Archive for March, 2009

Australia’s Economic Calm Before the Storm

March 31, 2009 Leave a comment
A Perfect Storm

A Perfect Storm

The RBA now admits that Australia will enter an economic recession this year, whereas there has been evidence that the Government’s bailouts have worked in reducing mortgage stress. This was probably not the intended effect of Kevin Rudd’s stimulus packages, but certainly a win for working Australians who, in their wisdom, put the cash in the bank instead of splurging it. However it is still remarkable that the RBA thinks Australia will sail through the global recession without many scratches and bruises. How do they think this will happen?

The Rudd “stimulus” money many received was arguably an unconstitutional act and is being challenged as such in the courts (a challenge which has since failed). It also appears that the money arises from foreign borrowings, such as from China. Although Australia is not engaged in a Cold War with China, genuine questions arise as to how this all impacts on the national interest, on security financially and militarily. More and more parallels with Gough Whitlam’s era are being used to place pressure on the current Government, but few of these relate to the probable real reasons for The Dismissal. It’s not likely that Kevin Rudd will be toppled any time soon, as far as any public information indicates. Time can only tell.

What could be expected, however, is a curtailing of “freebies” this year, followed by rising inflation over the next year or two. The shear enormity of money being thrown about in North America (expansion of the money supply from $850 billion to $4 trillion) cannot go unnoticed. It is inconceivable that this kind of desperate money-printing won’t result in hyperinflation in the US, with knock-on effects abroad. It could even spell the end of the US Dollar altogether, with louder and more direct statements supporting the abandonment of fiat currencies. This in turn should raise alarm bells with regard to the likely geopolitical fall out of America’s demise as an economic and political power. It won’t take long for America’s military to follow suit. Chess pieces will start moving all over the place, with potentially horrific effect.

How will all of this affect Australia?

It is quite possible that what is coming will surprise even the pessimists. Nobody in the Australian media is considering the ramifications of war breaking out. It already has in some ways. The rise of Internet based espionage should be taken as an important signal. The lines are being drawn as to who is becoming whose enemy on the international level. Other attacks have been so broad that the culprit will probably never be identified, nor the damage caused known. It’s a cluster of events whose timing is interesting, but there is likely to be much more activity in this regard than the public can ever be aware of. I guess one can only hope that so much information has been leaked to so many that nobody will have the confidence to attack anyone else, resulting in accidental peace.

The effect on Australia of North American and European financial turmoil has so far been quite mild. There are no major demonstrations, no big shifts in unemployment figures, no mass-defaults on mortgages. What has to be understood, however, is that the international economic crisis cannot end overnight. It will play itself out over years and will likely spill over into social and military conflict. The Australian Government cannot prop up businesses, households and banks for that long. It will have to flinch and let things go the way they are destined to. Soon, what we read in the newspapers about far away lands will become realities at home.


Analyzing Risk for the Average Joe

March 29, 2009 Leave a comment

Modern Day Swindler in a Suit

Modern Day Swindler in a Suit

Do it yourself, because no one else will do it yourself.

Risk analysis, when it comes to finances, can be confusing and it is no wonder that whole industries and academic specialties have evolved around it. It has its own terminology, making it even more unreachable to the average person. However, to avoid making the mistake of a lifetime (such as when you buy a house), it is extremely important to manage your risk yourself.

This article should not be taken as anything but tongue-in-cheek. Lawyers will tell you that you should get professional advice when it’s needed. Do that. This is not professional advice, even in the slightest.

We assume that you will be buying a house, but all investments need to stand up to the same general scrutiny.

Crap and Clay

The first thing needed to assess risk reliably is knowing the truth. The problem is, there is so little of it around, as everybody is out to make his own fortune and keeps all the useful stuff to himself. Most people rely on bluff and lies to achieve advantage. Some people are very good liars and most are less honest than you. The secret to working fact out from fiction is humility. Know your limitations and you will come some way to knowing theirs!

  • Don’t believe anything you hear and only half of what you read. Whatever a person tells you that is not on paper is complete rubbish until proven otherwise. This is an eternal truth that nobody seems to remember. Actually, you’re better off believing less than half of what you read. The sad thing is, most paper has so much crap written on it that it can’t even be used as toilet paper.
  • Don’t trust people from a culture you don’t understand. No, this does not mean racism (although it exists, for some reason), but knowing the limitations of your insight. In your own culture you will have a reasonable understanding of the kinds of people that are typical swindlers, the usual lies people tell and so on, but other cultures will have their own set of tricks, coated in smiles and politeness. Instead, get to know the culture beforehand, or at least assume the other person is a lying, scheming scoundrel and then be pleasantly surprised. Industries have their own “culture” too – be warned.
  • Corroborate any factual claims. When reading anything, separate fact from opinion. When reading product information (such as for a home loan, or a brochure advertising an investment strategy), underline what you would consider factual, and ignore the rest. Then go and find the same information by another route, such as at a competing institution or the Internet. If you don’t believe me, then go check yourself!
  • What’s the catch? Everything has a catch. If you there is no catch, it means you haven’t looked hard enough.
  • Get some kind of independent opinion. Get a market valuation of the property if you can afford it, or find out how professional investors find out what things are really worth. Don’t trust anything that comes for free and be careful what you pay for. If you don’t think it’s worth doing, then the property you are considering isn’t worth buying. Don’t forget that most people just fly by the seat of their pants and in many cases nobody does proper “due diligence”, even the investment companies with the glossy brochures. In most situations (not just investing), everybody assumes that everybody else checked. That’s why things go wrong. When you read an appraisal, again, underline the facts and discard opinion.
  • The secret of a Ponzi Scheme is getting out of it before everyone else does. Better still, recognize ponzi schemes (and schemers) by reading about them so that you don’t get involved in the first place.

Modern Day Scientific Fraud

Modern Day Scientific Fraud

The Money

Secondly, work out how much you can gain, how much you can lose and how much you can afford to lose.

  • Family budgets are overrated. Sure, go ahead and do one, but chances are you already know what you need to know. It’s easier just to look at your bank statements. If you are saving a hundred or two hundred dollars a fortnight, then that’s where you’re at financially. If you say to yourself “I’ll give up smoking and save $50 per week” you are kidding yourself. Sitting down and going over earnings and spendings will show up a few embarrassing truths, but expecting yourself or others to make major lifestyle changes to save money is just not going to happen, at least not easily. Try to save money, but assume that you will fail when doing calculations. The cost of making financial sacrifices can be greater than it’s worth. Being too much of a Scrooge will ruin your marriage.
  • Assume that your income will not rise. If you make purchases on projected income (even if it’s part of a contract), you are taking an unreasonable risk. You might be wise to make contingency plans in case your current income falls, even to zero. Everybody is an optimist and it’s always someone else who has the accident and ends up disabled. Sometimes all you will be left with is first dibs on parking spaces if you don’t plan ahead.
  • Assume interest rates will rise. Take the record highest interest rate for your country for the last century (something like 20%) and add a couple of percent. That’s how much interest you have to be able to pay, if you wish to take out a loan. When banks raise interest rates, they are going in for the kill, at which time they have no intention of letting you off the hook, even for one missed payment. If you think you can trust your bank manager, be assured, they will have replaced him in time to fleece you. Baaaaaa!
  • Assume your asset won’t appreciate. It probably will, but it might not. Things which can cause this to happen include closure of nearby industries, discovery of toxins in the soil, some kind of disaster not covered by insurers, war, etc. Therefore, think carefully about these kinds of bad luck beforehand. Depressing, isn’t it? The good news is that most things with a real meaning (such as a roof over your head) keep their value over time. If the rent that is collected on a house pays a food bill, it probably will keep paying a food bill a generation or two from now.
  • Never take risks on top of risks. If you borrow to buy a house, then use the house as collateral against more borrowings, you are crazy. There is no limit to the imagination when it comes to these things, but watch out for them. People do this more often than they care to admit. Even banks do it, as it happens. But they are stinking, scheming, lying, shifty and crazy.

At this point, calculate for a given purchase (assuming a house), how much you can afford, given your existing budget, your existing income and the worst imaginable interest rates. It has to be said that you do need to look at all the extra costs associated with the asset beforehand too, such as land taxes, council rates, insurance, cost of maintenance, repainting, repairs, etc. It’s probably a lot more than you anticipated.

Then calculate how much you can earn from the investment. Houses bring rental income. Farmland needs to be worked and this is a big undertaking, but fields of grass can be let out to other farmers. Other investments such as shares earn very little for the amount of money put in them and, contrary to popular belief, they are not “easy” and in most cases are the same as betting on horses. Most people believe that the money in shares is made by buying low and selling high. The problem with this assumption is that there is nothing behind it apart from “market sentiment”. Unless you have insider information, you are ultimately going to be one of the people who loses his money so that some faceless Madoff-type gets rich. Of course before that you will get a few winnings yourself, just like at the casino, until you lose sight of the shore of sanity and one day go in all-or-nothing.

Calculate how much you can lose. Houses can burn down (and the insurer will never give you back the real cost of rebuilding), land can be “compulsorily acquired” to build a highway, and companies on the stock exchange can evaporate overnight. With houses, having people inside means that someone other than yourself stands to lose by burning it down, plus you can put in safety equipment and do other things to reduce the risk. It’s a very rare event. With land, a bit of research and getting to know people at the local council can make it a very safe way of investing. With shares, there is basically no way to assure that you won’t be left totally broke.

Make plans to manage the risk. Do not let the total destruction of your main investment be the undoing of you. Diversification is generally a stupid thing to do because you end up putting money all over the place and having no idea of the risks you are taking. Better to do one thing and do it well. Better still to do two things and do them well. Then you are actively managing your risk. It can be as simple as having two houses from which you draw rent instead of one, as long as they are in different parts of town, or different towns.

Making the Decision

Before making any decision on finances, a few things need to be satisfied:

  • You need to be sure of how much you don’t know. If it’s too much, then delay your decision.
  • The investment has to be better than shoving money into a mattress. In some cases, depositing money in a bank account is worse than shoving it in the mattress.
  • You need to be ready to make the maximum estimated loss and have a plan in case this happens (and it can’t be suicide).
  • Your decision has to be morally upright. Usury is usury. Theft is theft. Cheating is cheating. Wrong is wrong, so don’t do it.
  • You must not rely on tax laws for the viability of your investment. The tax laws change and, just like interest rates, are a trap. Just take Superannuation as an example. The right path is often the most difficult one.

After all of this, it can become quite clear that investment is not easy. Most people work extremely hard to get very little out of life, and there is a small percentage at the top who get rich without appearing to do any work at all. They will probably all go to Hell when they die, and as such their life was not worth living. There is a group in the middle though, which takes what is seen as the conservative path:

Be humble, earn an honest living doing honest work, save your money, invest in real things that people need, have realistic expectations and prepare for the worst.

Tangible Units to Quantify a Trillion Dollars

March 28, 2009 Leave a comment
One Sydney = $640 billion

One Sydney = $640 billion

How much is a Sydney?

When someone gives you fifty dollars, you can imagine straight away what it will buy you. You could quantify it in loaves of bread, dinners at the local restaurant, or kilograms of horse manure.

But when someone talks of a trillion dollars then it is useful to talk in terms of houses, which most people find tangible.

Median house prices around Australia can be found easily. Using this information, a trillion Australian dollars ($1,000,000,000,000.00) will buy:

  • Sydney: 1,865,598 houses
  • Melbourne: 2,236,330 houses
  • Brisbane: 2,314,648 houses

The number of homes in Sydney is roughly 1.2 million. However, the actual house price as quoted by various agencies is probably inflated (easily by 5%), and a larger number of houses is probably accounted for by this amount of money. Additionally, unit prices are less than house prices by up to $200,000, so a great deal more dwellings would be afforded than the above list estimates. Our estimations are therefore very conservative.

So, when we read of bailouts in the hundreds of billions, it might be reasonable to count them using a “Sydney” unit. A Sydney (as at December 2008) was valued at $643,225,200,000, or $640 billion (at most).

When the Federal Reserve issued 1.2 trillion dollars in new money ($US), this meant that the USA had issued new money to the value of at least two Sydneys, possibly three.

Now please excuse me while I fall off my chair.

Australian Housing Disinformation

March 27, 2009 Leave a comment
Know Thy Banker

Know Thy Banker

A short note today on the difference between the RBA’s comments on the stability and durability of the housing market and, well, reality:

The Reserve Bank said Australian banks had been able to concentrate on profitable and relatively safe domestic lending to households over the past decade. They had not lent heavily abroad, where risks are higher, and they had avoided exposure to securities, such as collateralised debt obligations, that have brought such heavy losses to other banks.

How can they pretend that Australian household incomes are immune from international events? The difference between foreclosures on Australian mortgages and those overseas is one of timing and not necessarily magnitude. Claiming that we will survive this worldwide depression like we survived the other, smaller recessions, is nothing more than a random statement. Nobody really knows that.

It’s no secret that the New Zealand economy is in a terrible recession, and everyone is aware of the economic collapse in Ireland, Iceland, Eastern Europe and, it appears, even the United Kingdom. It’s now official news that Australian wealth fell by as much as 38% over the past twelve months. Unemployment is already rising and there is no evidence to support the notion that the trend won’t continue.

If we separate opinion from fact in all of this, we can see that the RBA has plenty of opinion but not much fact behind its confidence in Australia’s real estate market survivability. At the very least, the RBA is tight-lipped on how it arrives at its optimism.

Part of this optimism may come from Chinese investment into Australia which is a particularly smelly bucket of fish:

Market insiders believe China is buying 15 to 20 per cent of the $2 billion in Treasury securities being issued every week.

This would make China the single biggest lender to Australia, although details of who owns the bonds are cloaked in secrecy.

The program, authorised by Treasurer Wayne Swan, will leave Australia with a debt bill approaching $200 billion.

Our Government is playing a very dangerous game in doing so, and any assumption that China won’t want its pound of flesh in return would be foolish indeed. In a way, all this is a bit like taking out a mortgage to buy the kids a Playstation, a swimming pool, and some other expensive entertainment thingies, all in the face of impending unemployment. Hey, we might be lucky and not get unemployed!

Can this all be a reason to hope that real estate prices in Australia won’t fall? It cannot be, because ultimately, borrowed money has to be paid back and the artificial propping up of Australian living standards through foreign debt is not sustainable, even in the medium term, because economic resurgence has not yet occurred anywhere in the world. The stock market rally in the US is not to be taken seriously, as there is no fundamental reason behind it. Where are the glowing US trade figures? Where is the news of factories reopening, or of a jump in forward orders for commodities?

Australia is only in the early phase of the economic storm. Good economic news that is not based on indisputable fact should be considered to be nothing more than disinformation.

Engulf and Devour

March 26, 2009 Leave a comment
Silent Movie

Silent Movie

In the Times Online we read:

More aggressive, concerted efforts are needed by key economies to quell financial market stresses if the world is to avoid an even sharper and longer recession, the International Monetary Fund urged today.

Let’s face it, economic catastrophe is unavoidable and was foreseen by many (including those in power) for a long time. The IMF pretends to care, but we know that deep down it favors a single world currency (presumably with itself at the helm). There seems to be a race to get this single currency concept off the ground, with China and Russia also vying for the “top job”. But for ordinary people, a single planetary currency (with its obligatory single World Government) is nothing but a guarantee of Universal Mediocrity. The reasons the world is sick financially is because of Internationalism, not for the lack of it.

In the Mel Brooks film “Silent Movie”, the “Engulf and Devour Corporation” steals the film just before it is previewed. It is a parody of the Gulf & Western company, notorious for its aggressive business practices, hostile takeovers, asset evisceration and so on. It was an example of a highly immoral business in terms of how it treated its assets (companies it owned and its employees). The history of the company has been covered from several aspects and its business methods analyzed in detail:

The imperial conglomerate has wholly owned subsidiaries in unrelated industries. In theory, the conglomerate can use cash generated by operations in some areas to diversify into other areas that might provide counter cyclical market risk reduction.

Actually, these mega-corporations are like huge monsters which destroy smaller, independent companies by taking them over, bleeding them dry (particularly to cover the losses of other companies) and then selling the left-over carcass of a company to some other sucker-company. Some more of this excellent analysis is worth quoting:

In other words, a great many of America’s largest companies are de facto hedge funds. Their “diversification” (Peter Lynch preferred the term “di-worse-ification”) resembles that of imperial conglomerates. This is not exactly good news for a country with out of control debt growth and intractable balance of trade deficits linked to declining product competitiveness.

The size, prestige, and complexity created by cobbling many firms together into a large conglomerate often provides enough maneuvering room to subtly and cleverly plunder shareholders while real underlying wealth-creating performance actually declines (and malinvestment rises). As part of their sorcerer’s bag of tricks, imperial conglomerators typically have enough cash flow to pay for big ad budgets, big consulting fees, major lobbyist services, and big transaction costs. All of this helps to bribe elements of the media, academia, the consulting profession, Washington, and Wall Street into saying nice things about them.

Having too much under one umbrella company is not good for the world, let alone America. A single world currency would bring this about in its most extreme form, as what it really means is a single World Central Bank, with a single Director. It will be the Monster to end all monsters, if it ever comes about.

This is the situation where Capitalism will converge with International Socialism to create the worst form of government the world will ever see. When no nation is independent from the other (politically and financially), when the world’s economy is centrally governed (with politics to follow suit), there will be only one way to march. Yes, there will be “stability”. Yes, there will probably be no more wars between subscribing countries. But there will be no way to stop “scientific government policy” such as forced population reduction, suppression of religion and free speech.

You will smile and you will enjoy it, or else.

The Character of a Happy Life

March 23, 2009 Leave a comment
Henry Wotton

Henry Wotton

How happy is he born or taught
That serveth not another’s will;
Whos armour is his honest thought,
And simple truth his highest skill!

Whose passions not his masters are;
Whose soul is still prepared for death,
Untied unto the world with care
For princely love or vulgar breath;

Who envies none that chance doth raise,
Nor vice; who never understood
How deepest wounds are given with praise;
Nor rules of state, but rules of good;

Who hath his life from rumours freed;
Whose conscience is his strong retreat;
Whose state can neither flatters feed,
Nor ruin make oppressors great;

Who God doth late and early pray
More of His grace than gifts to lend;
And entertains the harmless day
With a good book or friend;

– This man is freed from servile bands
Of hope to rise or fear to fall:
Lord of himself, though not of lands,
And having nothing, he hath all.

– Sir Hentry Wotton (1568-1639)

Pretending They Don’t Exist

March 22, 2009 Leave a comment

QuackGovernment leaders feign outrage at taxpayer money being given to bankers in the form of bonuses. They struck back by threatening to tax those bonuses in what appears as an all-out assault on the finance industry. The Times raises fears that the banking industry is under threat as a result:

Proposals that could lead to Wall Street bonuses being taxed at 100 per cent could result in “the end of the banks as we know them now”, a leading financier warned yesterday.

Even if it’s 70%, it will still make banking rather unattractive to a lot of people as a career choice in the USA. All this of course is no more than populism on the part of Government, which as usual is making sugar coated legislation with a bitter aftertaste. A tax such as this will sink AIG, which has only just been bailed out. The idea of thwarting bonuses sounds good, but it will trigger a brain drain in the US financial sector, guaranteeing the taxpayer to be left with a useless, expensive corpse on its hands.

Bigger and worse things are happening which remain unchecked.

New money is being issued by the Federal Reserve. This is a more serious kind of theft which affects every honest person. The resulting inflation will be unstoppable and the Fed knows it. An anonymous commenter states:

Will other countries threaten violent force? Will they try to acquire U.S. claims to oil reserves in the middle east and Latin America, and to other “indirect” U.S. claims to commodities–originating from U.S. based companies?

The facts are pretty compelling that the U.S. will have to default on its debt. When that time comes, how will the rest of the world react?

These are very thought provoking questions indeed. That there will be physical (military) ramifications to financial incongruities is a given, especially if the current approach by central banks and governments is pursued. In the medium to long term, the public cannot possibly benefit from anything which has been done by both central banks and governments. All of this spells disaster for ordinary people.

So who are the beneficiaries of all of this? Where did all the money go?

The US Economy should be declared a crime scene.

Could it be people, as yet unidentified, who have been quietly exploiting the various tiers of the economic system to their own advantage? Theirs is an eerie silence. I have no doubt there are many individuals who have access to sensitive (and incredibly advantageous) trading information at stock exchanges. I also have no doubt that people who have sensitive economic and policy data (in draft form) at their fingertips make “good use” of it. They will have surely succumbed to the temptation of making untold profits by knowing the outcome of trades before they take place. The former Chairman of NASDAQ is but a snowflake on the tip of the iceberg of America’s economic corruption. His scheme was simple and easily blown out of the water, but the economic crisis (and the missing money) is an order of magnitude larger than Madoff’s billions.

If you had anything resembling a live feed to the names of traders, quantities traded, buy points, sell points, basically raw, unprocessed stock market data, what would you do with it? Nothing? The point is that, because so much in the economy is now electronic, evidence is easily erased (or planted) and communications are easily intercepted. I don’t know if trading data is being leaked on an ongoing basis, but I would be surprised if it wasn’t. I don’t know if people other than scrupulously honest law enforcement officers listen in on telephone conversations, business meetings, and so on, but I would be surprised if they didn’t. Heck, you can hardly find an honest person in any walk of life as it is!

So instead of printing new money and shooting easy targets (managers working for finance companies), governments should be digging up trading records, exposing insider traders (and all the other fraudsters and swindlers) and treating system problems which allow for opaque business and accounting practices.