Pete Wargent blogspot

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

4 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 is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent 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 and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Tuesday, 27 January 2015

Never Been a Better Time to Buy!

Employee Earnings

The Australian Bureau of Statistics (ABS) this week released its Employee Earnings and Hours data which are released every two years (not bi-annually, though I always have trouble remembering what that means!).

The May 2014 figures showed that full-time employees made up 60 percent of all employees, had average weekly total cash earnings of $1,568.80 and had an average age of 40.4 years.

That's an increase of just over 8 percent on the May 2012 figures which showed that the average weekly total cash earnings for all full-time employees figure was $1,452.00.

I thought it would be interesting to go back to the start of the data series to see how average weekly full-time earnings have changed over time. 

Some things have certainly changed a bit over time - the ABS previously used some kind of scanner or fax machine to upload their releases...


It makes the older stuff pretty hard to read, but the data is just about legible, and if my eyesight is operating properly then average full-time weekly total earnings in May 1996 were $723.90.


With a bit of back and forth I was able to piece together the average weekly full-time earnings figures for 1996 to 2014.


So what can we say about this?

Firstly, the 2014 May 2014 average earnings figures represented an 8 percent increase on the May 2012 equivalent, a little slower growth than we have seen in certain times past when inflation was higher, but not actually all that different in real terms.

This year's release provides almost limitless data to consider at the state, sector and industry level and in terms of hourly rates, gender, age, median earnings, and much more besides.

The basic headline figures over time show that in some years the rate of average earnings growth was lower when the economy was running through a rough patch such as around the turn of the century or from 2008 to 2010, and at other times the rate of earnings growth was higher.

But the really notable thing which stands out from this chart is how seemingly small increments in earnings growth equate to an enormous cumulative increase over time.

That's compound interest at work - a snowballing effect or growth upon growth. 

We have had good years, bad years and mediocre years in the Australian economy since 1996 but average weekly full-time earnings since that time have increased by well over 100 percent.

This suggests that despite the presently soft economic environment, average earnings decades into the future are likely to much higher than we intuitively think.

That's because we consistently program our brains to understand the world in today's dollars. 

Never a better time to buy!

One of the charges which is levelled against the real industry industry - and not without good reason, one might add - is that it is almost never considered to be a 'bad time to buy' property.

If prices are falling then it must be a so-termed "buyers market" where bargains abound, and if prices are rising then it really must be a time to buy then too in order to avoid missing out.

In other words, it's always a good time to buy! 

It's standard real estate agent patter, of course, even for those who have only been in the industry for a short period of time...not even long enough to experience one cycle, let alone to experience and understand several.

Of course, whether it actually is a good time to buy property largely depends upon your strategy.

If your plan is to buy counter-cyclically then some times - and some locations - are better to buy than others. 

If your plan is to accumulate property in the best location you can then you might opt to continue buying at any point in the cycle, on the assumption that over the long term the price of prime location property will move higher.

You only have to look at some of the disastrous recommendations for homebuyers to not buy in Sydney in recent years to understand that timing the market is rarely as easy to do in real time as it appears to be in retrospect.

As the old saying goes, "the charts are easy to read from right to left". 


Actually there is no such saying, but...well, there should be. 

Index funds

Not dissimilarly, there are different arguments and viewpoints about how one should approach share investing.

While the Great Depression and a huge crash in share prices forced investors to change a few viewpoints, there are still plenty who believe in the notion that it is always a good time to invest given that valuations are likely to be higher again at some point in the future. 


It has become increasingly common for individual investors to consider that they do not need a stockbroker, fund manager or indeed any financial advice, and that they will beat the market through skilful share trading and price speculation.

Some very organised traders with great money- and risk-management skills and a relentless desire to learn from mistakes do manage to do so,

In aggregate, though, most average investors achieve at best average results, and at worst do very badly.

Again it comes down to investment strategy.

There is certainly a place for value investing in individual companies - and even for trading - but Year 7 mathematics should tell you to be very wary about the notion of an "instant 4 share diversified portfolio" if those four stocks are individual companies. 

There is not necessarily anything wrong with choosing your own companies to invest in providing that you understand how to analyse financial statements, forecasts, stock exchange releases and undertake meaningful ratio analysis.

Most investors don't - and note that picking the company to invest in first then doing a few token calculations after you've bought it doesn't count.

If even Buffett can pick stocks such as Tesco (TSCO) which lose half of their value, then this should tell you that allocating too much of a portfolio to an individual company is likely to introduce significant portfolio risk.

At the end of each calendar year, take a look back at the stock picking tips from 12 months ago and you will find that the results are often extraordinarily mixed. 

Senex:



Myer:



Index funds

Despite this there is a sound argument to say that it can always be a good time to buy shares with the right strategy.

An example, we have a couple of index funds into which the same amount is contributed every month come rain or shine, one of them for nearly two decades.

It doesn't much matter what happens the index from month to month with such a basic strategy - if valuations fall, your contribution buys more units next month, and vice-versa.

It's known as "averaging" or "dollar cost averaging".

If an individual business falls upon hard times it will eventually slide out of the index upon rebalancing to be replaced by another company.

Naturally folk with products to sell frequently dismiss the idea of averaging as "dumb money" or a "dumb strategy", but when the dumb money acknowledges its limitations, as the sage of Omaha himself said, paradoxically it ceases to be dumb.

Investment strategy

These are important considerations for an investment portfolio and it is important to understand what your own strategy is, or whether it is a combination of several strategies.

What of deflation - such as was experienced in Japan - which led to a long, painful and drawn-out decline in share market valuations and real estate prices?

It does seem that in the decade ahead many developed economies face a greater threat from deflation than they do from the runaway inflation seen in certain decades past. 

The recent fall in oil prices has only added to this dynamic.

There is no such thing as a certain outcome, but recent events in the United States, United Kingdom and now the Eurozone suggest that governments and central banks will take extraordinary action to avoid befalling a similar fate, resorting to interest rates set at the zero bound and quantitative easing in order to stave off deflation.

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On a related note it is a huge 48 hours ahead for Australian markets, with the Q4 inflation data to be released tomorrow.

I had a look here previously at the relatively soft reading for Q3 and how this might leave the door open for an interest rate cut.

A stream of soft data since that time has suggested that more interest rate cuts are in the pipeline.

This morning's news feed shows that iron ore prices are down by more by than 4 percent or $2.60 to just US$63.30/dry tonne.

And with the oil price falling in recent times there has been a generally shift in inflation profiles globally.

Over in Britain the two dissenting voices on the Monetary Policy Committee have dropped their call for interest rate hikes.

Japan has expanded its lending programs. Canada unexpectedly cut its interest rates, while Turkey, Denmark and Peru have all eased policy in the last week or so.

The Reserve Bank in Australia has indicated a preference for rate stability, but markets are increasingly coming around to the view that the cash rate is likely to be heading to just 2 percent this year.

This might not sit comfortably with the bank's preference for forward guidance, but March is a long way off and the need for a rate cut or two to boost confidence may be deemed more pressing.

A much anticipated inflation (CPI) release lies ahead! Those wanting to see higher share market valuations and property prices should be hoping for another soft reading.