Never begrudge the money you spend on your own education.
Welcome to another new year.
It’s hard to believe that January is almost over. The last eight weeks have been very busy ones for me due to the dramas of getting the audible book of Retirement Made Simple finished and in publishable form. Dealing with Amazon in America is a nightmare. On top of that is the writing of my new book 10 Simple Steps to Financial Freedom which should be released in April. It’s been tough going because I am trying to write for people with no financial knowledge whatsoever. However, the manuscript is now finished and will be with the editor this week. Watch this space.
To make matters worse share markets around the world are having a bad time, and I’m receiving the normal barrage of emails telling me to get out before the big depression comes. I ignore them – I regard myself as a long-term investor, and realise that I’m not smart enough to pick the top and bottom of the market, and therefore am leaving things as they are.
And it’s tricky, the problems with panicking and getting out of the market whenever it has one of its normal bad spells are the transaction costs and possible tax issues depending on which entity holds the assets. But to make it worse, you then need to decide when the best time is to get back in. History tells us that when markets turn upwards it happens rapidly – most people who cashed in with the intention of getting back miss the upturn.
Keep in mind that the share market, even though it may end up with say 10% for the year, usually has down spots along the way. The attached graph shows this perfectly.
Returns are based on price only and exclude dividends.
Returns are shown for calendar years from 1994 – 2017.
Source: FactSet, MSCI, JP Morgan Asset Management
Land Tax Grab
Land tax is levied by each state based on the value of the land you hold in that state. The rates vary from state to state, and your own home is normally exempt. Queensland is attempting to make history by including the value of properties you hold in other states in the calculation of land tax. In Queensland right now the first $599, 999 is tax free but then increases to 1% in the dollar up to $1 million. The land tax on $1 million is $4500 +1.65% on land in excess of that up to $3 million. Companies and trusts pay higher rates.
Now a person in Queensland could have an investment property with a land valuation of $599,900 and pay no land tax. However, that person may have other investment properties in other states – as the law stands now those other properties are not added to their land holdings for Queensland land tax purposes.
Under the proposed changes if you had properties with unimproved land values of $1 million in other states your land tax would rise from zero to $4500. And this would be in addition to the Land Tax you would be already paying to the other states.
The government claims it’s goal is to discourage investors from southern states buying in Queensland and pushing up prices for first home buyers. If that’s the case it would certainly do what it’s intended because it would be a huge disincentive for interstate buyers to buy an investment property in Queensland. But I’ve noticed that governments tend to copy each other. If the tax hike works in Queensland you can bet your socks that the other states will jump on the bandwagon and start amalgamating all landholdings for land tax purposes. It has the potential to send land tax bills sky high and make the returns from residential property even less attractive.
Almost 40 years ago, economist Dr Don Stammer coined the term Factor X, which he defined as “a powerful influence that was not even thought about when the year began … but which has a big effect on business conditions.”
X-Factor effects on investors can be positive or negative. Recent negative examples are the near-meltdown of global banking in 2008, and the initial effects from the outbreak of COVID-19 in 2020. In contrast, X-Factors resulted in better-than-expected returns in 1991, when Australia’s trend inflation collapsed, and in 1998 and 2008 when our economy showed unexpected resilience during the Asian financial crisis and the global financial crisis, respectively.
Obviously COVID-19 was the X-Factor last year, but Dr Stammer has broken interesting grounds with his choice for 2021. He calls it “the fracturing of the long-dominant view that low inflation is here to stay.” In layman’s terms, this means that there are two different views in economic circles about where inflation is going, and what central banks can do about it.
It was simpler in the “good old days.” The economy would boom, inflation would become rampant, the central bank would exercise a combination of credit squeeze and raising rates and, lo and behold: “the recession we had to have.”
Things are much more complex today. Even before COVID-19 hit, interest rates were at record lows in most countries in the world. Then when the pandemic began, governments printed trillions of dollars to protect their economies. As a result, asset prices went crazy and widened the gap between the haves and the have-nots even further.
And booming asset prices were not the end of it. Thanks to a combination of COVID-19 and the relentless move to drive the world to renewables irrespective of the cost, we now have massive shortages — which of course drive-up prices. A classic example is the link between gas prices, which are soaring, and the shortage of nitrogen-based fertiliser: the EU is facing a fertiliser crisis that may soon become a food crisis. The rising price of gas, combined with the shortage of urea, drives up food prices.
There is no doubt that inflation is rampant. In Australia, builders cannot complete houses because they can’t get materials; restaurant owners are paying huge sums to get staff; it takes months to get a car, and food prices are going crazy. On top of that, petrol prices have been at record highs.
The big question is whether this is temporary, or whether it is part of a long-term trend. According to Dr Stammer, the world has changed. The US inflation rate in the 12 months to November was 6.8% – the highest in 40 years; Canada, Korea and New Zealand have already raised their cash rates.
Australia’s Reserve Bank is between a rock and a hard place. The purpose of increasing interest rates is to slow down the economy, but this inflation is caused by lack of supply, not by excess demand. In any event, there have been few, if any, instances in which inflation has been successfully stabilised without recession. Increasing interest rates and putting up the average worker’s mortgage repayments won’t do a thing to fix the inflation that is upon us right now. Nonetheless, increasing rates appears to be what central banks all around the world are doing; therefore, at some stage it will happen here, so be prepared.
Dr Stammer points out that the existence of one or more Factor Xs does not – and should not – stop people forming a view on where the economy, inflation, shares, property, interest rates and exchange rates seem to be heading. Instead, it’s a reminder that investors always need to allow for the surprises and over-reactions that drive returns up or down at short notice. Risk-management – including sensible diversification – is always important to successful investing.
The last 50 pages of my book Retirement Made Simple cover all the material about healthy ageing that I have gathered over the last 40 years. It says “I appreciate that forming new relationships may be challenging as you get older, especially if you have moved to a new area. But don’t underestimate the importance of what researchers call “low stakes casual friendships.”
Most of us effectively live in a kind of village: most of our social activities are carried out near where we live, that is, at local shops, restaurants and cafés, parks, health studios, accountants and doctors. If you are open to chatting to people you’ll be amazed how much you can learn and how much fun it can be.”
This was reinforced in the latest edition of the Blue Zones newsletter which says:
“While diet, exercise, and overall health all seem like they’d be the best predictors of how long you’ll live, Julianne Holt-Lundstad at Brigham Young University found that the following are three important predictors of longevity:
Drinking/smoking habits: Are you a moderate drinker? Do you or don’t you smoke? Did you quit?
Close relationships: These are your closest friends, the people you can call on a bad day, the friends you know will support you in bad times.
Social integration: These are the interactions with people as you move through your day and includes both strong and weak bonds. It could be the coffee barista you see on your daily commute, the postman, or the woman behind you in line at the grocery store.
The face-to-face interactions you have on a daily basis are one of the strongest predictors of how long you’ll live. “
This is such an important topic – all the research is going in the same direction.
Smoking and Body Corporates
There’s been much publicity in the media about a recent ruling that would seem to prohibit, or at least restrict, smoking in areas that are strata title or group title. What is normally written in the newspapers never covers the full picture, and I’ve taken the time the research it in depth.
The matter was somewhat unusual because it was between two owners – normally disputes are between two tenants or between an owner and a tenant. In this case one owner lived above the other one, and the owner above claimed the one in the unit below him chain smoked and the smoke rising was causing him grief. You may think that’s a “nuisance” and nuisance has been the major issue when these kinds of issues have come to light in the past. In this case the adjudicator took a different view and described the cigarette smoking as a potential “hazard” and said there was ample evidence that a hazard was something that had the potential to cause harm. And the dangers of passive smoking are well known.
Like most legal decisions this raises many new issues. Given that smoke rises, what is the position if the owner of a penthouse wishes to smoke. Is smoke from a barbecue to be regarded as a hazard, and if people live in a townhouse where the properties are side-by-side how far from the fence does a person have to be before they can smoke. It’s a can of worms.
I have written before that I think electric vehicles are way too expensive right now, and anybody contemplating buying one should not be in rush. I know that some state governments are thinking of reducing registration fees to encourage electric vehicle purchase, but to the best of my knowledge these will be for the lower priced EV’s.
The other issue is the superiority of Tesla technology – they are away in front of everybody else and look like staying that way. A feature I love with my Tesla is “dog mode”. If I park the car to go shopping I just put the car into dog mode and it keeps the inside at 22°. It also puts up a sign “don’t worry, my owner will be back soon and meanwhile the car is at 22°.” I don’t think any other cars can do that.
I thought you’d enjoy this extract from an article from Wired magazine. It gives a view on what’s happening in America:
In the United States EVs made up just 4 percent of vehicles sale last year. While the world falls in love with electric cars, the US is holding out. If it’s not careful, the knock-on impact on the rest of the world could be huge. Transportation is the biggest single contributor to greenhouse gas emissions in the US, and the country in turn is the second-largest contributor to global carbon emissions.
“Since EVs use emerging battery technologies, they face several significant technical, economic, and social barriers to adoption, limiting EV penetration in the US,” says Pradeep K. Chintagunta, Professor of Marketing at the Chicago Booth School of Business, who with colleagues researched ways to incentivize EV adoption. Those barriers include resistance from consumers who are used to the ability to quickly fill up with gas and go, a lack of awareness of the strengths of EVs, and price problems: An electric Ford Focus costs nearly twice the amount of a gas-guzzling one.
“There’s one major protagonist who has influenced that: Donald J Trump,” says independent EV analyst Matthias Schmidt. Trump’s administration paused the adoption of EVs for four years, setting back the development in a country that was already lagging behind. Now President Joe Biden, who said in August 2021 he wanted EVs to make up half of all sales by the end of the decade, is building on the work done by the ZEV Alliance, a lobby group of 10 US states, and several countries to promote zero-emission vehicles.
But the EV industry in the US has had to start from scratch, and Bank of America forecasts that EVs will make up just 20 percent of the car market by 2030, rather than 50 percent. A large number of these vehicles are expected to be “compliance cars”—vehicles built by manufacturers solely as a box-ticking exercise to meet the strictest emission standards in the country, in California.
Last month I did a podcast with Elizabeth McIntyre who is the group CEO of Think Brick Australia. I don’t normally like my own podcasts but I think this one came out particularly well.
We cover a range of issues including financial basic principles. I do hope you enjoy it.
Need Better Sleep?
We spend one-third of our lives asleep. Yet, people rarely think about what they can do to optimise their sleep — which has been especially disruptive given the turmoil with Covid over the last two years.
My son, James, who many of you know, will soon be sitting down to interview the world’s #1 sleep expert, Dr Michael Breus. If you have any questions you’d like answered, email his EA Jan (firstname.lastname@example.org) directly so they can include them.
It’s a follow up to their popular episode ‘Sleep Your Way to the Top’ available here:
Podcast / blog:
Sanjay Thakrar, CEO at Euro Exim Bank Ltd, got economists thinking when he said:
“A cyclist is a disaster for a country’s economy.
He does not buy a car and does not take a car loan.
Does not buy car insurance.
Does not buy fuel.
Does not send his car for servicing and repairs.
Does not use paid parking.
Does not become obese.
On the contrary, every new McDonald’s outlet creates at least 30 jobs:
10 weight-loss experts, apart from people working in McDonald’s outlets.
So, choose wisely: A bicycle or a Mcdonald’s?
Walkers are even worse.
Those people do not even buy a bicycle!
I hope you have enjoyed the latest edition of Noel News.
Thanks for all your kind comments. Please continue to send feedback through; it’s always appreciated and helps us to improve the newsletter.
And don’t forget you’ll get much more regular communications from me if you follow me on twitter – @NoelWhittaker.