In Search of the Perfect Investment

Monday, August 15. Last week’s gyrations made my friends crazy. They all worry. Yet their reactions differ. Some are loading the boat with “value”  equities. Others are looking for ways to go hedge their portfolios. But they can’t find cheap hedges. The VIX is too high.

For me. I’m wary. I’m keeping my stop-loss finger handy, and moving a little more to cash. But eyeing bargains. I’m still intrigued with the stats from Friday’s column which showed markets rising from situations like we’ve seen in the last couple of weeks. “History says the market will bounce. I’m back and optimistic.” See here.

I have money in a Westpac CD in Australia. It pays 6.30%. With the Aussie dollar appreciating to over the U.S. dollar, that investment has been really good. I’m onsidering putting more there.

This chart tells out. Translated, it’s a chart showing national debt compared to GDP. Japan is the worst. Greece is second worst. America is fifth worst. Look at Australia. Stunning.

Impressions from my quick trip — to Perth. Twenty years ago, what you noticed when you flew the 2,000 miles across Australia from Sydney to Perth and looked out the airplane window was nothing. No rivers. No houses. No towns. Nothing. Now when you fly across Australia, you’ll see big circular holes — mines from where China, India and the South Asian tigers get their raw materials. Gold, zinc, copper, iron ore, nickel, bauxite, lead, coal, etc.

One of the most famous books about Australia is called The Lucky Country. It clearly is. With its awesome resources, Australia is home to the largest mining copany in world (BHP);  Australia’s government bonds are triple-AAA, and its currency, the Australian dollar is now worth more than the U.S.’s.

Australia has enjoyed a real estate boom, but remarkably little bust. Locals like showing off the empty real estate shells and then blame the uncompleted developments on Indonesians or Chinese from Hong Kong who somehow forget to finish their multi-million dollar houses.

To visit Australia is to visit America perhaps 30 years ago. Australia is not crazy, nor frenetic, nor paranoid. The local senator slipped past us to join some mates for brunch at the local restaurant. One evening the most powerful company director in Australia (as the local Australian Financial Review called him) slipped by us at the restaurant we were having dinner at. No security. No fuss. Just one of the blokes.

You won’t hear a car horn honk in Perth. To sound one except in an emergency is illegal. You can actually be fined. A fellow who honked to say goodbye to his mate got slapped with $100 fine — much to the locals’ amusement.

Australia may be the first country in the world to have democratized wealth. Entrepreneurs flourish. They are everywhere. Everyone seems to be starting a business or is involved with someone who is. For young kids, the path is “go north” to the mines. A starting job up there for a 21-year old is $120,000, with quick moves to $200,000 if can weld or do a little electrical work. Parents marvel at the salaries their kids are earning. What gives these salaries their awe is that they come without expenses. From the moment you step on that plane at the Perth Airport to take you north for three weeks, or so, you don’t spend a nickel. Everything is paid for — your food, your entertainment and your airconditioned accommodations. Many kids bring their monies back and start their own businesses, building more wealth for themselves and the country.

Ireland is a disaster. The smart young Irish are emigrating asap to Australia, where there is no unemployment in Australia. Try to get someone to mow your lawn or fix your plumbing. Forget it. They’re all up north working the mines.

Western Australia is three times the size of Texas. It now has two million people, 1.8 million of whom live in Perth, the capital. There’s no one out there, except in the mines.

Perth is stunning. Paradise on the Swan River. The place is immaculate. The lawns are manicured. You won’t find a scrap of trash anywhere in the city. The last two U.S. consuls to Western Australia, rather than retire to the U.S. are said to have retired to Perth.

Local Coca Cola has cane sugar. American Coca Cola has high fructose corn syrup. Australian coke tastes real.

There’s no tipping in Australia — well, very little. The waiters and waitresses in Perth restaurants get $24 an hour salary. Which means main courses are typically $30 to $40 and coffee is $4 a cup. No one seems to notice the prices, except me.

My fiend Patrick says everything costs too much. He explains: A good current example is the old Alan Bond house on the Swan river. Built in the 1980’s, I think. It’s on a 6,400 sq metre block on the river. It was bought for over $9 million in 1999 by a man who made all his money from mining. He has just sold it for $39 million to a newer generation mining entrepreneur. A friend of mine’s son did an apprenticeship here in Perth as a car automotive mechanic at Big Rock Toyota. The apprenticeship was a three to four year part time course. As soon as he graduated, he went straight to a “fly-in/ fly-out” (FIFO) mine job at a mine just outside of Geraldton. He almost immediately went to $120,000 a year, with absolutely no cost to himself when at the mine site. The mine site provides for good food, cable TV, washing etc at no cost to the employee. From the minute he steps on the plane in Perth, until the minute he steps off, he pays for nothing. This salary he is on is a starting salary, as he is not yet sufficiently experienced. His work cycle is something like two weeks on and ten days off. When he gets back to Perth he often catches a plane to Bali and goes surfing there in his time off! The highest salaries in the mines go to electricians and welders/boilermakers. And these sons, and sometimes daughters, were all the “non-academic” ones that parents worried more about than their “brighter” children, who went to University and now earn less.

The boom in Australia has not translated into Australian shares. They’re too correlated to America, viz:

I did buy a little BHP on its recent pullback. It still looks cheap at $80.70.

Whatever Happened to ‘Risk Free’?

There are prosaic explanations for the gyrations that have been unmooring the financial markets. Start with the unseemly squabbling over the debt ceiling in the United States, and the inability of politicians in Washington to come to grips with the nation’s growing debt load.

Then there’s the parallel debt crisis in Europe, which has exposed fissures in the European Union and vulnerability among its major banks. Behind all of that is a sagging global economy — highlighted, in the United States, by a moribund housing market and painfully high unemployment.

While these issues aren’t new, the accretion of them all is like “adding grains of sand to a mound on the beach,” said Mohamed El-Erian, the chief executive of Pimco, the world’s biggest bond manager. “For a while, you add sand and nothing much happens,” he said. “Then with just a few extra grains, the structure starts to shift.” …

While there will be opportunities for astute investors, Mr. El-Erian says that in addition to a “new normal” of slow economic growth and high unemployment, we must now also grapple with a weakening of the financial system’s core. “We will be living in a more volatile world,” he said.

Read the New York Times article here.

The Debt Ceiling Deal. No thanks to anyone. From the Economist:

The outlook, then, is that America’s political dysfunction will only get worse, and with it the burden on economic growth. Some may think that too gloomy a view. The debt-ceiling farrago showed that old-fashioned bargaining could still work, and both Mr Obama and Mr Boehner showed themselves open to a grand bargain, if only for a time. A day after the debt deal, Senate leaders reached a sort of pact on moving the free-trade agreements forward.

Round the country, too, there are gleams of useful reform. Both Florida and California are experimenting with less partisan forms of redistricting, which should lead to more competitive elections in which congressmen have to cater to the average voter rather than the extreme wings of their parties. If other states follow suit, it could slowly reverse the ideological duopoly that has taken over the House. Even without that, many tea-party Republicans, who won their seats in districts that were recently Democratic, have a high risk of being turfed out next year if they fail to learn the fine art of compromise.

But all that is 15 months in the future. And congressmen who have left Washington in a glow of relief and self-congratulation should have no illusions. The political dysfunctionality of America has been on display as never before, to the nation’s shame. And it can still do plenty of harm to a very sick economy.

Read Ecnomist’s piece here.

The Business of Austerity by James Surowiecki in the latest New Yorker. He writes

The debt deal (raising the debt ceiling) alone didn’t send stocks spiralling downward, obviously. But the market’s plunge was largely the product of fears about the prospects for corporate profit in an increasingly weak economy, and the debt agreement amplified those fears. Markets, for one thing, tend to be spooked by uncertainty, and the debt-ceiling agreement has increased uncertainty by making it more likely that we’ll see down-to-the-wire, default-risking negotiations in the future. Senate Minority Leader Mitch McConnell was explicit about this last week, saying that there would be no more “clean” debt-ceiling increases in the future—in other words, Republicans will keep using the threat of default as a political weapon.

Read his pice here.

Mark Cuban discusses investing, etc. Why “buy and hold” makes little sense. Why diversification makes no sense. “You can’t diversify enough to know what you’re doing.” Why being fully invested makes even less sense. Why cash does. It lets you pounce.  What he invested in. Very worthwhile. Mark  talks also of investing in Australian bonds.

Listen here.

Totday’s front page news — an explanation. Thomas Friedman of the New York Times explains all. Click here.

Australian happiness. The magazine Australian Men’s Fitness has a piece on 24 Hour Happiness. Included:

7:05. Have Sex. Star jumps aren’t most peope’s idea of foreplay, but this is the ideal time for some horizontal exercise. “People tend to have sex at night because of work and social behaviour, but that’s when male sex hormone levels are at their lowesst,” says Leon Kreitzman, co-author of Rhythms of life. “Testoserone levels peak just before each bouth of REM sleep — the cause of nighttime erections — and remain high first thing in the morning, making this the best time for love-making.” Probably best to warn the missus first, mind.

9:00. Prioritise your day. “As soon as you get to work, highlight your first priority and get it done as soon as you can. Don’t open your email inbox because you’ll get submerged by smaller tasks that can wait. Getting a major tick on your to-do list early in the day also makes you more positive and more motivated — to tackle the rest of the day as effectively as possible.

12:30. Take a nap. Naps have been shown in trials to lower stress hormones and boost productivity. A nap reboots your brain, but limit it to 20 minutes to avoid feeling groggy.

17:10. Lift weights. Try to work out early in the evening; your coordination is good, body temperature is high and muscles are at their strongest.

18:00. Drink a protein shake. After exercise yo have a small window when consuming the right kind of nutrients will significantly increase your speed of recovery. Aim for a drink with a protein-to-carb ratio of four to one for optimum results.

22.30: Hit the hay. Quality sleep is far more important than quantity. An important part of this is setting a regular bedtime to get your mind and body ready for sleep. Avoid bright lights at night. Also avoid caffeine, nicotine, extreme temperatures and noisy environments in the evening.

Favorite recent New Yorker cartoons:

Harry Newton who lost again to Skip on Sunday. I need more running speed. I’ve got to train harder.