- Is the ASX ready for a run? Even the bears have caught the optimism bug.
- Crown scandal-if it’s half true, it’s the worst we’ve seen.
- Rio’s period of amazing incompetence
- How to invest in class actions
- The first homebuyer is back!
- Why the main purpose of the NEG is to unify the coalition
- Irish housing bubble vs Aus conditions. You can’t compare em!
- Why hasn’t QE driven up the Aussie dollar?
Hello, I’m James Kirby, Wealth Editor at The Australian
And I’m Alan Kohler, Publisher of The Constant Investor.
And we are The Money Café.
The Money Café.
Alan, it’s a hot humid afternoon here in Melbourne and it’s almost raining. I don’t think we’ve ever had a podcast when it was raining outside, which should tell you how dry Melbourne is these days.
It’s still not raining.
I know, but there’s a couple of big black clouds that are hovering outside the window so who knows, you may hear the crunch of a thunderstorm in the course of this podcast.
I’m supposed to be having dinner in the outdoors tonight so it could be a bit wet.
Best of luck with that. Now, why don’t we start off first of all before it’s too late – because obviously there’s been quite a bit of reminiscence about this event, but the 1987 crash, which we touched on last week and we should have really gone into it more deeply because we were both there, if you like.
We have to save something for this week.
You did an interesting piece about what happened to you in the 1987 crash but what do you think about looking back at it now, was it like a one off in history in its extremity, 23% in a day, or is this something that will come around again?
Every crash is a one off in a sense that everything is unique. That one was unique and the main reason that the market crashed – well there are two kind of reasons, really, the main one perhaps is that the market doubled in between the…
Yeah, because the market went crazy in ’87.
Between September ’86 and September ’87 the market doubled and if you look at a chart of the index from say 1985 to 1989 it’s a straight line except for the up and the down. So, it went up in ’87 and then it went straight down again. So, it sort of went up the stairs and then down the elevator on October the 19th.
Some people, and I think it’s extremely relevant to right now actually – some people lost their nerve, if you like, because the market was so hot at the time. But you were making the point that it doubled again from the levels where people were talking it was getting hot.
The person that I remember most in 1986 calling the top of the market and predicting a crash was John Spalvins, who was running Adelaide Steamship.
Which was the big operation then.
He was very dire about the market in ’86 saying that everyone should sell and all that stuff, and he was going to sell. What happened was that from when he was saying that the market did double. But, in around about August/September of ’87 I remember he capitulated and piled in and really lost some money.
He lost a whole empire, didn’t he?
He sent his company broke because he gave up. So, as you say the bear capitulation is a well-known phenomenon.
Well, maybe a message is actually – even though it sounds sort of like an old chestnut, is that idea of dollar cost averaging. If you’re an investor you’ve got to stay in the market and if you’re trying to time it well personally I just think timing – you have no chance of timing the market and you have to just take these big upswings and downswings, and maybe you can tactically move around.
Well, somebody asked me this morning saying I think there’s going to be another crash, should I get out entirely of the market and I said well, if you knew there was going to be another crash of course you would get out of the market however you don’t know. In fact, it’s just as likely that right now it’s 1986 again.
Well, I would say if you’re going to get out that’s fine, just don’t bother coming back. It’s a bit like should I sell my house and move to rural Tasmania because the houses are great value, and the answer is sure, but don’t try and come back.
So, it’s interesting because we look at the situation now, just now, and I mean right now after nine good sessions on the market in the last few days, best spell we’ve had all year, it was a tight trading range, nothing happened basically on the ASX over winter. There’s actually quite a credible argument to say well, our market just might go for a run now from here. We’re testing six thousand again, global conditions are really good, superannuation funds have a lot of cash built up, they’ve got 20% cash holdings at the moment which is very, very high.
So, are you hearing from people saying this, that the market…
Yeah, there seems to be – actually, I won’t go as far as to say there’s consensus but there’s a lot of people posting that the market is actually by no means overvalued on a pragmatic level, that is if you’re comparing it to cash, if you’re comparing it to residential property, if you’re comparing it to the US. So, our market on the strict numbers, may well actually go for a run. But, one other very interesting thing; Deutsche Bank have a graph which Don Stammer sent me this morning and it shows that for the last seven years, the last quarter on the ASX is the best quarter, so 4% every final quarter for the last seven years.
4% every final quarter?
Goodness, you mean on average or…?
I mean the final quarter every year, calendar year for the last seven years. So, 4% in a quarter, if we get it this year 4% on dividends, there’s 8%, it’s up 1.5% already, touching 10%.
Yeah. My friend, Gerard Minack in America at the moment visiting clients and so I rang him this morning…
Don’t tell me, and he’s bearish?
Well, no. Here’s the thing, he’s changed his mind.
Has he now?
And I said to him, Gerard, are you capitulating like John Spalvins in ’86 and he says you know, you could put it that way, but he thinks he might be wrong because he’s always bearish.
He’s a perma-bear dare I say.
Well, not now.
He’s a nearly perma-bear.
He’s now in your camp, he reckons the market could go for a run.
That’s very interesting because if somebody as fundamentally conservative as Gerard says that…
It’s obviously a counter-indicator because obviously the market’s going to go down now.
Yes folks, as you know we don’t know where the market is going to go but we can report to you what the consensus is and what the thoughts are out there, and what the numbers are too.
Anyway, the reason I raised the Gerard thing is because he is saying that the clients are telling him that instead of taking out downside protection which institutions tend to often do particularly when they’re bearish, they’ll buy put options which gives them downside protection. They’re taking upside protection.
Well, call options that protects them if the market goes up more than they think. So, there’s a growing sense that the market could actually go – because the trouble is that, as we were talking before, that the market from a late ’86 to September ’87 doubled, right? But in ’86 nobody predicted 100% increase in the market, there were predictions of a decline but nobody ever predicts that the market is going to double even when it does.
Yes. Now the thing is he’s talking about Wall Street, right, is he talking about Wall Street?
Well no, the markets.
Yeah, I mean Wall Street, yes…
Because I mean the opposite is if Wall Street falls 4% tomorrow morning forget all this, we’re going to fall 4%, we’re just going to mindlessly follow Wall Street, it always has been so, it’s not going to be any different.
Yeah, that’s right. That’s why when we got up on Tuesday October the 20th 1987 and I was running the Financial Review, and you just joined a few weeks before…
That’s right, I’m looking at the AAP wire service which is our sole link with the wired world.
I know, so I get up on that Tuesday morning and the US market has fallen 20% so I had to sound the fire alarm and get everyone to slide down the pole and come to work.
Yeah, well let’s hope we never see that again, can’t rule it out but point made I suppose very clearly is that there is a sense that the markets are good value in relation to other real estate assets and our market, of course the ASX, it goes without saying is very good value compared to Wall Street for instance. They’ve had 280% increase since the GFC, the bottom of the GFC, and we’ve had 90%.
Just while we’re still on this, because we need to move on.
Yes, we do.
But, just while we’re on this question of value I spoke to Shane Oliver of AMP this morning and the market PE in September 1987 of the Australian market was 15.8 times. Guess what it is now?
It’s exactly 15.8 now.
I was only guessing.
Exactly 15.8, same as it was then.
But, what were you getting for cash then?
That’s the point, exactly.
I bet you were getting more than 2%.
Exactly, you hit the nail on the head, JK, the difference is interest rates.
And the PE should have been much lower then.
The PE should have been much lower then, yes, that’s right.
Then, because of interest rates. Anyway, so the other big story of the week is two bad behaviours.
Crown and Rio.
Yeah, Crown and Rio. We have to talk about Crown first, Crown is the screamer, isn’t it, really.
You’ve been shaking your head more in sorrow than anger.
Well I am not anti-gambling, right, and I won’t say I have no problem with it but I don’t have an issue with it.
I am, I’m anti-gambling.
Interesting. I’m not, I reckon civil liberties – if somebody wants to go down and bet on something let them off. I actually like to bet on horse races now and again, cricket or whatever. I don’t go to the Pokies, I’ve done it now and again. I know anecdotally there’s always been stuff around about bad behaviour in casinos but what Andrew Wilke dropped under parliamentary privilege is spectacular. I mean it really is spectacular. If it’s half true that the gaming regulator was not on the job down there at the casino, that they were rigging their machines – these are allegations, obviously yet to be proven and Crown denies them all, but the stock to a right belt yesterday and that stock is now $11. It was $16 five years ago. Again, I have often thought Crown might be a useful stock. I thought James Packer sold out of Macau at the very worst time and that’s quite obvious because all those Macau stocks have been lifting since the time he sold out. But, if it’s true, if it’s even half-true, it’s possibly the worst scandal we’ve seen and much worse than Commbank, I think. I mean the money laundering is only a part of it, of the allegations.
I think it was interesting that Crown completely denied everything. They didn’t say we’ll look into it or…
Yeah, they’ve flatly denied everything.
I think that’s kind of interesting. So, it’s clearly going to be a bit of a case, this. I’m not quite sure the best way to proceed. People are calling for a parliamentary inquiry, I can’t see that’s going to resolve it, really. You need something more forensic than parliamentary inquiry.
I think you have to have an inquiry into the behaviour of the Victorian regulator too.
Sure, of course.
The Victorian Auditor General did ask questions in a very careful way.
This is criminal behaviour, surely the police should be looking into it. If they’re rigging machines and so on then you would think that’s a police matter, surely.
For a start, and a Gaming Commission matter and then a stock exchange matter because they’re listed. So it’s got layers of issues.
The other scandal of the week was Rio Tinto and…
Was Rio, which kind of get buried, didn’t it, because Crown was so eye-popping. But, Tom Albanese, apart from buying one dog company after another now is charged with fraud.
What really struck me, anyway, was that the SEC in the US has done it, not ASIC. So, ASIC looks a bit bloody hopeless.
Well, they look a bit slow for a start because it turned out in the course of the US SEC, Security Exchange Commission – in the course of their articulation of their case made the point that Rio had already settled with the British equivalent, they did a deal, they did a settlement. So, I mean our regulators have been surely aware of this stuff and haven’t been doing anything, our second biggest mining company.
And, it’s an Australian company.
It’s the second biggest miner on the boards, and actually has been doing quite well of late.
I mean really well, I mean it’s up over 70 bucks again.
Well, what a stuff-up that Mozambique coal mine was, I mean honestly…
It was obviously a period of amazing incompetence, really, that they bought the Guinea mine, which was a flop, and which has issues that Sam Walsh is still up to answer for. Then, preceding that they had the – what was it called in Africa, Mozambique?
Riversdale, that’s it.
So, that’s two shockers in a row. Yeah, I suppose the issue for an investor is it’s three CEOs ago.
Sure, that’s right.
That’s the thing. As an investor you say well that’s history.
Well, one way to play all of this is to invest in IMF Bentham which is a listed company that actually funds all of the class actions. So, they’re funding the Commonwealth Bank class action.
Is that the biggest – yeah, that’s the biggest class action we’ve ever seen.
That’s right. The Rio one might be bigger in fact, we’ll have to see. Because Maurice Blackburn is still kind of putting it together.
Just explain to listeners about IMF Bentham, it’s nothing to do with the IMF by the way, I don’t know why they called it IMF Bentham.
I don’t know either.
Actually, why don’t they call themselves Bentham and make it much simpler for everyone.
I completely agree.
Explain what they do.
I interviewed the CEO, Andrew Saker, the other day. Basically, what they do is they fund litigation, principally class actions.
Yeah, they bankroll class actions.
What they are and the way Andrew Saker described it to me is that they are a fund manager, they’re an investment manager. What they invest in is litigation. That’s how they see it, they see it as a portfolio of assets and their assets are ongoing litigation.
I would see it as a portfolio of bets on the courts.
Well, all assets are bets, they’re investments.
But they’re specific bets on which way the judge rules in the end of the class action.
Yes, of course. But as with other investments they do due diligence. They figure out what are the chances…
And they’re experts.
About 70% or 80% of them are settled.
So, how are they going as a stock?
Great. I can’t remember the price now, it’s actually left my head.
The other thing that’s interesting is I suppose you could almost think of them as a non-correlated asset.
Though they are listed on the stock market, but it’s totally outside the cycle, isn’t it, it’s just…
Precisely, that’s right. It’s to do with something else other than the economy as you say. It’s certainly an interesting one.
Are they un-rivalled? But that I mean have they rivals on the ASX?
Well, there’s no one else in the ASX, there’s other litigation funders in America.
I know one, Slater and Gordon, but we’ll put them to one side.
No, but they’re lawyers. That’s the point, IMF Bentham funds Slater and Gordon and Maurice Blackburn. They provide them with the money and then they take 30% of the winnings.
If there’s a big class action and someone wins the law firm, Slater and Gordon, take a big slice, these guys come in and take a slice, IMF Bentham, and then the shareholders are at the back of the queue, they get the cheque for $10 in five years’ time.
Well, arguably that’s a very cynical approach.
It is, I know.
I’m surprised at you.
No, I’m very sceptical about the whole class action thing.
Yes, we’ve mentioned that before. Now, IMF Bentham, worth having a look at.
Now, the other one that you’ve been on about is the first homebuyer schemes which has resulted, I think, in first time buyers coming back into the market.
Yes, that’s right.
So, the first-time buyer has returned.
The first homebuyer has returned, particularly in Victoria. Do you know why?
Because they’re getting cash.
Because they doubled the First Homebuyer Grant from ten thousand to twenty thousand. The number of first homebuyers that entered the market exactly doubled, it exactly doubled according to Tim Pallas, the Victorian Treasurer. I was disappointed to see that the Greens – I mean this government finds it so hard to get anything done and there was this tiny, modest slither of a piece of legislation which was to help homebuyers in the budget if you recall, it was called the First Homebuyers Scheme or something like that.
The Victorian budget?
No, the federal budget. There was a scheme that was going to allow you to access your super to get your home deposit.
I must have missed that one.
You’ll remember it, we did talk about it. But, it was so modest as a scheme that a lot of people didn’t take it seriously. Anyway, I did the numbers on it and I think first homebuyers is an exception to the whole idea of – I know it disturbs the market, I know house prices will go up if you put in homebuyer schemes, but I actually make an exception for them because it’s such a severe issue. The Greens have decided six months after the damn thing went through in the budget that they’re going to go against it and block it. To me it’s just like wouldn’t you just let that thing through? I mean it’s something that helps first homebuyers and they’re going to block it.
What possible reason would they have for blocking it?
Because it’s a raid on super, that it disturbs the sacrosanct nature of super. But, really someone owning a house is kind of sacrosanct too if you want to – anyway…
But the thing is that you’re saying is that the Victorian Government is handing out cash and so there’s a queue forming.
Well, I am but I’m also saying the Victorian government has evidence that if you do put in a first homebuyer grant you do get more first homebuyers into the market, even though house prices here pretty wild.
As night follows day pretty much.
It works, it works.
That’s the point I’m making. Now, talking about government’s inability to get anything done – so, now correct me again for being cynical but I’m now supposed to believe that after all these schemes on energy – I can’t even remember all their names, the new one is the – what is it?
National Energy Guarantee.
The National Energy Guarantee. Am I supposed to seriously believe that this is going to work and it’s going to get through parliament, and it’s actually going to help?
The main purpose of the National Energy Guarantee is to unify the Coalition.
Well, and to bring the opposition inside the Coalition, the Abbott opposition into the camp.
Yeah. It’s kind of more or less succeeded in doing that, Abbott is out there saying the government should build a coal-fired power station so he is right on his own with that. But, the rest of the Coalition is pretty much behind it now. So, what’s kind of not clear is whether Turnbull actually does want to get it through parliament or whether he wants to have product differentiation with the Labor Party, and whether he wants to continue between now and the next election to keep beating the Labor Party around the head and ears with being the party that pushed energy prices up. And Turnbull can’t have it both ways because he’s continuing to hammer at the Labor Party on that subject while saying that they should pass this NEG. Well, he can’t really have both. He needs to decide whether he’s going to be a statesman achieving a bipartisan policy, which is what business is calling for. Business is desperate for both sides to agree so that…
They’ve got the bills too, yeah.
What business needs, what investors need is for the policy not to change at the next election where the Labor Party wins.
Do you think this particular scheme will get up?
Well in a sense it doesn’t kind of matter whether it gets up or not because if it gets up…
It matters to the people who are paying the bills.
No, but if it gets up as a result of cross-benchers in the senate that doesn’t really achieve it. What’s needed is for the Labor Party to…
For sustainability, yeah, duration…
Well, for there to be a sustainable policy that business can then invest on the basis of. But separate to that what’s happening is the cost of building solar and wind power is collapsing and it’s now the cheapest form of new energy, right, solar and wind.
That’s what everyone was building and all that these policies do, really, is to change the timing of it because what’s going to happen, what is happening, is that the energy fleet – the generation fleet of Australia, is now switching to renewables. It is happening, right, the only question is at what pace will it happen.
Well, would this accelerate the pace if it got through?
Well, I actually think it makes no difference. The NEG is completely irrelevant.
Okay, the economics roll along but the economics will be influenced by government policy, surely, and the prices.
No not anymore, there was a time when – well, the renewable energy target creates certificates that subsidised renewable energy, right?
That was important for a while and did result in quite a few windfarms and solar farms, that’s true.
That’s now irrelevant because solar and wind are cheaper than coal and gas.
Yeah, so it’s going to happen anyway.
It’s happening, the policy is irrelevant, the National Energy Guarantee is a reliability guarantee and an emissions guarantee, they cancel each other out. In my opinion it’ll make no difference.
There you go.
Alright, well maybe this finally is it.
We have some questions, and I need to ask you the first one because it’s about Ireland.
Yeah, give me that first one, will you? My family home is involved in the first question, and so…
Robert says; do you see any similarities between Ireland’s housing bubble and the level of debt before their crash compared to Australia’s current house crisis and the level of debt?
And before you answer, James, this will have to be the BT Financial Group Mega Trend.
So, the level of the Australian house prices and the level of debt is the Mega Trend.
And it happens to also be Robert’s question.
House prices all around the world and their detachment from reality is the Mega Trend, isn’t it?
And they don’t come much more mega.
They don’t, no. The specific question; is their similarities between Ireland’s housing bubble and ours, if we have one, is that no, I have to say, Robert, I know the Irish situation very well and there really isn’t a lot of comparison because of two or three things. The first thing is that house prices in Ireland tripled in a decade or so which hasn’t happened here and there’s nothing remotely like that happening here. The second thing is that’s absolutely crucial if you want to understand what happened in Ireland’s crazy housing boom, was that the interest rates were being cut while the house prices were going crazy because the interest rates were set in Brussels and Ireland had no sovereign leverage so you had this absurd situation where everybody was starting to speculate more and more, and the banks were cutting their rates into the speculation. It just went bananas. The awful thing is that house prices then fell from top to bottom 40% and my home…
My home in Limerick fell 40%.
What did it go up by, was Limerick in on the boom?
Not as much as Dublin, Dublin is the hotspot. But the whole country, yeah, the whole country and 40% down from top to bottom. The bottom was hit about two and a half years ago and it has sort of crawled back almost to pre-crash levels which were now a decade ago. But, still 100,000 households in negative equity across Ireland because they bought in that period of craziness. So, we don’t really have any similarities in any useful way, Robert. Though no one is comfortable with the level of house prices here it’s not a bubble. If you wanted to say is it a bubble like Ireland, no it’s not. How about the second question from Michael. Michael says; I’m just a simple guy trying to understand where has all the increase in money in Australia for the past decade come from? If we’re not printing money like the other governments, and he mentions all the others of course, and fair enough, the US particularly and the EU. Why isn’t the Australian Dollar much higher against this basket of currencies? This is a good question from Michael. What do you reckon, Alan?
Well, I’m just a simple guy too.
Yeah, well have you got a simple answer for why the dollar is 77 cents forever?
Well, because it isn’t simply a matter of – money is not simply a commodity subject to supply and demand whereby if you print more of it, or create more of it, the price goes down because there’s an excess of supply. That isn’t really the main influence. I mean it should, to some extent…
Because he’s right, they’ve printed money and we didn’t.
That is true, there’s been money printing elsewhere but not here. The Australian Dollar is down on what it was, it was parity for a while and now it’s 78 cents. But, the reason for that is simply falling commodity prices. Our dollar is mostly affected by commodity prices, in particular iron ore, and the interest rate differential between us and the United States. Those are the two influences.
Then so the commodity prices are lower so our dollar is lower, and explain about the interest rate differential, what’s the story there, it’s narrowing?
Yeah, it’s narrowing but because interest rates in the US are going up so…
So, that’s putting our dollar down.
Yeah, well interest rates in the US are going up and I mean money tends to flow towards the higher interest rates. That’s the main thing.
Alright, well they were good questions this week, keep the questions rolling, folks, we’d love to answer them especially ones about the Irish housing crisis, and I think we might leave it there for today, Alan.
And don’t forget you can subscribe to the Money Café on Apple Podcasts or the app of your choice. While you’re there it’s very good to leave a review, if you would please, or a rating. We’d love one of those. To send in questions for next week’s episode you can e-mail us at The Constant Investor, which is email@example.com – and that’s “.com” not “.com.au”. Okay, until next week I’m James Kirby, Wealth Editor at The Australian.
And I’m Alan Kohler, Publisher of The Constant Investor.
Talk to you soon.