1997

I feel that 1997 might be a good analogy to 2025. After an aborted recession in 1994 (2022) the stock market went up strongly in both 1995 (2023) and 1996 (2024). But when I left the US in 1996 for Australia the mood was that the economy was struggling and maybe another recession was coming. There was also a feeling that the stockmarket was overvalued. Alan Greenspan first mentioned "irrational exuberance" in December 1996. But the stockmarket, or at least tech stocks, went up for three more years to crazy heights in 1999 (2027) before the tech wreck. Then the boom was mainly internet related stocks, now AI and maybe quantum computing. Oscar Carboni, who is very slightly older than me, often says: "This boom is just getting started." 

So, does that mean we should go all-in on tech stocks? There are no guarantees, and so I always diversify. My largest exposures to tech are through my venture capital exposures. If I am right, venture capital should do well for a while and maybe we can get some exits. And then I have WCM Global (WCMQ.AX), Generation Global, and Hearts and Minds (HM1.AX). Pershing Square Holdings (PSH.L) has investments in Google and Uber. Unisuper has some exposure through the Sustainable Balanced Option I am mainly invested in. But overall it would only add up to around 15% of net worth (and less of gross assets). On the other hand I have 18% of net worth in crypto-related assets that tend to move with tech stocks. Given that, perhaps my exposure is big enough?

The Banana Zone

So I wore this shirt to lunch with a couple of friends today:

After the first friend left, I was saying how I hated buying clothes (because it is hard to get stuff that fits), but the shirt I was wearing was new. So, he asked me about the Banana Zone. After I explained, he asked whether he should invest some of the extra money he wanted to put into superannuation earlier or wait for the end of the financial year. I told him that it really mostly applied to cryptocurrency. He mentioned that he was trying to reach the transfer balance cap. I said: "I've gone over that". He was surprised as I had only had $1.6 million when we had recently discussed this.* "What did you do?" "Cryptocurrency!" Then he was like: "You need to sell now, Warren Buffett would never do that." (I'm paraphrasing). I said that I did plan to sell this year... "Why are you making such risky late moves?" "To buy a $4 million house".

The $4 million house is an inside joke. We recently visited our friends' newly built house that was mentioned in the linked blogpost. It cost them a total of $4 million in the end, but probably isn't worth as much now. Buying and knocking down an existing house destroys value and property prices at the high end here have softened.

* At that time, I said I didn't want to make much more in non-concessional contributions, as I'd probably hit the transfer balance cap by investment gains anyway, and Labor's plan to tax balances over $3 million was looming.

Relative Wealth

Take all the bitcoin in the world and divide by the number of people - how much is an equal share? About 0.0025. Similarly, an equal share of the world's mined gold is about 0.8 ounces. Our family of four people has about 400 times its equal share of bitcoin and 50 times its equal share of gold currently. The dollar value of our gold holding is about 1.5 times our bitcoin holding.

New I Will Teach You to be Rich Podcast

 

 

Ramit Sethi has started a podcast titled of course: "I Will Teach You to be Rich" and subtitled: "Real money stories from behind closed doors".  It's like a couples therapy session with Ramit as counsellor. It's great, but often the numbers don't seem to add up. For example, this couple makes USD 250k between them. Let's take off 1/3 for taxes etc. They say they spend just over 10% on housing and save 20%. They have "very low expenses". The guy scrimps and saves on everything. But, apart from what I listed, they would have to have another USD 90k in expenses. That's near what our family of four spends on everything including housing and private school and daycare. So, what is really going on here? Does the woman spend a lot of that on her own outside the household budget stuff? So this doesn't sound like "very low expenses" to me.

Planning Permission Refused

I got an email today from the city planning office that the development in our neighbourhood that I had objected to was refused planning permission. The plan violated many individual rules, but basically the developers were trying to cram too much development into a small space. They planned on 56 town houses and commercial space and 12 apartments in a 5 storey building. The development occupies the two greenish blocks on the map:

You can see the size of townhouses and houses in the neighboring development (yes, we live there) to get an idea of how crammed this development was planned to be.

I objected to the height of the 5 storey building, which we would see from the front of our house, largely blocking our existing view to a wooded hill. Only 7 members of the public had filed written objections to the original plan despite wide advertising by the government of the application and consultation sessions in the neighborhood. I was the only person who wrote an objection against the revised plan the developers submitted.

I have been surprised how much work the developers have been doing on site. Apart from demolishing the existing office buildings, they have done most the excavation for underground car parks and then started building individual underground garages for the townhouses on the east of the site. They also recently installed a big yellow tower crane on site. How could they submit a plan that violated so many rules and then invest so much money on the basis of such a flawed plan. Will they have to change the work they have already done or will they get away with it? They have a month to appeal the decision, or they will need to submit a new plan.

Likely Political and Economic Scenario for Australia

A couple of days ago I posted a list of all 12 of Labor's proposed tax increases. How likely is it that these will actually be enacted? Labor is unlikely to gain control of the Senate. So, they will need the support of minor parties and independents to push through their program. A quite likely scenario is that there will be a recession in 2020 and the minor parties will be very resistant to raising taxes in those conditions, especially on housing. Or Labor will decide to postpone some of the proposals in reaction to a recession. Then Labor is likely to not be re-elected in 3 years if unemployment is rising etc. So, at this point I would put even odds on most of this agenda being enacted.

What's Your Forecast for the Stock Market?

My brother asked me what my forecast for the stock market was. Here is what I wrote to him:

"Well, I’ve been surprised how weak it has been recently, particularly in December, which you may have heard is so far the worst December in US stock markets since 1931. December is a seasonally strong month as is January. The US economy has been strong though house prices have been falling in many places, presumably due to the Fed raising interest rates and this seems to have been the main reason why the market is down. House prices have been falling in Sydney and Melbourne without any increase in interest rates here. Some indicators though show that the global economy could already be in recession, but I don’t know how reliable that is. The reason I was a bit surprised was it has been very predictable that before recessions the yield curve would invert (short term interest rates higher than long term). This hasn’t happened yet in the US. However, the Fed is signalling that they are going to raise interest rates by another 0.5% in 2019 which would reach an inversion probably. Stock markets tend to be leading indicators and so looks like this time it is more leading than usual. The US economic expansion is the 2nd longest in history and so presumably would come to an end some time soon (Australia hasn’t had a recession since the early 90s though…). Now we can say that the bull market ended as stocks have fallen 20%. If we look at the last two recessions and stock market crashes in the US, the stock market bottomed near the end or after the actual recession – in March 2003 and 2009. At that point the Fed will have slashed interest rates dramatically and unemployment will be high. OTOH in the 1990s the US market bottomed in October 1990, which was when the recession was only just getting underway. The Gulf War turned that around.

I did reduce my exposure to the stock market in early October, but not by enough. So, I’d probably use rallies in the market to reduce exposure more at this point. I was planning to use trading as a hedge, but I stopped trading soon after that as backtests weren’t good and I got ill and didn’t have time to work on it.

Of course, I could be completely wrong about all of this. In the last cycle I got out too early and got back in too early. Probably this time I’ll be late :)

I’m not planning on buying Australian Dollars in a hurry either, even though the current price is quite good. I’ll buy them gradually."

Exchange Traded Actively Managed Funds - the Big Deal is that Foreign Investors Can Buy Them

This Wall Street Journal article goes on about how an exchange traded managed fund like the proposed PIMCO Total Return ETF is not big deal. It is, however, a big deal to foreign investors. Only US residents can buy units in unlisted US mutual funds. But anyone can buy US stocks in the secondary market. It would be nice if there were more of these.

Payment Methods

I've recently done two small consultancies - one for an agency of the Cyprus government and one for a US government agency. The Cyprus people asked for my banking details and will make an electronic payment to my account (which happens to be in the US). This is the normal way of doing business in most of the developed world. The US people ask me to submit an invoice which doesn't include any banking information. So I guess they will send me a paper check all the way to Australia, which I will then have to mail all the way back to the US to my bank in New York. Two opportunities for it to get lost in the mail. Here in Australia, paper checks (or cheques in British) are very rarely used. Electronic payment through a number of methods is standard. While the US is on the cutting edge with many communications technologies this definitely doesn't apply to payment methods. Why is this? It seems that Americans think that asking for bank details is a sign of potential fraud. But I can't take money out of an account with just the account and branch number. So why would that be? And why aren't Australians worried about that?

Tenure

You've probably heard about Amy Bishop who shot three faculty members at the University of Albama in Huntsville after she was denied tenure. Turns out she shot her brother in 1986 in an incident that seems like was covered up as an accident but according to police who remember the event said was intentional - you don't shoot someone three times by accident with a non-automatic weapon. I maybe can see why she was denied tenure. She only published 6 papers in OK-ish journals since taking her current job. That's not much in biology. And her teaching evaluations are mostly not that good. Of course, there may be political reasons too. I've seen people with good teaching and research track records denied tenure because they didn't get on with the chairman of the department basically.

Anyway, it's amazing that someone would end up shooting people over this. I had tenure at a US university and gave it up and came back here to Australia. It was never something though that I wanted to get, though. The way the system worked I had to get it.

More Unisuper Glitches

I was actually sent a statement by Unisuper yesterday, but the glitches continue. I noticed that my account was about one month behind where it should be given the contributions that have gone in. In July, I just assumed they were behind a bit in crediting things. In preparing this month's accounts I noticed the same thing and went in to examine the transactions in detail. I found negative transactions exactly cancelling all my June contributions! They told me that they will investigate this. The average person who ignores their superannuation statement (as people have told me) would never catch this kind of thing. We can't assume that this will be automatically corrected at some stage. That this whole company seems so "buggy" I think is a sign of lack of competition. They have a monopoly over providing superannuation services in the university sector.

Annoying Changes to Australian Immigration Rules

After the previous government raised the residency requirement in Australia to 4 years from 2 for those seeking to become Australian citizens, this government has now lowered it, but only for athletes it seems. Travel rules might have been relaxed more generally for other potential migrants - details aren't clear. I'd like Snork Maiden to become an Australian citizen as fast as possible. The change to travel rules is sensible, but why should athletes wait less than others just so Australia can win more medals. It's a cynical move. They should just slash the period back to what it was for everyone who qualifies to be an Australian citizen.

Microsoft Office 2008

Because the equation feature in Word 2004 wasn't entirely compatible with with Macintosh OS 10.5 (some notation appeared incorrectly though it is fine using OS 10.4) I "upgraded" today on my university computer to Office 2008. Wo"rd seems to be fixed and looks manageable, but I found that Microsoft have completely mangled the charts feature in Excel. When you want to create a chart you no longer get a dialog box but instead the "elements gallery" expands from the top of the window you are working in. It seems that the default now is to insert the chart into the worksheet that is currently open (something I never do, I always put the chart in its own sheet). So then you have to move it to its own sheet. That is still tolerable though annoying. But then I found that Microsoft have disabled the "size with window" command. The menu item is still there but does nothing and is slated to be removed. Trying to expand the chart myself by dragging its border resulted in a mangled mess. I'm going to have to go back to Excel 2004. Seems I'm stuck with Entourage 2008 though and I may as well use Word 2008 on my laptop and office computer. So I'm going to have to run Office 2004 and 2008 together. Trouble is my laptop is not recognizing my Office 2004 CD and unfortunately I already (stupidly) deleted it from my laptop. Hopefully, my office computer has no issues with the disk (my laptop has a temperamental CD drive).

Taleb on Rebuilding Capitalism

A Black Swan in Canberra

Nicholas Taleb has an article in the Financial Times about how he thinks the capitalist system needs to be changed in the wake of the global financial crisis. Roger Nusbaum made some comments on the piece. Taleb's comments are all about making the system more resilient to shocks and some of them make sense in that regard. However, his point that people shouldn't depend on financial assets for their retirement "which they don't control" but instead on "their businesses" that "they control" is problematic. If you've read this blog you'll know that I am all for people being entrepreneurial but on the other hand not everyone is cut out to be an entrepreneur. And risk is very concentrated in most small businesses. While the owner controls management decisions they have no control over the external environment. And though an economy of many small businesses might be more resilient in the face of shocks than one with just a few large ones this isn't true of those businesses themselves. This is why small businesses are usually sold for lower multiples than large businesses. Of course there are some small businesses which are pretty solid like a medical practice, though they still have their risks. But most retail and manufacturing enterprises are at great risk from competition as well as general economic conditions. Farms are at risk from the weather and market prices.

And anyway what is the retiree supposed to do when they "retire"? Sell the business and put the money in financial assets? I guess we might consider land to be a non-financial asset, but it's not risk free either. In pre-industrial economies people could retire by renting their land out to a tenant farmer or relying on their children to feed them.

Realistically, retirement income can only be provided for most people either from financial assets of some sort or from the government taxing productive people and enterprises to pay the retirees. Not everyone has children or could depend on them to look after them. Relying on an employer to pay you a retirement income would be even more risky unless the firm invests in financial assets.

Abolishing Corporation Tax Makes More Sense

Apparently momentum is growing to abolish Australia's system of dividend imputation. In Australia companies pass on tax credits attached to their dividends to their Australian shareholders for Australian tax paid. As the corporation tax rate is 30% (note for Americans - much lower than US rates and we're worried it's too high!) a taxpayer in the 30% marginal tax bracket pays no tax on the dividend. Taxpayers in higher brackets pay 10 or 15% and taxpayers in lower brackets get a refund. Superannuation funds pay zero tax on these dividends instead of their 15% for ordinary income. If you claim expenses for holding your shares (like margin interest) you lower your effective tax rate further and boost your refund. Last year I got a nice refund due to this strategy.

Imputation is meant to avoid double taxation of dividends (the US has introduced "qualified dividends" with the same aim). The arguments against it in the article are valid. Another argument is that imputation discriminates against reinvestment in the business (or favors borrowing to invest) because credits can only be attached to dividends paid out. Australian taxpayers will favor dividends over capital gains.

Of course I would personally be disappointed by the elimination of imputation. I'd cut our allocation to Australian shares and boost our allocation to foreign shares dramatically as a result. I'm not sure that the comments in the article about this move boosting the Australian stock market are valid as most Australian shareholders would do likewise (while foreign investors would increase their allocation to Australia).

It'd make a lot more sense in my opinion to abolish corporation tax and simply tax dividends and capital gains equally in the hands of recipients. This includes foreign investors. Foreign investors currently face withholding taxes on dividends that don't have attached credits but not on so-called "franked dividends" and no tax on capital gains (though of course they may be taxed in their own country).

Why Petrol Has Gone Up in Price Though Crude Hasn't

I've noticed that petrol (gasoline) has gone up in price from a low of $A0.99 a litre ($US2.41 a gallon) to around $A1.25 a litre ($US3.04 a gallon) while the US crude oil futures contracts have gone nowhere and neither has the Australian Dollar. Even the Ford dealer tried to distract me by talking about the price of petrol when I complained about the price of Ford parts. Yahoo has an interesting article about the issue, explaining that the price of other varieties of crude oil has risen above that of West Texas Intermediate Crude, which remains depressed. Could this be a sign of economic recovery elsewhere in the world?

Why $950?

The Australian government announced its second stimulus package today. Included is a bonus payment of "up to $A950" for every worker earning less than $A100k per year. What an odd number. But the exchange rate with the U.S. Dollar is currently 63 U.S. cents to an Australian Dollar, and if you haven't guessed already, $A950 is exactly $US600, which was the amount of the "stimulus payment" in the first U.S. stimulus package.

Breaking the Buck was the Problem

A discussion of Bernanke's speech yesterday argues that it was the impact of the Lehman collapse on the Reserve Money Market Fund and the consequent run on all money market funds that caused the September-November collapse in financial markets and that the other impacts of the Lehman collapse were not significant.

Social Class and Choice

A comment I posted on "Graceful Retirement" as part of the ongoing discussion about Meg's blogposts:

"I'm not too sure about the correlation you make between being born poor and choices. Poorer parents might not have very high expectations for their children but those children's opportunities are often limited by going to bad schools and hanging out with an unambitious crowd of friends. Children who have money to back them up can do things like graduate degrees in non-professional fields, being an artist, working for NGOs etc. without worrying about increasing their net worth. So I think it cuts both ways. I grew up what I considered lower middle class in England - compared to most of my middle class friends we had a smaller house, car etc. My Mom had a degree in classics and training as a nurse (came from a working class background in Australia and studied on scholarship). My Dad came from a relatively wealthy family in Europe but was a refugee/prisoner/factory worker in the Second World War and then gradually built a career as an engineer without a formal degree. So I think we had higher social class attitudes than our actual income/wealth. My parents were definitely ambitious for us to get well educated and my Dad was somewhat concerned that we don't study something he considered useless but there wasn't big pressure to follow some particular type of career etc. I ended up as a professor - I studied geography which my Dad thought was "useless" and economics and just followed the do what you like and are good at route without worrying much about the money. My brother studied civil engineering and then later switched to computer programming."

Asian and U.S. Financial Crises

As the U.S. seems to be reaching consensus on the next stage in addressing its financial crisis I thought about another financial crisis ten to eleven years ago. The Asian financial crisis of 1997-1998 had somewhat similar causes and symptoms as the current American crisis. The main difference was the role of dollar denominated foreign loans which suddenly became much harder to repay after currencies such as the Thai Baht were devalued. The IMF response, which was much criticized at the time, was diametrically opposed to the U.S. response to its own crisis that we are seeing develop now. The IMF urged governments to cut budgets, raise interest rates, let banks fail, privatize state companies and to introduce a host of other structural reform and austerity measures that at best were irrelevant and at worst exacerbated the crisis. As a result Indonesia's GDP fell 13.5% in 1998 and deep recessions occurred in all the most affected countries.

At the time I really couldn't understand the IMF's response. It seemed that they were simply applying the same policies that they had applied, to hyperinflation in Latin America to a totally different situation. It seemed to me they only had one set of tricks they knew.

Looking at the U.S. (appropriately) doing the exact opposite of what the IMF prescribed in the Asian crisis, I don't know if we should be more angry or amused.