Buy a Home With Your Superannuation!

Ouch.

Yesterday was a nasty day on the market. The ASX 200 fell 77 points, or around 1.3%. Today’s Markets and Money will discuss whether this is just another blip in a generally bullish market, or the start of something more sinister.

But first, a quick spray for Treasurer Joe Hockey. Seriously, it looks as though Malcolm Turnbull’s people are advising this guy, such is the stupidity of his policy ideas.

Joe’s latest brainwave is to make superannuation more flexible. Specifically, Joe wants first homebuyers to be able to access superanuation to make home ownership more affordable.

He obviously understands that this extra funding will immediately be capitalised into higher house prices, benefitting those (like him and most of the political class) who already own property.

The policy is a cynical appeal to the lowest common denominator. Fortunately, Australia is not as dumb as Joe thinks and this policy won’t get up. If it does, I’m outta here…

Think about it. The whole recent discussion around budget sustainability has to do with the effects of an ageing society and how to manage the growth of the aged pension in the years ahead.

In the last financial year, 37% of my tax payments went to the aged pension. Just 3% went towards unemployment benefits and 8% towards education. The aged pension is the biggest drain on the budget.

And now Joe is advocating superannuation flexibility? Just dip into the pot whenever you like? As PJ Keating writes in today’s Australian Financial Review:

The key to wealth accumulation in retirement savings is compound earnings. It is the earnings on the earnings plus new weekly capital commitments that allow superannuation accumulations to roughly double every seven to eight years.

Such growth in the asset base could not happen if people were permitted to take funds for convenience, thereby diminishing the asset pool and its capacity to compound.’

Then there’s this Keating gem:

This idea is certainly not an innovation and is not responsible enough even to be considered a thought bubble.

Ahhh, for the good old days of politics…

It is a concern though that Joe Hockey has introduced the idea of tampering with superannuation. Perhaps he starts with the idea that you can get your hands on it early in some circumstances…and when that gets shot down he introduces the concept that the government could ‘use’ it for their own purposes, like infrastructure spending.

Who knows? But it’s something to keep an eye on. My publisher, Kris Sayce, has kept his eye on this for years, and he doesn’t like what he sees. For Kris’ full report on the issue of superannuation, click here.

Getting back to yesterday’s market action, most sectors were in the red. It was all because it looks like the US Federal Reserve might raise rates earlier and faster than expected.

This had the effect of boosting the US dollar, smashing commodities, and scaring those ‘chasing yield’.

All in all, there is plenty to worry about for Aussie investors. So is it time to panic…again?

It depends on your timeframe really.

In the short term, nothing much has changed. The market still looks bullish. It enjoyed a massive rally over the past few months, and a correction should be expected.

The fact that the economy continues to deteriorate and put pressure on company earnings is of secondary importance to ‘investors’ right now. It’s all about yield and buying assets displaying relative value.

With cash rates at record lows and bond yields the same, equities do look good in a relative sense. That’s if you’re happy to ignore the standard risks that come with investing in the stock market.

There is still a little value out there, but not much. I certainly don’t think you can build a whole portfolio around good value equity investments right now.

Diversification is the key. Cash and gold should also come into the mix when thinking about asset allocation.

In the short term then, the evidence suggests that this is nothing more than a correction within a longer term upward trend. So buy buy buy!

But. And there’s always a ‘but’. Longer term, this market is turning increasingly fragile. The renewed surge in the US dollar is evidence of this. The chart below shows the US dollar index.

As you can see, it’s just had another kick higher.

US Dollar

I’ve written about this before, but I’ll do so again because it’s really important to understand. A strengthening US dollar reflects diminishing global liquidity. It’s a sign of the global financial system’s weakness.

That might not make sense given Japan and now Europe are in the throes of QE. But with the Fed’s QE program over, and the possibility of higher interest rates in the US soon, the most important global liquidity tap is now turned off.

The US is the most important source of liquidity because the US dollar is the world’s reserve currency. This means that to keep borrowing costs low, many other countries issue debt denominated in US dollars…especially emerging market countries.

This works well when the US dollar is weak and the interest rate trajectory is down. But borrowing in US dollars also means repaying in US dollars, a feat that becomes harder once the dollar launches into a bull market.

Then there are countries that peg their currencies to the US dollar, like China. The US dollar bull is having a big impact on the liquidity in China’s financial system. As the UK’s Telegraph reported last week:

China is no longer buying US Treasuries and global bonds. It has become a net seller, stepping in to offset accelerating outflows of capital. The capital deficit reached a record $91bn in the fourth quarter.

‘The PBOC is now in the mirror position of boom years when it was buying foreign assets at a vertiginous pace, causing liquidity inside China to surge. All of a sudden that liquidity is draining away.

‘There is another twist to this. The PBOC’s reserve body, SAFE, was still buying $30bn a month of global bonds a year ago. It is now selling an estimated $10bn a month. This a $40bn a month shift in central bank intervention in the asset markets, a lot more than the extra $15bn a month that the Bank of Japan has been buying since October.

‘Or put another way, Asia is “tapering” at a pace of $25bn a month. You could argue that this neutralises half the quantitative easing soon to come from the European Central Bank.’

Anyone want to bet on sub-US$50/tonne iron ore prices this year? I do. What about the Aussie dollar going sub-US$0.70? I’ll take that too.

In the midst of trying to deflate a credit bubble, China is nailed to a roaring US dollar bull. This is not good for China and it’s not good for Australia either.

The biggest question for serious investors to answer is just when do the long term threats become short term? No one knows of course.

The global financial system is unsustainable and will collapse. Of that I am fairly certain. But whether it starts to take place next month, next year, or in five years is impossible to tell.

Hindsight will probably show that the initial signs of a system breakdown are already here. The Eurozone…Japan…China. All these regions are struggling to overcome their gigantic debt loads.

But confidence in the system remains, and this is the key. While confidence remains, the system will hold together. So my plan is to keep a close eye on the market’s price action, both here and around the world.

If there’s a hint of a loss of investor confidence, you’ll see it in the markets’ pricing first. The difficulty lies in interpreting the markets message.

More on this when I return Thursday…

Greg Canavan,
for Markets and Money

 

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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