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What we learned this week 29 Aug 14

28 August 2014  |  Investing

learn1. Successful Investing is about making fewer mistakes.

This is the short game: Get in, get out—make your profit, repeat as needed. Enormously attractive to the vast majority of investors, it eliminates the one thing investors are most uncomfortable with: uncertainty. It doesn't matter if the profits are large or small (large are preferred) as long as the transaction is quick and done.

The bad news about the short game is that since everyone wants the same thing the pickings tend to be slim, and the few that are found either don't last long or require a substantial combination of creativity, sophistication, opportunism and money. The enormous profits made by high-frequency traders only reinforced the lure of the short game. When the payoff is large enough there will always be people willing to risk whatever it takes—irrelevant either to the odds or the ethics.

For the rest of us there is the long game. Success at the long game requires overcoming considerable emotional and behavioral challenges; so it is far less popular among investors. But that means its abundant rewards haven't been picked over.

 

2. Ageing affects investment

Canny investors are taking increasing note of global demographic changes as they try to insulate their portfolios against the effects of a rapidly ageing population in many of the world’s largest economies.

As a Credit Suisse report released this week puts it, “the world is in the midst of a major demographic transition”. Not only is population growth slowing, it says, but the age structure is changing, with the share of the elderly population rising and the young shrinking. “The working-age population is already declining or will soon decline in a number of countries, presenting important challenges regarding future labour supply and potential growth.”

Most advanced economies are already feeling the effect of an ageing population, with the share of the working-age population – defined as people aged between 15 and 64 years – virtually peaking in the developed world. Japan is the most advanced in this process, with its working-age population declining in absolute terms during the past decade.

 

3. Income tax treatment on account based pensions

Question: My question relates to the changes the government is making to the income test treatment of account-based pensions after January 1 next year. I am over 65, working and earn $5000 in wages per year. I have a property which grosses an annual $35,000 outside super, as well as a $1.2 million super balance from which I have been making withdrawals which I recontribute to super. If I do a $180,000 recontribution in June 2015, how will that affect the way my remaining pension is assessed? I’m also considering taking about $300,000 from my super to convert my home for income-producing purposes. I was thinking about doing this in about a year, but would I be better implementing both strategies before January 1?

Answer:Pensions held by existing holders of the Commonwealth Seniors Health Card (CSHC) at December 31, 2014 will not have any of their income counted towards the CSHC income test, as long as no significant changes are put into place.

If you undertake a withdrawal and re-contribution strategy in June 2015 and start a new pension on the re-contributed funds, this portion of your money will be deemed and count towards the income test, says Dixon Advisory technical director Tina Wilson.

On the basis you are assessed under CSHC as a single person, a $50,000 annual adjusted taxable income threshold applies.

So you will need to investigate carefully any changes you plan to make and the exact level of income for your existing property that is counted under the CSHC income test.

If you do the re-contribution strategy of $180,000 after December 31 on current deeming rates, this would add between $5600 and $6300 to your CSHC income test.

So it would be prudent, and give you more flexibility in the future, to undertake the withdrawal and re-contribution strategy before January 1, 2015.

When you consider the impact of a further $300,000 that is currently exempt from the CSHC test being assessed under either boarder, rental property or deeming rates, you may come close to or exceed the indexed $50,000 threshold.

 

4. The 2008 meltdown was worse than Great Depression.

Former Federal Reserve Chairman Ben Bernanke, a prominent student of the Great Depression, contends that the 2008 financial crisis was actually worse than its 1930s counterpart.

  1. U.S. Court of Federal Claims as part of a lawsuit linked to the 2008 government bailout of insurance giant American International Group Inc.AIG +0.34%

“September and October of 2008 was the worst financial crisis in global history, including the Great Depression,” Mr. Bernanke is quoted as saying in the document filed with the court. Of the 13 “most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.”

Former Treasury Secretary Timothy Geithner is quoted in the document offering a similarly apocalyptic assessment. From Sept. 6 through Sept. 22, the economy was essentially “in free fall,” he said.

Non-mining capex is growing

It sometimes seems capital investment commentary in Australia concentrates on mining and manufacturing, perhaps because they are industries with unhappy outlooks – bad news is good news.

The reality is that the game has moved on, that the non-resources sector is substantially larger than mining and that manufacturing is but a small part of that non-resources story.

So while the immediate headline for the June quarter private fixed capital investment statistics is that capex was "less worse" than expected, it missed the real story: the outlook for non-resources capex is positive.

 

5. An attack on FOFA

In an extraordinary attack on the quality of commonwealth legislation, Allens Linklaters has described the former Labor government’s Future of Financial Advice (FoFA) laws as “some of the poorest quality legislative ­provisions we have ever seen”.

The leading commercial law firm has also called for the repeal of every rule currently governing financial product disclosure, labelling them a total mess and declaring the current system so “irretrievably broken that there is no real alternative to abolishing it and starting again”.

Pre-empting the dismissal of its concerns on the basis they are being made by whingeing lawyers, Allens said its second submission to the Murray inquiry should not be seen as “merely an expression of frustration by lawyers who have to work out what the regulations mean”.

 

6. Are low interest rates an indication of another crisis?

Some fixed-income experts such as Stuart Gray at Schroders are worried there are just too many similarities with what happened in the lead-up to the financial crisis.

Could it happen again ?

It’s almost impossible to predict the timing of a crisis but Gray said that “the distortions in markets from central bank programs designed to kick-start economies may well have created the conditions for the next financial crisis.

“What will cause markets to turn is difficult to say; however, the pre-conditions are building.”

In the wake of 9/11 and in the aftermath of the tech wreck, it’s generally agreed that, with the benefit of hindsight, the US Federal Reserve kept interest rates too low for too long.

As a result of those low rates there was a great chase for yield, (sound familiar?) and in turn that led to a range of complex products that grew like Topsy.

Some might say the crisis was due to the US sub-prime mortgage market, but Gray argues it was these new products, born out of an extended period of low rates, that led to credit being cheap and freely available.

“Investors ignored valuations and fundamentals because ‘it was different this time’,” he said, and then pointed out that “all these factors are evident in credit markets today”. It’s déjà vu all over again.

Credit spreads, which reflect the additional yield investors earn over a benchmark bond, are close to ­pre-crisis levels as investors hunt any sort of yield.

In addition, interest rates in the US, Europe, Japan and Britain are as good as zero at a time when $US5 trillion in cash has flowed into financial markets, courtesy of central banks.

If investors cannot get enough yield then brokers can add some leverage. They can then come up with a deal that fits the bill.

 

 

 



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