Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), & CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

5 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he's one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written, yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data & charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, author of the New York Times bestsellers 'End Game' & 'Code Red'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision - where world class experts share their thoughts on economics & finance - author of Things That Make You Go Hmmm, one of the world's most popular & widely-read financial publications.

"Wargent is a bald-faced realty foghorn" - David Llewellyn-Smith, 'MacroBusiness'.

Tuesday, 12 December 2017

Dunked donuts


Oh dear, yet another retail stock hits the skids. 

It's becoming nigh on impossible to keep count.

Proving that strong investigative journalism can still pack a punch, yesterday's share price collapse resulted from a detailed Fairfax investigation.

This time it was Retail Food Group (ASX: RFG), franchiser and owner of brands including Donut King, Gloria Jean's, Michel's Patisserie, Pizza Capers, Brumby's, and a a whole lot more. 

Until recently the stock-pickers' market darling, RFG has instead become a shorter's delight.

The share price crashed further yesterday following the Fairfax investigation which alleged that franchisees are charged...wait, actually, you can read the allegations for yourself, there's no need for me to copy them here. 

The share price was smashed by another 26 per cent yesterday.

The market for RFG is now down from the 52-week high of $7.18 to just $3.25.

Fairfax reported that "hundreds of stores are going to the wall", with many on sale, or about to be so (17 per cent of Gloria Jean's stores were said to be for sale, and 25 per cent of Pizza Capers stores). 

Indeed, Fairfax made a long list of claims, which you can read about here and here, among other places.  

The retail sector is under pressure, with prices already falling and Amazon now beginning to trade

There's been a lengthening list of retail collapses in Australia's fashion sector. 

Monday, 11 December 2017

The malcontent (how I grew out of FOMO)

FOMO (fear of missing out)

I must confess to having played the UK National Lottery when I left school as a teenager.
Of the 48 lads and one lass in the timber factory I worked in when I first joined the workforce, 48 of them were already signed into a Lotto syndicate (only the business owner didn't play; he probably didn't need to, or perhaps he felt that he wouldn't be welcome in the syndicate). 
I never really thought we had much of a tilt at winning - after all the odds of an individual ticket taking out the jackpot prize were seriously remote at nearly 14 million to one.
No, I simply couldn’t abide the thought of turning up on another dark winter Monday morning, only to discover that a band of exhilarated ex-machinists had retired to sun themselves by the pool in Barbados (leaving me with the tedious task of grinding tools for 10 hours a day).
Classic human psychology: even at the likely risk of losing, I wasn’t prepared to risk missing out where there was a chance of others gaining significantly. And I knew it too! 

I never won the National Lottery, unsurprisingly. But, at least as importantly, nobody retired to the Caribbean without me! 

E17: Gone to the dogs

Another short anecdote. Back in the 1990s I went to a boozy race-night work function (remember them?) at the now-defunct Walthamstow stadium in east London. 

On the very first dog race one of the lads, the son of one of the firm's partners, won an obscure Yankee bet - or possibly a tricast, the memory fades - netting for himself a tidy jackpot.

For the remaining dozen races seemingly everyone at the function was piling onto the same style of bet as it was clearly deemed to be 'the way to win'.

Turned out, it wasn't the way to win at all, it was just a very lucky bet. 

To be fair to the fella, he did at least buy a round for the bar! 
Contentment: the Bitcoin test

A quick 10-second exercise for today: imagine a good friend of yours tells you they've "just remembered" that they bought 100 Bitcoins for $10 each some years ago. 

How would you feel with the 'coin' price ballooning to above $16,000? 

I mean, how would you really feel?

In an ideal world, of course, you'd just be thrilled for them, and nothing else. 

On the other hand, you might be a tad jealous, or even feel a bit angry. Perhaps even livid! 

Most of us would lie somewhere on that scale between the two extremes. 

Moving towards my peak earning years, from time to time friends and acquaintances strike a jackpot or bonus through working for companies that have gone to a float, IPO, or private sale.

The 18-year old me would probably have been gutted or morose to hear of such tales (so unfair! Why them and not me?), whereas today I'm almost invariably delighted to hear success stories, even if there's a fleeting or momentary pang of envy.

They wouldn't really be my friends if I thought otherwise, I feel.

From an investment strategy point of view, you'd want to be sitting towards the sanguine end of the scale, and definitely not thinking of diving in to an investment like Bitcoin because someone else has done it (there are, after all, endless ways to make fast returns of a few thousand per cent, including at the dog track - it's called gambling!).

Ultimately we should all aim to be happy and content with our own lives, situations, and financial strategies.

Getting rich quickly is great if it happens, but it's rarely sustained, for various reasons. Far better to stick the tried and tested, compounding your wealth sensibly.

Doing something because someone or everyone else is doing it and winning is rarely an ideal starting point for an investment decision.

To conclude, an obligatory hat-tip to Sir Isaac Newton and the South Sea stock bubble...

Lamented Sir Isaac

"I can calculate the motions of heavenly bodies...but not the madness of people" .

True dat!

Growth hacking

Lucky country

There's an often-aired lament that normally goes something like the following.

Well, doesn't Australia have bugger all to show for its mining boom, even as it enters a 27th year of economic growth? We have way too much dependence on mining and 'digging stuff out of the ground', but paradoxically mining is declining as a share of the economy, and anyway it doesn't generate any profits. 

Since the Toyota and Holden closures, Australia doesn't make 'anything' any more, and the entire country is sitting around serving each other cups of coffee, or eating smashed avocado. 

The currency is too high, Australia is running current account and budget deficits, household debt is too high, and the banks are at risk of collapse because of half a trillion dollars of "liar loans" on their books (according to an odd survey conclusion at least).

Wages growth has collapsed never to return, mainly because of too much immigration, our luck has run out, future growth can't come from anywhere (because Dutch Disease), and the entire Ponzi scheme is a house of cards economy that's about to sink into a horrible recession, possibly leaving egg all over our collective faces. 

Depressing, indeed! 

But, hang on a minute. Employment growth has been positively tearing along at +3 per cent or +355,700 over the past year, while the Reserve Bank of Australia (RBA) forecasts that the economy will grow by more than 3 per cent in 2018, and by more than 3 per cent again in 2019. 

Well, what on earth gives?

Good growth/bad growth

The RBA's Luci Ellis unleashed her counter-punch in a terrific speech on economic rationalism, 'Where is the growth going to come from?'.

Laying the foundation of her arguments, Ellis first showed that since the floating of the exchange rate in 1983, Australia's manufactured exports increased from about 0.5 per cent of real GDP through the 1970s, to more than quadruple to above 2.5 per cent at the peak. Today, the share remains above 2 per cent (though the contraction would feel sharper if measured in nominal prices).

Australia was once said to be riding on the sheep's back, and indeed back in the 18th century it was believed by some that the only 'virtuous' source of growth in the economy was agriculture. But roll forward to today and that has been replaced by manufacturing. Goods are good, services bad, or so we're supposed to believe.

"Do people genuinely think that it's not really production if you can't drop it on your foot?" questioned Ellis, with a supremely satisfying level of snark.

Now I was born and grew up in a region that was hit hard by heavy industry closures, so I naturally sympathise with the view that the government might've picked winners by propping up Holden or Toyota. Yet technological advances may be crushing the industry, so pivoting away from car manufacturing might prove to be the smarter move over the medium term. 

Engines of growth

Is immigration really to blame for slower wages growth? Another realistic explanation is that Australia saw a tremendous surge in its terms of trade, seeing wages grow at a rollicking pace along with accelerating immigration, which then slowed as the terms of trade declined again. 

The narrative at the time was that as the ensuing resources construction boom turned to bust, Australia could sink into a recessionary quagmire, and the downturn was surely a big one (the recent spike partly related to the import of a floating LNG platform). 

But that downturn started half a decade ago now, so what happened? Dwelling construction helped to plug the hole, with lower interest rates and rising dwelling prices spurring building activity, particularly of apartments. 

Now the downturn in apartment construction is underway, but it in turn is being replaced by a significant pipeline of public infrastructure, comprising buildings, road, and rail transport projects, that will themselves help to facilitate future growth. And with the dollar declining, the tourism and education industries are already firing.

So, will we run out of ways to grow, and do we need an identifiable external engine of growth? Au contraire, continues Ellis...

The chips are down

Which industries and sectors will future growth come from? Mainly services industries, including all of those sectors which grew more slowly through the resources boom. It's true that mining accounts for a greater share of the economy than 30 years ago, and manufacturing a lesser one. However:

"Around the turn of this century, I remember foreign investors telling me Australia was an ‘old economy’. We should stop digging things out of the ground, they said, and start building microchip factories...considering the relative price movements of iron ore versus microchips since then, we are better off for not having taken that path."

Despite the mining boom meaning that resources account for about half of exports, the mining sector only accounts for a small fraction of employment, at fewer than 220,000 employees. Most Australians do other things, and for that matter most the economic growth comes from other things too. Over the year to September the economy grew by +2.8 per cent, with agriculture the only drag.

Mining royalties have soared since the beginning of the resources boom. In terms of profitability, a recent surge in coal prices helped to see gross profits in the mining sector rise to the highest on record. Sure, we'd all like those numbers to be even higher, but that's the nature of commodity cycles, and anyway total gross operating profits hit a record $319 billion. 

Meanwhile, LNG exports are only just beginning to hit their straps, so this will contribute to growth and profits over the next couple of years too.

As for the deficits, well, a current account surplus isn't necessarily an end goal in itself - Ellis notes with a fixed rate currency we'd have had the stimulus of a balance of payments surplus, but significant inflation and not much to show for it in the end - and in any case the current account deficit is hardly chronic.

The Federal Budget is projected to remain in deficit for some years to come, with full employment surely the best way to get it back into balance.

Of the three Ps...

Population growth will generate growth. Though new headcount itself doesn't increase living standards, larger denser cities are more productive - with some roles only flourishing with a larger population - while new migrants are on average younger and better qualified than the incumbent population. The interstate migration figures show that the labour market has adjusted to the fortunes of mining.

The participation rate has also been lifting for females and older workers, partly reflective of improved health, but these are once-off adjustments.

The real key to enhancing future growth is productivity, both for start-ups and existing businesses, including the adoption of new technology. Australia has normally been viewed as a fast adopter of technology, but this dynamic has slowed, while the share of research and development expenditure has also declined since the financial crisis, which is far from ideal. 

This has been the downside for Australia, we've been less willing to embrace new technology lately, such as cloud computing and the like. But over time other industries will grow, perhaps including robotics, AI, biotech, and more. 

Ellis believes that continued growth is more conducive to innovation than a recession: "There is nothing quite like a tight labour market to make firms think about how to do things more efficiently" - so with any luck the RBA will bear that in mind if the present slack persists! Indeed, challenges ranging from wages growth, to the budget, and household debt would seem much brighter with a return to full employment. 

Back to the future

Does Australia have nothing to show for its 27 years of growth? It depends on your perspective, I guess. GDP per capita is at all-time highs, living standards are remarkably high both globally and historically speaking (real disposable incomes have all but doubled since the late 1950s), and household wealth per capita is second in the world only to Switzerland. 

From time to time I read lists of companies and brands than didn't exist 10 or 20 years ago, which never cease to amaze, and herein lies part of the solution too. With the right political, market, and regulatory environment, future growth and employment will be created and sustained in industries and sectors that can't even be imagined today. Luci Ellis with the last word:

"The next time somebody asks you ‘where’s the growth going to come from?', you can answer: ‘from all of us, trying new things, and gradually getting a bit better at what we do.’ We don't need to wait for something external to make it happen."

Saturday, 9 December 2017

Brisbane in 2018 (video)


Brisbane's housing market has been, in a word, patchy.

Sifting through the 2017 figures, housing markets such as New Farm in Brisbane have recorded capital growth of about 7 per cent this year. 

Teneriffe has delivered similarly strong results.

Morningside has done about 7 or 8 per cent growth, and results of this magnitude have been seen in a number of inner suburbs.

On the other hand, the inner city apartment market has been struggling along, as I looked at in more detail here

Here are a few thoughts on the outlook for Queensland, recorded with the trusted resource, Brett Warren.

Trump factor

Trump boost

The US economy is now growing as fast as it can sustainably grow (potential output) for the first time since 2007.

Yet President Trump is set to deliver tax cuts, followed by a potentially significant 2018 infrastructure plan.

US GDP growth was revised up to +3.3 per cent in the third quarter, so things could now get quite interesting.

Even allowing for hurricanes the economy has averaged +170,000 new jobs per month over the past three months.

In November nonfarm payrolls expanded by +228,000 to rack up a record 86th month of expansion.

The unemployment rate again came in at just 4.1 per cent.

Despite this average hourly earnings still only increased by +2.5 per cent from a year earlier.

Rates in the US look to be heading higher, albeit gradually.

Weekend reads: must see articles of the week

Summarised for you here at Property Update.

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First homebuyers take the baton

Non-banks up to the plate

The total seasonally adjusted value of housing finance increased by +0.6 per cent to $32.5 billion in October 2017, led by a modest +1.6 per cent increase in investment loans. 

Industry data and polled economists had predicted a weak or very weak month for housing loans in October, but it appears that they failed reckon with the strength in non-bank lending, which has begun to kick in quite hard.

In the event there were 55,406 owner-occupier commitments in the month, above even the expectation of even the most optimistic of forecasters.

That makes it 4 consecutive months with more than 55,000 commitments, showing that home loan demand remains strong.

Of the mainland states, Victoria has by far the strongest homebuyer market.

Average loan sized are creeping up again for non-first homebuyers at $380,300, up from $370,900 a year earlier, but have stalled for first homebuyers as serviceability constraints bite. 

Investment lending ticked up a little in October too, but drilling the trendlines through the figures to smooth out the noise shows that the total value of investor activity is about 6 per cent lower than a year earlier.

Piecing it all together, total housing finance has been pretty robust, coming it at a solid $32.8 billion in trend terms - if there's been any cooling in the market, it may relate as much to muffled overseas investor interest as it does to the domestic market.

Moody's reported that it expects to see only a moderate increase in mortgage delinquencies in 2018, and this appears to be borne out by these figures, with refinancing activity some 11 per cent lower year-on-year.

Financing for new dwellings is tracking at extremely high levels, with the trend result hitting the highest level since Boney M was at number 1 in Australia with Rivers of Babylon in July 1978.

Ye-ah, we wept.

First homebuyer takeover

First homebuyers accounted for 17.6 per cent of finance commitments, up from 17.4 per cent in September, with lending to first homebuyers up by a thumping 38 per cent over the year as government incentives draw in new buyers. 

There has clearly been a sharp increase in first homebuyer activity in New South Wales and to a somewhat lesser extent Queensland.

But it's Victoria that's really driving the way forward, with its 3,250 financing commitments being the highest monthly result since 2009. 

That's upbeat news for turnover in Melbourne, Geelong, and some other regional housing markets in Victoria.

The wrap

Overall, a solid result, in terms of both the volume and value of housing finance written.

So it looks as though 2018 will kick off with the now-familiar "surprisingly resilient" articles. 

Friday, 8 December 2017

This is insania (Bitcoin)

Manic miners

The last thing I want to write about is Bitcoin, but how else will I get any readers in this sad era of internet clickbaitery, hey?

Record highs for Bitcoin today, and then some, of course.

One of the key characteristics of a mania is the lack of a valuation anchor, and Bitcoin has this characteristic in spades. 

Today the 'market cap' of Bitcoin, if that's even a real thing, went blazing towards US$320 billion, at least for a while, which made it more valuable than all but a handful of America's greatest companies. 

There are presently just over 16.7 million Bitcoins in circulation, with each one worth more than $19,000 on one exchange earlier today.

Bank of America, for example, is valued at much less that that, and it has more than a couple of trillion dollars in assets, not to mention annual revenues of about $90 billion, and the banking behemoth employs a couple of hundred thousand people. 

Bitcoin is also valued higher than Visa, which handles nearly $9 trillion in transactions per annum.

Bitcoin has no revenue, or assets (at least in the conventional sense), I'm not sure about employees, and delivers a yield of zero per cent per annum in perpetuity.

Not the type of investment that would normally grab you as sensible or see you rushing in!

But all of the Bitcoins combined are valued higher than Coca Cola, JP Morgan, or Chevron, because as far as I know, nobody has a reliable way to value them (or if they do, the market is acting very strangely).

At the current rate, Bitcoin will be bigger than Exxon Mobil by tomorrow.

There was some concerning news about Bitcoin theft earlier...wait, no-one cares!

The market may have liquidity risk, has wild spreads between exchanges, and the currency function is wracked with uncertainty, not least because of the price volatility. 

But the "this time it's different" meme is another market mania box that's well and truly ticked.

Shake it off?

Interestingly Bitcoin possibly doesn't appear to fit some of the other criteria for a market mania, such as the excessive use of margin debt or Ponzi finance (although arguably it reflects the exuberance seen across many markets in this era of easy money).

It does fit the most important characteristic of the lot: irrational exuberance.

It's been difficult to short Bitcoin to date - a dynamic we often see in housing markets - and with the price tending to reflect only bullish opinions, the uptrend has continued unabated. 

I was keeping track of how quickly Bitcoin ticked off each thousand dollar milestone in November, but this was rendered completely useless today when other exchanges had the market rising by a thousand dollars in just a few hours at one stage, which is mania writ large!

The most readily comparable market activity springing to mind might be the Dutch tulip mania of the 1630s, which gripped all members of society and even saw an offer of a dozen acres of land for a single tulip bulb.

This market's different though, no doubt!

The most compelling reason to buy Bitcoin at the moment seems to be that the price might be higher tomorrow, which is jolly good while it lasts, and there was possibly talk of some new derivatives increasing the potential for mainstream demand. 

In fact, paradoxically the higher prices go the fewer people appear to believe it's a bubble, presumably because there have been more willing buyers, making for stronger fundamentals (or warped logic somewhere along those lines).

For all that, my Twitter feed seems to comprise almost nothing but Bitcoin talk - a welcome break from the pain of Ashes cricket, granted - and I even saw Kochie discussing Bitcoin on TV earlier.

On that basis alone, this rally still must still have a way to run!