How I Became An Investor

It Wasn't By Accident, But It Wasn't Planned Either

I'm not a great investor. I'm no Warren Buffett or Charlie Munger. My portfolio would tell you that. At best, I'm a speculative kind of investor putting in small amounts to long shots and long positions. I do it the way I do it because it works for me. I came to this in the wake of the GFC like somebody taking up a craft . If you read back this blog all the way back to August 2007, you'll see the early inklings of me thinking about how low the market will go as a result of the unfolding financial crisis. I followed the indices all the way down to the bottom, which turned out to be March 2009, and it was then that I bought my first shares through my bank's website. 

Prior to that I only saw the Dow Jones and All Ordinaries and all the other indices on the news and paid scant attention to them, except for the big falls. The notable big falls in my youth were in October 1987 and 1989, and then the Dot-Com Bubble in 2000. Each time I would see the indices do a swan dive and wonder about the people with money in the markets and how they felt watching their holdings lose 20-30% of their value. Then I noticed something weird. A few months after the Dot Com Bubble burst and indices went south, the All Ordinaries in Australia were going for about 30% up from the previous peak. And realised a fundamental truth about markets - that they are volatile and if you can work around that, you could may be make some money. 

So when the GFC bottomed out in March 2009, I was able to pluck up some courage and start buying because I could easily figure the bottom was indeed the bottom. The rest of it weirdly, was all upside. 

All this happened a decade before Meme stocks, Robin Hood and Equity Bros and Spending the Stimmies on Stonks. Like the bros that started with USD600 stimulus cheques, I started with about AUD1000 and dicked around buying and selling stuff. I got to the first 10k on the back of a company called Boart Longyear and promptly lost half of it thanks to the end of the mining boom. I learnt a few tough lessons about the hot money that flows in and out of Australia on a seasonal basis, and I learned that no stock is safe from sudden turns in fortune.  

At the end of the day, putting money in equities as an activity is mostly about speculation. I might think I'm investing and there are moments where it looks like investing, yet in essence I'm placing bets on people, things, and money.  I'm not exactly gambling rent, but there are days I feel like maybe I am just gambling at the Casino Capitalism. 

The Speculative Impulse

I've had time to ponder the nature of my own spec-i-ness (so to speak).

When I was young I lived in Western Australia. We didn't play Cops and Robbers or Cowboys and Indians as we roamed the newly developing suburbs. Instead we played this game called Gold Miners. The idea was to find a mound of sand - these seemed to be everywhere where they were building a house - and we would "stake a claim", then start digging into the pile of sand. And at an appropriate moment somebody would yell "gold!" and hold up his hand holding some stone he found. We would all gather around him and slap him on the back and 'celebrate' with a big cheer. It's quite absurd when I look back on it, but we used to do it after school every day. Consequently I never really wanted to be a Cop or a Cowboy with a gun. But I always wanted to try my hand at a gold field. 

When I think about it, my whole life's been kind of speculative choices made, one after the other. I've never been in love with the daily grind of going to work to do the same thing day after day. I quit university to play in a rock band - and people don't do that unless they're speculating on success. Same with my time at Film School. I chucked in my regular paying job at the ABC to go be a film maker in the hopes that I'd end up successful as Steven Spielberg. My innate spec-i-ness has featured in all these bad decisions. Even today I think up harebrained ideas for start ups and angles on things. In a way, playing the markets is very tame as a preoccupation, especially since I only play with my own money. It has certainly cured me of wanting to play at casinos. 

I don't recommend these kinds of life choices to people. The share market is for a certain kind of fool. Some people are wired for the real estate market, others are for bonds, and others still are for cryptocurrencies or antiques or art or collectibles. Each to their own - I'm not arguing in favour of equities. For equities, you need a bit of optimism, intuition and an eye for a narrative. Details are important, but then, there's nothing on the planet where the details don't matter. I like equities more than real estate simply because your time frames are shorter and moving in and out of positions is easier. If you have a rental property and it turns 5% p.a., and you get your negative gearing going, sure that could be attractive with the ever-rising real estate market, but you don't really know how much that capital gain is until you sell it, and selling it is a pain in the ass. In some ways you're better off just having bank shares that pay a 5% dividend and ride the capital gains. At least you can see just how much the capital gains are every day as a concrete number. 

Where Are We Now?

The markets this year have been choppy. May, June and July gave me heartburn. Even then I had this stubborn faith that things would turn around simply because the flow of hot money does that. Every year, the hot money flows out of Australia in April, and then mysterious arrives back for the late year run towards a Santa Rally. After a while you get a feel for these things. Sure enough, things have been heading up again since the new financial year. That's a new pattern. The pick up used to be from mid-August or so. 

We're in a strange kind of race this year. One part of the race is to get through the reporting season with all the good consumer spending showing up as profits. That makes everybody feel good and shares go up. One part is this business in Russia and Ukraine. Thanks tot the war and the sanctions, supply chains have been screwed up beyond repair. This has led to a supply-side inflation that is prompting rises in interest rates so everybody is looking to see what the US Fed will do in October. The other race is to do with China and its bursting property bubble. They will try and re-inflate it with more debt but God only knows if that would even work. It's not a fix for what ails them. So after 13 years of everybody banging on about the Chinese property bubble, we'll finally see what impact the burst Chinese Bubble will have on the world economy. On the one hand there are reasons for bourses to go high well into later this year. On the other hand there are reasons why they could collapse. All those reasons seem to converge in late October. 

If I put on my realist hat, I would say the US markets will be good until it decides to freak out about interest rates; but then it freaked out abut inflation and how the Fed wouldn't move initially, so that's not saying much. The war in Ukraine will necessarily drag on into winter. There are no choices there, good or bad. And realistically Xi Jinping will win his third term as China's paramount leader, and probably turn on the money spigot to rescue his economy. When you add that together, we'll probably just muddle through. People are complaining it will be like the 1970s again with stagflation. If only. I'd take a Jimmy Carter Leonid Brezhnev kind of world over whatever the hell is happening with Biden, Trump, Putin, and Xi. I'm telling you, things were peaceful back then. 

Raven Runs

Ever-Grander Fears

Buy now you've heard about this Evergrande situation where this Chinese real estate developer owes USD 305 billion as it starts to default on some of its bonds.Beijing insists that even if it should default, it won't become a contain to affect global markets. A proper cynic would say, "of course they would say that."

There are two things that really worry me in this situation. One is that Evergrande is not going to be bailed out in anyway by the government because the CCP government intends to make an example out of it. It might be unwise to ignore the significance of letting Evergrande fail or implode. We only have to think back to the Bear Stearns moment during the GFC. That led to a bunch of other moments of sheer financial anguish and terror right up to and beyond the Lehman Shock. The point is, Bear Stearns didn't fail alone. When the tide went out, a lot of firms were exposed without their metaphorical pants on. The noises coming out of Beijing seem to indicate they're not thinking about this as a market problem, they're thinking about this as political problem because to the CCP all problems are political problems. 

So that leads me to think Evergrande and its pile of debt isn't out there on its own. There is a whole flotilla of these kinds of companies, each owing way too much money. The total size of this debt in the real estate  sector in China is pegged to be between USD 50-60 Trillion. The China's GDP is USD 16.6 Trillion

In other words, this thing is huge enough to swallow up China's economy. The calming words of China's central bank is no panacea to the pile of risk. With all due respect, it's a big pile. Evergrande might end up being the only company that goes under in this bubble-bursting moment. Something tells me that would be way too optimistic. Chances are better than even the whole sector in China will be on the receiving end of the stick. If there's no contagion to the globe, that's one thing - but there's no assurance there won't be a contagion of sell orders in China. This could become a massive market crash "with Chinese characteristics".  

The second thing that really has me worried is that the Renminbi is pegged to the USD. This is good for China because it will probably stop a currency crisis from blowing up during the debt crisis for which they have lit their fuse to blow up. It's certainly wonderful for them that their astronomical debt is denominated in USD and so, while it is pegged, cannot blow out against the USD. But it also means it commits the test of the world to be dragged in by the unfolding debt crisis. Instead of China's Renminbi collapsing in value, it will stay pegged to the USD - and through the pressure it puts on the USD, we will feel it everywhere on the globe. This isn't Greece with its GDP of USD 200 billion which cause so much heartburn during the last decade. This is China doing the dragging. It's going to weight everybody down. 

Happy days, no? Some think this won't be the Minsky Moment for the globe. Sure, easy to say. Yet here's another thing on top of all the above. The US markets are ready for another 'Taper Tantrum'. The FRB is trying to taper back the stimulus and rate cuts it brought in to bolster the markets during the pandemic. Just as it happened in the wake of the GFC, the markets have sent signals to the effect it does not like the taper. Combine it with the fact that we're in October, the month of crashes - c.f. 1929, 1987, 1989, 2007, and with the last week of October looming (when these crashes tend to happen), you're made to ponder if you're staring at the crest of the giant wave that's about to break. Is this the moment the global property bubble comes unstuck? And what is that going to do to the economy?

The deferred Evergrande coupon payment date from 25 September comes up Monday next week. The tea leaves say they'll probably default. The FRB will meet on 2nd November. In between those 2 dates, there's a solid week for things to go pear-shaped. Hold on to your hats. 

Come Join The Fun!

News That's Fit To Punt - 08/Jul/2015

The Optimists' Corner

The really funny thing is that when things are going wildly in a bad direction, somebody will come up with a contrary opinion in wildly the opposite direction. It's hard to fathom it, but on a day where the Shanghai index had to suspend trade on 40% of their blue chip firms to stop people trying to squeeze out the door at the same time, Goldman Sachs said that it sees no bubble in the Chinese equity markets.

Goldman Sachs is sticking with its optimistic forecast in the face of record foreign outflows, the biggest-ever selloff by Chinese margin traders and a chorus of bubble warnings from international peers. The call hinges on the success of unprecedented government efforts to revive confidence among individual investors who watched equity values tumble by 3.2 trillion over the past three weeks. 

"It's not in a bubble yet," Lau said in an interview. "China's government has a lot of tools to support the market." 

Lau, who set his CSI 300 target on July 1, confirmed on Tuesday that the projection still stands. He's been forecasting gains in Chinese shares for much of the past year, a stance that paid off as the CSI 300 surged to a seven-year high last month.

Heck, they may be right. Maybe there will be an almighty bounce soon, what with China's government pumping in liquidity, but... there's just this chart here:

...which sort of paints a picture of how these kinds of things don't work out too well. 

Just to be sure, I sort of poked Roger in HK who - as his living - gives investment advice to the stupendously rich in Asia. To which he replied:

The Chinese can't go to the Macau casinos because of govt crackdown on corruption, so the money's gotta go somewhere. It's like one big wet market where you can get leverage financing. Buy10 bananas for the price of one now and pay later? Yeah give me a hundred!

After lunch, he sent back two phrases. The first, as the market opened was, "Meltdown". A few hours later he told me "It's a Bloodbath." I told him to tell his clients to BTFD ("Buy The Fucken Dips"). I only got a smiley-emoticon back. I'm sure Roger's laughing-out-loudly, because that's his natural nervous reaction to anything out of the ordinary.  

The other wildly optimistic article was this one that said there is no housing bubble, Australian property prices were 30% undervalued. 

What has changed since then is that real long-term interest rates have fallen substantially. That fall made housing more attractive relative to renting, despite the increase in prices." 

Dr Tulip and his co-researcher compared the cost of renting and buying identical properties, avoiding the common trap of comparing national average rents with national average prices. Because owned homes are typically "bigger and nicer" than rented homes, a lot of the apparent price difference reflects a quality difference. 

They calculated the annual cost of a bought home from the purchase price, the transaction cost, the expected mortgage rate and the running and depreciation costs offset by expected capital gains. 

The annual cost of owning a home bought in April was likely to be 2.7 per cent of its value. The annual cost of renting the same home was likely to be 3.9 per cent. 

"So you can either pay 2.7 per cent of the value of the property to buy, or you can pay 3.9 per cent of the value to rent," Dr Tulip told the conference.
"The undervaluation is 30 per cent. 

"It's unusually wide, the widest in at least 30 years. I can take you back further but the data quality deteriorates the further we go back.

Ri-i-i-ight. I can follow the maths where 3.9% is 30% over 2.7%. But this is based on TwIRP. I wonder what it would look like under ZIRP - probably even better. Mathematically speaking, the gap would open up even wider as interest rates asymptotically reached towards Zero. While mathematically being true, you sort of wonder whether the real world economics would reflect such calculations. When we get down to ZIRP, we may no longer have banks that are willing to lend to people wanting to buy multimillion dollar homes as their first homes, given that the economy is at a zero-sum game. 

Anyway, I just thought you'd be amused by those two wildly optimistic views of what we are looking at: a market crash in China and a property bubble in Australia.

The 'Greferendum', Revisited

Walk-off HBP thinks this one's a bit alarmist, but it contains some really interesting information that is a little disturbing. 

Greek premier Alexis Tsipras never expected to win Sunday's referendum on EMU bail-out terms, let alone to preside over a blazing national revolt against foreign control.

He called the snap vote with the expectation - and intention - of losing it. The plan was to put up a good fight, accept honourable defeat, and hand over the keys of the Maximos Mansion, leaving it to others to implement the June 25 "ultimatum" and suffer the opprobrium.

This ultimatum came as a shock to the Greek cabinet. They thought they were on the cusp of a deal, bad though it was. Mr Tsipras had already made the decision to acquiesce to austerity demands, recognizing that Syriza had failed to bring about a debtors' cartel of southern EMU states and had seriously misjudged the mood across the eurozone.

Instead they were confronted with a text from the creditors that upped the ante, demanding a rise in VAT on tourist hotels from 7pc (de facto) to 23pc at a single stroke.

Creditors insisted on further pension cuts of 1pc of GDP by next year and a phase out of welfare assistance (EKAS) for poorer pensioners, even though pensions have already been cut by 44pc.

They insisted on fiscal tightening equal to 2pc of GDP in an economy reeling from six years of depression and devastating hysteresis. They offered no debt relief. The Europeans intervened behind the scenes to suppress a report by the International Monetary Fund validating Greece's claim that its debt is "unsustainable". The IMF concluded that the country not only needs a 30pc haircut to restore viability, but also €52bn of fresh money to claw its way out of crisis.
They rejected Greek plans to work with the OECD on market reforms, and with the International Labour Organisation on collective bargaining laws. They stuck rigidly to their script, refusing to recognise in any way that their own Dickensian prescriptions have been discredited by economists from across the world.

"They just didn't want us to sign. They had already decided to push us out," said the now-departed finance minister Yanis Varoufakis.

So Syriza called the referendum. To their consternation, they won, igniting the great Greek revolt of 2015, the moment when the people finally issued a primal scream, daubed their war paint, and formed the hoplite phalanx.

Mr Tsipras is now trapped by his success. "The referendum has its own dynamic. People will revolt if he comes back from Brussels with a shoddy compromise," said Costas Lapavitsas, a Syriza MP.

"Tsipras doesn't want to take the path of Grexit, but I think he realizes that this is now what lies straight ahead of him," he said.

Holy cow. So basically, the Euro creditors do want a Grexit, and sent terms that would be rejected by Greece and stuck to their guns. Tsipras didn't want to go to a Grexit so when he called a referendum, he was hoping to 'lose' to a 'yes' vote and use that as a catalyst to take Syriza out of government and the ongoing non-negotiations. But of course, the 'No' vote won which meant that Tsipras wasn't able to get his ticket to get out of the ongoing non-negotiations and had to head back. This explains Varoufakis' exit better, and how on Monday a new Finance Minister arrived Brussels without a plan. Yep. The Greek cabinet war gamed the Grexit and didn't like what they saw, so they tried to get back to Brussels with a white flag, but of course, there can't be a plan because they didn't expect the 'No' vote to win so resoundingly. 

Knowing all this now makes me more frightened. Thanks to both Greece and China, commodities have tanked as has the AUD. We may well not notice it immediately, but our balance of payments got worse by default in Australia. All this stuffs made us collectively poorer, and it's just the beginning. Economists are now readjusting the RBA outlook, thinking there's more than likely a interest rate cut coming. If it does, well, so much for TwIRP. 

From The Headlines

26 Year Worst Drop

Ouch. That's all the gains for 2007 being wiped of in the first 3 weeks of Jan. Did I hear 'Bear Market'?
...And there's no end in sight!

Tom Cruise Is Likened To A Top Nazi

There's this bit here that's being reported:

Respected German historian Guido Knopp has compared a speech by US actor Tom Cruise to the Church of Scientology with a call to war by Nazi propaganda minister Joseph Goebbels.

Knopp, an expert on World War II history, said in an interview with Bild newspaper: "Tom Cruise's manner calls to mind Goebbels."

The historian was commenting on a video recording of a rousing sermon Cruise delivered to fellow Scientology members four years ago that was recently posted on the internet.

The Mission Impossible star is seen asking fellow members of the church: "Should we clean this place up?"

Knopp said it was bound to remind Germans of Goebbels's notorious call for "total war" issued in Berlin on February 18, 1943.

"It is possible that the way in which Cruise speaks is common in many empowerment circles in the United States," he said.

"But the scene in which Cruise asks if the Scientologists should clean up the world and they all respond 'yes' will remind any German with an interest in history of Goebbels's infamous Sports Palace speech."

Cruise's portrayal of Nazi resistance hero Claus Schenk von Stauffenberg, an aristocrat who led a failed plot to assassinate Adolf Hitler in 1944, has caused unhappiness in Germany because of the actor's links to Scientology.

It's a convoluted world we live in. The cut on Tom's NAZI uniform looks much better than the real thing worn by Goebbels.