My Four Big Predictions

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EARLIER this week my phone rang. It was Nana Pape.

‘You haven’t been in the paper for a while – have they given you the sack?’ Straight to the point – as always.

‘No, I’ve just been on … holidays’, I replied somewhat sheepishly.

This is a woman who was a born into the Depression. She rode a horse to school. She raised her family in the Mallee bush. I may as well have told her I’d been off getting a pedicure for my pinkies.

So after an extended break of not appearing in her newspaper, I promised her that I’d come up with something that she and her mates at the retirement village could sink their falsies into.

Well, here’s my best shot – my top money predictions for the coming few years.

Your data is the new currency

This week Facebook confirmed its plan to become a public company. It’ll get a lot of attention (and most of it about as useful as your uncle’s status updates) but here are a couple of things to consider:

When big companies list on the share market, the founders and early insiders are selling their shares to the general public – so this tells us a little about the strength of the current share market.

Facebook’s one and only asset is the private data it’s collected on you and your friends, together with every word you’ve ever typed and photo you’ve ever shared. This week we learned the market values the information Mark Zuckerberg has collected at $100 billion – not bad for a bloke who started out in a hoodie in a dorm room eight years ago.

It’s the same at Google, which is currently changing its privacy settings. Yes, somewhere in the Google archive is your fact-finding mission on that mysterious red rash you had after band camp. (Tip: to see what Google knows about you, go to Google and click ‘Account Settings’, ‘Products’ and ‘Login to Dashboard’.)

Both companies are pushing the ‘sharing’ line – how their services integrate with our lives in a meaningful way. But what they don’t say is that the more data they collect, the more power they wield, and the more money they make.

Bottom line: The internet isn’t free – we pay for it with our privacy.

The property downturn has already begun

House prices are falling in most parts of the country – down around 4.8 per cent from a year ago. (And down 92.1 per cent if you happen to live in Wayne Carey’s apartment block.)

Most real estate agents, financiers, and anyone else who makes a buck out of pushing property are forecasting a rebound, but – unless the Government intervenes and boosts the First Home Buyers Grant again – it’s wishful thinking.

Now you can trot out the usual naysayers: The Economist believes our homes are 38 per cent overvalued compared to incomes and 53 per cent compared to rents. And the annual Demographia International Housing Affordability Survey found that Australia was once again one of the least affordable countries in which to buy a home.

But the truth of the matter is the banks control housing prices. Increasing prices have to correspond with increased home lending (since the majority of housing is mortgaged). And that isn’t happening – Aussies are concentrating on paying down debt rather taking on more.

That’s good news for first homebuyers, and investors looking at positive cash flow properties – houses that rent out for more than the total outgoings.

But it’s bad news for investors who’ve drunk the negative gearing Kool-Aid but not fully grasped that to get a yearly tax deduction they have to make a yearly loss. Their only saviour is rising house prices – but if they flatline (or, worse, drop in value), they’re on a hiding to nothing.

Bottom line: Forget about capital gains and focus on investments that put money in your pocket.

The share market downturn is still to come

You wouldn’t know it from all the doom and gloom in the financial media, but the US share market (which largely sets the scene for the rest of the world) has risen about 5 per cent this year.

But it’s a sucker’s rally – more to do with the US Federal Reserve’s low/zero interest rate policy, which they’ve openly committed to till 2014, than it does with underlying fundamentals (read: Europe still sucks).

According to Bloomberg, the leading economies of the world will have to refinance a record $8 trillion worth of debt in 2012. Which begs the question: in a low interest rate environment, what’s the incentive for lenders to part with ever-increasing amounts of their cash? Maybe they’ll demand higher rates …

Here’s you: ‘Interesting, Barefoot, but how does all this high-falutin’ finance stuff affect me?’

Here’s me: ‘The Reserve Bank will likely cut rates this Tuesday, but the banks will use increasing overseas funding costs as an excuse not to pass on the full rate cut.’

And if global interest rates rise dramatically this year, it will spell trouble for all investors – especially negatively geared property investors.

Yet share investors who have a portfolio of good-quality businesses with low debt, strong dividends and the ability to pass on higher costs (either to suppliers or customers) will insulate themselves from big losses. In fact a downturn could be an opportunity – if the company’s share price goes down but the dividend remains the same, you get more bang for your buck.

Bottom line: Forget about capital gains and focus on investments that put money in your pocket.

The old rules don’t apply (but the really old ones do)

The biggest danger facing investors today is falling into the same trap as our free-spending federal politicians: extrapolating the last 20 years (where debt made everyone look smart, and rich) as the playbook for the next 20 years.

When you take a broader view, you see that the last 20 years were actually an outlier: from the early 1990s to the mid-2000s, household debt as a proportion of annual household disposable income shot up from 60 to 150 per cent.

Today we’re reverting to the long-term average, which isn’t to say that there aren’t great fortunes to be made – just that the free kicks have come and gone. That’s why I shudder when I hear financial advisors trotting out ‘gearing strategies’ for clients. That’s so 2005. (Keep in mind, most ? cough ? ‘advisors’ who recommend borrowing to invest get paid on the total amount you invest, so the more you borrow the more they make.)

Put simply, the rules of the last 20 years don’t apply – but the thrifty, conservative rules that served my Nana 50 years ago do.

Bottom line: Well, I’ll leave that to Nana, who thinks hyperinflation is something that’s sold on Larry Emdur’s Morning Show, and whose strategic position on gold is that it makes a lovely wedding gift. So what’s going to happen, Nana?

‘Oh, don’t worry. I think everything will be fine.’

Tread Your Own Path!



Photo: http://www.flickr.com/photos/mightyboybrian/126630218/

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