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Paul Gambles
Co-founder of MBMG Group


Update March 26, 2016

Australian Property Market: will prices continue to rise?

Property prices in Australia are still rising. Is that because the market is immune to a bubble burst or is everyone just putting off the inevitable?

Back in 2010, Professor Steve Keen – my colleague at economics think tank IDEA Economics – walked 220km from Canberra to Mount Kosciuszko wearing a T-shirt emblazoned with “I was hopelessly wrong on house prices! Ask me how!”

That was because in 2008 he’d lost a bet with Rory Robertson of Macquarie that house prices would be lower in September 2009 than a year earlier.1 In fact, Steve’s initial point was that Australian property prices were in real terms in general at least some 40% above trend – he explained that this could be resolved by an immediate fall of 40%, a price stagnation for so many years that the trend eventually caught up with the gap or, most likely a combination of a fall over a protracted period of time. However, Rory reduced this to the coin flip question of “yes, but will they rise or fall in the next 12 months?” and didn’t seem to comprehend that such a coin flip wasn’t really the point here – Steve was observing a much bigger, more structural phenomenon, which may well be precisely why Rory didn’t seem to understand it.

With the latest house price index figures still showing a rise in the house price index (see chart 1), Steve has written two articles in the last few weeks explaining how he got it ‘wrong’.2

Chart 1

Keen saw that, whilst he’d got the cause of the housing bubble right (i.e. mortgage debt), he’d got the direction of the cause wrong. He’d expected, as happened in the US and Japan, that after the global financial crisis (GFC), the Australian economy would start to reduce the amount of private debt it was taking on. This didn’t happen for two reasons: the Rudd government stimulus and the RBA policy of raising interest rates in November 2011.

The Rudd government’s stimulus package, introduced in October 2008, included an increase in the federal government’s grant to first-time property buyers. The existing AUD7,000 grant was doubled for those buying existing homes and trebled for buyers of new properties. Added to that, state governments threw in their own grants, meaning purchases in Victoria, for example, could receive a total of AUD36,500.3 First-time buyers came flooding into the market, leveraging up the grant by a factor of ten of more in additional mortgage debt, until the reward ended in mid-2010. Of course this should be seen as an additional stimulus package in that there are permanent incentives, in the form of negative gearing tax breaks, to borrow in order to buy property in Australia – something that already creates a structural distortion in the property market.

Having first gone against the trend of the world’s central banks by increasing its reserve rate, the RBA lowered it dramatically from 7.25% to 3% in eight months. It then increased the rate before deciding, in late 2011, that it was right to drop rates all along. It currently stands at 2%.
The share market was scary and bond rates were falling, so investors bought into the housing market, causing mortgage debt to rise again: the consequence of which is a rise in house prices (see chart 2).

Chart 2

Of course, when talking mortgage debt in Australia, it’s not a question of small numbers. A report on debt published last December by AMP/NATSEM4 shows household debt in Australia stands at a huge 185% of annual income (see chart 3).

Chart 3

That means Australian households have nearly twice as much debt as annual income. This is a level that historically constrains any further consumption and leads to market corrections – in other words, a classic indication of bubble vulnerability. A case in point is the Australian housing bubble of the 1890s (see charts 4 & 5).

Chart 4&5

A more recent example is what happened in the US in 2008-2009,5 partially caused by sustained increases in private debt and house prices over several years, only for the housing market to reach its nadir and begin to fall rapidly.

One lesson we can learn from these examples is that the fundamental problem is, at some point, the level of mortgage debt relative to income will stabilize. Well before that happens, though, the acceleration of mortgage debt will decline, and prices will fall.

This hasn’t happened in Australia in recent years because of the 2008 and 2011 government interventions. On both occasions, the result was an acceleration in mortgage debt and a price bubble. Thus, when prices begin to fall, the government could theoretically step in once again and keep prices up.

The problem with this scenario, however, is that right now Australia has the highest levels of mortgage debt and total household debt in the world. At some point this appetite for living in a bubble will have to wane – as it has in the US, Canada, Europe and elsewhere6 and as it did in Australia 125 years ago (see charts above) – as people will no longer want or be able to increase debt repayments, particularly as deflation stifles any increase in income.

Thus, when the rate of growth of private debt inevitably starts to slow, the economy will experience what the rest of the world went through in the GFC. And that includes falling house prices.7 But Australia’s will be falling from a much greater height.

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3 source=exact&utm_medium=email&utm_content=1 864654&utm_campaign=kgb&
4 Buy now, pay later: Household debt in Australia, AMP/NATSEM, Issue 38, December 2015
5 &
6 &

Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.

MBMG Group is an advisory firm that assists expatriates and locals within the South East Asia Region with services ranging from Investment Advisory, Personal Advisory, Tax Advisory, Corporate Advisory, Insurance Services, Accounting & Auditing Services, Legal Services, Estate Planning and Property Solutions. For more information: Tel: +66 2665 2536; e-mail: [email protected]; Linkedin: MBMG Group; Twitter: @MBMGIntl; Facebook: /MBMGGroup

Update March 19, 2016

Retirement planning needs detailed plans, not magic numbers

There are many theories of how to calculate the amount of money you need to retire. Despite the plethora of formulae and algorithms, it primarily takes a clear head and accurate, detailed planning to get it right.
I once heard about a civil servant lawyer who celebrated his birthday every year by holding a big party, at which he would make a toast by declaring how many years left he had until retirement. Needless to say, as he worked in the public sector, he knew his retirement date years in advance.

In some ways, knowledge of the day you have to retire is a blessing – it’s an immovable target. For those who have to decide by themselves though, it can be difficult trying to determine at what point they’ll have enough savings to live life the way they would like to.
I recently read an article calling that optimum age the magic number.1 This apt terminology comes from the world of baseball, where it means the number of games a team has to win in order to secure a first-place finish. A retirement magic number differs for each person, of course, and the article suggests – accompanied by several charts and graphs – that people should aim to have accumulated ten times their final salary before ending their career. It’s suggested that this is broken down as follows:
* Have a year’s salary saved by the time you’re 30
* By 40, aim to have three times your salary saved
* At 50, six times your salary saved
* By 60, eight times your salary
* By full retirement, at 67 years old for example, your savings should be at 10 times your salary
No metric fits perfectly into everyone’s life and this plan certainly makes a lot of assumptions. Firstly, it assumes that everyone is able to save at the same rate. But what if the investments you’ve made undergo a major market correction? Or if we have a sustained period without income? Plus nobody knows how long we will live.
Also, the author is American and has thus based the theory on salary levels and living expenses in the US. It would be highly different if you had worked several years in high-salary countries, then later came here to Thailand, where the cost of living is quite clearly much lower.2
It is also based on the assumption that earned income stops as soon as you hit retirement. Some people nowadays continue to receive income, be it through a part-time role, consulting or directorships.
Subject to all these caveats, provided we don’t apply the plan too rigidly, it can be a reasonable yardstick for retirement planning. There’s no doubt that the sooner we start saving for retirement, the better. That’s not just because saving for longer means more money saved. Thanks to compound interest, the future value of money invested today is greater at retirement than an amount invested several years down the line. For example, if a 45 year-old starts to invest USD 20,000 a year and a 21 year-old invests USD 5,000 a year at the same interest rate until they are 65, the result is as shown in the box:
Again, personal circumstances mean that not everyone can realistically start saving in their twenties or even their thirties.
That highlights the point that there is no one-size-fits-all formula to finance. There are probably as many financial planning methods out there as there are exercise regimes or diet plans. Just like a diet or exercise regime, a retirement plan should be tailored specifically to your objectives, requirements and priorities. There’s no point in setting out a plan to which, soon afterwards, it becomes obvious you can’t realistically contribute the full amount each month.
Similarly, it’d be a wasted opportunity if the contributions are too low and extra cash is spent unnecessarily. A well-thought-out retirement savings plan makes it easier to apply the pay yourself first principle. This means allotting a portion of your income to savings, with the same mind-set as if the payment were as mandatory as a tax bill. Adopting that mentality helps keep money aside for your retirement, instead of using it on the gold-plated deluxe version of the latest gadget.
In addition to a realistic, balanced calculation of how much of your monthly income you can save, you need to find the savings product which suits you best. There are so many available that this can be a complicated task. The small print of many popular savings products is an unnecessary way to deflect investors off the scent – the language in which they’ve written is often so obscure that 10-feet tall print wouldn’t make it any easier to understand. But would a straightforward savings account do the job? Do you want to look at something that provides an opportunity of growth? Are you prepared to risk some of those savings for a chance to make a higher return?
If so, it is especially important in the current economic climate to look at how you should allocate assets to avoid being too exposed in the event of a major economic event, such as another global financial crisis. Many investors have become quite blasť about risk because the two multi-year global stock market corrections of 50% or more in the last twenty years both quickly reversed and markets hit new highs. They should be aware that when something similar happened following World War I the third correction wasn’t so forgiving. In fact it took US equity market investors in 1929 until well after World War II to regain the same index levels.
All-in-all, rather than merely using a rule of thumb, such as calculating how many times your salary you should accumulate, it’s better to work out a more detailed plan that is totally relevant to you, your objectives and your current lifestyle. As Dr Amaju Loving, assistant professor of financial planning at The American College of Financial Services, put it:3
If you apply [rules of thumb] without professional advice and some form of precision over longer periods of time, you may be getting farther and farther away from spending goals you want to have in retirement.
But if you actually sit down with a professional, they can run simulations to show you the percentage of time your portfolio is likely to fail, and you can do concrete things to make sure to withstand your retirement.
I couldn’t agree more. This is why I believe an individual cash flow plan, with a range of outcomes, is essential along with a plainly understandable savings arrangement with easily understood outcomes and well defined rises.

1 newsletter%7Cyourwealth
3 newsletter%7Cyourwealth

Update March 12, 2016

Are there any hidden opportunities?

With such negative economic prospects, heightened volatility, nervous stock markets, seemingly imploding commodity prices and socio-political upheaval, it may appear that it’s not worth investing right now. But that’s not necessarily the case. It just requires an approach suited to the prevailing situation.

Analysts, policy makers, investors and commentators seem to have become alarmist overnight with ‘a Cassandra on every street corner’. As I’ve mentioned previously1, the Cassandra message may well be proven right; although the timing could be off and it may be for the wrong reasons.
Amidst such chaos and uncertainty, opportunities may not be easy to spot. But wherever there are opportunities to lose, that invariably also creates opportunities to profit. But where can people get some return on their investment?
Firstly, the question is not where? It seems to me that the opportunities out there today are not so much geographical but thematic. So the right question should be how?
I’ve been saying for some time that both long/short and market neutral investors give themselves access to a much wider opportunity set by being able to make money in two ways: investing in assets which are appreciating in price; or betting against depreciating assets.
What does all that mean?
Funds that are more short than long are usually classed as short-biased funds and outright shorting funds are generally classed as dedicated short - the mirror image of long only. Both of these approaches involve betting against the laws of capital market nature – the fact that over time (albeit sometimes a very long time) assets in general have always so far appreciated in value.2 Therefore any short bias is essentially making a directional bet that we will undergo a period of counter long term trend asset price weakness. In a sense, this is all about timing. Timing is notoriously difficult. It doesn’t seem to be any easier in today’s opaque outlook. This is why we’ve tended to favour long/short approaches – the best of both worlds.

Macro portable alpha
Macro because the fund uses macroeconomic views of what’s happening in various countries.
Portable alpha as it is investing in areas which have little correlation with the market.
Definitions: Investopedia

Within long/short, there are different tendencies: some investors have far greater flexibility in their approach; whereas others are more rigid. An example of the rigid versions are the 130/30 funds that were popular for a while – funds which combined a gross long position of 130% with 30% shorts, meaning the same 100% net exposure as a long-only fund.
In general (especially in efficient or, at least, homogeneous markets) more rigid long/short positioning is an alternative to investments such as minimum volatility strategies which, in theory, go up less than the index in bull markets but fall less in weak markets. Another form of rigidity is to adopt a market neutral stance (typically the same amount of long exposure as short exposure, meaning that the actual direction of the markets is not a significant driver or component of returns. In general (again, especially in efficient/homogeneous markets) market neutral is theoretically a tricky area to make a profit, as it’s largely reliant on exploiting market inefficiencies.
Some analysts believe that alpha (i.e. performance against a benchmark, such as a market index) in market neutral and long/short positioning, derives more readily from the short investments. As shorting is an underused strategy, market prices on the short side, especially with the use of synthetic shorts, aren’t nearly as instantly sensitive or reflective as with other positioning.
Of course the concept of efficient markets is that asset prices accurately reflect totally reliable knowledge. However that’s not always the case. In less efficient markets – some emerging markets, for example – it could be argued that there is opportunity to generate more significant alpha, in both long and short positioning.
That’s because, on the long side, some emerging markets-based funds are able to take advantage of mispricing in under-researched, under-bought stocks from the smaller and medium-sized firms on an exchange. Similarly, in inefficient markets, shorting is able to exploit over-pricing in over-researched, over-bought blue-chip companies.
In such markets, the best results might be expected to be achieved by investment funds that have totally flexible mandates that can vary their long and short relative exposures according to the prevailing outlook.3 One such fund that we have covered for a number of years currently holds more investment in cash and short than it does in long stocks. Consequently, such funds move up and down the risk curve according to market conditions – generating what can be called macro portable alpha. This is a strategy which I advised and utilized last year with some success and which still seems to be appropriate for many investors amidst the prevailing uncertainty.4
The real sea change in the last year or so is that previously, what was actually being invested in was perhaps the main focus. Today the investment strategy, how it’s being invested, is paramount.5 This is a change that we all have to adapt to. I say this despite a long track record of successful asset calls, including many that were derided at the time for being too contrarian.
So why change now? Well as Keynes once said “When my information changes, I alter my conclusions. What do you do, sir?”6
What worked well in certain conditions in the past may no longer be the best solution today. It’s important to avoid becoming a slave to one single approach, purely because it has worked in the past. For the reasons I’ve stated,7 this is a very different time now and thus solutions like macro portable alpha should be considered within any asset allocation process.
Of course, any investment strategy contains an inherent level of risk and as I’ll continue to state ad nauseam, this is something that every investor can and should control and ensure that their portfolio risk level remains firmly within their own individual comfort zone.

1 and
2 Built Upon a Rock, Brian Horne CFP, iUniverse (2010)
3 Portable Alpha Theory and Practice by Sabrina Callin, Wiley (2011)
4 ibid
6 As quoted in “The Keynes Centenary” by Paul Samuelson, in The Economist Vol. 287 (1983), p. 19
7 and

Update March 5, 2016

The dangers of being right for the wrong reasons: Part 2

In Part 2 of my thoughts on forecasts of financial crisis in 2016, I look at China and other potential factors which may shape the global economy this year.
For all Europe’s problems, I’m even more concerned that an economic crisis will occur in China. Again, it’s far from clear that this will happen in 2016 but it looks inevitable in the near future and it will have significant knock-on effects on the global economy.
Once again, private debt is the culprit. I don’t believe official figures (which actually show China to have a greater private debt problem than the one in America that led to the sub-prime crisis) to be anywhere close to being accurate and, with the large shadow banking sector and repackaged debt, the reality could be far, far worse.1 As long as the Chinese government instructs banks to keep lending whilst trying to manipulate the markets, rather than tackling the debt problem head-on, this is simply force-feeding Monty Python’s Mr. Creosote.
Other factors
To be fair to the Royal Scottish Cassandra, there’s nothing to say that crisis couldn’t break out this year. We all know what happens when tinder gets dry – eventually a spark tends to come along. If events in London (e.g. the Clarence Hatry case) could affect Wall Street in 1929, then it’s clear to see how even the smallest, seemingly unrelated factor could affect the global economy today. War, terrorism, currency fluctuations or sustained extreme prices in certain markets could all trigger a crisis.
For example, it’s impossible to ignore today’s incredibly low commodity prices – especially oil. This is not necessarily because of the depths they have reached but the longevity of these deflated prices. For example, the average WTI price over the last ten years is USD80.65 a barrel. This mark hasn’t been reached since 30th October 2014. In fact, since the daily barrel price went below USD60 in mid-December 2014, it has only spent 16 days (out of a possible 280) above that point – and for never more than three consecutive days. At the time of writing, the price was just above USD30.
That may seem like a good thing, with cheaper fuel prices meaning more money in our pockets and fewer distribution overheads for firms. However, it also means large-scale redundancies – by September last year, there were already almost 200,000 job cuts in the oil sector worldwide – and a potential undercutting of the shale gas (fracking) business, which is largely funded on high-yield (i.e. junk) bonds. If there’s a run on these to the point of illiquidity, that could have repercussions on the overall, already-depressed, commodities sector. However, that could in turn lead to the US Government deciding to back the frackers and 2016 could be the year of the ‘shail out’.
Right… but also wrong
All of these elements suggest that almost anything can happen – and that ultimately it seems inevitable that a major systemic financial crisis and sustained economic depression will occur – but not necessarily this year. The danger is, elements such as those extremely low commodities prices and political turmoil could act as a red herring; leading analysts to be right about a crisis but for the wrong reasons. This would lead to a market rally once initial panic had subsided, leading to even worse times as the real cause hadn’t been eradicated. If we understand that it hasn’t been, then we can also grasp that that it will most likely be a very bumpy path that we’ll travel on before the house falls down, Mr. Creosote explodes or the dry tinder bursts into the biggest forest fire capital markets ever seen (or I run out of metaphors).
We should be more concerned about our journey on that path right now and simply be prepared for our destination when we do get there. The path itself creates both opportunities and risks and these are not universally homogenous or symmetrical. I don’t know when we’ll actually get to the end of the path; nor for that matter does anyone else. In which case, we should be managing risk (which we can always control) and seeking returns (which we can do our best to influence) on that journey. To that extent this year is no different to any other, except that we are one year closer to that journey’s end than we were a year ago.
The major issue remains private debt levels and we will only see true, sustainable economic recovery if governments and central banks tackle that first. They don’t seem to have any notion to do so. The wallpaper will keep being applied, Mr. Creosote will keep being fed (by the Fed?) and the tinder will keep getting dryer. Be prepared rather than frightened.
1 http://www.mbmg-investment .com/in-the-media/inthemedia/76

Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.
MBMG Group is an advisory firm that assists expatriates and locals within the South East Asia Region with services ranging from Investment Advisory, Personal Advisory, Tax Advisory, Corporate Advisory, Insurance Services, Accounting & Auditing Services, Legal Services, Estate Planning and Property Solutions. For more information: Tel: +66 2665 2536; e-mail: [email protected]; Linkedin: MBMG Group; Twitter: @MBMGIntl; Facebook: /MBMGGroup


HEADLINES [click on headline to view story]

Australian Property Market: will prices continue to rise?

Retirement planning needs detailed plans, not magic numbers

Are there any hidden opportunities?

The dangers of being right for the wrong reasons: Part 2