat currency
- Government has debt in the trillions, Australia, the UK and most of Asia (other than China) are all up to their eyeballs in debt
- Diversification – Typically acts in an uncorrelated, or negatively correlated fashion to shares and property
- As people get worried about property or shares, they may buy more gold
- This pushes the price up
- Number of uses – not just investment which creates a more stable demand
- Not just used as a speculative investment
- Used in electronics, jewellery, medical
- Gold has special properties and is very versatile
Disadvantage of Gold and silver
- No income return – Return solely based on demand
- Income returns can pick up total returns on shares or property if the growth is low or negative.
- Only Growth returns…which is hard to predict
- If it’s in ETF form, good luck getting your gold! It’s all electronic through derivatives.
Buying it
- You can buy gold through an ETF, or some companies will store it for you.
Where it fits into a portfolio
- Growth allocation – Mainly as a capital hedge
- Constructing a portfolio, it might be suitable to allocate 5% or so into gold, but that doesn’t mean it’s right for everyone
In summary
It’s good as a long-term inflation hedge, and to diversify a portfolio out further, but can be volatile or non-performing (due to no income)
Welcome to Furious Friday!
I recently saw a news article about Australians being “promised new laws to slash up to $832 from their annual electricity bills”
This article outlines;
- This is a “federal government move to toughen rules for big energy companies and demonstrate action on household costs”.
- Outline new laws “to set a default offer price for millions of consumers…response to calls from regulators …to put pressure on suppliers”.
- The Government “promises the default offer will ensure customers are not being "exploited" because they stay on the standing offer from their suppliers rather than shopping around for a better deal”.
- “Opposition Leader Bill Shorten revealed plans in August for simpler bills with "capped" prices under a Labor government, at the same time former prime minister Malcolm Turnbull outlined similar measures”.
- "Returning to the table to negotiate with Labor a bipartisan energy policy that will support the growth of renewable energy, bring down carbon pollution and bring down electricity prices for Australian households and businesses is in the national interest," Mr Butler said.
- “The "standing offers" used by companies such as AGL, Energy Australia and Origin have been criticised for years because loyal customers miss out on discounts and are punished for not shifting to different suppliers”.
How will this work?
- ACCC’s "reference bill" says that, in each region, it makes it easier for customers to compare offers from different suppliers, which is great because this increases competition
- Where it gets bad – Default pricing or capped pricing forces sellers/suppliers to limit their prices. When you break this down, whilst it SEEMS like a good idea, it isn’t actually that great.
Let’s look at the stats, and the claims that there will be price savings on electricity
- Government says the price premium to be saved could be $652 in Victoria, $411 in NSW, $369 in Queensland and $273 in the ACT
- ACCC's estimate of annual savings from the default tariff measure is much lower, at $105-$165.
- Either way, both the Government and the ACCC have said that it will lower prices.
What price capping actually does, comes back to my favourite thing - The Supply vs Demand equation
- When capping the price at which goods and services are supplied, it reduces supply, and this lowers infrastructure in the long term.
- Especially when renewable energy is being forced upon suppliers as well, pressuring them to cut their emissions etc
- These things increase costs to suppliers… so how will they pay for it?
- Demand – With lower prices, demand goes up, people use more when something is cheaper.
- This is a bad situation – Reduced supply along with increased demand = Not enough power
Lack of power - Rolling blackouts
- A rolling blackout - an intentionally engineered electrical power shutdown
- Electricity delivery is stopped for non-overlapping periods of time over different parts of the distribution region.
- Rolling blackouts are a last-resort measure used by an electric utility company to avoid a total blackout of the power system.
- They generally result from two causes: insufficient generation capacity or inadequate transmission infrastructure to deliver sufficient power to the area where it is needed.
- Rolling blackouts - common or even a normal daily event in many developing countries where electricity generation capacity is underfunded or infrastructure is poorly managed.
Long term effects of price ceilings
- When companies have price-ceilings enforced by regulation and are what they can charge for a service is limited, this effects profits.
- Their incentive to invest in the infrastructure and the grid goes down because level of investment can only come from profits
- If profits are going down because prices are capped, as publicly listed companies they’re still obligate to maintain profits – otherwise investors dump their shares and the company can go out of business. A lot of individuals lose their jobs in the end.
- This results in a decrease in overall supply to the market.
Pakistan
- In Pakistan there are shortages day in and day out. This highlights the chronic underinvestment into infrastructure, long-term planning sacrificed to short-term expediency, lack of leadership, cronyism and corruption.
- Capped prices meant the companies had no funds to build infrastructure
- The dual effect of the government setting low electricity prices PLUS the customers failing to pay for it meant state utilities lost money, and couldn’t pay private power generating companies, which in turn could not pay the oil and gas suppliers… who cut off the supply.
- Infrastructure investment comes from revenues – if revenues drop, there is less money to maintain the power grid.
Rolling blackouts in developed countries sometimes occur due to economic forces at the expense of system reliability (such as in the California electricity crisis of 2000-2001).
Okay, lets look to a developed nation, and specifically, California in 2000-200.
California had a shortage of electricity supply caused by market manipulations, and a capped retail electricity prices was one major factor
- The state suffered from multiple large-scale blackouts, one of the state's largest energy companies collapsed, and the economic fall-out greatly harmed Governor Gray Davis' standing.
- There were delays in producing some power due to weather
- By keeping the consumer price of electricity artificially low, the California government discouraged citizens from practicing conservation.
- When the electricity demand in California rose, utilities had no financial incentive to expand production, as long-term prices were capped.
- In February 2001, California governor Gray Davis stated, "Believe me, if I wanted to raise rates I could have solved this problem in 20 minutes”.
There are many other examples of asset pricing, like New York housing (which lead to it becoming derelict), gas shortages in the USA, and many others… (if you are interested, let me know)
How do we solve this?
The average bill is $1576 p.a. in Australia, where as in France it is $1178 pa (731 Euros) – 34% lower
- How they do this? Nuclear power – it is a viable, clean, option.
- Where it goes wrong:
- Poor construction – Chernobyl
- Building on a fault line – Fukashima
If it is done well it is the best solution to the electricity price issues. Either cap prices = No power for anyone, or increase supply through more power with no environmental pollution
As always, thanks for listening!
Today, we’re talking about the Trump economy, and the state of the US market.
Love him or hate him, America is doing better than ever – Trump just can’t stop winning when it comes to a lot of political and economic factors.
In his first 2 years in office President Donald J. Trump has achieved results domestically and internationally for the American people – he is the first President in my lifetime that seems to be putting his own countries interest first rather than signing a bunch of international pacts that look after other countries more so than his own.
- The American economy is stronger, American workers are experiencing more opportunities, confidence is soaring, and business is booming.
- Why is this going on? What we hear in the media is that America is going through so much trouble
- President Trump has put the American people first and made government more accountable – he is one of the most transparent Presidents in America’s history.
- I will focus on the economics in this episode, but with that said, Trump has turned ISIS into an afterthought, and de-escalated tension with North Korea
- The share market may have corrected but it is still massively up.
The play by play:
- America Economy is Stronger - American workers are better off thanks to President Trump’s ‘pro-growth’ agenda
- Evidence –
- Share Market – Still Up 33% since Oct 2016 and the ASX only up 7.5% since then
- GDP Growth – 4.2% - which has beaten all expectations
- Nearly 3 million jobs have been created – 304k manufacturing, and 337k construction (Highest levels since 2008)
- Unemployment rate has dropped to 3.7, the lowest rate in over 50 years.
- Job openings have reached 7 million, the highest level recorded.
- Gallup Polls – 67% of Americans believe now is a good time to find a quality job
- Only under President Trump have more than 50% of Americans believed it is a good time to find a quality job since Gallup began asking the question 17 years ago.
- Restored confidence in the American economy, with confidence among both consumers and businesses reaching historic highs.
- Consumer confidence has reached a 17-year high
- Manufacturers and small business confidence/optimism hit record highs
- Energy production – Net energy exporter
- Trump travelled the world to promote the sale and use of U.S. energy
How?
- Work Force changes and taxation – Leading to confidence
- Job training and workforce development to empower workers to seize more opportunities, signing an Executive order to expand apprenticeship opportunities.
- This is great for an economy – Everyone keeps saying that replacement of humans by technology is going to replace us – hearing that for hundreds of years – but, we adapt!
- Do you think that a medieval serf, where 80+% of the population were farming based populations – think that a computer engineer, or pilot would be an occupation?
- We are adaptable – why we are the #1 species
- Each American now gets more money in their account each week – Most Americans are now earning more due to the income tax cuts
- The top corporate tax rate was lowered from 35 percent to 21 percent so American businesses could be more competitive. This has caused companies to bring back money into America.
- This is great for an economy – Everyone keeps saying that replacement of humans by technology is going to replace us – hearing that for hundreds of years – but, we adapt!
- President Trump signed historic tax cuts and Jobs Act into law, cutting taxes for American families and making American business more competitive.
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- President Trump has rolled back unnecessary job-killing regulations beyond expectations. + When you make it easier for business to operate – they do wonders for the economy + The free market can choose very efficiently – Someone gets sick from eating at a restaurant for example. In the modern age, someone has invented an app letting people know that it may not be the best restaurant to go to. + Businesses are incentivised to give the best service – or lose customers in the long run once loyalty runs out
In 2017, President Trump far exceeded his promise to eliminate regulations at a two-to-one ratio, issuing 22 deregulatory actions for every new regulatory action, saving $8.1 billion.
- Fair Trade – lower regulations
- Since taking office, President Trump has advanced free, fair, and reciprocal trade deals that protect American workers, ending decades of destructive trade policies.
- Torn on this – Free trade is good, but not everyone wins
- Days after taking office, the President withdrew the United States from the Trans-Pacific Partnership negotiations and agreement.
- Made good on his campaign promise to withdraw from the Trans-Pacific Partnership.
- Opened up the North American Free Trade Agreement for talks to better the deal for the U.S.
- Worked to bring companies back to the U.S., and companies like Toyota, Mazda, Broadcom Limited, and Foxconn announced plans to open U.S. plants.
- Trump wasn’t entirely wrong. Companies from developed countries that signed up to the deal, such as Japan and the United States, would have outsourced to developing countries that have low-cost labour and fewer labour laws, such as Vietnam. In which case, unemployment in developed countries could have risen.
- Since taking office, President Trump has advanced free, fair, and reciprocal trade deals that protect American workers, ending decades of destructive trade policies.
- Accountability and transparency – lower regulations
- Accountability and Whistleblower Protection Act of 2017, improving processes for addressing misconduct
- Government shouldn’t be clandestine – which has been the trouble in the US for a while now. They have never been too forthcoming with information.
- Cleaning out the FBI and DOJ for individuals who allowed politicians to break the law
- Likely chance that Military Tribunals coming in the next few months
Why this is all so important?
- Gets barriers to the free market out of the way – Increases incentive and transparency
- Peoples’ behaviours change over time in relation to what incentives are around
- Gives confidence – Has a clear stable message – Strong leadership
- If a country has a clear direction it goes well even in tough times
- Example – War times, a uniting factor is the best thing for a country/culture
- In WW2 the English were bonded – some even missed the war times, as back then they were all in it, bonded by their comradery, when they worked together for survival, helping one another
- In Brisbane, Australia – In the floods people were really nice to each other, with strangers helping strangers
- Hard to achieve in democracy – as there will always be tribalism. But unifying factors in countries are important
- Has to come from what people want – having a good life and being free
Here’s the take away
- Regulations and taxation hand in hand lead to a society declining in economic power
- It has happened throughout history
- Rome is a good example – Went away from a republic where there were many representatives, to an Empire with one dictator ruling them all, and it became a popularity contest.
- It is the cycle of all empires – we just need to realise the signs and ignore the noise
- Always vote for freedom over free stuff
- It is trading good stuff now for less freedom in the future
- It is best to focus on your individual freedom – Building wealth – Increasing your own ability to take care of yourself
- Be wary of the trap of voting for economic instant gratification – Economic freedom is better
- Instant gratification / Gain through handouts might feel good now, but reduces potential in the future
- Working for what you own – nothing feels better. The first $1,000 I earned as a 14yo felt pretty good, especially at $8 an hour
Welcome to SWW …on a Monday … because we have been receiving a LOT of questions about what’s happening with this so-called “market crash”, why has the share market dropped so much, should we sell to cash to avoid massive losses?
Here’s the back story
The Australian share market has wiped out all its gains from the last 12 months
- Some say we have entered a technical "correction", plus
- Following a massive sell-off on Wall Street overnight
- It has fallen by more than 10% since its peak in late-August until October
- There were days last week when it was dropping 2+% in a day
Why are markets tumbling?
- What America does, we follow, and so does the rest of the world
- The local market's substantial decline comes after the Dow Jones index fell more than 600 points – this wiped out all its gains since January - 10 months’ worth
- New York's benchmark S&P 500 index - down 3%, Nasdaq (tech heavy) - down 4.5%
- Australia is still faring better than some others when it comes to one-day losses; Tokyo's Nikkei (-3.4%), Seoul's Kospi (-2.5%) and Shanghai's composite index (2.6%)
Why is this occurring?
- There’s a number of reasons, but a lot possibly comes back to investors taking profits ahead of upcoming uncertainty
- US Share market in 2 years rose 40% until the declines over the past few weeks
- Uncertainty is a major factor on share markets; People get worried, they sell their investments… so the market goes down
- If you aren’t certain about what tomorrow holds, how can your plan and act today for it?
- Certainty and confidence in the share market are the key drivers of consistent growth
- Markets with too much confidence turn into bubbles
- This will always exist in the share market; Consistence in confidence leads to overconfidence, overconfidence then leads to bubbles … but then profit taking sets in
- Profit taking = Selling
Factors affecting sentiment and uncertainty; there are actually many things, but let’s focus on the major 4
- US Midterms – Elections – Anyone heard of the blue wave coming? It is where the house and senate is voted on
- Among the 33 Class 1 Senate seats upfor regular election in 2018 are 23 currently held by Democrats, two by independents who caucus with the Senate Democrats, and eight by Republicans
- Republicans – 51 currently – All polls show Wyoming, Utah, Texas, Tennessee, North Dekota, Nebraska, Mississippi are all safe Republican – 8 seats up for re-election
- 6 are up for tossups – In independent states
- Democrats - 47
- 19 seats are safe
- There is an assumption – Republicans remain 51- Dems at 49 – but they’re still not in power. Media is saying the “blue wave” everywhere… but I don’t see it
- Economic advisor Larry Kudlow this week blamed the spectre of Democrat wins for falling market prices.
- Even if this is true, if it was the only reason for the market price fall, it is a great time to buy!
- Raising rates – The Fed are very quickly raising rates
- President Trump slammed Fed boss Jerome Powell, saying he threatened growth and appeared to "enjoy" hiking interest rates. - "Every time we do something great, he raises the interest rates,"
- How does raising interest rates affect markets?
- Shares; Free cashflows of shares is used and in the equation the risk free is the denominator
- Analysts use the risk-free rate when they determine the intrinsic value of a stock. And the rates on Treasury securities are used as the risk-free rate.
A lower risk-free rate typically translates into a higher intrinsic value.
- Bonds and Bond pricing; Rates rise, bond prices fall, and it’s worse the longer the duration
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Rate rises can hurt the valuations of both asset classes
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Decline of Tech - disappointing quarterly earnings from some major American companies
- Tech stock declines drove much of the repricing
- 6 of the top 10 are tech stocks
- Geo-political
- Tariffs and trade wars
- Geopolitical tensions with oil producer Saudi Arabia for the killing of journalist Jamal Khashoggi
- EU – Low growth and Italy's conflict with the European Union regarding budget spending
- This could be a big one, not enough time here but will do an episode on the EU and economic breakup in a future ep
We have been talking about America – Why cover it, we are in Australia?
- This does matter for us, not for fundamentals but ‘monkey see, monkey do’
- Crowd behaviour – Share markets around the world are highly correlated.
- Similar factors and similar human behaviour
What will cause Australia stocks to be volatile?
Similar things - overarching factors mentioned before, specifically to us though:
- Political uncertainty is a big one; almost one Prime Minister every year for the last 7 years
- It’s hard to invest if you aren’t sure what is going on. As policies are likely to change so too does individual behaviour
- Example; You learn that the cost of bananas is likely to triple in price in two weeks’ time…most people rush out and buy bananas.
- When an outcome is likely from a political change, people change their behaviours prior to it even occurring
- It’s hard to invest if you aren’t sure what is going on. As policies are likely to change so too does individual behaviour
What will cause Australia to have slow growth in the long term?
- Regulation – Stifles growth and competition by increasing barrier to entry – reduces incentive
- Taxation – Detracts from the reward – again, reduces incentive
Examples: You can have growth with one and not the other
- Taxation – America after war: High taxes but low regulation, average 70-90% tax rate. There was, however, high growth.
- They did import a lot of gold and were one of the only developed countries not destroyed in the war
- Singapore had regulation but low taxes and no welfare – so, it has good growth.
When you have both high taxation and high regulation, GDP growth slows;
- GPD growth is important as it is highly correlated with share market growth
- Corporate Finance / Finance at Uni – joined the Investment Banking Challenge and we had to value a merger into the future. The initial growth would be large, but once the business mature. The growth assumption is almost on par with GPD growth of the overall economy.
Our History of GDP growth
- Used to be more volatile, but consistently higher in number
- As regulation increases our growth narrows down to 2-3% p.a. over time
What would it take for a market collapse?
- Housing crash – Either from lack of demand in property plus interest rates going up a lot
- The housing market may decline a bit, but not like in the U.S.
- Fiscal Cliff – Government debt defaulting, banks defaulting
- Anything that destroys the nature of financial markets
- The Share market is related to financial markets – And also the foundation of every other company operating
- A lot of companies need loans and credit to operate and they get that from the banks
- If the banks shut down, so do a lot of other companies if they are overleveraged and can’t operate on revenues alone
Should you be worried?
- If the money is invested for a home deposit – maybe
- If the money is for the long term – not really
- This is part of the general market cycle
- What’s your end goal for your investment?
Ways to hedge against a collapse
- If you’re ok with something that carries a bit more risk: VIX, ended near 22% higher, to its highest since the turmoil during February's sell-off when markets started to perform. Not great over the longer term in a stable country.
- Gold – I’ll cover this in another episode next week
- Hold – Throughout the markets’ history, there have been collapses…ask yourself, are the markets still around?
- Not only are they around, most are a few percentage points off their high points
- What it would take to have a total market collapse – to get a 0% on all shares – Every company in Australia would need to go out of business. If that occurs we have more than our investment value to worry about.
- That is why it is important to be well diversified – if you only have 1, 2 or 3 companies in your portfolio the chances of 100% loss is much greater
- DCA in to the market – Take advantage of the downturns, but isn’t as risky as putting all into the market at the same time
- Example: If you have $10k to invest, put $4k in now and wait, if it goes down put another $4k in
- It may go up and it may go down – but at least you didn’t lose on $10k – nobody has a crystal ball
In the next episode I’ll give you another side to the Trump Economy and why the US economy is has done really well until now.
As always, if you have any questions hit me up at the contact page
Going to say it: Might be controversial – ‘But is it okay to be white’?
If you have seen - Pauline Hanson proposed an "It's OK to be white" motion in the Australian
- "Deplorable rise of anti-white racism and attacks on Western civilization".
- It was defeated 31-28 by opponents who called it a racist slogan from the white supremacist movement.
Today I want to go through this in detail and look at the longer-term economic impacts – and it will have to do less with race than you think.
Where does the story of neo-Nazis being behind this come from?
- Media claims it is from David Lane – American Neo-Nazi – Said to come from his “14 words” statement
- ‘We must secure the existence of our people and a future for white children.’
- I did a fair amount of reading on his other work and couldn’t find anywhere ‘it’s okay to be white’
- The “14 words” statement is clearly not the same thing
- So, where does it come from?
- It's OK to be white (IOTBW) is a slogan from 4chan in 2017 – self-proclaimed ‘shit posters’
- They did it as a "proof of concept" that a "harmless message" would cause a "massive media shit storm"
- Did they succeed? I’d say they did succeed as it is not a statement oppressing any group of people.
- It proves racism in the media
- Why is it not okay to say it?
- A narrative has formed. It is easy to label someone as something – they can defend that they’re not.
- You can’t prove a negative – If someone says you are racist, sexist, or a homophobe it’s impossible. For example – if someone calls me a homophobe how would I prove I’m not? Two of my best friends are dudes who are married to each other. When you’re on the defensive though, it can just dig a further hole
Social System is made up of Socio-Cultural, Economic, and Governmental systems, each interacting with one another.
Socio-cultural
- A sociocultural system is a "human population viewed in its ecological context and as one of the many subsystems of a larger ecological system". The term "sociocultural system" embraces three concepts: society, culture, and system.
- Media, Hollywood and narrative, “Evil, white men”
- For example, I have seen many Arnold, Stallone, etc action movies ... the terrorists in them are always white.
- Not wanting to offend leads to “political correctness” (PC)
- PC can lead to society breaking down
- In response to this an opinion piece satirising how hard it is to be a white man – by a white man
- Richard Glover - SMH
- It's not only Senator Hanson. The whole Parliament has long realised there's a role for positive discrimination: rules designed to give "a hand up" to those who are doing it tough.
- In our case: the negative gearing laws, the capital gains discount, the franking credit system, the family trust laws and the salary-sacrifice provisions within Australian superannuation.
- Some say, "where's the fairness in a program that can only be accessed by one segment of society", but that's to ignore the special problems faced by people who are right here, living among you.
- Frankly, if you didn't grow up white and rich, it's hard to understand. You may have to check your lack of privilege.
- What he is doing, is associating white with wealth – Why? Well, we will come back to this
I have a theory on why this might be occurring – well not mine, but Robert Johnson who analysed Jung
- Conscious - the ego represents the conscious mind as it comprises the thoughts, memories, and emotions a person is aware of. The ego is largely responsible for feelings of identity and continuity.
- Subconscious
- Personal unconsciousis essentially the same as Freud’s version of the unconscious. The personal unconscious contains temporality forgotten information and well as repressed memories
- Collective (or transpersonal) unconscious.
- According to Jung, the human mind has innate characteristics “imprinted” on it as a result of evolution.
- Examples - Fear of the dark, or of snakes and spiders might be examples, and it is interesting that this idea has recently been revived in the theory of prepared conditioning.
- Why we resonate to a good story – “The Hero’s Journey” where we start off on a journey, overcome the dark, etc. All parts of the personality, as we all have the capacity for evil.
- When you suppress the collective unconscious, this creates an “Ego Split”
- When an ego split occurs, you project everything about it on others
- Rich vs poor – Projection of “having money is bad”
Economic
- Each society needs some system
- Ancients – Barter system – mostly peasants – couldn’t accumulate much due to moving around
- Medieval – Coin/markets – settled – this created a nobility and large lower class
- Today it’s much more complex – No class structure and easier to accumulate resources than ever. Plus, there is a lot more people.
- This leads to a greater variant of inequality, plus, they actually measure it now for the first time
Governmental
- Government needs legitimacy to operate - Democracy through voting in – So cater to the socio-cultural and you can win
- Power base – tools of extraction
- From who do they extract? The ones the socio-culture has demonised
- “Inequality” gives power – not to the people, but to the government to redistribute wealth as they see fit.
Let’s talk about the Government voting on ‘It’s okay to be White’
- Why is there such controversy? Especially from the majority of white politicians, and in a majority white country?
- Socialist takeover 101: Demonise the group you are going to extract from, mobilise the masses and legitimise your authority to extract the resources from those that they’ve demonised.
- Socialist policy – Makes it okay to take stuff from then if they aren’t human or are “bad”
- This is what I was talking about last Friday – using some groups and advantaging other groups.
- Who has done this throughout history? Every socialist government before and during they take over
- Examples: They each have their own groups who are painted as the enemy
- Hitler – Germany; Holocaust – 6m dead (National Socialist)
- Lenin & Stalin – Russia; Bourgeoisie (anyone with money) 20m-60m dead
- Pal Pot – Cambodia; 2m dead - most of the victims of the Khmer Rouge regime were not ethnic minorities but ethnic Khmer. Professionals, such as doctors, lawyers and teachers, were also targeted. According to Robert D. Kaplan, "eyeglasses were as deadly as the yellow star" as they were seen as a sign of intellectualism.
- Mao – China; 65m – 75m dead - singled out nine categories of enemies: landlords, rich peasants, counter-revolutionaries, bad elements, rightists, traitors, foreign agents, capitalist and intellectuals.
- “Across China teachers, former landlords and intellectuals were being humiliated, beaten and murdered. They were hounded by neighbours, colleagues and pupils moved by misguided revolutionary fervour, personal grudges or little more than whim.
- Many hostile acts were taken by attackers seeking revenge, avenging a grudge or acting out of jealousy. People could make trouble for neighbours they resented for some reason or another by spreading rumours about them. If someone was jealous about another's Flying Pigeon bicycle he could make a few comments about “bourgeois tendencies” to local units of Red Guards
- All follow a similar playbook… and target group – those “with” something
- How do you extract things from people…By Force! And by playing on human emotions
- Guilt – White guilt/privilege
- Paint a narrative - Privileged – having special rights, advantages, or immunity
- It is about shame and guilt
- People won’t fight back if they think that they shouldn’t keep what they earn
- Fear – Repercussions
- Social mobs – getting labelled – online mob hate groups
- Government – Not paying taxes = Wesley Snipes in the USA
- Greed – This is what drives people to action as well
- Guilt – White guilt/privilege
- The extraction comes in the form of taxation – Wealth distribution at first
- Extreme examples – When socialists come in they just take your physical things too
- Democracy – Fear or Guilt
What can be done to solve this?
- Simple - don’t back down in fear of being labelled - tool of the mob for conformity in ideas
- Irony - They want diversity but not diversity of thought
- Don’t be guilted into thinking differently
- Avoid self-censorship
- Remember - Everyone in Australia is privileged
- Ever been to a 3rd world country?
- Once you see these countries, you realise that what we have is amazing
- The poorest people in the world live in regions where there is no means of owning (or protecting) private property. Ironically, socialism is based on removing private property rights.
- We aren’t monoliths. You shouldn’t be defined by your race. I find it racist (by definition) to prevented from being able to say “It’s okay to be white”
- It doesn’t matter what skin colour you are, everyone gets hated on and everyone can be the victim
- What you do defines you, if you are only looking for ways that you are victimised, that is all you will see
- Be happy with what you have – or if you aren’t, work towards a situation that you will be happy with
- Personal freedom – Financial independence and working hard to get there
- More people who can become self-sufficient there is less of the population who would vote to take things away from others
- Like many mismanaged countries - collapsing on ourselves like a dying star
Thanks for listening – Sorry for the tangent - If you have a question or want to know more about any of the topics we discuss, get in touch via our contact page
Welcome to Say What Wednesday! Today’s question comes from Katherine.
“I heard a story on Hack the other day about Sweden becoming a cashless society – Can you explain this further? Is it a good thing and should we be looking at doing the same thing in Australia?”
Sweden going cashless:
- This is not a government regulated change – it’s based on the behaviours of the population. Individuals are choosing “cashless” over cash transactions
- Already considered to be the most cashless society in the world.
- More Swedes have access to a payment card than to cash, according to data from the country's central bank, Sveriges Riksbank, or simply Riksbanken. And the overwhelming majority of the nation - 85% - have access to online banking.
How does it stack up?
- Circulation of notes and coins as a percentage of gross domestic product (GDP)
- Sweden: Just 2% of the total value of transactions in Sweden consist of cash
- Australia: About 4.2% of GDP
- Cash transactions in stores
- Sweden: 20% of payments in shops are made in cash
- Australia: Was 70% in 2007 but has declined to about 35% now
- UK: 42% of all retail transactions
The Central Bank is worried:
- The situation has gotten to a stage where the Central Bank has had to warn the public about the rapid rate at which physical cash is being phased out of Swedes' lives.
- Reliance on only a handful of third-party payment systems: Riksbank Governor Stefan Ingves, “a completely cashless society would mean a small number of commercial players being responsible for all payments in Sweden, posing a threat to the infrastructure for payments”
- A cashless Sweden could be unprepared if faced with a crisis, he added.
- Demand for cash would likely increase in a crisis situation
- Some people don’t have the ability to go cashless
- Elderly people and refugees are among those that would need access to physical cash
Sweden could eventually "reach a situation where legal tender is no longer an efficient medium of exchange”
- This means you would eventually lose the ability to exchange your cash for goods and services, and therefore the currency loses its value.
- Already some businesses are no longer accepting cash
- There are other reasons – It’s not actually safe to carry cash around (crime), plus there are issues around counterfeit money. It helps safeguard the stores from robbery.
A cross-party parliamentary committee in Stockholm is currently reviewing central bank legislation to examine whether banks should be forced to provide cash services for their customers.
- Increasingly bank branches are refusing to offer over the counter cash services, due to weakening demand.
Why is this occurring?
- Sweden is a unique economy when it comes to payments. It's home to a popular instant payment app called Swish, set up in 2012 by seven of the largest banks in the country. More than half of Swedish consumers are signed up to the app.
Government and Central banks
The public sector is required to facilitate people’s access to cash, and to help enable people to living within society.
- It all depends on the likelihood of the country's legislative tightening of the central banks and legislation creating protection for cash
- An option being tabled by the central bank is a government-backed virtual currency called the e-krona.
- The project is currently in its second year of a two-year pre-study.
- The central bank is not keen on the idea of cryptocurrencies.
- A very poor version of money - not a stable store of value or an efficient means of exchange
- There is also the idea that government-controlled banks could issue electronic cash
- May open the floodgates – personally I don’t think it’s a good idea to do this. It has been done before and ends in hyperinflation, for two reasons;
- Loss of confidence in economy – expropriation of resources – increases political risk (demand)
- No control on limiting money supply (supply)
- May open the floodgates – personally I don’t think it’s a good idea to do this. It has been done before and ends in hyperinflation, for two reasons;
What are the effects of not having cash in society?
- Black market economy gone
- In Australia – there is a lot of cash held in $100 bills
- Increased tax revenues – GST, Company and income taxes
- Absolute control over transaction – the Government can block you from spending money
- It’s a way to be able to control the monetary flows
- baring transactions
- Tracking – Can be tracked in spending
Thanks for the question Katherine! If you have a question or want to know more about any of the topics we discuss, get in touch via our contact page
Welcome to Finance & Fury!
Today’s we’ll be looking at how to start, once you’ve set your financial goals. This is the starting point for anyone looking to get a plan in place.
- We have talked about goals in past episodes, but we haven’t really gone into much depth.
- Goals and Reality – Setting goals and then making it a reality
So, where do you start? If you have your financial goals in place that’s a great start.
- It is about having a strong foundation for the plan and covering the basics.
- What are the basics to start a plan? We will look in depth at each one of these and what to do with them
- Budget
- Debt Management
- Personal Balance sheet
The Foundation Building Blocks 1. Budget: Cashflow is King * Cashflow Components - Income, Taxes, Net Cashflow + Gross income - What you get from employment or investments + Taxes (what is taken out) - Based on marginal tax rates which progresses in brackets - Tax Free Threshold - the first $18,200 at 0%, then the next tax bracket is 19%, etc - Then, you need to add on the Medicare levy which is currently 2% + Net Income/Cash flow – which is gross income minus taxes * Net cash flow uses + Daily living expenses (essentials) – Housing, food, utilities, etc + Discretionary spending – Everything else on top + Savings/Investment (what you have left to put towards your goals) + Previous episode - Pay Yourself First; “Why work your whole life, just to have nothing left over?” 2. Debt Management * Bad debts - Personal Debts or non-investment assets that have debt attached to them. * Avoid at all cost – it’s selling yourself down the river + Uses cash flow – To repay loan + Works like a negative investment – Costs you interest, up to 21% * Don’t get into too much bad debt – for example: Credit cards and personal loans + $10,000 of a personal loan * If you have personal debts make a priority to get rid of it * Good debt – Plan and manage + Negative gearing – Can be good for high growth investments + Goes against the budget metrics – Only as good as getting your marginal tax rates back 3. Balance Sheet * Starting point – Types of assets + Lifestyle – Ones used for personal use – Personal Home, Cars, etc - The ones that Bad Debts are attached to + Investment – Assets for investments: Shares, Property, managed funds, etc. - Good debts are attached to investment assets - This should be a main focus * Targets for investment advice * + Fill in the gap – The Rule of 20 allows you to determine roughly what you’d need in the future + This is where you can keep track of your goals * + Here is an excel sheet for you to use
This is the starting point Now you need to make a plan, and then implement it 1. Get a budget in place – Increase what you’re putting towards your goals 2. Stay out of personal debt – pay off debts based on level of interest. The higher the interest costs the more important it is to pay this off quickly. 3. Use a balance sheet in order to keep track of your progress towards your goals.
In today’s Furious Friday episode, we’re going to talk about one of the most dangerous things threatening our financial freedom – the notion that we are simply just groups of people.
It comes back to a lot of economic theory and the use of models based on aggregates. This crosses over with the politics of grouping – ‘The Poor’, ‘The Rich’, for example.
Tribalism and group preferences are dangerous – It’s a tool of distraction. The narrative that things aren’t going well because you are oppressed, or unlucky.
- It breeds hate, encourages divisive tactics in politics.
- It breeds helplessness – if someone tells you over and over again that you’re a part of a disenfranchised group it becomes a self-fulfilling prophecy
- The danger comes in the solution which focuses on equal outcomes, and how to optimise society rather than people improving their own situation that make up that society.
- Not based on equal opportunity. Where you start has little to do with where you end up
- Individuals forms groups – SO my optimising individuals’ performance for individual benefit actually helps optimise society even better, rather than just taking from one group and giving it to the other.
- Removes critical thinking and thinking for yourself
- For example, how does a policy affect you rather than ‘groups’ as a whole?
- The danger comes in the solution which focuses on equal outcomes, and how to optimise society rather than people improving their own situation that make up that society.
What is the counter to this? Is there a theory that is based around individuality?
The Austrian School of Economics a fairly unknown school of economic thought, which is a shame – This school of thought is the bed rock of modern-day economics and has been absorbed into mainstream economics. Theories like;
- Marginal utility – The theory of gaining satisfaction from additional units of consumption
- Opportunity cost – The cost of foregone opportunities / the cost of the next best option
- This is cornerstone to the economic problem of trying to solve unlimited wants with limited resources
- Theories on time preference, that is to say, we prefer the same size reward sooner rather than later
Austrian Economics – The choices of individuals causes all economic phenomena. * Unlike Keynesian economics which focuses on group preferences plus governments having a large input into the economic prosperity of the individual
Core components of Austrian Economics
- Individualism: To explain economic phenomena - we have to look at the actions (or inaction) of individuals
- Argues that groups or "collectives" cannot act except through the actions of individual members.
- Groups don't think; people think. Groups are formed by individuals!
- Democracy (especially with compulsory voting) is built to cater to group preferences
- Partisan politics works well with a two-party system – Us vs Them
- Libertarian (where the state plays a minimal role) is obviously not popular with the Government itself – after all, once something has power it doesn’t want to give it up.
- Subjectivism: economic phenomena goes back to judgments and choices made by individuals on the basis of whatever knowledge they have (or believe to have) and whatever expectations they have about external developments (events) and the perceived consequences of their own actions.
Subjectivism is the theory that perception (or consciousness) is reality, and that there is no underlying, true reality that exists independent of perception. * Example: Someone living in a private gated community has a different view on how the world is compared to people in poor parts of India! The same thing occurs within our own country. * Example: Imagine that you have worked really hard your whole life, not wasted your money, put it away and invested well. By the time you go to retire you have a few million dollars and give to charity, spend time on causes – but… society tells you that you are evil. While you are a good person, people who aren’t in your position think the only way you are rich is that you stole it from others – that is their reality.
- Tastes and preferences: subjective valuation of goods and services determines the demand for them so that their prices are influenced by (actual and potential) consumers.
- This is the opposite to socialism where the State provides the value of goods to the population
- Or, price fixing through governmental policies
- Example: Beer – I like German dark beer – I would be willing to pay more for it than others
- Tariffs and Taxes – leads to reduction in optimal utility
- Example: Climate change taxes and carbon emission taxes – Penalties collected by the Government that effects the optimal choice of the individuals. This leads to economic waste and societal loss overall.
- This is the opposite to socialism where the State provides the value of goods to the population
- Opportunity costs: Reflects the alternative opportunities that must be foregone. It is one of the principles of main economic theory;
- What is sacrificed in order to do what you are doing
- Monetary or ‘utility’ – time spent listening to this could be spend doing something else – Thanks!
- Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative foregone (that is not chosen).
- It is the sacrifice related to the second-best choice available to someone, or group, who has picked among several mutually exclusive choices.
- Opportunity cost is a key concept in mainstream economics and has been described as expressing "the basic relationship between scarcity and choice". The notion of opportunity cost plays a crucial part in ensuring that resources are used efficiently.
- Aggregate models look at opportunity cost from a group perspective, rather than an individual view point. The opportunity cost of the Government not taxing the rich more is that they have less to distribute.
- Placing an opportunity cost on a group will not satisfy each individuals’ preferences anyway.
- What is sacrificed in order to do what you are doing
- Marginalism: in all economic designs there are ‘variables’ (the values, costs, revenues, productivity assigned) which are determined by the significance of the last unit added to, or subtracted from, the total.
- For companies it makes sense for a business to produce one more unit of a good if its cost to do so is less than the amount the profit would be diminished by.
- For individuals it makes sense for you to consume one more unit of a good until the cost outweighs the benefit.
- You might spend $20 on a six pack but probably not $500 on 10 cartons if it is just for you to consume on your own – you can only drink so much!
- Time structure of consumption: decisions to save reflect "time preferences" regarding consumption in the immediate, distant, or indefinite future. We each have a difference time preference.
- Investments are made in view of larger outputs expected to be obtained if more time-taking production processes are undertaken.
What does it take for all this to work well for the Individual?
It requires individuals (the consumers) and the powers that be (government) to facilitate freedom.
- Consumer sovereignty: the influence consumers have on the effective demand for goods and services through the prices. This is the basis of supply and demand in action.
- Results in free competitive markets, on the production plans of producers and investors, is not merely a hard fact but also an important objective.
- Attainable only by complete avoidance of governmental interference with the markets and of restrictions on the freedoms of sellers and buyers to follow their own judgment regarding quantities, qualities and prices of products and services.
- Regulations interfere with this – Minimum wage employers would probably prefer to hire 2 employees at $12 per hour, rather than one for $24 per hour. Notice lately a string of news pieces about hospitality either failing to pay staff, or shutting down if they do?
- Political individualism: only when individuals are given full economic freedom will it be possible to secure political and moral freedom.
- Restrictions on economic freedom lead, sooner or later, to an extension of the coercive activities of the state into the political domain.
- This undermines and eventually destroys the essential individual liberties which the capitalistic societies were able to attain in the 19th century.
- There is a monopoly of force
- Voting – You don’t have a choice to not vote and you have no real freedom to vote for who you want (only get to choose between two parties).
- Restrictions on economic freedom lead, sooner or later, to an extension of the coercive activities of the state into the political domain.
Why it isn’t this more popular?
Well, there are two reasons;
- Economists - By the mid-1930s, most economists had embraced the important (in their opinion) contributions of Austrian Economics.
- During the middle of the 20th century, Austrian economics became disregarded or derided by mainstream economists
- Why? it rejected model building and mathematical and statistical methods in the study of economics (which is impossible for individuals). You can basket people into groups and get a best guess scenario of what to do, but there are always going to be individuals in that basket that don’t meet the model’s criteria.
- Economist Paul Krugmanhas stated that because Austrians do not use "explicit models" they are unaware of holes in their own thinking. We will talk about Krugman at another time - he recently wrote an article:
‘What distinguished Trump voters was, instead, racial resentment. Furthermore, this resentment was and is driven not by actual economic losses at the hands of minority groups, but by fear of losing status in a changing country, one in which the privilege of being a white man isn’t what it used to be.”
- Economist Paul Krugmanhas stated that because Austrians do not use "explicit models" they are unaware of holes in their own thinking. We will talk about Krugman at another time - he recently wrote an article:
- If models were that good, economics would be the richest dudes in the world
- I’ve joked about this in the past – meteorologists exist to make economists look good
- Most accurate forecasts only are slightly accurate for about 7-14 days
- SO, why do economists predict years into the future and believe it is accurate?
- Austrian economics doesn’t have the same fancy models
- Due to theories being based on individuals! It’s hard to model individual behaviours.
- So, economists in their wisdom abandoned it.
- Individualism comes with freedom – and freedom can be scary!
- The relationship is between security and freedom
- Having absolute freedom can be scary – we have all experienced this to some point.
- Leaving school – you have freedom to choose what we want to do and this can be scary.
- Working in a job – You are giving up your freedom for security and financial income
- But if you know what to do, it isn’t too scary – It’s important to think for yourself and not sell your freedom just for security.
- I won’t lie, I’m not a major fan of the mainstream schooling system
- Teachers do a great job, but the system is set up for learning to repeat the same answers and just ‘getting the grade’.
- It doesn’t give you the skills to deal with failure, or to explore what you really want to do, or even how to progress in life.
That is really why this theory isn’t taught – It is impossible to control a population of individuals if you tell them they’re all individuals
- Much easier to work to a crowd – People will tend to prefer some security over total freedom
- Just remember – the more you can do to improve your own situation the freer you become, and take back some of your time, freedom and preferences.
What you can do * Focus on education yourselves and on learning as much as you can. * Focus on what makes you happy. Put yourself into a situation where you are working towards your freedom. * Have a picture in your mind about what your best situation and what freedom actually looks like to you.
I will do another episode about the Austrian Business Cycle and what a truly free economy looks like in another episode – today’s episode is already really long so thanks for sticking with me if you’ve made it this far.
As always, thanks for listening to the episode, if you have any questions, feedback or ideas for topics to discuss go to https://financeandfury.com.au/contact/
Welcome to Finance & Fury’s ‘Say What Wednesday’! Today’s question is from John;
- What are the tax implications of investing in shares, owning, holding, selling, dividends etc, does this vary to ETF, LIC etc?
- Is tax payable on the change in value year on year, or only when a profit or loss is realised?
- And does this change if they are held in a company or trust?
We’ll take a look at:
- Types of taxes
- Structures - Managed Funds, Shares, LICs and ETF
Two types of taxes
- Income Tax – and Franking Credits depending on the investment
- Franking Credits (FC) – helps avoid a double taxation. Tax is paid at company level and then calculated alongside your personal tax to ensure tax isn’t being paid twice and that you’re paying tax on that income at your marginal tax rate rather than the company tax rate.
- Capital Gains tax
Income Tax Companies - Shares/LICS – Same thing really
- Shares/LICs pay dividends – the board sets the FC levels
- Shares – vary regarding dividends and franking credits
- LICs – Typically set a dividend and have FC attached
ETFs – work a little differently to Shares/LICs
- Australia – Franking credits are attached in most cases but are a flow through from the underlying shares
- Not going to be 100% Fully Franked
- International - International shares which get withholding tax taken out overseas
- 30% for US ETFs – can claim back 15% withholding tax from overseas income
- Capital Gains – ETFs as a trust – They don’t pay any tax – it flows through
- If they sell a share for a profit you pay the CGT – you do get the 50% discount though
Managed Funds
- Income from managed funds are called distributions – made up of:
- Dividends – As normal – Underlying companies pay dividend then this passed on
- Franking Credits – offsets the income and comes from underlying shares
- Small cap managers might not have any FC if underlying companies don’t
- Capital gains realised – Either non-discounted (<12 months) or discounted (>12 months)
- A highly active manager or geared fund can pay out large chunks of capital gains in a year if realised
- I’ve had a geared fund make 70% in a year in realised gains – and got a big tax bill ☹
What is best for tax efficiency?
- Typically Shares – Fully franked dividends
- Then the next most efficient are ETFs – Low portfolio turnover or passive/index and not as much capital gains tax paid out. Can have lower FF dividends compared to blue chip shares
- Lastly, managed funds – Typically higher tax payable due to distributions of capital gains
Reinvestment plans of Dividends
- Even if you don’t get the income it is still treated as taxable income
- Reinvest $1,000 of Dividends – you still have to pay the tax on it as if you received it
Capital Gains (The difference between the price bought and the price sold)
- ETFs/Managed funds – At a listed unit price – Net asset value – Sum of all shares
- Shares Shares/LICs are at a price per share sold vs bought
- ETFs – AS it is priced – same in gains
- Managed Funds – CGT is still possible when you choose to sell it but typically lower CGT – They pay CGT out to you along the way and you bear the pain along the way
Tax environment – Depends on how they are held
- Personally – Marginal Tax rates
- Trust – Distributed
- Company – Best to not – you don’t get a CGT discount
We went through a lot of information today – if you have any questions or want me to clarify things further please do get in touch. Head to https://financeandfury.com.au/contact/
Welcome to Finance and Fury. Before I start I want to say a massive ‘Thank you’ to our listeners. We cracked 150k downloads in the first 6 months which is phenomenal. Also, thank you to everyone who has taken up the course – I want to extend the promotion to another 50 people as a Thank You for everyone’s ongoing support. Just enter the code ‘faf01’ for 50% off at the checkout.
Here's a link to the course: https://financeandfury.com.au/learn-finance/
Today we’re talking about the AUD plummeting to a two-and-a-half year low - 70.79 US cents (approx. at the time I’m recording this episode)
- The Aussie dollar could be heading to the “mid to high 60s” by next year, experts say.
- The dollar is now about 13 per cent below January’s three-year high of 81.36 US cents.
Is it USD rising or AUD crashing? 1. It all depends on what the domestic country is doing in relation to the foreign country of comparison 2. In comparing the AUD to the USD it is the rising USD more so than anything 3. The AUD is going well in relation to the GBP, for example.
The Australian market
- There is a lack of competition between AU and the US
- Potentially soft retail sales data due for release could be “another possible nail in the coffin”
- There is a decreased demand for AUD
- “The principal reason it’s falling is because the yield spread, basically the difference between interest rates in the US and Australia, has turned very negative,” MacroBusiness Fund chief strategist David Llewellyn-Smith said.
- The US Federal Reserve last month raised rates - third time this year – now at 2.25 per cent.
- The Fed has flagged another hike in December, three more next year and one in 2020.
- RBA cash rate 1.5% since Aug 2016 – No rise since Nov 2010.
- With the fears of property prices declining – not likely to get a rate rise for a while
Factors affecting currency trade Carry Trade
- Global markets work through borrowing in low interest rate areas and invest in high interest rate areas. It’s called the carry trade.
- It is said that the yield spread on 10-year US and Australian government bonds is now “at the most negative it’s been since 1983”.
- A lot of people want to sell the Australian dollar at the moment
Terms of Trade
- The ratio of import to export prices, which in Australia’s case is basically all about coal and iron ore exports
- We sell so much of both coal and iron ore. There is normally a very strong relationship — high commodity prices means a high Aussie dollar. That’s not the case at the moment.
- Iron ore and coal prices, while nowhere near their levels during the peak of the China boom, are reasonably high.
- The AUD would be up around 85 cents based on the terms of trade
Economic & Tariff wars
- The growing economic war between the US and China.
- “As we speak, Beijing is employing a whole-of-government approach, using political, economic, and military tools, as well as propaganda, to advance its influence and benefit its interests in the United States,” Mr Pence said.
- Chinese spies hacked America’s technology supply chain by sneaking compromised chips into companies including Amazon, Apple and big Government agencies
- It’s about power and strategic ascendancy and hegemony.
- All that is bad news for Australia — and in this case, the Australian dollar.
- The worse it gets, the more sentiment sours about the Australian dollar. We’re a little country caught in between two behemoths.
What the current situation is good for
- Cheap to buy Australian goods if you’re overseas
What it is bad for
- Australians buying things internationally
The RBA, for its part, is completely boxed in - are totally unable to raise rates
- Forecasting currency is a mug’s game. There are an impossible number of variables. But those are the primary drivers.
Protecting yourself from currency fluctuations – Investments 1. Hedged vs Unhedged 2. Buying international shares – Hedged at not much risk of currency risks, unhedged is good when AUD is falling 3. Unhedged has been good over the last few years as the AUD has dropped 4. Within an investment portfolio diversify and get both
Welcome to Finance & Fury, the Furious Friday edition.
Today’s episode is all about the drive to equality.
A recent proposal by the Labour Government is to force equality through gender, and forcing companies to publicly disclose pay gaps between men and women.
- Reporting differences in pay between genders
- Personally, I don’t like it as it further drives division between people
- I think it will actually hurt women more than help them
The Proposal
- Companies with more than 1,000 employees will be forced to publicly disclose how much they pay woman compared to men.
- Companies that fail to comply will be excluded from competing for government work - this seems like blackmail for compliance!
- Companies already disclose pay gaps to the Workplace Gender Equality Agency as it is already illegal to discriminate and pay people less based on gender
Why is this happening?
The Wage Gap currently sits at about 15% or so, but this depends on how you interpret the numbers
- Stats – What is an average?
- In 2016 the average female wage was 89% of the average male wage
- The median (middle number of average) female wage was 92% of the median male wage.
- This gap has remained relatively steady over the past decade (see Table 2.1).
The practicality of it
- Will the analysis be multi-variant?
- Age and experience? – this will impact annual earnings
- Hours worked and time in the office
- What position and role in the company?
- The government doesn’t care about free market forces – it comes back to votes and control
Outcomes
- Prime Minister Scott Morrison is concerned workplace conflict would be sparked if pay details were disclosed.
-
Cost of regulations –
- New government agency will need funding – from tax payers’ money
- More staff required for big companies which means higher salary expenses without increasing output – this destroys the free market
-
What if a company has a wage gap?
-
SJW boycotts will cause trouble for companies, decrease of demand for their products, they may have to lay off workers to survive, and therefore go out of business
- Everyone loses their job – women and men alike. No winners.
Will it actually change anything? Will it help close the wage gap?
- The most critical thing governments can do to boost women’s pay is to ensure the economy remains strong, and not divisive.
- The only thing any government can do is to create the right economic circumstances to be able to grow jobs
Why does the gap exist?
Let’s look at Industry Sectors and earnings
Breakdown - Occupation and industry have different averages
-
Mining is one of the highest for men
- Western Australia has highest pay gap – 22.4% (Thanks to mining)
- This is due to dangerous work – 90-95% of deaths in workforce are men
- Get paid ‘risk premium’ – do women REALLY want to equalise that?
-
Social work is one of the lowest for men
-
Lower incomes compared to Mining
-
If it was only based on gender wouldn’t companies then only hire woman?
-
Companies are meant to be greedy – if this is true why don’t companies only hire woman?
This is an example of playing politics rather than being about actioning meaningful change. The issue with politics today – politicians go for the easy vote – it’s a game
-
Why are politicians playing this divisive game?
- This is dangerous – Telling 50% of the population that there is no chance for them is bad
- If you constantly hear that you are doomed to earn less, would you try as hard?
-
Be wary of Government Agency claims – They need the gender pay gap to exist
-
Again, it’s a race to the bottom and unfortunately this is more likely to reduce everyone’s wage
Sweden is one of the most ‘equal’ countries and you see more woman going into non-tech related fields because it comes back to individual choices.
I encourage you, especially if you’re a female, don’t focus on the so-called “Gender Pay Gap”, “there’s no hope” etc. etc. …and instead focus on trying to improve yourself, increase your demand and try to get the best for yourself without buying into social engineering. We all have equal opportunity (there’s actually more women than men at university now)
Regardless of your gender – make sure you tune in to Monday’s episode 😊
Welcome to Finance and Fury’s ‘Say What Wednesday’. Today’s question is from John.
John asks, “What is the relationship (if any) between shares and property in Australia? Should we expect the broader share market to react to falling property prices?”
Great question!
Correlation - a mutual relationship or connection between two or more things
- That is, what are the price movements doing in relationship with one another?
- Does property price rise and fall with shares? Or the other way around? Are they consistently moving in the same direction or in opposite directions?
- Correlation doesn’t mean causation!!
Just because things are related it doesn’t mean that they are caused by one another, for example Lisa Simpson’s rock that repels tigers.
Correlation between asset classes
The correlation between the asset classes and that factors that play into this.
Study showed that shifts in stock and property markets can lead to the emergence of an unstable linear relationship between these markets.
- This supports that there is some causality between equity and property markets however it showed that the equity market had an influence on the property market, but not the other way around.
-
“The results also indicate that non‐linear causality tests show a strong unidirectional relationship from the stock market to the real estate market.”
-
Ranges between 0.2 to 0.8 – changes over time depending on market factors
- Property companies – highly correlated
- Wider market – not as correlated
- However, the Big 4 banks make up 20-25% of the ASX and their major revenue comes from lending market – less loans = less money
- Is it Causal?
- Globally not so much
- But in Australia, yes - if property goes down, ASX may drop as well if the banks drop
- If banks lose 30% of their value = ASX drops 7.5% = Cause a panic sale in the market
- Do people see property as an alternative?
- Yes and no – people see more risk in shares
- All comes back to confidence – Share market returns look more homogenous (moving as one)
- Confidence in the economy - Good for one, and good for the other
- When people see shares go up = Gives confidence that things are good in the economy
- This can lead to increased in house prices as people then go out and buy more property
- Also – when companies do well, people are employed and earn more
- When incomes and individual wealth increases through employment people can afford loans
Conclusion
- There is no clear correlation but having both property as well as shares can help get a full diversified portfolio.
Welcome to Finance & Fury! On today’s episode we take look at the best ways to secure your financial future
- I’m going to share the rules I follow – And how to not be a victim
- It isn’t hard – it’s actually really simple… but simple can be boring and repetitive
- What you can do and how you can implement these things
Preface - Don’t be a victim
In today’s culture it seems that outrage and victim-hood are held above taking personal responsibility. Most of you won’t be like this as you are obviously doing something to help yourselves through learning - but being the victim seems to be better than succeeding for some people.
- Outrage at CEO pay, outrage at wage gaps, outrage at anything
- The solution is always to make “them” less wealthy, not to improve your own position – because that is hard
- What if the answer was to teach everyone else how to get there? And not through redistribution
- What if all of this energy was used to improve your own position rather than rage at things you can’t control?
- When it comes to finance – You can be a victim or not
- If you think of yourself as a victim you are the one victimising yourself
- If you take control, then you are setting yourself up to succeed
- If you can’t beat them – join then – Don’t hate the wealthy, but become one of them as they are people too
Simple Rules to live by
- Always remember that you are investing in your future
- You can negotiate with your future self, and your future wealth
- Be furious about it – if you want it, you can get it
- Start now and never stop… because the future catches up on you at some point
- Earlier you start the more you will have – the more your future-self will thank you
- I have been investing for the past 15 years, and my current self is happy
- I can see the funds, I couldn’t see the money I spent though
- My past self-felt a little stingy – but compared to others it has paid off
- Think long term and big picture
- Think about what your future looks like
- What you want to do, and how much you need to do it?
- Rule of 20 – Plan to get a 5% income off investments. For example: $100,000 = $2,000,000 asset base
- If you aren’t sure what this looks like, work it out! You need to have a plan in place as it is hard to work towards something that you’re not sure of
- Don’t try to go for big wins quickly. Doing this is the only way I have ever lost money – investing out of hope
- Invest well and don’t lose money. Quality - Don’t invest in hope of large instant gains
- In Wednesday's episode – it took years to get good gains, didn’t happen overnight
- Think about what your future looks like
- Losing funds will destroy your future
- You can negotiate with your future self, and your future wealth
- Diversify
- At least 15 – 30 companies (or a few ETFs/LICs)
- Get more than the top 10 (large cap)
- REMEMBER: Invest in line with the big picture
- Passive income of 5%
- Having 20 properties is no good if they are negatively geared – costing more than you earn
- Ignore your emotions
- Avoid selling low and buying high
- Rationality is your friend
- Be patient – don’t rush in based on fundamentals like PE or Yield
- RFG example – Wanted to buy a little while ago, thought that $1 was good – but saw it going down more - $0.48 now
- Has a Yield of 62% at the moment – but will be 0% once they update their earnings
- Track your progress to get to your ideal future
- Be honest with yourself – somebody has to (or have your partner keep each other accountable)
Putting it in place
- Figure out what you want to do
- This is the hardest part for some people to answer
- Look at your expenses – What does your ideal lifestyle cost?
- Also, when do you want it by?
- Time matters thanks to inflation - $1 today is not $1 in 10 years
- Apply the rule of 20
- What asset base will you need?
- Apply inflation – 2.5% by the time
- Reverse engineer your targets
- Play around with online calculators with how much you need to save each money to get there
- Just do it – Action is more important than planning
- You can know what to do – but if you don’t do anything then it will never happen
Conclusion
- Don’t be a victim – don’t blame others!
- Take control as nobody else will do it for you
Welcome to Furious Friday! Did you hear?! The property market is going to drop by 45%!! Oh no! Today, we’re looking at a recent 60 Minutes segment ‘Bricks and Slaughter’, which aired on Sunday and sensationalised Australia’s property market.
The segment made several inaccurate statements, including;
- Our property market has only ever increased (and implied that from here it can only decrease),
- That we were on a path towards a 45% housing collapse.
Since the episode
- Several of the experts that appeared on the show have come out and expressed their disappointment and unhappiness as the majority of their comments were either manipulated or never made the final cut.
- SQM’s Market Analyst Louis Christopher says he was interviewed for over 45 minutes of which approximately one minute was featured in the segment.
- Media did their job – which is to sell headlines based on fear!
So, where is the property market headed? Property moves in cycles, and doesn't always go up.
- Property prices have gone down in the past, even in recent times in 2008 and again in 2012 as attached.
- Majority of media is reporting on Sydney, no mention of Brisbane - In Aug 2018 values rose over the month in Brisbane, Darwin and Canberra, were unchanged in Hobart and they fell elsewhere.
- Australia's largest housing market, Sydney, has seen values fall by 5.6% since peaking in July last year; a trajectory that is straight down the middle of previous downturns.
- During the GFC, Sydney dwelling values fell by 7.0% in the space of twelve months, and the downturn before that (2003-2006) saw values fall 7.1% over the same number of months.
- Australia's second largest city, Melbourne, has seen values falling since November last year. Since that time the market is down a cumulative 3.5% and the descent has generally been milder relative to previous downturns.
45 percent housing price collapse
- Martin North says 60 Minutes took the absolute worst of the four scenarios he presented, and used it as the basis of the alarming segment which went to air on Channel 9.
- "It is not my central scenario, rated only a 20 percent probability, as I made clear when interviewed," he said noting this caveat did not make it to the final cut.
- North suggested a fall of 45 percent in home prices would be over three years or so, and require the US financial markets to react to rising US Fed rates.
- Even in markets where values have been falling consistently for more than four years on the back of a material weakening in economic and demographic conditions, we haven’t seen values fall by anywhere near 40%. Perth dwelling values peaked in 2014 and have fallen by 12.6% and in Darwin where conditions have been even tougher, dwelling values are down 21.8%.
Sydney median house price is still up 220% since 2008
- The median house price was $141,000 in 1988, $257,000 in 1998 $505,000 in 200, median house price was $1.120m in June 2018.
Australia is completely different to USA
- Finance market is very different to USA in 2008, they introductory rates which reset at the same time and went from 2% to 5% so repayments rocketed up.
- Also, the USA had non-recourse lending meaning you could walk away from a loan if you didn’t want to pay it back - When borrowers owed more than the asset was worth, they took full advantage of the non-recourse feature and handed the keys to their home back to the bank. The term “jingle mail” was coined to describe envelopes full of house keys arriving at lenders. Banks took the losses.
- APRA regulation
The Takeaways 1. The property market moves in cycles, it goes up and down. If property prices had kept going up we would be in more trouble – e.g. Sydney median house price will hit $2m by 2028 unless market changes 2. If people make crazy claims, look into them. Understand the context within which the statistics are presented. Know the full story. 3. Our market is fundamentally different from the American market. We have lending standards. 4. Remember, the language used in the media is used to SELL. The words “market correction” are far less sexy than, “Armageddon” or “market collapse”.
Here’s a few links
- Louis Christopher, SQM Research
https://www.news.com.au/finance/real-estate/sydney-nsw/sqm-researchs-louis-christopher-disappointed-with-60-minutes-appearance/news-story/3a749833c55f9456cb71560252d7f764 - Bricks and Slaughter
https://www.9now.com.au/60-minutes/2018/extras/latest/september/bricks-and-slaughter - Martin North
https://www.propertyobserver.com.au/forward-planning/investment-strategy/property-news-and-insights/89508-45-percent-hosuing-price-collapse-was-least-likely-scenario-martin-north-on-the-60-minutes-washup.html?utm_source=Property%20Observer%20List&utm_campaign=84f40de3d2-EMAIL_CAMPAIGN_2017_09_28_COPY_01&utm_medium=email&utm_term=0_a523fbfccb-84f40de3d2-245607477
Today’s Say What Wednesday question is from Paul;
“Hey fellas! I think you guys are doing a great a job. Always a fun listen.
Question; I was wondering your thoughts on the world of FI (financial independence) which is getting more momentum, to the likes of Mr Money Mustache and other FIRE? Have you taken a similar approach to these people with your own personal finance, having savings rates as high as or higher than 50% of total take home income?”
For those who don’t know:
- Financial Independence Retire Early (FIRE)
- i.e. Save and invest most of your income now
I really like the idea of Financial Independence and employ it myself to avoid the hedonic treadmill creep. I set a base living standard and then invest everything I earn on top of this figure.
Whilst I was PAYG a little while ago I was saving between 50-60% of my income and investing it, with a decent chunk being salary sacrificed. I've been in the process of setting up a new business in the past 18 months which put a dint in the ability to save, but hope to get back to that level shortly. I always reinvest income from investments – starts to make up a larger component of your income.
Keeping things simple – It is hard to get to that point – But with one simple trick you can start working in the right direction. It starts with, ‘How to not care about what I have, or how I relate to others’
Where it comes from – Spending habits – Shopping, cars, etc.
- Dopamine – Reward system – Buying something is the easiest way to get this
- Serotonin – Status symbols – feeling higher up in the social picking order
- Money provides both of these thing – But only in what others can see
- Dopamine is easier to do. Focus on savings every month and get your hit of dopamine when you achieve the target
- Serotonin is harder to do. It does require a bit more self-confidence (self-esteem) to be happy not chasing the way out through buying things. If you’re constantly looking at what other people have you’ll always be unhappy – there is always someone else with more.
- Why you can never really tell who has real wealth just by looking at them (or if it is funded through debt and cashflow)
- Met a guy who owns a helicopter, every time I saw him he was in old sneakers, old t-shirt.
What you can do
- Play a game - You can think of it as tricking people – turn the game around and as long as you know are making yourself wealthy, and not others buying their stuff it can work.
- Endowment effect – Put more value to what you already own
- Turn it into thinking about Keeping your money – put a premium on your spending habits
- Essentials – 0%
- Non-essentials – Gross the price up by a factor:
- Example - New TV is $3,000 – Life of TV is 10 years
- Earn 7% on that over the same time - is the TV worth $6,000?
- Thinking in terms of future value and opportunity cost
- To part with it, the item better be worth it
- Turn it into thinking about Keeping your money – put a premium on your spending habits
Conclusion
You don’t have to live like a pauper – enjoy your life with great experiences. But, just next time you’re looking at a big splurge on something, gross up the value and see if it is still worth it!
Today’s episode of Finance & Fury we’re talking about Artificial Intelligence taking over the ETF and investment market. The discussion was actually started by one of our listeners, Gabriel who recently wrote in, so thanks Gabriel for sending this through.
Introduction; there are a few types of AI ETFs
- Funds that specifically invest in companies involved in the development of products and services in AI
- And alternatively, the one that we’ll talk about today: AI is running the ship - funds that use AI methods to select individual investments to buy within the fund
We will talk about:
- The introduction of AI powered ETFs
- What this could mean for the market
- Options on what to do
AI ETF - AIEQ
- Been around for about almost a year (Oct 2017)
- Run by IBMs Watson AI - cognitive computing platform capable of answering natural language questions by connecting large amounts of data,
- both structured (e.g., spreadsheets) and unstructured (e.g., news articles),
- then, learns from each analysis it conducts to produce a more accurate answer with each subsequent question.
- Computing called cognitive computing, where systems understand the world the way humans do. That is, learning how humans would think about the world: through senses, learning, and experiences. Watson continuously learns, gaining in value and knowledge over time, from previous interactions.
- Example – Saw AI beat the world’s best players in complex online strategy and role-playing games
- At first the characters would stand still, then run around in circles, then run into enemies and die, then after enough deaths they figure out they have to fight back, then figure out the best strategy and style
- These are complex games and the players can make 300-600APM (almost 10 actions a second)
- AI is programmed with parameters, that is to say, we tell it what to.
- Investor demand - Equbot positions investment solutions based on in-depth analysis of investor demands.
- ‘strive to create products that deliver positive long-term results on a risk-adjusted basis through optimizing proprietary investment research and trading models’
- How will it do it? - drives an enhanced view of the global investment landscape.
- The ability to process continually growing volumes of data and thread machine learning throughout our operations enables a truly unique investment process.
- continually process, grow, and learn, just like our evolving investment technology
- “We are processing more news information, more data around different countries,”
- “We also added different capabilities like global macros and country risks, and integrated all the different modules to our platform.” Chida Khatua
How’s it doing so far?
- Pretty well –
- 6 months – outperformed the market ETF NAV by 4% - 12.34% vs 8.31%
- Inceptions (11 months) – 19.3% vs 12.5% - 7% out return
- Keeping its own at the moment and doing fairly well
- Slow start – it was learning – matched the index
- Diverged since then
Features and claims
- The ETF will create a portfolio of between 80 and 250 stocks, choosing from more than 15,000 companies across the globe.
- What does it include in the portfolio?
- Learning to trade other ETFs and take advantage of arbitrage (making money for no risk)
- Gabriel – Few points from a previous episode
- What does it include in the portfolio?
- ‘In a market cap weighted ETF, if a stock price drops, its market cap drops as well, so the ETF does not need to rebalance’ – Was talking about companies that fall in and out of the index – A company 300 in the index goes to 304 and is sold off (Sorry if I didn’t explain that properly)
- Amount of market data processed is unmatched - over a million market signals, news articles, and 6,000 US companies analysed daily
- A lot of noise at first – and there may be some big glitches
- Can it tell the real from ‘white noise’ news? – Would it react to 40% drop in price news articles?
- AI programs like this need to see a lot of information to be efficient and learn the best way of doing something
- Automated data driven investment process that removes significant human bias and errors
- End to irrational exuberance? - Bubbles
- Thing of the past? Computers remove humans all together – acts rationally?
- Worse in the future? What about if it works to manipulate a bubble to profit off it? Happens now – e.g. diamonds
- Goes beyond the news and looks at funds to buy based on their metrics
- End to irrational exuberance? - Bubbles
- Active management that combines fundamental, technical, and proprietary investment efficiency analysis to identify companies with high opportunities for long-term growth
- Artificial intelligence and machine learning capabilities continually build upon the financial knowledge base driving an investment system that perpetually grows in value
- What if it becomes ‘AI vs AI’? – Efficient market hypothesis becomes real
- EMP – Market is efficient – Prices rise to high, smart investors will short sell
- Assumes everyone acts rationally and that prices can’t diverge from their true value for long
- This is where the basis of not being able to beat the market comes from (which is mostly right but obviously not 100% right)
- EMP – Market is efficient – Prices rise to high, smart investors will short sell
- If performance is the driving metric, returns might be gained through positive feedback loops
- i.e. Buy a share, keep the price driving up to keep the returns going
- Get enough AI traders working together then that can
- What if it becomes ‘AI vs AI’? – Efficient market hypothesis becomes real
In today’s Furious Friday episode, we’ll be running through the historical life cycle of fiat currencies.
This episode is thanks to John – John wrote in with a few great questions;
- Is it true that all fiat currencies eventually become worthless?
- Should we be concerned about printing more and more money - is this something to be concerned about, i.e. the longevity of the AUD?
We will run through:
- How do fiat currencies fail and what causes it?
- Is safe-guarding against it something we need to worry about? How would one do this?
History of money
- Barter economy – was hard for getting values and trading efficiently – hard to travel with a mule to trade their corn
- Coins – Back by silver or gold
- Promissory notes – goldsmiths used to house gold for people – those people then give the ownership to others in paper (an “IOU”) – early day banks
- Skip forward to today – All paper but mostly Fiat or digital currency
Doesn’t have to be fiat to fail – it just has to be controlled by the government
A quote from one of the US Founding Fathers – Government is like fire, when it is well controlled it can help a country to grow and support it, when it gets out of control – it will destroy everything in its path.
This is why it is important to remove government from Central banks.
- America fought the war to get away from the Bank of England – controlling their currency
- Ended up back with one a few hundred years later
Beauty of the Gold Standard was in the early days it was hard to manipulate. But even physical currency can be manipulated – as the ruler has control of the currency.
- Let's go back to Roman times and the Devaluation of the Denarii – Coins were made of silver
- Introduced 211BC and ended around 400AD (almost 600 years)
- So, until Augustus the coin was relatively valuable, but in 100 years its value decreased significantly, roughly 2,000% devaluation altogether, when there was almost no silver left in the coins.
- Like coinage of today, Ancient Rome's coins represented portions of larger denominations. The As (plural assēs), the basic unit – think of it as a 1c coin.
- Loss of purchasing power - During the time of the Roman Republic, you could buy a loaf of bread for ½ As or a litre of wine for one As.
- A year's pay for a commander in the Roman army around 133 B.C. was 10-2/3 assēs, by Augustus' rule (27 B.C.-A.D. 14) 74 Denarii, and by the reign of Septimus Severus (A.D. 193-211), it rose to 1,500 Denarii.
- Stopped using denarii and started paying in gold – Military and officials only
- Average Roman Joe was forced into Denarii
- Two-tiered economy.
Today – Rather than decreasing the quality of the coins we increase the supply of it, which has the same effect
-
Look at global GDP to Debt
- Japan has the highest – over 250%!
- America is over 100%
- Australia is about 42%
According to the last federal update, we (Australia) have decreased our debt, which is great.
Liberals are trying to get back to a lower debt environment.
An analogy
- Say you have parents (most people do) – Mum and Dad. Dad is a stickler and won’t buy you toys as you don’t have the money, but Mum racks up a credit card bill, gets in debt to buy toys.
- You have the toys now, but then your pocket money is halved – from $10 to $5 because Mum and Dad still have to pay back the debt.
- Government spends it, but you have to pay it back. Government debt is your debt – they can’t pay it back without you paying it off through taxes.
- Pay in more than one way - The money you have isn’t worth as much anymore thanks to inflation – the loss of buying power due to increased money supply. You don’t have the ability to increase your money supply as easily though.
The government however, can keep increasing the money supply – Let’s look at US history…
- 1900s - National Monetary Commission is established to propose legislation to regulate banking.
- US. Money Supply:$7 billion - What $1 Could Buy: A pair of patent leather shoes.
- 1910s - The Federal Reserve Act is signed in 1913.
- US. Money Supply:$13 billion - What $1 Could Buy: A woman’s house dress.
- 1920s - The Fed starts using open market operations as a tool for monetary policy (what we use today)
- US. Money Supply:$35 billion - What $1 Could Buy: Five pounds of sugar.
- 1930s - To deal with deflation during the Great Depression - suspends the gold standard. Executive Order 6102, which criminalizes the possession of gold.
- US. Money Supply:$46 billion - What $1 Could Buy: 16 cans of Campbell’s Soup
- 1940s - The massive deficits of World War II are almost financed entirely by the creation of new money by the Federal Reserve. Interest rates are pegged low at the request of the Treasury.
- US. Money Supply:$55 billion- What $1 Could Buy: 20 bottles of Coca-Cola
- 1950s - The Korean War starts in 1950, and inflation is at an annualized rate of 21% due to low rates – so they increased the rates
- US. Money Supply:$151 billion - What $1 Could Buy: One Mr. Potato Head toy
- 1960s - U.S. dollars in circulation around the world exceeded U.S. gold reserves.
- US. Money Supply:$211 billion - What $1 Could Buy: Two movie tickets.
- 1970s - In 1971, President Richard Nixon ends direct convertibility of the United States dollar to gold.
- The federal deficit doubles, stagflation hits, and the oil price skyrockets – all during the Vietnam War.
- Over the decade, the dollar loses 1/3 of its value. - US. Money Supply:$401 billion
- 1980s – Stock market crash - The Federal Reserve stepped in, “The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system”. This just means they printed more money!
- The Dow would recover by 1989, which prolonged the recession which was occurring. The US. Money Supply:$1,560 billion. What $1 Could Buy: One bottle of Heinz Ketchup.
- 1990s - This decade is generally considered to be a time of declining inflation and the longest peacetime economic expansion in U.S. history.
- US. Money Supply:$3,277 billion - What $1 Could Buy: One gallon of milk.
- 2000s - After the Dotcom crash, the Fed drops interest rates to near all-time lows.
- In 2008, the Financial Crisis hits and the Fed begins “quantitative easing” (aka printing more money!)
- US. Money Supply:$4,917 billion - What $1 Could Buy: One Wendy’s hamburger.
- 2010 - After QE1, the Fed holds $2.1 trillion of bank debt, mortgage-backed securities, and Treasury notes. Shortly after, QE2 starts.
- Purchases were halted in October 2014 after accumulating $4.5 trillion in assets.
- It wasn’t for the bank bailouts – or for ‘economic stimulus when it is funded through bad debts’
- US. Money Supply:$13,291 trillion - What $1 Could Buy: One song from iTunes.
Money supply was just $7 billion 100 years ago. Today there are literally 1,900 x more dollars in existence.
The buying power of a dollar has changed significantly over the last century, but it’s important to recognize that it could change even faster (up or down) under the right economic circumstances.
What causes them to fail?
- Giving the Government all the control – Venezuela inflation at 1m%
- Too much supply – the process of printing money to bail out debt
- Debt is future-Government’s problem, printing money and giving people what they want is a way to stay popular.
- Not enough demand – Someone needs to want your currency now for it to retain its value
- When we were exporting a lot – 1AUD was 1USD – people wanted Aus Cash for Aus goods and wanted to invest here
How to avoid this (though there’s no simple answer)
- We live in a democracy and we should be voting against government spending, even if it’s hardest way
- Just remember when voting for government spending – large amounts are funded from debt
- Own assets that increase in value or that are unrelated to inflation
- Unrelated to inflation
- Crypto currency
- Gold, moves like a volatile asset as well, but the supply doesn’t go up by much
- Physical assets
- Buying shares, property, anything that has a long-term growth component to it
- After inflation the real return on cash is pretty much negative
Thanks for listening, as always! If you have any questions contact us at https://financeandfury.com.au/contact/
Today’s Say What Wednesday question comes from Emma, and relates to saving for a house deposit:
“Hi, thanks so much for the podcasts - I have learnt so much. My question is about saving for a house deposit in Sydney. We have $130,000 saved (which has taken us about five years to save) however we met with a broker and she recommended avoiding LMI by saving up the full 20% of the purchase price plus 4.50% for stamp duty etc. As we have two children we’d like to buy a modest townhouse which are currently valued at around $850,000.
Basically, at our current renting while saving rate this would take us five years or so. Do you recommend using ETFs, LICs in this saving circumstance or using the first home super saver scheme or term deposits etc? I’d love to hear any ideas you have to help us save, stay motivated and finally buy something!”
Thanks Emma!
Here’s what we think...
Option 1 – Staying away from risky investments – (5-year period)
- Given that you want to purchase a place in 5 years, I would probably recommend staying clear of ETFs and LICs.
- The share markets have had a good run over the past 8 years and historically speaking, we are more likely than not to have some correction in prices within 5 years.
Option 2 – Interest accounts
- Keep doing what you are doing – Savings in personal names
- Downside at the moment – Low interest rates and income taxed
Option 3 – Super (First home super saver scheme)
- Using superannuation is a viable strategy in most situations, even though it can be a little restrictive.
- It essentially allows for larger savings through the reduction in total tax paid on the level of savings (through not receiving it as a taxable income).
How it works:
- From 1 July 2017, individuals can make voluntary contributions of up to $15,000 per year and $30,000 in total, to their superannuation account to purchase a first home.
- Pre-tax contributions. – Taxed at 15%, along with deemed earnings, can be withdrawn for a deposit.
- Done through employer – Salary sacrifice
- Self-employed – Can still make the contributions, and claim a deduction on personal contributions later
- Must remain within concessional (pre-tax) cap of $25,000
- Withdrawals will be taxed at marginal tax rates less a 30% offset and allowed from 1 July 2018.
- Amount of withdrawal = Net contribution plus deemed return (90-day bank bill plus 3%)
- 4.50% currently – will change as the RBA cash rate changes
- Withdrawal administered by the ATO - determine the amount of contributions that can be released and instruct superannuation funds to make these payments accordingly.
- Amount of withdrawal = Net contribution plus deemed return (90-day bank bill plus 3%)
Examples
- Individual earning - $60,000 a year – Never bought a home before
- They direct $10,000 of pre-tax income into superannuation
- increasing her balance by $8,500 (after 15% tax)
- Continue for 3 years – Contribute up to $30k in total
- Withdraw $27,380
- Net contributions of $25,500
- Plus deemed earnings on those contributions (4.5%).
- Withdrawal tax of MTR (34.5% including Medicare levy) minus 30% offset
- $1,620 in tax paid
- Net withdrawal - $25,760
- $6,240 more than if saved personally ($12,480 more if you are a couple)
Thanks again for the question Emma
P.S. Awesome work on being able to get to $130,000 in savings!
How to not get screwed over in property, the warning signs of scams and how to do your property research
Warning signs of scams
- Off the plan/cold calling companies
- Buying off-the-plan, or purchasing a property that has yet to be built –
- The time between the sale and completion and settlement of the dwelling means that "buyers are essentially paying today's prices for a product in tomorrow's market"
- Makes sense in what looks to be a rising market – most off the plan are oversupplied at the moment though
- Likely be overpaying
- Inbuilt commissions of up to $40,000
- Sales tactic of reciprocity – “I do something nice for you, so you feel the need to do something nice for me”
- Can blind to shortfalls in a property
- Buying off-the-plan, or purchasing a property that has yet to be built –
- Free trips/offers with the property
- Sales pitches – Tax breaks, gurantees on rent and future growth
- Government concessions – FHOG
- Negative gearing/tax breaks being the focus point of the sale
- If tax is the only gain from the property, then look elsewhere
- No point paying $12,000 into a property to get a maximum of $6k back
- Better to put money into something that will grow
- Plus, sometimes they are only negatively geared as they are overpriced
- e. – Rental yield is low
- Guarantees
- Rent – Rental returns sometimes have 12 month rent guarantee
- Seems nice now, but what happens afterwards?
- Growth – The one unknown
- Assume that property will grow with inflation
- Rent – Rental returns sometimes have 12 month rent guarantee
Due Diligence – What you need to do to find a property
- Work out your property criteria
- Research your suburb and the surrounding area
- Walkscore
- Microburbs
- Research Rental Income per week
- SQM Research
- Calculate (potential) Rental Income
- Research similar sales in the area
- DSR Data
- Soldprice
- Determine the property’s value
- Research the history of your home
- Confirm the property’s value with a free RP Data Valuation
- RP Data / Corelogic
- Research if your home has gone swimming (i.e. flooded in Brisbane)
Today we’re looking at the market environment for Facebook, Google, Twitter, YouTube etc… their costs are going to far outpace what their revenues will be. Are they on their way up, or on their way down?
- EU copyright laws affecting business models
- Proposal for online forums to be banned
- The difference between a ‘platform’ and a ‘publisher’ and how the law treats each of those definitions
Facebook is down 30% - and have advised that revenues would continue to slow down and its costs rise.
- Market cap almost half of Australia’s GDP (1.2tr USD)
- Loss equals the total GDP of Kuwait - some $120.3 billion in 2017 last year
- Indeed, over the last three months alone insiders - including Zuckerberg - have sold off $3.8 billion worth of stock in the company.
- Earnings per share (EPS) actually were a little ahead of forecast at $1.74 versus $1.72 that had been projected. And, revenues were only a tad shy at $13.23 billion compared to the $13.36 billion that had been expected.
- Trend analysis - middle of a very wide and falling trend in the short term with a further fall within the trend is signalled.
- Stock is expected to fall -18.53% during the next 3 months and, with 90% probability hold a price between $120.68 and $156.81
Three risks for social platforms – FB, Twitter, YouTube (owned by Google)
EU Copyright changes – Article 11 (link tax) & 13 (meme ban)
- Copyright directive - potential memes banned and platforms will need to pay publishers to link to their websites
- The European Parliament has voted in favour of a controversial new copyright directive that could force tech giants to do much more to stop the spread of copyrighted material on their platforms.
- designed to update existing copyright laws for the internet age
- Directive on Copyright places more responsibility on websites such as YouTube, Facebook and Twitter to make sure that copyrighted materially isn’t being shared on their platforms.
- Until now, the onus has mostly been on the copyright holders to notify the platforms
- The article intends to get news aggregator sites, such as Google News, to pay publishers for using snippets of their articles on their platforms.
- Legislation: “may obtain fair and proportionate remuneration for the digital use of their press publications by information society service providers”
Nobody knows how these will work – The EU politicians voting on this haven’t even read it. They have their assistants read it and they tell them how to vote.
- The Directive does contain an exemption for “legitimate private and non-commercial use of press publications by individual users,”
- this is open to interpretation - someone with a huge following on social media, who posts adverts to that audience, a “private and non-commercial” entity
- Article 12a might stop anyone who isn’t the official organiser of a sports match from posting any videos or photos
- could put a stop to viral sports GIFs and might even stop people who attended matches from posting photos to social media
- all of this depends on how the directive is interpreted by member states when they make it into law
UK – Online Hate Bill
- Want to ban private chats and forums on FB and other social media sites
- All that it will do is make hate filled groups go underground and punish those who are part of funny cat meme groups
- Irony is that there is no public forum for their policies
- They are allowed to meet in private and make decisions that affect our lives
Platform vs Publisher
- Platforms are not responsible for content uploaded
- As Facebook does control and edit content, they run the risk of losing platform status – and can be sued for content
- Publishers are liable
Today’s question is from Declan, “What advice would you give your 21-year-old self?”
To my 21-year-old self I would have the following advice:
- Life is a series of challenges, the more you solve the better your life becomes.
- Always continue learning - I thought after Uni I was done studying, but realised that the more you know the more you can solve.
The more you learn the more you earn - By investing time and money to pick up new skills, you become a more valuable member of your company or organisation. 3. Value my time more - Think of time as a compounding factor, like an investment – The more you can do earlier, the more the effort will compound over time.
Plus, opportunity cost now can be represented by putting a dollar value to each hour of your time. 4. Failure only means there is something else needed - The only shame in failing is if you give up. Failure comes from defectum in Latin, which translated in another way is deficiency. The word failure just means that something else is needing to be done to achieve you goal.
Today we’re talking about a news article that came out highlighting that young Australians’ are experiencing either zero, or negative income growth.
- Stats throughout history
- How to increase your income - whilst this is a real issue, there are real ways of actually getting around it.
- The 'Smashed Avo' reference - the idea young people can’t afford to buy a house because they’re living large.
- The origins of ‘smashed avo’ as a reference to millennial laziness, meanwhile, go back to a column by a middle-aged man named Bernard Salt, who is a partner at one of the big four accounting firms.
- Living an easy life of brunch, Instagram and maxing out their credit cards. Then they have the audacity to complain about the price of housing!
Let’s look at the stats…
Sources: Productivity Commission estimates using Australian Bureau of Statistics (Microdata: Household Expenditure, Income and Housing, 2015-16) and ABS Household Expenditure Survey basic confidentialised unit record files 88-89 through 2009-10.
The graph
- Shows “real” income
- Shows age groups and time periods of 5 years
During the 10-year period between 1988-1998, those aged 25-34 saw the largest increase in wage growth.
But that that all stopped in 2009-10.
- Since 2009-10, growth in real income has been OK for other age brackets.
- An individual will still normally gain income as their age increases from 25 to 34. But that income gain will be swimming upstream against a general downtrend in real income for people of that age group.
- In previous eras, the income gain associated with gaining age and experience was boosted by a general uptrend.
- Businesses and wage growth also go through cyclical change, which needs to be considered when looking at these figures.
Currently
- Those over 65 are having the highest increase of income of around 2% (in line with increases of Age Pension)
- Below 35 are experiencing low to negative income growth
Grow your income
- Increasing your income is a long-term journey and doesn’t happen overnight.
- Employment - Starting early to maximise lifetime earnings, review your pay with your current employer, upskill yourself to provide real value to employers.
- Investments - Increase your income personally and reinvest the income from property and shares
- Higher disposable incomes - Getting out of bad debt or reducing discretionary expenses
Today we’re talking about the markets, how CEOs affect share price and how public perceptions can make or break. We look at Elon Musk.
Musk is a business magnate, investor and engineer.
- He is the founder, CEO, and lead designer of SpaceX;
- Co-founder, CEO, and product architect of Tesla, Inc.;
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Co-founder and CEO of Neuralink; and co-founder of PayPal.
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In what has been a pressure-filled year for Tesla, the company’s third-quarter performance might be its most important test in 2018 – Musk said it will be great - “most amazing quarter in our history.”
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But – JRE - Musk was filmed drinking whiskey, briefly smoking marijuana
- It was the latest in a string of unconventional behaviour and bizarre acts by the billionaire
- He has a very high IQ – Those people can come across as bizarre to some who don’t have high IQs
- Even before Musk's surprise August 7 tweet that he had funding "secured" for a go-private deal, Tesla had been under scrutiny from investors,
- Analysts and short-sellers - it works to hit production targets and slow its cash burn.
- Constant pressure from shareholders and analysts regarding near-term performance
- He has said he wants to preserve a broad ownership of Tesla as a private company. That might be impossible for the mom and pop investors in the stock now who don't qualify to invest in private companies as accredited investors. If they want to keep their ownership, it might have to be through a special purpose fund, something Musk has mentioned.
- "Issues around regulatory approval - unclear how Tesla will allow retail investors who are not accredited investors to own stakes in a private Tesla
Musk stunned investors a month back with tweets saying he had funding to take the company private for $420 (A$589) per share.
- Several followers questioned if it was against the company’s policy, while others mocked the CEO’s initial $420 bid, a number that has become code for marijuana
- He then backed off from his plan, saying Tesla was better off as a public company.
Taking a company private - how it's done
- Simply going dark is a multistep process.
- The exchanges need several days’ notice of the plan,
- The public has to be informed at the same time.
- Forms are filed with the regulators, one to notify it of the delisting and another to deregister the shares if the company has 300 or fewer shareholders.
- Going private requires cash to buy out the minority shareholders, usually through a merger, tender offer or reverse stock split.
The political spectrum and where we line up, plus a look at what we know so far of Bill Shorten and Scott Morrison’s policies.
Everything is portrayed as a ‘cost’, which is ironic.
“Costs” from the Government’s perspective is simply NOT charging you tax. Not taking all income earned is a trillion-dollar cost to them.
Shorten’s Policies
Lowering 50% CGT discount to 25% (for assets purchased after 1 July 2017)
- People will potentially hold onto assets longer because they will be taxed so much if they were to sell.
Negative Gearing – Removal of negative gearing (grandfathering existing)
- (ABS Stats) 21% of households own a second home as an Investment property
- 35% of dwellings are investment properties (rental properties)
- Can’t offset more tax than is paid
- What if property is not rented for a while?
- People may not buy highly leveraged – high growth properties
- What if rates go up? A lot of properties in the past were negatively geared
- Depreciation already gone, property may become less attractive
- Less incentive for investors to hold an investment property, less available to renters, so therefore with the decreased supply the price of rent increases.
Family Trusts
- Implement a 30% floor on the taxation that applies to distributions made by discretionary trusts
- Distributions cost $3.5bn to government in lost tax revenue
The removal of Franking Credits
- Australian Market - unfranked 5.5% to 6.5% dividend yield on major bank stocks still smashes the 1.8% yield on US equities
- Change of company behaviour
- The American model – Reinvestment of funds is better for companies than double taxation of income for shareholder (reduced shareholder value)
- Remember, the Government might say that this is costing them money, but really, it’s just money that they aren’t able to collect in taxes!
Health Funding – additional $2.8 billion funding for hospitals
- Additional money doesn’t equal additional efficiency, it depends on how the money is spent. Throwing extra money at a problem doesn’t necessarily solve it. For example, the hospital in Adelaide.
- Help reduce emergency department and elective surgery waiting times and provide more beds, doctors and nurses
Education
- Scrap upfront fees for 100,000 TAFE students and to spend $100 million modernising TAFES around the country.
- Promised about 200,000 extra places at universities
- He did not give a costing for the extra university places
Increased funding for even further regulation and red tape
- ASIC - lambasted the Government for cutting funds to AISC as a "disgrace" and "immoral" and pledged a $25 million taskforce for public prosecutors
- ASIC has gone industry funded - their revenue has gone up and just moved away from tax payer funding
How all of this can be funded?
- Can afford the extra spending because he would not “spend” $80 billion on big business tax cuts.
- Extra government spending enabled by this revenue-raising – think back to past public works programs, like the NBN or pink batts, or solar panels
Morrison
- Retirement age to 67, not increasing to 70.
- Whilst it’s not nice to have to increase the eligibility age for the pension, life expectancy has increased by 25 years since the age pension was introduced…and eligibility age has only gone up by 2 years.
- Cuts for small and medium businesses will cost up to $3.6 billion over four years
- $7.6bn on infrastructure spending
- Increasing rails and road networks etc
- Not sure about what the details or other polices are – nothing is clear at this stage.
In this episode we discuss Cash.
We will run through what type of asset it is, how the currency system works, and how it can be manipulated!
We also discuss:
- The good old days of the Gold Standard
- What the real uses for cash are
- What are the uses for cash, and how you can improve your position.
- Why you can get a 60% interest rate in Argentina, but it may not be worth it!
- What to do with cash and the potential negatives of doing so!
Today’s episode is a Market Update and we look at a few of the factors that affect our market. We will discuss why these things matter, and why we are in the state we are in!
In this episode we discuss:
- Consumer confidence – Look at the savings ratios
- Business Confidence – what factors are affecting it and what this means for the economy.
- Australian Wages and labour - Unemployment and underemployment and how it is correlated with difficulty finding labour
- Housing Market - House process going through a bit of a down cycle – We run through the Supply to demand ratio – And also look at the homes vs apartment market.
Also, here are the graphs that we discussed:
Australian motorists are suffering the biggest annual increase in petrol prices in 9.5 years as global factors combine to slug drivers at the bowser.
ACCC - 2017-2018 financial year petrol prices on average rose by 10 percent, resulting in drivers struggling to make ends meet with the price of fuel. Add on people living further and further away – Adds to the weekly budget – making it harder to save!
But motorists can manage this cost by using fuel price apps and websites to reward retailers offering the lowest price.
In the episode we cover the following:
- What is causing the rise: Supply and Demand of course
- The global oil markets
- Geopolitical and currency pressures
- Greedy retail margins
- How to try and save at the pump
The decline of auction rates and confidence in the market
The number of homes being put up for auction across Australia has plummeted as falling property prices and fewer cashed-up buyers shake the confidence of owners looking for the right time to sell.
- CoreLogic - properties taken to auction last weekend was 1,909 - down from the previous year - 2,270.
- The number of homes being taken to market is down on average by 20 percent.
- Sydney, the preliminary clearance rate was 59.1 percent, indicating a classic "buyer's market". Property values plummeted by 5.6 percent to record over the past 12 months to a median house price of $863,769.
- Melbourne, the preliminary clearance rate was just 58.6 percent. House values have fallen 1.6 percent over the last 12 months to record a median house price of $709,568
The Analysis
Coming down from the top - Last year was at the peak of the market
- Long term normal averages
- Why is this happening?
- Consumer confidence
- Prices are too high
Property Clock Link: https://www.htw.com.au/month-in-review/
Things move in Cycles
Residential property market goes in cycles
- Supply and demand
- Supply – Properties being built
- Demand – Interest rates, credit availability, population increases
- Demand may be dropping as auction set prices are too high
- People may just not want to pay what people are asking for in the price
- Especially Sydney and Melbourne
Don’t panic
- Be aware, but don’t be alarmed
- News stories are crafted just to sell
- A few weeks is not a trend – Takes some time and may have just been a rainy day
Won’t see a massive drop
- Investment properties will go first
- Expensive to own property
Last episode we ended with Lenin’s death. The roll out of Communism was well underway and it was time for new leadership.
One his last policies before he died in 1924 was the New Economic Policy (NEP) in 1922…
- A mixed economy put in to place in order to reintroduce a level of private ownership into the economy. Individuals could own small enterprises and some private property. Tax in the form of ‘Quotas’ were introduced with people getting to keep and trade what they produced over and above their quota.
- Lenin had a stroke not long after this, leaving him partially paralysed.
- This is when Stalin really stepped up being a regular visitor, and
- Lenin didn’t like Stalin – or his “Asiatic manner”. Stalin was Georgian and a bit of a racist. Lenin wrote to his sister that Stalin was ‘not intelligent’.
- Regardless, Stalin had support of a large chunk of the Bolsheviks. So…he was needed.
Joseph Stalin ruled from Lenin’s death in early 1924 to 1953 when he too died.
- What life was like under Stalin was brutal
- The movie The Death of Stalin is a black comedy about the power grab in the wake of Stalin’s death. The level of paranoia and fear seems a little hysterical (overacted) however it was pretty true for the time. There is a scene Stalin wanted the recording of musical group. It was a horrible event, but it makes light of the oppression people were under.
Between 1924 – 1927 Stalin spent most of his time killing off any challenges to power. Then by 1927, power was consolidated.
- He saw the solution for getting rid of the dissidents was to imprison them – in the Gulags. There were a few of these operational under Lenin. The number of concentration or forced labour camps grew from about 87 to over 350
- Communist Party and The Soviet State considered repression to be a tool of control and enforcement.
- Securing the normal functioning of the Soviet state system (people toe the line)
- Preserving and strengthening their policies (redistribution)
- Keeping control of their social base - the working class (keep them in fear)
- The GULAG system was introduced in order to isolate and eliminate anyone not toeing the line
- Class-alien, socially dangerous, disruptive, suspicious, and other disloyal elements, whose deeds and thoughts were not contributing to the strengthening of the dictatorship of the proletariat.
- Forced labour as a "method of re-education" was applied.
- This theory based on one of most famous Marxists in history – Leon Trotsky. Trotsky came up with the solution for dissidents.
- He was a Russian revolutionary, Marxist theorist, and Soviet politician – He was one of the ‘old Bolsheviks’ – and mates with Lenin.
- The Prison Camp idea was based on Trotsky's experiments with forced labour camps for Czech POWs from 1918
- He wrote about "compulsory labour service" in his book - Terrorism and Communism
Why does all of this happen? Why am I talking about this part in a show about personal finance?
- These violent social policies have to go hand in hand with the economic policies of a Socialist or Communist society.
- It is about the collective and ‘Equality of Outcome’. With force being the only true way to guarantee the outcome.
- The economic policies of socialism have to be enforced by the State.
- Follow the logic – Say you don’t pay taxes, you would get notices from the ATO, eventually criminal charges and eventually you get taken away to jail
- Now imagine you went to the fields (which are meant to be the peoples’ anyway) and picked some left over grain for yourself. People were shot for doing this
- Or, you made a joke about Scott Morrison – That is 3 years in the Gulag!
- Any speech or action against the collective is a crime – and it has to be. No freedom can be present if equality of outcome is desired.
Aleksandr Solzhenitsyn, “Gulag Archipelago”. A recount of stories from these camps from memory with first hand testimony from 227 fellow prisoners…it’s a looooooong book, around 70 hours of audio book.
What landed him in jail?
He was fighting in WW2 and wrote a letter to his friend about conditions on the front – that was his crime.
- It wasn’t until 1973 when this was published that the world got to really learn about this. This caused the western world to start to wake up to the lies of communism.
- Before this, the Socialist plan was also lauded by some members of the Western media, and although much of his reporting was later disputed, New York Times reporter Walter Duranty received the 1932 Pulitzer Prize for Correspondence for his coverage of the first five-year plan.
Back to Stalin’s policies
- 1927 - 1931 Collectivization and industrialisation – The core of all Socialist policies
- The word ‘collectivisation’ sounds technical, a little dry, even boring. But, it’s the process of taking what people have, and spreading it around
- Human consequences were profound and dramatic.
- How does one achieve this? It is an impossible problem to solve to keep everyone equal at all times – So the only solution is to remove those who are on higher wealth positions on an ongoing basis, to keep redistributing that wealth until there is no wealth left to redistribute. It’s the perfect race to the bottom.
- The principle was simple. Richer, more successful peasants (Kulaks and Nepmen) had to be ‘liquidated’, by starvation, murder or exile.
- For equality – Those ‘with’ have to be taken from. But this requires dehumanisation.
- Sadly, the Soviet Union lagged behind the industrialisation of Western Countries during this period
- But Stalin argued that collectivisation was simply good Marxism.
- To build socialism on earth, he said, they needed to smash the peasants.
- Can’t have a truly socialist society if they still allowed people to farm for themselves and make money
What’s the reason they had lagged behind?
- Up to now the NEP was in place, but Stalin was not a fan
- Too free-market – Some people still could make money
- Kulaks (Rich peasants) and the Nepmen (small business owners)
- This goes against key socialist or communist policies and the belief in a controlled economy with no ‘evil profit’
- 1928 - Stalin starting claiming that the Kulaks were hoarding their grain.
- The Kulaks were arrested and their grain confiscated, with Stalin bringing much of the area's grain back to Moscow with him in February
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1928 - The first five-year plan was launched, its main focus on boosting heavy industry;
- Needed Labour to achieve this
- Prison Labour – The Gulags
- To meet the goals of the first five-year plan the Soviet Union began using the labour of its growing prisoner population
- 1929 – Stalin ordered the collectivisation of the agriculture countryside
- 1930 – Took measure to liquidate the existence of the kulaks as a class; accused kulaks were rounded up and exiled either elsewhere in their own regions, to other parts of the country, or to concentration camps.
- By July 1930, over 320,000 households had been affected by the de-kulakisation policy
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1932 – About 62% of households involved in agriculture were part of collectives, and by 1936 this had risen to 90%
- Takes time to do it but once in place it’s hard to get out
- Productivity slumped, then famine broke out in many areas
Famines: Starvation in Ukraine – 1932 to 1933
- 1930 – Armed peasant uprisings against dekulakisation and collectivisation broke out in Ukraine, but they were crushed by Red Army – He wanted to truly crush them
- Stalin’s thugs roamed the fertile Ukrainian countryside, seizing grain that he could sell abroad — which would allow him to buy the industrial machinery he desperately wanted
- Around 3.3 to 7.5 million died in Ukraine – there are not many records
- 2 million Kazkhs population (40%)
- Remember – There were more people starved over one year than Jews who died in the Holocaust over 4 years
I will Skip over WW2 – Check out Ghosts of the Ostfront series by Dan Carlin who covers this well over a few hours
- WW2 had 70 million deaths in total (soldiers, civilians etc) – 30 million died in the conflict of Russia and Germany alone – Germany lost 5 million troops total in the whole war. 4million of these were on the Eastern front
I’ll also skip over the start of the Cold war – Remember too…governments do have the power to take whatever they want by force – if they write the law to allow it (South Africa and Constitution changes)
What Russia looked like when Stalin died
- Work-life was rough since unions were shut down as they are a competing power to the State. The irony is that a lot of unions are on the left
- No longer allowed to strike
- No concern for working conditions
- The collectivization created a large-scale famine - herded into vast state-run farms where they would toil ceaselessly for the greater Soviet good, instead of for private profit.
- Famine led many Russians to relocate to find food, jobs, and shelter outside of their small villages which caused many towns to become overpopulated.
- Millions dying because of starvation or even freezing waiting in line for rations
- People stopped having children - decreased the population.
- The imprisonment of others into labour camps – Not nice places – Especially from other inmates
- Dangerous prisoners were released and forced into labour camps
- People were forced to live in communal apartments
- Without work and the danger of being robbed for the possessions that they did manage to keep.
- With such living quarters people shared tight spaces with strangers accompanied by many other horrors such as theft, violence and stripped of privacy.
Socialism went on until 1922 – By 1991 more than 60 million had died… which is about a third of the Australian population every decade. These are pretty normal as far as socialist outcomes go.
Be careful what you wish for.
Welcome to Say What Wednesday!
This week the question comes from Sean, "You spoke about Education Funds in a recent episode, I’m just wondering if you can explain this further?"
In this episode we discuss
- What Education Funds are,
- The pros and cons of using Education Funds
- When and how to use them
In this episode we discuss the magic trick to paying off a mortgage in a shorter time frame, to save thousands in interest costs. The trick is that there is no magic trick - plain and simple. Like the dream of 7-minute abs, or 6-minute abs.... (but what about 5-minute abs!) it takes a bit of work to get it done.
In this episode we discuss:
- One simple strategy is to make your mortgage payments weekly, in addition to increasing your repayments.
- With this formula you can halve your mortgage from a 30-year term into 15 years.
- We’ll deep dive into ways to do this, but start with the single simplest and most effective way to crush debt.
- Doing this can save literally thousands in interest payments and increase your financial freedom.
- We also discuss different interest rates. Obviously with higher interest rates, you save a lot more.
- Finally, we run through whether it’s worth investing the money instead, or repaying your debt.
Here’s a link to the Pay Yourself First Episode
Today we’re going to run through the very first implementation of Communism on a mass scale. Our last few Furious Friday episodes are a lead up to this. If you didn’t catch those episodes, it’s not the end of the world but if you did manage to have a listen it will provide a bit of context to this episode.
Russia – 1917 under Vladimir Lenin & the Bolsheviks (Spoiler alert! It didn’t end well!)
Firstly, it’s important to understand Russian History, pre-1917, as a prelude to the events that occurred.
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1861 - Tsar Alexander II passes the Emancipation Edict, ending serfdom in Russia
- Alexander II was a pretty good guy (as far as leaders through history go)
- Sold Alaska to the USA 1867 for $200m in today’s dollars.
- Favoured an economic system similar to that in other European countries;
- Capitalism and free trade.
- Promote development and to encourage the ownership of private property, free competition, entrepreneurship, and hired labour
- Most Serfs were free (a third of the Russian population)
- They had rights (marriage, ownership of property, freedom)
- 80% of the population were peasants, substance farmers. Peasants were to receive land from landlords (though they had to pay for this eventually with money, or working it off through labour obligations)
- Landlords were paid 75% from the government upfront, and the peasants paid it off over time. This was abolished later on, so the full payments never really came through to the land owners.
- Alexander II was a pretty good guy (as far as leaders through history go)
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Changing the system so significantly is a very complex problem to solve. However, by all metrics it seemed to be working well as far as increasing the prosperity of the population.
- The land ownership changed hands significantly
- Previously there were the Gentry class – A social class whose land ownership provided their incomes (Mr Darcy from Pride and Prejudice).
- Land ownership by the Gentry class fell from 80% to 50% as the mobility of wealth under a freer society increased.
- Serf land ownership rose - 5% to 20%
- Substantial rise in the amount of production of grain
- Surprise, surprise! When people are allowed to keep what they produce, and are incentivized, there is an increase in goods produced.
- Rise in the number of hired laborers
- Rise in technology needs - machinery
- Remember: This was set up to be a free market economy – Efficiencies started to happen!
- Those who were more entrepreneurial could do more than just farm land as well
- 1890s - Industrial development
- A large increase in the size of the urban middle classand of the working class. This saw the emergence of the Kulaks, who were essentially the wealthy peasants
- By this time the second generation were entering adulthood. There was a 35% chance that their parents had been slaves.
- This gave rise to a more dynamic political atmosphere - the one downside of freedom
- Previously there was no hope of rising up, peasants were peasants. But, with freedom comes choice, and with choice comes wealth…
- You either chose to own something/keep what you earn, chose to work where you want
- Inequality is created. But this is then used as a tool to mobilise the masses – to create an equal outcome – where everything was utopia and everyone has the same amount of wealth
- During this period is when Vladimir Lenin was born – 1870 to be exact
- Wealthy middle-class family. His father was a serf who was freed, did well and became wealthy
- I’ll skip forward through Lenin’s life to 1917 when things pick back up –
- Spent most of time between being expelled from University, exiled in Siberia, then living in Munich, Geneva and London, or holidaying in French or Italian Villas
- WW1 was going on around this time
- Unrest is growing. The First Revolution: Disaffected soldiers from the city's garrison joined bread rioters and industrial strikers on the streets.
- More and more troops deserted the front lines and with loyal troops away at the front things fell into chaos, leading to the overthrow of the Tsar. In all, over 1,300 people were killed during the protests of February 1917
- Didn’t solve the fight for power
Enter, The Bolsheviks – A second revolution
- Bolsheviks - majority faction of the Russian Social Democratic Party, which seized power in the October revolution of 1917
- Lenin came back to Russia in October 1917 – From Finland (wasn’t even there until the end)
1918 - Russian Soviet Federated Socialist Republic
Lenin gets to work on the new Government
- The first was a Decree on Land, which declared that the landed estates of the aristocracy and the Orthodox Church should be nationalised and redistributed to peasants by local governments.
- Decree on the Press that closed many opposition media outlets deemed counter-revolutionary
- The courts were replaced by a two-tier system: Revolutionary Tribunals to deal with counter-revolutionary crimes, and People's Courts to deal with civil and other criminal offences. They were instructed to ignore pre-existing laws, and base their rulings on the Sovnarkom decrees and a "socialist sense of justice"
- Decree limiting work for everyone in Russia to 8 hours per day.
- Issued the Decree on Popular Education that stipulated that the government would guarantee free, secular education for all children in Russia
- Embracing the equality of the sexes, laws were introduced that helped to emancipate women, by giving them economic autonomy from their husbands and removing restrictions on divorce
- Decree on Workers' Control, which called on the workers of each enterprise to establish an elected committee to monitor their enterprise's management (gangs of workers controlling the company they were working for)
- Issued an order requisitioning the country's gold, and nationalised the banks, which Lenin saw as a major step toward socialism
- Nationalised foreign trade, establishing a state monopoly on imports and exports
- It decreed nationalisation of public utilities, railways, engineering, textiles, metallurgy, and mining, although often these were state-owned in name only
1918 - Many cities in western Russia faced chronic food shortages and famine.
What happens to a controlled economy?
- Price controls, for one. Things that are price pegged below cost fall into shortage
- To supplement - A booming “black market” supplemented the official state-sanctioned economy
- Lenin called on speculators, black marketeers and looters to be shot. (So, the food shortage gets worse)
- Lenin blamed this on the Kulaks - wealthier peasants (his father’s class) - allegedly ‘hoarded the grain’
- Armed detachments were ordered to be established to confiscate grain from Kulaks for distribution in the cities
- Resulted in vast social disorder and violence - armed detachments clashed with peasant groups – Roaming gangs
- Bolsheviks’ Red Terror policy - a system of repression - sometimes described as an attempt to eliminate the entire bourgeoisie – 50,000 to 140,000 range of those who died (mass murder)
Mass murder doesn’t look good, plus there needs to be workers
- 1919 - Establishment of concentration camps, later the government agency, Gulag.
- AleksandrSolzhenitsyn (Gulag Archipelago)… we’ll come back to this in the next episode.
- By the end of 1920, 84 camps, 50,000 prisoners; 1923, 315 camps, 70,000 inmates.
- This was the early days for these slave labour From July 1922, all intellectuals deemed to be opposing the Bolshevik government were exiled to inhospitable regions or deported from Russia altogether; Lenin personally scrutinised the lists of those to be dealt with in this manner. In May 1922, Lenin issued a decree calling for the execution of anti-Bolshevik priests, causing between 14,000 and 20,000 deaths
- Common pattern – Anyone who has differing opinions or offer alternative hierarchy of beliefs
In 1920, the government brought in universal labour conscription, ensuring that all citizens aged between 16 and 50 had to work. This is in a time when life expectancy was around 35 years old
- WW1 – Diseases and famine – most people didn’t know anything but work and a short life
- Infighting within – few civil rebellions which were quickly crushed by the Red Army
By 1921 – Lenin got sick and went to the Gorki Mansion to spend his final years. In Lenin's absence, Stalin had begun consolidating his power both by appointing his supporters to prominent positions.
1922 – Stalin took over: Formation of the Union of Soviet Socialist Republics – USSR
That was the short summary of the life and policies of Lenin. From 1918 -1922, a body count of 3,284,000 (not including the 6.2m killed in the civil wars in this time).
We’ll leave it here for now, next week we can run through the later part of the USSR where things really ramp up under Stalin
The price of free is freedom – A government that provide equality and free everything has complete control over everything
Thanks for listening!
Welcome to Finance and Fury’s ‘Say What Wednesday’.
Today’s question comes from Braden, “What are the tools for young people to invest in exchange trading funds or the wider share market? Can I only use Commsec or Nabtrade, or are there better options out there?”
Let’s start by considering the following features of competing online share brokers;
Fees
- You’re charged brokerage for every buy or sell transaction, with many fees around the $20 mark.
- Fees may be calculated as a percentage of the transaction amount for larger trades.
- Also charge an ongoing annual or monthly fee on top of this, especially with the more feature-dense platforms.
What can you trade?
- Shares – Australian and International shares (Direct, LICs, ETFs)
- Others - CFDs, forex, indices, currencies and much more, so look for this functionality if it's important to you.
Research & Access to market data
- Daily market reports, buy and sell recommendations and company financial reports can all provide useful information.
Trade options
- You place orders at market and/or at limit, and are stop loss orders an option to add more flexibility to your trading?
- Some accounts allow short selling
Reporting. Check what reporting tools each platform offers to help you track your trades, record dividends and pass on any relevant information to the ATO at tax time.
Margin loans. A margin loan lets you borrow money to invest and uses your shares as security. If you're looking to borrow money to build your portfolio, check to see whether the platform provider offers margin loans. Don’t forget, this does comes with additional risk.
Education Does the platform also feature a range of educational tools and resources, such as how-to guides and webinars, to help you get more out of your trading account?
PlatformsSo, let’s look at some of the platforms available. Which one is right for you depends on what you want to achieve.
- Either you will be a fulltime trader, or a casual investor
- Different types of accounts will suit each
- Traditional (the banks)
- CommSec – Below $10k, $10, Below $20k, 0.11% above
- nabtrade
- Westpac
Your needs If you’re just a casual investor, do you really need a share trading platform that offers a whole lot of complicated bells and whistles?
Some platforms targeted at entry-level traders may not have all the features an experienced investor needs.
- For larger trades – Self wealth is good – Flat for $9.50
- Important: Doesn’t matter massively – it’s not where you buy, it’s what you buy!
Thanks for the question Braden! Any other questions go to https://financeandfury.com.au/contact/
Welcome to Finance and Fury
In today’s episode we’re talking about property - Commercial vs Residential.
It’s often a question people ask when they’re looking to start investing in property and considering which is the best type to get in to.
- What is best to buy? Residential or commercial?
- What do you want to achieve?
- They aren’t the same beast – Whilst they’re both ‘property’ they aren’t really the same thing and behave quite differently
Residential Property
- Homes or apartments
- Rent to individuals
Commercial property
- Three different property types
- Office
- Retail
- Industrial
- Rent to businesses
Commercial property to residential
- Pros
- Costs – Commercial can have lower costs
- Upfront – Technically cheaper per square meter than residential
- Ongoing – Tenants cop some of the costs (maintenance, etc.)
- Higher Rental Yields
- 8-12% on yields
- Residential has about 3-4% on yield
- Long leases
- Leases for 3-5 years are more common. Can go to 10 years.
- Provides certainty
- Costs – Commercial can have lower costs
- Cons
- Lower capital growth
- Supply and demand: If populations are growing (immigration) – prices go up
- Businesses aren’t growing in number at the same rate as residential
- Higher risk of vacancy – Often untenanted for long periods
- Got to have enough other cashflow to cover any costs on the property.
- Resale challenges
- Again, supply and demand
- Important to select property that will be demanded in the future – Rise of share office blocks
- Economic changes – Business don’t do well when the market is experiencing an overall decrease in demand.
- Residential property – you only have to look at individual demand – Places people want to live
- Commercial – Two-fold – Individuals need to demand business, and then business need to demand property
- Lending – lenders require 30%-50% deposits for property
- Lower capital growth
Relationship for supply and demand
- Fundamental driver for property growth – demand compared to supply
- Residential demand is driven primarily by population growth
- commercial demand is driven by both population growth and economic factors.
- Often in the ‘not so nice’ parts of town
It is important to understand these growth factors when deciding where and when to investment.
- Risks
- No growth – Demand to buy doesn’t do up
- No income – Nobody wants to rent
Commercial – Works if:
- Low maintenance
- Desired part of town for business to operate
- Strong cashflows
Residential – Higher capital growth – Plus more leverage
Summary
- Residential – Good for long term growth – Leverage helps
- Commercial – Good for incomes – But has its risks
Welcome to Finance and Fury! If you haven’t listened to last Friday’s episode go check it out, it’s a prelude to this episode. Today we are going to discuss the founder of Communism – Karl Marx, along with his ideas.
1848 – Karl Marx, along with Friedrich Engels, brought the philosophy of Communism to the masses. We’ll start with a brief outline of his life. Whilst we could go on for a while about him, I’m more interested in looking at his ideas, which are more important. We will talk more about he and Engels’ character, too, to form a good understanding about their ideologies.
Why is this important to cover?
- The Communist Manifesto is one of the most read books – still today. Research conducted by the Open Syllabus Project - 15 years of over 1m course curricula in Colleges and Universities
- The Communist Manifesto is number 3 in most assigned, 2nd in History, Number 1 in Sociology
- The top 10 Economics books are written by New Keynesian Economics
- Assumes rationality and economic efficiencies – Wants to achieve macroeconomic stabilisation through;
- Fiscal policy – Taxation and redistribution – GPD from government spending
- Monetary policy – Printing money to stimulate economic growth
- This is a problem that there is only one way of economic thought being taught
- I know – I went through it. I didn’t learn anything about the Austrian school of economics which focuses more on individuals rather than the state as a solution
- Used to be more socialist and thought that printing money for economic stimulus was good
- Especially reading articles by Economic Writers
- Assumes rationality and economic efficiencies – Wants to achieve macroeconomic stabilisation through;
- We need to try to get the complete picture out there though
- There is no perfect theory or method, but only seeing one may lead people to think that
Who was Karl Marx?
Either the saviour or the devil depending on what side of the political compass you lie.
- Born 5 May 1818 – Trier, Germany – father was a la He lived a relatively wealthy existence, growing up in a 10-room property, with his family owning a number of vineyards. His mother was from a wealthy Jewish family of businessmen. They later founded Phillips Electric. His sister-in-law married Lion Philips, a Dutch tobacco industrialist
- Why is this important
- Karl wrote that the working class needs to revolt
- He never worked a day in a factory
Education years
- 1830 - Trier High School - police raided the school in 1832 - discovered that literature espousing political liberalism was being distributed and taught to the students. This is another important point.
- The authorities instituted reforms and replaced several staff during Marx's attendance.
- Early education revolved around one ideology of liberalism
- 1835 - at the age of 17 Karl attended the University of Bonn. He wanted to study philosophy and literature but his father insisted on law as a more practical field.
- Karl was excused from military duty when he turned 18, due to a condition referred to as ‘weak chest’.
- While at the University at Bonn, Marx joined;
- The Poets' Club, a group containing political radicals that were monitored by the police.
- The Trier Tavern Club drinking society
- In August 1836 he took part in a duel with a member of the University's Borussian Korps.
- His father forced him to transfer to the more serious and academic University of Berlin.
Marriage
- 1836 - Married Jenny von Westphalen – An educated Baroness of the Prussian ruling class
Work
- 1837 – 1845 – Between Cologne and Paris writing for socialist newspapers by German and French radicals
Engels
- 1844 – Met German Socialist Fredrich Engels whose father was the owner of a large textile factory. Do you see a trend here?
- 1848 – Co-authored Communist Manifesto
- The ideology
- Marx’s quote – ‘The history of all hitherto existing society is the history of class struggles’
- The class you belong to is determined by; If you own the means of production and control labour power, or, if you are the labour power – the workers
- Sees everything as either “Oppressor” or “Oppressed” with all business owners exploiting workers
- Oppressors – The Bourgeoisie (capitalists) who are the owners of production and always working in self-interest, exploiting the working class.
- Oppressed – Proletariat – the working class. They are the ones selling their labour power – remember: voluntarily – awful conditions but thanks to the free market this improved.
- Class is solely determined by property ownership – not by income or status
What the Manifesto contained: Ten major points in total, almost like the “10 Commandments of Socialism”
- Abolishing ownership of all private property – i.e. the people now own everything collectively and nothing privately
-
- Businesses: Assumes that capital just appears. Marx theory is that the labourers are the one that produce everything, so they should own it as well
- But where did the factory come from? Someone took a risk to create these things.
- A Tragedy of the Commons situation – which turns into social loafing
- Living: You are taken from your home and put in the lodgings assigned to you by the government.
- No private property means not owning anything – no car, investments, telephone
- Establishing system of heavy taxation (Differs for Socialism and Communism)
- Communism: The People own everything - You don’t get paid, but you do have a quota to make (form of taxation)
- Socialism: The State owns everything – You get paid an income but it’s heavily taxed to the point where you don’t actually have much discretionary income left.
- This removes the want to work. So, when everyone stops working there is less tax to provide resources for everyone. Things work well to begin with by redistributing existing wealth, but then it’s just a race to the bottom.
- Abolishing the right to inherit
- When you die, The State takes all your stuff – because to begin with it owns everything anyway
- No incentive to save for retirement – you can’t anyway
- Centralizing credit and establishment of a State Bank
- Removes competition and creates a monopoly – a State-run bank who lends and controls all money
- Removes all financial freedom and will lead to bad behaviour (i.e. 1,000,000% inflation in Venezuela)
- Central Banks are meant to be independent from Governments or democratic influence
- Centralizing communication and transport
- Now they see and hear everything, and control what you see and hear. They can also control where you go.
- Confiscating all emergent and rebel property
- Start anything new? They now own it – and they punish you for doing it as well
- This is a race to the bottom – As soon as someone gets slightly ahead they have their stuff taken away
- Extending the means of production to The State
- Once all private property is taken, the state starts running these things. This is their power source – Income and control
- Hasn’t worked so well – Hard to measure efficiency in controlled economy
- Russia: Production quota by weight for nails – SO factories produce nails too big to use just because they were heavier.
- Equalizing liability to all levels of labour
- Brings an end to the parasitic situation existing under capitalism where the few who don’t work are supported by the many who do.
- Everyone works in communism. Those who don’t work, don’t eat (except those unable because of their age).
- Work is assigned to you
- Combining agriculture and manufacturing industries
- Labour intensive jobs to be spread around when needed. Farmers become factory workers, and vice versa
- This destroys specialisation
- Establishing a free public education system
- Important to educate good ‘future-communists’
- How do you think schools in North Korea, or under Mao’s China looked?
Every one of these principles is designed to remove incentives – as it removes all freedoms!
- Why do we do anything? - There needs to be some incentive
- Everyone is incentivised by something different – we are all different.
- But when freedom and incentives are removed? What happens when these get taken away?
- There’s a difference between ‘being content’ in a modern ‘minimalistic’ sense, and not having a choice to have anything, or the hope of ever getting anything.
- I truly don’t know why people would want this. The only thing I could think of is that they haven’t been taught the other side, or they think that the simple ‘all needs are provided for’ promise is true.
- In a Democracy this system can actually be slowly be voted in policy by policy
- Has come from many a Democracy: very possible in a democratic and free market (wealthy) country
- Under the free market – Some rise, some don’t, but there is mobility of wealth
- There needs to be something in the first place to take and redistribute
- The greater the distributions of wealth, the more this can be weaponised
- Larger distributions in free market and large populations (Such as America) are outliers
- In a Democracy this system can actually be slowly be voted in policy by policy
How it plays out in the past and how it would play out here as well.
The question to really ask yourself is ‘why’ – Every time this has been implemented, why does it end in genocide and mass starvation? If you can answer that you might have a good idea is wrong with this concept.
- REMEMBER: Small, homogenous free market societies, like Scandinavian countries, aren’t Socialist (Norway has a lower company tax rate than us at 24%)
- TIP: A Government big enough to give you everything you want, is a government big enough to take away everything that you have
Next week to the first time these ideas were properly implemented…in Soviet Russia around the turn of the century
Thanks for listening! If you enjoyed this episode, or if you didn’t, let me know at https://financeandfury.com.au/contact/
Today’s episode is just a quick one. I’ll be going over a couple of questions I have had over the past few weeks about the personal finance course we’re launching. Plus, we have an exciting announcement at the end.
First off, why does the course exist to begin with?
- There is almost no financial education at any level of the schooling system.
- Unless you teach yourself, or someone else teaches you, it is almost impossible to completely understand personal finances or investments. This has created a problem where something that we all rely on very heavily has become misunderstood, and underutilised.
- We will all encounter money at some point in our lives, or pay taxes, so why not do everything possible to maximise the former and minimise the latter?
- I want to create a platform with everything you will need to know, or may ever want to know. Plus, tools that go along with each topic to put your newfound knowledge to use.
- Most of these things seem complicated – until it is explained
- I had great feedback from those who I have taught in person so know that it really does help.
What I hope this course will achieve
- Give you the skills and knowhow to make smart money decisions
- Help you create a plan to secure your financial future, removing uncertainty and financial fears
- Remove money stress and fear
- Put strategies in place to manage your money, taking the hassle out of it
When is it coming out?
- Sorry for the delay – tax changes meant I had to change the content and re-record
- Website be up in a week or so
How does it work? Giving you the knowledge, but also what to do with that knowledge.
- 8 Modules to complete at your own pace
- Complete each module to build a complete picture
- Online content delivered in lecture format
- Practical strategies and tools to help implement them in your own lives
- Community support
- You will join the community of people signed up for the complete course to help discuss ideas and learn from shared experience as well.
What is included?
Eight Modules, designed to provide the knowledge and how to use it to your advantage.
Each module then builds upon another to provide a complete picture of the economy, investments and your own finances. Some modules have tools to help implement strategies that you learn and manage your own financial freedom.
- Financial Goal Setting
-
- First mod is about goals – how to work out and set financial goals, plus how to achieve them
- Understanding your cash flow, lowering taxes and reducing debt
- Personal Finance Basics
- Economic terms, along with Supply & Demand
- Designed to help you understand the jargon / economic terminology
- Price mechanics behind the free market
- Economics 101:
- Returns
- Risks (volatility and how it’s measured)
- Risk / Return ratio
- Investment Theory
- Asset classes
-
- Cash
- Fixed Interest
- Shares
- Property (direct and indirect)
- Risk profiles
- Portfolio Construction – Growth vs Defensive
- Investment Basics
- Learn how to invest in Trusts or fund your retirement through Superannuation
- Structures & Environments:
- Build Wealth
- Reduce tax
- Asset Protection
- Strategies:
- Investment and Personal protection
- Risk management
By working through the lectures and tools in every module, you will be able to build your own financial plan to help secure your future.
And our surprise announcement
- After his hiatus – Jayden will be coming back
- I’m excited about my partner in crime being back – even if you aren’t I won’t feel like I’m just ranting at myself
I’ll let you know once it is all up and running, thanks for listening!
Today we will talk about the fundamental principle of being wealthy. It’s very basic, and, if you get it right, you will start to accumulate wealth…which is the whole concept behind actually being wealthy. You don’t get dumped with a truckload of cash and all of a sudden find yourself wealthy – those who are wealthy tend to have accumulated their wealth over their lifetimes.
It’s about keeping more of your money, and investing it to grow over time.
The big dream:
- Have millions of dollars and being able to purchase anything.
- This revolves around spending money
- You need the money in the first place to do this though
I want to talk about the allure of getting everything that we want in one go – the get rich quick schemes
- Lottery winners, or massive inheritances – do they never have money worries again? Well, it’s been shown that they do. And this goes back to the fundamental principle of spending more than is sustainable. The money is going to run out pretty quickly if you don’t have any discipline. People develop bad spending behaviours, so it doesn’t take long to go through $100m
- This extreme example is important – the mobility of wealth is massive – the “1%” is a very mobile group, people move in and out of it throughout their lives – Generational wealth
- All have the same sort of decline – 3 generations on average to spend through wealth
We all spend money and it goes hand in hand with modern life
- Basic needs (housing, food, transportation, etc.)
- Modern day – Easier to spend money than ever before. There is additional choice.
- Credit availability – CCs, Loans, cashless
- Online shopping – Amazon, delivery with minimal effort
- Advertising – constant stimulus, triggering of dopamine
- Why we spend money?
- For things we need
- For things that we want!
- Gives us some other gain – there’s a dopamine release
- The hedonic treadmill, and always needing to increase how much you’re spending to get the same feeling
- What we could be doing with our money – Opportunity cost
- Short term – What could you have done with the money spent?
- Long term – Is it the best thing now, or could I buy something bigger later
- How we grew up – Dopamine addicts
- Neuropathways are developing under constant dopamine stimulation
- Phones, Internet, Facebook, TV on demand
- It’s then very hard to find something to fill the dopamine gap when a lot of effort hasn’t previously been put in to doing this – Spending money easily fills this
How we decide – For financial spending
- It’s usually not cold and calculated
- It’s really, “Pain versus gain” – ‘cost v benefit’ mental accounting – use pain and gain constructs
- Pain – Will spending this money hurt in a certain period of time
- If you focus on the pain of not having the money, less likely to spend
- Gain – Good feeling and anticipated future benefit
- Anticipation – excitement for imagined future benefit
- Unpredictability – When we work for something and there is no guarantee of reward
- It is hard to qualify spending money as a ‘pain’
- The pain is not realised now – for example with a Credit card with a bill which is delayed for 60 days. The pain is in the opportunity cost, which is hard to qualify.
- You don’t conceptualise the pain of opportunity cost with any immediacy
- Hyperbolic discounting
- Time – the longer the time delay, the less we tend to value the gains
- Would you rather receive:
- $100 today, or $110 in a week?
- $100 in a year, or $110 in a year and one week?
- In the world of instant gratification there is easy reward with no anticipation or uncertainty – it’s important to find meaning in delaying spending, but it gets harder and harder
- Spending money wont help in the long term – hedonic treadmill
- Pain – Will spending this money hurt in a certain period of time
The Imagined Future Benefit problem – The Gain has been experienced before you finish
- Dopamine’s release changes based on two factors – Many people think that dopamine is released when the brain receives a reward, but dopamine is actually released in anticipation of a reward.
- It’s done to keep motivating us to work towards what we are trying to achieve. You don’t actually get much of a release when you finish working on the project – not sustainable long term to only have one goal, or none.
- That makes it release while we are doing the activity
- Anticipation – excitement for imagined future benefit
- Unpredictability – When we work for something and there is no guarantee of reward
Human behaviour – How do we act when we have something we didn’t work for (or earn?)
- It won’t make you happy – without the ongoing work for something, dopamine release isn’t going to be as great
- Working on the goal is what provides longer sustained releases of dopamine
- My experience – Sanding a deck – if I had paid someone to do it then there wouldn’t be that feeling of achievement
- Beyond dopamine
- Serotonin Status – our position in a hierarchy - spending money on nicer cars, suits, watches – Trying to live up to an ideal image. This doesn’t actually increase serotonin
- Fake it till you make it doesn’t work here if your brain knows that you are just flashy/showy with no substance
- The belief (anticipation) that spending money will give dopamine and serotonin becomes a dangerous cycle
- Without fulfilment – Just have to keep spending to keep up these feelings
- Also – Turning to easy releases of dopamine - The wrong way to do it – Easy releases of dopamine
- Gambling – The thrill – Uncertainty and anticipation are strong here. But it’s not sustainable. You’re only losing money to get dopamine.
- Risky investment – Get rich quick schemes – Often just lose money
The right way to do it - Best way to get rich slow
- Simply, spend less than what you earn. You spend money on things to get the same feeling that saving money can actually achieve and that working towards a goal can give you.
- This has a lot to do with investing as well, if your goal is to accumulate wealth to do something meaningful, why can’t this give the same dopamine release?
- Money is a tool – spending can give you a dopamine release and so can saving towards a target – but difference is that it is delayed
Stable and slow – More meaningful
- Sounds cliché and has been repeated 100 times (which maybe means it’s important then?)
Remember what the end game is – Being self-reliant and having meaning in your life - Dream, vision, purpose
- Nietzsche – ‘To live is to suffer, to survive is to find some meaning in the suffering’
- If you hit your goal too soon, you lose purpose. This is why big goals can be good…as long as they don’t dishearten you, they always give you something to work on. If the goal is superficial (e.g. spending) then you end up resenting work as while it provides the ability to spend – it gets in the way of what you want to spend money on
The take away
It’s all about choice – and this is why I like free markets. We have the choice to save and invest – Or chose to spend
This is why I don’t by the BS that it is too hard so you should never try
- Anything that is worthwhile is hard – and that’s good – working to get something that is easy won’t give the same level of satisfaction as something that’s difficult.
- Even the complaints we have really aren’t bad – I can’t afford a house – At least you can buy one in the future. You get to choose. And it’s all these choices that you make in life which lead into how well you actually achieve the things you want – job v career v purpose
- Most of the world isn’t so lucky, though there are some people in Australia are doing it tough
- Those who are ‘privileged’ are simply those that understand the concept of money
Thanks for listening!
Welcome to Finance and Fury, Furious Friday
Have a think about how much you know about history? Are you familiar with the big events, like WW1 and WW2? Events that have been re-enacted in movies like Saving Private Ryan? Did you study it at school? Have you done your own research and study on these events as well?
I’ve been listening to a lot of history podcasts: Dan Carlin’s Hardcore History is one of the best, the History of Rome podcast, as well as History on Fire… basically anything with ‘history’ in the title.
- The more I listen to these podcasts, the more I realised that even the general gist of an event in my head was way off in terms of accuracy.
- It’s eye opening learning about history from the view of those who were actually there. Soldiers on the front-line writing home about conditions, speeches from leaders and their political dealings behind the scene.
- This seemed so different – When was the last time you listened to a news story that shows you more than a 5 second clip of what someone said? The news anchor will spend the remaining time telling you a recount of what happened (rather than hearing it directly yourself
Why am I going on about this?
- The more I listened, the more I learned of the same horrible events repeatedly coming up in the past
- One thing that was surprising is that most seemed to have the same elements as each other
- More surprising: I had no idea that most of them occurred - especially from the firsthand accounts
- We all know about the atrocities of the Holocaust – Approx. 6 million Jewish people lost lives
- Hitler established first camp in 1933 - Dachau
- Most of the killings occurred between 1941 to 1945
- BUT did you know about the famine in the Ukraine between 1932-1933: when millions of peasants were forced off their land and made to join state farms under the Soviet Communist Party Leadership
- Throw in a bit of bad weather – 6 to 7 million Ukrainians died of starvation during this 1-year period
- Any food that was produced was taken by the state for the collective
- Remember: Ukraine was trying to fight for its independence from 1917-1921. They lost as Russia Invaded Ukraine with the Red Army in 1919, but they were still causing issues a decade later.
- Economists and Historians have painted a pretty clear picture that it was to punish the Kulaks (wealthy peasants) who were the most productive.
- What makes this story worse is that it isn’t an isolated incident – however it is not well known. Since 1848 the same thing has been tried and tried again. It may have involved different countries, during different times, and given different ‘names” …yet with the same results
- It’s almost like that episode of Rick and Morty – Morty’s Mind Blowers, where he keeps having a memory removed. He says– ‘How many of these are just horrible mistakes I’ve made? Maybe I’d stop making so many if I let myself learn from them!’
- Within Western culture there seems to be some Morties present, who are ready to repeat more horrible mistakes again
- The drug of Marxism and Socialism: A bad habit that humanity has picked up with the Communist Manifesto being published in 1948.
- Like with a lot of bad habits - people can ‘relapse’ back into them regardless of the negative consequences
- Socialism seems to have the characteristics of a drug addiction when applied to a democracy
- The first time someone does a drug they don’t do it thinking it is going to ruin their life
- The ideology of socialism has those warm fuzzy feelings as well, initially…until it ruins your life.
When I look at political candidates in Australia, the UK, America, Canada, New Zealand there seems to be a rise in Socialist policies again - like a drug coming back!
- Socialism is a moral philosophy posing as an economic system. It’s a cancer for economic prosperity
- People think that the benefits of socialism (in theory) are that its greatest goal is that of common wealth; As the collective (State of people) controls everything, it can allocate resources to maximise every individual’s need best.
- And who doesn’t want to have all their needs met. Everything’s provided for you, it’s nice and safe.
- This is one reason why it’s hard to kick this habit – it tells a compelling story. Everything is free (healthcare, education, housing, loans, food, power, etc)
- Everyone puts in the same effort and gets their fair share
- It seems great at first, and this is what makes it addictive
- People wouldn’t do drugs if they had a bad experience first time round (or have the side effects up front). Once hooked it is hard to kick the habit
- Addiction, dependency and enabling
- Addicts who have someone enabling their behaviour will likely not stop – change is more likely if they hit rock-bottom
- When we become dependent on the government, it is hard to become independent again. We adapt well as humans, which has allowed our species to thrive when there was a race to the top
- Like all addictions though this one can ruin your life…through poor policy
Since the abolition of Monarchies, Oligarchies, and the Feudal system, there have been a few players in this game of political rule;
- The working class owns everything.
- Everyone is working towards the same communal goal (ironically, in the end this becomes staying alive)
- Theory – No wealthy or poor people, everyone is the same
- Everything is distributed based on needs in equal amounts. But someone else is determining what you ‘need’
- Socialism – The State owns everything
- The State ‘pays’ the workers, the workers spend how they want
- The State determines what workers ‘need’ to get paid but relies on tax to continue payments
- So, think about that for one minute – The state controls all businesses so they set the tax on their own businesses and the workers, to collect funds to pay to run the businesses and workers?
- In a system with no waste that may be able to work in the short term. But there is waste (because it costs money to actually run the system) and eventually the tax runs out.
- The focus is on equal outcome, which is dangerous. For example, say you have a test – you study hard and get an ‘A’, but Billy gets an ‘F’. Your marks are then normalised and you each receive a ‘C’.
- Free Market ‘Capitalism’ (Adam Smith) – this model is not perfect, but reward comes to those who go beyond the minimum effort
- Owners are allowed to keep the excess production they earn.
- Competition occurs naturally which fosters advancement.
- Capitalism tends to create a sharp divide in wealth, especially with large populations
- China and America have lots of people. With the larger number, there is a more extreme difference between the top and the bottom, thanks to Pareto distribution
The Rundown
- The irony here is they all hate each other. Communists hate socialists and vice versa, and it’s really about ‘People vs the State’
- Hitler was a Socialist and Stalin was a Communist, Hitler’s Brown shirts would fight ‘Commies’ in the street.
- They both hate the free market, because they can’t compete with it.
- A major theme seems to be that countries have shifted between each throughout their histories.
- Communism and socialism are very, very, similar, they’re economic and political structures that promote equality and seek to eliminate social classes.
- Equality (read: Equality of outcome) - everyone has to have the same, society can only go as fast as the slowest person
- Australia is a free market economy with socialist policy (health, education, protection, etc), but mostly free market
- We have equality of opportunity – the free market provides this
- It also provides wealth. Ideologies that have to come from Democracy + free market = wealthy country
- Under free markets the rise of socialism often follows, as wealth becomes unevenly distributed
- In wealthy countries there will be wealth disparities which need to be equalised, the perfect feeding ground
- The greater the population, the greater distributions of wealth are going to be (Such as the U.S.)
- Pareto Distribution – the more data points, the greater the number of outliers, on both sides
Okay - Why I am covering this?
- Beyond WW3 or some mass extinction/fallout 4-like event, I think that this collectivist ideology is one of the greatest threats we face as a species.
- But like with financial literacy, economics, and even history, this point has been neglected
- We will be going to go through some examples of what has worked, and what hasn’t – it won’t be a boring history lesson.
I don’t think it is pointless either
- History provides a narrative going forward. The past is what created where we are now.
- George Orwell – 1984: “He who controls the past controls the future. He who controlsthe present controls the past”. This is talking about controlling what version of history we are taught in order to control how we behave in the present.
- Radio invented: 1920s – Regulations on broadcasting networks required ‘public good’. News was invented to inform the public.
- Skip forward to the days of TV. It didn’t take long to learn that covering certain stories attracted more viewers, which is of course, more profitable. The ones that sell are drama/gossip, and little time is spent covering the important issues of the world.
- Plus – It is such a common occurrence that over-exposure to horrible things can desensitise us
- Unfortunately, ignorance about (or ignoring) problems means that we are more likely to repeat them
I might sound crazy, but hear me out: We are in a democracy – By extension we vote-in our economic philosophy
- This is a great irony of life - with the freedom of democracy we are also responsible for not voting-in our demise.
- There is belief that socialism will work better for us. But remember, Socialism is a moral philosophy posing as an economic system. Everyone has to be equal, there’s no freedom, no hope.
I don’t think that people are dumb
- But we are very adaptable. When we are in a comfortable environment we can forget that life can be a struggle sometimes
- With Globalisation and technology, we have mass access to information, but too much can become overwhelming. We also forget that the majority of the world doesn’t have it so good.
- As a man (who will come up in future episodes) once said ‘A single death is a tragedy, a million deaths are a statistic’ – Joseph Stalin – Boy did he get his statistics up
- But without perspective and gratitude we forget how great we have it – I like Australia and I love living here.
- We will likely repeat the same mistakes by changing something that has been proven to work well
It’s not your fault – the media spends more time on doing hit pieces, or covering who wore it best, than reporting actual events
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So, it’s hard to get the information – therefore I want to provide some history that you might not have been exposed to in the past
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I want to spend a few Furious Friday Episodes to go through events that seem to reoccur in societies – time and time again - awful event in history of Marxism being implemented that you might not know about
- Think 7 Million starving under Stalin is bad? Well, try the 38 million which died under Mao’s Great Leap Forward in Communist China under economic reform
- Monday and Wednesday episodes will be as normal - Next Friday we start with the man himself – Mr ‘Silver Spoon’ Karl Marx
Thanks for listening – If you couldn’t tell, getting this information out there is something that I think is important – hope you can get some info out of it to make informed decisions – If you can this with your friends – We really do have it good, let’s keep it that way
Today’s Say What Wednesday question is from Linus. Linus asks, ‘I was just wondering what you think the ideal weighting of Australian (ASX200) ETFs, similar international ETFs and Bonds is in an investment portfolio? Love the show, thanks.’
There’re a few things to cover off here!
The ideal weighting of Asset allocations; that is, how much you have allocated to Australian Shares, to International shares, to Bonds, etc.
To determine the ideal weighting there are 3 questions that need to be asked:
- What is the purpose of the investment portfolio? What are you trying to achieve?
- Long term growth – Trying to maximise the balance
- Short term stability – Well diversified portfolio with low exposure to growth
- Drawing an income or reinvesting – which determines the type of investment held
- How much time do you have?
- Longer timeframes allow for more planning and take advantage of long term growth
- How much risk do you need?
- Returns come in two parts = Income + Growth
- If there is growth in the equation, the investment can lose value – this is where risk comes in.
But, it can also help long term.
Portfolio construction – What you need to know
- Which asset classes you need?
- How much should you allocate to each of these asset classes?
- Which investments should you choose within each asset class?
No. 1. Asset Classes
Selecting the correct mix of Income and Growth
- Five main asset classes – the core to most portfolios (doesn’t include direct property)
- Each has their own purpose
- For example, if you need to draw a consistent income, you won’t want much volatility
- Defensive (No growth) – Low chance of capital loss, don’t increase or decrease in value over time
- Cash – earns interest
- Fixed Interest – receives coupon payments (receive the Face Value back at the maturity)
- Growth – Has chance of capital loss (riskier)
- Australian Shares – Dividends and Price gains (generally higher dividends than International shares)
- International Shares – Dividends and Price gains
- Listed Property and Infrastructure – Dividends and Price gains
No.2 Risk profile
To determine the allocation to each class, you need to determine your capacity to deal with risk.
The traditional way - Risk Profiles (which provides an outline but is not a perfect science). These help to get an idea about how much growth is acceptable.
- High Growth – 100% to Growth investments like shares and property – Longer term 8+ years
- Growth – 80% to growth – Longer Term – 7+ years
- Cash, Fixed Interest of 20%
- Balanced – 65% to growth – Min timeframe of about 6 years
- Cash, Fixed Interest of 35%
- Conservative – 50% growth
- Cash, Fixed Interest of 50%
- Defensive – 30% growth – Good to minimise volatility, shorter term investments or those from which you’re drawing an income
- Cash, Fixed Interest of 70%
No.3 Selecting the investments within each asset class
- Defensive
Generally for either income or capital protection- Cash – How much income do you need? Do you have a need for reserves?
- Fixed Interest – Australian or International. Credit, Alternatives, or Bonds
- Higher risk (e.g. Corporate debt) - higher yields
- Growth
- Australian Shares – Market caps – Selecting a good weighting between asset classes
- ASX200 – Large Cap allocation
- Small cap ETFs – Issue is when they are passive
- International Shares – different countries and market cap
- Australian Shares – Market caps – Selecting a good weighting between asset classes
Balancing your desired return with how much risk (volatility) you can afford
- Risk - Volatility - Potential movements in price around a mean average
- High potential for movements, considered higher risk
- Speculative risk - Can become absolute risk (i.e. losing everything) but can be avoided through proper diversification (which is the whole point of asset allocation)
- Returns - The higher the levels of volatility, the higher the expected return should be
- Risk-return relationship – Less invested in assets that can lose value, lower the allocation to assets that don’t grow in value
- If something can’t gain value, it is harder for it to lose value
Back to Linus’ question: Ideal Weighting / Perfect allocation
- What is the purpose, timeframe and return needed?
- Example #1 – purpose is to invest for the long term to maximise wealth, investing every few months
- You are tolerant to risk (not spooked out by volatility) and have about 20+ years to invest, plus you’re going to make ongoing investments
- Allocation – Growth to high growth may be appropriate. For example, 0-20% Fixed interest (cash can be minimised)
- Allocation: 20% to FI, 20% to LargeCap Aus shares, 10% to MidCap Aus shares, 10% to Smallcap Aus shares, 20% to LargeCap International shares, 10% to Emerging Market International shares, 10% to Infrastructure
- What this is looking to achieve – Large long-term returns, leverage volatility to take advantage of ongoing investments, have best chance of maximising the balance
- Example #1 – purpose is to invest for the long term to maximise wealth, investing every few months
- Example #2 – Purpose is to invest to generate a passive income with minimal volatility
- Pretty scared about volatility, you want to achieve a better income return than your cash, but don’t want to see portfolio drop more than 15%
- Allocation – Conservative – Over 50% Defensive (depending on timeframes)
- Allocation: 20% to Aus Fixed Interest, 30% to Int Fixed Interest, 15% cash, 30% to Aus shares – mostly large cap, 15% to International shares – again, mostly large cap
- What this is looking to achieve – Greater return than cash, likely to not drop below 15% loss overall
Conclusion – First just ask what the purpose of the investment is
- What you will need out of the investment?
- Growth, stability, income? – Determines the Income/Growth Relationship
- What investment mix will achieve this? i.e. how much to growth or defensive (Risk profiles)
- Long term high growth – Greater amounts to growth investments
- Capital stability – More in to investments that don’t lose much in value historically
- What allocation within each asset class is needed?
- Fixed Interest – High yield or safe AAA rated bonds
- Shares – Emerging markets or allocation to smaller cap allocations
- Does this suit my risk tolerance?
- Yes – Good allocation
- No – Do I need to accept the additional risk? There’s more than one way to skin a cat
Thanks for the question Linus!
To ask a question head to https://financeandfury.com.au/contact/
To start today’s episode, I want you to think about if there is something that you keep putting off. A nagging little task, like paying a bill, lodging a tax return, doing a budget and so on.
Does this cause you stress? Little things in the back of your mind actually tend to build up over time, taking up your brain function bandwidth. When you actually get around to doing it though, it’s never as bad as what we think. We build things up to be a big problem in our minds, but they really aren’t. Once it’s done it wasn’t as bad as we thought.
Today we are going to talk about financial stress, and what can be done to avoid it and prosper.
Financial stress is a major issue for many Australians – We worry about money more than anything
The Australian Psychology Society- research shows financial issues are the leading cause of stress - Stress and well being in Australia Survey (2015)
- Financial issues - leading causes of stress (49 per cent in past five years)
- Others items included: family issues (45%), health issues (44%), workplace issues (32%).
What causes financial stress
- Causes - really comes down to one thing: not being able to pay the bills.
- People tend to spend what they earn, or more than what they earn
- Maintaining a lifestyle – Debt or pay cheque to pay cheque
- Uncertainty – Not having enough to cover what we spend
- Financial Stress – The definition
- Struggles of meeting day to day costs – Bills, utilities, rent, mortgage
- Worries about upcoming costs – next week’s bills or upcoming expenses
- Anyone can feel it - Even high-income earners can suffer from financial stress
- Stress arises when they spend their money on discretionary items
Stress – Why is it bad?
- Impacts health – Cortisol and bad habits to cope
- Cortisol (Hormone) – Created when under stress as one of the body’s short-term coping responses
- But when you are always under stress it isn’t good – decreased immune system, depression, weight gain, weakness/fatigue
- Over eating to deal with stress – Dopamine release to get some feeling of achievement
- Cortisol (Hormone) – Created when under stress as one of the body’s short-term coping responses
- Impacts our relationships
- Shorter fuse and more conflict, which creates additional stress
- Lack of sleep – Of those who are financially stressed, 7 in 10 people lose sleep over about it (compared to 1 in 10 for non-stressed)
- Compounds the issue – A study found that financially stressed people drink more, sleep less, have worse mental and physical health, and more conflicts in relationships
- Compounding Effects
- Decreases ability to make decisions – Can lead to worse financial decisions
- Bandwidth – Additional stress reduces ability for other tasks
- Ever had something on your mind (breakup or another stressful event). How well can you concentrate on what you need to do?
- This compounds the financial issues, like getting into more debt due to coping behaviours which aren’t helpful
- Drugs/alcohol – CoreData: Financial Mindfulnessin 2017– 35.2% people are likely to use alcohol/drugs to manage negative feelings
- Those not financially stressed – 2%
- Continue spending
- Spending more gives a good feeling, and helps to ignore the negative feelings
- Makes it all worse – If you are in a hole, stop digging, digging ‘up’ doesn’t help
- Drugs/alcohol – CoreData: Financial Mindfulnessin 2017– 35.2% people are likely to use alcohol/drugs to manage negative feelings
What are the elements that help?
Regaining control
- Finances shouldn’t control you – Get the finance monkey on your back
- Having control/certainty reduces stress – Knowing what you are in for helps, but being able to control it works better
- Tail wagging the dog – Financially stressed people spend to feel better
- Have $10k in CC debt, so spend $300 on a night out to make it better – spending gives control
- But, you can get control over the debt – forming good habits and increase certainty
Ways to solve these issues
Three time frames to focus on; Now, medium term and longer term
- Build the basics now - Short term
- What you can do right now – gaining control immediately
- Get disciplined – Stress comes from the unknown –
- Get a budget – Get to know what you are spending, and when you are spending it
- Set aside money to cover this – Aim to have your own left over as well
- Make it a habit –
- Direct debits - Once you know your costs and incomes, you can pre-plan. You can “set and forget” to remove the stress
- Get apps to track it for you
- Very simple to do – yet it can be a very harsh reality – ‘hard truth’
- Example - Once you are covering your bills with ease, start managing your money to get ahead…and ready for next stage
- Medium term –
- Once you are feeling less stressed you’ll be feeling more in control you can plan for the future
- Start planning! Savings targets to be achieved need longer term planning
- You need to have covered the basics before moving on to stage two
- Examples – Wants: Holidays, new cars, home deposits
- Long term
- Start Investing – Long term goals normally include having debt paid off or generating a passive income
- Long term goal of reducing financial stress for your future.
Why are all three important?
- The long term will become the short term if you aren’t careful
- Short term - Stress occurring now – Meeting the bills day to day (ultimate stress and priority)
- Stress that will occur in a few years – May not be at the front of mind, but it will be when it comes time that you need a new car
- Stress that will occur at retirement – One of the long-term consequences of not planning is having stress for the rest of your life financially
- Get to 65 and not have enough to live off – it might feel like a long time away, but if you get there and don’t have enough, well, you’re are back to the short term financial stress
Summary
- Financial stress can be solved – Takes some additional stress (potentially) at first
- Work on the short term – It will feel good once you are in front again
- Those positive results will compound to your personally and financially
Welcome to Finance and Fury, Furious Friday!
I saw an ad this week for a movie called ’Wizard of Lies’ – Bernie Madoff movie – 2008.
He was a stockbroker, investment adviser and financier who made headlines around the world when he was arrested for one of the largest accounts of financial fraud in U.S. history. What he was operating was known as a Ponzi Scheme (named after Charles Ponzi, who became notorious for using the technique in the 1920s)
For those who aren’t aware the definition of a Ponzi scheme is a form of fraud marketed as an investment – the usually have high, guaranteed returns – “too good to be true”
- Fraud - a thing intended to deceive others through wrongful or criminal deception intended to result in financial or personal gain.
- The success is reliant on new inflows from investors, as that is where returns come from.
- In other words: A Ponzi scheme is a system where the investor thinks their money is invested in something which is generating the returns, but are actually just used to pay other investors
- When the scheme runs out of new investors it then collapses – it’s doomed to fail
- The Ponzi scheme generates returns for older investors by acquiring new investors
Warning signs of a Ponzi scheme
- High investment returns with little or no risk. Be highly suspicious of any "guaranteed" investment opportunity
- Overly consistent returns. Investment values tend to go up and down over time, especially those offering potentially high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions
- Unregistered investments. Ponzi schemes typically involve investments that have not been registered with regulators. Registration – this provides investors with access to information about the company's management, products, services, and finances.
- Unlicensed sellers. Federal and state securities laws require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
- Secretive and/or complex strategies. Avoiding investments that you do not understand, or for which you cannot get complete information, is a good rule of thumb.
- Difficulty receiving payments.
Ponzi scheme - People think they’re investing in something, but their money is actually being invested in nothing.
- This is why a Ponzi scheme is Fraud: Act of deceiving others for financial gain
- The only winner is the one who runs the scheme
Why have I been jabbering on about this? I was thinking that social security has a lot of similar characteristics
Is social security a Ponzi scheme?
First – we need to look at social security
- Social security is ‘any government system that provides monetary assistance to people’
- Social security is enshrined in Article 22 of the Universal Declaration of Human Rights (UDHR) – Adopted by UN General Assembly in 1948:
- Consists of 30 articles affirming individual's rights
- It’s not legally binding but sets guidelines for countries to follow
- Expenditure includes a range of payments and services:
- Income support payments such as pensions and allowances (Age pension, Newstart, Veterans)
- Family Payments, paid parental leave, child care fee assistance
- Funding for aged care services and disability funding
- Put simply: Social Security is a transfer payment - transferring income from one person to another
- Transferred from: The younger working individuals (generation of workers)
- Transferred to: those who have ceased work - generation of retirees
How does this compare with a Ponzi scheme?
- Current Welfare Payments in Australia - $164bn p.a. now and looking to reach $191.8 billion in 2019–20.
- Income tax levied total is $390m, MTRs, payroll taxes, GST others
- Of this, $195bn is from individuals
- 84% of income tax paid goes to pay for social security
- The scheme – Payments (returns) are reliant on new money coming in.
Warning signs
- High investment returns with little or no risk -"guaranteed" opportunity
- For any return, some risk needs to be present
- The risk here: As long as taxpayers still are around it will be fine – 84% of income tax paid goes to paying Government benefits.
- Overly consistent returns – payments go up in large consistent annual growth
- Refer to previous – tax payer reliant – As long as the income tax increases over time, welfare can continue
- Unregistered and Unlicensed investments.
- No Regulation over the regulators - Registration is important because it provides investors with access to key information – how much do we get?
- There is nowhere near the level of reporting regulation imposed on CBA for example. That is, we have a good idea about the financials of CBA – We have a choice, so they need to be transparent…and it’s in their best interest to show off as well. When there is no competition or if you aren’t doing what you say, less transparency works best.
- Let’s use tax savings for example – When the government forecasts tax revenue based on policy changes, it is wishful thinking at best.
- Example – Make $10bn from franking credit removal – Assumes behaviours would stay the same. Would investors value dividends as much if they got rid of franking credits? If not, companies will change their dividend model and reinvest (high value to shareholders) – Like in the US where there are no Franking Credits
- Secretive and complex strategies
- Who pays attention to the bills being passed in parliament? More time is spent in the news on stories that sell
- Technically you don’t get a say either – we elect people to represent us – but no communication on policy
- Difficulty receiving payments – If you qualify you will get a payment, but…
- It won’t be the money you have put in, that has gone to someone else already.
- What you are getting is someone else’s contributions. The new money funding the returns of the older investors!
Warning signs add up, but technically not fraud
- There is the promise that when current workers retire, there will be another generation of workers behind them who will be the source of their Social Security retirement payments
- Can this last? Given its size, the welfare budget is often a target for savings measures, particularly in the face of budget deficits.
- Government website quote: “It will be difficult to achieve significant savings without looking at addressing spending in these areas, particularly the largest component: The Age Pension.”
- Risen from $100bn in 1998 to $164bn in 2017, $192bn in 2020 – which is an increase of about $10bn p.a. for the next 3 years
- “It is unsound” (Samuelson - Nobel Prize in economics) - Those who receive retirement benefits are actually receiving amounts that far exceed anything paid in by 5 to 10 times on average
- It relies on having new tax payers for the inflows to be sustainable
- Need to always have more youths than old folks in a growing population.
- Real income going up at 3% per year (compounding) then the taxable base on which benefits rest is always much greater than the taxes paid by those receiving the benefits, and there is no issue…just as long as the real income, population and tax base keeps on increasing
This may be a great Ponzi scheme ever… as long as the population (or tax base) continues to increase.
- But what happens when populations cease growing?
- Through history – People used to have a lot of kids, why?
- No mechanisms to save, which is how you prepare for retirement
- No Age Pension (Introduced in 1904 when average life expectancy was 63, age pension eligibility was 65)
- The funding mechanism was children – Better be good to them and have plenty to share the load
- Through history – People used to have a lot of kids, why?
- Why else did people use to have 6 kids? Infant mortality used to be 50% for one. But they had their retirement funding covered. Why do we see high birth rates in nations that don’t have the same privileges we do in the west?
- Small Problem – Used to live shorter lives, and there used to be higher birth rates (future people to tax)
- 1960 – Birth Rate per woman 3.45 – Average life expectancy 70.82 (Baby Boomer Generation being born)
- 1978 – Birth rate dropped below 1.95 – Average life expectancy 73.67
- 2018 – Birth rate hasn’t gone above 2 – Currently 1.83 – Life expectancy 82.45 (longer for woman)
- Birth rate of 2 would mean we are staying the same (less than 2 the population is declining, more than 2 the population is increasing). That is, you need 2 new people to replace mum and dad. But a lot has changed – contraceptives for example, as well as the need to have children reduced due to having social security.
Over the long term it’s uncertain that there is going to be enough of a population to tax at the appropriate level to fund required social security. As life expectancy goes up there are more people around that will rely on benefits.
Don’t fear though – While there is uncertainty, you can remove this by having a plan in place
- Nothing is impossible – Some systems do collapse
- When a reliance on a system is introduced
- Rather than being reliant on the system, reduce any uncertainty by working out what you’ll need and when you’ll need it by
What you can do:
- Invest for yourself –
- Super – Path of least resistance – Check a super fund calculator – Simple projection to see if you will have enough
- Personal investments – come up with a plan outside of super – Property/shares/managed funds
- Be self-sufficient in retirement, this removes the risk.
- When the success of payments is reliant on others, you have no control – Financial independence is the aim after all
- Being on the Age Pension isn’t fun – Centrelink want to know everything about you (updates)
- Get a plan and just start – Gaining back control
Thanks for listening!
Today’s question comes from Richie, who asks, “Have you been following the Bitcoin ETF at all? If so, are you able to do an episode on this and if it is worth looking into?”
Thanks for the question, Richie…and yes in fact I actually have been following it. I noticed that the price jumped up about 20% on the news that the SEC in the US was considering allowing ETFs for Bitcoin.
Crypto currency fascinates me, but not as an investment option. That is, I like the technology but haven’t bought any as an investment option. To start with why, I want to break down the ‘currency’ part in crypto currency –
Currency is money: Comparing Bitcoin to money
- Functions of money
- Unit of account – Divisible, identifiable amounts
- Medium of Exchange – Can you use it for transactions for the purchase of goods and services
- Store of value – Is worth something now and will be in 10 years (food isn’t a good currency long term). Can I hold onto this to be able to exchange it in the future?
- Characteristics of money fall under this
- Durability – Want money to last
- Portability – Need to be able to take it with you
- Divisibility – Units to break it down into – or have many 1s
- Uniformity – Same consistency – Helps avoid risk/time/effort in barter
- Limited supply – Needs to store value – Endless supply devalues
- Acceptability – Widespread use and people want to take it – this isn’t the case when there’s hyperinflation
How does crypto fall into this? Crypto currency is a decentralized monetary system
- There is no central authority that regulates the monetary base.
- Currency is created by the nodes of a peer-to-peer network.
- The algorithm that generates Bitcoin defines how and when the currency is created (methods and timeframes)
- Currency can be generated by malicious users (does not follow the rules) but will be rejected by the network and thus is worthless – this does affects the Spendable Supply
How does bitcoin fair?
- Unit of account – yes
- Has divisibility
- Uniform as well
- Medium of exchange - Transactional
- Portability - Bitcoin whitepaper makes it clear that it will be one day: A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. — Satoshi
- To be unit of transaction, need available supply - people holding it though (54% are holding for longer than 3 years)
- Acceptability – Wider spread acceptance – not 100%
- Store of value – Price isn’t value – Fiat (current system isn’t great)
- Volatile and inconsistent without any underlying value
- Limited supply – Not really
- Durability – as long as computers last
- Another comparison – Time people expect to hold it – good measure of investment or medium of exchange
- Shows that Bitcoin is seen as an investment
- 12% think longer than 10 years, 10% for 7 to 10 years, 46% expect up to 3 years
- It doesn’t look so compelling as a medium of exchange
- Shows that Bitcoin is seen as an investment
How will the ETF pan out? - History of bitcoin
- Back in the early days: Bitcoin was flat for a long time.
- What causes price rises? People buying bitcoin. The price spiked when then even more people bought it – which seems super obvious
- This also comes back to Supply and Demand – and there was high demand while supply was only slowly increasing.
- What caused the sudden rise in demand?
- Technology making it easier - Buying Bitcoin 2009 was almost impossible unless you had computer smarts
- March 2010 – Price of $0.003 – Someone auctioned 10k bitcoin for $50 ($111m today) – Was $240m at the peak – Stories like this increased the hype/demand for coins – But the technology barrier stemmed a lot of demand potential
- Now – Currency trading platforms do it for you - Very simple – Almost like buying foreign currency – Massive spike in buyers
- New regulation being discussed – Bitcoin Exchange Traded Fund
What will the ETF achieve?
- The ETF will simply help to increase demand in bitcoin - as people buy the ETF, the ETF needs to buy the bitcoin
- ETF – Success depends on underlying assets – NTA
- Remember you are really buying the underlying asset when buying an ETF
- Designed to track the yield and returns of the benchmark
- ETFs are an easier way to buy Bitcoin – but may not be the best for the future
- It solidifies it as an investment
- Reduces the quality of the currency as you technically cannot trade the ETF for something else - This diminishes the medium of exchange potentials for Bitcoin
Market state
- Supply - Bitcoin is capped at 21M total circulating supply.
- Current: 17.2 million mined coins (but 4M BTC lost or dormant) = 13.2M available to trade
- How is supply created – mining increases the overall supply
- This can be manipulated – bitcoins can be lost/destroyed
I like the concept of it: What I like
- Supply – Supply is capped, but only due to the programming
- Alternatives (substitutes) are available
- Example – The Gold Standard – Capped Supply, until more was mined (Ever wonder why increasing supply in crypto is dubbed ‘mining’?). But gold has no close substitutions in terms of the qualities it has
- Crypto has alternatives (sometimes better) – increases speculation
- Blockchain technology – Digital credit for transactions
- (Avoided) taxation – The Governments are wising up now with reporting requirements
- Business accepting bitcoin may be charged CGT on payments
- (Avoided) taxation – The Governments are wising up now with reporting requirements
What isn’t working so far in terms of Bitcoin becoming a true currency
- Medium of exchange – Currently being tested
- Acceptability – Wide spread use
- Available supply (Unlike fiat where more can be created when some is lost)
- Store of value
- Volatility – Can be a risk to transact in
- Supply – Can be manipulated, alternatives are available
- Nothing backing the underlying asset –– fiat has the law to fund their monetary system
- At lease it is guaranteed unlike with crypto
- Gold was the old way to avoid excess monetary inflation
For now:
- Crypto remains as a ‘canary down the coal mine’ for the future of decentralised monetary systems
- I like the concept of decentralised
- No one person has much control
- Value comes from the network of people using it
- One problem – the statement ‘decentralised currency isn’t controlled by any bank or Government’ seems to not be certain
- James Garfield (US president) - He who controls the money supply of a nation controls the nation
- Purchasing crypto is anonymous, and whoever owns the asset technically is the controller
- The market cap is $140bn - China had $3.1trillion sitting in foreign reserve account
- No idea what the future holds on this
- Will spend an episode in the future - Feel like I’m just scratching the surface on this subject of the mechanics of crypto, supply and demand etc
- Are they created to act only as speculative investments, or are they evolving?
- ETF – Increase access to BTC – Likely increase demand of it, while potentially reducing supply
- Note – That it doesn’t mean that fundamentals of it are any better
Thanks for the question Richie, and thanks all for listening!
Today’s episode stems from the question last week from William about investment bonds (an investment vehicle, kinda like a life insurance product). Today however, we’re talking about the asset class of Bonds
What are bonds?
- A bond is a debt instrument - a form of lending.
- Part of the ‘Fixed Interest’ asset class (ever seen a multi sector asset allocation, like inside a Super Fund)
- Financial Product designed to raise money for the entity that issues the bond
- I liken it to an interest only loan – If you need money, you borrow it (like a mortgage) which you pay back along with interest too.
- When a company or the Government needs money, someone (you) purchase that bond – Essentially loaning money to the issuer who then pays you interest (coupons)
- At the Bond Maturity – you get the initial loan back (unlike a PI loan)
Basic Terms
- Face value: This is the nominal value of the bond, typically $100. It also refers to the principal lent to the bond issuer which they commit to repay to investors when the bond matures.
- NOTE: This is not the price – but we’ll come back to this a bit later
- Coupon rate: The annual interest paid to the investor and is calculated as a percentage of the face value.
- 5% Rate = $5 p.a. on a $100 FV bond, or $50 on a $1,000 FV bond
- 6% rate = $2.6 on a $100FV
- Maturity date: This is the date the bonds effectively expires and final payments are made to investors. These payments include the initial loan and the final coupon
Types of Bonds
– Who needs to raise money?
- Government
- 1988 to 2008: $50-100bn on issue
- Since 2008 has risen - $500bn
- Corporate – Since 2000 gone crazy - $200bn to $1.1 trillion
- Total Market Size = $1.8 trillion – About the size of the ASX300 on any given day
Designed to be a defensive asset
Due to the fixed rate nature of a bond and lower level of risk they carry in general, bonds are considered a defensive asset.
- They are debt – but creditors are paid back before equity holders
- If a company defaults they will pay back the debt holders first before share holders
- The Risks - risk does lie is in the chance of the bond issuer defaulting on the loan
- The levels of risk vary – e.g. The Australian Government is safer than a small mining company
- Typically, government is considered safe compared to corporate
- Unless government is Greece and are at risk of defaulting on debt
Where the bond is being bought is also a factor.
That is, the Primary or Secondary market
- Primary - Buying bond directly from issuer - When a bond is first issued you can purchase it directly from the company
- Price here will be the Face Value e.g. $100 FV = $100 price
- Secondary - afterwards, they are listed on the secondary market where investors can buy and sell their bonds.
- Price – Remember the Face Value, it is not the price once it has been listed on the secondary market
- Face value of a bond remains fixed for its lifetime
- Price/value of the bond fluctuates due to changes in market conditions, particularly changes in interest rates
Mechanics
- Interest rates – Given that bonds are debt, they are related in pricing to interest rates
- Interest rates rise – Bond price goes down
- Interest rates fall – Bond price goes up
- Negative correlation with Interest rates
- Example:
- FV of $100 on a bond
- Bond has a coupon rate of 5% and the interest rate in the economy is 5%
- The Price = Face Value at $100 – That is due to interest and coupon being the same
- Falling interest – Interest rates go to 3% - Bond price might go to $108 from $100
- Bond is more attractive now – Better coupon than cash – the value of it is better now
- Rising interest – Interest rates go to 7% - Bond price might be $92 from $100
- The bond will be less attractive as it is slightly riskier than cash, so the price will go down as why by a bond when you can get 2% extra in cash?
How much will the price change when interest rates change?
This is based on Duration:
- How sensitive a bond will be to interest rate changes? Measured by technical term called duration – slightly confusing as it is based around time to maturity, but isn’t the only factor:
- The duration is based on the time until maturity – Longer duration more sensitive to changes in price
- Rough rule of thumb – Per number in the duration = 1% interest change = 1% price change
- Duration of 5 = 5% price change for every 1% interest rate change
- Duration of 20 = 20% change in price
- When is higher duration better?
- When interest rates are expected to drop – As the rise in bond prices will be greater
- Long duration bonds are typically shunned if rates are going to rise
Where Bonds Fit in?
- Typically form a defensive component of a portfolio
- Depending on tolerance to risk (Volatility) – They can be good
- Uncorrelated asset – Performs in opposite direction to shares/property
- Shares Crash (2008) then bonds typically rise
The negative aspects of bonds
- No growth to offset inflation
- Can get inflation linked bonds – But they still may fail outpace the traditional growth investments over the long term
- AUD gov bonds pay about a 2.6% yield – almost the same as term deposit rates
- 30-year bond – Face value of $100 in 30 years is worth about $48 with inflation of 2.5%.
Summary
- Bonds are a debt instrument (Fixed Interest)
- Defensive – or as defensive as who issues them
- Buy someone’s debt and get interest (called coupon payments) for loaning them money
- They have their time and place – Stable income returners, provide capital protection
Welcome to Finance and Fury! The main aim of our Furious Friday editions is to clear up misconceptions. We’ve been seeing a lot of news stories lately about companies underpaying staff – 7-Eleven, hospitality businesses, celebrity chefs etc.
The incidence of this has risen over the past few years – why can’t these people just pay the legal wage?
This episode may be a bit upsetting depending on what side of the coin you’re looking at…we’re talking about wage controls, that is, Minimum Wages. Are they good or bad?
What are minimum wage laws?
Regulation/body of law which prohibits employers from hiring employees for less than a given wage
Australian History
- Basic Wage since 1907, which wasn’t quite as strict as what it is now. More of a prescription, or suggestion, rather than enforced legislation.
- 14 December 2005, the Australian Fair Pay Commissionwas established
- The Australian Fair Pay Commission was replaced by Fair Work Australiain 2010, and since then there’s been a significant rise in the minimum wage level.
- Base rates
- October 2007 - $13.74 per hour
- 1 July 2018 - $18.93 per hour
- Casual rates get an additional 25% loading
- GRAPH: Wages normalised to 2018 value
So, is this good or bad? – There’s always two sides to every coin
- The minimum wage law does not create any new jobs.
- Prohibits employment relationships that offer wages within a certain prescribed range (low paying jobs, for instance) – sounds awful to say but some jobs are worth $18.93 per hour
- This prohibits employers and employees deciding between them as to what the pay rate should be
- Employment is mobile – people in high demand are headhunted for higher wages
- Commentators argued - contrary to prevailing economic theory, minimum wages increase overall employment
- Money in pockets of workers flowing to greater spending in economy
- Greater demand for goods and services, therefore there should be more employment to meet this demand….
- But what about supply? That may have the opposite effect, as labour costs go up
- Less potential labour used
- And/or, as costs go up, so do prices
Let’s unpack this by looking at the two sides; Employees (those who are getting paid), and Employers (those who are doing the paying)
Employees - The effects: What happens when minimum wages are introduced
- For existing employees
- The employer decides to either raise wages, or to terminate the employment
- It’s easier to raise the wage, as it is actually quite costly to terminate in Australia
- So, it’s good for existing employees
- What about Future employees
- Creates productivity bar (employers need to make sure that employees are worth it)
- This is an issue for two groups of employees – Young market entries, lower skilled positions who are priced out of a lot of roles in the economy.
The productivity bar: You need to get what you pay for
The prerequisites for employment increases – how is this measured? By a piece of paper, known as a Degree.
But when everyone has something, it becomes less valuable – this is the same with education and means a devaluation of education in the long term.
- Higher wages increase need for competition in your skills (or perceived skills)
- Not everyone can be employed – if an employer has $60,000 for wages the want to make sure they get the most qualified person that amount.
- Need to get a degree for what used to be an entry level position without one
- 2011 to 2016 saw massive jump in education levels
- Grad Diplomas (28%)
- Bachelor degrees (24%)
- Biggest increase is in post grad degrees (46%) – It seems bachelor degrees are now the new high school diplomas
- But if there is no employment that matches your degree – you feel like doing something else is beneath you
- My example: Studied for 5.5 years – being naive, I thought this put me above the curve. After searching around, I came to realise that I was still entry level. So, I started on $50,000 – working about 60-70 hours a week - $14.88 per hour
- Some other examples, like some of my friends: Grads in Law and Audit - $40-50k as well and working similar hours
- This is where those who are young, without degrees, will struggle to find work.
- Skipping back 20-30 years ago these entry level positions didn’t require you to have a degree.
What the stats say - Employment levels
Lot of studies find that minimum wages are statistically insignificant regarding their effect on employment overall – that is, they don’t create much of a change.
This is true when you look at it in aggregate. As we just touched on, it’s hard to fire existing employees when minimum wages go up. But…
- The employment rate only factors in those who are looking for work
- Those who can’t get a job in the existing job market and so stop looking for one, are no longer are counted as unemployed
- Underemployment – Those who are employed, but can’t get enough work – are still counted as employed
- Employers cut their hours
- Unemployment rate around 5.4% - Includes those actively looking for work
- Underutilisation rate includes underemployment – 13.7%
- Including unemployment = 20%
- For example: US Gas crisis – price control/ceiling on petrol – almost the same amount of gas was sold, but the number of hours that service stations were open decreased, from around 100 hours per week to 20 hours.
Employers - Factors
- Costs (Labour)
- Break even costs – Some jobs aren’t profitable to employ people in now
- Higher wages – costs go up for production of goods, which gets passed onto consumers and negates the overall rise in wages. How? Price increase in what we buy!
- Industries, like manufacturing, then go offshore (drop of 24% in manufacturing jobs over 2011 to 2016)
- Index points, as far as labour costs go, steadily increased from 45 in 1988 to 100 in 2010
- Since 2010 it has been flat – Labour costs have normalised – Forced to pay salary – so not much voluntary increase since then
- But the costs still go up – People from overseas think Australia is expensive, and it is!
- Show me a country with high wages and low costs of living and I’ll be very surprised. The two are very closely related.
- Productivity and the ways that businesses actually operate
- The switch to “capital intensive” over “labour intensive” goods. Hence, the drop-in manufacturing
- There is a lot of the talk is about how technology is replacing human capital – which happens when it costs too much. Minimum wages speed up the process.
Summary:
Overall, the jury is out on the effects of minimum wages - however there is consensus for the young or lower skilled:
- Thomas Sowell - argues that this policy hurts those who it is designed to help the most – lower entry workers
-
Evidence shows that the overall unemployment level is often unaffected, people employed in low-skill and low-paying positions experience greater adverse effects
- OECD study also said the results of its research suggested that a rise in the minimum wage had a negative effect on teenage employment.
- Many European economies introducing or increasing the minimum wage have experienced increased unemployment in low-skill, low-pay positions
- Andrew Leigh - historical employment data on increases in the minimum wage in WA, relative to employment in the rest of Australia.
- found that increases in the minimum wage in WA were followed by reductions in employment
- most pronounced among young people, where the minimum wage had a large effect on labour demand.
-
The results of this research found a consistent negative relationship between the minimum wage and labour demand (i.e., when the former is increased, the latter decreases).
- Add to the cost of living increasing – These policies sound nice in theory but…
- No-one wants to see people struggling.
- But imagine that the Government forced a wage for one role of $1M compared to $25,000 previously
- That is 40 less people employed, but costs are still going up for the production/employment
- A lot of younger Australians spend 3 or 4 years to get a degree, get out of uni with $40k in debt, just to get into the workforce. In this way there may be some additional harm being done
Thanks for listening!
Welcome to Finance and Fury’s ‘Say What Wednesday’ where we answer your questions on personal finance. Today’s question today comes from William who asked us to do an episode on Investment Bonds.
Investment bonds - What are they?
- Investment vehicle - Not to be confused with bonds which are a (Debt instrument) investment (just in case the question was asking to cover these, I’ll do another episode on these too)
- An investment bond is technically a life insurance policy
- Nominate a beneficiary
- It is a long-term investment with features similar to a managed fund
- money is pooled with money from other investors and invested
- Designed to be held for at least 10 years
- Types
- Traditional Investment Bonds – what we will focus on in this episode. There are also,
- Education Bonds, and
- Funeral Plan bonds
Tax Treatments
- Tax effective for individuals with higher Marginal Tax Rates
- Internal Tax of 30% - Tax paid at company rate by the insurance company
- Net income reinvested
- If no withdrawals are made in the first 10 years earnings will be tax free
Investment options
- Investment options such as cash, fixed interest, shares, property, infrastructure or a range of diversified investment options
- Risks range from low to high – Depending on the requirement and timeframes, different investments will be better serving your situation
Withdrawals
- You can withdraw money at any time, BUT it comes at a cost
- If you withdraw before 10 years, tax may be payable
- <8 years: 100% of the earnings on the investment bond are included in your assessable income and a 30% tax offset applies
- 9th year: 2/3 of earnings on the investment are included in your assessable income and a 30% tax offset applies
- 10th year: 1/3 of earnings on the investment are included in your assessable income and a 30% tax offset applies
- After 10 year: All earnings on the investment are tax free and do not need to be included in your assessable income
- The 30% offset is due to the company already paying tax.
Investment Bondage Bonds 😉 ...There are strict, strict, rules and you really are tied up;
- 10-year rule - If you need to withdraw some of your money before the 10-year period is reached some of the tax benefits will be lost
- If you hold the bond for at least 10 years the returns on the entire investment, including additional contributions made, will be tax free subject to the 125% rule.
- 125% rule – You can make additional contributions each year of any amount up to 125% maximum
- i.e. $1,000 year 1, $1,250 year 2, $1,562.5 year 3
- These are still treated as initial contributions – Allows each contribution to receive full tax benefits after 10 years
- But don’t exceed 125% of previous year’s contributions – Otherwise your 10-year period restarts
- Also, don’t forget to make a payment. 125% of $0 is still $0. If you miss one year’s payments you wont be able to contribute anything further in the future – and if you do it will start the 10-year period again.
The Pros:
- Can be a tax effective long-term investment
-
- Follow the 10-year rule and 125% rule
- Can be an effective way to save for a child's future.
-
- Especially with Education bonds which are similar. You can only use these funds for education but there is no “125% rule”
- Can be used as an estate planning tool
-
- Beneficiary benefits received tax free
- Alternative to super caps
-
- $1.6m in pension (tax free) – Start planning out from retirement > 10 years
- Investments are not normally subject to capital gains tax due to ongoing tax treatment
The Cons:
- The costs - You will pay fees, and they are fairly costly
-
- Investment options – MERs are higher up to around 1-2%
- Investment bond – admin fees of around 0.6%
- To make it tax effective, it is locked away
- Limited investment options – Multi managed and often limited to the company offering the bond.
-
- Also, lower levels of transparency due to the pooled nature of investments
In Summary: You need to think about some things to determine if investment bonds are right for you
- Are you in it for the long haul? - The tax benefits from investment bonds are only realised if no withdrawals are made for 10 years and you comply with the 125% rule.
- Are you able to make regular contributions? - These investments are particularly tax effective for people who make regular contributions over the life of the investment.
- What investment options are available? - It is important to choose a product that offers investment options that are aligned with your risk tolerance and investment goals.
- What are the fees on the investment bond? - Common fees you may pay include establishment fees, contribution fees, withdrawal fees, management fees, switching fees and adviser service fees. Shop around and compare the fees to similar products in the market.
- Are you using the product for estate planning purposes? - Make sure it fits with your estate planning goals.
Thanks for the question William!
I will do another episode on Bonds (the debt instrument kind) to make sure we’re covering off on that as well.
Do you have any questions or have a topic in mind you’d like to know more about? Head to https://financeandfury.com.au/contact/
It’s no secret that property is expensive in Australia – it can be pretty disheartening for those trying to get into the property market especially if you’re trying to buy your first home.
So, in today’s episode we’ll be covering off how to buy property using what’s called a fractal investment. It’s about getting into the property market in small increments rather than the traditional way.
- Getting into the property market can be risky, costly, time consuming.
- Rather than buying a full property yourself, you buy a portion (fraction) of a property – “Fractal property investments”
- There has been an increase in fractal investing over the past few years as people have been having trouble getting into the property market by buying property outright.
- People struggle to
- Build deposit – most cases $60k to $100k in cash savings
- Getting a loan – banks are tightening requirements
- Have time to find property (want to make sure it returns) or manage it
- Option of Buyers agents
- Property managers
- All of these together go in the too hard basket
What are the alternatives?
- Online property investment platforms
- Allow for the investment into property for around $100 at a minimum, rather than buying the property outright
Two companies doing this - Brickx, CoVesta
How do they work?
- Unit Trust Structure
- Trust is created with 10,000 Units - Trust buys the property
- Gearing – Generally levels don’t exceed 50%
- Select a property you like
- Buy your Bricks/Blocks
- Transaction fees: 1.75%
- Earn rental income - Distribution payment calculation
- Gross Rental Income – (strata levies + water rates + council rates + maintenance + management fees + annual audit and valuation fees + property taxes + debt interest + principal repayments + other costs) = Net Rental income
- Capital returns
- Valuations
- Independent external property valuations are performed semi-annually
- Serves as a price guide – Not what the units are sold for
- Valuations go up – Guides for what bricks should sell for does as well
- Shares example – Almost like valuations vs price
- Price of the units – Based on supply and demand
- Valuations
- Sell the Bricks at a later date
- If you want to sell – list your units for sale
- Members have to then buy this off you
- What you sell for – Brick Price is determined by Member Supply and Demand
- Selling Brickx – List the Brickx sell price and number you want to see
- Average sale time is about 22h 1m.
- If you want to sell – list your units for sale
Whilst these investments are quite liquid, it can be a double-edged sword;
The Pros
- Start building a property investment portfolio
- Diversification – Buy units in a range of properties
- No hassle – Easy to purchase and takes care of management
- Structure – Unit trusts are transparent
- No risk to you if other owners going default
The Risks:
- Run on property – If lots of people list and no buyers, then values go down
- Someone has to be willing to buy you units (brickx/blocks)
- Unit trusts can be frozen if too many people try and sell
- Gearing – Capped at 50% in most cases
- Good for protection against declines
- Bad against
- Interest only loans
- You don’t get any of the tax offsets
- Trust structures don’t allow the losses to flow through
Summary
- Good way to get a toe (or toe nail) into the property market
- Easy way to start the property investments
- Not without risks though – Likely to be more volatile if everyone tries to sell
Thanks for listening!
For the last few weeks we have been talking a lot about the economy; the Reserve Bank, printing money, and now we will be finishing off by talking about the final effect of this – Interest Rates.
Today, we ask the question; Are low interest rates actually a good thing?
Well, I guess it depends on who you’re asking…
- The Economy as a whole
- e.g. Business
- The population – you and I
- Retirees – Low rates don’t look so good – they’re trying to save money in cash to live their lives out. But they’re not really getting ahead when accounting for inflation – the real return on money is close to zero. They’re actually going backwards
- Younger people – it’s great for borrowing because it’s cheap to do so.
- But in the long run it’s not so good for affordability. As people borrow more money, they can artificially afford to buy more…affordability over all isn’t as good, so the real value of money decreases.
Interest rates
- Nixon in 1971 – Ended the Bretton Woods system and the last days of currency being tied to gold. The Reserve/Central Banks can just go ahead and print more money and control interest rates that way.
- Monetary system – Fiat currency – printing money and control of the supply (interest rates)
- We have talked about the control of money supply by the reserve banks in this other episode
- Our economy over all doesn’t operate as a purely free market as rates are very heavily controlled - the free market for interest rates is gone
- Interest rates are no longer allowed to fluctuate naturally. The central banks, in their wisdom, have capped them!
What are interest rates currently?
- 50% Interbank rate – set by the RBA
- Then separately, there is the rate that banks lend out at: the commercial rate.
- Low rates means we can borrow more – Simple!
In the Economy: What do low rates lead to?
-
Price rises
- Inflation – More money, more being spent, increase in prices of goods
- When money is printed at high rates, with no domestic and/or international demand for that currency to suck it up, the result is Hyperinflation (real devaluation)
- Asset bubbles - Transfer of assets
- Artificially higher overall asset values (e.g. property)
- Low rates lead to an artificial share market rise
- Inflation – More money, more being spent, increase in prices of goods
-
Valuation of shares is based off the risk-free rate – Bonds and long term cash rates
When rates go up, shares go down – Free cash flows -
Currency
- When domestic rates are high compared to those of other countries, it attracts foreign investment – Back in 2012 – High rates, high demand on the currency, high AUD
- They don’t determine fully, but play a role
-
Savings:
- Where is the incentive to save? If you can only earn 2% interest on your cash savings, and inflation is at 2%, then why bother saving?
- Increase of money supply = Banks lend more = Increase money (our last episode).
- Cheap money = Increase in credit = No savings
- If you could earn 10% interest on your savings you’d likely save more because your money is working for you, as opposed to going backwards.
- Savings (deposits) can then be loaned out rather than the Reserve Bank printing money to prop up lending (Deposits at banks being the cash reserves)
- Savings are declining:
- Back in the 1980’s savings were about 20% of disposable income
- 0% in 2002
- At the end of 2009, this increased to about 14-15%
- However now we’re back down to close to 2%
- There’s no savings and people are putting their lives on credit
- Only way to increase the supply of savings is to increase rates
- Need to increase supply through higher rates incentivising people to save
Let’s take a look at what happens in very low interest rate environments. A good example is Japan, and their current zombie economy;
- Late 1980s – Japan went through massive growth periods, but it was a bubble.
- There was a tripling of land prices and stock market prices during the prosperous 1980’s. Post-WW2 they were one of the most productive economies in the world.
- The Bubble burst around 1991
Liquidity Trap
- A situation in which monetary policy is unable to lower nominal interest rates because these are already close to zero, and there is no control in this way to stimulate the economy.
- Therefore, you can’t stimulate the economy and you can’t drop rates further
- Negative interest rates mean it actually costs money to keep your savings in the bank
- Interest rate has remained below 1% since 1994
The financial institutions:
- They have been bailed out through capital infusions from the government, loans and cheap credit from the central bank (we have talked about this time and time again)
- This postpones the recognition of losses, ultimately turning them into ‘Zombie’ Banks
- Zombie Banks are essentially dead – no real asset value – very, very, low economic growth
- When low growth occurs, there are lower tax revenues for the government, which is a problem because they have debts! For example, government bonds (which are just debt instruments).
These are bought by the RBA, banks, other countries, or by individual people.- One solution is to raise taxes to try and pay back Gov Debt
- Stimulus leads to Debt to GDP – 240%
- Australia is at about 43% now
If low rates are good, then 0% would be better, right?
- ZIRP – Zero interest-rate policy: associated with
- Slow Economic growth – easy money leads to decrease in required productivity
- Deflation – Decrease in the price of goods and services = Increase in real value of debt
- Deleverage – Decrease in debt. When economy RUN on debt however, a severe recession is very, very, likely.
- Exactly what has occurred in Japan for the past 20 years
Monetary and Fiscal Policy
- Fiscal policy negates a lot of monetary policy
- A truism of the political system is that to win an election there is no point giving the electorate the facts about how things work. You’re much more popular if you tell the population you’re going to give out free money!
Australia needs serious productivity and innovation reform …not cheap money.
- To pay for things the government can either tax you, or borrow money (which they will need to tax you to repay anyway)
- Increased welfare increases reliance on the fiscal policy side of things, whilst negating monetary policy.
- There is a burden and over taxation on the productive side of the economy. This disincentivises production. Why be more productive if you’re only going to get taxed more?
So, if you don’t produce anything, you don’t get taxed. You produce too much, you lose half of it. This decreases incentives - Why borrow/save and start business if you will be taxed to death!?
- This is the same with home deposits – there’s no real incentive because it takes so long to save up the required amount with property prices so high. As well, there’s no real return on your money. If you’re keeping it in cash (the best way to save for a home deposit) you’re not getting a real interest return – property prices are going up at a greater rate than what cash rates currently are.
The solution to this isn’t popular
- No government is suicidal in terms of their political careers. It’s all about being popular. They refuse to give up and accept defeat – instead they just keep plugging the dam.
- Without a free market for interest rates there’s no ability for the economy to respond – No feedback loop
- It’s pretty hard for a few people to use the crystal ball and tarot cards to set rates as there are millions of factors
Summary
Lower rates get, the further into the hole we go. Currently, at 1.50% we have a LITTLE wiggle room.
BUT, if a large economic downturn occurs though, the RBA won’t have the same ability to drop rates like they have before.
Thanks for listening – Enjoying the podcast? Love to hear your feedback – go to financeandfury.com.au or leave a review on itunes
Welcome to Say What Wednesdays – Where we answer your questions about personal finance and the economy!
This week’s question comes from Michael. His question related to interest rates, and to not give away his details I’ll paraphrase: “With interest rates at the moment being currently fairly low on my personal home, do you think it is a good time to lock in a fixed rate, or should I keep it variable?
I can’t give a yes or no answer on this one without knowing more about your personal situation, but can speak generally.
To answer this, we will run through three players in the game;
- RBA Cash rate
- Interest rates of the banks
- Deposit rates of the banks
All three of these are related
RBA cash rate is the core, which then leads on to what banks lend out at, and then also what they offer on deposits placed with the bank.
RBA Cash rate – what the RBA set as monetary policy through OMO and the supply of money
We have been talking about this in recent Furious Friday episodes.
- We are coming up to 2 years of having the RBA cash rate at 1.5% - Aug 2016 has been on hold since
- While 1.5 per cent is historically low, is it helping?
- Unemployment is not falling at the anticipated rate.
- Inflation is below the [RBA's] target range and has been for three years
- Wages growth is at record lows
- Economic benchmarks to start a cycle of rate rises are straight forward.
- Annual GDP growth above 3.25 per cent,
- the unemployment rate falling to at least 5 per cent,
- wages growth lifting to 3 per cent and beyond
- underlying inflation increasing to 2.5 per cent.
- We’re not ticking any boxes – and this is a bit of an issue for the RBA
Bank interest rates
- These are related to the RBA cash rate, but can move out of ‘cycle’
- The do follow one another, but the banking deposit rates are what the cost is for lending
- The two go hand in hand - Banks use deposits to lend (went through this in last Friday’s episode)
Big Four Deposit rates
- ANZ
- Deposits: 12m - 2.3%, 24m - 2.6%, 36m - 2.5%
- Lending: 36m 4.14%
- CBA
- Deposits: 12m - 2.2%, 24m - 2.6%, 36m - 2.4%
- Lending: 24m – 4.04%
- NAB
- Deposits: 12m - 2.4%, 24m - 2.6%, 36m - 2.7%
- Lending: 1 year - 3.89%, 36m - 3.94%, 5 years - 4.09%
- WBC
- Deposits: 12m - 2.3%, 24m - 2.4%, 36m - 2.5%
Investment and interest only rates – March banks dropped these by 0.3% to 0.5% on average.
What this means:
- Anticipation for rates going up isn’t high
- If lending rates were high in 3-5 years, the anticipation from the banks would be that rates are going back up
- The bank isn’t going to lose out on money here
RBA Rate indicator – this keeps sliding further and further into the future
- Has been for the past 12 months: Shows steady for 12 months, then slight change of increase
- All the way through to end of 2019 – 50/50 chance of raise to 1.75%
The signs:
- GDP – better growth but still below long-term trend
- Retail sales – May be going backwards
But…this isn’t the whole story:
- Interbank credit spreads are a powerful leading indicator of where mortgage rates are heading.
- Spread: Difference between banks offer of their borrowing vs lending out money
- Interbank spreads are getting wider, so mortgages rates may go up.
- But competition between lenders is high, so this keeps them honest.
- Other option: They might to decrease the deposit rates
The take away:
Getting back to the question of ‘locking in rate now’
-
Locking in a whole loan on fixed interest can be risky
- Breaking costs – Rates go down then you are stuck
- Limits debt repayment options
- While rates are low there is the chance to pay debt back
- Doesn’t have much of a benefit now, as rates are low
- i.e. you save more paying debt off when rates are high
-
If you are worried:
- Look at what you can afford to pay back in a time frame:
- Potentially lock in a portion at a lower rate
- But make sure it has a 3 in the front of it! (Or, at least, a very low 4% range)
- All indicators show that there is unlikely to be a raise
- Nab has 3 years for sub 4% - this is in line with variable rates –
- Shows low anticipation of raise in rates
Alternative investments and what they can mean for property and the economy
- Classical Car Index
- The CommSec Luxury Vehicles Index lists the following as luxury vehicle makers: Audi, Aston Martin, BMW, Bentley, Ferrari, Hummer, Jaguar, Lamborghini, Lexus, Lotus, Maserati, Maybach, Mercedes-Benz, Morgan, McLaren, Porsche and Rolls Royce
- Wine index – Liquid assets
- Art or Luxury Property
Characteristics
- Almost like an asset backed security - No income, gains come from the increase in price of the good that backs it
- Capital growth focused rather than income
- Pretty volatile – Based around demands
Luxury Investment Index
- Subjective pricing – Good example of ‘elastic’ and ‘inelastic’ demand
- Imagine Demand supply cure
- Demand slopes down, supply up
- Demand – very vertical = Inelastic (remember through I being vertical)
- Inelastic – necessities, price changes don’t affect demand
- Elastic – horizontal – responsive to changes in demand, change in price, due to close substitutes
- Imagine Demand supply cure
- Financial crisis – luxury declines – elastic good
- Small change in quantity demanded, big change in price
So... what does this have to do with property?
- In economics no relationship is perfect - but they can be related. Lead-lag relationship
- Historically: slowdown in sales of luxury vehicles = a slowdown of upper-end property prices.
- This infiltrates the broader market.
- Luxury vehicle sales are still good - growth of sales is coming down from high levels
All about consumer confidence
- Confidence is demand: more confidence, more demand
- This is why there is a relationship in most assets that work off supply and demand –
- Types of assets that are risky = Drop when confidence drops
- People sell so the price drops
- Confidence (demanded) affected by many factors, a few factors:
- Affordability – Wage growth
- Plus, low inflation – 3% wage growth with 0% inflation better than 12% with 15%
- Car affordability has never been better – Lower car costs, wages increasing
- Anticipated environment – Prices continue to go up
- Affordability – Wage growth
- Confidence – Self-fulfilling prophecy – If people think that the economy is doomed, they run!
Components of the index – Micro and Macro
- Estimates of family finances compared with a year ago – up from 12.9 to 15.2
- Looking back – own personal finances
- Estimates on family finances over the next year – down from 29.3 to 29.00
- Looking forward
- Economic conditions over the next 12 months – up from 13.7 to 15.3
- Economic conditions over the next 5 years – down from 15.2 to 14.6
- Good time to buy a major household item – rose from 38.6 to 43.3
The current state
- ANZ - Consumer sentiment – Rose 1.2% to 123.5 – Highest in 4 years (long run average = 112.9)
- WBC – Consumer confidence – Rose 3.9% to 106
What will impact the future confidence and overall economy
- Wage growth – 2% wage growth required some adjustment after years of 3-4% per cent annual wage growth. But more people are realising that prices are growing at a slower rate than wages or are even going backward.
- Affordability – interest rates – Current borrowing to finance expensive goods is low
- External factors – market crashes in shares/business
- Individual demand dried up
- Leads to companies not earning as much (people are buying)
- Leads to companies having to cut costs (affects supply potentially)
- Leads to further demand drying up as people lose jobs
- Incomes go down (or are expected to)
- All of it has a similar pattern and is a chain of events.
- Everything working together leads to an increase
- Everything working against one another out of fear leads to an inevitable decrease
The take away
- Not designed to profit off – relationships aren’t perfect
- Correlation doesn’t equal causation!
- When luxury car sales are in retreat – higher probability that home prices aren’t far behind.
- This episode was to give a better understanding about how the economy works
- Economy is a collective of millions of people
- Bacteria – Growth
- Microcosm where one good can show a trend for the overall health of the economy
Thanks for listening!
Welcome – Last Friday we looked at the stock market crashes of 1907 and 2008
Difference between them was the crash of 1907 had no intervention by any central bank in the USA – because no central bank actually existed yet. But this crash lead to the creation of the US Central Bank (Federal Reserve). This made way for the intervention by central banks in 2008 to try to advert more of the crisis in the banking sector than what was experienced in the past.
So, today we will be talking about Central Banks, and more importantly, the interventions they take in the economy. Why? Some economists put banking crisis (estimated around 100) at the feet of Central Banks and not banks. Let’s look at if it is the case or not:
- Central banks – responsible for monetary policy
- Monetary Policy: (Central Banks) Money supply, interest rates and inflation
- Fiscal policy: (Government) Govt. spending and taxes
- Every country has one, but not many people know what they do! Almost like a brain, everyone has one, but few know how it actually works.
- Continuing with analogies of human body parts – If an economy was a human body
- Central bank – Heart – Pumps money into the economy to help it flow and stay healthy, and keep growing
- Commercial banks – The veins – what spreads the money around
- This is the circulation of money! And the role and function of the two!
- Continuing with analogies of human body parts – If an economy was a human body
Monetary policy - Why the Quantity of Money Matters
- The quantity of money circulating in an economy affects both micro and macroeconomic trends.
- micro level - more personal spending - Individuals also have an easier time getting loans
- macroeconomic level - affects GDP, interest rates, and unemployment rates.
- Maintain price stability (Inflation of 2-3%), exchange rate, employment & Economic prosperity
What is involved with monetary policy
- Print More Money
- Money is no longer pegged to anything – Like in the gold standard – since 1971
- USA: 1950s to 2008 – Hundreds of mil to $1trn, 2008 to now $4trn. It basically quadrupled in 10 years.
- Central banks can increase the amount of money in circulation by simply printing it.
- More money printed = less valuable due to inflation
- Influence Interest Rates
- cannot directly set interest rates for loans (mortgages, personal loans)
- the central bank holds the key to the policy rate—this is the rate at which commercial banks get to borrow from the central bank
- banks borrow from the central bank at a lower rate - pass savings on by reducing the cost of loans
- Lower interest rates tend to increase borrowing – increase quantity of money in circulation
- Engage in Open Market Operations (OMO)
- The reserve bank affects the quantity of money in circulation by buying government securities from (or selling to) banks - called OMO
- Increase quantity of money - purchases government securities from commercial banks and institutions.
- frees up bank assets—they now have more cash to loan.
- Set the Reserve Requirement
- Sets how much banks can keep in reserve versus lend out
- more money circulating - reduce the reserve requirement.
- bank can lend out more money.
- cannot directly set interest rates for loans (mortgages, personal loans)
- Money is no longer pegged to anything – Like in the gold standard – since 1971
How this works – Very simple example
- Bank A - Suppose a person in another country sends $1,000 and they deposit it into the bank. This becomes a NEW deposit for the bank (a PRIMARY deposit).
- The bank will now
- Keep their desired target reserve ratio (10.5%) – Covers consumers’ cash demands
- Lend the rest out to borrowers – Bank A lends $895 (keeps $105)
- This $895 will hit another bank at some point
- Spent on a mortgage off someone else, who puts that $895 in their bank
- That bank can lend $801 of the $895 (retaining the 10.5%)
- The process goes on and on
- Technically doesn’t create money out of thin air – The loans are assets for the banks
This is called the Deposit creation multiplier
- If nobody keeps cash under the mattress: 10.5% per $1,000 = $9,524 (approx.)
- Slippage or currency drain: 5% + 10.5% = $6,450 (approx.)
But is this the truth?
Professor Werner - Chair of International Banking at the University of Southampton - bring attention to the fact that banks loan money into existence
- Campaigns to get rid of cash - Indiaand Australia to get rid of cash are coordinated attempts by central bankers to monopolise money creation.
- Professor Werner: the death of cash and the rise of central bank - controlled digital currency.
- This will further centralise what he describes as the “already excessive and unaccountable powers” of centrals banks, which he argues has been responsible for the bulk of the more than 100 banking crises and boom-bust cycles in the past half-century.
- Werner says: “To appear active reformers, they will push the agenda to get rid of bank credit creation. This suits them anyway - the central banks want to be the sole issuers of money.”
- “This sudden global talk by the usual suspects about the ‘need to get rid of cash’, ostensibly to fight tax evasion etc, has been so coordinated that it cannot but be part of another plan by central bankers” he says.
Why does this change in policy matter?
Australian economists, Steve Keen and Bill Mitchell –
- The old theory, taught in high school economics classes and to university undergrads, is that banks receive deposits and loan out of a percentage of that money, while keeping some in reserve.
- According to Professor Werner (rough approximation) - closer to the following: A bank receives $100 from a depositor, keeps that $100 in reserve, and then creates $9900 worth of new loans and deposits. It may also create up to $15,000 in new deposits through its lending.
- the banks do not lend existing money - but add to deposits and the money supply when they ‘lend’.
- And when those loans are repaid, money is removed from circulation.
- Estimates - the banks create upwards of 97 per cent of money, in the form of electronic funds stored in online accounts.
- Banknotes and coins? They are just tokens of value, printed to represent the money already created by banks.
- M0 – Bank notes and coins - $107 bn
- M3 – Money supply - $2,070 bn (about 95% which is electronic)
This theory is now widely accepted as fact. 2014 - the Bank of England published a bulletin confirming it is its official position.
- They admitted - banks create money out of nothing. So now they want to take away control from the banks to protect the monopoly of money creation and increase their control
Mervyn King, former Bank of England governor, explains the process – and its dangers – in his 2016 book, The Alchemy of Money.
- “During the 20th century, governments allowed the creation of money to become the by-product of the process of credit creation. Most money today is created by private sector institutions – banks. This is the most serious fault-line in the management of money in our societies today,”
Felix Martin - Money: The Unauthorised Biography (published in 2013) - Describes banking as Promises:
- a deposit at a bank is a promise to pay you, the customer,
- a home loan is a promise by you to pay the bank.
- a fraction will ever be demanded in cash at any one time, but all of the debts can be used as money.
- Balancing act of incoming and outgoing payments due on his assets and liabilities = RISK
This is likely a cause of the sudden calls for reformers – central banks will push the agenda to get rid of bank credit creation and for the central banks to be the sole issuers of money
Orwellian dream (1984, RTWP, Animal Farm) – the increase in deposits needed reduced the amount banks could lend, reducing the amount of new money supply from the banks – Further centralising powers and control of the economy
The take away: We aren’t in a free market for money creation, slowing being monopolised – It is heavily controlled!
Is this a good or bad thing? Will look at this in the next Episode – Are interest rate control healthy!
Thanks for listening!
This week’s question is, ‘do I need a family trust?’. I have had a few questions about this over the past weeks, however in order to avoid making this ‘personal advice’, I thought I’d just talk about it in more general terms.
What is a family trust?
- Family Trust refers to a Discretionary Trust set up to hold a family's assets or to conduct a family business
- Established by a family member for the benefit of members of the 'family group'
- Established to hold assets for mainly two reasons:
- asset protection or
- tax purposes (will come back to this)
The Trust
- Settlor - settlor executes the trust deed and then, generally, has no further involvement in the trust
- Appointor – Has the power to add or remove trustees (controlling power)
-
Trustee
- Role – the trustee is responsible for the trust and its assets
- broad powers to conduct the trust and manage its assets
- Types
- Individual – Can be mum and dad for instance, in a family situation
- Corporate – Company acting as trustee – Directors
- Additional layer of protection and flexibility
- Role – the trustee is responsible for the trust and its assets
-
Beneficiaries
- Named (Primary) – receives the benefits
- Secondary – Spouse, de facto, children (generally family members)
- Company – Corporate beneficiary
How a trust works
Assets are owned by the trustees, held in the trust
- A separate environment, even if transferring from individual to same individual as a trustee, it’s still a transfer of ownership
Types of assets
- Shares
- Franking credits received by beneficiaries
- Property in trusts
- Loss of negative gearing, unless income can fully offset
- Property taxes
Trust income - Distributions
- All distributions must be made only to people who qualify under the terms of the trust deed to be beneficiaries of the trust.
- Distributions are not payments! - completed on tax returns but don’t actually have to be physically paid out
- Forms part of a beneficiary's assessable income - taxed at personal marginal tax rate
- Trust does not have to pay income tax on income that is distributed to the beneficiaries
- Trust pays tax on undistributed income
- Where distributions go wrong
- If a family trust makes a family trust election and then pays out to someone not a member of the family group, they will be taxed at the maximum rate possible
- Undistributed income is taxed in the hands of the trustee at the top marginal tax rate of 45%
- Penalty tax rates can apply to distributions made to minors
Benefits
- Flexibility – Tax planning
- favourable taxation treatment by ensuring all family members use their income tax "tax-free thresholds’
- Capital gains tax can be distributed – split between beneficiaries
- Asset protection
- protecting the family group's assets from the liabilities of one or more of the family members (for instance, in the event of a family member's bankruptcy or insolvency)
- Estate planning
- provides a mechanism to pass family assets to future generations
- Trust life of 80 years
- Helps avoid challenges to the will following a death of a senior member of the family
- provides a mechanism to pass family assets to future generations
Situations where it will work
- Wanting to invest and accumulate wealth
- OR, own a business
- Asset protection – Are you in a situation you will be sued
- Taxation planning – Will you have people to distribute to?
What is important for a trust – Long term Planning!
- Transferring owned assets in has problems
- CGT – The transfer of assets from your own name into a trust is a sale
- Stamp Duty (For property) – The trust would need to technically buy the property off you
Thanks for listening…if you have a question or want to provide any feedback, go to https://financeandfury.com.au/contact/
Though banks bear much of the blame for previous financial crises, ordinary investors play a more central role than most people realise…
…through greed, and fear.
Ironically, it is likely to occur through a vehicle which has been created with just that in mind – exchange-traded funds, or ETFs
Listed funds are passive by nature, designed to track the performance of an index of stocks, bonds, currencies or commodities, rather than to pick and choose among individual companies.
The ETFs are very popular;
- The simplicity and low costs
- But they could be a time bomb for global markets.
- Australia – Only listed in Australia in 2009, when it was cheap to buy shares (after the GFC)
- The popularity of ETFs has soared in the past decade.
- Passively managed have nearly doubled = 40 per cent of Funds under management (in America)
- Vanguard alone owns a position greater than 5 per cent in 491 of the stocks on the S&P 500, adding up to nearly 7 per cent of the index's total market cap.
- Japan, where the central bank owns big stakes in ETFs, passive investors hold over half of all share market assets.
It's easy to see why such funds have thrived. ETFs, invested in indices that are theoretically diversified, have consistently outperformed active managers. There are more fund managers than shares because there are a limited number of shares.
Their simplicity is appealing to lay investors, who can focus on broad asset-allocation strategies rather than guessing at individual winners and losers.
Hidden risks
- ETFs, however, are riskier than many investors appreciate.
- With cap-weighted indices - funds have no choice but to load up on shares that are already overweight (and often pricey) and neglect those already underweight.
- As prices rise, investors may become overexposed to a few large shares
- That's the opposite of "buy low, sell high."
- ASX 300 ETF - $12.5 Bn – One fund is 1% of Aus market cap
- ASX 300 - Market cap of $1.5 trillion
- Commonwealth Bank of Australia
- BHP Billiton
- Westpac Banking Corp.
- CSL Ltd.
- Australia & New Zealand Banking Group Ltd.
- National Australia Bank Ltd.
- Wesfarmers Ltd.
- Woolworths Group Ltd.
- Macquarie Group Ltd.
- Rio Tinto
- The top 10 holdings represent 42.8% of the total ETF.
ETFs can replicate indices in complicated ways.
- Rather than purchasing all the assets consistent with index weights, some funds use a sub-set, thus exposing investors to tracking error.
- ETFs must be fully invested and therefore hold minimal cash, which could limit flexibility in a downturn. The rules governing indices can be changed, sometimes arbitrarily.
- ETFs – by their design and their sheer size – ETFs encourage concentration in a few liquid, large-cap stocks, creating homogenous and momentum-following markets.
- To have low costs: ETFs to emphasise scale, further exacerbating concentration to the top heavy in the ASX
Risk of bubbles
- Markets become susceptible to flows from a few, large, passive products.
- Artificial factors, such as inclusion or exclusion from an index, forces buying and selling; this can lead to misallocations of capital. In the current equity cycle, for instance, over-weighted, liquid, large-cap stocks have benefited disproportionately from forced buying. This increases the risk of bubbles, as in 2000 with the dot-com crash.
- ETFs may even distort valuations outright.
- They don't analyse prices, meaning that they don't contribute to price discovery.
- They weaken corporate activism, as passive owners have little interest in corporate governance.
- ETFs increase volatility and shrink liquidity.
- Passive funds exhibit significantly higher intraday trades and daily volatility, driven by arbitrage activity between ETFs and the underlying stocks.
- With ETFs increasingly important as the marginal buyers and sellers of securities, this may increase volatility in periods of instability.
From passive to panic
- Index funds lock up a large percentage of shares that can only be traded on changes in market capitalisation or other index metrics.
- Number of shares available to trade may be a lot smaller than investors realise. Especially when dealing with small-cap shares, liquidity will be lower on these assets
- If a crisis does arise, this is likely to exacerbate the downturn.
- ETFs will have to sell quickly what they've disproportionately bought;
- Passive indexers may become panic sellers.
- But they may have trouble finding anyone willing to purchase the holdings they're trying to liquidate.
- Example: Imagine that an investor in an ETF with, say, a 10 per cent stake is forced to sell a large part its holding in a single day, such as an industry fund
- If there are no ready buyers for such a large holding, causing the ETF to fall to a price below the value of the assets it owns.
- This price impact may be exaggerated, as ETF activity intensifies both upswings and downswings.
- Crashes, when they happen, may be bigger.
Take advantage
- How resilient you will be when conditions change.
- Untested structures have revealed hidden weaknesses which have threatened wealth and financial stability. There's no reason to think next time will be any different.
- But: You can buy ETFs when they crash
- If they crash, they will crash harder then most active managed funds
Summary
- Indexes are great, but not without risk
- Get some index, but make sure it is diversified
- Look at smaller caps, but LICs not ETFs in small cap
Thanks for listening!
This week we continue with where we left off last week’s episode - is it the Banks, or Government Regulation and interference, that causes financial crashes.
Let's take a look back on America and their financial crashes through history
- 1873 – 1907 – Financial panic was common
- 1983 a bank panic triggered worst depression US had seen – Stabilised after J.P. Morgan stepped in –
- P. Morgan – The monopoly man, founder of J.P. Morgan Bank
- Speculation that J.P. Morgan caused this through spreading rumours
- 1907 – Speculation on wall street ended in failure – bank panic
- History: speculation that went awry - "stock operators" borrowed huge sums of money to finance an effort to manipulate a stock price
- In October 1907 - Mercantile National Bank attempted to corner the market of a copper mining stock. The operation failed, and the stock, which reached a price of 60 during the attempted corner, almost immediately collapsed to 10.
- 1983 a bank panic triggered worst depression US had seen – Stabilised after J.P. Morgan stepped in –
- Mercantile National Bank, was feared by the public to be bankrupt.
- The bank was still solvent, but in banking, perception can become reality, and as depositors pulled their money out, Mercantile needed an emergency loan to stay alive.
- The prospect of a small bank failure shouldn't have been more than a blip on the economic radar.
- But, there was no central bank to act as a lender of last resort, and no deposit insurance, which would have calmed the nervous savings account holders
- The next victim: failure of the Knickerbocker Trust company in New York
- Drained cash reserves from the financial system and created a shortage of liquidity all over the city and, eventually, in the broader economy.
- Businesses couldn't use credit to pay for inventory, cash wasn't available to pay workers, farmers couldn't sell their crops, and the economy entered a recession.
The Cabal - A group of bankers, led by J.P. Morgan himself,
- They went over the Knickerbocker's books to determine whether or not it should be saved or not. In the end, the bankers, who were essentially acting as a central bank of sorts, decided to let the Knickerbocker go down (technically, the trust didn't fail, it just closed its doors for six months and locked out depositors; but practically speaking, it was bankrupt).
- This failure sparked massive fear all around New York
- Morgan and his cohorts quickly reversed course by extending a lifeline to The Trust Company of America and a few other major financial institutions in the city.
But just like in 2008, the bailouts didn't stop the crisis from spreading. Depositors continued to ask for their cash back, and the banking reserves of the entire financial system rapidly evaporated.
- 48% of the deposits left New York trusts and found safety in mattresses and dresser drawers.
- It meant that businesses didn't have enough cash to finance their operations or pay their workers, and many had to close their doors and halt production lines. The share market plummeted 40%.
The Panic of 1907 and the crisis that occurred 101 years later in 2008 were remarkably similar.
- Mercantile National Bank failure was like Bear Stearns - it was the first domino, but on its own it should have been manageable.
- But the Knickerbocker - just like Lehman in September 2008 - was the catalyst that accelerated the crisis and nearly brought down the financial system.
- In both instances, the men in charge (Morgan and his syndicate in 1907; Bernanke and Paulson in 2008) decided against saving what turned out to be a systemically important bank.
- And in both cases, this decision led to panic, crashing stock prices, and additional bank runs.
- Everyone wanted their cash in hand. Both bank failures also caused the decision makers in each case to reverse course and save other teetering institutions - in 1907, Morgan saved the Trust Company of America, and in 2008, the US government saved AIG
The practical takeaway - asset prices can be impacted by sheer emotion and herd behaviour
- The greatest investors are usually the ones who capitalize on such panic
- Morgan was making loans and buying banks for cheap when no one else was in 1907
- Buffett (and JP Morgan Bank) were providing capital and buying stocks 2008
The factors that are the same in financial crisis
- Fear and panic
- Depositors around New York City wondered if their own deposits were safe
- It was a classic run on the bank - fear begets fear, and everyone wanted their cash back at once
- Run on the bank created further panic, people demanded cash above any other asset, liquidity dried up, causing businesses that relied on credit to suffer
- Liquidity
- Banks have 30% of funding from short term liquidity
- 60% from Deposits
The Aftermath - The More Things Change, The More They Stay The Same…
- The general result of every crisis is always the same: finger pointing…but then…
- The remedy is new legislation and increased regulation - all designed to prevent the next crisis.
- The merits of this is debated, but the common denominators are in human behaviours
- Given the fact that human nature doesn't change, the next crisis is inevitable.
- Greed and fear are two constants in financial markets, and they will be the two key ingredients that will lead to the next great crisis.
- The cause will be different and unexpected, but the human behaviour before, during and after the panic will look very similar.
- One difference is that the 1907 recession was very deep, but the recovery was swift, unlike the aftermath of 2008
- The panics of 1873 to 1907 – lead to a big change in the way the banking system works
- Meant to cure this problem, but it is still going on - Why can’t they avoid collapses?
- After 2008 - To stimulate the economy and further lower borrowing costs, the Federal Reserve turned to policy tools.
- It purchased $300 billion in longer-term Treasury securities,
- Support the housing market, the Federal Reserve purchased $1.25 trillion in mortgage-backed securities guaranteed by agencies such as Freddie Mac and Fannie Mae and about $175 billion of mortgage agency longer-term debt.
- These Federal Reserve purchases have reduced mortgage interest rates, making home purchases more affordable.
You can’t regulate human behaviours of greed and fear
- How much safety does the guarantee provide to the public?
- How bailouts are funded through ‘Quantitative Easing’ as it was called in the US, but it is printing money by any other name
- What allows for these bail outs, where the money comes from, and the flow on effects of cash advancing your unlimited credit card, but at the government level it is ‘Quantitative Easing’
- The burden is now on the public – Regulations and deregulations lead to the monopoly of present day - creating banks being too big to fail, meaning that they are insured, which leads to their failing due to risky behaviour – but they can fail so step in the Reserve Bank!
- We will look at this in the next episode…
Thanks for listening!
Why has Telstra tanked?
For so long, Telstra has been a Market Darling … a great dividend-paying share, almost like the world’s best term deposit…but what has happened? They are out of favour with investors for the past 3 (or so) years…
What has gone wrong:
- Telstra has warned investors to brace for a profit level at the lower end of its guidance range, but remains committed to a 22-cent total dividend payment.
- Telstra has blamed "challenging trading conditions" for a pre-tax and interest profit that is now expected to come in at the bottom end of a previously stated $10.1-$10.6 billion range.
CEOs and price - History:
- Ziggy Switkowski – 1999 to 2004 – Oversaw the transition from government sector to privately owned, started in 1997. Went from $9 to $5.
- Sol Trujilo – 1/7/05
- Went from $5 to $3.5 in his first year
- Back to $4.8 the next year, then down to $4.2 the next year
- Just before he left - $3
- David Thoedy – May 2009
- From a price of $3, it went to around $2.50 18 months later (at a low), but from there it rose to $6.50 at the start of 2015 – 5 years of positive gains
- Andy Penn – April 2015
- Dropped from $6.60 to $2.70
- 2016 Aug – momentum has been on the oversold side
Sentiment
- Competition - last 12 months alone - facing a fourth network operator entrant in mobile, an increasing number of MVNOs [mobile virtual network operators — basically companies that provide services through another telco's network]
- NBN – The Delays are having a negative effect on expected earnings
- Aggressively cut costs, with "core fixed costs" expected to decline around 7 per cent this financial year, with about $300 million in restructuring costs.
- Telstra is ramping up its capital spending on new technology, especially its 5G mobile rollout – 2016 – Announced $3bn in capex (capital expenditure)
- Fines - $10m of fines, but that is nothing
- Outages – Few outages nationally in the past few months
Financial metrics were near the bottom end of targets
- Revenue expected to be around the middle of the $27.6-$29.5 billion range
- Free cash flow near the top, or even above, its $4.2-4.7 billion guidance.
- Big one: The decrease of dividends
- Raised Dividends, then cut by 30%!
- Earnings per share (EPS): Average about 32c per share for 10 years
- 2018: 29.3 EPS, 22 dividends per share (DPS) – 75% dividend payout ratio (DPR)
- 2019 – 27.5 EPS, 18.3 DPS – 66% DPR
- 2020 – 25 EPS, 22 DPS – 88% DPR
- History has been about 90% DPR
The fundamentals
- Price/earnings ratio (PE ratio) – 8.99
– But what is the future earnings versus current prices?- 2019 – 9.8 PE
- 2020 – 10.8 PE
- Yield – 10.1% plus FCs
- Income Coverage 8.96, Debt/Equity – 118.9%
- Financials – We are back to revenues of 2011
How much of the price is moved by fundamentals – very little! It’s really our response to the drop in dividend payments which has created such a massive decline in the price itself.
- Telstra are in and out of favour with the market
- Is it overhyped?
- They need to turn themselves around in terms of management decisions go, because their success lays in what they are spending the capital expenditure on
- They are a decent term deposit – Though the price could go down more
- Will it ever grow again?
- Competition – Telstra still have a pretty decent market share and are semi protected through regulations
Welcome to Finance and Fury
Welcome to the New Financial year – looking back on the year, are you in a better or worse financial position than you were this time last year? Today’s episode we’ll be looking at how to be in a better financial position this time next year.
- Ways to get ahead in your finances
- The compounding effects of the little changes in behaviour and things you do everyday
What does a “better position” actually look like?
- In general terms – there are categories we can look at
- Build wealth – start investing
- Reduce tax
- Save money
- Increase income – Salary, investments
- Hard to generalise with these broad goals: That is where having predefined, specific goals comes in
What are your goals? “New Year’s Resolutions”
- Not many people stick to new year goals – Why?
- There can be too many. Normally people think this is good, to have a lot of goals
- But if these are similar to last year and you didn’t make it, why might that be?
- Hard to go from 0 to 100 overnight – Inertia – something continues in its existing state (rest or in motion) unless it is changed by external force
- Hard to start a train and get it to top speed – takes a while. This is similar to investment or a personal finance strategy
- Example: say you have 10 goals – all new things that you’re trying to implement, maybe its investing in shares, reducing tax, buying a property, generating $50k of income in 5 years from investments, etc. …but, where do you start? And how?
- Information overload sets in and you go back to your old ways pretty quickly – It is safe and easy
Finding “motivation” is rubbish
- What people search for is a moment of inspiration to get the ball rolling
- It never comes – Why?
- Motivation comes from a positive feedback loop – do something good, dopamine is released in the brain, you then want to do this again
- Think about it, you don’t need to find motivation to indulge in anything
- Part of the problem is that bad things compound as well
What you can do to get ahead now
- How do you motivate yourself to invest?
- Motivation is a lie, there will always be something better to spend your money on than your future security and financial independence.
- How to start?
- Sometimes there can be too many things to change at once
- Start small – pick one thing
- What is ONE financial behaviour you would change?
Small action = dopamine = larger actions.
- The best way to get over slumps – a little momentum to start and it takes off.
- Once you get enough of a craving for the feeling of saving/investing, it is hard to stop
- Remember: Almost impossible to go from 0 to 100 – like the train, it starts off slowly, but then don’t get in its way once it’s going.
My personal habits:
- Wanted to share the things I have done to help for 14 years now – it didn’t happen overnight
- Chipped away – little things over time – Easy and sustainable way
- From about age 16 I wanted to be able to save $10,000 p.a. to invest
- Living at home and working at a pizza shop while at school this was fairly easy
- Minimum wage of $14 per hour at 14 hours a week
- Went to uni – it got a bit harder to save that much
- Studying engineering at the time before changing to Economics and Commerce, playing rugby with UQ – 3 training sessions a week and most of the day Saturdays – Lost time working, plus weekly physio visits
- Tearing my knee for the 3rd time – Gave it up, started working more, labouring as well
- When working: was earning much more full time in financial services – I upped the saving target to $25,000.
- Living at home and working at a pizza shop while at school this was fairly easy
- I needed to change some habits to increase this.
- Preparing lunches for work - $20 for meat, $3 sauerkraut, $3 on feta, $5 on avo, olives and nuts
- $30 per week, versus $75 ($15 min per day) – Save $45 per week
- How it got there? Took a plan
- What was something I could eat – every day?
- Would it save money and time?
- Total time – 2 hours to prepare per week – But I eat at my desk, 30 mins a day for lunch = 3.5 hours per week
- Preparing lunches for work - $20 for meat, $3 sauerkraut, $3 on feta, $5 on avo, olives and nuts
- Salary Sacrifice into super - $100 per week since 2011
- Save for long term - Invest $85 instead of $65 per week after tax.
- Hitting Saving targets each year but reinvesting the income
- That grew over the years - compounding returns when income reinvested
- That is the process to improvement – one small thing at a time.
Financial habits are built through the positive feedback of cue, action, reward.
- These decisions years ago have improved my position now.
- That is the relationship with good habits – Keep improving slowly over time
- Pareto distribution – 80/20 rule.
- 20% who have 80%, they have been able to grow good habits, compounding effects
- It is as simple as investing and waiting - $20k today would be $80k in 14 years at 10%
The past determines your present – all actions
Your future is determined by your actions from now up until that point
- You can negotiate with your long term, or “future-self”
- Bank hostage negotiation – But it is all inside your head– The desired outcome is hostages survive, bad guys give up and that you don’t lose money
- You don’t want to have the future outcome with no funds in the vault and chalk outlines on the floor
- Always something trying to steal your money – Just don’t give them the helicopter to get away
- But if you hit the future and aren’t where you want to be, where does that leave you?
- That is where further self-doubt kicks in – unrealised expectations
- Bank hostage negotiation – But it is all inside your head– The desired outcome is hostages survive, bad guys give up and that you don’t lose money
What is one thing that you can do to better the future self? Starting sooner rather than later – There wont be much joy in starting, but ‘all good things comes to those who wait’ – means that if you wait it out and just start at one thing, keep at it, you will start getting the motivation to keep going, and increase speed.
Time can be broken down into the following:
- Past – What has gone on – All of your life events to this point
- This dictates a few things – Behaviours and habits, and we all have habits that creep in over time
- Most people may have been financially secure if not for making bad choice in the past
- Present – The now – What are you doing?
- Most peoples’ financial security comes from employment income
- What happens if you were to lose this today? Is there enough to survive?
- Future – This is where goals come in - What you want to achieve needs to be defined
- Plans and Goals
- With the one goal – breaking it down
- SMART – or What, How and why?
- Implement it and adjust along the way – Over time (30 – 90 days depending) it will become a habit… and then once this is a habit and takes no effort, implement the next goal on the list!
Thanks for listening everyone! I hope you all can make a small change today, that your future self will thank you for :)
Remember, feel free to ask any questions, or even how you can achieve financial goals!
Welcome to Finance and Fury, the Furious Friday edition!
Today’s misunderstanding is about the “Too big to fail” myth.
I want to tell you a story. It’s probably a relatively unheard-of story… of our “Big 4” banks and their recent history.
The whole point of this is to answer: Are financial collapses created by too many regulations, or not enough?
The answer seems to be that more regulation is the only way to solve future financial crashes and any financial collapse has had some form of regulation come out of it as a result. But, the aim of this episode is to see if this has helped or hurt the economy and the banks overall
Warning: The banking system is pretty complicated, so there’s some points in this episode that might be pretty in depth. But that seems to be the whole point of the financial system: Make it so complicated not many people know what is going on. I have tried to make this as simple as possible so hopefully it isn’t a bore.
In this episode: What we will go through
- Banking sector: Vertical integration – One single company controls several others along the supply chain = profits come from different activities in different areas
- Look at history repeating itself – Comparing Australia to the US between 1999 and 2008
- What really lead to the GFC, and how we may be blindly following the same path
- The big 4 banks - market share of the economy – the effects on the Stock Exchange and the population
Timeline: How did we get where we are now?
- Banks listed: early 80s to 91 for CBA - No guarantee on deposits at that point
- APRA Australian Prudential Regulation Authority – Regulation for Banks - has only been around since 1998
- Before this: The riskier banks wanted to be, the higher the interest rate they would need to offer
- Under tighter regulations, risky banks had to comply to less risky standards
- Goodbye risk premium on interest
- Regulations continued as normal for a while, until financial crisis:
- We had a scare in 2008 – during the GFC banks stopped lending to one another for short term funding for their expenses
- Banks who can’t operate shut doors. Lehman Brothers for instance
- Bank runs – Great depression in the US 4,000 banks closed from 1929 to 1933
- US banks started doing ‘bailouts’ – In essence, printing money to buy Mortgage Backed Securities off the banks (we’ll come back to this)
- Fearing a bank run in Australia - October 2008, right at the peak of the GFC, the Australian government decided to guarantee bank deposits
- This is new-Australian Deposit Insurance – Guaranteed for the public (ironically by the public as well)
- History has shown Government can’t risk the market effects of wiping out people’s bank deposits – especially when voters money was on the line
- A guarantee helps to calm the public – if a policy says the money is secure it must be!
- The Financial Claims Scheme (FCS) was created - emergency measure to secure the banking system.
- Who is eligible: Authorised Deposit-taking Institutions (ADIs) - bank, building society or credit union. This means that this money is guaranteed if anything happens to the ADI.
- It applies to all ADIs incorporated in Australia, including Australian-owned banks, foreign subsidiary banks, building societies and credit unions.
- ADIs insured for up to $1m
- Feb 2012 – Dropped to $250,000
Sounds good right? Nice and safe!
- Safety has a dark side – It isn’t really safety for us, but the Banks!
- Removes incentives for depositors to review a bank before depositing – Onus is taken off us
- Some banks could offer higher returns, if riskier.
- But with this it is all the same – almost zero risk – removed risk premium on interest
-
What behaviours it incentivises
- Increased risk
- Insurance creates moral hazard – Insurance to cover risky actions
- Maximise profits as the risks are covered for the most part
- It really provides safety to banks, and they can increase their risks – like giving a gambler a guarantee on his losses if he made a risky bet?
- Increased risk
-
Increased incentives to maximise profits
- But where from? Derivatives, asset backed securities and covered bonds – these can be risky
- Massive spike since 2011 of bank profits coming in the form of derivatives
- Derivatives: Complex financial bits of magic
- The options – Forward & Future Contracts, swaps, etc.
- Locking in rates now for the future
- Asset Backed Securities – Investment with an underlying asset -
- MBS – CBA: in one security - $2.65bn in mostly AAA rated
- Covered Bonds – Change in regulation in 2011 = AAA rated bonds issued
- Debt instruments covered by mortgages
- Sitting at over $80bn in value since 2011
- One difference is issuer covers bonds if they default, not on securities though
- The options – Forward & Future Contracts, swaps, etc.
What stops this all going wrong: APRA has to overregulate in response –
- Strong regulatory intervention through the (APRA).
- Australia has strong regulation but even the best regulation can be gamed.
- They have to be closely monitored by APRA – But banks are still incentivised to take on more risk
- Derivatives are held ‘off the books’ and very hard to regulate
- NAB and CBA stopped disclosing theirs, so who knows what their current levels are?!
Why does it matter? What happens to just 4 banks has an affect on everything!
Where we sit today: The big 4 = 25% of the ASX
- The ASX is one of the most concentrated in the world
- Financials – 35% of our index, 25% is just the big 4 banks
- What is the fate of our market if the big 4 tank?
- We saw it in the GFC
- Declines in the banks of over 50% = Big drop in index and panic selling across the board
- If our banks rise, our market does, they fall, we all suffer, because the government will print money to stop the collapse (bailouts!)
- Double death! – Both Equity and Debt markets – Comes from regulation. Used to be just one at a time
Why are just 4 banks so big? The regulations lead to concentration at the top – Economies of scale to survive
The banks love (or loved – see the Banking Royal Commission) vertical integration! It was needed to survive in the regulatory world.
Current state of the banks
- 1991 - Commonwealth – Bankwest (2008), Aussie, Colonial First State
- 1982 - Westpac – RAMS, St George (2008), BankSA, Bank of Melbourne, BT
- Hastings (Infrastructure), Ascalon, Advance, Securitor, Magnitude
- 1982 - NAB – Ubank, MLC, Banks of New Zealand
- JBWere
- BOQ – Virgin Money, Investec Bank, Home Building society
- Bendigo bank – Adelaide bank, Delphi Bank, Rural bank
The party is over for most as they are selling other divisions: CFS for CBA
Hopefully the vertical integration can be looked at – A brief history of things:
- It was similar in the US: Has the guarantee $250,000USD, however something went wrong
- Glass-Steagall – Part of the 1933 Banking Act of the USA – Prohibited vertical integration
- Congress debated bills to repeal Glass–Steagall's affiliation provisions (Sections 20 and 32). In 1999 Congress passed the Gramm–Leach–Bliley Act, also known as the Financial Services Modernization Act of 1999, to repeal them – But not the guarantee (almost the same place as our system since 2011)
- How much safety does the guarantee provide to the public? They had it in the US, but that arguably lead to the banks behaviours – Look at this in next Fridays episode
- How bailouts are funded through “Quantitative Easing” as it was called in the US, but it is printing money by any other name
- What allows for these bail outs, where the money comes from and the flow on effects of cash advancing your unlimited credit card, but at the government level it is ‘Quantitative Easing’
Thanks for listening! Next Friday we look at Part 2 of this question
Welcome to Finance and Fury, “Say what Wednesday”
- Where we answer questions about the world of personal finance.
- This week, the question isn’t from a listener but a common one recently from people I have been meeting with.
- Best strategy for surplus cash: to reduce debt or use it to build wealth?
Why is it important to ask this first?
- Finite resources – economic problem
- Wants and Needs – We have a lot of them
- Physical things
- Experiences like travel or going out
- Resources – A lot of things cost money – Which is typically more limited than our imagination
- Balancing act – Use what you have to get where you want to be
- Wants and Needs – We have a lot of them
- Budget and Cashflow – What is left after everything is paid for?
- Things that reduce your cashflow
- Taxes – Decreases what you have left
- Lifestyle costs
- Debt – Mortgage
- Things that reduce your cashflow
What is spent on each, versus what is important
- Now versus future needs – Your now needs will seem more important
Uses of disposable income – A hard decision
- Factors that should help to determine:
- Stage of life and the timeline
- Priority
- The options of cashflow
- Reduce debt – More defensive
- Build wealth – More expansive
Breaking down the options for each
- Types of debt
- Bad – Something against a non-investment asset which doesn’t generate an income
- Good – Is it against something increasing in value, and can I claim the expenses?
- Yes to both = Good debt which is a form of building wealth
- Build wealth – Investments
- Monthly investments
- Salary sacrifice - Super
- Using leverage = More debt
What to focus your cash flow on
- Goals
- How long until debt has to be paid off
- Savings
- Good – Pay down in time to retire, but wait until the last minute to start
- Bad – Pay down ASAP, but not at the expense of investments
- Investment – What are the income needs in retirement?
- Hard to work out: Rough guideline – Rule of 20:
- $X amount of passive income multiplied by 20
- Multiply this number by 1 plus the inflation rate to the power of the number of years until retirement
- How long do you have? Great to start early.
- Hard to work out: Rough guideline – Rule of 20:
Answering the question: Should I pay down debt or invest it?
- Ask yourself if it is debt or investment as the priority to reach your financial goals?
- Am I on track to retire with enough invested?
- Yes – Means you have enough to cover what you will need
- No – You may need to focus on investments more
- Look at the timeframes you have to work within
- Do you have bad debt? Yes, will it be paid off before retirement?
- Do you need to pay this off quicker?
- How much, and by when?
- If it is good debt, will the investment be able to pay for itself before retirement?
- Or, will the income be needed to provide a passive income? i.e. used to live
- Putting it all together: Rules of thumb. Remember, this is not advice, but just some guidelines:
- Bad debt is always bad.
- Good debt declines in value the closer you are to retirement.
- But if used correctly, can decrease the time until retirement.
Example: Person with $520,000 mortgage, just bought first place so they have a 30 year time horizon
- Long term rates of 7%, repayments of $3,462 p.m
- Option 1: Pay $20,000 onto a loan, or invest the money – 30 years
- Loan – rate of 7% long term rate and P&I, versus lower rate
- 7%: 30 years would save you $123,301 in interest and 3 years – If you kept your repayments the same
- 5%: 30 years would save you $63,787 in interest and same 3 years – If you kept your repayments the same
- Loan – rate of 7% long term rate and P&I, versus lower rate
- Option 2: Investment – Put $20,000 into portfolio, getting 8% p.a. for 30 years
- 30 years would be around $186k to $200k invested.
- Taxes on investment income – Return: 4% Income + 4% growth, income will be taxed.
- Either fund through cash flow
- Or use investment income to pay for
- What's even better? Pay down the loan and redraw the funds as separate investment loan.
- Convert debt to good debt. – Debt recycling that we have covered
- Have best of both situations – Have investment, and while paying interest it is deductible.
- You would have the $200,000 in investments and pay the loan with $123,301 of deductible interest along the way. Depending on MTR: lowest marginal tax rate: $25,893 to $57,950 at the top.
Summary – Remember this isn’t advice, just things to think about:
- Should you pay debt or invest your cash?
- Long time – Invest but not at expense of Bad debt costing too much
- Short time – Bad debt, then invest or pay down good debt, or both.
Welcome! This week we will be talking about Estonia, which sits right on the Russian border, just below Finland.
- Anyone can become an e-resident in Estonia, create a company and operate it in the EU.
- Digital identity is probably the most significant legal and commercial and political concept we have in today's world
- Estonia is a very Digital Society - government services are provided online, including e-health, e-school, e-tax and e-voting.
- We will be focusing on Estonian e-Residency – As anyone in the world can become one
Estonian e-Residency
- You receive a government-issued smart ID card that provides digital identification and authorisation.
- you can digitally sign important documents, access secure services, and make secure transactions - even if you don't live in Estonia.
- E-residency does not grant citizenship rights or function as a travel document, but: as an e-Resident, you'll be able to
- Establish and run a company online
- Conduct your banking online e.g. make electronic bank transfers
- Have access to international payment service providers
- Digitally sign documents (annual reports, contracts) within the company as well as with external partners
- Verify the authenticity of signed documents
- Encrypt and transmit documents securely
- Declare taxes online
The purpose
- e-Residency program makes life and business significantly easier for
- freelancers, digital nomads, business owners, international partners, and any other non-resident who has a relation to Estonia.
- Great if you want to start a business, expand your business, make investments, or study in the European Union
- For e-Residents who have established Estonian companies, it is important to note that there is a difference between personal tax obligations and corporate tax obligations.
Tax system
- You need to pay tax in accordance with tax legislation in Estonia (and Australia sadly)
- Individual – Property, income, benefits are all taxable at different rules, but there is a flat 20% tax on individual income.
- Double Taxation Agreement – Avoids paying tax in both, only pay in one – We don’t have one with Estonia so there would be double taxation
- Only bad part is that we don’t have a DTA with Estonia otherwise we would be able to keep funds invested in the company there and pay no tax on the profits.
- Companies are taxed at the same rates depending on types of income
- An Estonian company entered into the commercial register is regarded to be Estonian tax resident. Salary are different to dividends
- Types of tax
- Corporate Income tax – Not assessed by profits, but only when profits are distributed (as dividends)
- Dividends: 20% tax rate on assessable payments
- Different rules apply for the avoidance of double taxation with regards to wages as compared to dividends.
- if a company is active in a foreign country (not Estonia), the other country may tax income received from there, in accordance with the rules applicable in the tax treaty instead (remember we don’t have one)
- Corporate Income tax – Not assessed by profits, but only when profits are distributed (as dividends)
- Possible double taxation is avoided in Estonia when distributing profits as dividends.
- We don’t have a DTA so from what I can see it may probably be double taxed
- Value added tax - the supply of the goods and services which shall be taxed in Estonia and which VAT rate is 20%, 9% or 0%
- Social tax – Tax for social security payments
- Others (customs, duties, unemployment insurances, etc.)
Determining the tax residency – It is murky
- An Estonian company registered through e-Residency is automatically tax resident in Estonia as according to the Income Tax Act a legal person is a tax resident if it is established pursuant to Estonian law.
- If a natural or legal person is regarded to be Estonian tax resident, it should also be taken into account whether the same person is tax resident of any other country under the law of the foreign country. In such case the tax residency in Estonia will depend upon the tax treaty between Estonia and the foreign country.
- Business operated online - you receive income from around the globe, your Estonian OÜ would be tax resident in Estonia.
- e-resident company can generally avoid double taxation if business activity is conducted abroad. If profits that are taxable abroad are paid out as dividends in Estonia, these profits might not be subject to tax in Estonia.
- Business operated physically in another country - your company is likely to be taxed there too.
I’d strongly advise e-residents to consult a qualified tax professional in order to determine their tax obligations.
Example
- If you work in another country and create a company in Estonia
- Tax rules apply to your company profits in you local country
- IF the company is managed by a tax resident of the home country, the company would be treated as a tax resident company in the home country
Summary
- This is a promising sign for the future – Ease of business and ability to access lower taxable environments
- I see it as a competitive market of taxation
- If you have a monopoly operating then there is no optimal solution for consumers
- With tax – Gov is monopoly and we are forced consumers
- When it is opened up for countries to compete, you start to see shifts in the places companies do business which is a sign of consumer demand
Hope you found this episode interesting...but again, if you are interested, speak to a tax expert before doing anything!
Welcome to Furious Friday… The Tax Bill has Passed…Yay!
Now, let’s clear up a little misconception floating around, we’re going to talk about the Robocall that was made to a lot of Queenslanders.
I wasn’t “lucky” enough to get one of these calls, but I can just imagine it was the same voice that does all the smear campaigns. It said:
"Right now, in Canberra, Pauline Hanson plans to vote with Malcolm Turnbull to give another tax cut to the top end of town. She's even giving herself a massive tax cut. But it's not too late for us to stop her. Pauline is in Canberra right now – the final vote could happen at any minute. Press one to be connected direct to Pauline Hanson's office to tell her yourself: Stop selling Queenslanders out."
Questions of the day:
- Are these tax cuts going to the “top end of town”?
- And is this selling Queenslanders (and the rest of Australia as it is Federal) out?
The plan is a 6-year rollout, aimed at reducing the burden on the full-time workers in Australia due to the progressive tax policy.
Here's a summary of the changes, courtesy of the Parliamentary Budget Office:
1 July 2018
- Increases the upper threshold for the 32.5% marginal tax rate from $87,000 to $90,000 (3-4% of Australians)
- Low and Middle-Income Tax Offset of up to $530 for individuals with taxable income up to $125,333 (Full $530 between $48-90k, reduces by 1.5 cents every dollar over $90k)
1 July 2022*
- Increases the upper threshold for the 32.5% marginal tax rate from $90,000 to $120,000
- Increases the upper threshold for the 19% marginal tax rate from $37,000 to $41,000
1 July 2024
- Increases the lower threshold for the 45% marginal tax rate from $180,001 to $200,001 from 1 July 2024.
- Removes the 37% marginal tax rate, income from $41,001 to $200,000 is taxed at a marginal rate of 32.5% from 1 July 2024.
- That is around 40% of Australians – Or almost every single full-time worker!
Who will receive this reduction in tax? Let’s look at the stats
- $81,531 average annual full-time earnings (Data Sourced: ABS)
- 5m Australians - 19 million Australians are over 15 years old
- 6m are employed full time
- 8m are employed part time
- 800k are unemployed (looking for work)
- 2m Not in labour force
- About 3.5m over 65
- Incomes of 19m Australians of those 15+ years of age
- 10% - No incomes
- 31% (6m) between $12,000 and $30,000 – But these are likely those not in the work force or working part time
- 46% above $30,000 – About 8.5m, of which 6.6m are working full time
- 6m Australians will not have to pay the 37% tax bracket from 2022
- This group makes up 85% of all tax income the government receives.
The Verdict:
- Not much benefit for the first 4 years
- Small benefit to those between $50k and $90k - $530 tax offset now (4.5m Australians)
- By 2022 – Earning $120,000 p.a. you will have $12,220 more per annum (10% of salary)
Back to the questions
- Is this just for the top end? Well for those lucky people who work full time it does benefit
- The top 30% of income tax payers who pay for 84% of the tax will get the benefits
- So, I guess the claims are true… but it isn’t like the top 1% are the only ones getting the benefits. And they’re the ones paying a higher tax rate anyway.
- Is it selling anyone out? Or letting people keep what they earn?
- When you look at it, for those not paying much tax, they don’t save much, as they don’t pay much
- They don’t receive anything either, as it is a tax cut and not a handout.
The real benefit:
- Save tax – Have more disposable income
- More to invest! - $3k to $12k for the average households incomes (about $120,000)
- Shouldn’t really be more to spend but either repay bad debts or increase net wealth
I hope this clears things up!
Have a great weekend
*Yo, I said “2020” on the podcast, but I meant “2022”. Sorry!
Welcome to Finance and Fury, 'Say What Wednesdays' where each week we answer your questions.
This week's question is from Sandeep:
“Hi, Can you please talk about how to purchase investment property using my superannuation?”
Thanks Sandeep, great question!
Buying property in superannuation
-
First you need a Self-Managed Superfund (SMSF)
- An SMSF is a private superannuation fund, regulated by the Australian Taxation Office (ATO) that you manage yourself.
- All other funds are managed by the Australian Prudential Regulation Authority (APRA) - the regulator of financial organisations (Banks and superannuation funds)
- SMSFs can currently have up to four members. All members must be trustees (or directors, if there is a corporate trustee) and are responsible for decisions made about the fund and have to adhere to compliance with relevant laws/ Superannuation Industry Supervision (SIS) Act
- When you run your own SMSF you must:
- carry out the role of trustee or director, which imposes important legal obligations on you
- set and follow an investment strategy that is appropriate for your risk tolerance and is likely to meet your retirement needs
- You need to have enough time to research investments and manage the fund, keep comprehensive records and arrange an annual audit by an approved SMSF auditor
- Organise your own insurance
- Use the money only to provide retirement benefits.
- An SMSF is a private superannuation fund, regulated by the Australian Taxation Office (ATO) that you manage yourself.
-
Who is it appropriate for?
- Those wanting to combine individual superannuation balances
- Those who are hands-on
- Those looking to buy property
- You can get Direct shares or Term Deposits in other super accounts which aren’t available within SMSF
Buying the property
- The property must meet the ‘sole purpose test’ – and only provide retirement benefits to members
- Must not be lived in by a member or related party (family)
- Must not be acquired from a member or related party
- Must not be rented by a fund member, or related party
- BUT – the exception is business real property
- Must meet the business real property definition – if you own and run a business you can operate out of a property your SMSF owns
- Your SMSF generates an income as you pay rent to the SMSF at market rates – must adhere to definition of ‘Arms-length’ transactions
Property purchased with a loan – limited recourse borrowing arrangement (LRBA)
-
Bare Trust – A separate legal structure which protects the members of the fund, set up inside the SMSF in order to borrow on behalf of the superfund.
- The property it the sole collateral for the loan and any other assets owned by the superannuation fund are protected
- Property has to be a ‘single acquirable asset’
- Not able to change the character of the property (can’t subdivide or renovate it while there is a loan attached to it)
-
When it works well
- When you have a decent balance – ASIC guidelines say a minimum of $200,000, however the more the better – you’ll incur flat fees of $2,000 p.a. plus investment costs
- The more you have the more you’re able to diversify into other investments. This comes back to having enough to spread around. There’s a great deal of additional risk with a lack of diversification. Don’t put all your eggs in one basket.
- The property: Commercial real, especially if you have your own business – own it yourself and lease it to yourself. Super only pays 15% tax too!
- What won’t work – The risks of buying property
- If the property is heavily negatively geared
- Deduction are lost if no additional income is earned by SMSF to be offset by the deductions
- Also, maximum rate of tax is 15% for accumulation
- Not much in super – only asset is a property
- Non-adherence with the fund investment strategy; liquidity requirement, meeting diversification requirements
- Big risk to your retirement balances
- Not making a lot of contributions
- Sometimes the property income won’t cover costs; auditing costs, accounting costs, interest repayments etc
- Need to have employer or personal contributions to meet cashflow requirements
- Can’t make changes to the property until the loan is paid off
- If you need to renovate for any reason, you will be stuck
- It can be hard to wind up an SMSF
- Loan documentation (if not set up properly) would require the complete sale of the property before SMSF can be closed
- If you move overseas and become a non-resident you can’t have an SMSF
- Additional rules, like the in-house asset test
- If the property is heavily negatively geared
If you are looking at doing it, seek advice! Don’t stuff up your retirement!
Thanks again for the question, and remember - these episodes are open to anyone who has a question! Go to Financeandfury.com.au and get in touch through the contact page!
Have your Super set up – do yourself a favour!
- What will kill your retirement? Not looking at your super now.
- Would you trade 15 minutes now for $350,000 in 30 years?
- That is all this episode is, little things now for the future self – not hard, and your future self will thank you.
- Tips on what you can do now with little effort or sacrifice to maximise your future
What is super?
- Most people think of superannuation as just something your employer pays into, which you can’t access until you turn 60
- Even though your employer pays into super, that is your money! 9.50% on average
- Don’t care and why would you right? Out of sight, out of mind and decades away from becoming relevant.
- If you could log into your bank account and click a few buttons to save a few hundred dollars a year, would you?
- The real cost of super is opportunity cost – doing nothing now will hurt
- Any problem ignored long enough will grow – until it is too late
- Pay attention and make it work – don’t regret the future
- One thing I hear clients say all the time is ‘I should have looked at this years ago’ – regret is worse than the effort
Real use of super
- Forced savings - YOLO safety net.
- It allows me to diversify my investments and secure my future. My businesses can fail, go broke but at least by the time I am 60 I will have enough in my account to sustain myself for the rest of my life.
- Tax effective investment account – if you are investing for the long term, why not use?
- Same investment of 10% p.a.: Compounding returns of 8.5% p.a. vs 6.1% p.a.
- $20,000 over 30 years = $231,000 vs $118,000 – or almost double the money
What are your options:
Super is a vehicle to invest funds for retirement – A car is a vehicle
- You can get a Mazda, or Mercedes but the aim is to get you from point A to B!
- Like cars there are different types of super accounts with different features
Retail
- A Master Trust is a superannuation fund in which a large number of members deposit their money.
- The trustee of the Master Trust pools the money together and purchases interests in the underlying investments, typically managed funds.
- The value of the investments of each member incorporates the fees, franking credits and some taxes from the underlying investments.
WRAP account
- External super trustee but you have control over investment decisions
- You get a cash account
- Then you select third party investments – Managed funds, Direct Shares, LICs, ETFs
Industry
- Industry super funds are multi-employer funds (employer associations and unions)
- Investments - limited to around 10 multi-sector investment options (eg. Growth, Conservative, Balanced), limited insurance options
What to do to make sure you make the most out of it?
- Pay attention – get the right investments
- Cars: You can have a Ferrari but if the driver (investments inside the account) is awful, the car may crash! Not getting to point B!
- Make sure your contributions are going in there
- Treat it like your own, because it is – If you think you don’t have any investments, well you do in your super
- Managed funds are investments – just doesn’t look like it with industry funds
Strategies:
- Consolidate accounts
- Like a lot of people, I had different employers
- 4 super accounts v 1 account – Each costs $80, plus $300 in insurances ($380 total)
- $1,500 p.a. : $20,000 in super = 8% costs – good luck for investments to beat this
- Like a lot of people, I had different employers
-
Check your costs – Some accounts are higher than overs (in the last Furious Friday ep)
- Admin fees: Standard is about $78 which is good for lower balances
- The platform I am with costs $175 p.a, but it’s worth it. Any managed fund I want, any direct shares (Australian or International).
- Investment fees (MER/ICR) – these can be hidden
- Recently industry funds went from very low to about 1% - Disclosure required
- The higher the MER – the lower the net returns depending on investment strategy
- Don’t get caught out.
- Admin fees: Standard is about $78 which is good for lower balances
-
Insurances or not?
- What is your situation like?
- Do you have dependents and debts? Or are you paying for something you don’t need?
- If you are studying still, with many super accounts you are probably over insured!
- Don’t pay for things that you don’t need.
- If you are a professional – Chances are you are paying too much for the cover
- Standard Covers – Same premiums for all – Builders vs Accountant
- Premiums – statistical likelihood for claims
-
Investments - Depends on the account.
Premix - Balanced for someone who has 30+ years might not be the best choice.- Higher levels of volatility can be good for regular contributions
- Example: 15 mins for $300k
- Earn $60k p.a. growing with 2.5% and starting super balance of $30,000
- In 30 years: Super earning 6% = $707k, or 8% = $1,060k
- Doesn’t have to be earnings but reduced insurance costs as well
-
Contribute - Tax savings and asset gain
- Salary sacrifice when on a decent marginal tax rate - Earn $100k, each $100 you put in there is $60 less you have in pocket, but $85 more into your super account.
- Non-concessional - Lower MTR - Can get up to $500 from the government in government co-contributions (free money!)
What’s right for you?
- Type of account
- Retail – Lots of options
- Industry – low options, standard based on risk profiles
- Investment options
- Long term growth
- About to retire – protect your capital
- Boost your super
- Cut costs or consolidate
- Make effective contributions
Most important things - Pay attention
- Don’t regret the future wishing you had consolidated your super or reduced your costs 20 years from now.
- Doing the right things now means that your eventual retirement can be more financially secure!
Thanks for listening!
Welcome to Finance & Fury’s ‘Furious Friday’!
Today’s misconception – Is cheaper better, or do you get what you pay for?
Met with a client this week for an initial appointment – He had been reading ‘The Barefoot Investor’
- I haven’t read it, but he had a summary of the tips in the book.
- His biggest take away were on the cost of things – basically, lower cost is the best option.
- But is it? You pay for costs for a reason - to get something out of it!
- Super – Admin fees and Management fees
- Listed Investment Companies (LICs) – Management fees
Very true that when looking at ‘like for like’ products – cheapest is generally the better option
- When comparing the exact same: for example, buying a car – If ‘Car A’ and ‘Car B’ are the exact same, you go for the lower costs
- Close substitutes: If things are really similar ‘Car A’ and ‘Car B’ (Mazda and Hyundai) – Might go for a personal preference
- But how do you compare things like investments or superfunds?
- Not all things are created equal
- Comparing solely on costs can be a trap!
Not all things (like super) are 'like for like'
- Admin fees
- Host Plus - $78
- Sunsuper - $78 + 0.1%
- Australian Super - $78
- Investment options, returns and net costs: Returns – MERs – taxes = Net Returns
- Income returns taxed at 15% on average
Cumulative returns
- Host plus
- Balanced Default - 74.31%
- Index Balanced - 69.60%
- Sunsuper - 67.01%
- Australian Super - 71.59%
You get what you pay for here – because they are all managed and invested in similar ways
- These options, however, might not be the best for all
My funds
- My super is with another platform that allows me to make the investments, so I can choose from 400+ other managed funds, direct shares, LICs etc.
- They do charge more though, so if you are going for multimanaged you will underperform, but if you go for other managers you will make up the difference.
- Needs to be non-index investments to make up the difference
- Active funds
- If you are higher growth, non-index, that increase in values more than income returns
- My fund pays me franking credits
- For me the costs are worth it to access the investments and franking credits
Cumulative returns
- Average – 148.15%
- Not ‘like for like’ – More high growth than the industry funds.
- But costs more - $175 flat + 0.3% of balance
- MER – 1.4%
LICs vs ETFs
- LICs -Companies
- Control Dividends
- Make active investment decisions
- ETFs – Trusts (similar to managed funds)
- Generally passive
- Dividends, FCs – flow through to the investor
Dividend payments
- WAM – 6.6%
- WAX – 6.4%
- AFI – 3.96%
The take away
- If you know you’re comparing ‘like for like’ – Lower cost is best
- But you shouldn’t base all decisions around the costs only
- If you are comparing two large cap funds that do the exact same thing
- Or two super funds doing the exact same thing
- Go for lower costs
- Some things are worth the extra cost!
Welcome to Say What Wednesday - Today’s episode is a special one! Plus there’s a bit of an announcement at the end.
This all started with a question I asked myself a few years ago. The question is: How can I increase the financial literary of Australians?
The Back Story
- Started reading books about investing at age 12, played the ASX School Share Market Game as well
- Started investing at 16 years old, just before finishing school
- Went to Uni and did Commerce and Economics degrees
- Started in financial planning after graduating and never looked back
- I had a lot of financial knowledge, but my clients didn’t (which is why they were coming for advice!)
- I had a ‘Eureka!’ moment – most of the initial meetings I was having with clients was spent simply educating them on a few of the same basic principles. Teaching people was 60% of the job.
- Previously I hadn’t thought too much about the fact that people didn’t have the same background or exposure to finance as me;
- I was pretty naive starting out – I assumed everyone would know at least the basics
- But learned that financial education is lacking – it’s not taught at school or anywhere else in life unless you specifically seek out the education yourself
Education / Literacy
- You learn physics and chemistry and how to dissect poetry – but most people never use it again
- The point, I thought, of an education is to equip you to earn an income later in life.
- From there, people go into trades or go to Uni, but never learn what to do with their money
- What are your options then?
- You either learn as you go – make some mistakes along the way
- Someone does it for you
- Or someone teaches you
There is plenty of information out there – But this comes with a few problems
- Scatter gun approach to information / Information overload – where do you start?
- No structured order to the internet in most cases
- You don’t know what you don’t know – hard to search online unless you know what you are looking for
- Most top-ranking searches are from the media / money making institutions – selling something, not providing education – a shiny quick fix
Creating a Solution
- In 2014 I decided to do something about this problem
- First step was to see where I could teach
- Contacted the course coordinator from a community education provider, we met and they liked the idea
- I locked myself away and started from scratch – I went back to the basics and thought about what information I would need if I was starting from day 1 all over again.
- The end result was a 6-week course that I taught each semester for 2 hours a week, Wednesdays 7pm to 9pm.
- Really enjoyed this, but it was limited in scope – plus people’s lives are busy and 7-9pm on a Wednesday night is a big commitment
- Lots of people wanted to take the course – but couldn’t make it
An evolution
- After 2 years of teaching I had another eureka moment – almost the same time as Jayden and I started The Rentvesting Podcast
- Why not put it online? You can do it your own time and there’s unlimited scope and online tools to use as well
- So, over the past few months been putting it together in an online package - not restricted by school terms and 2-hour time slots and condenses all the information into modules that flow in a sequential order
- The content ended up growing into 24 hours’ worth of lectures over 12 modules – I was running into same problem as before - information overload. Plus – there was so much information in there it was hard to get through.
- So, after some initial feedback I scaled it back to just the essentials
The Announcement
- Lectures recorded for the essential finance course – gone from 24 hours to 7 hours of lectures
- To be completed through an online portal – go at your own pace
- Tools for each module and quizzes – no point learning if you can’t apply it.
What the course covers - 8 Modules
- Financial independence and goals
- Basics – Income, taxes, balance sheets, budgeting
- Basic economics – Supply and Demand – Important for price of investments
- Investment theory – Risk returns and diversification
- Investment Basics – Different asset classes – How shares work, bonds, etc and asset allocation
- Structures – where you can hold investments – Family trusts, super
- Strategies – Focus on how to build wealth and reduce tax
- Risk management – Long term plans need contingency – Investment risks and personal risks
For those who are interested go to https://financeandfury.com.au/learn-finance/
- Or just get to our website financeandfury.com.au, select ‘Learn Finance’ from the main menu, then scroll down to the bottom of the page to register your interest
- We are already getting a list of people together to contact when the course goes live - this course is only being released to podcast listeners
- Further details soon
Thanks for listening!
Welcome to Finance and Fury
- Quick tips to help with making successful investments in property
- When property will work – and when it won’t!
- It is two-fold – How well the property works, and then what your own personal situation is like as well
Situations that will work – essentially, doing well in property compared to not doing well
Property
- Paying fair value or undervalue for the property - The first step is making sure that you don’t lose from the get go
- Don’t overpay – New builds can have the FHOG built in
- Or at least pay the fair value in an area that will grow
- Remember for a place where land values will go up – The property price will technically go down (remember to watch out for maintenance costs)
- Potential zoning and subdivision – future capabilities of the property
- What is the ability to increase prices?
- Zoning – growth of land value from high density zoning
- What are the limits on your ability to change the property?
- What is the ability to increase yields?
- Sub division – 2 incomes for one
- Duel occupancy
Your situation
- Stable cash flows – Don’t get caught out
- The ability to have long term ownership and maintain payments is important
- Can hold for the long term
- Future plans are important – Property is great for growth – But you have to wait
- Limit your outgoing – $50 or $100 p/w – Don’t get in a hole
- The worst case is to be in a position you are paying more than you earn long term
Situation that won’t work!
The property
- The hidden costs – the things that kill the profitability of property
- Sinking Funds/Body corporates – Seen $6,000 on a place renting for $28,600
- Leveraging too high
- Price declines can lead to banks increasing your repayments – LVR too high
- Interest rate rises – too much debt against value = Bad yields
- Repayments may be unaffordable if too much debt and rent declines
Your situation
- Family/income situation changing
- Maternity leave or starting a family – Additional costs plus lower incomes
- Needing to buy a new home for yourself – bank may not lend if existing investment debt
- Property is a wealth trap
- Worst property in best street is a good buy – but not if it is going to cost $300,000 to make it habitable
- Title searches – Flood zones, major highways (Moving to Brisbane, places in Kenmore)
- Negatively geared – with no income to offset or low marginal tax rates
- MTR of 21% means that 79% is being lost
- Loan or ownership structure incorrect
- Joint owned but one person has no assessable income – bad for deductibility
Thanks for listening!
Welcome to Furious Fridays!
Make sure you’re caught up with last week’s episode about the system and what it should provide
System - Inclusive Vs Extractive systems
- Inclusive - Equality of opportunity – everyone has access, same rights, no preferences
- Accountable – Can’t be extractive: held accountable and easily removable, transparent
- What system provides – what incentivises should be available
- Property rights – keep what you own
- Ownership of what you own and purchase,
- Patents
- Legal system - protect what you have, know deals are honoured
- Contracts
- Borrowing
- Public services – Well functioning state; police, infrastructure, education
Use what the system provides – What has worked over history
- Extractive system – those that rise to power and keep it, sucking wealth up (short term for some)
- Inclusive system – those that do it on their own and keep it.
Your incentive: increase the incentive of others to exchange money with you.
- System provides freedom – freedom of exchange of money is the first part
- You have wants, you buy goods/services and exchange money for it
- Wants – Things to be met by products and services
- Products and services – the vehicle of wealth transfer in a free market
Options on how to have individuals voluntarily transfer wealth to you:
- Create the product/service – New idea, or improvement to existing
- Demand for a product of service
- This is what people need, and will exchange money for
- Built around solving problems, or convincing people of needs (marketing)
- Participate with an existing product or service – employment
- Demand for you and what you can do to improve the product/service
- What you know to help? How can you get to know more?
- How you can use it to help?
Creative destruction: mechanism for societal improvements
- Extractive economy - too destabilising = lose power. Stocking producer in England – Elizabeth banned him from doing it, but he had to go through the state to do, went to France, same story.
- Inclusive - If you think there is no money in something as nobody is doing it, there may be money.
- What do people need? People solving problems – wealth is transactional under this system.
- Or, Who do products/services need?
Where do you start? Figure out the area to focus on
- What are you good at?
- Individuals have talents – mine is numbers/theory, don’t give me an English test.
- What you like to do?
- Happens that as I am interested in finance/economy, which is thankfully has theory and numbers
- If you don’t know: Get a list together! See if there are cross overs.
Once you have it: Either what product/service you want to work with, or create yourself
- First step – increase your demand – have to provide greater value than cost (PROFITS are incentive)
- Product – Best product or service, or what people value
- Individual – what do companies need?
- Second step – Once people transfer wealth to you invest your surplus
- Reinvest in business/build outside investments
- Invest personally to build personal wealth beyond transfer of wealth
- Third step – keep repeating steps one and two again & again
Along the way: Tools at your disposal
- Systems to take advantage of
- Property rights – you keep what you earn/save
- Borrowing – leverage your wealth to access capital to invest
- Legal system – minimise tax and protecting what you own
The really wealthy have always done this well
- Created a product/service people really want.
- Kept reinvesting and creating more to fulfil peoples wants.
- The more people want what you have, or the more people want what you can offer them,
- the more you are in demand, the more you can demand for your good,
- the more people will transfer your wealth.
THE BAD - Crooks and people who transfer wealth to themselves, for poor or no service
- Obvious flaw in the system – transfer in wealth needs to be beneficial, informed voluntary decision.
- Market crashes occur – thanks to human behaviour – but the market learns
- Human nature – we are more self-interested than altruistic
- Works in small numbers – help your friends/tribe, etc.
- But when in millions of people, humans’ motivation on average is the self
- Why shared group work people slack off – for additional effort you put in, little additional reward.
- NEED INCENTIVES!
Our stories
- Jayden and my story are similar – Started PAYG – saw problems with the systems, wanted to improve.
- Started own companies – potential to do a better job at helping people
- Provides freedom to improve what you are doing.
- When you are starting out – you really want to do a good job, if you can’t help people, your business fails.
- When you are comfortable at the top – what are your incentives? It’s pretty hard to change, but the old models don’t work for new world – Creative destruction
In summary
- Become “In-demand”
- Product/service
- You are the product – measured by how much people want you
- Decide what you want to be demanded for
- Get really good at it, or
- Create a product people want.
- Keep some of the wealth transferred to you to invest (keep/save)
- Keeping improving!
- Product - Reinvest the rest, do a better job, and
- Self-improvement
If you think that you’re a victim, you are really your own oppressor!
Leave a review, ask a question or provide some feedback. We love hearing from our listeners! Go to https://financeandfury.com.au/contact/
Welcome to Say what Wednesday
Today's question is from Emma. She says, “I'm new to the podcast so not sure if you have covered this in the past. I thought it might be cool to hear you analyse a specific stock or company; not like a recommendation but say something in the past. To avoid people taking it as a recommendation it could be something you have put money into and how it went or maybe something you lost money in and how that happened too.”
Analysing stocks
- I’ll talk about the two camps of analysing shares
- Look at the pros and cons along with how they work
- Talk about how I personally do it, and a few winners and losers, what they did right and what they did wrong.
The Methods of making stock analysis
Fundamental Analysis vs Technical Analysis
- Fundamental analysis – Aims to value a share by its intrinsic (fair) value – valuation of shares
- Done by examining the financials, qualitative
- Why? Buy the undervalued or expected future performers
- Technical – Doesn’t care about intrinsic values
- Shares are traded using share charts to identify patterns and trends
- Works off the “Dow Theory”
- market price discounts every factor that may influence a shares price (why [intrinsic] values don’t matter)
- market price movements are not purely random but move in identifiable patterns and trends that repeat over time – This works off “support and resistance”
- Why? I talked about markets being behaviours of crowds – supply and demand
- If it’s over-demanded you sell, if it’s under-demanded you buy
What they are and how they work
- Fundamental
- Macro – Trends in the economy
- Country stats – unemployment, tax rates, weather
- Thematic trends of society
- Examples – Lithium (Pilbara), Health care
- Micro
- Underlying company financials, understand the management
- All about looking for evidence in financials and forecasting these out
- Macro – Trends in the economy
What to look for:
Fundamentals
- Financials – historical – but can show trends, most important thing is cash flow
- Earnings per share goes up from a few things
- Increased dividend growth (profits)
- Buy backs – reduction in shares
- Example - RIO
- Decreasing debts – will show the reduction in costs
- Management – hard to know what they will do, as they are make or break as we will see
- Track record is important, but impossible to know future performance
- Thematic – trends and the future
- The important question is – how will these effect the future earnings of the company?
- This is where share recommendations come from. It also depends on who you talk to as to the value
- Earnings per share goes up from a few things
Technical
- Use technical indicators
- Moving averages, volumes, trends in the long-term prices
- Aims to predict the future direction of the price based on past behaviours of the market
- You want to look at trends here, plus some technical indicators
- If a share is below the exponential weighted average + oversold = it could rise
How do I buy shares?
- In the early days – Fundamental analysis – smaller cap shares
The horror stories
- BCI Minerals - BCI – 4th biggest iron ore producer at the time
- Earnings growth was great, below fair value – bought in 2011 for $2 – 2013 went to $4.50
- BUT – they took on a massive amount of debt - 2012 (11.7m) to 2013 (67.4m)
Was fine as long as iron ore prices didn’t go down...but they did… - Revenues dropped – their response was to do equity raising to pay off debt – 144m to 228m = Dilute EPS… and they kept going to 393m
- Today are sitting at $0.145 = 93% loss from $2
-
Medusa Mining – MML – Gold exploration
- Decline from $9 to $1.80 peaked my interest in 2013
- Massive bubble but looked stable – EPS went from 54c to 28c, but they had no debt
- But then they started slowly borrowing after I bought – 2.3m, 2.8m, now 4.6m
- While revenues have been going up – EPS in 2015 was -94c, now -23c
- Price now at $0.65c = 63% loss
-
What is the common connection between these two?
- Single focus companies (iron and gold) with revenues tied to resources – no control
- Poor management decisions - Being in resources they dug further into their hole –
- Rather than hunker down and get rid of debt, decrease costs and wait, they got further into it all
The happy endings
- Dulux Group – DLX – The paint company
- Can’t take full credit – Fund manager gave the tip – Bought for $3.20 in 2012
- Revenues going up year on year
- ROE was in the double figures each year
- Diverse – Aus, NZ, Asia, and produces lots of hardware/construction for private and section
- Plus, they had a monopoly!
- Today $7.64 = 138% gain
The mixed, but then great!
- Codan Limited - CDA – Communication products, detection and mining technology
- Bought in 2013 for 1.60 – Rise from $1.60 to $4
- Then they declined from $4 over 5 months – but this peaked my interest
- After mining boom news came out and dropped to $0.90 I bought 50% more
- What I liked
- Range of markets – Gov, private, and world-wide (Aus, Canada, Middle east, Europe)
- After crash they started focusing on paying down debt
- Cut other costs and got financials back to a healthier position today
- Smart management is the winner here – Today at about $3.10/$3.20 = 140% gain
These days - I use a bit of both
- ETF, LIC – Technical
- Individual shares - driven by fundamental, but do follow trends to see what direction it is heading in.
- Micro caps are too volatile - I don’t buy micro-cap shares personally anymore
- Use micro managed funds as they are getting the info I am not, and trading daily
- Not a lot of public information to work off
- Someone sneezes and their profits can be gone = Price drops!
I hold companies – all because it dropped doesn’t mean you should sell if it is still a stable company out of market favour – sometimes I buy more
Summary
- They both work off the crystal ball in the end
- Just better know what you are doing and not freak out
- Best way to go is to invest for the long term into stable, diversified companies – i.e. won’t go out of business with some bad results
- Thanks again Emma for the question!
Want to hear more like this? About technical analysis or fundamental analysis, or something else? Go to https://financeandfury.com.au/contact/
Welcome – Today we're talking about controlling your behaviours and emotions...when it comes to investing
- Investing is an action, controlled by behaviours – emotions change your behaviours.
- Getting a good investment midframe allows you to invest well for the long term.
How to start investing and not muck up – This means controlling your fear more than trying to control investments – Can’t control what investments do short term
- Fear is an emotion – Which stops you from investing
- Starting is the hardest part – Getting the right fame of mind and overcoming fear
- But staying motivated and on track is just as hard
- Life gets in the way – and new things happen in your personal life as well as market ups and downs
How to start? “Needs-based” plans – ignoring your emotions
-
Hard to know – “you don’t know what you don’t know”
- What are you trying to achieve? – If you don’t know your reasons to invest, you can’t answer this
- Long term growth?
- Passive income?
- How will you achieve this? Strategies and investment options
- Save a deposit – Buying a property
- Monthly investing into Managed funds, LICs, rather than savings
- What are you trying to achieve? – If you don’t know your reasons to invest, you can’t answer this
-
The most important thing is to just start – otherwise fear will take over and then so will indecision
- Information overload will be hard to overcome
- Diversified products help to remove this – ETFs = let someone else make the investment decisions for you
- Taking the plunge – Start small if you are uncomfortable
- You don’t need to put everything in, but a small amount
- Example: Some people like to jump into a cold pool, others start with feet and slowly move in to acclimatise. Like a pool of investments, some people do dive heard first into pools, but what happens when they can’t see the bottom, or can’t swim?
- If they break their neck or drown, would people say that pools are dangerous, or the behaviours were dangerous?
- Say it is your pool, or a pool you go in every day? You know what you are in for – So you know if you should dive, or slowly get in.
- Prior experiences do affect your future behaviours
- Buy a property that goes down – Will you be more or less likely to buy another?
- Buy shares right before a crash – will you be more or less likely to think share are too risky?
- LESS likely in most cases – But these are some of the best long-term investments thanks to GROWTH
- Don’t let one bad experience stop you
- Or something you hear about – fear will come in from hearing about other people losing money
- Information overload will be hard to overcome
Failing at investments
- FEAR = failure
- Rational fears vs Irrational Fears – Some fear is good, but only of very risky investments, or of diving in head first!
- Stops people from starting to invest – Fear of the unknown – Shares are ownership
- Investments will fall apart if you respond by fear!
- Doing the wrong thing – “fear selling”
- FEAR leads to following others instead of doing what is right for you.
- Do they know something you don’t? SO, you follow them just in case, even if it’s irrational!
- Buying – Leads to buying at peaks of bubbles
- All because people buy property doesn’t mean you should.
- All because people buy shares, doesn’t mean you should.
- Selling – Leads to selling in the crashes
- How do you avoid this?
10 Do’s and 500 Don’ts of knife safety - Don’t do what Donny Don’t does!
- Investments can be pointy and have sharp declines – Killing your investment future
- I have some rules when I invest: There aren’t 10 – there are 5
Rule 1) Invest for the long term with a purpose!
- This means holding through the cycles
- Also investing in a diversified portfolio to survive – long term!
- Not putting more into one investment than I can afford to lose
Rule 2) Don’t invest out of hope, or more than you can afford to lose – That is gambling
- Invest with a greater certainty
- Avoids you chasing the risky (and unlikely gains)
- EXAMPLE – the only losses I have in shares is from hoping they will be big returns in the short term... they weren’t
Rule 3) Don’t do what the crowd is doing, just because they are doing it,
- That is called “Contrarian investing”.
- Buy when others are selling
- Personally, I love doing this. Like the “divorce yard-sale” of investments
- Sell when others are buying
- Personally, I don’t do this, as what would I buy if I sold? I just wait for the crash and get things on discount.
- I just don’t buy at these points, but I don’t sell.
- You can’t time the market, but you can know when things are cheap or expensive.
- Buy when it is cheap, and don’t buy when it is expensive
Rule 4) Don’t listen to the media – Their job is to sell fear and there is always a new crash coming
- Try to sell when to buy: Look at the fads of investments – short term holds – but longer term someone is left holding the bag.
- You don’t want to have to change your investment wardrobe every 6 months.
- What do you replace it with? When you sell an investment, it goes to cash
- Then what do you buy?
- You are back at square one – Figuring out what to invest in now!
Rule 5) - If in doubt, remember rules 1 to 4!
In summary
- Just start, but don’t dive in head first unless you know how deep the pool is.
- Come up with your own rules over time as well. And avoid the fear!
- Getting started in investments and keeping going is all about your behaviours.
Introduction – Welcome to Furious Fridays
Imagine you are a child
- North Korea - After school (which is mostly propaganda to solidify your ruler), 10 years mandatory military service
- No option to accumulate anything
- No way to start a business
- No way to buy your home
- Never own a car, telephone, or travel overseas
- Constantly looking over your shoulder, similar to Soviet Russia, 1 in 10 were government informants
- South Korea - Whatever you want – get a degree, buy a home
- South Korea out produces North Korea’s economic output by 37 times - $33,400 vs $1,800 GDP per capita (that is, per person)
- Live 10 years longer in south, infant mortality is almost 7 times lower
So, what makes them so different? Capitalism!
Let’s look at the history:
- Korea WW2 – Japanese colony, then split North/South with Russia and America
- Korean War – June 25, 1950 North invaded south with Russian aid, America stepped in, demolished north with firebombs, they surrendered
- North – history – state run economy – founded by Kim Jung-il’s grandfather
- South – History – adopted capitalist ideas
Capitalism is characterized in the following ways:
- It is a market-based economy made up of buyers (eg. People) and sellers (eg. Companies).
- The goods and services that are produced are intended to make a profit, and this profit is reinvested into the economy.
- The market (people buying & selling) determines investments, production, distribution and decisions the forces of supply and demand
- There is a need for continual production and purchase for a capitalistic economy to operate efficiently.
Capitalism provides a system that create incentives and efficiencies
- What are incentives? – Rewards for your effort
- Not a zero-sum game – earn more, keep it, and use it as you want
- If someone can take your stuff, why bother?
What capitalism provides: Inclusive system
- FREEDOM! - Why is it important? Allows improvement, and people to dream of betterment.
- Protection! - Why start a business, or take risk, if it can be taken or taxed away from you?
The easier it is, the safer, the more you trust the system, and others trust you in the system, then easy!
The political System - Inclusive Vs Extractive systems
- Needs to be Inclusive - Equality of opportunity – everyone has the same rights
- Inclusive - Opportunity providing
- Lack of interference – restrictions (regulations)
- Reduced barriers to entry, freedoms/opportunity - laws
- Non-exploitive (Extractive) – shouldn’t take from some to give to others
- Inclusive - Opportunity providing
What inclusive systems have– what incentivises should be available
- Property rights - keep what you own
- Ownership of what you own and purchase,
- Patents and intellectual property
- Legal system - protect what you have, you know deals will be honoured
- Contracts and Borrowing capabilities = TRUST in the system – Economy is built on confidence
- Public services – Well functioning state
- Infrastructure – Roads, transport, water, power, etc
- Legal system enforced
All are needed simultaneously!
What doesn’t work – Extractive systems – Socialism
- Extraction from the productive is a race to the bottom – history repeatedly shows this.
- Extractive – the more it is, more people will fight over it. Dictatorships and democracy are both fought over
- Example - Proof – Christianity hasn’t had a major war since churches power was separated from the state. Other parts of the world where Government and Religion are one and the same aren’t as peaceful.
- Dictatorships – violent overthrows, for power state has. At least they are public about it, as there is little the public can do to get them out beyond another violent overthrow – rinse and repeat
- Democracy – trash talk about the opponents, depending on conspiracy level – shady behind the scenes like “House of Cards”.
- Incentives – They are the thing that makes you want to do things.
- Example – state run systems – ‘they pretend to pay us, so we pretend to work’
- Property rights – providing people of China with property rights
If profits are the purpose of capitalism, is this immoral?
- Capitalism is painted as heartless, but nobody wants to see the poor suffer.
- Those that want to provide for the poor through taking what the wealthy have, stand on a moral position of wishes….and theft
- Example - You bring bubble-gum to the class – you better have enough for everyone? But why?
- What if you worked mowing lawns as a kid to buy gum, when others in the class didn’t?
- Renee (shout out!) – her niece is 8, and makes shirts, and sells them to earn her money for roller skates, rather than asking her parents. Now makes and sells healthy muffins each afternoon after school.
- That is what kids need to learn, as she will likely be successful!
- Ask yourself – What is greedier – Keeping what you have earned, or demanding someone else provide for you with what they earn?
Importantly, what has been proven to reduce poverty? Capitalism
- The more capitalism produces = more things, the more things we have, the lower prices are and easier they are to get!
- The more things being made, the more people need to be employed, so lower unemployment.
- These two together is what reduces poverty in the long term – but takes time
- Not as easy as the Venezuela model of reducing poverty by 50% - by stealing
- But no further redistributions – as all the wealth is gone
What is better? One that provides lower costs for things, more welfare (as more tax to redistribute), and greater employment opportunities through freedom of opportunity?
Society is a sum of all the individuals in it – If everyone is doing better, then so does society!
Need for Inclusive System – Thankfully we have one of those, some extractive elements, but not enough.
- System that allows for individual choice, and incentives to the individual to increase their wealth.
- Inclusive - Equality of opportunity – everyone has access, same rights, no preferences - Property rights – Legal system - Public services
- Next part we will run through how to prosper in this system – if you understand demand and how to create this for yourself, or something you produce, you will increase your wealth!
Thanks for listening! Head to https://financeandfury.com.au/contact/ to leave a question, or send in some feedback
Welcome to Say What Wednesdays – Where we answer your personal finance questions each week.
Two questions this week from Chris:
No 1
what are your thoughts on investing through a platform such as acorns? In your opinion do you see it as reliable and a worthwhile investment option? Furthermore, with such platforms would you say that there is a degree of double fees being taken out (platform fees and ETF fees for underlying investments e.g. ASX ETF's) which erode earnings?
No 2
What is the best way for people on a low income (around $25,000 p.a.), such as students and job seekers to start building a growth portfolio?
Platforms
What are they? – Ways to hold all of your investments in one place
- Types – three types
-
- Raiz (Acorns) – Investment application (app) * Allows for micro investing – automatic investments * Limited choice of options – Growth Option, etc
- Investment Platforms are a bit different
- Allows for accessing managed funds, shares at wholesale level
- Range of choices of funds
- Broking platforms
- Direct shares mostly
- Costs – Admin fees
- Raiz – 0.275% p.a.
- Investment platforms - platform fees generally higher
- Flat fees - $175 to $600 p.a.
- Percentages - 0.4% to 0.1%
- Broking platforms
- Transactional costs when you buy/sell investments
- Benefits
- Raiz
- Nice, simple easy way to start
- Automatic savings takes away the hands-on approach
- Passive
- Platforms
- You can have actively managed funds
- Specialist Managed funds in certain sectors
- I have an account – Buy small cap, micro-cap, international, emerging market fund etc. Wouldn’t really get that much in the way of large cap here, as that is ETF
- Small cap – 25% p.a. for the past 8 years
- Worth it if you know how to use it right
- For ETFs, shares, Large cap, probably not worth it.
- They do consolidated tax statements for you (that's what the admin fees are for)
- Don’t have to meet minimums on fund purchases - $25k to $500k
- Broking
- Benefits – no ongoing holding costs
- Can buy the same ETF in RAIZ in broking platforms, for broking costs
- Upfront costs may be higher, but no ongoing.
- Raiz
In my opinion, if you are starting out, probably better to start somewhere than not start at all
- Especially if you aren’t familiar with investments or good at saving, may as well go with app to do it for you. Better to start with something then never start.
- Broking platforms – Can have large upfront costs
- Investment platforms are good, if you have enough to justify it
- But only if you use the specialist funds that you have access to – geared, emerging markets, micro-cap, etc.
To answer Chris’s second question
There are two options for students
- Hands on/personally invest
-
- Focus on Franking credits, or high growth long term – You will get more back in income than what you would pay in tax
- Need low transaction costs and diversified – Good Fully Franked LICs or ETFs are an easy place to start
- Super co-contributions – free money
- $1,000 (post tax) = $1500 investment
- Comparison over 3 years at university, while earning below $37k p.a
- It’s a boring answer for long term benefits – superannuation as an investment vehicle!
Each year you put $1,000 into super, or $1,000 into the same investments personally. Who wins?
- Either way you put $3,000 towards investments
- In super you get an extra $1,500 (or 50% return) straight away!
- By the time you access it, say 40 years, earning 8% p.a. (4% income, 4% growth)
- Personally, after you get taxed on the income at say 34.5% = $37,031
- Super gets taxed at 15% = $72,965
Awesome questions Chris! I hope I covered off on it all.
- Next Say What Wednesday we’ll answer a question from Emma
- Send in your questions and feedback! https://financeandfury.com.au/contact/
Welcome to Finance and fury
- Financial Crash proof your Share investments
- There is no way to control the rise and fall of investments but focusing on what you can control makes all the difference!
- Behaviours lead to underperforming, or outperforming, the ‘market’
- Firstly – What you buy and when
- Secondly – What you actually do when a “crash” occurs
What is a correction or crash?
- Drop on prices – followed by mass hysteria – panic selling – further declines in investment values
- Shares can drop quickly – They are liquid
- Liquidity = How easy is it to sell shares and get your cash back
- The share market is a measure of crowd behaviour
- Positive feedback loops
What triggers a crash?
- Prolonged periods of rising markets, excessive in the long term
- P/E far exceed long term averages
- Higher buying volumes
- Year on year large gains
- Then something spooks investors to think the good times are over
- If the markets think good times are done with, they will be
- Self-fulfilling prophecy – positive feedback loops
What makes people sell shares at a loss?
-
Myopic Loss Aversion – Fear of further losses – Losses (even on paper) are hard to bear, so people crystallise losses to avoid feeling further potential paper losses
- Shares are some of the most feared investments out there
- People feel like they can’t see or touch them, but if you buy some Woolworths – just remember half of you probably visit a store once a week.
- They are hard to understand – Fear from the unknown
- Shares are some of the most feared investments out there
-
History of share crashes and the drops – 1987, 2008 (worse than US)
-
What happened before this? Markets rose – 2002 to 2007 = 226% rise
What can you do?
On the buy
- Diversification – Have one egg, it breaks, you have no eggs. If you have 1,000 eggs and one breaks, you’re ok!
- Different segments – Not all banks, but across large, mid, and small cap, as well as different types of companies
- Different countries/economies – we make up 2% of share market – 98% of companies are off shore
-
Don’t overpay for investments
- FOMO – Bubbles in shares are pretty clear
- Market PE – Shares are valued mostly on expected future earnings (inherent values).
- Where are we at now?
- Gains - 194% cumulative rise in the market since 2012 – but still not above 6,700 in 2007 pre GFC
- PE – In line with long term average
-
Don’t buy rubbish – never invest out of hope into shares that might not be around tomorrow
- Shares are ownership in a company – Is it a good company? Will it be around in 10 years?
- Is it a fad, and not earning? They don’t survive crashes as well – avoid speculative shares
When the crash happens
- Don’t panic sell!
- What happened the next year? After a crash there is rebound
- Why? Demand picks up the following year
- Buy more! If you are game!
- Why would you buy something going down? Why is it going down?
- You can buy investments on special – 2 for 1!
- Why would you buy something going down? Why is it going down?
- What happened the next year? After a crash there is rebound
Let me get the crystal ball out…
- The next crash – Will come in form of borrowings within debt instruments / levels of government debt especially in the US. The market freaks out because they think the government can’t service their debts and default on their debts.
- Sad truth – free market gets blamed for government interference
- Nobody knows what will happen.
- Hold for long term
In summary
- Markets work in cycles – they go up, they go down
- The long game – hold and buy – Next Sunday we talk about FEAR and avoiding emotions
Thanks for listening – we need YOUR feedback! Leave a review, or ask your finance question at financeandfury.com.au/contact
Welcome to Part Two:
Let’s look at these claims:
-
Means of production owned by the public or state
- This removed property rights – Which is the foundation of wealth accumulation
- Think of a group assignment – social loafing
- Property rights lead to incentives
- Zimbabwe – Took property rights away – expropriated land and property rights
- China – Introduced property rights – Incentivised farmers – reduced starvation
- Australia – Same thing – gave the convicts rights – as was only way to get them to work – Joke: ‘pretend to pay us, so we pretend to work’
-
Equal opportunity for all
- I have an issue with this – it is equal outcome for all, NOT equal opportunity (unless zero)
- The outcome is nobody can get ahead, so they have zero opportunity
- You want to start a business? You can’t!
- You want to buy a house? You can’t!
- You want to save for yourself? Well, you don’t get paid…and the government can take all your savings anyway
-
Economic activity and productions are planned by central planning
- There is no feedback system here – so no recourse for when things go wrong
- State gets it wrong – tough luck
- Free market gets it wrong – that person goes out of business and someone else prospers
- New Coke – That was a decision that was corrected quickly due to feedback from the market
- Forced Labour
- Uzbekistan – Cotton industry – Millions of people a year are forced to work on cotton fields – Doctors, teachers, businessmen
- Not just adults - Children aged 11-15 in September – Forced to
- Price Controls = Mass starvation
- Creates shortages as no incentives to create more
- Example – you are a farmer – it costs you $10 to produce a bag of apples, BUT the Government will only allow you to sell the bag for $5… will you continue to work for a $5 loss?
- There is no feedback system here – so no recourse for when things go wrong
John Oliver – Venezuela
- No facts – Funny guy, but he kept saying “if only”, “If only” the oil prices kept going up, “if only” Chávez had stayed alive...
- He forgot one “if” – if only they hadn’t destroyed the most productive oil company through having the government take control
-
‘Epic mismanagement’ – that is inevitable in a socialist society – free market isn’t
- Give all the power to the top to control – the workers don’t make decisions
-
Socialism leads to lower inequality
- Sadly, again not true
- Creates higher inequality as power is centralised – no free market or ability to improve yourself
- And at the same time – wealth plummets and poverty sets in for the masses.
- No middle classes here – simply poverty and ultra-wealthy (the State)
Heaven and hell
I’m not religious, but I do believe in Heaven and hell – Look at some parts of the world – they are living in hell!
Examples of Socialism/Communism implemented faithfully – Starvations and killings
- China – Mao – 61 million – Starvation lead to cannibalism in both
- Russia – 45 million
- North Korea – Forced labour camps – mass starvation
- Germany – Hitler was a socialist – Nazi = National Socialist German Workers’ Party
- Unemployed promised work and bread
- Today: Venezuela – population has lost average of 19kg in weight per individual since Maduro took over
- Capitalism – I guess is responsible for deaths as well – Obesity and smoking – but it’s the individuals choice at least!
- Unless you are Bernie Sanders – ‘bread lines are a good thing’
The unfortunate thing
It does work in the short term (social proof) – but then stagnates as there is no incentive for further growth
- Venezuela - Poverty halved in the beginning due to taking all of privately owned business and giving it away – how did that work out?
- Oil rich having largest reserves in the world – but no means of getting it out of the ground – They have to import it
- Price controls and creating more money – that is what happens when State gets their hands-on the money supply
Print, print, print = Hyperinflation and no ability to transact!
Socialists are Hypocrites!
- Stating that there is “discrimination”, but now they engage in it with socially engineered policies which discriminates against those who have something
- To get the outcomes they want, they discriminate against the rich through taxes
Socialism works from manipulating the masses – take from those who, unfortunately, are the productive ones (hence why they have the wealth in the first place)
Two fish
- Sail fish – fastest fish – over 100km per hour – if in a pond that dries up, it will die
- Sea Horse – Less than 1/100th of a kilometre per hour in a large ocean prospers
- Destroys society – nobody can swim faster than the pack
Compared to Capitalism
Capitalism affords economic freedom, consumer choice, and economic growth.
- Socialism, which is an economy controlled by the state and planned by a central planning authority, provides for a greater social welfare …
- As Thatcher famously and correctly said, "The problem with socialism is that you eventually run out of other people's money."
Thanks for listening…
Next Friday’s episode – we’ll look at why free markets lead to a better life for you and how to build wealth within that system.
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This is going to be a bit of a longer episode in order to unpack this topic fully… You’re probably going to need to relisten
Book – Utopia
Wishful thinking – the story described perfect, imaginary world. A complex, self-contained community set on an island, in which people share a common culture and way of life. Although this book was a work of satire, I was 13 or 14 at the time, so wasn’t quite sure what satire was.
- There is no money, no external trade, so… everyone is happy, right?
- If your job is harvesting wheat, and another person’s job is to distribute what you’ve produced, how long will it be until you resent them and their job? Even though we aren’t speaking specifically about money, people will still be different!
- Times have changed – This book was written in 1516 when the world was ruled by Monarchy and Religions
- Once I started investing, studied economics and commerce, and started working – Things changed. This can be summed up best by Frenchman, Anselme Polycarpe Batbie, whose words are oft wrongly attributed to Winston Churchill, “If you are not a socialist (liberal) by 20, you have no heart. If you are still a socialist by the time you are 40, you have no head”.
This makes sense When we grow up, most things are provided to us. We are, for the most part, taken care of. And, in a wealthy society like ours, many of us don’t get to see just how lucky we are compared to the rest of the world.
- If we have been taken care of, why can’t everyone have it that way?
- We haven’t experienced the ‘real world’ yet.
- I don’t believe that those who lean towards socialist ideas are bad people – they just haven’t seen it play out
- The ideologies are born out off feelings and rhetoric - so this episode will be pretty heavy with the underlying issues and outcomes from each
Definition:
- Socialism - A political and economic theory of social organization which advocates that the means of production, distribution, and exchange should be owned or regulated by the community as a whole (Centralised by the State/Government).
- It is said that countries like Canada, Denmark, Finland, Norway are socialist, however this is incorrect – they redistribute through welfare, but they are still free market.
- The only reason they can do this is thanks to their free market and the wealth generated from this.
- The Prime Minister of Denmark asked Bernie Sanders to stop calling them socialist! They are free market, just have large redistributions of wealth – but still have property rights.
- Socialism is characterized in the following ways:
- The means of production are owned by public enterprises or the state, and individuals are compensated based on the principle of individual contribution.
- There is equal opportunity for all. Large-scale industries are cooperative efforts, and thus, the returns from these industries must be returned to and benefit society as a whole.
- Economic activity and production are planned by the central planning authority and based on human consumption needs and economic demands.
- Socialists believe economic inequality is bad for society, and the government is responsible for reducing it via programs that benefit the poor.
How do we get to that from a free market?
- Production owned by state and population
- Taken by force
- Exterminate, imprison or just take it from those that have it
- It happens naturally when you put groups against each other
- The return of enterprises and business to the people
- Well, this doesn’t ever happen
- The only way you can truly own a business is to buy the shares
- That is participating in capital – when everyone owns everything, it turns out that nobody owns anything
- It becomes a public good - Think of air and water… these are available for everyone, but do you own it?
- Production is planned by a central authority.
- This is a problem. Individual needs are ignored in favour of group needs.
- Land and production is taken and controlled by one group
- How do they manage to make decisions then?
- Soviet Union – steel worked well – steel production is consistent
- But farming – given weather and land/crop differences – impossible to implement one plan for all – as each is very very different
- And inequality –
- Is inequality bad? Well poverty is bad.
- What happens if we were all equal but all in poverty
- And how does the government ensure we are all equal?
The argument – it just hasn’t ever been implemented properly yet – I disagree...
- The level of control the State needs to enforce destroys everything – leaves everyone with nothing
- Example – If everyone is on UBI of $20k p.a.
- Someone spends all of it, someone invests $10k p.a.
- Give it 10 years, inequality again and you have to do another economic reset on society
- This is exactly what happened under the Agrarian reforms in Russia around 1880 – skip forward to Lenin pre WWI – inequality again
This was a very heavy episode – and part 2 will dig deeper into this. Hold onto your hats!
And remember... shoot through your comments and questions at https://financeandfury.com.au/contact/
Welcome to Finance & Fury, Say ‘What’ Wednesdays! where we answer your questions on finance and economy.
Today’s question comes from Mike – ‘Hey mate, loving the show, what’s your view on Private health insurances, I keep seeing my premiums going up and am wondering if you think it is worth having or not’.
Thanks Mike!
-
Hikes in premiums over the past few years
-
Media articles are stating that Australians are dumping their covers ...but are they?
- Roy Morgan Research – 265,000 Australians have dumped their covers for Private Health
- Industry body – Private Healthcare Australia say that more Australians have private health than ever
- An extra 50,000 Australians have taken out covers in 12 months – 13.58 million with hospital, extras or both
- Up from 13.52 million
- What is true? The percentages are down, but the number of Australians are up
- 55.2% in March 2017 to 54.6% in March 2018
- Why are people dumping it?
- Getting too expensive obviously – not enough value in it unless you claim that value back…and how much will it pay back?
- Premiums have gone up an average of 72% in the past decade – greater than inflation and wage growth
- Looking for someone to blame? The greedy companies, or the system setup?
- Premiums rose 4% to $23.75 billion in 12 months
- Benefit payments rose 3% to $20.1 billion
- Gross margin - $3.65 billion
- Expenses - $2.21 billion
- Tax $441,000 and state ambulance levies of $226,000
- Profits = $1.38 billion
- Why do a lot of younger people have it? The Government is this industry’s enforcer
- One reason - If you are likely to claim on it
- Another reason - If you are going to be charged the additional tax
- Customers are pushed through the door – the cattle prod here is tax penalties
- Medicare Levy – Introduced 1984 at 1%, now 2%
- Lifetime loadings – Introduced in 2000
- Lifetime Loading – Increase premiums by 2% each year above 31
- Take it out at 35 – 10% loading, take it out at 65 – 70% loading
- Most people don’t really start using it until their 50s
- Medicare levy Surcharge – 1997
- MLS is levied on Australian taxpayers who do not have an appropriate level of private hospital insurance – Earning more than $90k, or $180k for families.
- Tax – 1% to 1.5%
- It is designed to ‘encourage’ individuals to take out private hospital cover and to use the private system rather than the public health
- But the Medicare levy they still pay…2%
- Over the years, as taxes go up, people have less money to spend on their own health, as they are paying for others.
- So, people rely more on Public than private in the end
Behind the scenes
-
Moral hazard –
- Economic definition for transaction costs, it has an incentive to take unusual risks in a desperate attempt to earn a profit
- Theory of if you get covers, you will change behaviours
- Try to maximise your use
- Behave in ways you wouldn’t otherwise
- Example – phone insurance – Case/Protection or not?
- If you are sick – Are you more likely to get cover or less?
-
Subsidising the sick – if you are going to claim, you get it and are willing to pay more
- The total costs are the same regardless of your health hazards, ages, extracurricular activities.
- A heroine junkie (if they haven’t spent their money on the tar), would pay the same as you.
- Premiums are based on the likelihood of claims – But at the industry level!
- Claims go up – premiums go up
- Costs of health goes up – premiums go up
- As the number of people paying in decrease – premiums go up.
- The total costs are the same regardless of your health hazards, ages, extracurricular activities.
- The more that people ditch it, and the more the system is run with inefficiencies, the more that the price of insurance will increase.
- ESPECIALLY: with no incentives for companies to make it better, as there is the cattle prod provided by the government to round you all up.
How to fix it: Healthier Australians…or change the process of getting cover - needs based on how healthy you are. Underwriting in the same way as Life, TPD or Trauma insurance covers to assess individual levels of risk
- Pre-existing condition exclusions
- Focus is always on insurance companies – greedy CEOs looking to make money
- If they can’t, they go out of business though.
To answer Mike’s question - Is it worth it to have private health cover?
- If you are likely to claim on it
- If you are going to be charged the additional tax
Welcome to Finance and fury
- Financial-Crash proof your investments
- This is a flow on from the last Say What Wednesday, this episode talks about how to get yourself into a position to survive any market correction.
- We’ll cover off on the two types of volatile investments – Property and Shares; today’s episode will focus on Property, and in the next episode we will look at shares.
What is a correction or crash?
- A decrease in prices, followed by mass hysteria and panic selling, which further decreases values
- Why prices go down?
- Something spooks the market – The market is just individuals like you
- When people get spooked fear sets in and with fear comes ‘myopic loss aversion’.
- While this is a technical term, but we all know the feeling – seeing investments go down in value doesn’t feel good so people sell to avoid further loss
- But what happens if you just don’t sell? Those that don’t sell haven’t realised losses
Property
- Property investing is all about your finances and behaviours – property is just the vehicle to create the wealth
- Property is a long-term play so you can set yourself up to survive the long term.
- The economy works in cycles – one criticism of the free market
- Ups and Downs are needed – remember volatility – downward movements need to be accepted to have access to upward movements in price
What you can do:
- On the buy: One of the best ways is to make some smart decisions on the buy
- Buy below intrinsic value - look for something that isn’t overvalued
- I avoid ‘off-the-plan’ - built in first home owner grant in price
- Don’t overpay - emotions in auctions can kill this
- Overpaying also kills any future gains - don’t get emotionally attached or let your emotions control you – Fear of Missing out (FOMO)
- Buy below intrinsic value - look for something that isn’t overvalued
- The property itself: Future growth is all about demographics
- Look for something you would want to live in – as other people are like you
- Owner occupied properties are less volatile than speculative investments
- Ensure that it will have the best chance of being rented and not sit there chewing up your cash flow with no tenant
- High land to value ratios – land in property is important – not a massive block but getting the land value right is important
- History of long term – stable capital growth
- Desirable areas – infrastructure, transport, schools, nice area
- Can the property be improved to increase the value?
- Worst house on the best street
When the crash comes:
- Get buffer! – Having a cash reserve will help you survive short term correction
- And offset account on property rather than savings – save interest
-
Don’t over leverage:
- Covers interest repayment increases.
More debt = greater cash flow requirements
This can force people to sell - Covers massive losses
Deposit of 10% = Loss of 100% if prices go down by 10%. - Don’t cash flow yourself out of existence
- If interest rates go back up, don’t be forced to sell – stress test yourself
- Work off worst case (like the banks) and see what CF looks like at 8%
- Covers interest repayment increases.
-
Don’t panic sell, or be forced to sell
- Thankfully property is harder to dump than shares, but people can be forced to sell with property (banks are the boss until the loan is paid off)
- Insurances – more to cover a “crash” in your personal life
- Cover your debts and cash flow in case of the unexpected
Property is a long-term game
- Spread the risks out – diversification
- Focus on reinvesting the additional rent
- Either in an offset to build up the buffer, or
- Into other assets which can help diversify
Summary
- Market sentiment – Consumer confidence is one of the key drivers of property cycles
- Positive sentiment leads to bubbles – overshooting during ‘booms’
- Negative confidence leads to markets overreacting on the down, overshooting the other way and getting too depressed during slumps.
- Remember, each property boom sets us up for the next downturn, just as each downturn sets the scene for the next upswing.
- Demographics drives markets
- how many of us there are, how we live, where we want to live and what we can afford to live in
- What state is peoples’ finances/the economy in?
- Macro factors like interest rates, consumer confidence and government meddling (first home owner grants have pushed up new build prices)
Thanks for listening!
- Next Sunday’s episode will be focusing on shares and avoiding getting wiped out in a crash
- “Like” our Finance and Fury Facebook page to keep up to date with episodes as the come out.
- If you have any comments, you liked the episode and want to hear more, hated it and have suggestions go to https://financeandfury.com.au/contact/
Welcome to Furious Friday – These episodes aim to solve misunderstandings
In this episode - Furious about the muckery of statistics used to perpetrate misunderstandings
- Misconceptions about the world when it comes to the world, the economy and what we are taught, by the media.
- Click Bait is the winner when we are too busy to fully look into an article!
- So, I did it for you – I’ll go through two examples
- Article about 9 out of 10 Australians support Healthcare and Education being free
- Oxfam study of income and wealth inequality – how the rich suck up all the wealth
Study one – The “Findings” (read: The Claims)
- About Support for universal access for free to healthcare and education
- 9 in 10 Australians believe those services should be provided free of charge. (88% for Education) (89% for healthcare) –
- Who doesn’t like free stuff?
- Free services are a human right?
- 8 in 10 Australians agree the rich should be “taxed more” to support the poor.
- 8 in 10 Australians agree - every citizen should have the right to UBI
- Found that 49% agree that ‘socialist ideas’ great value for societal progress...for who?
Digging deeper
- Grain of salt – The “Australians” surveyed was only an online Ipsos survey of 1,000 Australians who are working aged.
- Most people who are working don’t have time to fill out 20-minute surveys…they are working.
-
Free education –
- No Free lunch - And it isn’t free, other people pay somewhere along the line.
- What about those who don’t want to go to uni? They pay for those that do!
- But …what is to stop people just doing degree after degree after degree… “Van Wilder” style
-
Healthcare – already subsidised by the rich – do you pay for blood tests? Tests? It’s all Medicare funded!
- When something is free (public good) – it gets overused and the system is burdened
- Bulk billed – I feel for doctors in this system – work in 15-minute time slots. It’s hard to help someone properly within this time restriction – healthcare declines
- If the costs go up, wages would be capped by the government
- If you study for 10 years, you are in that bottom 10%
- Sacrifice a lot to get higher income
Study two – the findings
- Oxfam – Inequality report – Richest 1% are sucking up the wealth
- Top 1% of population has 22% of the wealth
- Income Growth – Between 1988 to 2011
- Bottom 10% made up 3% of all growth
- Top 10% made up 27% of all growth
Digging deeper
- Misrepresenting “inequality” as immoral – poverty is the issue not inequality.
- Focusing on inequality is economic resentment.
- The guy next door has a bigger house, so go steal his stuff?
- Income growth – this is not the same group of people over time – Just shows statistical spreads
- Remember our Student Doctor? They go from working for free to earning higher wages over time
- Income inequality means nothing – most people listening would be doing okay, you would have a computer, or phone.
- So does Bill Gates. But rather than trying to make Bill Gates less rich, we should be focusing on poverty. How much poverty do we have?
- Bill gates is rich because we use the stuff he helped get out to us at a low cost. And thanks to that we are better off than we have ever been!
- They ignore what a ‘fair share’ is – do the rich do their fair share?
- 3% of Australian income earners (only 399,000 people) – pay 30% of the tax bill
- The irony here is that Oxfam turns out to be hypocritical
- Chairman of Oxfam international was detained in February for corruption charges
- Senior staff members paid local Haiti woman for sex after the 2010 crisis.
- Talk about taking ‘advantage’ of the poor.
- Standing on a position of morality doesn’t avoid reality
Issue with this methodology
- Only focus on population distributions – broken up into percentages
- Doesn’t look at age, their lives, how they got their wealth
- The 1% is a group – that can only ever be the 1% - so if the number of people who compete to get there get more and due to people trying harder, this group gets richer and richer
- There is always going to be a “1%” if you measure things in percentages
- It’s dangerous to lump people into groups this way – as policies are designed to benefit one group, they destroy another group. We lose more and more of our freedoms the more policies are built around group think. Punishing one, for the benefit of another.
I am not in the 1%...yet! But I do hope to be there one day
- I don’t want to get there through stealing things, but through voluntary transactions – giving more than I get = VALUE
- Why don’t people want to be there? What biases do you harbour that are telling you that having money is bad? All money does is provide freedom and stability.
- The Media’s job is to sell fear. Not inform you – a good story sells better than the truth.
The most ignored factor –
-
Age! Someone who is a 24 year old head-of-the-household, will have half the income on average of someone who is a 45 year old head-of-the-household.
- Time is your friend here - Mobility of the wealth over time.
- Pareto Distribution
- Example – two individuals with the same income $90k ($67K net), 30 years old, over the following 30 years one individual invests 15% of their net income and the other person doesn’t.
- Return 8%, income reinvested, wage increase with inflation = $1,580,000
- A lot of this is choices made along the way, over time, compounding effect.
-
Nobody should have the moral authority to tell people how wealth should be distributed, or how people should spend it
- They have in the past they have tried though, and it hasn’t gone well. We will discuss this in next Friday’s episode
Why does this go on? And what does it lead to?
- Looking at the whole picture is really hard.
- IMO this is simply people, not willing to take responsibility for themselves, blaming the people who do take care of themselves
- When you repeat a lie enough, people start to believe it. This creates more and more unjust outrage.
- Nobody actually explains what it takes to be wealthy and some assume it’s just the roll of the dice.
- Some are born “with a silver spoon in their mouths”, however economist Thomas Sowell estimated only 10% of wealth is ‘old money’.
- Economic resentment - thinking that the rich people steal form the poor?
- If they are poor they have no money to steal. It would make more sense to steal from rich people - which is what those without are crying for through increased taxation and redistribution
- Is there an ‘economic morality’ to being poor? Malcom Gladwell – ‘I never root for the underdog as statistically they don’t deserve it.”
Conclusion
Ask yourself: Is money the root of all evil? Or is it evil people doing evil things who are the root of all evil?
I’ll leave you with that question to think about.
In next Friday’s episode, we look at giving the masses what they want – Socialism V Capitalism!
This week’s Say ‘What’ Wednesday is from my friend Adam. We were talking on the weekend about Harry Dent’s recent visit
- He predicts a property crash - There is ALWAYS another financial crash coming!
- He claims that Australian property is set for a 50% crash - Or correction?
- Interestingly, Dent made similar prediction in 2011, 2012, and 2014 as did The Economistand Demographia.
History: Lets go back in time
- 2014 - Dent came to Australia warning the China bubble would bursts in mid-2014 and Sydney house prices could collapse by up to 55%.
- What happened? Houses and units went up over 80% since then
- 2012- Dent was quoted in Forbes as saying: “The greatest housing bubble in developed-country cities starts with Brisbane, Australia …”.
- What happened? Prices went up average 23%
End of the world
- Just like those that predicted the end of the world – Mayan calendars – just read the tea leaves wrong.
- But Harry has doubled down in his conviction his timing was premature
- Forecast is correct because he has no doubt that we are in a bubble.
Wait... bubbles are different to a guaranteed crash!
- I agree we are a bit of a bubble – when compared to the rest of the world
- Bubbles “can” crash isn’t the same as bubbles “will” crash
- There’s two options; either the price growth can crash, or the price growth can slow to a snail’s pace, or have slow and steady declines (a small correction)
Reasons
- Look at the areas with ‘bubbles’
- Sydney, Auckland, Vancouver, NYC – High immigration + low supply
-
What are the signs of a Bubbles?
-
Sydney price-to-income ratios are the second highest in the world—above London and New York—but hey, Sydney is a great place to live.
- High incomes, employment, and family members of those moving here
- Supply is constrained by zoning laws, two national parks, a mountain range, and an ocean. Yet demand continues to grow, so prices tend to rise.
Where Dent is confused – Australia is different to the US
1 - Our regulators are prepared (too much so?)
- APRA introduced several measures aimed at reducing risks in the mortgage market – investors and interest-only lending have been key targets.
- The number of investors in interest-only loans fell sharply as a result, and experts see a major recovery as unlikely in the near term. This is a long-term strategy.
- UBS economists argue the move “suggests a more rapid tightening of lending standards than our base case outlook”, with the regulator preparing the marketfor more permanent measures
2 - Our economy is strong enough
- Our banking system is sound, mortgage arrears rates are low at about 0.5-0.6 per cent across the country
- Household budgets are in good shape as we've been paying down our debts
- Inflation is contained and interest rates are low and likely to remain so for a while.
3 - Real estate is different in Australia
- Because people don’t just dump real estate. It gets very illiquid and hard to sell fast.
- The banks in Australia will come after you – Can’t just leave the keys and walk away like in the US.
- That in conjunction with the incentives of the US Gov to lend to those that couldn’t afford (thanks to guarantees) caused bad behaviour (Mortgage Backed Securities)
- Like any addict – don’t incentivise them to indulge their behaviour
Devil’s advocate - To make our property markets crash we need one or more of the following four things.
- A major depression(not just a recession). Nobody, other than Dent, is suggesting this will occur;
- Massive unemploymentand people not able to keep paying their mortgages — unlikely;
- Exceedingly high interest ratesso that home owners won’t be able to keep up their mortgage payments. Again, this isn’t on the horizon; and
- An excessive oversupply of propertiesand no one wanting to buy them. Other than in a few spots this is not occurring in Australia.
What the future holds
- Demographics
- how many of us there are
- how we live, where we want to live and what we can afford to live in
- property will always be in demand – people need somewhere to live
- interest rates, consumer confidence and government meddling.
- Prices (Source: SQM Research) – 2018 forecasts (down a lot from 2017)
- Perth 1-4%
- Sydney -4% to 0%
- Melbourne -3% to +1%
- Brisbane 0% to 3%
- Hobart 8% to 13%
- Canberra – 1% to 4%
Maybe at some point he will be right, but what are the real risks to our economy?
- Government spending money – printing and not getting out of debt
- Fiat currency will lead to the devaluation of our money – inflation but thankfully, while being bad, aren’t as bad as the US.
- Higher taxes – leading to unemployment
- Or if the Gov takes over housing – that would be a guaranteed crash
- Free market for housing allows choices – Government system wouldn’t.
The debate!
(it’s not time for a math debate, there will be numbers)
Please do listen to our episode “Pay yourself” first
The choices are: Managed Funds, ETFs, LICs
- What they are and what they do
- Features and what works best
- Who will win?
Disclaimer – Full disclosure, I own all three types. Bought shares first, Managed funds about 6 years ago (tech super longer), ETFs and LICs in past 3 years.
Introducing the contenders:
-
Managed Fund – more managed funds than shares on ASX. 31 December 2017, the managed funds industry had $3,389.6b funds under management (FUM), not FUN, FUM, fun for managers for fees. But some are worth it.
- Structure - Unit trust
- Price– Net tangible assets. All shares in UT are worth $1,000,000. units 1,000,000 = $1 Units
- Underlying investment
-
ETF
- Structured as managed funds, but on the ASX – Unit trusts – Income and FC flow through based on holdings. Dividend may not be FF
- Price – Supply demand, but - Net tangible assets. All shares are worth $1,000,000. Shares 1,000,000 = $1NTA
- Underlying investment
-
LIC
- Structured as company – Income determined by board, FC usually paid (due to tax)
- Price – Net tangible assets. All shares are worth $1,000,000. Shares 1,000,000 = $1NTA
- Underlying investment – Mostly shares – Different segments – small cap, styles
Company V Trust – one has discretion, one is a flow through – value is the same, vs other company
What are they? - Features
- How are they traded and when?
- End of day - MFs
- Intermarket - LICs, ETFs
-
Diversification
- Index - Lots of shares, top heavy
- Active - 30-150 shares, select sectors/styles
- Asset classes - Managed funds allow greater access to alt. investments
-
Costs
- MERs – percentage-based cost 1% of $100 = $1
- passive MFs same as ETFs 0.18%, Active 0.8-1.4% p.a. – LICs/MFs
- Platform costs – Admin fees %, plus flat, sometimes built into platforms (AMP)
- Transaction costs – per $1,000, each year
- Buy sell – 0.2% = $2, 1 year = $24
- Brokerage – $20 = 2%, 1 year = $240
- MERs – percentage-based cost 1% of $100 = $1
Investment styles
-
- Active
- Passive
- Target investments
-
- Performance/Volatility
Winners:
- Managed funds – transaction costs, investment styles, diversification
- ETFs – MERs, off platform, index diversification
- LIC – Investment style
Losers
- Managed funds – MERs, platform costs,
- ETFs – brokerage
- LIC – brokerage
In the end:
- How much will you invest?
- For how long?
- What is the end goal?
- How risky are you? – Costs and volatility – reduce your performance
- How active do you want to be or hands off?
Summary
I like all three – this is what I do...
- Managed funds – use for smaller monthly investment – as $100 minimums per fund.
- LICs – invest into when dividends come in
- ETFs – same as LICs - invest when dividends come in.
Welcome to ...Furious Friday!
Today’s episode is a special edition covering off on B!tching about the budget
Why are people complaining? Well, I actually don’t know….
The media kept harping on about Santa – The jolly guy who gives free things away in concept - but it isn’t free, someone is paying for it (the parents). And isn’t Santa a fictional fantasy we tell kids to behave? Sounds a lot like the Government, except you are the children in their eyes!
Instead, this budget is letting people keep more of their own money, rather than taking it to give away.
In this episode we will cover off on a few important topics:
- Lower taxes for all…who pay tax anyway
- Why people having more of their own money is better than the government having it
- We will join out friends in the bar again and look at their savings when drinks get cheaper.
- What the cuts will be from next financial year:
What some are saying? And why do people oppose it?Why are tax cuts important? And who benefits?
- The flow on effects, comparing the ‘Cashed up coke economy’ of Florida in the 80’s.
Then to finish it off, the big announcement that from now on Friday’s will have their own special episodes... Furious Fridays!
Today we talked about The Laffer Curve...if you're keen to know more, Investopedia knows what's up
Today’s question comes from Jake. He asks “should I sell my bank shares, given the recent fall out from the royal banking commission?”
IMPORTANT: This episode comes with a general advice warning! I’m not telling you to buy or sell... Instead I’m going to run through what the future of banking might look like given what we have seen so far.
But let’s break it down.
- The nature of the beast – Where profits come from
- Banks are diversified revenue models – out of top 5, they make up top 4
- Lending and banking – CBA 45%, NAB 92.8%, ANZ 49%, WBC 39%
- Wealth Management – CBA 9.3%, NAB 7.1%, ANZ 3.2%, WBC/BT 10.6%
- Banks are now selling off all the wealth management parts of their businesses.
- AMP (a diversified financial service company) generates 72.8% of their revenue from wealth management/financial services
So, what does this mean? ... Prices are down
- Banks are at their 52-week low, CBA at a nearly 3-year low
- AMP – steady decline since 2015 from $6.83 to $4.15 – 37%
What will happen to profits?
- Big 4 – getting out of selling financial advice
- Nab – MLC is being sold
- CBA – CFS is being sold
- WBC – still will have BT
- ANZ got out mostly in 2013, so likely the least effected.
- AMP – Obviously will be hit.
- may lose license if can be proven they have been criminal
- If they lose their financial services licence – 70% of revenue goes.
Price: Supply and demand
-
- It’s like fashion – Banks are “out of fashion” in the news
- Prices determined by how much demand there is for the shares v how many are available. There doesn’t seem to be much demand for AMP.
- Dividend yields are where banks appear to have value!
- Current prices vs dividends
- BUT: Watch out for value traps! AMP at a 10% dividend yield seems awesome, but what happens if 70% of revenue disappears? All dividends will disappear as well!
- The Crystal Ball
- The future of the banks is always unknown – Big 4 aren’t going anywhere
- People know them and are at least perceived as safe, so that helps. But it’s going to be hard for them to attract much capital growth.
- BUT: AMP may be in trouble. Won’t know the damage until September when the next round of information on earnings comes out.
The takeaways:
- Just because prices drop, doesn’t make shares great value to buy, especially if the inherent value (which is what’s important) is dropping also.
- AMP might be forced to change their revenue model and be regulated out of the market.
- Remember – Ratios stay the same until the update in earnings/dividends come out. There is a lag in information and therefore ratios may not be accurate.
- The future depends on what the banks decide to do with the gains made in the sale of the wealth management parts of their business, and that is up to management …
Thanks for listening to another episode of Finance & Fury. These questions have been great! Keep them coming….go to https://financeandfury.com.au/contact/
Pay yourself first!
- Keep your own money – why work for others, then have nothing left to show for it?
- You earn more over your lifetime with this strategy – you save more and get rich right? Income earners can be wealthy
Where does money go?
- Hedonic Treadmill (or, hedonic adaptation) - The tendency of humans to return to a relatively stable level of happiness despite major positive or negative events or life changes.
- Money/goals - despite a change in fortune or the achievement of major goals.
- As a person makes more money, expectations and desires rise in tandem, which results in no permanent gain in happiness. To feel happier, we then need to spend more.
- MC Hammer – paid his entourage first…didn’t work so well.
Hold up, we already do this in the form of super.
- Government legislates that your employer must contribute 9.50% of your salary into your super account on your behalf.
- But, is it enough?
- $1M in super at the end of your working life (in 30 years, for example)
- Drawing 5% = $50,000 income
- $50,000 in 30 years’ time though, is only $23,900 in today’s dollars
- Can’t access funds until you’ve reached preservation age (60)…or later, if legislation continues to change at the same rate...
What can you do instead?
- Monthly savings = lame
- Monthly investing = better
What to do?
- Don’t trust yourself? Super – lock away until 65. Technically better return for same investment, depending on fees. But lower tax.
- Salary sacrifice can save tax. And tax saved can offset costs.
- Trust yourself/need earlier access – Invest it outside of superannuation (personally)
- Pay yourself before you pay others
- Set a limit and invest the surplus. If the surplus increases, say, along with a pay rise, then invest the greater amount rather than increase your discretionary spending
Where to invest this?
- Property will be a different strategy (we look at that later).
- Doesn’t work when paying yourself monthly. Hard to save a deposit month to month
- When doing monthly investing look for the following:
- Liquid – easy to buy
- Divisible – units easy to purchase at small numbers
- Low transaction costs
- Diversified
The options
- Managed funds
- Exchange traded funds (ETFs)
- Listed investment companies (LICs)
- Why these?
- Divisible
- Easy to purchase
- Low transaction costs (depending on structure)
- Diversified
Discuss these three options in more depth in the next episode (part 2), but for now we’ll just focus on the strategy overall.
What works and what doesn’t?
- Some things work better in the long term
- It seems counterintuitive, but volatility is actually your friend when making monthly contributions.
Example No. 1:
- Investing $100,000 today, allowing it to grow for 25 years.
- Australian Shares (ASX 300) vs a typical portfolio with a growth profile
| Growth | AS | IS | AFI | IFI | Cash | AP | IP | | Weights | 35% | 30% | 10% | 10% | 5% | 5% | 5% |
| Investment | Growth | Australian shares | | Total value | $1,005,291 | $998,663 | | Annual ROI | 10.13% | 10.40% | | Average volatility | 9.16% | 11.49% |
Example No. 2:
Dollar Cost Averaging (DCA)
Investing a fixed dollar amount at a regular interval, regardless of share price, resulting in the purchase of more shares when prices they’re at a lower price and fewer shares when their prices are high
- Investing $100,000 today, allowing it to grow for 25 years.
- Adding $1,000 per month for 25 years
| Growth | Australian Shares | | Original Investment | $100,000 | $100,000 | | Total funds invested | $400,000 | $400,000 | | Total value | $2,089,636 | $2,124,140 | | Annual ROI | 10.13% | 10.40% | | Average volatility | 9.16% | 11.49% |
More volatility can be your friend!
- Over time – DCA!
- Reduces risks
- Reinvest income
- If you will be investing monthly forever, who cares if the market corrects tomorrow? - Buy cheap!
- Disclaimer: This is general information only and based on historical returns.
In Summary
- Pay yourself first, you’re worth it!
- Why work your whole life to not have anything left over?
- Invest the difference between what your set limits are and your income. Get off the hedonic treadmill!
Next week’s episode we’ll run through managed funds, exchange traded funds and listed investment companies and have a debate about which works best and in which situations.
Go to https://financeandfury.com.au/contact/ and send in your questions and feedback. We want to answer the questions on topics that are ACTUALLY important to you so don’t be shy, get in touch 😊
Welcome to Say What Wednesday
This week we’re going to answer some of the burning questions that have been on a lot of peoples’ minds around the banking royal commission…and rather than repeat everything you’ve been hearing in the media, we’re going to approach this from a different angle. In fact, beyond doing this podcast and teaching personal finance courses, I am one of these financial advisers all painted with the same stroke by ABC and other media outlets.
Banking Royal Commission
- A formal public inquiry into misconduct in the Banking, Superannuation and Financial Services Industry, established on 14 December 2017 - it’s all anyone can talk about!
- Three facets
- Broking
- Financial Services
- Small and Medium enterprises
What are the allegations?
- Fees for no service
- Investment platform fees – lack of transparency (fees hiding in products)
- Inappropriate advice – advice not in the clients’ best interest
- Improper conduct by advisers – Sam Henderson and improper conduct
What is involved with advice?
- Understand clients’ goals, and their current situation
- Advice should focus on strategy first, and products last
- Unfortunately, most of the issues are with institutions and companies that are product focused where it’s really just placing a client into a product. Advice becomes conflicted.
Their internally managed products create conflicted advice
AMP, Westpac/BT Financial/Colonial First State, CBA/CommInsure, ANZ, NAB
- They own the platform – and collect fees
- They own the investments – and collect fees
- They own insurance products – and collect premiums
- They own loan products – and collect commissions
- They have advisers – who are salesmen placing clients into products, to collect fees and are incentivised with volume-based bonuses.
Welcome to the Wild West
- Prior to current times, where an SOA (Statement of Advice) is required in order to outline financial advice recommendations, you only needed to be RG146 compliant – and you could get it this certificate done in 2 days before technically being allowed to provide advice
- The legacy of this is a lingering culture and mindset whereby advisers don’t truly want people to know what is going on as they have never had to disclose information of be transparent
- All products were commission based and clients paid little to nothing for advice…but you get what you pay for. Advisers are incentivised to push the products that paid them the highest commissions.
- Future of Financial Advice (FOFA) -
- They got rid of commission-based incentives and raised the costs and time it took for practices to provide advice
- This is, essentially, a great thing, but there were unintended consequences.
- The incentive was not removed for banks and industry funds to only recommend their own products. They just changed their KPI structure to incentivise their advisers to increase volumes of clients being put into their products.
- It pushed out independent advisers that weren’t aligned with the banks as costs went up (government regulation costs), and the only ones who could cover these costs were the big end of town who were still making plenty of money through all their own products.
- They got rid of commission-based incentives and raised the costs and time it took for practices to provide advice
- Best Interest Duty (BID) – “Safe harbour conditions”
- No.1 - Identify the objectives, financial situation and needs of the client that were identified through their instructions
- No 2 - Identify the subject matter of the advice sought by the client
- No 7 - Take any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances. – This is a catch-all that can catch out inappropriate advice every time
- This is a bit heavy handed though because, in effect it doesn’t look after the clients, it just forces advisers to spend more time and effort covering their butts.
Who are the winners and the losers?
- The advisers who are with institutions are still winning! Industry funds, banks, anyone with a product from which the company collects a clip.
- Adviser insight study - $2,500-$3,000 actual cost vs $700 cost clients would expect to pay.
- Independent advisers - The costs are high. PI is about $10k p.a. Costs that need to be passed onto clients in order for a company to remain in business.
What will the end result be?
Greater inequality – as the cost of advice goes up
- Cost of operating increases
- Needs to be passed onto the consumers
- Independent fee-for-service gets more expensive
- The options you have as an individual
- Go to bank/industry fund (product owners) – Cheap advice for the same situation
- Pay more – you might get good advice. You have to pay more for now to see benefits later, but when you receive the advice you should be able to understand how the advice will benefit you
- Creates inequality
- Those that need advice – those will little financial resources – can’t afford it
- Those that have a lot of money – do they need advice? Yes, but they pay for better advice and continue to improve their situation and perpetuate inequality.
- Incentives for advisers is to cover your butt, not give advice – spend more time on compliance now than on actual advice and improving skills
- Example – FAESEA education requirements coming out next year… I am not educated enough to give advice. I have BCom and BEcon from UQ, Finance and International Finance and Trade. I have the DFP, did the CFP which is sort of like the accountants CA, I have Diplomas of SMSF, Margin lending and gearing, Certificate 4 in Mortgage broking, am an accredited listed product adviser with the ASX
- BUTTTT …if I had done just a BCom from Griffith I would be fine? UQ 3 (94), G 14 (499)
- The cost to tax payers – Royal commission will cost tax payers an estimated $75m - $100m, banks estimated to spend $100m on lawyers and protection for themselves as well. That is the level of what people have apparently been compensated...
The players and outcomes - $220m of compensation
- AMP – not actually the worst here, only reason is mis-leading ASIC $4.5m
- Westpac/BT Financial/Colonial First State
- CBA/CommInsure – worst offender, $118m
- ANZ
- NAB
The real truth is, I feel like the people leading the charge on this are just making more of a problem
- You cannot regulate greed, incompetence and laziness, which is really all that this has stemmed from.
- I’m afraid that nothing will change, except those rogues will just go further underground and continue business as usual.
- One thing I agree with media – CULTURE – The culture is ingrained from the older adviser who do have little incentive to change. I know first-hand, which is why I went to start an independent practice, avoiding all of this BS.
If you have an opinion, feedback or a question on this topic, or anything else for that matter...hit us up!
This is how the wealthy get wealthy, how the rich get rich!
We’re discussing the two-tiered economy and leveraging – taking something that you don’t have, investing it, and growing that over time. It’s one of the tricks behind how companies and individuals can amass such great fortunes leveraging to generate additional returns. But, the higher the reward, the higher the risk.
You can do it to! Only catch is you have to borrow at a higher rate than the Banks, so you better make it worthwhile!
What the process is, how you can make it work to your advantage, and how to not mess it up.
Debt – Leverage & Borrowing money to invest
- Agree or not – Is $100k worth more than $50k? – It’s about the nominal increase in value
- Looking at returns as a percentage of the investment value – the greater investment value, the greater dollar value or nominal return at same percentage rate.
- We are locked into same percentages for ASX – however different amounts invested will earn different nominal returns in the same environment.
- The rich ARE getting richer – due to having larger amounts invested into the same stuff as everyone else, earning the same percentage return.
-
Does debt go up with inflation in value?
- No, you pay interest instead
- This is why you borrow to invest in something that grows, rather than just keep it in your bank account.
- Time goes on, your investment increases, debt doesn’t.
-
Borrowing funds to invest is a strategy known as leveraging.
- Good Debt – not because you can claim a deduction for the interest payments but that you’re investing in something that increases in value.
- Bad debt – you’re simply paying interest to borrow money and the value isn’t expected to increase
- The principle of increasing long term capital growth rather than investing in something for an income.
How it works
- Options
- Home equity – Drawing on equity to buy shares, or managed funds
- Debt recycling - borrowing more each year and using the income from investments to pay down bad debt
Leveraging works better for growth and not cash flow.
Having it is neutral position to slightly positive is thing that max leverage.
- Loan to value ratio (LVR) is the loan amount divided by the value of your property
- Paying back your loan principal reduces your LVR = Lower multiple of growth, but lower repayments for cashflow.
- Increase loan with value = Increasing multiple of growth, but higher repayments.
How to start
Example: Property – Initial purchase and building equity
- Utilise equity of $100,000 to purchase a property for $500,000. This gives you a LVR of 80%.
- If the property value increase by 8%, you have an 8% return (8% of $500,000 = $40,000)
- Essentially you have put $100,000 in to get $40,000 back, or a 40% return.
- Interest payments – Have to repay interest on the borrowings.
- The borrowing of funds against a property for investment purposes. The process involves having the home revalued.
Is it worth it to leverage?
- Hurdle rate - the minimum rate that you need to earn when investing.
When borrowing to invest, your hurdle rate will be the cost of borrowing the funds (interest payments).
Downsizing risks - Where it goes wrong
- Wrong investments, no diversification. Shares or managed funds?
- No liquidity, or not reducing investment time risk – Dollar Cost Averaging (DCA)
- Disposable cash flows low – job security
- Panic selling or being forced to sell
- Buffer account – lower LVR or surplus cash
Example:
Your property, valued at $500,000 has grown to $700,000, your mortgage is $450,000
- If the value is $700,000 and the current loan is $450,000
- The bank will currently lend up to 80% of the value – an 80% LVR
- This means that you can borrow more against the property, up to 80%, or $560,00. That’s an extra $110,000 you’re able to borrow against your property.
-
Initially $30,000 is invested with monthly investments of $3,000 established.
So, in summary;
-
Leverage for growth
- This is a LONG-TERM strategy
- Risks can be worth it if done correctly
We would LOVE to hear from you! There is only one way we can ensure that we’re addressing the topics that are important in your world. Let us know that you are listening and what you want to hear. Ask a question, leave a review, comment on Facebook or email us at info@finance&fury.com.au
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Remember – this is General Information only!
This podcast includes general information only and does not take into account your personalised situation, including:
- Investment objectives
- Financial situation
- Particular needs
You need to assess its appropriateness before you make a decision based on any general information. Share your knowledge!
Welcome to this week’s ‘Say What Wednesday’ episode!
Our question today comes from Anna …who was actually listening to our podcast while driving her tractor on a farm, which is pretty cool!
Anna asks, ‘how much is the economy of regional Australia worth? Is this growing faster or slower than metropolitan areas and what will it look like in the future?’
We’ll define ‘Regional Australia’ as all areas outside of metropolitan areas.
Let’s get started…
Regional Australia - Population breakdown
- 69% of Australians live in major cities,
- 20% live in inner regional areas
- 9% in outer regional areas
- 3% live in remote or very remote areas
What is it worth?
- Workforce – One third of employment in Australia
- Production/output - Regional Australia accounts for around 40% of national economic output
- Industries
According to the National Rural Health Alliance Limited’s online publication, “The little book of rural health numbers” (Nov 2015), “Approximately 67% of the value of Australia’s exports comes from regional, rural and remote areas.”
The publication also cites the following data;
- Tourism in regional, rural and remote areas contributes about 1% of Australia’s gross domestic product (GDP) ($16 billion) (Regional Australia Institute);
- agriculture contributes 3% (about $50 billion) to GDP (or 12% (about $150 billion)
-
- bring in around $40 billion in export income (around 13% of total export income). (National Farmers Federation);
- The resources sector (mining, oil and gas production) contributes around 10% of GDP ($150 billion (Minerals Council of Australia)),
-
- amount to around 50% of exports.
- BUT: Wikipedia asserts that mining (excludes oil and gas) contributes about 5.6% of Australia's GDP and around 35% of Australia's exports;
You can read more here
It’s all related!
- How the economy works – The supply chain and flow of goods and services within the economy
- The Multiplier Effect – 1 tonne of Iron Ore; extracted, transported, produced into steel, sold, transported, used to manufacture something else
Again, as referenced by the National Rural Health Alliance Ltd, “Research by the Reserve Bank of Australia has confirmed the extent of positive spill overs from the mining industry to the wider economy. The resources sector as a whole (including resource-related activities) is estimated to account for around 18 per cent of Gross Domestic Product (GDP) in Australia and almost 10 per cent of employment.”
National Rural Health Alliance’s report discusses that in 2010-11 there were 307,000 people employed in agriculture, with 1.6 million jobs across the supply chain agriculture powers. (Data sourced from a previous National Farmers’ Federation report. The most recent version of the report can be found here)
Each Australian farmer produces enough food to feed 600 people, 150 at home and 450 overseas. Australian farmers produce almost 93 per cent of Australia’s daily domestic food supply.
Crystal ball - What will it look like in the future?
- For growth – For urbanisation – Population shifts
- A study by KPMG - mining is stimulating residential population growth
- The mining industry is boosting incomes, attracting families and reducing unemployment
As always guys....get your questions in! go to https://financeandfury.com.au/contact/
No question is too big or too small.
Today's References
National Farmer's Federation (2017). Farm Facts | National Farmers' Federation. [online] Nff.org.au. Available at: http://www.nff.org.au/farm-facts.html [Accessed 20 Apr. 2018].
Minerals Council of Australia (2013). Analysis of the Changing Resident Demographic Profile of Australia's Mining Communities. [online] Minerals Council of Australia. Available at: http://www.minerals.org.au/file_upload/files/reports/MCA-13-ResidentialProfile0131-MYR.pdf [Accessed 20 Apr. 2018].
Regional Australia Institute (2015). Talking Point: The Economic Contribution of Regions to Australia's Prosperity. [online] Regional Australia Institute. Available at: http://www.regionalaustralia.org.au/wp-content/uploads/Talking-Point-The-economic-contribution-of-regions-to-Australia’s-prosperity_to-send.pdf [Accessed 20 Apr. 2018].
Ruralhealth.org.au. (2015). Economic contribution of regional, rural and remote Australia | ruralhealth.org.au. [online] Available at: http://ruralhealth.org.au/book/economic-contribution-regional-rural-and-remote-australia [Accessed 20 Apr. 2018].
Welcome to Finance & Fury.
I’m sure that everyone’s heard the saying, “playing it safe” before. And in any game, it’s generally a good idea. If you’re playing a game or participating in anything, you want to make sure you don’t get kicked out of the game too early. And that’s where diversification comes in with investments. Its about covering your butt to make sure you don’t get kicked out of the investment game or at a certain point where it’s actually really essential to have your investments. We’ll be running through today; why even bother, how to get it right (because that doesn’t mean just spreading the risk around, it actually means increasing your returns as well) and then practically, how you can achieve that.
Spread the risk
- Risk measurement - volatility
- Correlation
- Perfect correlated (move in the same direction by the same magnitude) – Australian to International about 80% or 0.80
- Think about it as how related things are in their movements together
- For example, driving down the highway – cars going same speed in the same direction, measured as 1.00
- Driving a bit slower: 0.90
- Someone driving towards you, on the wrong side of the road – perfectly uncorrelated, maybe -0.60
- The important thing is coming up with the right mix of correlation between investments helps to protect you from downside risk.
- Last 20 years of returns
| Best | Worst | Negative | | Cash | 1 | 7 | 0 | | Fixed Interest (Bonds) | 4 | 5 | 1 | | International Shares | 4 | 4 | 6 | | Listed Property | 5 | 3 | 3 | | Australian Shares | 6 | 1 | 4 |
Example
Water flowing down stream. Rocks stay in place regardless of the direction of the water.
Salmon swim upstream against the current. The correlation between those three elements is a complete mess. If you’re investments are all over the place it’s really hard to get a targeted return.
Diversify! Focus on increase in value, not just returns
- Would you prefer an average return of 11.40% p.a. for 25 years or 10.20% p.a. for 25 years?
- More is better? Not always…but why?
Let’s say 11.4% is the return on an international share portfolio.
25 years ago, you invested $10,000. This has now grown to $100,000. But! The returns are not compounding, they’re “average” returns! With compounding this would have been closer to $140,000 rather than $100,000. Some years you gained, some years you lost, some years stayed the same.
- More is better? Not always…but why?
Let’s look at the second half of that trick question. 10.20% average return.
25 years ago, you invested $10,000 into an investment with a “growth” profile.
- 40% Australian Shares
- 40% International Shares
- 20% Bonds (Fixed interest)
This would be worth $106,000 now! You made $6,000 more on an investment with a 1.20% lower average return.
- The downside movement has been reduced, which means even after an investment has dropped, you have more money still sitting there ready to go up.
- Would you prefer to get a 5% return on $100? Or 100% on $5? – it’s the same thing in value gained, but it’s the risk that varies.
You more you diversify, the more you have in investments – this shows progress
- The equations –
- You get more
- Can diversify more
- You get more out of that – plus it becomes safer
The process
- If you’re just starting out, you’re probably not in a position to just go out and buy 100 properties, along with a few million in shares, and build yourself a nice big diversified portfolio so it can be hard to get right at the start with limited assets.
- Where to start?
- What have you go to work with?
- What is the outcome?
How to determine what to invest in:
- Risk tolerance
- Required Return
- Time horizon of investment
Just start!
How many investments:
- First cover the bases mixing combination appropriate asset classes
- Then, diversify within an asset class
Easy diversification
Having a diverse portfolio can be an expensive and timely to manage. Financial indices can help to solve this. A financial index is a measurement of the asset class (or market segment) it is representing.
Australian Share indices
ASX20 – Top 20 companies (by market cap)
ASX200 – Top 200 companies (by market cap)
ASX300 – Top 300 companies (by market cap)
All Ordinaries – Top 500 companies (by market cap)
An index is a cheap way to provide diversification as it captures many investments in one holding.
Risks of diversifying and where it goes wrong!
- Overdiversification – Can create a reduction in performance.
- Making a reduction in standards of investments.
- An increase in transaction costs.
- Holding many of the same type of investment.
- Not diversifying within asset classes.
Summary - Diversifying is awesome
- Means you are buying more investments
- Grows your wealth in the process while protecting it
- As your ability to buy investments increases, your investments are more stable and secure
- Just start 😊
Finally, …thank you! The podcast has received tremendous support so thanks to you all. Great to hear all of your feedback and know I’m not talking to myself every week.
Questions and feedback, go to financeandfury.com.au/contact
Let’s take a look at a recent Press Club speech from the Australian Greens leader, Dr Richard Di Natale,
“With the radical way that the nature of work is changing, along with increasing inequality, our current social security system is outdated…A modern, flexible and responsive safety net would increase their resilience and enable them to make a greater contribution to our community and economy.
That’s why we need a Universal Basic Income. We need a UBI that ensures everyone has access to an adequate level of income, as well as access to universal social services, health, education and housing.
A UBI is a bold move towards equality... It’s about an increased role for government in our rapidly changing world.”
You can find this Press Club speech on the Greens’ website https://greens.org.au/npc-2018
What is Universal Basic Income (UBI)
Here in Australia, it has been suggested the government might hand out somewhere around A$20,000 per year to every man and woman (with figures between A$10,000 and A$25,000 discussed).
The UBI scheme proposes that the government distribute a flat-rate payment to every adult citizen, without work testing or individual level of participation in the labour market, without job-search requirements or even submission to drug tests and would be implemented as either a partial or complete substitute for social security and welfare programs.
Where does it stem from?
- UBI has returned to the policy agenda as the result of concerns about technological change.
- Some commentators argue that new technology will permanently reduce the demand for labour leading to job losses, stagnant incomes and worsening inequality.
Technological unemployment – a long history
- During the Renaissance period for example, where a lot of people were put out of work in transcription and textiles with the invention of the printing press in the 15th century and knitting machines in the 16th century
- Industrial revolution – Steam power, eventually engines
- Agriculture 1920s – Tractors – A decline from 65% average in the 1500’s, down to 40% in 1800’s. Now it’s down to 1-2%. This is a massive displacement of employment wouldn’t you say?
Has employment gone anywhere?
- Employment at all-time high.
- More people on the planet than ever, lower unemployment rates. That means, there’s lots of jobs - as tech increases, options increase, jobs increase.
- Okay, say we do get to the point tech can do everything for us…we may as well collect our income from these robot slaves. Just hope they don’t become self-aware otherwise they might want to keep some of what they work for.
How it might work?
- The numbers – population of 24 million
18+ at $22,000 (Age Pension rate) = $428 billion
Is there a solution? Tax more (or borrow): Get rid of Tax free threshold? 2. On top of what we earn? Cost money to collect, so they would have to take more to give back less …20% slippage on their collection costs. 3. The tap will run out! Socialism doesn’t work as eventually there is nobody left to take stuff from. 4. Example – 5 friends in bar * Guy #1 spent years working 80-hour weeks, good job now, banker * Another went to Uni – comfortable job at 35 hours a week * The other 3 are unemployed * Every week the 3 who are unemployed ask the guy #1 to buy their drinks, guy #2 gets his own drinks, since he has a job. * One week, guy #1 says no, so his friends start laying on the guilt …How long does he go and buy round after round for his friends? Then, when guy #1 stops paying, who is going to pay the bill? Guy #2? * After a point, the 3 unemployed guys are suddenly in a much, much worse position because no one is buying the drinks.
In the real world
- That one guy, or top 20% of people, pays 71% of income tax. How long would they keep footing the bill for their friends who are not working?
- The what about companies? When robots take over and production costs decrease, do they make a tonne more profits? Not necessarily. Lower production costs see in greater competition. Company profits don’t increase in the long term, but prices of goods do drop!
Going back to the quotes from the speech…
“With the radical way that the nature of work is changing, along with increasing inequality, our current social security system is outdated,”
Needing a radical way that will assist everyone with our current social security system. I do agree that it’s a bit outdated and might be looked at in the future…however…
“A modern, flexible and responsive safety net would increase people’s resilience and enable them to make a greater contribution to our community and economy.”
The part in the speech about being more resilient as a result of this income, its actually the complete opposite when you look at it. Its 100% reliance on the government. Some people may stop being self-reliant and making their own income - that makes you reliant! The government will (apparently) take care of everyone if only you give them the money to do it.
In my experience I tend to know how to care for myself in better ways than the government can.
“It’s about an increased role for government in our rapidly changing world.”
Sadly, this is the only true statement in this speech.
A better solution
Helping each other - why can’t people go back to helping their local community? Kids helping support their parents? It’s hard when a decent chunk of your income goes to funding someone else’s parents as well.
Go to financeandfury.com.au to ask a question
Unless you want me to cover how different political institutions lead to different conditions of living and equality? Or how legislation to protect consumers leads to an increase in monopolies, hurting them more?
Today on Finance & Fury, we’re talking about …risky business!
Why take risk at all when investing? There must be a reason some people are willing to expose themselves to unwanted troubles, to downward movement in their investments? As the saying goes, ‘fortune favours the brave’ but unfortunately you still have to get it right! You can be as brave as you like, but it can still go quite wrong.
Getting it right with ‘risk’ without actually taking much risk, is really the smart, brave thing, rather than the blind silly thing of jumping 100% into an investment off the hope that it will go up. In this episode, we’ll look at how to use risk to your advantage.
Fortunes are built by those who have been brave investing in good long-term growth investments because you do not have to work as hard, if you’re in the correct investment that’s growing for you behind the scenes as opposed to something that might go down in value making you have to work harder and harder to build that fortune.
Types of Risk
- Pure (Absolute) Risk
- Events that happen where the outcome is either loss or no loss - there is no potential for gain.
- Examples: A car accident, your house burning down, health conditions, or death.
- Speculative Risk
- The chance of a loss or gain in an investment.
- Measured by volatility, which is just a statistical measurement that can make things look ‘risky’, when they’re actually quite a good investment.
Why take risk at all?
- Why speculate? To win!
- You have to be in it to win it - staying out of this game, or never taking risk, is actually losing by default
Volatility in daily life
- Volatility is the movement of the price of an investment – either up or down
- As humans we are ‘volatile’ with emotions for example
- Road rage
- A volatile partner; you get home one day to a pan being thrown at you for being late, or you get home the next day and the pan has been used to cook a meal waiting for you.
Volatility in finance/investments (the boring ‘Stats’ definition)
- The changes in the price from the mean (average)
- Measured by Standard Deviation; the measurement of the average movement a share prices makes away (up or down) from the average price.
- A standard deviation of 1 means there’s a 100% possibility of movement from its average.
- The good and the bad
- So, what’s bad about volatility? The downside movement! The potential for downwards movement, or loss in value
- Though of course, volatility goes both ways - it also measures the upside movement, or potential gain
- For example - A2 Milk Shares (ASX: A2M) has a standard deviation of 421%, it can change in price by $2-$3 very quickly. Increased in price from $0.5 to $11.50 in 3 years.
- Gains are movements away from the mean, so as you increase the price quickly, the standard deviation also increases.
Risk and Return
- Return = Total Income + Growth
(minus inflation if looking at the real return in the long term) -
Growth = Volatility
- The increase in value of the investment itself
- The more volatile the portfolio is, the more it has the potential to grow – but it can also go down!
- You can choose to reinvest income or have it paid to you in cash. For example -
- You have an investment of $10k, paying an income of 4% ($400) p.a.
If you’re invested in cash, which is paying 4% income out to you every year, you may choose to reinvest this income. Over time, the income your investment is generating increases from $400 to $592 in 10 years, and $876 in 20 years. So, in 20 years you’ve more than doubled your income from your original investment, by simply reinvesting the income.
This asset doesn’t have any growth though it’s just cash sitting in the bank. - Now, let’s introduce growth into the equation -
You have an investment that is not only generating 4% p.a. income, but also 4% p.a. growth. You reinvest your income as in the previous example. Over time, the income your investment is generating increases to $868 p.a. in 10 years, and in 20 years it’s $1,864. From a 4% increase in growth, you have an additional $1,000 per annum, which is more than double what you would have if invested in cash.
- You have an investment of $10k, paying an income of 4% ($400) p.a.
-
The only difference between these situations is the volatility of the investments – one is considered risky, the other one isn’t.
What causes share price risk?
- Supply – Number of share listed/available to purchase
- Demand – How many people are buying or selling the share
Price Factors: No crystal ball
- Business environments go through peaks and troughs (resources)
- Companies face competition
- Technology changes
- Poor management
- Legislation/Political Risk
How to avoid it?
- Similar to relationships, you get to know the signs
- Never had a relationship? Well, you might not know the signs
- If you have gone through them over and over, maybe you either love volatility or you can’t tell the signs either.
- But if you can tell over time, you are learning
- You invest in relationships, hard to know beforehand.
Here’s what to look out for with your investments: Ways to avoid Risk of loss
- Avoid over demanded companies – Bubbles
- Risky investments –
- Ongoing lack of profitability
- Underlying asset unstable – e.g. Agribusiness
- Overextend – Too much debt/leveraged
- Eggs all in one basket – No diversification
Summary
Beyond not taking relationship advice from me, do yourself a favour, get some good growth going - but do it right! In next week’s episode, we talk about covering yourself for when things do go wrong. In addition, we cover off topics like diversification, and not over extending yourself.
Until then, if you have any questions, please get in contact. We love hearing from our listeners – whether you have a topic or a question you want us to discuss, or you want to give feedback head on over to our Facebook page, or through our website contact page https://financeandfury.com.au/contact/
Think someone you know might like to learn more about how to manage their money? Go ahead, spread the love!
Welcome to 'Say What Wednesdays' - Where we answer your finance questions.
Today's question is from Rhys:
- “I’ve been seeing stories on the news about Trump putting tariffs on China and sanctions on Russia. What is the benefit for the US to do this?” Thanks Rhys
Economic sanctions
- Economic sanctions are penalties applied by one or more countries against a targeted country
- Examples - trade barriers, tariffs, and restrictions on financial transactions
Economic sanctions are used as a tool of foreign policy by governments.
- imposed by a larger country upon a smaller country for
- the latter is a threat to the security of the former nation or that country treats its citizens unfairly.
- They can be used as a coercive measure for achieving particular policy goals, e.g stopping
- Illegal trade or
- for humanitarian violations.
- Economic sanctions are used as an alternative weapon instead of going to war to achieve desired outcomes.
Effectiveness of economic sanctions
Studies
- Haufbauer - 34% of the cases were ‘successful’
- Robert A. Pape re-examined their study, and only five of their forty so-called "successes" stood out, dropping their success rate to 4%.
Types
- Import restrictions - consumers in the imposing country would have fewer choices of goods.
- Export restrictions - the imposing country could lose markets and investment opportunities to competing countries
Some policy analysts believe imposing trade restrictions only serves to hurt ordinary people.
Jeremy Greenstock - sanctions are popular "that there is nothing else between words and military action if you want to bring pressure upon a government"
What is a tariff
- Tax on the imports or exports of something between countries.
- Example - Customs Duty - Tax on the import
- How it works
- Penalise other places for bringing goods in – but flow on effects – companies etc
- Free trade agreements – FTA.
In summary, tariffs are a tool and hurt people on both sides.
Welcome to Finance & Fury!
Is it better to actually make money or take money?
Today we'll be discussing whether it's better to actually cooperate with companies or compete with them, and the best ways to actually make money of your own. And specifically we will be discussing shares and what to look for when you want to buy shares as well. Because when looking for the best companies to own and how to pick them, it's all about picking the best company to cooperate with. And we'll run through the different methods of people use, whether it's protest, plunder or profit. We'll discuss a lot of the metrics around which shares to buy and which should actually work better for what your goals are in the long term.
So, to take us into it, Mr. Fury...
Enough is enough. I have had with my personal finances being all over the damn place. Everybody's strap in - it's time for Finance & Fury.
Firstly, what is a share? Share, stock, it's really all the same thing depending on which country you're in and what you call it. It's simply an ownership in a publicly listed company. And companies are a separate legal entity set up to operate (normally) businesses. Most companies that have listed on the ASX, which means that they've had a private company and they've reached a point where they can actually put that publicly available for everyone else to buy because they've got to a point where they're big enough to justify it. Because, to list on the ASX, it costs quite a bit of money. And most of the company is currently on there were small businesses that started off, grew over the years, and then got to the size that they could list and have external investors rather than just a few individuals who privately owned the business. And that's where most of these companies have come from, where they've been startups that have just grown really, really, well and provided a service that people really want. There are the exceptions to that, such as the previously state-owned ones like Telstra and the banks that got listed when they no longer were owned by the government.
But, when you buy a share, what are you getting for it? Well you're simply owning the business. If you buy a share in a company, say Telstra, Commonwealth Bank, and any of them, you're technically buying a part ownership in that business. Because rather than being privately owned, it can now be publicly owned by anyone. And what you get for buying a share? Well, being an owner in a company, you're entitled to some profits. If the company makes profits then they can pay those out to you in the form of a dividend. So, you get some income from the share. You also get voting rights. If the board aren't doing a good job or there's something going on behind the scenes that the shareholders don't like, they can vote the board members out and they can actually have a quite a substantial influence over these companies.
Then, the thing that you hope to get most of all from a share, is actually sharing in the company’s success, where as they grow and increase their profits, you'll profit off that as well being the owner of the share.
Before going further, we need to clear something up. The board of directors - they're the ones in control, really, of a lot of the decisions of the company - around who the management team is and a lot of the decisions they make. They have one job - it's making shareholders happy. If you own a share, the board of directors in the company by extension really only has one job beyond just providing what service they do, and that's to make shareholders happy.
So, they're meant to provide the best service to the public to get the most amount of profit and do the best job that they can for the business, on the shareholders behalf.
And that's through making the company do well. And they've got a lot of important decisions to make around what's the best use of the profits. Because if a company earns an income, pays its tax, then it has profit left over - and it can either reinvest that into the company, or pay you a dividend.
And that's important for the board of directors to actually get right. Because if they don't shareholders aren't happy and when there's the choice of either investing internally in a project or paying investors a dividend, it really has to come down to what's going to get the best return. Where, if you as the board of directors, see a project to invest in, that could make maybe 10% in a year, or 12%...Or you could pay that out as dividend, which shareholders might value higher than that, it's better to pay them the money. And we've seen many, many, cases of poor, poor, management getting this decision very wrong. Where they think that it's a great new opportunity to go into - new and exciting fields outside of what the company actually specializes in - and the use of those profits into a poor investment decision actually really hurts the share price and hurts the shareholders.
So, shareholders don't get happy and then that's when they sell the shares. If people are selling shares as the shareholders, that actually has a pretty bad effect overall. And that's where looking at what a share really is and how to profit off it is the best way to cooperate because you've got two options really - competing or the cooperate. And you see people trying to compete with these companies at the individual level a lot and that's where they're trying to plunder them almost, with like cyber hacks, unfortunately old-time sieges don't work on companies these days - you can't set a moat up around a castle, wait for them to starve it out, and then take all their stuff. There's laws, regulations, so plundering it's not really a good option to make wealth off companies anymore. So cooperating with them is really the best option, where if you purchase those shares you’re buying the shares to get a profit from the company, and, it's being an owner. And if you don't like a company, what should you do? Should you protest and want to change it? or should you get so stinking rich that you can own at least 51% of the company? Because if you really want to drive change, rather than shouting at others to do it, just make so much money you can earn 51% of the company… then guess what… you're in control of those board of directors and you can make some pretty big changes in a business. Which companies do you want to compete with then? None. You really don't want to compete with companies at that level, you prefer to cooperate really, because if you're cooperating then you're sharing in its successes. And the ones that do well grow in value and pay you an income that increases over time.
How do you select those? You can choose to be the stock picker, where you can look at what may affect the share price. And there's really four key factors that might affect share prices, and really its inherent in nature, because the shares’ price is based around supply and demand.
If the share itself has a very, very, high demand, the price will go up. It's all around how many people are buying it that affects the share price. Plus, the supply of the shares on the market. If there's a lot of available shares to purchase on the market and people don't really want to purchase them, the price will go down and you see that when you see share price collapses. That's people dumping the shares - selling them. So, the price goes down quite a bit.
But what you want to look for is, first of all, the inherent value of dividend, which is inherent in nature, so it's actually trying to forecast what the future dividends are gonna look like. And that includes the franking credits attached to them, the yields of the dividend, and stability and growth of the company as well, where if it's been able to grow the dividend consistently every single year, year on year, that's a good sign, that's a good inherent value of a dividend where it's likely to increase growing every single year. And especially with franklin credits and a decent payout ratio, that's very valuable to investors.
The next one is the inherent value of the future earnings of the business. So how well can the company grow itself to increase their earnings. Not so much just to payout to dividends but to also reinvest and grow the company, because if you've got a business where it's highly competitive, which a lot of companies are, they need to keep growing and doing something different which requires them to grow their earnings first.
There are external factors, such as market forces, economic factors, politics, even just recently is expropriation of property in South Africa, is a very big risk. If you're in a business owning farms then that is something to look out for, where it's got to be in a safe legal environment that is doing fairly well for the share to be fairly safe and secure. Because people who own shares can freak out very easily. It's not safe and secure and they're worried and there's a lot of instability or uncertainty, then that can cause the market to spook, and that's not really a company you want to cooperate with. Because again when you're cooperating with companies you share in this success but you share in the loss as well.
And one big thing to look for is the management. It holds all those three factors together, where if the management's doing their job properly, they're able to increase the inherent value of the dividends over time and they are able to increase the value of future earnings. And hopefully mitigate any external factors.
There's things called ‘ratios’ with shares. They're only based around the balance sheet. And if anyone's ever looked at a share, or even just gone to the ASX website, you'll see a little summary of things called PE’s, EPS, DPS - just acronyms for days. The PE is the price to earnings ratio, and it's the value of a share in its price to the earnings that underlay it. It's really just a good measurement of profitability of the business, where the price of the share to the earnings is given as a multiple. Say for instance, Commonwealth Bank, PE of 12. It means that the price is 12 times greater than its earnings per share. So, what's the profit of each share, and what's the price. And it gives you a multiple of that, and the lower that is, technically the greater, what's called a value share is. If you can buy a share with the PE of 4, then technically there's only four profit years there before you make up the full value of the share back. Compare that to Amazon – PE of 330. But that's where it gets murky again, where it's simply a balance sheet measurement.
And when you look at the balance sheet, it only gets updated four times a year. The price gets updated every day. And the price gets updated when people sell it. If there's future expectation that the earnings will drop heavily, then the price will drop well in advance of the actual news coming out, and the balance sheet being updated.
And that's where there's anomalies going on in the market and we'll go through those all in a minute, because the EPS is the next one that really affects the PE, where if the earnings per share or EPS is the per-share profit that's being earned by the company.
If you buy one share you're entitled to part of that earnings per share in the dividend per share. So how much profit is paid to you? And that again gets fairly squirrely when trying to look at what's the best ratio to go for, with how much does the company reinvest, and how much do they pay to you? Because, with mining companies - very [high] capital expenditure companies that have to spend a lot to make money, technically they don't pay much out in dividends compared to what they reinvest. But when you compare that to cash cows like Telstra (well up until recently Telstra was, not so much anymore), but they prefer to pay profits, because they're in stable businesses that they don't really need to invest more in, so the management there decides well there's no point in us trying to reinvest a lot of this income because it's not going to actually help investors as much as just paying them dividend.
The last one is a yield. It's the dividends of that dividend per share as a percentage of the price. So, a lot of these metrics are just the price by something else. What the earnings are, what the dividend is…and they can be good or bad. They're very easy methods of just taking a snapshot look at a company and thinking “oh well that's either overvalued, so, Amazon at a PE of 330, technically is a massive growth company where it's not earning so much of a profit, and that's out of management decision just so they don't have to pay tax. But if you're not really earning much of a profit then the share price has gone up a lot in that case of anticipation of future profits. And PE of 330 is fairly massive. And the good and the bad of it is just ratio traps, where previously we went through that the earnings are updated roughly every quarter, but investors inherent value - what they put on to these metrics - goes up and down every single day. And, if the share price was constant up until every quarter when the ratios really get updated, then everything will be fine but unfortunately the price changes as the ratios or the underlying metrics of them, stay the same. Here's an example. You look at a share it's got a yield a 16% on dividend, which means that if you put a dollar into that you should be getting 16 cents back. That's a pretty good dividend yield. But now imagine that the company has actually just dropped 75% in price. And that's off future expectation of them not making much money next year. Guess what, the update in earnings comes out and that dividend yield of 16% has now just gone back to 3%. Because the 75% drop in price happened before the earnings got updated.
Another example, company with a PE of 4 might look really, really, good. But again, it could just be off a massive price drop off of future expectation. So, there are traps with ratios where they can look very attractive, but outliers generally exist in financial markets for a reason. And it's not a form of arbitrage or some profit for nothing that everyday investors can take advantage of because there's a lot of sophisticated professional investors out there that if they saw a PE company of 4, they probably would know that it's a good buy, but if they're not buying it at 4, it's probably a good indication it's going to sink further. Or, when the earnings get updated, it's going to go back to a PE of 20-something.
It's very hard to be a stock-picker. You have got to do it a lot, and those ratios again, they're just the most simple example. But when looking at what shares or what investments to cooperate with, it's all about figuring out what you're after. So, what your goals are, and what your target return, and what your timeframes are, will really determine what the best shares for you to purchase will be. Because if you're approaching retirement and you want some safety and stability then what's called a large cap share might work really well, where they’re big stable companies and they generally don't have massive drops in price. Small cap though, the smaller startup companies, they might have massive future potential growth compared to your large caps because they're stable now and don't have much ability to increase than market share. But some small cap startup they might be able to generate massive, massive, massive growth.
Unfortunately, though there's a high chance that they won't and go in the opposite direction. So, it's all about figuring out what you're after first when you're investing as to what shares to purchase, and it's very easy to try and get a target return. And that's the easiest option. Where you can purchase shares through indirect investments like managed funds, exchange-traded funds, listed investment companies, and just get a portfolio together of diversified investments across a number of different companies because if you're the stock picker and you see a PE of 4, you see a dividend yield of 16, you put all your money on that company, and it gets rerated and then it all of a sudden drops another 40%, well that's unfortunately a big loss to incur off trying to cooperate with the company that should be doing well.
And that's where spreading the risk out across a lot of different companies really helps, but again it has to be the right environment, right target of what you're going for. And you can own them in a number of different ways. You can get them indirectly - so buying through platforms, managed funds, exchange-traded funds, LICs, or, you can go through share brokering accounts like COMSEC or NAB trade.
There's all different methods of doing this. But the most important thing is there's just no crystal ball. No one can guarantee you that this is the next best share, next best company. People can have a good idea about generally the thematic trends of the market, if say, health care is becoming a big, big, focus of aged/retiree individuals then that could be a big growth industry. Or even legalized pot - there's CAN, a company on the ASX, that have got some medicinal trials. They have grown massively off the back of that news, and that's because the future inherent expectation of dividends and growth, off an industry like that. It’s pretty big when you compare it to what's happened in Colorado and places in America. And with no crystal ball though, comes the risks of not getting it right …and it's about just asking yourself what are you buying for? So, if you're buying for income, look for companies that are your more cash cows - have high dividend payout ratios compared to their reinvestment ratios. And look for companies potentially that are growth if you're in an early position, you don't need an income because technically income off shares gets taxed. If you can buy a share that is fairly stable, doesn't pay much income but is expected to grow quite a bit, that's a good way to increase your net wealth position without paying a lot of tax until you sell the share. And looking for what good companies have, it's all about just the management and decisions they've made over time, where you can look at the financial statements and just look year-on-year - are they increasing their revenue? Yes, tick. Are they increasing how much they pay out of that? Yes, tick. Are they still getting good return on investment? Because, what they used their profits for is to pay you or invest.
And if internally, they're not getting a good return on investment for their money, then that's a bit of a sign the management might not be doing their job correctly.
So as a brief summary, I think it's much better to cooperate with companies than try to compete with them. You just buy them and profit off them. And again, if you don't like the company, then out of spite, buy so much of it that you can just change it. And it can be very hard to do it well though. Especially if you haven't tried to buy shares or never purchased shares before, and you've actually never experienced your first loss. It's a very humbling experience. However next week, we’re going to talk about how to avoid that because I’ve gone through it, a lot of other people have gone through it, of having investments go down in value.
So, we'll go through how to avoid this and protect yourself in the process while being able to gain good cooperation with growing companies, but not be caught with your pants down at the same time. I hope you enjoyed the episode and if anyone has any questions, like always feel free to go to financeandfury.com.au - hit us up on the contact page. Have a great week everyone, and I'll see you next time.
Welcome to finance and fury, the Say What Wednesday editions!
Today’s question comes from Dale: “My question refers to a point you and Jayden made a few times about recycling debt or using good, specifically using equity to purchase shares. I understand that you can claim the interest paid on the equity as a tax deduction. So, does that mean you have a second loan to pay down? And also, how does it look at the backend when you want to liquidate your shares?
Great questions!
Today we will run through each one of these covering off on Leverage.
Leverage is when you borrow to invest money, and why do this? Well, is $100,000 more than $50,000? Agree or not? It is! And that is what leverage does. Borrowing fund to invest into something to increase the value of the investment.
And it works off getting percent returns, where the greater the value of something, the greater your real return in dollar figures off the exact same percent when compared to a smaller investment.
We are all really locked into the same return the ASX can give. If you put money into the ASX300, everyone invested in the ASX300 gets the same return. However, those with more money in it will get more of a dollar value of a return.
That’s the whole “Rich getting Richer” saying, where the same percent increase off a greater value will lead to a greater return.
Now on to good debt. As Dale said, if you can claim the interest against the debt, it is generally considered good. And to make it eligible to do that it needs to be invested in an income providing asset.
More importantly though, good debt is debt that is being used towards something that will actually go up in value. If it is on a personal loan or something that will actually go down in value, that is what it is bad debt with credit cards or personal loans. Plus, no deductions.
But for good debt, if you take out $100,000 to invest in shares, the shares should increase in value while the debt shouldn’t. It shouldn’t go up with inflation, so using leverage can help to increase your overall wealth when your starting values are relatively smaller than what you would like.
As a warning, when borrowing funds to invest both your positive and negative returns are magnified. This is general information only!
But how borrowing-to-invest works in this case is from what is called home equity, where you borrow money out of your home to buy shares or managed funds.
Equity it just money you have in the value of your home. If you have a $1m home, you can borrow up to 80% of that value. So, if you don’t have any debt against your property and it’s worth $1m, you technically have equity in that property of $800k which you can borrow to utilise to invest.
And even though it is your own personal residence, because you are borrowing funds to invest in something that produces and income, then that will actually become a tax-deductible expense with the interest payments. As opposed to if you took money out to buy a second holiday home.
And any investment that you invest in that produces an income, you can claim deductions against it. Either for the cost of the investment (management fee of the platform you are invested on) or the interest that you have to repay on the borrowed amount.
Now, the process of borrowing money against the home going back to Dale’s question.
You do need generally to get a separate loan if you have bad debt attached to your home. So, if you have a home, again $1m, and there is a $500k mortgage on it, that 500k mortgage is your bad debt. But then you can create a separate loan (or second loan) and borrow money on that.
The reason why you have to take out a separate loan is to keep track of the interest components of repayments. Because if you have one loan that is principal and interest that is bad debt, and you take out more money on top of that and invest those funds, it is going to be very hard on a month to month basis (especially if the rate is variable), to work out what component is interest of the repayments towards the investment and your mortgage.
Mainly, accountants require a second loan and the ATO requires a second loan to actually make sure the interest being claimed is 100% accurate. And with the separate loan, it does mean that you have to pay it down……if you choose.
But you have time! Like all loan you can take an additional 30-year loan on a separate facility on your home. But if you do want to pay it back, then yes, you over time will have to repay it.
And the deductible interest you claim that at tax time. The way that works is during the year you earn your income, then when you lodge your tax returns you’ll list on there income earned from investments and personally, and the interest you have paid on those investments to offset the income.
Why it’s great to have a separate loan as well, is that you can structure it differently to your bad debt. And one of the best waits to structure investment loans may be on Interest Only payments rather than Principal and Interest, because if you are on a Principal and Interest payments half or sometimes majority if it is a new loan it will be paying off principal which is not deductible.
And over time, maybe after 15 years, the majority of your repayments start to become principal with little interest. So, you’ll be paying the same amount on the property, but how much you can claim as interest on that isn’t actually going up, its going down over time.
The other thing is flexibility, having an offset account on there against that loan allows you to have a separate offset account which is your cash fund for investment purposes.
And unlike margin loans, the home is the collateral for the investment. Therefore, the investments can be independent form the collateral. If you get a margin loan you need to get a loan on every share that you get, in this case you are just borrowing money against the home which is collateral itself, then investing that in really any investment.
So, the loan isn’t attached to the investments itself you are making. And that works a lot better as it is safer than a margin loan where you can hold the investments if they go down in value, indefinitely. With a margin loan, if the investment goes down in value but your loan doesn’t decrease the bank will step in. Remember that you loan stays the same as when the investments go up, but you loan stays the same also when your investments go down, even below what the loan is.
So in a case where you have a margin loan and the value of the investment goes down, when the value of the investments is below the loan the banks going to tell you need to buy more of the investment, sell investment to repay loan or repay loan using your cash.
That is actually a greater risk, because you are forced into a situation where it might not be the right investment to buy, as it is going down! Or you have to sell an investment and crystallise the loss.
The second benefit with home equity compared to margin loan is the lower rate. Again, a home is a much less risky collateral for the banks to have, than a share which is much more volatile.
So that is the initial proceeds, you borrow money against the home with a separate loan with an offset account generally attached to that separate loan, then you invest the funds.
You take money out of that loan and invest the funds. This can be in any asset as long as it produces an income. It should be in certain types of assets to not introduce additional risks, you wouldn’t just borrow $100k and put that into one bank or mining share.
The ongoing strategy from there, you can either keep borrowing money as the value of the property increases, you can keep the loan the say, or you can start paying it down.
And that is where over time you can choose to do really whatever you want with that loan! And that takes us back to Dale’s question again. If you want to repay the loan at some point, you can do it early, or can wait until the 30 years is up. Either way it will take a bit of planning to do, as if you want to repay the loan without selling the investments, you have to plan ahead and utilise the investment income, to use this surplus income plus your cashflow to use this to repay your debt down quicker.
But a bit of a better strategy, if you are looking at repaying debt, pay down your bad debt first. So, use your investment income to pay down your personal mortgage, as that is not deductible. And it isn’t borrowed funds against an investment asset! Therefore, you can over time try to pay down bad debt, and then figure out what to do with the good debt. With the good debt, that should be the last one to pay down if you have bad debt, but if you plan properly over time you can work out over time how much in repayments it will take to pay this down by the time you need to.
And the other option is to sell the investments. So, as far as liquidating the shares go, you can do that at any point as well. You don’t have to sell all of the investments, you can just select one investments in the portfolio that does have a large capital value increase to pay out the loan.
Because when you sell that investment you will pay capital gains tax on this. And that won’t actually be reduced by the loan in any way. As it is only the ongoing interest payments that you can claim a deduction against. It’s not like you’ve invested funds that are borrowed and what’s invested goes up, that you somehow get a reduced tax on the capital gains tax. It works the exact same as if you bought the investment with your personal cash rather than borrow funds.
So, those are the options, but it is probably better to plan over time to pay the loan down. But because it is an equity loan that is against a home, and the home is the collateral for the investments (and not themselves). That is why the investments are independent and you can choose that to do what you want with them over time.
So, they are unrelated unlike with a margin loan it is attached to the individual share, so if you want to repay that again, you got to pay the bank back their money or in that case sell the investment. But here, there is more flexibility. So, you can choose to do whatever you want when it comes to when to repay the loan and how to repay it. You can also choose over time to increase the loan as the property value increases, keep the loan the same or choose to pay it back.
The last thing is if you choose to sell the property that the loan is attached to. If you have equity borrowed against the property and you sell it, the investments don’t have to be sold, they can stay in place. It just means that when you get the proceeds (or equity) out of the remaining money in the property once it is sold, you will just have less to put towards the next property to buy. If you have a $1m property with no debt, you get $1m of proceeds. If you have a $1m property with $800,000 of debt, then you will get $200,000.
I hope that covers everything. The questions were just relating to understanding that claiming the interest as a tax deduction, but does that mean you have to pay down a second loan? So, you do, you borrow a second loan, you don’t have to pay it down on Principal and Interest, you can pay it on Interest Only and transfer savings into an offset account, which technically means you aren’t paying the loan back but still reducing your interest. But at some point, the bank will want their money back. When it comes to winding the investments up at the back end, do you liquidate your share? Well you can but it is probably better not to.
Thank you for the question Dale, I’ll do a more detailed episode on this in episode 6, covering off how the rich really get rich!
But if anyone has equations, go to financeandfury.com.au/contact and hit us up with something like Dale’s question, or Adam’s last week.
I hope you enjoyed it!
Welcome to Finance & Fury! Today we're talking about increasing your net income …and the way to do that is reducing tax.
So, in today's episode we'll run through why we pay tax, where it goes and I'll break down all of those dirty little “loopholes” that you’re hearing about, how the super wealthy tax dodge every single year, how they pay no tax…well, guess what! you're all entitled to do the exact same thing if you're in a similar position. So, to take us into it, Mr. Fury…
Enough is enough! I've had it with my personal finances being all over the damn place! Everybody strap in…It's time for Finance & Fury.
Before jumping into all the amazing tax dodges, I want to talk about monopoly again because there's a part of that that I really, really, enjoy and it's the fact that every single turn being forced to pay other players based around how many properties you have, is purely chance. Imagine that this specific card in monopoly where you draw it, and every home that you own, you have to pay other players twenty-five dollars for that. Well, imagine that it was guaranteed in monopoly every single turn rather than just based around picking up one random card, I worked up that from this card you’re paying around 20% of tax, where the average cost of a house in the game is around $125 - so that ranges from $50 to $200. And if you're paying $25 on that average, it's 20% of tax and it's actually a really rare event to actually get that card because you're more likely to land in jail.
Everyone's played Monopoly I'm sure. Imagined that this was a guaranteed outcome every single turn, how would you play? Would you go hard trying to get as many properties as you can, accumulate as many homes on them, or would you sit back and wait for your payments from other players? And taxes (beyond being a certainty compared with death) really, it's money that you pay to the government to spend, which in a lot of cases does just go to other players. The sources of tax in Australia you've got your income tax (which is based around marginal tax rates on what individuals earn) and that can range from 0% to 47% with the Medicare levy. That's also paid on capital gains tax and then you've got other taxes like sales tax (which is the GST on all goods and services produced), you've got state taxes as well, such as payroll, stamp duty tax, and at the federal level as well you've got company tax rates. So why do we pay tax? Well you go to jail if you don’t. But beyond that it goes to help run the country with all the operations and services that the government provides. In the latest budget it was estimated that a spend of $464 billion’s anticipated for the financial year. The tax revenue for the year was $433 billion. So, there's around a $31 billion or so deficit there. Of that spend of $464 billion around 16% of that goes to healthcare, 7% goes to education, 4% goes back to paying interest on debt that's accumulated, because if there's a shortfall in spending (such as that $31 billion in that previous example) the funds are borrowed and then that interest has to be repaid as well.
And that comes from our taxes. But when you go to the overall spending picture 35% is spent on transfer payments to other people. That's a form of social welfare where it's actually decreased from just shy of around 40% over the past two years down to 35%, so, it's a good step in the right direction. However, it's still $430 million every day and the Australian tax policy, it's designed to be what's called “progressive” where the higher that you earn in assessable income, the more tax you have to pay at a %age. And there's a massive debate between politicians and economists over the role of tax policy in affecting the economy, where it can help mitigate or exacerbate wealth inequality.
And, it also has effects on economic growth. And it comes back to the question of the “progressive” policy designed to be fair, but does it create fairness and equality?
I looked up the definitions. The definition for fair is treating people equally without favoritism or discrimination. The definition for equality is the state of being equal especially in rights, status, and opportunity. And everything's equal when there's a uniform application or effect without discrimination on any grounds. Based on that definition it sounds like it's talking about equality of opportunity, where everyone has the same opportunity, while not being in the same position, but we're all granted the same rights and the same ability to do what others are as well.
What the progressive policy is focusing on is equality of outcome, which is a massive difference to an equality of opportunity. Where the equality of outcome simply means that the more that someone else has, it has to be taken away to give to someone else to have, so everyone can have the same outcome.
And unfortunately, with that policy of equality of outcome, the more equality is actually pushed for, the less equality is actually provided to people when you take the dictionary definitions (where it's privileging some people over others - if you earn a high income you're less privileged).
And it's measured in Australia by a thing called the Gini coefficient (well, it's actually measured worldwide by the Gini coefficient) and it's a number between 0 to 1. If you have a number of zero in a country that's got this thing called the Gini coefficient, it means that everyone's equal, everyone's earning the exact same amount regardless of how much they work, it's just completely everyone’s on the same, say $10,000 per annum. If it’s a Gini coefficient of 1, it means that one person or just a couple have all the wealth and income in the economy. In Australia our Gini coefficient, before taxes and transfers, is about 0.47 and after tax and transfers it goes down to about 0.33 or so.
So, 0.33 is actually a very equal Gene coefficient when you compare it to most other nations. It ranges all the way up to around .62 for South Africa. But again, after transfer payments it comes down to around 0.45.
And when we're looking at the definition of fair, again, in Australia today who’s doing their fair share? Going through the numbers …people who are of the working age of 18 to 65, it can be broken down into ten lots of 10%. And looking at those numbers, the top 10% of taxpayers pick up 52% of the income tax bill. The next 10% pick up 19%, then the next 10% pick up 13%.
So, the fair share there of tax distributions comes from 30% of people who are working age between 18 and 65. That 30% picks up 84% of the bill. And if you earn $120,000 per annum, or $500,000, or however much - if you think about tax as something you don't get to keep, technically then you're working for someone else. Where if you're earning $120,000 per annum, if your average working year is 240 days, at 48 weeks, five days per week, you're working around 70 days of that 240 for something else. And if you earn more (say $500,000) you're working around 100 days of every year of your 240 days for something else - where your money is just going away. And the definition of slavery is working for someone else with no choice, and I'm a bit torn, where the fairness model here doesn't seem that fair.
There is an article from The Australian that was talking about the government budget and the figures, but here it's actually just focusing on the government itself and what the government costs in running. The ATO, the individuals responsible for collecting the money, that costs $3.5 billion each year. And they employ 20,000 staff to collect the tax revenue. That's $163,000 per employee that it costs (that's not what they get paid, it's just simply what it cost to run per employee).
To give an example, in the U.S. the IRS (their tax division of, I guess you'd call them the American ATO) you’ve got one bureaucrat for every 2,000 working age people to collect tax. Here, we have one in 500. Moving down the list, the Department of Social Services (the individuals responsible for the transfer payments) they spend $5.5 billion every year just on administration costs. And breaking that down to number employees, it's an average cost of $160,000 per employee. Federal Department of Health, 4,500 employees costing $222,000 each. The Department of Foreign Affairs, 7,000 employees costing a whopping $240,000 dollars each (I guess it's fairly expensive to go on overseas holidays every year!).
When you break down the fact that all of these costs are not actually producing anything, it's been going into a system to try to transfer the payments. And the total bill for the government running itself (just on costs) is just shy of $60 billion. So, it comes to about 16% of our revenue is just going into the system of running it.
And the big problem with higher taxes is that it's never actually been proven to lift productivity, or enhance prosperity, where every dollar that’s taken out of your pocket is one less that you have to spend. And if you think every dollar that's taken out of your pocket, straightaway 16% gone on collecting the revenue and redistributing it, well that's a pretty awful loss when you're giving a dollar. And if you're investing, you wouldn’t want to invest or give a dollar, just to lose 16%.
And there's always the guise of a conversation on tax reforms, really just being a discussion for tax hikes because over time the message of reliance is increased to the point where it’s simply funding the government's own growth. It hasn't been a measurable increase in products or services that the population gets for this increase of tax.
When you compare it to times in history, a big fan of ancient Rome where the average tax rate was 1% to 3%. And 3% was a big outlier in the peak of the empire, which was just in major war times. And if you weren't a citizen you didn't have to pay tax, it’s only if you're a citizen you paid your tax, if you weren't a citizen you didn't have to because you didn't get too many rights if you’re a non-citizen in Rome. What happened to society and just kids helping parents out? Oh, wait... ok you don't have much money left to pay tax so it's fairly hard. And now we’re in a position of a lot of our money going to a system that's meant to take care of people, when if we had more money we could take care of each other.
So, remember, it's up to you. Now, what can you do for your situation? Because, rather than a ‘reliance message’, getting an ‘independence message’ is really the first step when thinking about reducing your tax. And it's all about financial independence after all and that comes with the independence message. Love him or hate him Kerry Packer has a fantastic quote about minimising tax when he got dragged in front of the Senate inquiry about the print media. His quote, when asked about minimising tax was. “I'm not evading tax in any way shape or form. Now, of course, I'm minimising my tax… and if anyone in this country doesn't minimise their tax, they want their heads read, because as a government I can tell you you’re not spending it that well that we should be donating extra”.
So, what can you do to reduce your tax? Simple. All the secrets of the rich are here. You can either just earn less – so, stop working – and you won't pay much in tax. Or if you don't want that option, we’ll go through 8 ways to actually legally minimise your tax. And that's by reducing what you're assessed on. So, rather than just not earning an income you can earn an income, just try to reduce the assessable amount… and one way is the old ‘negative gearing’. Everyone hears about negative gearing, it’s and simply spending more on investment than what you earn.
If you borrow to invest, say borrow home equity and buy some shares, the interest payments there, if they’re higher than the income that you generate from those shares. Say you buy $100,000 worth of some mining shares that don’t pay much income, maybe 3% of dividend yields, compared to interest payments of 4.5% we've got a negatively geared investment because you're putting money into that, and the tax you get back is only as good as your marginal tax rate. And same with property - if you're paying interest on property and you've got ongoing cost management, for every dollar that you're net losing on that investment, you get to claim the marginal tax rate back. So, for a property if you're earning an income of $20,000 in rent, but it's costing $30,000 per annum, and you're on $100,000, well you're only getting 39 cents back for every dollar that you spend on that investment. So, that's negative gearing and unfortunately, it's not the best for a cash flow position because it actually reduces your after-tax cash flow quite a bit. Even after the tax deduction’s given back.
The second easy tax dodge is ‘deductions’. Similar to the negative gearing example, any investment costs that you have are claimable as tax deductions as long as they're going towards some asset that's generating an income.
Other deductions are work-related expenses. If you've got some, even education, to improve your current role or job, then you can claim that generally as work-related expenses either through just operating or as educational purposes.
Another great way, is give to charity. If you give money to charity that's a complete deduction against your assessable income. Another great way, the third way, is buying shares with franking credits. Franking credits are the tax offset on dividend income. When you buy a share that has a fully franked dividend against it, you're essentially getting back the tax that the company’s paid at the company level to avoid double taxation. If you get a fully franked dividend though, the franking credit actually gets added to your assessable income.
So, an example of that - if you have, say 1,000 Commonwealth Bank shares, each Commonwealth Bank share pays $4.30. Of that, you get $4,300 of dividend. So, I've got your 1,000 Commonwealth Bank shares each paying $4.30, you get $4,300 per annum. Attached to this is franking credits of around $1,843. What you get taxed on is the dividend, plus the franking credit. If you're earning $100,000 again, the total tax that you'll have to pay is adding those two together so it comes to around $6,143 you're going to be assessed on now rather than just, you know, the $4,300 that you got in income… and you’ll pay tax at 39% on that.
So, after the tax is paid - which is around $2,393 on that, you actually then get the franking credit back. So, the net tax on that is $523. So, you've received $4,300 of income after all the mucking around with the frank credit calculations, you’ll pay $523 net. That actually works out to be a marginal tax rate of around 13% on the dividend, rather than 39% so franking credits provide a very tax effective income.
The next, is family trusts. Family trusts just own an asset on your behalf, or the behalf beneficiaries, inside a separate environment. Rather than owning assets in your own personal name where you’re, every year, obliged to pay at your own marginal tax rate, family trusts allow assets to be owned inside the trust and depending on who the beneficiaries are, every year that income can be distributed to someone with a lower marginal tax rate. You can't distribute your personal income though, it has to be an investment. So if you're buying investments inside a family trust and they're generating say $20,000 - $30,000 of income per annum, if someone's on a very low marginal tax rate in the family, then you could distribute that income to them.
However - kids – they’re no longer a loophole. If you’re below 18 it’s about $460 you can give to a kid tax free. Then, for the next up to $1,300 or so, it’s 66% of tax, and then above that, it's 47%
Then, salary sacrifice. You can actually put money into super pre-tax paying 15% of a contribution tax, rather than your marginal tax rates. And if it's sitting inside super as well, it pays a maximum 15% tax again, rather than having an investment in your own name paying marginal tax rates.
If you earn $100,000 and you put $100 into super, sit back for 20 years, you'll likely have an additional $180,000 - $200,000. And that's at 6.40% return. And you would have saved around $25,000 of tax over that time.
Your net benefit is around $200,000 over that period - all for just $60 less per week in your hand. Just remember with salary sacrifice don't let your employer contributions and salary sacrifice go over $25,000 because otherwise, tax!
Another great tax dodge …capital losses! Just lose some money on an investment. Then you can claim future gains against that. If you buy shares for $100,000 of value and lose 50%, and you dump it and sell, you've got a capital loss of $50,000 that you can carry forward every year until you gain a capital gain and then you can help offset that.
So, with Donald Trump not paying tax forever apparently, well, you too can do that if you just lose $916 million so you can essentially, indefinitely, offset any capital gains you get.
And that's where the next strategy comes in if you are selling some asset with capital gains…try to time it so that you're doing so in a year that you don't have much of an additional assessable income. A great way to do that (probably way too down the track for most of us) but waiting to retirement, or waiting until maternity leave, or just waiting until you're in a position where you're outside of your normal assessable income to sell those assets. Because capital gains get added to your assessable income. So, if you're generally working for $80,000 a year and you sell an asset (even if it's had a $100,000 gain) $100,000 is just added against your assessable income. If you could wait an additional couple of years, if you're on maternity leave or if you're simply approaching retirement, then you can sell that asset and not have to pay the additional tax being added to your assessable income.
And, last but not least, superannuation and allocated pensions.
Allocated pensions have come under a lot of attack recently and can so I can sort of tell why when, if you're above the age of 60 or your preservation age, you could convert your super account into what's called an allocated pension or income stream. They've got many different names, but it's all the same thing, where you can transition your super account into a tax-free account. So, all the investments inside there can be tax free. You can have a property inside an SMSF, you could have a $20 million gain. You could sell that while you don't pay tax (if you're in the pension environment).
Similar to all of the franking credits and other income that you receive in that environment, it just gets added to your income rather than paying tax. So, it's really the most tax effective way of funding retirement, of just building that up, and then hopefully locking it away to the point the government doesn't keep just grabbing tax off it.
And all these 8 different strategies to reduced taxes is really true equality. Anyone can do it. You all have 100% equal access. But, it just doesn't make sense for a lot of people to do these because they're not in a position where the costs involved in setting up, say a family trust, is worth the tax saving they would get.
Because if you're not paying much in tax then setting up all these structures which cost a lot of money, doesn't actually save you any net benefit. You might save some tax, but you're paying probably more than what it's saving.
Well, I hope these have helped – where if you're paying tax that's a guaranteed certainty every year, why not just try to improve your position a little bit. Increase your net cash flow by looking at ways to just simply reduce your tax. The most common for those ones we looked at, the major 8; negative gearing, salary sacrifice, claiming deductions, getting franking credits with shares, family trust, looking at capital losses…
So, if you can use these as well - that's true equality. It's just you probably haven't lost a billion dollars so you can't claim that as a tax loss indefinitely …and really when we look at tax, does the government deserve more money that is really not increasing the quality of service we receive? and we don't know really how it's spent, we get a chunk of a pie graph, saying “34% went here” and if you try to look into really how it's being spent or what's being divvied up, it's very hard to find. It's possible to really make the government accountable by that point, and if they're asking for more, I think they should be fairly accountable to at least let us know where it's going. Because we're never ending source for them - they can legislate anything really, and unfortunately, they have the guns… so we have to abide …or go to jail.
So, if there's going to be the message of trying to accept more of our taxable income, then it's probably a good idea that we give a message back of just needing to be fiscally responsible first, before asking for more money. It's like a kid who doesn't want to work on their own and just keeps putting the hand out say more, more, more, more, more. Eventually one of the parents might give that to them, but then over time if they just keep handing out money, they going to go bankrupt.
So, I hope you enjoyed the episode today …and I'll see next time.
Welcome to ‘Say What Wednesdays’, this ‘Say What Wednesday’ is brought to you by Adam and Tate, they both asked separate questions about the Franking credit issues and just to help clarify around that because Labor's announced some proposed changes to the Individuals Wealth Policies, one of them includes a thing called, Changes to Franking Credits.
This system for Franking credits was set up so individuals weren't taxed twice on any dividends that they received from companies that they owned. The other individual polices that Labor have introduced, or want to introduce, are to lower the income threshold for superannuation tax rates for contributions so, they want - if you're earning greater than $200,000 you are going to have to pay 30% on contributions to Super. They want to limit 0.5% increase to the Medicare levy for people earning over $87,000, lifting the top marginal tax rates by 2%, scrapping the first homeowners super savings scheme, restricting negative gearing for properties, halving capital gains tax discounts to 25%, removing refunds for the dividend imputation credits, which are the Franking credits, lowering non-concessional contributions to Super from $100,000 currently to $75,000 and remember a few years ago, $150,000. A few years before that it was unlimited, and they want to dump the ability to make - catch up contributions for any individuals with low superannuation balances and they want to remove the ability for anyone to make personal tax-deductible contributions.
So, it's very much an attack on superannuation and those on the higher marginal tax rates but Franking credits is one that's actually going to affect everyone because if you buy a share in a company you technically own that company then that company makes money, they pay tax on the money they make and then they have some profits.
With those profits they have two uses, they can either reinvest that money in themselves so they can purchase new stock or they can expand their business operations, hire new people or they can pay dividends, the profits, out to investors - all those who are in the shares in the business and the Franking credits were introduced to avoid the company paying tax and then paying profits out to the individual and them paying taxes as well.
Because, say a company has a $100 revenue, they pay their company tax rate of 30% they're left with now $70 of profit. If they choose to pay the full amount of profit, that's $70 out to an individual, if they're on the highest marginal tax rate that $70 is 35 to that individual. So, what was $100 is really now being taxed at 65% that the government's taken and the individual is left with 35, so that's what Franking credits were introduced to avoid but with the removal of that there's two separate issues, which are actually dragging each other into different directions, where it's actually bad for all retirees and it's actually bad for poor people as well. Where if retirees are in a situation where they're drawing income from shares whether that be superannuation or personally they're going to lose a lot of their net incomes because their either are going to have to pay more tax or they're not getting those Franking credits in cash back. And anyone who's on low marginal tax rates as well, they don't have any other investment income to offset their dividend incomes, they’re just going to be losing their Franking credits and increasing their effective tax rates from around zero to 30%.
So, it's a big change that really has many - many losers and a very finite number of winners …and when looking at the winners you can sort of tell who's driving this policy.
So, the losers - anyone who's invested in shares. That can be broken down, even Australian fund managers (people who professionally invest in shares for a living) they pass the Franking credits on to investors and that's a big incentive for people to buy Australian share funds. Also, the second biggest losers will be anyone who has a self-managed super fund or an individual wrap superannuation account where they receive Franking credits. You don't have to be a millionaire to have these, you can have a super balance with one hundred thousand and access direct Franking credits as an additional income to you.
But it's being targeted as just, again, lies. Of just painting that the wealthy are the only ones benefiting off this. But retirees are really, and actually those on low marginal tax rates, are going to be the hardest hit because anyone who's done an accounting 101 course knows that if you receive a dividend of say $100, you're going to be assessed as owning an income of the dividend plus the Franking credit. So, what you're really getting taxed on $142 anyway and then you get $42 back, so it's not like these Franking credits for the ultra-wealthy are just, you know “free money”, it reduces their tax a bit, but they still pay a lot of tax. The individuals not on high marginal tax rates, they're the ones really benefiting from this, and it seems like it's just disincentive anyone to really take the necessary steps to build their own wealth. Because when you look at the winners from this, the real winners from this are the industry funds because industry funds don't pass on those Franking credits to investors, they keep them and help to subsidize their own costs and taxes in the background.
Then another major benefit or winner from this policy is any property trusts or utility trusts or property investments because property trusts, they don't really pay much in tax. You don't pay much in taxes a company or a trust you can't really claim Franking credit if you haven't paid tax, so therefore they pay a lot of the distributions or incomes and dividends out as unfranked dividends because they haven't paid tax, or they can't pass it on. It's only going to be hurting the companies who are actually paying tax and then the investors who have invested in them.
So, the net effect of this it might be actually pretty similar to what we see globally with countries that don't have Franking credits, where companies do not pay much in dividend. You look at the average ASX listed company where the ASX overall has an average yield of 4.4% excluding that Franking credit.
With a yield (say you buy the ASX300 share index), your yield will be around 4.4%. If you buy the U.S. index your yield will be 1.8%. So, it's less than half… and why? It's because the US doesn't get Franking credits.
So, going back to what a company can do with it (profits) they can pay you, or reinvest in themselves. They pay you and you're going to just get double tax - no tax benefit back to you from what the tax the companies paid. Then it's not very much of an incentive to buy the share purely for income, which in Australia it really is. So, these companies might actually change their decisions on dividend policy and stop paying as much dividend and just decide to reinvest it in themselves. And shares are a big part of retirees or anyone's income source for passive income because property itself it doesn't actually give the best passive income when it's got debt against it and it's got additional cost because if you're looking for in retirement for big net cash inflow, and you have to own property personally and it's got additional running costs, agent fees, insurance, rates, you're looking at a fairly low yield compared to a share after all the tax and Franking credits are rebated.
So, this policy is really just punishing everyone to pay more in tax because anyone who has superannuation has Australian shares, industry funds have already been not passing this on so hey in anyone in an industry fund, you're not worse off. But anyone who actually has their own individual superannuation account like a wrap account which really anyone can get - it's not like a self-managed fund where you've got to pay thousands of dollars to have it set up - they're going to be missing out too. And all it is is just to grab more tax, pay more tax, so it's punishing people for doing the right thing and investing in their own lives to look after themselves in the future. It's just punishing them, and why? Well, the government obviously needs to feed themselves, create more money that they get which reduces the money that you get, which then creates more reliance them. But it's so counterintuitive because we've just gone through a massive shift of age pension changes where around three hundred thousand people lost their benefits. So, it seems like a massive tax grab where you no longer have any incentive to invest and better yourself with shares but at the same time, well good luck if you ever want to get on that age pension.
Out of this I've been inspired in the next episode to actually tell you all these dirty little tax loopholes that Labor and the uninformed keep harping on about because really, does the government deserve more money? …And we'll tackle that in the next episode.
So, thanks for the questions Adam and Tate and anyone else has any questions please leave them at financeandfury.com.au, if you just go to the contact page and type any questions that you have we can tackle them in another ‘Say What Wednesday’, so thanks for listening guys, and I hope you enjoy the rest of your day.
Hey guys, and welcome to Finance and Fury.
Today the misunderstanding we're going to be tackling is how to be wealthy. There seems to be a lot of “rich-hating” going on around at the moment, but why? I think it's just a lot of not understanding how people actually got to be wealthy in the first place.
So, today I want to treat wealth, or building it, just like a game. Because most games are pretty fun to play, and it's all about just following the basic rules of games to actually win in the end. And generally depending on the game, it's who's accumulated the most by the end. And we’ll be running through the best ways to win a game - whether it's actually through competition with others or cooperation with others. Because there's a lot of misconceptions around how the economy actually works, how building wealth works, and why the wealthy are actually wealthy, and whether they've competed to get there ie just taken everything from you, hence why, you know, there’s all the hate directed, or if they're just cooperated better than others.
And it's very important to figure out exactly how they've got there because if they've done it then you can actually do it too and we'll be running through how to use these forces to succeed and build wealth for yourself. So let's get into it with Mr. Fury.
Enough is enough. I’ve had it with my personal finances system all over the damn place. Everybody strap in…it's time for finance and fury.
I'm sure every one of you have played some form of game before. You'll have a preference about what types of games you like to play, whether it be a group game, or solo games, or board games. Depending on the games you like you might prefer different play styles. Solitaire has a much different playstyle compared to a game of monopoly and I’ll be using monopoly actually, as an example to help illustrate what things work in games and what doesn't. And I like to use games here just for the fact that they can be fun. Because finance is fairly boring, so why not try to make it into a bit of a game where you can start winning more than you lose.
And the funner it is the more likely you'll continue playing. Firstly, going through monopoly. Does monopoly provide any benefit to any players? If you've played before you're probably familiar with the rules of the game - you all start out with the same amount of money and you all get the same roll of the dice every turn. But when it comes to who gets the advantage, it's really only who gets to go first. It’s a massive advantage. If you get the head start of the first turn and the first roll of the dice, it actually reduces your chances of landing on any properties that are previously been taken.
However, after this first roll of the dice your advantage starts to diminish to zero. Let's use an example - if you’re on your first turn, you go first, you roll a 5... You hit the railroad (you're probably going to buy it) but then on your second turn you roll a 4 then on your third you roll a 6, and on your fourth turn you roll an 8. By this stage if other players have rolled on in the first turn a 9, second turn 15, third turn 23 is a cumulative score, well you're just landing on other properties people have purchased. So, while you haven't actually been able to manage to buy any properties you've been losing money because you've had to pay other players rent. That's where life is fairly similar, where as soon as you have your first turn (or you're born). You might be very lucky born into an affluent family but if you don't take the necessary steps and keep doing the right things and following the rules of the game, you might not actually have the same end result as someone who has just rolled very well.
The basics of monopoly, it's pretty easy to master. To win you simply don't allow any other players to build houses. That can be achieved by either not allowing them to buy three of the same types of property - so you don't allow trades to occur or you purchase them up when they become available, another dirty little tactic you can use is to only build houses and never actually build a hotel so if you take up the full supply of houses no one else can buy them. The other one is to build houses strategically on the most profitable for their cost. And that's actually the orange set, if you have the orange set, or the yellow set, or the red set, they've actually some of the most profitable ones to target for rather than those really expensive ones right at the end, like Broadway.
Another basic is to manage your cash flow reserves well because the last thing you want to do is be in a position [where] you land on someone else's property and you have to mortgage one of yours to pay. Because if you mortgage one of your property you can't get rent off it, and that's your real only way of winning the game of actually getting rent off other players. There are a lot of other tactics which can help as well such as if you're in jail paying to get out early. Because if you're missing the first few turns that's a lot of lack of compounding where the first few turns make the most difference for the rest of the game.
But once the board's fully owned you may as well just spend your time in jail because it's less likely that you'll be able to accumulate any more properties and there's a high chance depending on the number of players that you're just going to be paying rent then.
How to win? How to win is very simple. It's about the number of wins you have to losses over time, compounding. And winning in this is just controlling the board the more wins you have is the more properties that you have, and the more people that are landing on the paying you rent. And you can increase that by having more properties, developing the properties that you have, which will give you a greater win and then actually over time increasing how much those players are giving you. So, if you have a lot of properties you've increased the chance that they'll be paying you rent - but then you develop them so that increases the size of the rent that they pay you. It sounds all well and good but how much of this is actually based on chance? Because when everyone knows the rules to play the game, the difference in outcome is mainly around how well the roll of the dice has worked out for you in the first 8 turns. Then after that the rest is really not too difficult to see who's going to be the winner or not. Because the ultimate outcome of this game once everyone really knows what they're doing is unfortunately luck.
And I’ll be honest, I really don't like monopoly. The outcome is way too reliant on randomly generated chance. And you spend most of the time, depending if there's eight players for instance, you'll be spending 88% or 90% of your time just sitting and waiting for other players to finish their turns. And that's depending on the position you're in. Not that fun if it's eight turns in and you only have a few properties and you're just waiting 90% of the time for the roll of the dice for you just to figure out which property you're going to land on to pay someone else rent. It's not that much fun. And who really wins at this game because once that shift of direction occurs and the clear winner is really present, everyone else feels like they just want to walk away. But if they do that the individual who's winning probably won't be happy either because who wants to be robbed of the feeling of victory?
I find it just to be lose-lose. It's based on pure competition, which is really not a great outcome, because unlike the real-world, monopoly’s just a zero-sum, lose-lose game.
The outcome of it is, unfortunately, where one person wins through taking what others have. Because there's a finite amount of money, finite amount of property, and the board has a finite number of spaces you can purchase.
There have been similar times to this in history where economies have operated fairly similarly to monopoly. Economies controlled by Mao, Pol Pot, Stalin …they've operated in a similar way. So, imagine you're playing a game of monopoly with Stalin. He's the top hat, and he's also the bank. You all get set up to play but he doesn't give you any of your money on the first turn and guess what he already owns all the properties. When you pass go you don't get $200. So, you just spend your time sitting around, rolling the dice hoping that you don't land on any properties that have too higher rent on them because, hey, you don't have much of an income.
But don't try and leave the table, Stalin is a pretty trigger-happy kind of guy.
That situation doesn't sound fun, and for those who have been in it in those economies and societies, it hasn't been fun. But thankfully we don't live in that so why not treat life like it really is as a game where you can actually cooperate to win, rather than competition and that's where the misconception about how to win a game can enter. Is it better to cooperate or compete? I think it's actually better to maximize your results through cooperation than competition. Competition in games is just destructive and it's a win condition unfortunately of most finite games where there's that zero-sum mentality. Any board game has a zero-sum mentality. There's only a finite number of spaces finite number of resources and you're competing to bankrupt other players to win. Healthy cooperation is about improving yourself through interacting with other players to boost, not only your own results, but everyone's through trade and helping other players when they need it. So an example of the real world and how cooperation works is team sports. And it might seem like that's competition. Two teams turn up once a week to face each other in some form of sport whether it be rugby soccer and it's defined as a competition. But I feel like it’s more cooperation. Because both teams turn up and have agreed to turn up at the same time, same location, to play for the same number of periods, follow the rules of the game, and anyone who breaks the rules are penalized.
At the end the results are drawn, they shake hands and part ways. If it was pure competition i.e. win at all costs, it might not be so civil. If it's win at all costs and there are really no rules to follow then you might be more on task to take your switchblade or baseball bat to a rugby game and it just becomes an all-out brawl and who turns up next week to play? Within teams as well there's cooperation, where players are competing against themselves to be the best player in the team while training with other teammates. So the team mentality is all about helping each other, cooperate and those who become the best players generally out of just competing with themselves and having other players to help train with them. If it's a cooperative environment other players really know that that's a benefit to the team when someone else is better than them because it's a benefit for the team overall. If it was a competitive team, it would end up just in an internal sabotage if someone becomes the best player to them they might just injure them in training because who wants to not be the best player.
And remember improving yourself is not the definition of competition here. You can think about it as internal competition for yourself and that's great as long as you're competing against yourself to become better that drives progress. Where it becomes destructive is where it's introduced into the external and you start competing with others and others start competing with you in a destructive way. I like to think of cooperation as everyone working together for the improvement of not only themselves but society. Making it easier for everyone to get ahead and working together can only really be achieved in the presence where there's no mentality around a zero-sum game being present. Society is the sum of all individuals after all. If you have competition in a society then there's not much chance to actually specialize and it's a mentality of just taking what other people have to get ahead. If there's cooperation then people can introduce some comparative advantages where some can specialize in one thing and others can specialize in another. Trade occurs between them and they cooperate. And there's actually growth in the economy present when that situation occurs. But what led to some civilizations over time advancing to that point and others not. To get the answer to that we have to go back over ten, twelve thousand years. When agriculture started being developed by some societies it led to them introducing the stationary lifestyle compared to nomadic that they had been used to in the hunter-gatherer societies.
Being stationary allowed the accumulation of resources and goods and started an increase of food supply that allowed people to start specializing in certain things. Because if your day to day is no longer trying to just feed yourself, and others are producing the food and you can, say, be a blacksmith, or you can be a pottery expert, or just any other field outside of just living day to day. That is a massive benefit to the overall collective of society. And especially when trade occurs and the sharing of technology and knowledge happens across a greater number of people. As the food resources increase and more people can be fed that leads to a massive abundance of technology and shared knowledge.
And that's where trial by experiment comes in, and that's the foundation of most scientific formations, where they would look at what they're trying to achieve, and test different ways of doing that. And that's impossible if you don't have enough food to actually feed yourself day to day because you were more likely just worried about where the food's coming from rather than figuring out better ways to get food. With greater number of people cooperating in different environments as well, it just led to a greater pace of growth and technology through the cooperative process.
Unfortunately, germs had their own cooperation they needed to do, where with living and greater numbers more densely packed especially with animals, disease started to spread at greater rates. And think about the additional sewage that a few thousand people would have, compared to a tribe of a hundred. With insects, rats, ticks, diseases, plagues and other major illnesses developed, it actually wiped out a lot of people in those societies. But thankfully some were semi immune, then they had children who were more immune and they had children as well. So, our biology actually cooperated to make us immune to these germs that were normally destructive.
However, some weren't so lucky by around five hundred years ago where you had parts of Europe that were very well advanced even their germs are very well advanced and other areas that were locked off from the cooperative process unfortunately weren’t. And whenever a more advanced society met a less advanced society it didn't go well for the less advanced society unfortunately.
And it's not for the reasons that you would think. It's germs. The germs were responsible for more massacres and atrocities and murders then the guns and steel that these Europeans had over the other societies that they were meeting that were ten, twenty, thirty-thousand years behind their technological advancements. Where if they were in an isolated situation they weren't able to cooperate and the germs weren't able to cooperate and when they got introduced to these germs it led to mass extinctions of these populations. And the numbers of estimates, even around what the native Americans suffered in casualties from the introduction of germs like smallpox, it's around 90% of their population was wiped out.
And it wasn't out of mal-intent. Germ theory didn't occur until the 1800s and were talking 1500s here. And it was just a tragedy of events that occurred because their germs hadn't cooperated and their biology hadn't cooperated at the point of becoming immune. Societies that were in a position where they had a lack of cooperation, had no growth, and it actually was zero-sum competition. Where if there's no growth, it’s tribes infighting, trying to steal some territory from one another, actually it didn't lead to progress. And that mentality comes from just focusing on what others have and just trying to take that rather than better the position of everyone.
And it can be very hard to ignore what others have. But it's very important. Because how do you measure what your success is compared to someone else's?
You can't judge what you want and your own criteria by projecting that on someone else in the way that you think their life is working out. And who cares what the 1% are doing? Why waste time complaining about it? You’ll find out what they're doing when you get there after all. If you want. It doesn't help to think that monopoly man figures of the world are trying to steal your wealth and that's the only way that they became wealthy in the first place is just by taking it from you.
And I see that a lot of the twenty-year-old protesters out doing the 1% protests or the marches on Wall Street. They're just their whole working life behind accumulating wealth compared to the 65/70-year-old individuals that they're protesting. Warren Buffett's a great example. He was apparently worth 1% of what he is today, even when he was 50 years old. He's around like 87 or so now, so over 37 years he accumulated 99% of his wealth and that's compounding. That's just compounding of around 13% per annum for 37 years to get to 87 billion. Granted he had a much better asset base to start off than most people but you can use those rules yourself.
And it doesn't help to compete against someone like that because how are you going to compete against Warren Buffett? It's all about focusing on yourself first because it's up to you. It all starts at the individual level if you want to change the world start with yourself and if you have more capacity in your own lives you can actually do more and help more and improve the situations of others. So how do you get there? The first step, don't compete with others only compete with yourself while there are many other players in the game you shouldn't be trying to keep track of them or keep track of their score. There’s really billion of players in this game, how are you going to keep track of everyone? And there will always be someone doing better than you and that can be disheartening. So competing against yourself is about just focusing on the outcome you want and not focusing on the competition.
If you know the outcome that you want then who cares what someone else is doing? And it's very hard to compete against the 1% because if you take Buffett again, he's got eighty billion dollars. At 13% that's a lot more in gained value than someone who's gained a hundred thousand percent from bitcoin that they invested maybe twenty thousand dollars in.
When you're playing, the next step is to play by the bank's rules. And this comes back to monopoly because the bank's always the last one standing. And how? Well it’s because they have what people want, and people will exchange money for it if you want a property you'll give the bank money to get the property, or if you want the title, you'll give the bank money to get that.
So, using the basic rules of this game, there's six…
Spend less than you earn - and that's where cashflow is very important. If you're spending less than you earn and you're directing those savings into something that can actually grow and accumulate over time, then you can introduce compounding into your own situation. And you might be surprising, where the average car for millionaires is Toyota, Ford, Honda. Many people think that if you're a millionaire you may as well get a Mercedes or Ferrari or Lamborghini. But the true millionaires know that that goes against the first rule of spending less than you earn.
The second rule is just to start as soon as possible and let compounding do its thing. Because time is your biggest asset. And the marginal increases early on only compound into massive benefits over time. Anyone who's heard ‘The Rule of 72’ knows that generally if you're getting a 10% return you'll be doubling every 7 years. So if you start out early and you have many 7 year doubling periods, you'll be much better in the end.
The third rule is to invest wisely and just keep at it. Never invest out of hope. If you're investing out of hope to make a million dollars and it's only relying on hope coming through if you're investing wisely, you know that these assets tend to appreciate over time in value and pay consistent incomes that you can reinvest it might be boring but at least it's not gambling. Minimizing how much your your wealth is taken from you is the fourth step. How much of your wealth is taken from you can either be in fees or taxes. Minimizing that's essential because if you have more left over to compound through minimizing what goes out the door to others then great you now are in a better position and your compounding can take over. Being confident that you are actually getting better as well as the fifth step because you need to start feeling that you're actually improving your situation but without showing it so you have the need to show off your situation then that breaks rule 1. The final part is the question to ask yourself every day. Would you prefer to pretend to be rich or make it a possibility. Unfortunately you can either pretend to be rich or really just become rich. If you're pretending to be rich you're breaking rule number one again and that breaks down all those other rules where you don't have enough to start investing in compounding over time. And if you're spending more than you own it's pretty hard to minimize. How much of what of what's going away in just you know sunk costs and that's rule 4.
So the third step of this is to cooperate. Cooperation as the community level or shared knowledge is really the impediment of society. Where cooperation is even listening to this podcast working with others knowing that if you ask questions or you seek information that someone will help you. And that's all around learning to buy the right investments if you're cooperating and engaging with others then you can actually pick up that shared knowledge of society and figure out what the wealthy are doing. And the only way to really make money is cooperate. You can either buy the companies you want to profit off which is cooperating with them so entering in a contract where you buy some shares in their business and then they pay you. That's cooperation or you can just stand outside with a bit of cardboard and protest or just try to plunder them or break their premise and that's competition it doesn't really get used that far so again don't compete with Warren Buffett just buy some Berkshire Hathaway shares in summary of all this.
I really don't like monopoly. It's lose-lose and it introduces a bad mentality on how to actually get wealthy the best way to win at any game is to cooperate in the real world and if everyone's working together for the improvement of themselves and then society overall everything will be better off and it makes it easier for anyone to get ahead. Thankfully it works only in situations where zero-sum games are not present and we live in one of those situations. If you think we're in a zero-sum game then unfortunately it's going to be hard to cooperate with others because if you are trying to cooperate with someone your mentality is that they're gonna try and steal all your stuff so you better try and steal theirs first. And that's a breakdown of trust and over history when there's been breakdown of trust between certain groups saying goes when trade stops crossing borders troops start and that's where things turn from cooperation to competition.
And when the some of society is a measure of all the individuals in it, it's better to cooperate with them. Where you can start getting some comparative advantage where someone specializes in one thing you specialize in another. And you trade and get on. If there's competition then there's no specialization and you're likely just going to steal what your neighbor has. So the step to focus on is yourself. It's all up to you where the first step is to not compete with others. Only compete with yourself. Only aim to achieve what your goals are and give little thought to what others are trying to achieve. Because you can't try to compete with them and you don't know what they're doing really so it's better just to save that mental energy and focus on what you're trying to do.
Step two is playing by the rules of work. Either play by the bank's rules of having something that people need and that they'll exchange money for or managing your cash flow well, compounding over time and minimizing your costs and taxes.
Step 3 is cooperating. So, cooperating in a community sharing knowledge helping each other out to improve their situation, but that's not competing with them. It just doesn't matter what they're trying to achieve but if you can help them achieve it with a bit of shared knowledge that is fantastic. And that's what leads to everyone growing in a society but what's next or it all depends on what you're trying to achieve on where to go from here. But we'll leave things here for today and we'll focus on different situations and goals and how to achieve them in a later episode. So thanks for listening guys. And I hope you enjoy the rest of your day.
Welcome to the first episode of Finance and Fury and today we're going to be setting the scene for the rest of the podcast. The whole podcast is about helping to solve misunderstandings… and one really big one is actually how to get what you want financially!
So, today we'll be running through two underlying factors that you can actually use to get what you want financially and to do so, we'll actually be talking about a few hot or explosive topics, so as a bit of a warning if you are offended by sensitive things this might not be the right episode. But it's not meant to be offensive in any way, it's purely helping to provide some illustration on a few factors behind what actually causes a bit of a disparity and financial pay and a few other things. And the most important thing is actually going to be covering through what they really mean for you and how to use them, because fortunately these same underlying factors can be really applied or harnessed by anyone when they know how. So, to take us into it, Mr. Fury.
"Enough is enough. I've had it with my personal finances being ALL over the damn place. Everybody, strap in, it's time for Finance & Fury."
Before covering the factors behind how to get what you want financially, let's cover the hot topics. If anyone's been paying attention to the news, or I actually saw it in my Facebook feed, an article about a pay gap between the stars of a Netflix show, The Crown. So, the male actor and female actor in that are apparently being paid separate amounts… with the male earning more.
Does this mean that Netflix is sexist? Well, if we only look at the difference between these two as being the gender then it's actually probably the correct answer. Unfortunately, the issues of this nature tend to have many actual causal relationships and it's almost impossible to put the blame at the feet of just one. The problem with that line of thinking as well is what's the next step, if there's not another reason between genders as to why they're owning a different amount then you can break it down where regardless of the position that they have if they're costars, main star, even just the extra that walks… Shouldn't everyone get the same?
Even if another actress at similar level is in one episode, should she be paid the exact same amount as the recurring star of the show? So, it's gets very hard when factors are brought in without actually picking up the cause and treating them like symptoms and distributions happen everywhere. The 80/20 principle is actually seen when you look at rugby or soccer or cricket, any professional sport. The best players get paid the most money and that's all due to people wanting to watch them. Music as well, a very tiny proportion of people sell the majority of records or even sell the most amount of theatres around the world. Even athletics. It's all relative to the individual inequality people have, so inequality itself isn't inherently a bad thing.
The bad thing about it is it's used to measure bad things. So, income inequality in this regard, if people are in poverty that's awful and that should be the focus not that Bill Gates has a billion dollars every single year in addition to, you know, your standard average Australian income because if everyone's doing okay then who cares how much he has. It's more about focusing on solving the underlying cause and not looking at the symptom and there's always going to be bad situations to measure with inequality but treating the fact that inequality exists is the enemy and focusing on one factor to solve it can lead to some issues over time and especially when the policies to solve equality really means just to have the same outcome for everyone, which will always be at the expense of someone else.
So, what are some factors? Well, let's break it down.
I spent a lot of time covering economics, so why not use demand and supply here again. Even in entertainment going back to Hollywood, even T.V. hosts, people watch shows for most of the time the stars that are on them, therefore the T.V. production companies or show producers they are going to want actors that are going to have “eyes to the screen”. So, they're going to pay them more to incentivize them and if viewers have a problem with them getting paid different amounts, well it's pretty hard to change our preferences on who we like to watch, because if some individuals like certain actors more, they're going to see those movies… and if those actors might be a different gender then that gets a little hard to change your individual preference on what movie type you actually prefer.
It's a touchy subject the next one but as a great example of one place where women actually dominate men in the industry of pay (and in just more ways than one apparently!) …is porn.
Demand here creates a lot of viewers (which are men) so I actually got to research a little bit of this around who the top-ranking porn stars are for income and current assets.
It was more enjoyable then looking at economic trends but looking at the figures of the top twenty rankings after looking at a couple of the ranking sites one of which did include Forbes, on average the top twenty stars in earnings and wealth, only three to five or so were actually male actors.
Of the top twenty the closest I could actually find to the top that was a male actor was at number three. It's pretty high up actually - ten million dollars but to get there that's 2,583 films and this individual actually directed 61 films himself.
The next one down the list number four is a female actress with a net worth of eight million. To get there, 82 films.
Depending on how you look at it's a massive disparity in the paid per film because number three is done 31.5 times the number of films, directed 61, and has $2,000,000 left at the end of it. If you're only looking at gender, it looks fairly unequal but there's a million factors behind the scenes. As where focusing again just on the one leads to a generally incorrect outcome.
Companies in this case want to make money. They're going to pay people to star in films or roles based on demand for them. So, if there's a high demand for something they're going to pay more for it, but it also has to do supply because the more of something there is out there, the less they're going to pay because it's not as scarce and that actually works very well back to that previous example, where the entry requirements for that industry for males is far lower so there's a much higher supply, therefore they can't really demand as much money unless they work very, very hard like number three, or they find some sort of niche and that's where supply actually comes into the equation again because if in entertainment there's a greater supply of something then people won't want to demand it as much.
Think about some of the highest paid actors in this case, how many “Rocks” are out there? Someone who is as talented as him, and as big as him, and as funny as him, (I don't have a crush on him) but that's a bit of a reason why he actually can demand such a high salary for films, so what does this mean for you?
Supply and demand.
On the individual level you can actually use these in your advantage. Using demand is about not demanding things but making people really demand you and your service. It's about making yourself “in demand” by the people who will actually pay you more money. It's more or less self-improvement and finding niches. So, focusing on what your good out is a pretty decent place to start in finding out what a niche for you is. If you don't know what it is maybe finding that out is a good place to start as well but once you get good at something or even do more of something, people will find you more valuable to actually pay you more money.
Think about in any employment situation, if you could go to your boss with a solution to some issue that they might not even know about - saving money, time, resources and introduce that in a way, they might actually give you quite a big bonus. So, using supply as well, increasing your own personal capacity and supply is simply in this case investing and building wealth because if you have a greater passive income then your wealth actually at a nominal or just real value actually increases at a greater rate as well
And this is a reason why the same, rich keep getting richer is the thing because if you have a billion dollars and it goes up by even 5% you've got a lot of a greater increase in someone who's got a $100,000, it goes up by 50%. So, at a nominal rate the rich will get richer because they've got a greater supply of assets to grow and that's where again if you have more money, you can then demand more things yourself.
So, don't focus on factors outside of your control.
Focus first on what you can't control with your individual supply and demand and why spend time on things you can't actually change? And forcing it won't end well because someone will always lose. It comes back to that previous example in a few episodes ago of pure competition vs cooperation. If everyone’s working together and people are actually engaging in your services willingly because you're one of the best - then that's a good thing. If you're forcing people to use your services, it doesn't work out so well.
So, in my business I can't demand people come to see me and pay me money if I'm actually not worth it in the first place. And how bad would the service actually be if that's how the world worked?
But thankfully there's only one example of that occurring today …but there's plenty of other ones where there's limited choice in a situation, and how bad is the service there! Internet or phone providers, if you're locked into just one in a certain area. I’m sure everyone's had an experience like that.
It's about what you yourself can demand and negotiate purely once you've got the value there to back it and becoming “in demand” is the most important thing. So, increasing what you can offer to someone in return for money is truly one of the best ways to increase your individual wealth.
Any of the top billionaires have done exactly that. They have offered something that people have really - really demanded, whether it be a product, service, even entertainment value. So, it's all about really, rather than just demanding or forcing something, making people want something off you.
So, the point of this episode was just to set the tone for the rest of the podcast and introduce what the format is going to be like. The whole purpose is to help solve misunderstandings, so the framework will be broken down into two episodes a week.
One will be simply on finance, things in your lives where you can actually increase your supply; so, investing, how things work, even just reducing your tax or increasing income. Then also just on demand, things that can be improved on to help you make more money.
So, the next episode actually is the part two, which is questions where it clears up any misunderstandings that any of you may have as well. If you actually have any questions, feel free just to go to financeandfury.com.au, go to the contact page and leave them there because every week the second episode will just be dedicated to help clearing up those misunderstandings and answering questions that you guys have. So, thanks for listening and we'll see you next time.
Hey guys! Welcome to the wrap up party for this little intro series
Well done if you’ve made it to this point listening. I know a lot of it could have come across pretty confusing …and don’t worry I was quite confused myself by this point. So, I decided to do a bit of a summary on everything that’s covered; all of the problems that we covered and talked about, and then also the potential solutions that we hope to be able to provide.
The first one we went through was, where are you aiming, and why? There’s a bit of a problem if you’re not quite sure what you want to aim at. And, without an aim, it’s hard to actually put a value to it, to not only put in place a strategy to get you there, but measure progress as well, and help provide some positive motivation along the way. You can constantly tick off little achievements say, every month, of reaching that target (because you’ve got a figure on it) and you know how much you’ve got to do to achieve it. It’ll actually help provide some forward momentum towards the goal, and that’s the only way to start.
So, without that motivation behind it as well, it’s hard to keep going …especially when there’s the new shiny thing that will give us the same satisfaction (really just momentarily).
And it’s very fleeting because you get something that satisfies, any really, and the next day another problem takes over, and life and is back on track, and that thing that we had that was making us happy yesterday is now just a thing that is “good to have”. And slowly over time there’s [another] new thing that comes around.
[By] defining the aim, it’s really just about having a clearer idea about where you want to be and why. And helping define the aim as well, actually means that you don’t need to know as much. So that’s the second puzzle problem solving piece – where if you have the knowledge and understand what you need to do and how to do it (back in one of the earlier episodes we used the translation analogy) then that will go a long way to actually getting there as well.
So, we want to help provide this - through not only the podcast - but also through just some education online material as well; few calculators and tools just for you to be able to work out simple savings targets of how much you need to do consistently to get there. And rather than trying to reinvent the wheel, we just picked what works. And that’s just between making the correct choices and having the ability to follow a structure and plan so you don’t get lost along the way…and trusting yourself to make that happen, as well.
So, the next one - number three - is having the ability. Which comes in the form of a clear idea about what you’re doing and how.
And then lastly choices. Making the correct choices and sticking on track. So that’s the forth one. So, if we could come up with a solution; to build a system, to help you define your aim, what your goals are and why you’re planning to achieve them, exactly what you need to get there, how you’d do it (so, with some strategy), providing a framework and the knowledge to help put it all in place, and then allowing you to monitor and actually keep track of the progress… That’s generally the aim behind the whole concept of “F.U.R.Y”.
FURY is a little acronym for Financial Understanding and Responsibility Yields… independence… and the whole framework (the podcast will make up a small amount of that) is really designed to help reduce misunderstanding. Because misunderstanding is where a lot of problems come from. We do things not really knowing what the long-term outcome will be. And that misunderstanding really is the first step that we’re going to try to solve. So, that’s built up of defining the aim, and providing the knowledge.
Financial responsibility is the second part. And it’s not meant to say that responsibility (in terms of, “you’re obliged to do something ‘cos you have to”) is because you really want to, and you’re able to, do it. It’s not trying to say that you’re bad people or any negative connotations normally involved with “responsibility”, instead it’s meant to really give a message that you’re in control. Because no one else, unfortunately, will take the journey for you to give you financial independence. You can structure everything and have everything sorted… but unless you take that first step… it’s really hard to get there! So, the next part we’ll deal with and I’ll talk about a bit in the next episode is the responsibility side of the picture, which is having the ability and making the correct choices.
What we’ll cover for the rest of this is just mainly the financial understanding side, and having an aim and the knowledge, because that will be the first thing that we’ll be targeting to try to solve. The misunderstanding piece - what this podcast will be about - is just trying to reduce a few misunderstandings, and complications, and problems that people run in to. And we misunderstand things all the time. It’s actually very easy to misunderstand things if they’re not presented in an easily understandable way.
And there’s not much in finance that’s actually easily understandable!
So, having the financial understanding, and knowing exactly where you’re going and why, is all about just building your knowledge in what you want to achieve.
And that’s what this podcast will try to focus on, in conjunction with a later course, to help increase the knowledge base as well. So, an online program to help you go through step by step and figure out what’s the best strategy as far as knowledge and build up a base to achieve your goal.
Before we end there’s one critical point that I will point out to myself – where this can actually go wrong (and it’s the big elephant in the room) is, “will your means of financial capacity, actually matter?”.
And this is the first part of the “F.U.R.Y” – the finance part. Because obviously if you’re planning, say, [to] generate a passive income of $100,000 by tomorrow, and you currently aren’t earning an income, it’s going to be fairly hard to actually achieve that!
But with means it doesn’t actually go as much in the direction of “you need a lot to make a lot” initially, because it’s all about choices. You can choose to direct the majority of something that’s not as large as someone else’s (who has a lot more that doesn’t actually do anything with it).
One of my friends, when they were going through their medical degree they had someone come in and talk to the students about the issue with a lot of doctors - once they get to a certain point of life, they’ve been on big incomes and unless that’s been directed in a way, they have to keep working. And there’s issues there because obviously the older you get the less capable you might become, and they have to medically retire some doctors because they have to keep working. And that’s a sad outcome.
And that’s where having a lot of means doesn’t actually really give you, firstly, the responsibility to get there. Definitely it gives you the vehicle to do it… but you’ve got to have the feeling of needing to become financially independent without work. So, pretend this little mini-series is all about a journey – “where you want to go and why”. And like all journeys, one of the favourite ones is Lord of the Rings, so Tolken’s quote “It's a dangerous business … going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to”…like all great quests or journeys begins with one step.
And we take ours’ next week with the system... So, thanks for listening and I’ll see you next time.
What do you normally think about before you go anywhere?
Anyone who has ever left the house before has probably had to think about something before taking a step out the front door. Anyone who hasn’t, this analogy won’t really apply to you but for those of us who have, what was the last thing you thought before going to the shops? Probably fairly common - you need to do a list of what you’re going to buy. And sometimes it’s a spontaneous trip of just going to get one item. Thankfully, for this a lot of habit and routines kick in to take over the duty of actually getting to the shops, because it is a relative common occurrence.
But say you have to drive to your relative’s house and they live around 8 hours away. It’s probably going to take bit more planning than just popping down to the shops or even driving to and from work every day. But generally, an 8-hour drive in the modern age (with cars) you’ll not need to put too much planning in to it.
Say for instance you’re 15 minutes down the road after you leave your house on this 8-hour trip, then all of a sudden you realized you forgot a gift that you were taking to [your] relative. You probably would just turn home and grab it, because is a lot easier then actually try to find a new one.
But say for instance you are an hour into the trip; the car breaks down, you wait for RACQ to come, they tell you that it’s either going to have to be towed away and repaired, or they can just lend you a car a now, they’ll deal with it, and you can drive on.
Either way, what decision you make is actually all around why you are going, because if you are going to take the additional resource and spend money on not only fixing the car, but having it towed away, and having a hire car, plus the additional hassle of trying to come back, and at the same time trying to figure out what’s wrong with the car... If you’re not going for a reason that means a lot to you, you might just be likely to take the first taxi back home and just have the car repaired and pick it up in the morning.
If you’re going for your cousin’s 21st birthday you might call and just apologize… but, say it was someone’s funeral. You’re much more likely to still proceed with the journey. So that analogy is really just finishing off from last time where, the “why” you take the journey really matters more than anything. And depending on the reason as well, it would trigger different responses based around what the incentives are.
So, if you’re hungry for instance, or you’re thirsty even, that’s just a basic need. Beyond a basic need though would you prefer to receive something now or something later? And it really depends how big is that thing, and how quickly do we get to have it.
Years of behavioral studies really show that, there’s [a tendency] to prefer something right now even if it’s a smaller reward than something we would get in the few days’ time. And it’s all about what we perceive the value of it to be.
So, if you perceive something as very valuable (even though it might not be valuable to others) you pay more for it, you’ll go to much greater effort to obtained it, and that’s part of your “why”. What you perceive to be in the future and what you want to achieve has a perceived value. So, imagine you’re hungry again and you couldn’t leave where you are. You’re stuck there for say 6 hours or so. Someone offers you a sandwich or even tells you that you can wait and then have two sandwiches, what option do you go for? So, if you’ve got 6 hours to wait and someone says that you can have one sandwich now, or you can wait and have two in 30 minutes (depending on how hungry you already are) just wait that 30 minutes out and then have two sandwiches, and that might get you through the 6 hours. However, they said that you can have 17 sandwiches in 8 hours, would you still take them up on the offer? The offer itself seems far less attractive because technically, if you’re really hungry now, in 8 hours you would be out of where you’re stuck and you’ll be able to get your own food and not be forced to have a sandwich. It’s the exact same rate of return; a sandwich every 30 minutes but it becomes much, much less attractive because it’s in the future and we need that sandwich now. So, it’s been experimented on a lot in the past - and there’s a thing called the Stanford Marshmallow Experiments (they’ve done recreations of these studies a lot, but just go to YOUTUBE and checkout a video) it shows children put into a situation where they can do exactly that, they can get one treat now or they can wait out until the researchers come back and the researchers will give them two treats so, the expected value of what the kids thought of around having two treats is preferable to one.
It was shown that those kids that could distract themselves and could focus more on the greater value rather than the instant reward, did fairly better in a lot of metrics even later in life, even getting into high school, getting into college and then their later careers as well as because their ability to delay some gratification slightly to help to move toward that future goal.
And the reward itself - it needs to be something tangible to you - because if you don’t like marshmallows or you don’t like sandwiches, then you’ll probably pass up on these options. Friedrich Nietzsche said it perfectly where, “He who has a “why” to live for can bear almost any how”.
Imagine that again you are hungry but you have no money this time, and you’re still stuck there for 6 hours, so… you got a family to feed back home and you’ll likely wait that 8 hours then for the 17 sandwiches if you can’t actually afford to get the food on your own. And that’s, again, just the perceived value where, if you do have more of a resource, then you might not actually wait out because the perceived value is less than if you don’t have money to buy the sandwiches. It’s a lot about scarcity and time, so the more scarce something is, the greater value would put to it …but at the same time, the longer and the future we have to wait the less value. So, it’s about finding a balancing act between the longevity of your goal to still keep it motivating, such as financial independence which for most people is very long journey. So, it’s hard to stay on track and keep motivated, especially when there’s not a clear aim or idea about what that why is.
Take for an example a common retirement dream were people think that they would travel and tike off all the countries on the bucket list, or just sit on the beach and drink cocktails all day at a tropical resort. How long do you think you could realistically sit on a beach drinking for the remainder of your retirement? You probably could manage it for a while but the accumulative hangover would probably become a bit of an irritant after a bit.
Or even just travelling to different countries, how long could you be on the nomad’s road just traveling across Europe or South America before finding out you’ve been everywhere …and then “what to do now?”.
So, the whole point is [that] just having a fixation on a moment or activity in time isn’t a tangible “why” to enter into the road to financial independence. And unfortunately, we can’t really experience the same moment of time over and over and not have that scarcity again of the abundance of the thing. [It’s] become less valuable so, we perceived it’s very valuable, because we don’t get to go drinking on a beach all the time or we don’t get to travel that often. But when we start doing more of it, it’s actually more of common occurrence, therefore the scarcity in us makes it slightly less valuable. Again, you can’t really live out that same moment unless you’re Simple Rick and have it really the same emotional magnitude. If the activity played out for years and years, you might really want to move on to something else and that’s the unfortunately thing as well with the next shiny thing that’s pops in - something new, something “now” provides some satisfaction and it’s essentially the same satisfaction that drinking in the beach provides - except we can get it now rather than waiting until retirement.
And what you’re aiming for is really just a motivating factor and is actually sustainable over the long term, where as something that’s the alternative to really achieving financial independence can also be motivating if you’re not quite sure were to aim.
So, imagine that your income is now capped, you’ve got around $23,200 per annum in income, in your life right now how would you get by?
If you have mortgage - it’s probably almost the size of the mortgage repayments itself – let alone if you want to travel, to keep up with daily living or even buy groceries.
That figure I just provided, is actually the maximum pension income for a single home owner in Australia. It’s $17,530 or so, if you are in a couple (so each couple gets $17,000). And generally, it’s not a lot of additional income to pay for all those lifestyle wants when you’re younger. And it feels pretty awful in that situation. I work with clients in that situation, where it’s about managing the cash flow - and it limits options, and I really feel for people in that situation. That’s part of why this podcast has come into existence, where helping people avoid this is quite an easy thing… if it’s just done consistently over time.
But where does the money come from to fund such a system with the age pension? It would be great to have more and more income for individuals who wants to do more. Given our unlimited wants, what [calculation] can be place on the income like that? And how long can it be funded for, because it increases at a certain rate where it might actually start demotivating people? And it might actually be a certain limit where, if you provided universal income of $50,000, would that actually create happier people if they still have a lot of resources to find the beach every single day? And the most important one - because I’m not going to even try to answer the previous ones - but the most important is really, will it be around?
So, the age pension was introduced back in 1904 and it still had a relatively similar eligibility to today. If you were 65 years old in 1904 you could obtain the age pension. But the little catch with that is the life expectancy back then was between 54 to 58, so it’s a fun trick to play on people - when you introduce something saying if you reach a certain point you’ll obtain it. People started living a lot longer though from the 1930s, and the eligibility didn’t really increase up until a few years ago…So, it’s become a large allocation of the government’s budget.
It wasn’t really counted for 100 years (like nothing can ever really be) but when the total expenses are $450 billion, and they spend around two hundred of that on transfer payments, it might take them some time to actually catch up to being able to afford that - or they’re going to have to reduce it.
I’m not saying it’s a good thing, it’s just a possibility because we’ve seen all round the world that government can go bankrupt and when they do, transfer payments is the first thing to go. It’s never their salary.
So, with history it’s a good, valuable lesson – not saying it’s going to happened here - it’s just that it’s something that you can’t control and the whole reason for independence is to have control over your situation.
so, what’s the main reason that you’re taking a journey to financial independence?
And why?
If its avoiding a similar situation to the previous one, or if it’s striving for something else in mind, where you’ve got a dream about what you’re trying to achieve (even a hobby that you want to become a full time hobbyist at), that’s something that you can put a tangible value to almost as long as you know when you want to achieve by, and what it would cost to sustain your living expenses.
By this point, we think we really had it as far as putting together the picture of how to achieve financial independence over all…but unfortunately that’s where the hammer dropped for us where there’s only so much knowledge, structure, advice anyone can provide.
As long as there’s that why there (as to why you are going towards financial independence or along that journey), that “why” will actually make up more of an effort, or value, or just long term success than as any really of the other factors put together.
So, we can’t tell you what you want, nor really can anyone else. That’s the disconnect between a lot of the information that is provided where it’s structured in ways it seems like it’s what we want to achieve. But unless you really figure that out first, it’s almost like the rare golden watch era where people would get the job, be in the same position for decades and decades, and at the end get the golden watch... and that’s what a lot of peoples’ retirement dreams feels like where they get the watch and now what do we do?
So, the relationship between completing a task and the incentives needed to do it is totally separate as well, because the journey is more satisfying than achieving it.
That difference is motivation versus satisfaction. Satisfaction is just momentary, if you get a new car, you get a new house anything like that actually provides a satisfaction to you, depending on how it satisfied you are with it, it will either provide a little bit of happiness, a lot of happiness but it all reduces to the same base line level almost. It’s all about increasing along the way and the journey. Because the journey itself provides more happiness I guess you could call it than actually obtaining what you set out for.
And even with a goal in mind you realize there is lot of effort required to get there once you start, so, having that “why” and having something tangible to aim toward really helps motivate and keep working through the goals. Unfortunately, it’s not easy otherwise it would be not a topic we’re covering… so, reducing the barriers to these problems is what we want to achieve.
So, reducing the effort in conjunction with responsibility, understanding and frameworks, essentially, to provide an easy framework that is something that’s generally complex (but the easier the better). So, from the next episode we will be wrapping up – it’s a bit of a wrap up party, a summary on all of these episodes put together and then from the seventh we’ll start with really what the podcast is all about.
To start off, do you think that having a map to financial independence would be the ideal solution?
Compared to a puzzle it actually would be far better than trying to pieces together something, if you could just have a map to take you to where you needed to go.
We’ve all used maps before. We’ve probably even used those old maps that are a few hundred pages long and you’ve to look up “G3 to E6” and compared that to the iPhone today where you’ve got a GPS – all you need to do is jump on the phone as long as you know the address, enter that in, and you can get there fairly easily
And even if you’re in a car that has blue tooth the car will talk to you and tell you where you need to go
But unfortunately, that still runs into a few issues - the phone not have updated with the new internet location, it tells you to go down the wrong street or even a street that’s a dead end or a no right turn that you have to make... so eventually you have to pull over, stop, and figure out where you need to get to from where you are.
And that can be fairly distressing if you’re in the middle of the highway, you have no idea where the next turn is. That is a fairly bad situation to find yourself in but if you’re in a residential street you can pull over and generally the internet will come back on fairly soon and most people have been in this situation however if you’re in say, another country, and you don’t have internet and no body speaks the language either it can be much more difficult to deal with a situation like that and it’s because there are too many decisions involved.
If you’re fairly familiar with being in the city, being in your car, the only things you need to wait for is the internet to kick back in and readjust and look at the new direction that the car will tell you to go.
Then that’s not really much of a burden as far as making a decision, however in the previous example in another country, you’ll have to think about new ways of actually achieving what you need to do - and that’s figuring out where you are and where you need to be!
With more decisions comes a thing called “Decision Fatigue”, and decision fatigue actually occurs to us all the time. Every single day you’re going to need to make decisions. The more you need to make the more fatigue you’ll have.
So, think about just going to the gym. If you do 100 push ups you might not be able to do many more after that, and that’s because your muscles are fatigued. And, it can be very costly to make the wrong decision when you’re too fatigued to do anything more. So, if you’re in the gym and all of a sudden someone needs help to lift something and you’ve already exhausted yourself you might not be able to help so well.
With decision fatigue the best thing that you can do is try to hone in on what your goal is first. Because, when you have a clear idea of what financial independence really looks like, your choices are much narrower. However… now you have to choose which one is the correct one.
And unfortunately, a lot of the strategies that are online or that are taught, they generally teach [that] all financial independence can be gained by this strategy, or dream to financial independence. And it’s a bit confusing because if every single strategy will get to financial independence then there’s almost no wrong strategy. It still fails to meet a lot of individuals’ goals. So, by that logic, if every strategy meets your goals it doesn’t matter which one you choose. You’ll likely see one that’s popular amongst friends or family and pick that. Or if you don’t have any guidance in that direction, and you’re not sure still, and everything looks like it’s a good option, then you might actually not make one… and have “Decision Paralysis”.
It actually becomes tomorrows task then.
So, the more information that you actually get (and the longer that goes on for) your brain’s building up many, many, many, many stockpiles of different choices, different decisions, and it can cause people to freeze and not actually ever make a decision.
There’s a pretty interesting study that was done on farmers markets where they set up stalls with 3 options compared to 20. And the ones with the 3 options basically sold out their stock every single time because it was very easy for people to go up and actually just select the one that they wanted. However, if you’ve got 20 different options it’s going to be hard to stand there and puzzle at which one’s actually the best. I’m sure everyone’s experienced a similar thing if you’ve had to go to say, the supermarket, and pick out a dip for someone. And they just asked you to get “dip”.
If you don’t know what type of dip they want it might be a bit of a risk to not call them first and ask. And say you do just make a decision. Upon searching, all of a sudden, there’s many, many, many, options and you see all the negatives about them.
And that’s what you see most in the news. Every time you google something it’s more likely to be something negative or something casting a bad light on it than anything on the positive. And that’s because fear sells.
So, it actually creates a real pain in people seeing the stories of others losing, because we emotionally resonate with one another. We see a bad story and then we feel not as much pain as that individual, but we do feel something about it as well.
And that’s just more negative feedback! So, the more you actually search and look it’s actually more of a detriment to you.
How do you trust what you read on google? Someone at the end of another computer who’s saying something. It could be the wrong strategy and it also could be just the over information out there that’s leading to decision fatigue and therefore picking some sub-optimal choice
At the fear of choosing incorrectly though why even step outside of our realms? What we’re doing right now - our lives are fine, “everything will be fine”, because why take the risk?
If you trust your friends and family you’re more likely to turn to them and obviously they’re going to try to give you the best advice because they love and care for you. However, if what they say is in the best intention (but not the best outcome) for you, you’ll still believe that it’s the correct [information] because you trust them and you believe what they’re telling you will actually help you in the long run.
So, there’s a big different between trusting something and knowing it’s the actual truth. And when I say truth I’m talking about more an objective truth. So, what’s the outcome that you’re after? To explain that think about gravity. Gravity it’s almost like a “universal truth”, and it’s actually one we have to live by every day. So, the more you believe gravity exists, the more likely you are to trust that your information about the world is accurate, and you’ll actually trust. And that gives you confidence - in knowing that if you fall from a very high building it’s not going to end well. And that trust actually comes in two parts; first is actually knowing that gravity exists and that you will hurt yourself if you fall off a high place. However, trusting that you know what to do with that information though, well that’s another separate thing.
Because for instance, say you had to make a decision around how much speed you’d need at a certain angle to ‘Evel Knievel’ over a canyon - that is a complex thing - and it involves gravity. So, you can trust that gravity exists but you might not trust yourself to apply it to a physics problem where the outcome is very, very, life-ending if you get it wrong.
So, the difference [is] between trusting yourself and making the right choices about applying that knowledge. It actually goes a long way to start building and learning the basics because a lot of it comes back to the basics, when trusting yourself is the most important thing in what you to do. You need to gain that trust. And the basics is where to start.
I know this perfectly well first hand where, the first time I invested, it was fairly nerve wracking. And anyone who’s bought shares for the very first time probably knows that little heart beat going on, the elevation, the excitement almost, of buying that share.
And I was 16 at the time, all life savings at that point (and for a 16-year-old it was quite a bit).
I was starting to look at buying shares and I bought a few - and this was 2004 so it was a pretty good time. I thought I was a genius for years and years and years and years. I kept buying more shares and up until 2007/2008 I hadn’t had any negative experiences.
And all of a sudden GFC hits… and the value goes down, quite a bit!
But that is, again, just learning how that market works. When that happened, it was fantastic - it wasn’t a time to sell, it was a time to buy. And that just comes with knowing the basics. So, trusting to learn the basics and to actually be able to achieve what you want to achieve is baby steps.
And the other truth is that it won’t be smooth sailing. With the GFC and that example, that could have been disastrous if I’d sold all my shares at that point in time and put it into cash. It would’ve been a much worse outcome. It’s about learning that there will be tough times as well. There will be financial corrections along the way and it’s about having the correct structures in place built on the basics, to survive them (and actually take advantage of them).
And everything can be really, really, amplified with fear. And fear comes from the unknown. If you don’t know the basics about a lot of finances then it’s very stressful and fearful. Shares don’t have to be scary. All it is, is an ownership in a company. And it can be scary if you’ve bought a very small company that might not be earning an income and is in a very “start-up” phase. It might have gone up in value because people think it’s going to be the next best thing. But if it doesn’t turn out to be that way it’s a very, very expensive (but valuable lesson) …and I’ve made plenty of those.
I started out investing with one rule – it was, “never invest more into one asset than I could afford to lose”. So, with my “life savings” I put it amongst about 7 or 8 shares. But then I actually learnt the best lesson from there (where it’s my second rule now) of never investing in something out of hope. A few of those companies were solid with the banks, but I took what I thought was an educated guess as a 16-year-old (and how much do they know about the world when looking back at it).
I was investing out of hope.
Thought that these companies were the next best thing. It’s great to see them go up by 150-200% in a very short period …but eventually they went down 95-96% …all the way to zero. So, it’s those sorts of lessons in life that you do learn over time, but it’s about structuring the basics and doing it all well.
And that’s what this whole series is trying to lead into – how to teach yourself. Eventually to trust yourself. And be comfortable to make the correct choices.
Because human behaviours and actions are really the “make it or break it” moment for financial independence. ‘Responsibility’ and ‘trust in yourself’ - they’re the two biggest factors because you need to really realise that the only person who can make you financially independent …is you!
And that comes back to choices – making the choice to be financial independent – I know it sounds very cliché – but unless you actually put that first step in place and put that first investment in and start building, then who will do it for you? And it can be scary to realise that.
No-one’s going to do it for us, but ourselves. But, it also should be very liberating, as when you can be in charge and be responsible you’re 100% in control of your journey. So, believing that a politician or another person out there is going to help you succeed in your financial independence without actually taking the first step, well, they’re selling dreams.
And it comes back to what ought-to-be isn’t, so people put a big weight into what ought-to-be rather than looking at what they have to work with, and build up to what ought-to-be.
So of course, I believe in rights, say, what ought-to-be is a right for everyone. But there’s a level of tyranny that I don’t think people realise, that to have the same level of equal rights for everyone and it doesn’t lead to a better outcome for any individual. Because any individual can only better their outcome by doing the basics but if no one can than why bother?
And if there’s things that are determined as rights (or just called rights) unfortunately it’s not guaranteed that they’ll actually ever eventuate. Because I’ve checked a few countries (I haven’t been able to check them all) but the bill of rights of every single one says that the population has the right to housing. Unfortunately, Zimbabwe’s in this mix and it doesn’t mean that declaring something as a right makes it happen. So, if it’s a right for us to be financially independent then we need to do something to make that ought into an IS.
And that comes back to choices and the basics.
Michael Jordan said that doing all the basic stuff is all it took for him to play the game so well. So, once he had the fundamentals, he was one of the best with the fundamentals and could build on that. So, with a map you can go a long way with following the route but you need to make the choice of, if the GPS kicks out, what do you do?
And if you just wait for a bit and then decide what the decision is, probably a good idea but if you keep driving down the road saying that “we’ll get there eventually”, you might end up on the other side of the city. So, it’s about learning to reduce fear, becoming comfortable and taking control and just not waiting…and starting!
And unfortunately, it still doesn’t do much for the long term at this point. This will help you start - but what keeps you moving forward? And it’s all about why you are going. So, in any journey why are you entering that address into the phone? If you’re going to a friend’s house to catch up (depending on how bad the journey is) you might just turn around and just come back. But if it’s going to a very important event, like a job interview or something, you would probably do whatever you can to get there.
So, we’ll finish off this point in the next episode.
Welcome to the 3rd part of the intro series for Finance and Fury
Today let’s start with a bit of time travel.
Picture 1500’s, London. All the guys have hipster like facial hair, accessories, the big beards, the little curly moustaches (wearing some frills instead though, maybe that’s going to be the new trend?). And women were wearing those big wire frame silhouetted dresses, trying to make their butts look bigger rather than getting implants.
Times they looked very, very different but people were still doing similar things.
If you really want to picture it, just think of Shakespearean times. It was around this time where modern English was starting to take form. Imagine that you’re actually now back in those times when Shakespeare is having his plays put on at The Globe Theatre. I’m sure most people have read a bit of Shakespeare or heard some of those sentences and words that are actually in there. And while it’s pretty hard to interpret the meaning of what’s actually being said we know that the words are, we know generally what the gist is - especially once we read it a few times it explains it. But, now go back a further 500 years. So, 1000 AD, London. They were speaking a totally different version of English, and we’d really have no idea what they’re saying.
So, I looked up a few words from back then, and ‘danger’ (I’m not quite sure how to pronounce this, again that’s how little I know about this language) I think is said ‘béot’?? That’s how someone would cry out ‘danger’ in 1000AD.
Imagine if someone cried out ‘béot!’… and we stand around looking at them weirdly while a raiding party is just riding into town. So, life would be quite difficult to operate under those conditions. Even worse, times were different - what skills do we actually have that are applicable? So, most of society was built off agriculture-based farming systems and majority of this was manual labour, so there was no power, no running water, no phones, no computers and there was a very limited amount of information of what’s actually going on in the world and all you had to work with was some very basic tools to farm some produce.
And if you got dumped back then (unless you’re already quite skilled up with the farming procedures, crop rotations, everything like that) it would actually be very, very, hard for us to pick that up without being able to understand what people are saying. And that would make life very, very, difficult. That’s where we ended the last episode, trying to solve that translation problem. But it doesn’t fully answer the “why”, and that previous example just gives the answer of, “even if you can translate and someone can tell you, you still might have a hard time picking up what to do with that information”.
Say for instance, business owners. They can translate their own business very well but they might not need to translate the share market, or ways of building their own financial independence outside of the company, because the company can do that for themselves.
It’s important to speak the language of really what you want to do and what you’re trying to achieve. The translation theory alone here doesn’t hold because, while you can translate it, you need to know what you can actually do with it as well. And helping build that is the next step of the how we want to provide a system of financial independence.
So, this got me thinking about the world of personal finance looking a bit like a jigsaw puzzle. I’m sure some people love solving puzzles and I’m sure some hate them, so let’s just say that you either want to or you actually need to complete jigsaw puzzle. But the catch is you only have a set amount of time…and you’ve got to get it done regardless of how much you enjoy it.
Generally, jigsaw puzzles come in a box. There’ll be an image on the front of the finished product of what it’s meant to look like and each piece has a little identifiable image on it that you can piece together eventually. And the box may contain 6 pieces to thousands, depending on how difficult you want to make it.
So, if you have a puzzle though which has no image on the box, and the pieces come, (thousands of them!) with no image, it may be a little harder to actually figure out how to finish this puzzle. And don’t forget time’s limited so the more time you spend trying to figure out what pieces go where (because you’ve got no frame of reference as far as a picture to follow) its going to take many, many, more hours/days/weeks to actually put that together than if you just had that reference picture in the first place.
In reality though, what happens is that sometimes the box is missing pieces. So, if you have no picture on the box, and you aren’t sure that there’s actually the right number of pieces in there, you might not even give it a shot to solve that problem. In this analogy the image of what the picture looks like is what you want the future to look like (so, the big picture financial independence) and then the individual image on each of the pieces is the individual area of your personal finances [that] you need to build and fit together to complete that picture.
But again, the issue with the real world is that it isn’t as simple as an analogy. And even trying to figure out every single piece, putting those together in order - that’s going to take a long time. And unlike the jigsaw puzzle, where you can just put in a piece, see if it fits, take it out if it doesn’t, with finances it’s much more costly to put a piece into place and realise it’s not working …because it costs time and money.
So, it’s much too simple a comparison to actually work with and peoples’ pictures are different as well. And the principles (while they’re the same) life is just far, far, more complex than this.
Instead of trying to give a pre-packaged jigsaw puzzle - say for instance you go to the shops and buy it on your 10th birthday and then you can set that up and just build your own financial independence - no-one is going to give that to you. Or, there’s no ability to buy your pre-set jigsaw puzzle. You’ve got to make it on your own, and that’s the beauty of the real world.
While no-one’s going to show you the completed picture on your box, it’s something you get to choose. You get to choose what the picture looks like, you get to choose where each picture will fit. And it actually seems like you can work it out if you can remove more and more pieces from the picture. So, with the puzzle, if you start the puzzle with 1000 pieces it will take a while to finish, but if you can finish your puzzle with only 6 pieces then that’s probably going to be a lot easier and less time consuming to achieve.
That’s where the next problem broke in for us, where the internet is wonderful, however it allows for an overexposure of information. Because if you’ve got 1000 pieces which are on the internet that could possibly fit, where do you start? what pieces work? and how many options do you need? and which do you choose?
If you google ‘shares’, there’s over 7.5 billion results for shares. Sure, google will rank the top most popular sites first, but how do you know it’s the best information? And how do you know it’s the right piece for you in the first place? Because shares might not be.
And when something is seen and repeated enough it generally becomes the truth, and that’s how fads and trends occur because they create confusion among what really works and what doesn’t in how to properly build sustainable wealth. So trends are almost like the fashion industry, where investments can be ‘in season’ or ‘out of season’… so the price of them will go up a lot all of a sudden when everyone thinks, “oh, that’s the best new way to financial independence” …and then they’re out of fashion and the price goes back down and people have pegged all their hopes on that one new fashion trend.
And when the price goes down, unfortunately it’s quite hard to actually recover from that… and now enters the financial biases we’ve all formed over time!
They’re called heuristics. Your individual bias of your experiences through your life; positive feedback on things you’ve done, or negative feedback. The more positive feedback you get about actions you do, the more likely you are to continue those… and the more negative feedback you get the more likely you’re going to avoid those sorts of behaviours.
So, you see others gaining money very ‘simply’ from following this ‘trend’ and that’s very positive - you’re more likely to jump on that trend of investment because it has very positive feedback with many people doing very well. The price has gone up a lot – “Oh! That’s great positive feedback, let’s do this!”
But when you see people lose money, that’s negative feedback… so you get positive feedback from something, then negative [feedback] can kick in, and then you sell the investment or you make the opposite decision. And this programs us subconsciously over time to follow certain actions and avoid other negative feedback.
Because the pain of losing money is something we really, really, want to avoid.
But delaying the pain now through avoiding getting any negative feedback (so, you just don’t do anything because there might be a negative feedback) that’s actually leading to a massive negative feedback in the future. Where, if it keeps being delayed, then the negative feedback you get is realising that it’s ever, ever, closer to where you want to be…. but you’re not actually getting any closer to achieving it.
So, through seeing the same message over and over broadcasted endlessly, we tend to form how we should view our own journey of financial independence. And unfortunately, the view is that it’s relatively easy and one trend will be able to solve all your problems. That’s been hardwired into us from a very, very, early time because we’re hardwired to gravitate towards the maximum reward for the least amount of effort. If you had two options where you’re going to get a million from either option, but one’s going to take you two hours to do and one’s going to take you 20 - you’re going to go for the two hours!
And it’s really the best thing to understand that if you’re gravitated towards toward the maximum reward for the least amount of effort, it’s that your perceived reward that matters, not the actual underlying reward. Because you think the reward for something’s going to be better, you’re going to really go and look for the least effort-ful way to do that.
And that unfortunately is a disconnect with the effort you expect. Because you expect the reward to be a certain amount but you also expect the effort as well. So, you’re anticipating these things.
And when the effort that you start experiencing outweighs what you think the reward will be long track, that’s a massive disconnect. We ended up seeing that these get rich quick schemes they actually overexpose people to many, many, positive feedback before many, many, negative ones… Because apparently “others have done it” – that’s positive feedback. That’s why we got in. But now we’re not achieving our dreams, we’re not becoming financially independent… that’s more negative feedback. So, why not us? Why aren’t we achieving it?
So eventually the message becomes (rather than financial independence is easy and if we do this we’ll meet it), “Oh, financial independence is impossible! It’s not achievable” and, while it’s not easy, it’s certainly possible and it’s certainly achievable.
So thankfully, while the truth that it takes effort can hurt, it’s actually just too simple to really believe. Hearing the truth can be hard, to start, as promises of get rich quick schemes go and trigger into that hard-wiring of receiving the massive benefit for the least amount of effort it creates a big problem when sustaining wealth and building wealth.
So, that’s actually a great importance to most people - to actually come to a conclusion where, if they do simple things over time just to build wealth rather than looking for the next best thing and jumping ships, it simplifies things.
And the frustration from the very, very, first episode was simply that things are complicated, things are frustrating and annoying and that’s because there’s no simple plan to follow, to achieve, because there’s always the next best thing coming along.
And the more negative experiences related to finance you have the less you are likely to believe that financial independence is achievable, because one big bad event – say, the GFC (that ruined a lot of people’s beliefs that they could actually achieve financial independence) and those negative flow on effects actually affect everyone in society because everyone sees those stories. And it’s very, very hard after you get knocked down so severely to actually get back up especially if you keep getting knocked back down there’s only so many times you can get back up.
But why does this seem to still occur? Why do these negative feedback, or positive and then negative, still happen in society?
What if we could somehow turn the puzzle analogy into a map, where the map will show the destination of where you want to go and depending on what that destination is you can follow a certain root to get you there.
So, most of the work is really just creating a picture of the map - what it looks like at the end.
And then, depending on that there’s going to be pretty clear, self-evident root to take, simply over time, to get you there.
It would help to remove redundant pieces as well from the puzzle because again the puzzle analogy you’ve got 1000 pieces you might only need 6.
So, if you have a target in mind then this is really what the picture of financial independence looks like, it’s the destination at the end of the map. However, you still have finite resources and time to get there. And, what happens if you don’t?
So, this is where defining our own limits of potential when it comes to unlimited wants is really important because without that cap it’s probably going to be very, very, hard to get a picture in mind when there’s an unlimited want involved in that picture – if you can’t buy a private island, why even try, right?
That’s the eventual flow on effect of always wanting more with our unlimited wants, where if you can’t get that private island, what’s the point?
So, the only purpose of having a map is to take you to your destination and if everyone has a different destination in mind …then everyone will take different roots. And even with a GPS though, people get lost. So, you have a map, even today with technology that will track you around, people get lost.
We understood, based around this, that a map alone won’t cut it. It’s not as simple as just following a map to reach financial independence because like every journey, you know what the outcome is you know what the destination is, but you can’t tell what’s going to happen along the way.
And that’s summarised nicely by David Hume with what’s now called the “Is-Ought” problem, or Hume’s Law. He was a Scottish philosopher who started thinking about this very concept where there’s a significant difference between what we think ought to be, based around our own biases, of observation, of what we think should happen in society vs what IS.
It’s a realisation or just the relation of having an idea about something, but the matter of fact and experience of it will be very, very, different.
So, this was developed into Hume’s Fork - knowing what ought to be with your financial independence doesn’t mean that it will become an IS.
Unless you actually have a proper [idea] (not ought) in mind, but what you’re going to do to get to the IS, the problem will still be there. So, we can take this Hume’s Law and really help implement it, to stop getting lost on the map, and figure out how to get to the IS best.
And this is what we’ll be covering for the next episode…so I hope you enjoyed it …and I’ll see you next time.
Welcome to Part 2 of this intro series to Finance & Fury.
Today I wanted to start this episode off with getting you to imaging you’ve hit the lotto jackpot! Say for instance, you’ve got a guaranteed million dollars per annum in future income, perhaps it’s one of those “Get rich for life” programs where for every year of the rest of your life you’re guaranteed to get a million dollars.
So, what are you doing? Where are you? And how are you living your life?
This might be pretty hard to think about for some (or, actually pretty easy for others) and it just depends on much time you’ve actually spent thinking about it before. If you had unlimited financial resources how would you spend your time? and what would you do? and would all your problems be solved?
More importantly how much would you actually be spending?
If you were getting a million dollars a year, would you just spend that million dollars per year, or would you have a different expense requirement in mind to just do what you want to do?
And this is a two-sided problem to tackle with financial independence. First because it doesn’t really matter how much money you have, it more so matters how you much you need to have. And, what would you do with your independence? And how much would that cost?
So, as we went through at the end of the last episode, I think that financial independence is really reached once you have the ability to choose how you spend 100% of your time and maintain the life that you want to live in doing that.
The first focus is mainly on the finance though before defining what actually independence is. And that’s an issue to really tackle because if you are just aiming for that million-dollars-a-year of income, and it’s only going to cost you $80,000 then financial independence is almost something that may never be achieved - if you think it’s a million dollars a year.
To tackle this a little further, we’re focusing on a thing called ‘the economic problem’. It’s where we started and this is the definition of really what economics is as a class or theory is trying to achieve...and that it is how to best meet our unlimited wants with the finite or limited resources actually available.
So the more I thought about this the less it actually made sense because while the second part of this is really true; that we all have limited resources or we all have a finite amount that we can actually use to put towards financial independence, the first part of having unlimited wants is what gets in the way a lot of the time. Because it’s a really, really big hurdle. And, we’ve got really powerful imaginations so we can imagine how we would spend that million dollars pretty easily I believe, but trying to get there is quite a different story! Because, if you’re trying to achieve a million per year in passive income it’s going to pretty hard, and if that’s what you’re aiming for in independence it’s going to be pretty disheartening.
So, it’s that very thought that made me change my mind around financial independence as a target because, with a million dollars a year (which is really more money than what anyone could want to be able to provide most of their actual needs and independence goals) you’ll still probably not be meeting your unlimited wants because unlimited wants are, unlimited.
And it’s doesn’t meet the criteria of being independent because while you’re earning a million dollars a year, it depends on where it’s coming from…
Say you’re employed as CEO of some company, getting a million dollars a year, could you walk out the door at any minute and never return? And also, be able to survive financially and meet the same level of requirements that you were before. So, say you’re on a million dollars and you walk out the door, would you have enough to survive if that million dollars dried up? And if it’s the case that you can walk out the door and you’d still be fine then obviously you’re financially independent and you’re staying on working because it’s your choice.
But what happens when the cost of maintaining a lifestyle is greater than the income that you’d receive if you stopped working?
Then really even if you’re earning a million dollars meeting your unlimited wants definition, is it actually independence? and I don’t really think it is. Because you meet the criteria of being able to fill almost unlimited wants but you don’t have the independence side which is really what everyone is trying to achieve.
So, by this definition though would someone who lives in a forest and somehow manages to survive off no income being totally self-sustainable, would they be financially independent?
Well yeah, if that’s what they want to do and that’s how they want to live their life. Then, as long as money isn’t a barrier (and they’re there out of choice) then that actually meets the definition of being financially independent.
So technically even if you earn income from being self-employed, while you have no boss in the classical sense, the people that you provide a good or service become your boss…and as the saying goes, the customers’ always right.
So even if you’re self-employed it’s a great place to be, but you might not be financially independent because if you walk out the door or just shut self-employment-shop, would an income still keep coming in?
It’s been proven that getting our unlimited wants doesn’t provide much in the way of happiness, and once you have enough to pay the bills chase away debt collectors it doesn’t provide much additional benefit for happiness or joy beyond that point. It comes back to what you want to do with the money that really does.
Money provides ability to have independence but creating a picture of what your independence looks like is a really, really good place to start. That should be almost the overriding goal for every single person who wants to reach financial independence because it needs to be pretty specific, measurable, relevant, timely and achievable, and with all goals (if you’re familiar) that’s the S.M.A.R.T acronym.
So ‘timely’ and ‘specific’ are really the first things we could focus on helping with financial independence because for us that’s fairly easy to help you work out. When do you want it by and how much do you need?
But working out how to create a template for people to remove all the other confusion and really help with the ‘measurable’ and ‘achievable’ and more importantly ‘relevant’ side - that’s what we have been trying to work out for the first few months of this series. And if not, at least it takes what it works to be achievable out in your head. And having a plan and aim can actually help you back track so as long as you know where you’re going to be, you can fill in the gaps and we can help with how is it achievable, and, how do you actually measure your progress.
So, let’s take the lotto winner as an example again of when you get a lot of money meeting all your goals for financial independence. A lot of winners do this in a spectacular fashion. Mostly, $450 million is the US lottery winnings on the news a lot of the time. If you get $450 million all of your problems are gone, you’ve got all the independence ever - but that’s a lot of responsibility in your hands in one day. And, unless you’ve got the habits formed around money and really fully prepared for receiving that level of responsibility, it can actually go pretty wrong without a plan. It’s actually almost impossible to prepare for - so last minute - to get such a large level of funds and to actually change your mindset and be ready to reach that financial independence.
Because again, we’ve all got unlimited wants, and unless they’re curbed prior to receiving that, it’s very hard to curb your unlimited wants once you get the ability to meet them. Think about people and their lives - how do they know that their friends are any more their friends and they like them more, or, people just are just becoming friends with them because they’ve got $450 million?
It reminded me of the scene in the movie “A Bronx Tale”, if anyone’s seen it probably know what I’m talking about, but it’s a great movie from the early 90’s I think - with Robert De Niro, about the Bronx, with immigrants and Italian mobsters and things, and there’s an Italian mobster called Sonny and he says one of the best things (that can actually relate to this) when he gives the quote and says, ‘Friendships that are bought with money mean nothing, you see how it is, I make a joke, everybody laughs. I’m funny, but not that funny.’ So, he knows exactly why everyone’s around him because he’s got the fear, the power, and the money in that position. But, if you’re not prepared for that how do you know that people who are around (and laughing at your jokes) are not there for the money?
That’s where a lot of the additional money comes with additional problems. Look at that college student in the US who not long ago won $450 million at the age of 20. A lot of people see that as a massive blessing but I think it’s more of a curse, because how can a 20-year-old be prepared for that level of responsibility?
And even for myself, if I had $450 million at 20, it would be very hard to trust yourself not to acquire those expensive tastes, and as we see with a lot of lotto winners, those expensive tastes are hard to maintain. After a certain while, unless the money’s actually put to good use (as it happens with anyone) if they’re given too much responsibility without actually working for it or having a plan in place. Even child actors where they get thrust into the spotlight with very little in the way of barriers, and no one to say ‘no’, that doesn’t lead to a very good outcome in the majority of cases. So, money and power really doesn’t give the ability to solve your problems unless you know what to do with it. As the saying goes, “mo’ money, mo’ problems”. It’s really true. Unless you have the idea of how to deal with your problems first. Because money will just introduce more problems unless you’re prepared for it - you’ll just likely spend it and end up back where you were.
So, let’s get back to the original point, what does independence look like for you and how much does it cost? Even once you know what you need, and what your finite resources are that you can actually work with how do you put it to use? And that’s where it can be quite hard to start because financial services can almost be like speaking another language the first time you try to learn it.
There’s lots of ratios – PE’s, EBITDAs, so those little acronyms and the terminology with finance is almost another language …and think about how much effort it would take you to learn a new language right now. Say you’re going on a vacation to Germany – just popping in for a week and then popping out – would you be bothered to learn the whole language? So, you might just learn a few sayings; hello, goodbye, where’s the toilet? But the level of effort it would really require to pick the language up fluently is not worth it for a week’s worth of travel. And that’s more or less what we do with finances every day where we’re just doing transactions – so it’s almost like popping in and out of a country. Not really speaking the language properly. But now imagine that you move there…and you’re going to be living there for the rest of your life so 50, 60, even 70 years. Would you learn the language?
You might!
You’d probably be more incentivised to pick it up and learn what’s going on so you can actually interact in society. So, just like language, you use money and you interact with finance on a daily basis so even if you’re not quite sure what you’re doing you’re still using it.
And, if you’re in Germany, and you don’t understand the language it’s pretty hard to get around day to day and avoid the pitfalls of society and life. Say that for instance there’s a nice German individual, and he’s waving you in, he’s very friendly, offering for you to come have a drink with him, sit down…he’s speaking German and you have no idea what he’s saying. But he seems warm and friendly.
Now imagine if you could understand what he’s saying and he said “oh, your drink is just poisoned and you’re going to wake up in my prison basement”.
The content of that speech is quite different to the message that you actually think is what’s going on. For instance, the frustration of not understanding what’s happening is really one of the key roots to why financial independence is so hard. Because you try to learn, it’s too frustrating, it’s too hard, so, hey you getting by fine why actually bother learning the language.
And seeing people struggle under this is really what made us want to do this because for us it’s quite infuriating. Because, in this analogy we speak German and we see these stories of either translators or people misinterpreting for others what they’re doing. Or, people just misinterpreting what’s happening and that’s how people are taken advantage of financially, where most of the time they don’t speak the language - but the other person knows it!
So, we get mad when we see this because a lot of people offer the world and its very, very, hard (unless you speak the language) to know what they’re saying is not actually 100% correct.
So, we want to help you stay out of the prison basement pretty much. And you need to be able to speak the language to understand if something good or bad is really going on. It all comes back to the translator or who you have to translate for you. Because you can translate for yourself or have someone to help translate. With the exposure to stories of bad translators when it comes to finance, there’s no ability to get any trust within the industry or know that what you hear as being accurate. You can’t really trust.
So, I now question every time I see someone doing sign language interpretations on TV – are they faking it or not? Like when Obama was giving the Nelson Mandela speech in South Africa, or recently with a few press conferences (in the US they were doing hurricane press conferences), the sign language [interpreters] for two of those were actually just up there faking it. They actually didn’t know what they were doing. But I had no idea. I was watching it and it looked legit. And it actually took someone who actually knew what sign language would look like to realise, “this guy’s just waving his hands”.
So that is actually a very applicable analogy where (if you understood sign language) you would understand that what that individual was doing was not actually sign language.
And it’s very hard to find a decent translator or actually pick it up on your own, so that’s what we wanted to do - to try to make it simple enough for you to translate on your own and actually only translate only what you need to know. Because again, with a language you can learn every single thing and become fluent, but there’s a massive diminishing marginal return after a certain point. Like, if you can get around in a country you know how to ask for things, you know directions, you know the basic conversation, that can be picked up relatively quickly within a year but it takes a lot longer to actually become fully fluent and we hope this podcast will help with that.
But finance is a little hard to translate without actually seeing the numbers and following a structure, to cover all the basics, to make sure you can build on the foundations, and get to exactly where you want to go.
That translation was obviously why we’ve broken down the independence problem, and that might be something we can actually focus on solving, but it doesn’t help without actually having a tangible framework or knowing what you’re doing is correct.
You can translate it but it’s very, very, hard so we wanted to keep breaking this down and uncover more and more and more of these problems so…we keep doing this in the next episode.
I hope you’ve enjoyed it and I’ll see you next time
Welcome to the first part of this intro series to “Finance and Fury”. This series is brought to you by THINKING, as thinking is where this all started! Thinking about the easiest solutions to reaching financial independence. And, in doing so, helping to give you greater value in the time you spend listening to us.
But trying to solve a problem where we would need a lot information and different perspectives to actually get to the root cause, we needed to start asking listeners and people that we deal with day to day what are the common set of problems that they face are.
Because if there’s a common set that everyone has, then that would be a pretty easy thing to focus on first to try to solve.
But like most people, most of their goals and the problems they faced to meet these were all different, and not only that, they had different ones over different time periods.
One thing though that they had in common was being frustrated that these were all still problems. So, frustration seemed like a pretty good place for us to start then because, just like a runny nose it is a symptom of an underlying cause. Frustration is a good sign that something’s wrong.
At lot of our frustrations come from knowing what can be, versus what is. Getting frustrated that we aren’t in the position of what we know can be.
I get pretty frustrated with my headphones when I get them out of my gym bag after they have been rolling around in there for a week or so, they tend to resemble a rubber band ball, and I get frustrated trying to untangling them because, I know what their functional state looks like and the longer it takes to untangle them, the more frustrating the situation becomes. But hey, if I didn’t want tangled headphones, I probably shouldn’t leave them in a gym bag.
Seeing stories of those who appear to have reached financial independence so easily has really shown a lot of society what can be. But it’s also really disheartening because for us, it’s not what is.
Especially with the majority of people that we are exposed to on TV, movies or music and just the entertainment industry, generally have little to worry about financially, and subconsciously I think we know it.
So, with these frustrations we had something to work with, and it’s a pretty good starting place to look for a common cause across all.
To kick the process off, we wanted to take a step back to look at maybe if the cause could be a macro issue, something that’s inbuilt into society affecting everyone. Because, if that is the root cause it’s going to be pretty hard to come up with a solution to it
In today’s society when we have greater access to investments, and the systems that allow us to actually accumulate wealth we have greater access than ever to laws to protect us, property rights to keep what we have, banks to save money, online access to buy a share just with the click of a button.
So, if we have the ability to purchase investments, be protected to keep what we have under the law, have places to deposit that and hold it securely, then society has the underpinnings of what it takes to actually be able to maintain and keep wealth. Obviously, this doesn’t hurt trying to reach financial independence, and especially with the fact that the world is actually becoming wealthier off the back of this.
And the proof of this comes from a study by the world bank where it shows that poverty’s been cut in half over the past 30 to 15 years depending on how they measure the time period. So, in most of our lifetimes at this point, more people have been lifted from poverty than during the whole of human history. In the last 15 years alone more than half of the world’s population has been lifted out of the standard definition of poverty so there’s more wealth being generated across the board for everyone. But is there someone who is taking the majority of this, or getting in our way?
For these people in society, we might look at the notorious 1%
But… you may know some of the people in this shadowy group.
Because the latest figures for Australia show that to make it, all you need to do (beyond learning the secret handshake) is earn above $237,000 a year. So, if you’re earning $237,000 per year, your take home pay after you pay tax is about $152,000. It’s a pretty decent income after tax. But does it really give you the wealth you need to have private jets and yachts and be this elite 1%?
And are they actually sucking up all of the wealth, as a lot of studies and publications are actually claiming?
To look at this we really need to break it down because I see two answers to the question, depending on how you view wealth is created, and more importantly, who should receive it.
Say for instance, every year a pre-set amount of money was just gifted to the population – cargo jets come in during the middle of the night and just drop trillions of dollars onto the population and the fat cat 1% dip their hands in, grab it all, grab as much as they can and by the time they’re done, we get the scraps. If that how it works, then it’s completely unfair. But, I haven’t figured out who this donor would be, or who’s piloting these big jumbo jets… because whoever is actually distributing this wealth in this system would need to generate it. Otherwise it would simply be that they’re borrowing the money to give out or they’re taking it from others to give out. Neither of those actually generates any wealth in society.
However, what if wealth is something that is created, by individuals through voluntary transactions with other willing participants for their goods or services, then that’s a different story.
Imagine that someone creates something that we all really want. Maybe an iphone, and people wanting this iphone purchase it.
This individual then is selling their product and collecting money from people buying it. The person that creates the best product and has the most amount of people buy it (giving them therefore the most amount of money) accumulates the greatest level of wealth.
How good their product is compared to everyone else’s determines the level of wealth they are able to accumulate.
To look at these people, we need to go to the top 1% of the 1%, or the Billionaires.
Is it these guys who are keeping us down?
From 1870-1890, John Rockefeller; one of the wealthiest individuals in history (you might have heard of him, if you haven’t just think about Rockefeller Square in New York – same dude). In this time period he was in charge of Standard Oil, and what he did was create oil (or petroleum) that was actually mass produced and accessible to people to a point where it was extremely affordable. So, they could now purchase oil for power for far less and they could spend their money on other things. If you have money to spend on other things, while your total level of income hasn’t gone up, your total level of technical wealth has gone up because you can now have more money to spend elsewhere.
And, here’s an example of one of the wealthiest men in history making everyone else a bit wealthier because they dropped the price of something that was an essential good for everyone. What’s also been theorized about that is now people could actually afford to light their houses for a longer period after dark especially, literacy rates rose drastically over this time.
Even for those of you environmentally concerned, because oil might not be seen as the best thing, it actually took over Kerosene as the primary fuel source for lamps. Remember, 1870 or so, cars weren’t really being mass produced yet so oil wasn’t really going towards the petrol side of the story, but instead for people to use as energy in lighting their houses.
This drop in Kerosene as the primary use created a drop in the price from the 30c to 6c a gallon. The primary source of kerosene back in the day, was whales.
This price drop reduced the US whaling fleet from 732 to 200 over the same 20 year period, after which it still continued to decline. Whaling is fairly expensive, fairly risky - not worth it compared to oil. So hey probably single handedly managed to save more whales than anyone in history.
And even in modern times, Bill Gates has made PCs affordable and accessible for everyone so not only can we all afford more than one computer in most Australian households, you now have more money to spend elsewhere thanks to that. And you’re more efficient because you can email, research things online…and think about Henry Ford and the mass production of automobiles – the amount of time he has saved us getting to places through making cars publicly available to everyone at relatively affordable prices has improved everyone’s lives.
I think that Billionaires do really improve our lives overall. We probably wouldn’t have Facebook, the iPhone, Computers or name any other thing that we use every day without most of them.
These inventions have come from individuals who want to accumulate wealth (and even if they don’t want to they end up accumulating wealth) off the back of creating something so good that people want to buy it.
Without them, as well, someone else would need to employ all the people they do from these companies that produce these goods and services. The people they employ, most of them are receiving a salary from their employment – and this is the key component in wealth accumulation for a lot of individuals.
While society portrays these billionaires as greedy hoarders, they provide massive benefits through flow on effects to everyone. It is just very, very hard to quantify and much easier to say they’re the single problem to today’s wealth inequality issue.
Sure, some may be corrupt, but that is because they are people.
People can be corrupt, greedy, violent across the board regardless of wealth. This is human behaviour.
Sure, having money can bring worse traits out in people, but it’s not the money’s fault – it’s the underlying traits of the individuals’ nature. Money just might give them the ability to start acting like a d**k.
But even though some people have become wealthy from committing crimes and ripping people off they often don’t keep it for long. They go to jail, they get caught, and that’s why we have the laws in place to protect individuals from these people stealing money and accumulating wealth from ripping other’s off.
Okay, so our access to goods and services is better than ever, there is more wealth in the economy than ever, survival has never been easier, our ability to keep what we earn has never been better...so...why hasn’t financial independence solved itself?
It’s simple – escaping poverty or becoming a billionaire are completely different to financial independence.
What the hell is financial independence anyway? And, how do you get it?
The news and entertainment shows that we see if they ever cover anything financial, it is a problem someone is facing; they’re defaulting, someone’s repossessing their house, or other ways that they show you is just saving up on your electricity bills or the best way to your water output.
And, learning to save on anything is awesome but it’s only great if the money that you saved isn’t wasted on spending elsewhere.
I get it! It’s hard to really educate properly when you are trying to entertain through a show – and that in itself determines what you see on TV more than anything; just the number of eyes that the program will draw will give you the content. That’s more entertainment value than giving someone a valuable piece of education
Instead, the complete opposite to the message of financial independence is more common to be broadcast - that equality of outcome is more important. And that’s actually the complete opposite to financial independence.
People should be really, really careful what they wish for, and when asking for the same outcome for all because even if everyone is on the same income today – everyone earns $50,000 regardless of what they do, it wouldn’t take long for some to start earning more.
Because, say if you’re earning $50,000, your living costs are only $20,000; you’re living on a bag of rice a day, you live very, very, very, very minimally, you’ll save a lot of money and you’ll be able to invest that to earn more and more income over time
If you’re spending $60,000 a year, you’ll be getting into debt and your disposable income will be going down over time. And therefore, you’ll have less than $50,000 because you’ll be repaying debt.
So, the level of tyrannical government control that actually would be needed to enforce a system to make sure that everyone is on the same equal playing field to make sure everyone’s financially independent, universal basic income, we give you all $50,000, no worries. That system has been tried. And it doesn’t work.
There’s a lot of evidence even over the past 100 years. If you want to look at how well it works just try to ask the hundred million people who have died under that system in the past hundred years – of state-controlled regimes that try to solve inequality and give the people the message of financial independence if only they just give the power to the state they’ll look after them and give them all the money that they want. The outcome of this is actually having no independence because everyone is dependent on a totally equal society where no one can get anything – not even food. People starve under these regimes.
If you don’t believe me, its currently going on right now. The Venezuelan President at the end of last year came up with a genius "rabbit plan" and it was actually to encourage the population to breed rabbits to eat as a source of animal protein. Children’s mortality rates had spiked 30% due to starvation related diseases and some blamed the oil collapse for prices and it certainly hasn’t helped because their socialist society was built on an oil-based economy, having the largest oil reserves in the world. However, why has no other oil producing country gone through the same thing?
And when you have the largest oil reserves in the world but yet you’re importing oil maybe that’s not a good sign that you’re running things efficiently. And if you’re not running things efficiently it’s very, very, hard to get any profit in society to give people growth and economic wealth
I spent a lot of time thinking about this. Why have other countries gone through a similar thing and why have others not? I have spent so much time we’re going to cover it in episode no.7 to save time here, but it’s essentially a system from a stable economy into a death trap within a few years. So, by this point if we’re not in a similar system currently it looked like the macro or society level was actually set up to help us gain financial independence. And that comes back to the micro level or individual level where the first steps is just defining financial independence because it’s something that everyone mentions, everyone talks about but when you ask someone what it is what that looks like, it’s more or less a different answer every single time.
This is just my definition, and what I think it really means at the core – financial independence is really reached once you have the ability to choose how you spend 100% of your time while maintaining the life that you want to live. So this is just my definition, as I said before everyone has a different idea of what the concept is and what financial independence actually looks like.
This is why turning to a collective power to give us financial independence has never worked because everyone’s different everyone’s got different needs and you cannot be financially independent through relying on a system of dependence
So if we are totally self-reliant and can afford whatever we want and have the freedom to travel to wherever we want does that actually mean you’re still independent and do the billionaires who use the same phones, laptops and have the same life expectancies almost as we do as well. And isn’t the feeling of independence the underpinning of the whole concept that we’re striving for. So independence is really the thing that people are wanting but the focus is so much on wanting the finance which is just a tool you use to support that independence
The great thing about society, and reality, is you can actually negotiate with the future …so you can control the future if you just work it out with the present – you negotiate with the present now, you set some stuff up and you can determine a better outcome for the future. So you can negotiate your future saying hey, we want to have financial independence in a certain amount of time, here’s what we’re going to do now to achieve it. And the future will reward you for that. Or you can just ignore it and see where you end up in the future. So, helping people to find this in their own lives and provide a system to really make it happen was something we wanted to put into place. And along the way we want to hear from you as well because, by the end of the series if you think we’ve left any causes, or anything, unaddressed please let us know because the more feedback we get the greater value that we can actually provide. And it’s not very wise to build a house and ignore someone telling you there’s a hole in the roof when there evidently is and the water’s leaking through
So now that we’ve got the macro out of the way, we’ll start going through the micro and the individual levels in the next episode where we start building the house
I hope you enjoyed it, and I’ll see you in the next one
Were back! Sorry for keeping you waiting for quite some time, but our absence hasn’t been wasted.
As you can probably tell the podcast looks a little different, but don’t worry, you’re not lost.
To help avoid any further confusion this is a quick announcement introducing “Finance and Fury”, and also the reasons why for the change and the rebrand.
We started the Rentvesting podcast with one purpose in mind, to help you become financially independent. Our goal was to do this through helping educate on property and investing, plus making smarter financial decisions to achieve your OWN financial independence… rather than following the masses.
However, we reached a point where we felt there was actually little additional value that we could provide with education on “rentvesting” as our sole focus. Plus, there’s no shortage of property or investment education online. So, while we felt that while we were meeting our goal of educating, would this actually help you achieve your goal of financial independence?
While we think it definitely helps, we realised there were still many other factors that we still needed to focus on. Because if education alone was going to provide financial independence, then anyone who took the time to educate themselves would make it, right?
So, we went back to the drawing board but this time we knew that our ‘how’ had to be beyond education as the sole focus and I wanted to share our progress on trying to solve this problem over the past few months.
It’s mainly to help to clarify what we think the key factors involved with reaching financial independence are. And this is really important as it’s going to be our focus going forward.
Also, we’ll try to help explain the system for financial independence we’re trying to implement for you to remove each one of these problems. The whole purpose of it is to make it as simple as possible as well, so anyone can use it.
This has been a focus of ours for quite a number of years now so pretty shortly we hope we can overcome it. Sadly, this whole process isn’t that easy to explain. I originally had it just in one podcast, but it was way too incoherent to follow. So, its now become 6 …in a nice easy sequential order.
These six are a little different compared to what you’re used to with the Rentvesting podcast. These aren’t produced at all, they’re just raw audio recordings, and that’s just purely to get these all out to you without any further delay.
Starting from the next episode, we work our way through some ‘whys’ to the complex financial independence problem, discussing all the solutions along the way.
At the end of these 6 episodes I try to tie all of the problems back together with the solutions together into one workable program.
We aren’t claiming that this is perfect, as nothing is, but from our experience, it is workable. And not just by professionals but anyone who puts the effort in.
If you are up for listening to me puzzle though this piece by piece for the next 6 episodes, join for the next where we start the journey.
Today we will discuss three things that have really helped me in my life, so I wanted to share these with you. They are three daily practices which help me to reduce stress, increase concentration and my general health as well.
Meditation
I started meditating about 2 years ago. At first, I was really sceptical. I always had in my head that this was something monks did under a tree, until I started trying it.
Now I think of it as a bit of quiet time with some massive benefits being both mental and physical, as follows:
- Reduces stress – Time to switch off. All phones, computers, emails, all switched off. Studies have shown an improved ability to regulate the emotions in the brain from meditating, helping to reduce the levels of stress.
- Improved concentration - Meditation has been linked to a number of things that lead to increased ability to focus and improves memory. Greater concentration is related to the increased energy meditation provides to the prefrontal cortex which also helps impulse controls.
- Increased happiness - Studies have shown that brain signalling increases in the left side of the prefrontal cortex, which is responsible for positive emotions, while activity decreases in the right side, responsible for negative emotions.
- Slows aging - Studies show that meditation tend to have more gray matter in their brain, literally, more brain cells. Meditators also have longer telomeres, the caps on chromosomes indicative of biological age (rather than chronological). While meditation won’t lengthen life, the increase in longer telomeres reduces stress and its effects on the body.
- Improved cardiovascular and immune health - Meditation induces relaxation, which increases the compound nitric oxide that causes blood vessels to open up and subsequently, blood pressure to drop. One study, published in 2008 in the Journal of Alternative and Complementary Medicine, showed that 40 of 60 high blood pressure patients who started meditating could stop taking their blood pressure medication. Meditation also improves immunity.
So how do you meditate? There isn’t one right way to do it, however if you are unsure you can follow this general outline:
- Sit or lie comfortably.
- Close your eyes.
- Make no effort to control the breath. Just take normal deep breaths.
- Focus your attention on the breath breathing in and out.
That’s it! It really is that simple so try to go for a few minutes to start with and built up over time. If you are having trouble getting started, there are plenty of options to help. There are applications which do guided sessions for beginners and also brainwave frequency applications to help as well.
At first, random thoughts will pop into your head however try to just let them go and focus on your breath again.
Breathing exercises
Breathing exercises in conjunction with meditation can have some great effects. I use two regularly between box breathing and the Wim Hof method.
Box breathing is a technique used in taking slow, deep breaths. This can heighten performance and concentration while also being a powerful stress reliever.
The technique involves breathing in deeply for four seconds, holding this breath for four seconds, releasing the breath over four seconds then holding for four seconds. That is one repetition which can be repeated for minutes at a time. It is recommended that this be done for at least five minutes to get the full effects.
I learnt about this when listening to a Navy SEAL talk about how they do this in their training to help remain calm in stressful situations.
According to the Mayo Clinic, there is sufficient evidence that intentional deep breathing can actually calm and regulate the autonomic nervous system. This system regulates involuntary body functions like temperature. It can lower blood pressure and provide an almost-immediate sense of calm. This will also reduce stress and improve your mood.
The Wim Hof method involves something called power breathing.
I heard about Wim, also known as the ‘Ice man’ through his amazing world records, with a few being:
- He can stay immersed in ice for 1 hour 13 minutes
- He can reach the top of Kilimanjaro barefoot wearing just shorts, in only two days.
- He also completed a full marathon above the polar circle in Finland where the temperature was as low as -20 degrees, dressed in only shorts.
He says that his breathing technique is the major reason he has been able to overcome such demanding physical challenges.
How this technique works:
1) Get comfortable - Sit in a meditation posture, whatever is most comfortable for you. Make sure you can expand your lungs freely without feeling any constriction. It is recommended to do this practice right after waking up since your stomach is still empty or before a meal.
2) 30 Power Breaths - Imagine you’re blowing up a balloon. Inhale through the nose or mouth and exhale through the mouth in short but powerful bursts. Keep a steady pace and use your midriff fully. Close your eyes and do this around 30 times. Symptoms could be light-headedness, tingling sensations in the body.
3) The Hold, retention after exhalation - After the 30 rapid successions of breath cycles, draw the breath in once more and fill the lungs to maximum capacity without using any force. Then let the air out and hold for as long as you can without force. Hold the breath until you experience the gasp reflex.
4) Recovery Breath - Inhale to full capacity. Feel your chest expanding. When you are at full capacity, hold the breath for around 10 seconds and this will be round one. The breathing exercise can be repeated 3 rounds after each other.
If you are after a tutorial on how this works, there are plenty on YouTube.
The second part of this comes from cold therapy, so I have a cold shower while doing the breathing exercises.
Affirmations
An affirmations is simply a positive statement that describe a desired situation or goal. If this is repeated often enough it becomes impressed on the subconscious mind. This then motivates, inspires, and programs the mind to act according to the repeated words.
So, how do you write your own affirmation?
- The first thing you need to do is to write down several areas or behaviour you'd like to work on.
- Write out an affirmation that offers you the positive flip-side of the area you want to work on.
- Write in the present tense as if it is already true.
- Make it personal using words that mean something to you.
- Repeat it multiple times a day.
For each of these positive, present-tense statement you can repeat to yourself several times a day. It's also important that your affirmation is credible, believable, and based on a realistic assessment of fact. Telling yourself over and over again something positive will really help you in the long run. The more you tell yourself something, the more it becomes the truth.
There is a quote by the Roman Politician, Cicero. "What then is freedom? The power to live as one wishes."
In this episode, we will discuss how to gain freedom through financial independence.
As Cicero said, what is freedom if not to live your life the way you want? This means not being beholden to a job, being able to travel, live where you want and go after what you want.
So, what does it take to achieve financial freedom? It is really simple, having enough passive income to pay for your expenses. If you have investments which can pay a passive income to cover your expenses, then your only reason to work is because you enjoy it.
This is where money can buy happiness through doing what we enjoy and is meaningful.
If you want to have financial freedom, you need to decide what this looks like for you and plan on how to achieve this!
This can be broken down in to six steps to work through and then implement:
- Determine what income you need to cover your costs.
- How you generate a passive income?
- Reverse engineer to meet your goals
- Do some planning
- Implement your strategies
- Review regularly
Step 1) Determine what income you need to cover your costs.
This first step is where you decide what financial freedom looks like to you. So how much income would you need to live comfortably? This can sometimes be tricky as your expenses change over time. You might have a mortgage and school fees which will inevitably cease at a certain point.
There are two ways to work this out. The first is to look at what you would spend on yourself without those temporary expenses through completing a budget.
Another way is to look at ASICs assumption on what retirement costs the average Australian. Just remember that holidays and travel costs will be extra costs on these levels.
Having an idea of when you want to be financially independent is also important. This will help plan and also account for inflation. Time will be either your biggest friend of worst enemy. If you have a long period of time it will be easier to achieve.
Step 2) Figure out your asset base that can get your level of income.
There is the Rule of 20. This is based off if you can generate 5% per annum in income, then you simply multiply your desired income by 20 to work out the investments needed. For example, if your target level of passive income is $50,000 per annum, then your asset base would be $1,000,000.
However, inflation will need to be accounted for as well. This is where time is of importance as it allows to work out what level in future values is required. If you wish to be independent in 15 years, then this $1,000,000 would be closes to $1.45 million.
Step 3) You know the target, so time to set some goals on how to achieve this.
In this step, you need to work out how you will reach your target level of investments. Working out how much you need to put away into investments each month can be a little difficult.
This can be done using the PMT formula in Excel or through calculators on the MoneySmart website. It is best to work off a relatively conservative return on long term growth investments of around 8.5% per annum.
Say your target it $1.45m in 15 years, then you would need to invest $4,000 per month to reach this. This monthly figure can sometime be daunting especially if you are having trouble saving in your current position. Try to start out small with the ‘pay yourself first’ strategy and build up to your target over time.
Step 4) Plan and look at alternatives to invest in to meet your criteria.
Once your target on investments and monthly savings is worked out, look at the investment options available to you.
This can range from investment platforms with managed funds, direct shares, properties or any asset which will pay you enough of a passive income. Just remember there is no point investing into shares or a property that won’t eventually be able to pay a passive income.
Historically, growth investments have performed better than income only assets in the long term. This is due to the return equation being income plus growth. Therefore, cutting out half of the equation will limit how the funds perform in the long term. Just remember that the investments need an income as well and should be well diversified.
Step 5) Start your plan!
Success takes planning but not following through on your plan is pointless.
Once you have your plan in place, it is time to start saving and investing. Set up your investments to be well diversified and to reinvest the income over time. Volatility is your friend when it comes to long term investing, especially when making regular investments.
Try to make this process as automated as possible, setting up regular direct debits or investments.
Step 6) Review Regularly
The final step is ongoing reviews of your progress. How are the saving targets going? How are your investments performing? This will help to keep you accountable along with being able to change your plan over time as needed.
For further information on gaining financial independence, check out a Webinar I have done on this:
https://www.youtube.com/watch?v=T0LnNpXuTIA&feature=youtu.be
The saying goes that ‘Money can’t buy happiness’ – I’m sure you have all heard this.
Well it has been proven to be kind of right, and kind of wrong.
The studies around this have shown once you have a certain level of income (around $75,000 per annum), the returns of happiness decrease significantly for any additional income that you earn. Once you can pay your bills, not worry about money and use money to convert into experiences, then you are set, right? Well, why is ‘affluenza’ a thing?
This is what we will be looking at today through the sources of happiness and some ways to boost your happiness.
There is a general consensus that there are three primary sources to happiness, as follows:
- 50% baseline genetics - Since happiness is an emotional state dictated by specific neurons in the brain, it follows that happiness would be a heritable, genetically-regulated trait. This can be referred to as 'the cortical lottery'.
- 10% Life circumstances – How much money you make, social standing, where you live.
- 40% Intentional activity: Thoughts and Actions – What you think of yourself and the world and how you interact with it makes up the remaining 40%. If you think the world sucks along with your place in it, chances are you are less happy than others.
As 40% of happiness comes from your thoughts and action, we will be focusing on how to increase this area as this is the easiest to change!
Being happy is important after all. Without being happy what is the point of getting up every day? Not only is being happy great, a number of studies show that it leads to being able to achieve more in life.
Actions you can take to increase your happiness:
The feeling of happiness is triggered inside your brain through four primary Neurotransmitters.
These are Dopamine, Serotonin, Oxytocin, and Endorphins, also referred to as the ‘quartet’ responsible for your happiness.
The following are some actions you can take to help hack some of these neurotransmitters:
Dopamine
Dopamine is the 'feel-good' hormone which is responsible for the reward-motivation feeling. Dopamine helps to provide motivation to take action toward your goals and gives you the good feeling when they are finished. Having lower levels of dopamine lead to increased procrastination, self-doubt, and lack of enthusiasm. This was discovered through studies on rats, where those with low levels of dopamine always opted for an easier option (i.e. less reward/food) compared to those with higher levels of dopamine.
To constantly get this release, break your big goals down into little pieces. This will allow your brain to celebrate on a more frequent occasion rather than once. Just remember to actually celebrate whenever you meet a small goal. You can also try to create new goals before achieving your current one. That ensures a consistent pattern for experiencing dopamine and craving this reward over time. This will help to build motivation along with being happier.
Serotonin
Serotonin is known as the 'happy hormone'. It is the 'happy hormone' which regulates your body's sleep-wake cycle and temperature along with providing the feeling of feeling satisfied. Serotonin flows when you do something that makes you feel significant or important. When serotonin levels are low, the feelings of loneliness and depression are more likely to be present. It has also been shown that being a part of a culture and ‘community’ facilitate serotonin release.
To help increase this, try to reflect on your past achievements more. This allows your brain to re-live the experience and get the feeling of importance. This is where reflecting on your ‘wins of the day’ will help to boost this as well. Even focusing on future achievements you haven’t met yet will help. Your brain has trouble telling the difference between what is real and what is imagined, so it produces serotonin in both cases. Gratitude practices are popular for this reason, they are reminders and mental pictures of all the good things you’ve experienced.
Another thing that you can do is to join a group that you are interested in to experience the community feeling. There are thousands of groups on MeetUp so try one out!
Oxytocin
Oxytocin is known as the ‘Love Hormone’. It plays a role in bonding and falling in love in both sexes.
This can easily be increased by just smiling at someone or giving them a hug. Maybe not a stranger or someone’s child but you get the point.
Endorphins
Endorphins are responsible for helping to reduce stress and provide the feeling of euphoria. They are released in response to pain and stress to help to alleviate anxiety. Similar to morphine, it acts as an analgesic and sedative, diminishing your perception of pain. Also, the euphoric “runners high” is all thanks to endorphins.
Exercise has been proven to be one of the most efficient ways of releasing this, especially high intensity cardio workouts. Try going for a run up a hill or do some sprints to help boost this. Along with exercise, laughter is one of the easiest ways to induce endorphin release. Even the anticipation and expectation of laughter increases levels of endorphins. Try to find a few things to laugh at during the day to help keep your endorphins flowing.
Before we get into the next section, I am not a psychologist. If you are feeling depression, go seek help. But if you just want to boost your happiness through thoughts then the following will really help!
The thoughts you have about yourself and the world can really effect your overall happiness.
This comes back to the episode on mindset, where having a positive view will help boost success and happiness. As your own ‘mental talk’ can either lift you up or bring your down, it is important to try to focus on the former.
Cognitive behavioural therapy (CBT) is a short-term, goal-oriented psychotherapy that many studies have shown is better at curing depression in the long term compared to medication. Its goal is to change patterns of thinking or behaviour that are behind people's difficulties, helping change the way they feel. This is done partially by treating Cognitive distortions that everyone experiences in differing degrees.
Cognitive distortions are simply ways that our mind convinces us of something that isn't really true. These inaccurate thoughts are usually used to reinforce negative thinking or emotions through telling ourselves things that sound rational and accurate, but really only serve to keep us feeling bad about ourselves.
The book Happiness Hypothesis by Johnathan Haidt talks about the 10 top Cognitive distortions which people suffer from:
- All or nothing thinking – Black or white thinking with no middle ground. Either things are great or awful. This is where the feeling of being a failure can come from. Better to try and realise that bad things will happen, but good can come out of it.
- Overgeneralisation – Words like ‘always’ and never’ can lead to a self-defeating pattern. Focusing on a single negative event as if will always occur can deter you from ever trying anything new. If something bad happens to you, then better to realise it is a one-off event and that you aren’t cursed and things will get better.
- Mental filter – This is where people place a filter on events and only dwell on negative things. Your brain can pick up a single bad event and fixate on this for days or weeks leading to feelings of inadequacy or depression. Try to focus on the good side of life and be grateful for what you have, not what you don’t.
- Disqualifying the positive – This is done through not counting good things that happen. Having a daily gratitude challenges, focusing on the good things in your life will help to remove this. So, be grateful for what you have and focusing on the positive.
- Jumping to conclusions – This can be broken down into two categories:
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- Mind reading – Guessing what other people thinking. Most people don’t think about you at all, so why think about what they may be thinking of you?
- Fortune teller - Thinking of the worse outcome possible for your situation. Predicting outcomes can lead to your brain just focusing on the worst possible scenario. This goes back to the episode on fear. It is silly to be afraid or focus on something that is only true to your imagination.
- Magnification – Exaggerating the importance of events that happen in our lives or blowing small things that happen to you out of portion. Just remember that life will go on!
- Emotional reasoning – Assuming that your negative emotions necessarily reflect the way things are. This can lead to downward spirals in your life where your view of yourself can affect your view of the world.
- Should statements – ‘I should have finished this by now’. These sorts of statements can lead to guilt and delaying the task even further. It is simple to just stop saying this. When you tell yourself you should do something, it makes you feel bad for not doing it. Instead just say ‘I will’. Give yourself some slack and just say I Will do this!
- Labelling – Labelling yourself as something in life. An example of this would be to call yourself a total failure when a small set back occurs. This is the best way to put yourself down so keep track of this and talk back and correct yourself.
- Personalisation – Seeing yourself as cause of negative external events or that bad things in your life and around it only happens because of you.
To help with all of these, start to make a journal to track if these pop into your thoughts.
Try to track these and pick yourself up on your daily use. If you aren’t actively looking for these they will go by without even noticing.
Out of these, focus on one each week and change your thought patterns to boost your happiness.
Hacking your brain to become more productive, or to stop bad behaviours doesn't require a computer chip! Instead it can be done through implementing good habits, or rewiring bad ones.
What are habits?
Habits are your brain’s own internal productivity drivers. Your brain has a lot to do each day between controlling your bodily functions and actions along with your though process. Thankfully, it is constantly striving to become more efficient in doing this through transforming as many tasks or behaviours as possible into habits. This allows you to do things without thinking, freeing up more brainpower to tackle new challenges.
If you are like 98% of people, your habits each morning will remain relatively unchanged. These habits may be to wake up, have a coffee, shower, have breakfast and go to work all without thinking. In doing all of this without thinking your brain has conserved resources to put towards your daily activities.
While this mechanism allows us to become more efficient, it occasionally works against us in forming bad or unproductive habits. It may seem impossible to break bad habits or integrate new ones, but once you know what’s happening inside the black box of your unconscious it becomes far easier.
How habits are formed?
When we first engage in any new task, your brain will have to work hard to process all the new information to complete the task. But as soon as you understand how a task works, the behaviour starts becoming automatic and the mental activity required to do the task decreases dramatically.
Think about how much brainpower and concentration you had to use when you were a child to tied your shoelaces for the first few times. Now I bet that you do this without even thinking. This exactly how habits work in your favour, to save you time and mental effort! This process is known as The Habit Loop!
The habit loop is a neurological loop that governs any habit. The habit loop consists of three elements: a cue, a routine, and a reward. Understanding these elements will allow you to change bad habits or form good ones.
MIT researchers first discovered the habit loop while experimenting with rats in mazes. They discovered that the first few times a rat ran the maze, its brain generated a great deal of activity in the cerebral cortex (the area in the brain responsible for information processing).
However, after the rat had run the maze a number of times, the activity in the cerebral cortex reduced significantly. This was due to their brain converting the sequence of actions, "chunking" them to the primitive basal ganglia (an area partially responsible for automatic movements). This allowed their cerebral cortex to be reserved for more intensive functions. This is the mechanism that operates when you are driving home at the end of the day without actively thinking about the route to take.
The Habit Loop Elements:
- The Cue:
The cue for a habit can be anything that triggers the habit. Cues most generally fall under the following categories:
- a location,
- a time of day,
- other people,
- an emotional state,
- immediately preceding another action.
This trigger then sets off the chain of events of entering into the routine to get the reward your brain as come to expect from the habit. For example, if you suddenly crave chocolate, this could be set off by the time of day, finishing dinner and wanting a sweet treat, really it can be anything!
As children one of the most power cues we ran into was the ringing bell from the ice cream truck going around the street.
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The Routine A habits routine is the most obvious element and easiest to identify. It is simply the action that you wish to change (e.g. smoking a cigarette or biting your nails) or reinforce (e.g. taking the stairs instead of the elevator, or drinking water instead of soft drink).
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The Reward The reward is the reason that your brain decides that the cue and routine are worth remembering and following in the future. As the reward provides positive reinforcement for taking action, this helps to reinforce the behaviour and engrain this to become a habit. This reward can come in the form of something tangible (e.g. chocolate), something intangible (e.g. a half hour of television or endorphins).
So how do you break the habit loop?
As the habit loop governs a lot of your actions, it takes some self-analysis to overcome any bad habits, or a game plan on how to implement new habits.
I read a book by Charles Duhigg called The Power of Habit which suggests the best framework for reshaping bad habits I have seen so far.
If you want to get rid of a bad habit, you have to find out how to implement a healthier routine to yield the same reward. In the book, he says that once habits are formed you cannot remove them, however you can rewire them to achieve what you would like. The reason for this is that if you remove the routine which would then yield no reward, you’ll likely be unhappy and fall back into the old habit.
The trick is to keep the cue and the rewards while changing the routine.
Steps to implement:
- Identify the Routine
Most habits have a routine that are pretty easy to identify as this is the behavior you wish to change. This may be sleeping in, eating junk food or watching too much television. From there, you have to identify the cue and the reward.
- Experiment with Rewards
The reward for a given habit isn't always as obvious as you might think. While the reward for a daily craving for chocolate could be just the chocolate, it could also be the resulting social interaction with the folks next to the vending machine or an energy boost from the calories (which could be replaced with an apple or some coffee).
Experimenting with rewards is the most time-consuming part of hacking your habits. Each time you feel the urge to repeat your routine, try changing the routine, the reward, or both. Keep track of your changes, and test different theories on what drives your routine.
In Duhigg's book, he would crave a cookie each afternoon, but did he want the cookie or just want a walk to get it or the calories? Was he hungry or was he just seeking social interaction? Each time you try a different routine, ask yourself after 15 minutes if you're still craving the original "reward". Duhigg discovered his craving went away after just chatting with friends, so he was just craving socialising, and he isolated that craving by experimenting with the rewards.
- Isolate the Cue
With the amount of stimuli bombarding you each day, isolating a habit's cue is a difficult proposition. Experiments have shown that habitual cues generally fall into one of the five categories;
- Where are you?
- What time is it?
- What's your emotional state?
- Who else is around?
- What action immediately preceded the urge?
To whittle these down, try to think what could be triggering your habit and write down your answers to each of these over a number of days. If you see the same thing reoccurring in one of the categories it is likely that you have just found your cue!
- Have a Plan and believe
Once you find out what your cue is, then you can get to work with changing the routine. Just remember to keep the same cue, and implement a new routine for the same or an equivalent reward. For instance, if you sleep in through your alarm, then your alarm is the cue, the action is to switch this off and the reward is the feeling of going back to sleep for more energy. So, if you are trying to break this, the cue will remain unchanged however to get your out of bed (the action), and do some pushups or have an extra hit of coffee to get the same boost of energy!
While implementing any new plan there will be hiccups, however after a few weeks of paying careful attention to your new routine, it will become part of you as a habit.
One of the most important parts is actually believing that you can change this! Studies on AA members have shown that those who give up drinking are those who believe that they can.
On average, it will take around 30 days for your brain to form a new habit or break an old one. While it may seem like a big task, it is worth it in the long run!
So what habits do you want to introduce or break in your life?
It can be hard to get effective work completed, and stick to the GSD model thanks to a little thing called 'procrastination'.
This episode is to give you a guide behind the science on why we procrastinate and to share proven ways to beat it!
Procrastinating is a part of humans and creeps into our lives without really consciously thinking about it. One of the worst parts about procrastinating is that we justify this behaviour as well using some very clever tricks:
- Avoidance and distractions – Looking for other tasks to do instead of taking action on what we need to.
- Blaming – We external events as the cause of why we delayed in doing a task.
- Denial – We can tell ourselves that what we are doing is more important now, or that we will do what we need to do tomorrow.
- Comparisons – Other people haven’t gotten round to do this, so why should we?
Sadly, while these may make us feel better in the short term, all that they do is delay the inevitable pain we will feel.
What is procrastination?
Procrastination has been around for as long as humans have been alive. Socrates and Aristotle wrote about this in Ancient Greece, describing it as a state of acting against your better judgement.
Put a little simpler, it is delaying doing important tasks for less important ones. It is much easier for us to still feel productive by getting through easy non-urgent tasks in preference of doing demanding ones. Also, it is much easier to do something fun compared to something hard. Therefore, if we are given a choice we will often choose the fun thing over the hard thing, even if it will benefit us.
This is the difference between inaction and action which is the way I like to think of it.
Why do we procrastinate?
Behavioural psychologists have a term called ‘time inconsistency’ which helps to explain why we procrastinate. This refers to us as individuals valuing short term rewards more highly than future rewards, even if these may be greater in the future.
All goals and plans are for your future self. So based on this, you sabotage your future self by seeking rewards for your present self, even if it is not really that great a reward.
This internal battle between your future self and present self can be said to be the key cause for procrastinating. The fact that your present self is the one that needs to take action and it can be hard to make your present self take action.
As you cannot rely on long term rewards or consequences to provide motivation, you need to implement strategies to either provide some immediate reward or consequence for procrastinating.
Achieving any tasks comes in two phases as well. The first is procrastinating and then taking action. The longer we delay, the greater the pain we feel from procrastinating. However, the longer the time is away until we absolutely must take action, the less pain we feel delaying. It is funny however, as generally as soon as you go over the breakeven point you will see that taking action isn’t that painful at all.
Have you ever had a small task to complete, delay it for a few weeks then when you get around to doing it, it only takes you 10 minutes? So the act of delaying causes more mental pain in most cases than just taking action.
How to stop procrastinating?
Option 1 – Make the reward of action immediate through temptation bundling.
The concept behind this option is to only do what you love while doing what you are procrastinating about. The reason this has been proven to be so effective is that you are rewarding your present self for taking action to benefit your future self.
I do this myself. If I am doing house chores, I listen to music or watch something on my tablet while doing it. So figure out what is something that you enjoy doing and add it to your routine. This reward can also be something more tangible, such as giving yourself a treat for completing a task.
Option 2 – Make consequences of procrastination more immediate.
This relies on having a system in place where there are real consequences for not taking action for your present self. This is similar to following through with goals, where having someone or something to keep you accountable drastically increases your chances of succeeding. You can either have a ‘bet’ with someone or with yourself where if you don’t complete what you need to by a certain time, some negative consequence comes in to play. This may be in the form of money or now allowing yourself to do something else you really enjoy.
Option 3 – Follow your action plan without thinking or delaying.
In the last episode, we talked about setting a daily routine, which is exactly what an action plan is. This is a very powerful tool to use as it allows you to get more done through focused work and limits any delays as you don’t have to think about what to do and when every 5 minutes. It sounds fairly easy to just ‘follow the plan’ however it takes some habits to form around this.
How to make this stick?
Once you have your action plan in place, see what works for yourself between implementing rewards or consequences. I am a big fan of all three, as they don’t have to be exclusive. If there is some big project you are putting off, write up an action plan and have tangible rewards and consequences in place to make sure you stick to that plan.
From there, habits need to be formed around this as part of your daily routine. Habits are formed as your brain has a lot to think about, so if we do an activity for a little while, our brain wires it to become a habit so we don’t think about it anymore. However bad things creep in, like procrastination over time.
As habits are in a loop of cue, routine and reward, you can change the cues to change the routines to get more done. However, this is a lot of information so will cover this in the next episode.
To be successful in any part of life, you need to learn how to control your time, not just manage it. This is what this episode will focus on, or put bluntly, it’s about Getting Shit Done!
You can GSD by being able to control your time and reduce procrastinating (which is the next step).
When it comes to controlling your time you need to implement habits to work smarter, not harder. It is about what you get done, not how long you spend doing it.
The reason this is important is that time is limited. Whether you are a CEO or retired, we each have 24 hours a day. So how do some people seem to get so much done working with the same time constraints?
They do this by creating and controlling time. When I first heard this it took me a while to fully comprehend. How do you create time?
Easily, you can either free up tasks or get through them quicker, however focus is the key. Tim Ferris has his 4-hour work week through unlocking potential to achieve as much in a few hours as what it takes others a week to do.
I believe that the 9-5 work day has killed productivity. Most people if they really wanted could get what might take a full eight-hour day in far less time. This has led to habits in the workforce that have flown through in to lives.
Even if you are at work and there are tasks to get done which someone else is providing to you, you control how you do these. The more you control time, the more you will get done and the more valuable you will be. This then leads to a greater output and greater chance of pay raises and promotions. Plus, you will have more free time!
So how do you get started? Implement the ‘time management loop’!
- Start your day with a clear focus.
This starts the night before with a review of your tasks the next day. I used to waste so much time figuring out what the plan for the day was when I would arrive at the office. I used to get in to the office, spend the first 20 minutes organising tasks and reading emails, then go get coffee.
To do this, organise your time by chunking up your day in to blocks. This helps to set limits on how long you have to finish something, helping to reduce the overall time spent on the task. A book called Deep Work explores flow and productivity that recommends exactly this. Having chunks of time set for one task and one task only leads to much more being produced.
But focusing on the important tasks should be your priority. There is no point in chunking your time to spend on tasks that make you feel busy but achieve little.
- Focus on high-value activities.
What is a high-value activity? It is simply something that will move you towards your goals more so than any other activity.
To determine what is of the highest value, you need to align these tasks with your goals and priorities. It helps to focus on outcomes more so than the individual tasks. So, ask yourself ‘what must be done now to get to my end goal?’. Becoming goal orientated when deciding on what to spend your time on will give you the clear focus you need to become as productive as possible.
But what happens to other tasks that you don’t get around to? There is a concept called comparative advantage. This works in economic terms where if one country can produce something at a lower cost (or better) than another, it should do this task and then trade for the other goods it foregoes producing. We can do this as individuals through outsourcing by getting someone else to do what you aren’t great at or don’t enjoy doing.
To help with this, try to complete an ‘Activity Audit’. List what your weekly tasks include and
what takes most time each week. This helps to determine how you spend your time and on what. Then you can potentially look at what can be outsourced and what can you only do to increase your income or fee time.
Say your goals is to start a side business, then you need to focus on the tasks that will achieve this. So, if there is the option between watching TV or working on setting up the business (website, registering, marketing) then the choice should be clear. However, there are some things that you cannot outsource such as spending time with family or friends. Sure, you could hire someone to take your partner out to dinner but you get little enjoyment from this.
Focusing on your highest priority tasks helps to redefine time so you can control how it is spent and is the basis of the 80/20 rule.
- Minimize interruptions and unimportant things.
Minimising interruptions is between external interruption and also then ones you create through multi-tasking. Just focus on one thing at a time, don’t let things distract you from your priority.
Trying to perform too many things at once is the best way to reduce your overall productivity. This usually comes in the form of switching from one task to another without completing the first task. We’ve all been right in the middle of focused work when an urgent task demands our attention; this is one of the most frustrating kinds of multitasking, and often the hardest to avoid. It almost doesn’t seem like multitasking at all, but our minds need time to change gears in order to work efficiently.
This then leads to taking longer to complete all of your tasks and makes you more prone to errors. If the tasks are complex then these time and error penalties increase further.
Each task switch might waste only 1/10th of a second, but if you do a lot of switching in a day it can add up to a loss of 40% of your productivity.
Also, removing unimportant decisions from your life will reduce Decision fatigue.
Decision fatigue refers to the deteriorating quality of decisions made by an individual after a long session of decision making. It is estimated that average amount of remotely conscious decisions an adult makes each day equals about 35,000. I find that hard to believe and there is no way to accurately measure, but even if it is 10%, then that is still 3,500 a day!
The less you have to think, the more brain power you will be left with. Most people spend more time thinking about what to eat for dinner than their goals so by the time it comes to do something of value they are already depleted. You have a finite amount of brain power, so use it on important things.
- Review your day.
The only way to improve this whole process is to see what you actually spent time on versus your daily activity schedule. I was surprised with how much time I wasted every day on switching between tasks, not focusing enough and doing mundane tasks. The first week is the hardest, it initially takes some time and effort. Then, you should plan out your next day and complete the loop.
To keep this loop going, you need to make a habit around this. It takes 30 days to create a habit, but good habits make your life easier. With good habits in place you don’t have to make as many hard decisions, thus you are less likely to make unproductive ones such as talking yourself out of doing what you had planned.
Jocko Willink, a former navy seal who wrote the book Extreme Ownership has a great saying; Discipline equals Freedom. It is true, the more disciplined you are with this will give you more freedom of time in life!
In the next episode, we will discuss procrastinating or ‘do nothingism’. But for now, go and control your time!
Achieve your goals and overcome the fear of failure!
To do anything new can be scary due to the unknown. Our brains paint a dramatic picture of possible outcomes and we psych ourselves out from ever pursuing these goals. This mental picture can create anxiety due to the fear of failing so we remain in our comfort zones and never try.
This type of fear is something that effects a lot of people, I know I used to be one. When I first started working in financial services even calling a superannuation fund to get clients information caused a bit of anxiety in me, god forbid calling a client to discuss their personal situation. Over time I learnt how to get rid of fear and with it, the fear of failing.
The irony of this situation is that you are guaranteed to fail if fear stops you from ever trying! This in conjunction with procrastinating (which we will cover later) are the biggest causes of not reaching your goals.
What is fear?
Fear is a vital response to physical and emotional danger. This response has led us to protect ourselves from legitimate threats to survive. Fear causes a physical change in metabolic and organ functions and ultimately, changes your behaviour. Anyone heard of the fight or flight response before?
Early humans who were the quickest to fear dangerous situations were more likely to survive and reproduce. From this a theory called preparedness emerged where through natural selection, modern humans have developed a heightened sense of fear. Our heightened sense of fear created another element to add to fight or flight, which is freeze. This is now known as the fight, flight or freeze response.
In society today, we rarely (if ever) face a situation that is life or death. There aren’t many terror birds or sabretooth tigers running around. When we think about trying something new there is normally no immediate danger to us, so we have no need to fight or take flight, so we freeze.
Major Fears can be broken down in to two categories:
- Physical – Flying, heights, death, spiders, etc.
- Emotional – public speaking, failure, commitment, criticism, poverty, etc.
These can be broken down further into Rational or Irrational fears. To give an example, I am not petrified by snakes, but I almost stood on a red belly black snake one day and boy did the flight response kick in. This can be a perfectly rational response to this situation. However, fearing to go outside for the possibility of running in to another snake would be an irrational fear.
Fearing failure is another irrational fear as the outcome of what we are afraid of is totally unknown. However, we are still hardwired to respond to fear which we will avoid at any cost, so we do nothing.
The funny thing with this type of fear is that it is entirely self-created. The term Fantasied Experience Appearing Real (F.E.A.R) has also been coined when describing irrational fears. We automatically think that we will fail in the worst possible way and of course, fear this outcome enough to never try.
Failure is a good thing. I know it may not seem like it, but treat it as a learning curve and failing can become your best friend. It may seem like a dirty secret, but everyone fails. Most people just don’t like to talk about their failures.
I have failed plenty of times at many things and no doubt, will fail many times in the future. The first time I spoke to an audience of 50 people I was really nervous, you could even call it fearful. Because I was so nervous, I spoke to quickly and forgot some points I wanted to go over. It was ironic that in this experience, fearing the worse lead to a worse outcome than if I was completely calm. Nothing bad happened, expect when I expected it to. Instead of fearing the worst, treat every failure a great opportunity to grow.
As an infant, you didn’t just jump up and run a marathon when learning to walk. You fell down a lot, but kept getting back up and eventually learnt to walk. Now you do it without even thinking. This same principle can be applied to anything!
This occurs when investing as well. I made plenty of errors in my early days of investing and rather than never investing again, I just learned from the experience and became a better investor out of the process.
A great example of the best attitude towards failure comes from Thomas Edison. He made 1,000 unsuccessful attempts when he was trying to invent the light bulb. When asked, "How did it feel to fail 1,000 times?" Edison replied, "I didn’t fail 1,000 times. The light bulb was an invention with 1,000 steps."
So how do you avoid this fear?
Our minds tend to paint the worst-case scenario when it comes to failure, but this is completely in your own mind and we are incredibly creative when it comes to this. Successful people have fear, they just don’t let it control them. So, what are you worried about?
Step 1) The first step is to review your goals and action plans from last episode. If there are any immediate fears that spring to mind, then write these down. If your goal is to start investing, then you may fear losing money. This step is important as it allows you to take a personal inventory to see what type of fear you have. If you are fearful of an outcome that has no guarantee of occurring then just remember, this is irrational!
Step 2) Go through each fear and discount them. This step comes back to changing your mindset.
The first question you should ask yourself is: What is irrational about this fear? If there is no guarantee of it occurring, then tell yourself “this is irrational”. From here, take the ‘so what’ approach. If you are afraid of calling someone to propose a business deal and they say no, so what? You are left no worse off. The same is true when it comes to investing. If you are invested in quality assets, then how will you lose money? If you buy a basket of investments (like the ASX300), the only way you can lose all of your money is if all 300 companies in the index go out of business or if you sell when the investment has lost capital value (which by the way, will occur at some point!).
Step 3) Focus on the outcome - Imagine how happy you would be if you had achieved your goal. If it is really a goal you want to achieve, this outcome should provide enough inspiration to overcome your fears. This allows you to focus on the pros and cons of the situation (your fears are cons, versus the outcome which is your pro).
Step 4) Just do it! This last step focuses on taking the first step towards your goal, regardless of if you are afraid or not. I have found that the best way to overcome any fear is to expose ourselves to our personal demons and through doing so, move past them. Fears are good, they show you that you are moving in the right direction. Anything outside of your comfort zone is normally feared, but through tackling these you will grow as an individual.
Time is fears biggest alley. The more time you spend thinking about what may happen, the less likely you are to try.
You can’t remove fear completely. There will always be something new to be afraid to try. But you can change what you are afraid of. Through applying these steps to my own life, I only have one fear now. Waking up one day and I am 50 years old, having achieved nothing that I set out to do with my life. This is what causes a mid-life crisis; failing to meet the goals you have, through fearing failure.
I learnt this from studying many self-made individuals. A large majority of these people have been broke, or immigrants who move to a country with nothing. What I saw it that their fear of being poor was greater than the fear of failing. This is where staying in your comfort zone can be the biggest killer of success.
Failures will happen, they are a part of life. However, through facing adversity and failures, we grow and appreciate our success more! If you have ever played a video game on ‘GOD MODE’, you end up getting pretty bored and it is not fulfilling. This is what I have found, anyway. The same can be applied in the real world.
Getting over your fear of failure allows you to take actions but there will be obstacles in your way, you have to come to terms with this. Just remember to stick to the action plan you have created from your goals.
How to overcome obstacles?
When something like an obstacle occurs, there will always be a solution. Make 3 different strategies to solve this and if they don’t work, try three more! It is always too soon to give up – just keep going and don’t let anything stand in your way. It took Thomas Edison 1,000 attempts to invent the light bulb. There is a solution to everything, we just have to find it! As the saying goes “Success is only one failure away!”.
To conclude, failure is not the enemy, your fear of failure is!
Just remember if these fears are self-create, you can get rid of them.
Welcome episode 5 in the steps to success series!
This week we chat about the ‘building blocks’ of your vision, which are goals.
You might really like doing goals, or you may hate doing them, either way most soon end up on a piece of paper in a draw which we find when we move houses. New Year Eve goals are typically treated in the same way. We say we want to lose weight, start saving or investing, generally anything we can think of to better ourselves. The trouble is that these aren’t really goals, they are just good ideas. Also, arbitrary goals that don’t align up to our vision typically fail to be achieved as where is the motivation to keep going at the first sign of resistance.
This is why having your vision and knowing what you want is so important. You can’t achieve something if you don’t know what it is. As soon as you know what you want though, you can hone your inner GPS to get it. This is where goals come in, they will be your map or navigation system.
For every vision that you have, you need to put a goal against it.
Last week you took an inventory of seven areas of life and how you want each to look. This allows one of the best ways of achieving your vision in the following steps:
- Where I want to be: Vision
- Where I am: Personal inventory
- Fill in the gap! Reverse engineer it.
Setting Goals is how you fill in the gap. Just remember, nobody is going to make your dreams come true. But action on your goals will!
So how do you set these goals once you know what you want?
I am sure most of you would have heard of SMART Goal. If not, SMART is simply an acronym on how to help define and write a goal. The summary of this can be see below:
- S – Specific: Who, what, where, when, how & why?
- M – Measurable: Something measurable on what you want to achieve.
- A – Attainable: Believe that your goal is attainable, developing the skills and attitude to achieve them.
- R – Realistic: Must represent something that you are willing and able to work towards. The bigger the better – This can create a high motivation!
- T – Timely: This anchors a timeframe by when your goal will be achieved. Putting a date on a goal allows for you to break this time down and with it, the goal in to smaller segments.
This is where knowing exactly what you want to achieve really helps as the more definite your vision is, the more details you can use when defining your goal.
This system of setting goals really helps. It turns what is a ‘good idea’ in to an actual goal. We all have good ideas about things we should or want to do. For instance, a lot of us say we want to lose weight. This is a great idea, but it isn’t a goal. A goal would be closer to ‘I will lose 10kg by exercise and diet in 12 months to be healthier’. This would be the overall goal. From there you expand on this by the activities that you will need to do in smaller chunks to get to the goal of losing 10kg.
This really works with anything. Instead of saying “I want to be rich”, put this in to a goal. Define what rich means to you and then make it SMART. If having $1,000,000 in investments is your idea of being wealthy and you know when you want to achieve this by; set a goal! This would look like the following: ‘I will invest $1,720pm in to a portfolio of shares for 10 years that get an average return of 8.5% p.a.’.
If your goal is to achieve financial freedom, you need to decide what this looks like for you! If your living costs are $60,000 per annum, what investments do you need to fund this? This is where it gets trickier, as to work out your goal of ‘financial independence’ has a lot of additional layers. We will spend a whole episode on this, how to work out what you need in income, working out what asset base you need to get this done, then working out how to do this in a timeframe.
Now it comes time to do an action plan on your goals. The last part is the hardest, especially if you don’t know how to. However, what you are trying to do is likely what someone else has done, or knows how to do. So you can ask for help from them. Isaac Newton (guy who discovered Gravity) used a metaphor from a philosopher of the time when asked how he achieved so much in his life: ‘If I have seen further it is by standing on the Shoulders of Giants.”
You need to use knowledge that already exists to create your action plan to achieve the goal. Just remember to break each long-term goal in to smaller achievable ones. It is easier to eat an elephant one bite at a time.
Recap: For each of your ideal visions, you need to set one goal. Set this as a long-term goal and then break this down in to yearly goals, monthly goals, weekly goals. You get the idea! Then you need to put an action plan in to place on how to achieve this.
So say you wanted to save $5,000 in one year, this would be 12 goals of saving $417, or 52 goals of $96, or 365 of around $14. The action plan would simply be to transfer $14 a day in to a savings account.
Best ways to keep goals: Share it with one other person who will keep you accountable. It is best to find one other person who also has goals and you each do a weekly goal check in. Sadly, it is a lot easier to lie to ourselves than others. In studies that have compared groups who thought about goals versus those who have someone to keep them accountable, the first group only achieved 43 of their goals, compared to 76 percent of the second group. Back to the previous example, if you wanted to save $5,000 in the year, give updates to someone if you did manage to save $96 per week.
One of the best bonuses from this is an Increased happiness from working towards goals! Achieving them is great, but working towards them and planning them gives bigger dopamine releases, studies have found. This is why setting goals is really important as well, not only to achieve your vision, but to enjoy the ride along the way.
We will run through the most important financial goal of independence in another episode, but for now:
- Set your SMART Goals based on your vision.
- Break it down into small achievable tasks.
- Do your action plan Once your reverse engineer - Ask people/research what needs to be done.
- Prioritise - must dos, can dos. Really important and cuts down on the time.
- Take action and delegate! What you are good at and what would be better to outsource. It is okay to make mistakes, these are great learning opportunities to find out what works and what doesn’t.
- Track – set weekly progress reports.
Having a purpose is the reason to get out of bed each day. Having a vision, allows you to complete a picture of your ideal life. When combined together, these will be the measure of what ‘success’ means to you!
A vision is an ideal picture of how you want your life to look. It is what you want the future to hold for you. But you have to make it happen!
Your vision should show you where you want to head and provide some motivation and focus to help achieve this. Life happens, there will always be setbacks but the best way of overcoming setbacks is keeping your long-term vision in mind and working towards this.
To expand on this a little further, imagine that you are about to go on a road trip. You start your journey and have your destination in mind. There may be speedbumps along the road, maybe some potholes as well, but if you really want to reach your destination you will keep driving.
So how do you build your vision?
Last episode we did some lists to work out a purpose statement, this week it is no different. Again, you have to know what you want to be able to achieve it so the first step is to make three lists, broken in to three headings at the top of the page again.
- What I want: This list is for the material things you wish to have in your life. From houses, cars, even owning a business.
- What I want to be: This list is for the type of person you want to be, from happy and positive to being a leader in your field.
- What I want to achieve before I die: This list is practically a bucket list where you can think about the things that you want to achieve in life.
Under each heading, you need to list 20 things for each one so once you are done you should have 60 in total. It may be hard to come up with 20 things for each, so listing small things or expanding on larger ‘wants’ can help. So instead of just saying ‘I want to be successful’, list out individual items which mean success to you.
Once you have a list of 60 things, it is time to move to the next step. This first exercise is to get the brain juices flowing and to clarify the ideal vision of your life! The next step involves sorting through your lists and placing each in to seven areas of your life.
This covers off 7 areas in total. For each one you need to have a clear picture of what each area should look like!
- Work/career – What are you doing for your career? Is it something that you enjoy? Is it something you can have freedom? Can you make a lot of money from it?
- Finances – What does your financial situation look like? Are you out of debts? Do you have a portfolio of investments, paying you an income? This is the key to financial independence after all. You need to have enough in finances to give you all the free time in the world to focus on everything else.
- Free time/Recreation – What do you do in your free time? Do you r .Are you going on holidays each year?
- Health/Fitness – What is your ideal fitness? Are you 80 still in great physical and mental health?
- Relationships – Marriages, kids, parents, everyone etc.
- Contribution to the world – Do you give back to society?
- Personal goals – What do you want to do before you die? Travel to every country on earth? Swim with Great White Sharks? I may be projecting some personal goals here but you get the point.
You will most likely find that after doing your list of 60 things, these all fit nicely in to one of the key areas of a personal vision. If you find that these don’t fit in to any of the above categories then have a think about how you want this area to look like.
Remember, that your personal vision is where you want to be – so you need a clear picture on what it looks like, what it feels like, you should almost be able to taste it!
Once you have your vision in place, you need to hone your Inner GPS – this is your internal navigation system which will allow you to plot a course and follow the road map to get you there! This is what you can build your goals and actions around which we will cover in the next episode.
To help this, you can start taking a personal inventory of where you are at in each of the areas. This will help to fill in the gaps and reverse engineer some steps to build your ideal life. All of this will be covered in the next episode.
But in summary, before you start working on your ideal life you need to get your vision in place! The best way to expand on this is to create a vision board. This is where you place pictures or statements of what your ideal life looks like!
I have my own vision boards, one for each of the main areas in life. There are pictures and statements on each while provide me motivation and focus for me to work towards obtaining these.
Lifestyle: Property in country with lots of rescue dogs. So, I built a goal around this. What the time period was, what the property looked like, even down to the number of dogs. This allowed me to figure out what passive income I would need to achieve this, what the approximate cost of the property would be, really everything.
Finances: I have printed out doctored banks and financial statements for myself with how I want my finances to look. What my share portfolios are, what my investments portfolios are, completely out of debt.
Free time/recreation: Here I have pictures of other countries and snowboarding. My dream is to go to travelling and snowboarding somewhere in the world each year.
Hopefully this helps you to complete each section of your ideal life and set some goals around this. The more you focus on these, the greater your chances of reaching them!
Behaviours that kill your investments: Do you suffer from these?
Sitting wondering where the year has gone and that you are no wealthier for it? Or what has happened with your financial goals of building wealth?
It’s time to sit down, take 20 minutes and think about if you may be suffering from one of the following behaviours! This episode is on four behaviours that will destroy your ability to grow wealthy through investing.
1) Myopic risk aversion
Myopic risk aversion is one of the greatest behaviour traps that people repeatedly fall into leading to investment losses. While it is a fancy title, it simply means the fear of loss in the short term which occurs regardless of intelligence or skill level.
Loss aversion is completely rations, however it’s the myopic or in other words the short-term part which is irrational.
There is a saying in the share market that the Bulls take the stairs and the Bears take the window. A Bull market is when the market is going up (like a bull bucking its horns) while a Bear market is one that declining in value (like a bear swiping down with its claws). This can be seen in charts of any index where gains occur slowly while declines occur quickly. This is because investors feel the pain of losses far greater than they feel the pleasure of gains. We all have a natural and healthy aversion to losing money, helping us avoid falling for financial scams and protecting our capital.
But short term loss aversion is different. It happens when we temporarily lose sight of the bigger picture, and focus too much on what lies immediately in front of us. For investors, this usually means panic selling during sharp market declines.
Think back to 2008 in the GFC when everyone was selling shares out of the fear that the share market was going down. This created a self-fulfilling prophecy that caused markets to go down further. A lot of company’s earnings didn’t decrease however their share prices fell by up to 40%. Rationally, if their earnings didn’t decrease then their prices shouldn’t have either.
Economists have found that investors who check the performance of their portfolios too frequently suffer from this at a greater rate. If you check your investments on a daily basis, you will experience many days of losses which will create a greater fear of loss. Given that investors feel the pain of losses far greater than they feel the pleasure of gains, you may start to feel greater levels of pain and panic and sell investments, resulting in guaranteed long term losses. This has become a greater problem now with the internet, as most investors now have the capability to check on investments in real time. This can easily cause investors to stray from a well-thought-out investment plans causing investments to be sold at low prices which is the best way to lose money consistently in investments.
So, what can you do? It is simple, don’t freak out and sell investments when they suffer short term losses all because of a declining market. Volatility (upward and downward movements) will always occur in any liquid market, however if you have quality investments there is no reason to sell. Stop checking on the performance every day as this will compound the feelings of loss. Invest in quality assets and hold on to these for the long term.
2) Prospect Theory
A major investment mistake is created through erratic behaviours like changing your risk tolerance based upon what financial markets are doing. Making emotional decisions rather than sticking to your long-term wealth building strategy is one of the greatest ways to lose money when it comes to investing.
Prospect theory is a behavioural economic theory that describes the way people choose between probabilistic alternatives that involve risk, where the long-term probabilities of outcomes are known.
If you're the type of person who takes big risks in one area but takes almost none in another with similar likely outcomes, you might be suffering the effects of prospect theory. For instance, you are okay placing a bet on the Melbourne Cup but are afraid of investing as you may lose money.
The theory states that people make decisions based on the potential value of losses and gains rather than the final outcome and these outcomes are determined by your individual bias at the time. If the media is reporting on the next crash (before it occurs) then some people may become very conservative and sell investments or avoid investing.
The best way to avoid this is to always focus on what your long term outcomes are and to stick to your plan!
3) Herd behaviour and following the crowd
A financial market is made up on thousands of different assets which millions of people regularly buy and sell. The behaviours of either buying or selling these investments is what causes these markets to move in a certain direction. If more people are selling investments than are buying them, then the market will likely decline in value. If more people are buying investments than are selling them, then the market will likely increase in value.
It is this mechanic that can lead to investors following the trend of what the masses are doing, affecting their investment decisions. This comes back to myopic risk aversion as well as in the short term, who wants to be wrong? If others are selling their investments and we are not, what do they know that we don’t? It is this fear of missing out that causes investors to make irrational decisions.
It is ironic though as following the market will likely inflict the maximum pain on investors as many individual investors miss the start of the trend and make their decisions too late. For instance, buying at the peak of the market or selling after a big loss has already occurred.
This is the concept of herd behaviour, as the problem with being a follower is that the leaders are the ones that will make the money while the followers are making their decision too late. This is how bubbles are formed as well as when investors are buying an over demanded asset, it will cause the prices to increase above their long-term averages which is normally the point the average investor buys in to the market.
To avoid this there are two simple things that you can do. The first is ignoring the crowd and focusing on your investment strategy. The second is to implement contrarian investing - buying when people are fearful and selling when people are confident. This is one of Warren Buffets favourite tips for investors.
4) Analysis paralysis – Diminishing marginal returns
When deciding to invest, you have thousands of shares to choose from and almost as many managed funds and ETFs to sort through. This can cause investors to seemingly research ideas and different investment options forever.
At some point though, if you wish to make money through investing you are required to ''pull the trigger,'' so to speak. Researching investments is great, but over researching will cause a lot of investors to never actually enter the market as there is always one more investment to research before making a decision.
It is important to research investments, however there is a difference between selecting one investment that meets your need and trying to research 100 different investments that are all relatively similar. There is a concept call Diminishing Marginal Returns. This states that the longer you spend doing a task, the lower the results for each unit of time spent are after a certain point. Think about if you know nothing about cars. You spend a day learning about how they work. You may now know 50 percent of things about cars. You spend another day, you may know another 25 percent. You spend a third day and only know another 10 percent. After a certain point, every day you spend researching will only yield minor increases in knowledge.
Based on this, the more time spent researching doesn’t lead to better decisions. To avoid this, firstly focus on what your outcome is. If you are after long term growth, maybe research a few of the leading growth ETFs and then purchasing one or two. It is a better way than trying to research every share that the ETF holds, which would take your research from 2 two options to up to 300 in some cases.
It may feel uncomfortable but just pull the trigger as it is better to be invested in quality assets than trying to research the next big win.
Hopefully learning about these behaviours will help your stick to your long-term investment plans. Historically, markets will always have negative periods. All that matters is that in the long run they have greater positive periods than negative and to stick to the plan!
If you take 100% responsibility for your own life, you are more in control of your success than if things just happen to you. But what is success and how do you reach it?
In this episode, we run through finding your purpose and coming up with a clear idea about what you want to achieve in life. This is what you are responsible for to make real and how you can define success for yourself. This doesn’t have to be purely financial, but ranges in any area you want; your finances, relationships, health and free time.
It is important to find your purpose as if you don’t know what you want, it is impossible to get it.
This starts off with the question of ‘what is the meaning of life?’. You can ask Siri and you will likely get a smart-ass answer, like chocolate. There is no one overall meaning to life except to exist and eventually die. But there is a meaning to your life. You just need to find it and live up to your potential.
To get your purpose, you need to decide what you want and what is important. You have to Be clear why you are here!
It is said that The Australian dream is to buy a house which will lead to a better quality of life. Pretty simple, right? Buy a house and be happy. Buying a house is great, but it won’t really provide financial security or happiness.
This is a societal norm, which is slowly changing. The house affordability issue is killing this dream for many. Most people spend their lives conforming in to societal dreams like this. Programming in life slowly changes our real purposes to conform to the new social norms. This leads to taking actions in life which will get the approval of others rather than ourselves.
We are told from childhood the word ‘no’ and ‘don’t do that’. While this was said to help protect us, it has led to crushing dreams.
While conformity has been important in evolution (by not sticking out and getting ousted by the tribe), it has lead into conforming to a normal level of life or living someone else’s dreams.
Just remember, if you aren’t working towards your dreams, you are working towards someone else’s!
This is why you need a reason to get out of bed in the morning which is your purpose. If you have this purpose, something to work for, you will be successful and happier along the way.
What is your purpose?
By now, hopefully you are convinced of the importance of finding your purpose. So how do you find out why you are here? To figure this out requires a bit of brain storming.
First, you need to write some lists of things that are important in your life. At the top of a blank piece of paper, write the following three headings:
- I care about
- What I am great at
- I love doing
Draw two lines down the page to make 3 columns under each heading. Then write 20 things for each under each heading. 20 for what you care about, 20 about what you love doing and 20 for what you are great at.
For those who are entrepreneurial, you can use the things in the the what I love doing category and ask, “how I can make a living off this”? You can use this to determine what you can make a living off, but we will cover this in a later episode.
Now that you have 60 things on the page, beside each one put a plus or minus against it. If it is something you really enjoy or are great at, put a plus against it. If it is something that you just put in there to make up the numbers, put a minus sign against it.
Now, with the three categories, write another list with only the things with a plus sign against them. From each section of; what I care about, what I am great at, what I love doing, select two things from each category. This will leave you with 6 things in total.
You might find that the things you are great at are the things that you love doing, because you care about them! It is common to see this sort of overlap as generally, if you enjoy doing something, you are normally pretty good at it! Also, if you are great at something you can use that to your advantage. There is a thing of general knowledge versus specialised knowledge.
This is how you find your purpose in life. It will take some playing around with to get right. Be honest with yourself.
For example, here are a few from my list: I care about: Making a difference in lives, I am great at: personal finance, I enjoy doing: Teaching
From these, I built my first purpose statement for myself: ‘I will help others by teaching personal finance’, so I started teaching personal finance courses. Then that led to the Rentvesting Podcast and now to Self Made Millennials.
You need to use language that suits you as well! This is a personal mission for you, so make it personal.
It really is that simple and needs to be refined over time, but what is really important is action. Taking action towards your purpose will be the difference between following your purpose versus following someone else’s. We will cover off on the action steps in the next episode.
Once you have your purpose statement, you need to know what you want out of it: This will be covered in the next episode. We will cover off getting the vision right and start achieving it!
In summary, you need to be clear why you are here and you need to get your purpose ingrained into you. You can sit around pondering what is the meaning of life, but it is much easier to find the meaning of your life.
So go find what is the purpose of your life and be on purpose!
This week, we build on this through taking 100% responsibility for your life!
To be successful you need to be 100% responsible for your own life. Ask yourself this question: Who is in control of your current situation of income, debts, relationships? Is it Politicians, your boss, your spouse or parents?
It is a common thinking among a lot of people that they are entitled to a great life, great relationships, health, incomes and always being happy. This couldn’t be further from the truth. Everything great in life needs work to achieve. So, what happens when we fail to live the life we dream of? We turn to blame – blaming the Government our family member and even ourselves.
It is a bit like drinking too much and then throwing up and blaming food poisoning. Even blaming alcohol as the cause isn’t true. The alcohol didn’t force its way in to you. Most people make the conscious (then unconcise after drinking) choice to drink.
To have a great life it takes work which we are 100% responsible for. The sooner we realise that every decision we have made has led us to where we are (incomes, debts, etc), the sooner that these can be changed. In reality, your thoughts and actions are the only thing in life you can control 100%. You can’t control the weather, the Economy or day turning to night but you can control the quality of life you have.
The past is the past. All that matters now is that from this point forward you choose—that’s right, it’s a choice—you chose to act as if you are 100% responsible for everything that happens to you.
You have the power to make your life different and to produce your desired result. For whatever reason—not knowing what to do, fear, not wanting to be outside of your comfort zone—you chose not to exercise that power.
Every great successful person preaches about this. Jack Canfield, the author of the Success Principles was the first person I head this from.
We normally own our wins as by claiming responsibility here, but rarely do we do this when something bad happens. I’m not saying bad things don’t happen, like cancer or car accidents. But the majority of your conditions are self-created, so if you have constructed them you can reconstruct them.
How to start taking 100% responsibility:
Step 1) Give up all excuses – To take 100% responsibility you have to stop playing the victim. Don’t make excuses as to why you haven’t done something, just give them up. It takes a lot of less mental energy by giving excuses up. They don’t matter. Past is the past.
That means giving up all your excuses, all your victim stories, all the reason why you can’t and why you haven’t up until now, and all your blaming of outside circumstances. You have to give them all up forever.
Jack Canfield has an equation on getting the best outcomes in life: Event + Response = Outcome
This equation says that every outcome in life is a result of your response to any event. If you don’t like the outcomes you are getting you normally go straight to the event as the reason for failure. This results in the common response in doing nothing except making an excuse or complaining.
You can’t control the event, but you can control your response which leads to a better outcome.
Successful people wouldn’t be where they are if they let their excuses take control. We normally defend ourselves with excuses which is natural but instead, if something doesn’t turn out as planned, ask yourself, “What do I need to do differently next time to get the result I want?”.
Blaming and excuses are a waste of time. It may make you feel better in the short term, but it doesn’t solve the problem and takes away energy.
Step 2) Change your response - This step comes back to getting in the right mindset as this is a habit which takes time to change. To do this you need to regain control over your mindset which will determine your behaviours in responses to the event. The first question should be “what can be done to get the best outcome?”.
If you get stuck in a traffic jam, normally people have two responses: ‘I hate this traffic, this sucks’ or ‘It isn’t a big deal in the grand scheme of things’. One will lead to a better outcome than the other by reducing your anger at the situation. If the traffic was the problem, then everyone would have had the same response, but as you can respond in the way you want, you can get a better outcome.
It is important to change your responses if your current ones aren’t getting you the outcomes you are after. If you continue the same behaviour (responses) then you get the same results.
Step 3) Give up complaining!
We are all guilty of complaining, either voicing complaints to others or mumbling them to ourselves.
The truth is that we complain about events that we know can yield a better outcome than our current situation. We don’t complain about things that just exist. For instance, we don’t complain about gravity being gravity. To give up complaining, change is needed in your response.
We normally don’t though as changing a response can be uncomfortable. People may judge you but who cares? It will take effort but it is worth it!
Complaining is pointless in most situations as we normally complain to the wrong people anyway. You will complain about your partner to your friends, about your boss to other employees. We never talk to the person we have the issues with.
A strategy to help give up complaining is to use a Complaining jar. Every time you find yourself complaining, put some money in a jar. This helps anchor a change in habit which should help you give up complaining. Then you can also use this money as forced savings. Win win!
Overall, taking 100% responsibility makes life simpler. If you accept that you have 100% responsibility, therefore control you can become the master of your own success.
Just remember that the world doesn’t owe you anything, you have to create it!
This is the first episode of many in a series called ‘the steps to success’.
What is success?
Everyone has an idea about what success means to them. What we will be talking about here is success on all areas of your life. This includes the level of your achievements, the results you produce, the quality of your relationships, the state of your health and physical fitness, your income, your net worth, your happiness or anything that is important to you!
This is not easy.
Over the next few episodes we will break down the key elements which have been proven to deliver great success in people lives. Hopefully you will gain a lot of knowledge through this series. They say that knowledge is power, however I slightly disagree. You can have all the knowledge in the world, but if you do nothing with it then it is useless.
This is why I want to give you the practical tools as well to use the knowledge gained in this series to make an impact.
So, what causes success? Intelligence, drive, taking risks or luck? I thought that surely these would be what it takes. However, Stanford Psychologist found that the predictor of success in life is someone’s Mindset.
Today, we start with the first building block – which is your Mindset!
The first step to overall success requires getting the right mindset!
When I first heard this years ago, I was sceptical. I was doing a lot of research into key elements of success and mindset kept coming up.
Mindset determines your view of yourself and the world. But, why is viewing the world differently important, isn’t it what you do that matters? This is very correct, but your mindset controls what you do and how you act in most cases such as failures or setbacks.
What is a mindset? Basically, it is the sum of knowledge and experiences to this point in your life. So, you have spent you whole life to develop your current mindset. If you think the world is awful, you will have an awful life.
We see a lot of information now with the internet. This is great as you can access all the information you could ever want, however a lot of information we see is negative. News story are typically negative so seeing the news of 7 billion people can be overwhelming.
Seeing more negative information over time will slowly seep into your mindset.
There is a theory created by an Anthropologist called Dunbar’s number. This is meant to be the number of people we can maintain a stable relationship with, which is only 150. So even taking in the news feed from your Facebook friends can exceed this.
There are two types of mindsets: People either have a Fixed or Growth mindsets, or sometimes a little bit of both depending on the situation.
If you were to try sometime new, your fixed mindset would say; ‘What if you fail?’ Or ‘I can’t do that!’. Your Growth mindset would say; ‘Everyone fails, if I do I can learn from it so how can I do it?’.
The way you interact with you Mindset is your internal voice. On average, we speak about 125 words per minute. We can listen to around 400-500 words per minute. However, we can think to ourselves around 1,300 words per minute. Based on this, you technically talk to yourself more than anyone. So, if you have a negative internal voice you have a negative mindset as on average you will put yourself down.
Now that we have run through the basics, here are the steps to change your mindset:
1) Learn to hear your inner voice.
The first step is to pay attention. Your mind is a bundle of thoughts and interpretations which form your mindset. It is hard to change your inner voice if you don’t know what it is saying. If it is being negative then it is important to first realise this before any change can be made.
Take a journal of your thoughts every day for a week. Just write it down on your phone if you think something negative.
2) Examine your current beliefs and track what you talk to yourself about!
We all have beliefs. Beliefs about ourselves, our place in the world and the world itself. Along with our good beliefs, we have self-limiting beliefs as well.
Some self-limiting beliefs are around money. Through your own upbringing and relationship with money, you can develop a limiting belief to money. What is money anyway? It is simply a median of exchange. Should it change the way you think? Well hopefully it doesn’t because there is nothing bad about it, it allows you to do more.
It’s about what you do, not the money you have.
We also have self-limiting beliefs about ourselves. This comes back to that internal voice we were discussing earlier. Think about the way you talk to yourself. If you make a mistake, do you just blame yourself, or do you think about how it can be avoided in the future?
Belief in yourself is important. This helps determine what you think is true and possible. Believe you can do anything you want!
3) Recognise that you have a choice.
How you react to any situation is a choice. Therefore, you have a choice to change your mindset and the way you think. While your current mindset has crept up on you due to life experiences, you can still change this. This doesn’t happen overnight. In fact, this will be the topic of the next podcast on taking 100% responsibility.
Choose growth and believe you can.
4) Talk back to your negative thoughts!
If your internal voice is negative then talk back to it with something positive. Think of it as a debate against yourself. Your negative thoughts make a point and it is up to the positive thoughts to rebut, not the other way around.
You have to also align with your vision, purpose and goals which will be covered in another episode.
5) Try to avoid negative information.
If you start taking in positive information, eventually your brain will filter this and will reflect in your outlook on life! Cut out any negative news or gossip from your life.
PS Sorry for the poor audio quality in this episode! My normal microphone broke so had to use a backup. The next episode will be better quality!
Welcome to the podcast helping to create happier and wealthier Millennials! If you are a Millennial looking to kick ass in life then this is the podcast for you!