TW3 – The Elephant(s) In The Room

Market Wrap

Global shares trended lower this week, as a common indicator for US recession hit levels not seen since 2007. One of the most popular indicators for a US recession is the inversion of the yield curve (covered in a previous Finance 101), one measure of which saw its highest dispersion since 2007. Although it may seem intuitive that concerns about economic growth should lead to concerns about the sharemarket, the reality is that changes in economic growth expectations have little to no bearing on short-medium term share returns.

This week’s selling is likely to continue today, with el presidente starting another skirmish in the trade war this morning!

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There is an old saying in investing “sell in May and go away”. Although it has no basis in reality, the strategy would have paid off for global investors this year. The broader global index is down more than 5% for May, with trade wars and economic woes dampening investor sentiment. The Australian market bucked the trend however, with Scott Morrison’s election victory prompting a rally in the blue-chip companies that pay large dividends (and by definition, high franking credits if you are earning below the company tax rate).

Finance 101 – Elephants In Finance

There is a famous Indian parable that is taught in philosophy classes throughout the world to prevent absolutism and foster tolerance for the views of others. To paraphrase, six blind men are taken to “see” an elephant for the first time. One man feels the elephant’s tusk and declares that the elephant is like a spear, one man feels the elephant’s legs and declares that elephants are like trees, another man feels the trunk and declares the elephant is like a snake. Each man has a wildly different view of what constitutes an elephant depending on what part of the elephant they happen to come across.

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The parable ends as follows:

“And so these men of Indostan

Disputed loud and long,

Each in his own opinion

Exceeding stiff and strong,

Though each was partly in the right,

And all were in the wrong!”

There are few domains with as much noise and chatter as investing. Every day you’ll hear some expert’s opinion on the trade war, yield curve inversion, or whatever the flavour of the month is. Much like the six blind men in the parable, these opinions often have a grain of truth, but they are incomplete because the pundits tend to have major blind spots (pun intended) in their understanding of the world.

So the next time you read that so-and-so is predicting an recession or making a stock pick, remember that they probably haven’t seen the whole elephant!

Stuff The Scammers

This week we received a call supposedly from the ATO explaining that we had an outstanding payment due, and if we didn’t pay immediately we risked fines or even arrest!

Thankfully we were aware the call was a scam and hung up, however millions of dollars have been lost to scammers in recent years. Here are some tips to avoid a similar fate:

  • Robocalls – The preferred medium of communication for these scammers is via robocall (you can hear an example here). If you receive a call from an unknown number that begins with an automated voice, just hang up.
  • Aggression – A common technique used by scammers is to intimidate with threats of arrest or fines. If you receive any correspondence that demands immediate payment in order to avoid undesirable consequences, it is a scam.
  • Too good to be true – Conversely, scammers often find success by offering money. The most common example of this is a falsified email from a bank or PayPal saying that you are owed a refund and need to provide your account details. Another example was a recent ATO scam that claimed that investors could gain early access to their super. If it sounds too good to be true, it often is.
  • Check the email address – If you receive a suspicious email, check the sender’s email address as it often indicates that it is a scam.
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ASIC has put together a comprehensive guide on common scams and how to avoid them. Alternatively, your adviser is always available to help identify fraudulent material.

Stanford Brown in the Media

Dr Don Stammer, lauded economist and member of Stanford Brown’s Investment Committee, has featured heavily in the financial press this week!

In an article for The Australian, Don summarised Stanford Brown’s research shares to predict what Australian shares will return over the next 10 years. The key takeaway from the article is predictions for long-term share returns are incomplete without understanding how they are likely to perform in the near-future. An investor will only realise the 10yr return if they don’t sell, and sharp sell-offs often prompts ill-advised abandonment of sound investment strategies.

In a related article for Cuffelinks, Don delves into discerning between real and fake market crises, providing five useful factors to help make that judgement. Some market sell-offs are merely corrections, which can provide attractive buying opportunities. Other market sell-offs turn into crises, meaning that investors who buy the dip are exposed to further losses. Many Australian super funds bought shares in mid-2008 after they had fallen 20% because they were “cheap”, only for shares to fall another 30% in response to the collapse of Lehman Brothers!

Fancy a Buffet with Buffett?

It’s every investor’s dream: lunch with the Oracle of Omaha, the greatest investor alive, the one and only Warren Buffett!

The dream can become a reality if you have a spare $3.5m USD lying around! Every year investors around the world bid for this dream opportunity, with all proceeds going to charity. We wonder if lunch in included in the bidding price, and are we expected to cover Warren? Only one way to find out!

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Subsidies For Steel And Spaghetti?

A recent article in The Economist highlighted an interesting inconsistency seen with many voters. The collapse of the British Steel Corporation has prompted calls for a government bail-out to save jobs in the steel industry, yet there are no similar calls for saving the jobs of workers in Jamie Oliver’s failed restaurant chain.

Most western economies have seen major declines in their manufacturing sectors in recent decades, as many low-skill jobs have been shipped overseas as a result of globalisation. This shouldn’t be too much of a surprise – if a job can be done by a worker in Vietnam or Honduras for a 10th of the cost of an Australian worker, there’s no compelling reason for a company to stay in Australia.

This economic reality hasn’t stopped western governments from kicking the can down the road. The Australian government spent $30b (talk about corporate welfare!) to try and save around 7000 jobs in the automotive industry, only for all major manufacturers to end production by 2017.

The primary reason for government support for manufacturing, aside from political posturing, is that there are few opportunities for these workers once the industry leaves. Most of these employees don’t have any tertiary education, and are often situated in regions where there are few other jobs available (Elizabeth in South Australia, Norlane in Victoria, etc). When these people lose their jobs they vote for Trump in AmericaBrexit in England, and One Nation in Australia.

One of the reasons Scott Morrison outperformed in Queensland was that he abandoned Malcolm Turnbull’s innovation agenda, which sounded great if you’re a software engineer in Balmain, less so if you’re a butcher in Bundaberg that didn’t finish high school!

The World’s Most Expensive Cappuccino

Ever wondered which city has the most expensive beer? What about the city with the most expensive dress in a high end store? Wait no longer with Deutsche Bank’s Price Report for 2019!

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Once a top tier global investment bank, Deutsche Bank has enjoyed a spectacular decline in recent years. $1 invested in Deutsche at the beginning of 2010 is worth less than 20c today, and that includes reinvested dividends!

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Perhaps they should stop writing reports of questionable relevance and start writing new business!

Name That Line!

If it bleeds, Kate and James can kill it!

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But what’s this classic line?

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Pic of the Week

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Video of the Week

Always a tearjerker!

Jonathan Hoyle, CEO & Nicholas Stotz, Investment Analyst

Stanford Brown

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