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Could Donald Trump send the USA bankrupt? And why the first challenge is February next year.

By | Investing Times Classics | No Comments

IMG_5997 (481x640)Donald Trump and economic stability rarely go hand-in-hand. While Trump insists he’ll “make this country rich again”, his path to riches has been subjected to four bankruptcy negotiations and his vagueness as a potential President can be summarised in “I want to be unpredictable.”

With the expectation for a close race to the White House in November this year (betting odds apparently have it as 1/3 vs 5/2 in favour of Clinton), it seems likely Donald Trump or Hilary Clinton will inherit a ticking bomb that is called the “debt ceiling”.

The debt ceiling is a piece of legislation that is intended to limit the amount the United States Government can borrow. However, well before Donald Trump rose to prominence politically, the USA Government has been amassing more and more debt, to the tune of $19.29 trillion at the latest recording and counting. This equates to a potentially dangerous ‘Debt to GDP ratio’ of 105.4% and a trajectory that means the last extension of the debt ceiling to March 2017 will need to be renegotiated again early next year.

The problem is this. If the vote is close, which it could easily be, and a majority is not created in Congress, either Trump or Clinton will have a very difficult time agreeing on terms to extend the debt ceiling further. If no agreement is made, the United States Government can’t pay its bills which leads to an abrupt default. The seriousness of this event for the USA should not be under-estimated:

“A default would be unprecedented and has the potential to be catastrophic: Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.” — U.S. Treasury report in 2011

It may not be Donald Trump or Hilary Clinton’s fault that the debt grew so substantially, and it is a complex story on why the United States has opted to take on so much debt along with the majority of the world, but whether it is Donald Trump or Hilary Clinton in office, they will hardly have had a chance to warm their seat before having to deal with this mess. Historically, debt ceiling negotiations have required an 11th hour agreement because the two political parties (Trump’s Republicans and Clinton’s Democrats) cannot agree on policy direction and block it in Congress as a re-negotiation tool.

The last occasion this “debt ceiling” was breached, it was Barack Obama’s “Obamacare” in the firing line. This would seem far less controversial than many of Donald Trump’s policies, meaning a greater risk of a stalemate and increased recessionary risks.

While Trump is known for his comments such as “Rich people are rich because they solve difficult problems”, it is another thing altogether managing a Congress that have conflicting views on policy to the extent as this 2016 Presidential Election.

It would seem Donald Trump himself has been an advocate of a stalemate and willingness to let the United States go into shutdown. His remarks prior to the 2013 debt ceiling negotiation went along the lines of “I don’t think [the United States is] going to go into default, but I do think if we allow laws like this to go through, we’re going to be in much bigger trouble long term” — Donald Trump in 2013

It begs the question on who is a more suitable candidate to lead the United States through a very tricky time politically. Forget the lacklustre growth forecast, the ageing population or the unemployment concerns, the real concern between now and the start of next year is how to handle a potential United States default.

Hilary Clinton does not have a perfect record, and it would appear likely the debt train would continue under her wing, but the alternative is Donald Trump who has been subjected to four Chapter 11 negotiations either directly or indirectly before attempting to take the White House (Trump Taj Mahal in 1991, Trump Plaza in 1992, Trump Hotel & Casino Resorts in 2004 and Trump Entertainment in 2009).

Regardless of the outcome, it is unlikely to be comical if the debt ceiling isn’t dealt with prudently and promptly. So with this in mind, which nominee do you think is better suited?

Quotes on the Debt Ceiling and its Risks:

“We’ve never gotten to the point where the United States government has operated without the ability to borrow. It’s very dangerous. It’s reckless, because the reality is, there are no good choices if we run out of borrowing capacity and we run out of cash.” Senator Jack Lew

“There is precedent for a government shutdown. There’s no precedent for default. We’re the most important economy in the world. We’re the reserve currency of the world. … If money doesn’t flow in, then money doesn’t flow out, so we really haven’t seen this before, and I’m not really anxious to be part of the process that witnesses it.” — Lloyd Blankfein, chief executive of Goldman Sachs

“The debt ceiling is such a calamitous possibility that you could go to a recession or even a depression worse than Lehman and AIG in 2008.” — Senator Chuck Schumer

“To tie [the debt ceiling] to something about whether you break the promises of the United States government to people all over the world as well as its own citizens, just makes no sense. So it ought to banned as a weapon, it should be like nuclear bombs, basically too horrible to use.” — Warren Buffett

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Worried about a property crash? These nine facts answer it better than most…

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What causes a property market to crash? Is it a falling economy? An unemployment outburst? A building oversupply? Should we concentrate on consumer confidence data? Or is it as simple...

Long-term investment themes: 10 year + view of the trends, opportunities and challenges

| Economy, Investing Times News, Recommended by the Investing Times | No Comments
Drawing attention to the outlook and big themes present in the economy is always a healthy perspective. Below are a number of key themes to think about as you monitor your...

Facts about the Chinese economy: How likely is a financial crisis in China?

| Economy, Investing Times News, Recommended by the Investing Times | No Comments
China is undoubtedly important to the global economy and with embedded signs of rising bad debts, there are enormous concerns surrounding China’s ongoing stability. Since 2005, China has accounted for...

It’s not (totally) the baby boomers fault: Why the working population matters most

| Most Viewed, Politics, Recommended by the Investing Times | No Comments

We have an unprecedented rise in the over 65 age group and our working population is growing at a more modest rate. This article will detail the real problems we face and how you can profit from it.

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17 stock metrics: value, growth, dividend strength, stability, momentum and sector analysis

| Investing Times News, Most Viewed, Share-Market | No Comments
If we agree the primary objective of stock-picking is to pick the winners and/or avoid the losers, then we must start with a framework that helps determine which companies to...

Recession risks: what are 10 of the top indicators to watch and why it works.

| Economy, Headline Article, Most Viewed | No Comments
What does it take to identify an impending recession? Obviously, this is an extremely complex question. However, there are at least 10 factors that have had a strong historical track-record...

Can Warren Buffett and Robert Shiller both be wrong at the same time? Unlikely.

| Headline Article, Investing Times News, Most Viewed, Share-Market | No Comments
Warren Buffett and Robert Shiller should be familiar names to anyone with an active interest in the share-market. They are two of the most respected individuals on the planet when...

It’s not (totally) the baby boomers fault: Why the working population matters most

| Most Viewed, Politics, Recommended by the Investing Times | No Comments

We have an unprecedented rise in the over 65 age group and our working population is growing at a more modest rate. This article will detail the real problems we face and how you can profit from it.

Recession risks: what are 10 of the top indicators to watch and why it works.

By | Economy, Headline Article, Most Viewed | No Comments

IMG_1116 (640x477)What does it take to identify an impending recession? Obviously, this is an extremely complex question. However, there are at least 10 factors that have had a strong historical track-record of identifying recessions, and below we outline ten metrics to add to your watch-list:

  • Household spending – The amount of money households spend on everyday goods and services is the number one determinant of economic growth. It represents more than half of GDP at 55.7% and is thus a directly attributable indicator and of significant importance to any GDP insight. Household spending changes tend to change instantaneously with the rate of economic growth, however given that consumer confidence tends to go in cycles it is still a useful tool to foresee future recessionary risks.
  • Business investment – Technically called ‘private fixed capital formation’, business investment is a direct line in the GDP calculation and thus has a direct effect on recessionary conditions. Business investment accounts for 20% of GDP so it’s thus seen to be a very important component and indicator for future recessions. Apart from its direct impact, it is also a clear signal of business confidence which has flow on effects for future GDP results.
  • Dwelling formation – Dwelling formation refers to the activities involved in new and used private houses, including alterations and renovations. It now accounts for 5.3% of the entire economy and is thus seen to be strongly correlated with the overall economic growth rate. Similar to household spending, it is seen to be an indicator of consumer confidence and thus has the ability to act as a leading indicator for economic growth. An encouraging signal involves a positive and/or growing rate.
  • Corporate earnings – Corporate earnings refer to the aggregate profitability of businesses and is a data series produced to gauge the health of the corporate sub-set of the economy. If the average company is highly profitable, it makes sense that the overall economy will be expanding. With this logic, we can see a strong correlation between the current status of corporations and the future growth rate of the country. The risk of recession is seen to increase when corporate profitability is deteriorating on average.
  • Yield curve – The yield curve simply refers to the difference in ‘borrowing rates’ on 10 year bonds versus 5 year bonds. If the 10-year bond pays a higher rate than the 5-year bond, this is seen to be normal, however when the opposite occurs it is seen to be the markets way of pricing for a recession. Across the globe, there has been a very strong long-term connection between the shape of the yield curve and the risk of recession. The link in Australia has been relatively weak but remains an insightful measure of risk.
  • Historical GDP growth – It makes intuitive sense that the risk of recession is higher if the economic growth rate is off a lower base. For example, it would seem highly unlikely for a recession to occur from a base of 5% or more, but would be far more plausible to slide into recession from a growth rate of 2% or less. This momentum effect is a powerful force behind economic growth, and for this reason the historical GDP growth rate can be an insightful measure for future recessionary risks.
  • Worker productivity – The driving force behind an economy is the workforce. The more people work, or the more efficient they become, the stronger the economy tends to be. There are many useful measures to track workplace productivity, however the most useful measure tends to be the total number of hours worked as this factors in population growth and demographic changes. A low and/or falling work ethic increases the risk of recession, whilst a growing rate is a positive sign for the future economy.
  • Retail sales – Retail sales is a vital component of household spending and is a very useful measure of the future direction of the economy. If consumers aren’t shopping and money isn’t passing through people’s hands, the economy is unlikely to be growing with conviction.
    If retail sales are falling, there is a reasonably high likelihood that a recession could be impending as consumer confidence becomes dented. History has shown that this connection with GDP is strong.
  • Housing starts – The process to build a house begins with a housing approval or ‘housing start’. This commitment is a clear sign of confidence that the economy will hold up, and marks the commencement of a long list of transactions that eventually push the economy forward. The new housing starts data is subject to volatility, however, if more people are committing to build a new home, more people are signalling their confidence in the economy. This reduces the risk of a future recession.
  • Employment growth – Similar to the workforce productivity indicator, the employment rate is of vital importance for the future prospects of the economy. The total employment growth figure is a more useful measure than the unemployment rate because it accounts for new additions to the workforce. While the employment growth figure tends to have a strong instantaneous correlation with GDP, the indicator has also proven to be an effective measure for future recessionary risks.

Of course, this list is not conclusive and there are an array of other important economic fundamentals that will impact the likelihood of a recession. In reality, there is no such thing as a perfect model, simply because the economy is so dynamic.

Creating a view from the data

Despite the limitations, an individual that wants any form of success should be trying to formulate a view based on the “known-known’s” while acknowledging the inability to predict the future with any precision. On this basis, the Investing Times opens up this research to help its readers, and produces a global recession risk report that is freely available to the public via the link below. This is a value-add service at no cost that covers at least five of the major global economies.

To give readers an idea of what to expect, the chart below is a historical view of the “recession trackers” ability in Australia, with a strong connection between the leading indicators and the future GDP growth rate.

Recession tracker performance

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Worried about a property crash? These nine facts answer it better than most…

| Investing Times News, Lifestyle, Recommended by the Investing Times | No Comments
What causes a property market to crash? Is it a falling economy? An unemployment outburst? A building oversupply? Should we concentrate on consumer confidence data? Or is it as simple...

Long-term investment themes: 10 year + view of the trends, opportunities and challenges

| Economy, Investing Times News, Recommended by the Investing Times | No Comments
Drawing attention to the outlook and big themes present in the economy is always a healthy perspective. Below are a number of key themes to think about as you monitor your...

Facts about the Chinese economy: How likely is a financial crisis in China?

| Economy, Investing Times News, Recommended by the Investing Times | No Comments
China is undoubtedly important to the global economy and with embedded signs of rising bad debts, there are enormous concerns surrounding China’s ongoing stability. Since 2005, China has accounted for...

It’s not (totally) the baby boomers fault: Why the working population matters most

| Most Viewed, Politics, Recommended by the Investing Times | No Comments

We have an unprecedented rise in the over 65 age group and our working population is growing at a more modest rate. This article will detail the real problems we face and how you can profit from it.

MOST VIEWED

17 stock metrics: value, growth, dividend strength, stability, momentum and sector analysis

| Investing Times News, Most Viewed, Share-Market | No Comments
If we agree the primary objective of stock-picking is to pick the winners and/or avoid the losers, then we must start with a framework that helps determine which companies to...

Recession risks: what are 10 of the top indicators to watch and why it works.

| Economy, Headline Article, Most Viewed | No Comments
What does it take to identify an impending recession? Obviously, this is an extremely complex question. However, there are at least 10 factors that have had a strong historical track-record...

Can Warren Buffett and Robert Shiller both be wrong at the same time? Unlikely.

| Headline Article, Investing Times News, Most Viewed, Share-Market | No Comments
Warren Buffett and Robert Shiller should be familiar names to anyone with an active interest in the share-market. They are two of the most respected individuals on the planet when...

It’s not (totally) the baby boomers fault: Why the working population matters most

| Most Viewed, Politics, Recommended by the Investing Times | No Comments

We have an unprecedented rise in the over 65 age group and our working population is growing at a more modest rate. This article will detail the real problems we face and how you can profit from it.

Money, Health and Happiness: Evidence shows all are linked, but what’s most important?

By | Opinion Articles | No Comments

Happiness should be at the core of our inner pursuits, and common-sense guides us towards this objective, both by staying healthy and creating financial security. However, nobody talks about what’s more important? Money or health? Would you rather be rich and fat or poor and healthy? And is it better to be cash-flow rich but asset poor or cash-flow poor and asset rich? The OECD global data for 2015 shows all of the above as important connections, however income seems to be the greatest contributor to happiness, at least statistically.

Happiness Economics

We spend so much time analysing markets and global data, yet we rarely take a moment to reflect on the purpose of our laborious activities. It has been famously said that every human is seeking happiness and purpose, with each entitled to their own opinion on what matters most.

With happiness at the forefront of our minds, it is interesting to see a growing field of study on “happiness economics”, which is primarily designed to answer the world’s hardest and longest running questions: What makes us happy? Does additional money make us happier? And is health or money more important to our happiness?

The OECD is at the forefront of this research and their data is freely available to download via their website http://stats.oecd.org/. Naturally, we took advantage of this opportunity and ran similar tests to those that we sequence on monetary matters. What we found is largely common-sense, although fascinating and worth reminding ourselves as we venture through our financial well-being and health-conscious lives.

Happiness and money

What seems to matter:

  1. Money – according to the OECD global data, there is a 0.66 correlation between income and happiness on average. There is also a 0.43 correlation between a person’s total wealth and their happiness. This link between income and happiness is one of the strongest of all (at least statistically speaking); marginally surpassing other factors such as health, education and social networking. An interesting comparison involves the difference between the 20% highest income earners versus the 20% lowest income earners in the OECD countries. The analysis consistently showed that money was important, although its importance seems to diminish the wealthier you get. For example, the correlation between personal earnings and happiness is strongest for low and middle income earners at 0.65 and 0.66 respectively than for high income earners at 0.32.
  1. Health – around the world there is a 0.64 correlation between a person’s self-reported health and their happiness. This is also a very strong factor and tends to increase as income levels grow. Interestingly, the “self-reported” health has a higher correlation to happiness than a person’s actual health or life expectancy (which also has a reasonable correlation of 0.38). We found it noteworthy that Australia’s self-reported health is among the world’s highest at 85%, despite us having among the world’s highest obesity rates.
  1. Social Networks – around the world there is a 0.51 correlation between the strength of a person’s social network and their happiness. Consistent with other data, it showed that people with higher incomes tend to have marginally stronger social networks.
  1. Education –the link between education and happiness is not as strong as many initially assume. Officially, there is a 0.17 correlation between education and happiness, which shows a weak but positive connection. Interestingly, the link between education and happiness also diminishes as personal incomes increase.
  1. Long-term unemployment – there is a high negative correlation of -0.56 between the long-term unemployment rate and average happiness level. Expectedly, a higher unemployment rate is linked to those with lower education standards and lower wealth.

 

Note on Money and Happiness: None of the above is likely to make you change your day job, although it is nice to provide clarity on what matters most to the average human. In Australia the wealth divide clearly still exists, although this pleasingly seems to have a relatively small impact on one’s ability to find happiness. Maybe it is not all about money after all.

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Worried about a property crash? These nine facts answer it better than most…

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What causes a property market to crash? Is it a falling economy? An unemployment outburst? A building oversupply? Should we concentrate on consumer confidence data? Or is it as simple...

Long-term investment themes: 10 year + view of the trends, opportunities and challenges

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Drawing attention to the outlook and big themes present in the economy is always a healthy perspective. Below are a number of key themes to think about as you monitor your...

Facts about the Chinese economy: How likely is a financial crisis in China?

| Economy, Investing Times News, Recommended by the Investing Times | No Comments
China is undoubtedly important to the global economy and with embedded signs of rising bad debts, there are enormous concerns surrounding China’s ongoing stability. Since 2005, China has accounted for...

It’s not (totally) the baby boomers fault: Why the working population matters most

| Most Viewed, Politics, Recommended by the Investing Times | No Comments

We have an unprecedented rise in the over 65 age group and our working population is growing at a more modest rate. This article will detail the real problems we face and how you can profit from it.

MOST VIEWED

17 stock metrics: value, growth, dividend strength, stability, momentum and sector analysis

| Investing Times News, Most Viewed, Share-Market | No Comments
If we agree the primary objective of stock-picking is to pick the winners and/or avoid the losers, then we must start with a framework that helps determine which companies to...

Recession risks: what are 10 of the top indicators to watch and why it works.

| Economy, Headline Article, Most Viewed | No Comments
What does it take to identify an impending recession? Obviously, this is an extremely complex question. However, there are at least 10 factors that have had a strong historical track-record...

Can Warren Buffett and Robert Shiller both be wrong at the same time? Unlikely.

| Headline Article, Investing Times News, Most Viewed, Share-Market | No Comments
Warren Buffett and Robert Shiller should be familiar names to anyone with an active interest in the share-market. They are two of the most respected individuals on the planet when...

It’s not (totally) the baby boomers fault: Why the working population matters most

| Most Viewed, Politics, Recommended by the Investing Times | No Comments

We have an unprecedented rise in the over 65 age group and our working population is growing at a more modest rate. This article will detail the real problems we face and how you can profit from it.

Stock-picking skills: a key metric from Bruce Berkowitz, one of the world’s best investors

By | Investing Times News, Share-Market | No Comments
In search of perfection: Copy thy best

In search of perfection: Copy thy best

The world’s best investor is a distinguished title – no doubt about it. And a lot of names are regularly thrown around – Warren Buffett, George Soros, Bruce Berkowitz, David Tepper, John Paulson, Peter Lynch, to name a few.

We introduce to you the ‘Investor of the Year of 2013’ according to gurufocus.com and seek to identify what makes his investing technique so special. More importantly, we are looking for lessons and trading ideas.

Introducing Bruce Berkowitz

Without boring you with his life story, Bruce Berkowitz was Morningstar’s ‘Investor of the Decade’ through the tech wreck of 2001 and the GFC in 2007-09. What is most impressive is that the Fairholme Fund, which Berkowitz manages, has returned a cumulative +306.49% since it commenced in 1999 versus a total benchmark return of just +24.39%.

In fact, he has outperformed the index in 94 out of 97 rolling 5 year periods (and investors should know how hard it is to outperform the index at all).

Getting down to what matters…

To be practical for us, we want to know what makes him a great investor. Most people would agree that an impeccable track-record over the long-term is the evidence that separates a good investor from a great one. But the track-record is an outcome, not a formula.

A great investor must have an investing philosophy which enables them to either a) pick the winners or b) avoid the losers.

Sounds pretty simple, but any investor worth their salt understands how hard this can be.

Lessons for Australians

Thankfully, Berkowitz speaks publically about his investing style which creates a fantastic opportunity for us to learn valuable lessons. Below is a summary of the key principles that have allowed Berkowitz to outperform exceptionally:

  • Find the intrinsic value of a business. “People like to predict rather than price”.
  • Take a 5 year view. “We go back five years to measure 5-year performance”.
  • Don’t try to perfectly time your entry into assets. “I have proven time and time again that I can’t time the bottom of the market, but when I see $1.00 selling for $0.50, I buy and my feeling is if I’m early and the price goes down further, I have the chance to buy more. With being early, you look wrong until you’re right”.
  • Only diversify if you don’t know what you’re doing. “Why would I own my tenth best idea when I can own more of my best idea?”
  • Find businesses that are selling at a discount. “I want to buy stocks that other people hate”.
  • Use history as your guide. “History doesn’t exactly repeat itself, but it does rhyme”.
  • Nobody is perfect. “Oh, there are always hundreds of mistakes”.

 

Berkowitz’s key advantage?

It appears that Berkowitz does his best work while analysing the balance sheet of a business. In this sense, he is very similar to Warren Buffett. But while the average investor will find it very difficult to replicate his methodology, Berkowitz loves to refer to the “Price to Book Value ratio”.

In simple terms the price to book value ratio is a comparison of what the market implies a company is worth (ie. the share price) versus what the accountant thinks it is worth. It also has one of the best records in history.

A quick Google search will reveal numerous PhD’s which confirm that a low P/BV results in significant outperformance over the longterm, whereas a high P/BV has the opposite effect. This has become one of Berkowitz’s keys.

Berkowitz loves to find a business that is worth more dead than alive, meaning that if the doors were shut they would get more money than what the current shareholding is worth.

Should we rely on P/BV?

Using common sense, it is unsustainable for the P/BV to perpetually expand or shrink, except in the event of a business failure. Therefore, it is natural to see that this ratio should normalise in the long-run, creating opportunities in companies with an abnormally low P/BV. You will note that the lowest P/BV opportunities are often unloved stocks, at least temporarily, however this is the perfect hunting ground.

Beware that this ratio doesn’t work all the time (if it did, everyone would follow and it wouldn’t work) but don’t be mistaken because it has proven to work in the long-run and across multiple countries.

How you can copy Berkowitz?

Screening your portfolio for P/BV is the recommended starting point. The odds are it will show one or more of your investments have unattractive fundamentals. The other key lessons are to be relentless in finding bargain prices, don’t follow the crowd, have conviction and be willing to accept that prices may move the wrong way in the short-term.

Note: The Investing Times uses the Price to Book Value ratio as one of its 17 stock-market valuation tools in the “Direct Share Research Weighting Models”. If you wish to see the other 16 metrics and its performance history, request a one-off free trial edition or subscribe here.

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Worried about a property crash? These nine facts answer it better than most…

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What causes a property market to crash? Is it a falling economy? An unemployment outburst? A building oversupply? Should we concentrate on consumer confidence data? Or is it as simple...

Long-term investment themes: 10 year + view of the trends, opportunities and challenges

| Economy, Investing Times News, Recommended by the Investing Times | No Comments
Drawing attention to the outlook and big themes present in the economy is always a healthy perspective. Below are a number of key themes to think about as you monitor your...

Facts about the Chinese economy: How likely is a financial crisis in China?

| Economy, Investing Times News, Recommended by the Investing Times | No Comments
China is undoubtedly important to the global economy and with embedded signs of rising bad debts, there are enormous concerns surrounding China’s ongoing stability. Since 2005, China has accounted for...

It’s not (totally) the baby boomers fault: Why the working population matters most

| Most Viewed, Politics, Recommended by the Investing Times | No Comments

We have an unprecedented rise in the over 65 age group and our working population is growing at a more modest rate. This article will detail the real problems we face and how you can profit from it.

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17 stock metrics: value, growth, dividend strength, stability, momentum and sector analysis

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If we agree the primary objective of stock-picking is to pick the winners and/or avoid the losers, then we must start with a framework that helps determine which companies to...

Recession risks: what are 10 of the top indicators to watch and why it works.

| Economy, Headline Article, Most Viewed | No Comments
What does it take to identify an impending recession? Obviously, this is an extremely complex question. However, there are at least 10 factors that have had a strong historical track-record...

Can Warren Buffett and Robert Shiller both be wrong at the same time? Unlikely.

| Headline Article, Investing Times News, Most Viewed, Share-Market | No Comments
Warren Buffett and Robert Shiller should be familiar names to anyone with an active interest in the share-market. They are two of the most respected individuals on the planet when...

It’s not (totally) the baby boomers fault: Why the working population matters most

| Most Viewed, Politics, Recommended by the Investing Times | No Comments

We have an unprecedented rise in the over 65 age group and our working population is growing at a more modest rate. This article will detail the real problems we face and how you can profit from it.

“Would you rather be a miserable millionaire or happy and homeless?” How do you answer these questions?

By | Investing Times Classics | No Comments

IMG_0801 (480x640)The game of “would-you-rather” is a favourite past-time, usually involving an alcoholic beverage and a willingness to be embarrassed. However have you ever played a clean, moral-based version of the game that helps decode what’s most important to you? See how you answer these tricky questions.

Before we start, let’s clear up the rules. Each question starts with “would you rather” and there will be two options that follow. You must select only one – and your answer can’t be both or neither. As you go through them, you will hopefully find how much importance you place on money in comparison to the other important things in your life.

The 29 questions

“Would you rather have more time or more money?”

“Would you rather go back in time to meet your ancestors or go into time to meet your great grand-children?” (74% say the future)

“Would you rather live one life that lasts 1,000 years or live 10 lives that last 100 years each?”

“Would you rather know when I’m going to die or know how I’m going to die?” (59% say how)

“Would you rather be the best looking person or the smartest person?”

“Would you rather live in a world where there are no problems or live in a world where you rule?” (66% say no problems)

“Would you rather find true love or find $10 million?” (53% true love)

“Would you rather be the richest person on the planet or be immortal?” (53% richest)

“Would you rather secretly lose $500,000 on a bad investment or have everyone think you lost $500,000 even though you didn’t?” (53% would secretly lose)

“Would you rather receive $10 billion or give $10,000 to 100,000 African families?”

“Would you rather be famous or be the best-friend of someone who is famous?”

“Would you rather win the lottery or live two lives worth?” (60% say lottery)

“Would you rather always know when someone is lying or always get away with lying?” (54% say know)

“Would you rather have no-one turn up to your wedding or have no-one turn up to your funeral?”

“Would you rather be able to speak every language in the world fluently or be the best in the world at something of your choosing?”

“Would you rather change the past or be able to see into the future?”

“Would you rather email an embarrassing email to your entire company or secretly lose $10,000 on a bet?”

“Would you rather lose $1000 or lose all of your phone contacts?”

“Would you rather have been the smartest kid in school or the most popular kid in school?”

“Would you rather have lived like a king but have no family or live on the poverty line but have all your friends and family?” (74% say the latter)

“Would you rather go on a world tour with your enemy or never have a vacation?”

“Would you rather be a musician and have a number one hit or be an unknown with 50% more intelligence?”

“Would you rather have a small fulfilling life or a long unsatisfying life?”

“Would you rather have all your dreams fulfilled but have a 10% chance of instant death or be completely average with nothing special about you?” (63% say dreams)

“Would you rather visit a small house with your 10 loved ones or a mansion but not know anyone?”

“Would you rather change into someone else or just be you?” (52% say change)

“Would you rather be a hideous but popular person or happy but unrecognised?”

“Would you rather invest in a start-up which has lots of information or invest in a property chosen for you at random?”

“Would you rather be a miserable genius or a happy moron?” (56% say miserable)

As you can probably tell, the questions tell more about you than you first realise. Do you crave social attention, even at the detriment to your monetary objectives? Does money buy happiness in your mind or do you value other things more? Regardless, it might tell you a bit about your inner drivers and hopefully made you think twice about what is really important.

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Can Warren Buffett and Robert Shiller both be wrong at the same time? Unlikely.

By | Headline Article, Investing Times News, Most Viewed, Share-Market | No Comments

IMG_9055 (480x640)Warren Buffett and Robert Shiller should be familiar names to anyone with an active interest in the share-market. They are two of the most respected individuals on the planet when it comes to money matters, and each have varied yet complimentary views on what drives the overall share-market.

Therefore, the title of this article has an underlying power behind it. “Can Warren Buffett and Robert Shiller both be wrong at the same time” is really the same way of saying “These two people are legends of their field and worth watching closely”.

The reason these two men are exceptional

Robert Shiller’s CV includes being the Professor of Economics at Yale University and a Nobel Prize winner in Economics. More importantly, he is the man behind the Shiller P/E ratio – a complex and compelling share-market indicator.

The Shiller P/E ratio is known as the more stable and reliable cousin of the Price to Earnings ratio, and is a market valuation tool that has accurately predicted the bubbles of recent decades (including famously for the 1987 Crash and the GFC in 2007/08).

Shiller PE Ratio in Australia

Shiller PE

Warren Buffett is the world’s 3rd richest man and better known for his ability to source businesses that have an understandable business model and long-term abilities to grow. He is quick to tell people he cannot predict the short-term direction of the market, however, underlying his strategy is an optimistic outlook for the overall economy and a strong consideration on its relationship with the share-market. In fact, it is the relationship between the share-market and the economy that has made him a fortune along with his “buy low, sell never” company philosophy. More specifically, Buffett has been documented on multiple occasions for his consideration of the Market Capitalisation of the overall share-market and its position relative to the nominal value of the overall economy. This is called the Market Cap to GNP ratio or the Market Cap to GDP ratio.

Market Cap to GDP Ratio in Australia

Buffett Market Cap to GDP

Utilising the favourite metrics of the smartest minds in a field would be seen by many to be a no-brainer. Going against it could be like ignoring the opinion of the world’s best heart surgeon when needing a heart transplant.

Yet fund flows continue to diminish and the average allocation to equities continues to remain well below historical norms in Australia. This is despite the Shiller PE being below historical norms and the Market Cap to GDP around historical norms.

Summary

It will take time before we know who will make the correct long-term judgement – the Shiller/Buffett duo or the average Australian – but it would seem unlikely to be the latter.

Note: This articles comes from the most popular and commented data from the Investing Times Asset Allocation Research document. This comprises nine of the most influential factors that determine share-market value (including the Shiller PE and Buffett Market Cap to GDP ratio), with a compelling track-record over a 25-year period in Australia.

If you wish to see the 9 metrics, please request a free trial below and we will forward it by email. This is a value-add with no obligation.

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Facts about the Chinese economy: How likely is a financial crisis in China?

By | Economy, Investing Times News, Recommended by the Investing Times | No Comments

IMG_0174 (640x480)China is undoubtedly important to the global economy and with embedded signs of rising bad debts, there are enormous concerns surrounding China’s ongoing stability.

Since 2005, China has accounted for approximately 40% of total global growth with the economy growing five-fold in just 15 years. However, jitters are now apparent and the past six months has seen the biggest test for emerging markets since the Asian crisis of 1997. A combination of three key factors are being cited; enormous growth in shadow-banking, bubbling asset markets and indebted local governments.

But just how likely is a financial crisis in China? What is their debt position in comparison to other countries and/or history? And what should an investor need to know in order to make educated decisions in related markets?

The Debt Expansion is Fearsome

A scary and newsworthy chart often put forward by media outlets shows the rapid growth in total debt across China. There are many versions of these articles, however even highly respected news outlets such as the Wall Street Journal (WSJ) and Bloomberg have caused stir with headlines such as “China’s Debt Bomb” and “A Debt Balloon With Nowhere to Go But Down”.

Of course, they are intended to inform their audience, but they also use such headlines to sell newspapers. Therefore, it is important to obtain a balanced view of the data.

The reality shows two important but contradictory points. Firstly, China’s debt has ballooned relative to history on both a nominal basis and in comparison to the size of their economy. In this sense, both the WSJ and Bloomberg are correct. However secondly, this debt expansion was from a very low base which means China is still in line with global peers on both a relative and absolute basis.

A Global Comparison

China’s total debt – accumulated by households, corporates and central/local governments – reportedly rose from 121% of GDP in 2000 to 158% in 2007 and 282% in 2014. This 161% expansion in debt looks unhealthy, but looks considerably worse in absolute terms.

Nominal GDP in China is estimated to have grown approximately 474% in the fourteen years to 2014, meaning the nominal total debt position has increased over 12x from around US$2.1 trillion to $28.2 trillion.

In comparison, no other country has ever encountered the same debt expansion on both a relative and nominal level. However, before everyone runs for the hills it is important to also illustrate the debt position of other key economies that many consider “perfectly safe”.

For example, the latest total debt figures – including public, corporate and household debts – show China has 282% estimated total debt to GDP, the USA has 269%, Germany has 258% and Australia has 274%. Relatively, all four countries have less debt than Japan’s governmental debt level alone.

Therefore, even after factoring in the misunderstood shadow banking, the Western World faces very similar levels of total debt as China according to the Bank of International Settlements. On this basis, China appears to be on track. The only problem is whether they can handle the next inevitable bad debt cycle.

IMG_0153 (640x480)Bad Debt cycles explained

It would be imprudent to brush off China’s debt expansion, including the shadow banking, on the basis of a global comparison. There are many valid reasons to be cautious about China’s debt expansion. Firstly, the composition of the debt is considerably different to its Western peers, with a much greater portion of higher risk corporate debt (especially lower grade non-financial corporate debt). In China, corporate debt represents 67% or two thirds of total debt compared to Australia which has less than half in corporate debt (47%) and the USA which has only 38%.

This debt composition is important on many levels, no less because it affects the speed and severity of any financial crisis, should it occur, plus it tends to lack the same levels of regulation and hence attracts riskier lending. This is a major risk for an economy known for volatility.

Bad and Doubtful Debts

Using the analogy of an individual that over-leverages on debt, it can be universally agreed upon that the greater the amount of debt relative to assets or income, the greater the risk of a severe collapse. For example, a couple earning $200,000pa with a $2 million home and a $1.8 million debt faces severe risk if either the asset or income falls. On the contrary, it also provides the greatest opportunity for growth if the asset value grows at a rate greater than the interest expense. On a country level, this is no different, and for China a high debt level creates this leverage.

The lesson from the “PIGS crisis” in Europe (the debt crisis of Portugal, Ireland, Greece and Spain) was that the real risk of a financial crisis comes from two sources; rising interest costs, typically beyond 7%, or a spike in bad and doubtful debts.

At present, the effective borrowing rate for China, assessed via its bond yield, is healthy at approximately 2.88%. Therefore, the real risk would be a spike in bad and doubtful debts, which is a key dataset to watch.

Will we see a spike in bad debts?

Whether we will see a spike in bad debts in China will relate to the ability of corporate China to meet its debt obligations. In the current environment, this is heavily reliant on three issues; 1) the overall exposure to resource-related debt, 2) whether the property market stabilises to constrain defaults, and 3) whether Chinese capital outflows can be constrained. In many ways, this is no different to the Western World, with the possible exception of capital outflows.

The biggest difference between China and its global peers is the historical analysis of bad debt cycles, with Chinese downturns far more severe and worrisome than Western counterparts. For example, a commonly cited downturn was the 1997 Asian debt crisis, which reportedly wiped more than 10% of bank assets in China. To put this in perspective, a similar episode today based on current Chinese debt levels would create a financial crisis up to 3.5x bigger than the 2007 crisis in the USA. This is scary stuff.

What to do?

It would seem contradictory to expect and/or fear a financial crisis in China without expecting something similar elsewhere in the indebted Western World. In reality, the backdrop of high debt and high asset prices are a common theme among many of the world’s most important economies.

Regardless of whether you think a crisis will occur, it is reasonable to worry about the impact a Chinese financial crisis would have on the global economy (including share-markets), particularly because of its size and historical volatility. Emerging market bond spreads are one way to monitor proceedings, as this is the markets way of telling us the risk of corporate debt, which China happens to have a lot of. Asset prices are another area to monitor, as a sharp fall in either property or equities could be an obvious trigger for a rise in defaults and the commencement of a bad debt cycle.

Patrick Hess from the European Central Bank said it well, when he was quoted as saying, “a domestic financial crisis is not unlikely to happen in China, and very likely to spread globally, should it indeed happen. To implement all the reforms necessary to avert a Chinese crisis is almost a “mission impossible,” or at least very difficult in the complex Chinese policymaking context, which involves a high degree of institutional overlap, conflicting goals and interests, and political bargaining. Even such a strong leader like Xi Jinping cannot change this context”.

At present, it could be plausibly stated that China faces its greatest debt-related risk since the 2007 GFC and possibly since the 1997 Asian Crisis, with capital outflows and asset values showing weakness. For now, Xi Jinping seems to be aware of the risks and we have seen the introduction of numerous reforms in recent times to counter or reduce these risks, and property values appear to have commenced a mild recovery.

Recent economic data shows the debt-train continues in China as it continues stimulating to avoid further capital outflows. However, rather ironically, the more China borrows the greater the risks become. In summary, investors should exercise a high degree of vigilance and monitor Chinese developments very closely.

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