Friday 20 May 2022

Economics - a really 'soft' science

Economists like to think of economics as a 'science' but although it uses a lot of graphs, numbers and statistics it is firmly rooted in psychology and crowd behavior which means any one event often has several competing theories trying to explain what has happened, and none of them may be very 'correct' (think of it like curve fitting a fourier transform to past data points - you can get many equations that will fit the past data points very precisely, but none of those equations will make a good prediction of future data points).

For an example of how woeful economic predictions can be in practice, have a look at Statistica's predictions out to 2026 for Turkey that were published at the end of Nov 2021:

Turkey GDP projection:

Turkey Inflation projection:

One gets a sense of just how insanely optimistic the Author Aaron O'Neill was in the commentary about Turkey's economy "By 2030, Turkey is estimated to be one of the countries with the highest gross domestic product worldwide."

Of course, reality has already diverged widely from the four year forward projections made less than six months ago:

Turkey actual GDP data isn't available as promptly, but it looks likely to turn out more like this: 

considering how inflation has been taking off in 2022:

Turkey actual inflation:

Now, inflation may suddenly drop and GDP pick up in Turkey so that the '2026' predictions turn out to be accurate, but I doubt it.

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Monday 16 May 2022

DS1 left the nest

DS1 finished his IT degree at the end of 2020 and started working at the Sydney office of a large local IT startup that has grown into a significant international online during the past decade. His starting salary was similar to my current salary, and after a year at work he has received a promotion already earns more than me ;) He wanted to purchase an investment property in Sydney, but prices were too high for any decent property to be within his borrowing capacity, so he purchased a rental property in Brisbane late last year. He had a short holiday (two weeks) in the US in April and when he got back he moved out of home to live in a shared apartment with two of his high school friends. It is closer to his workplace than our house (reducing his commuting time by about 30 minutes each day) and it will also be good for his social life to be living closer to the city.

DS2 us currently in year 10 High School, so has another couple more years before his HSC exam and then (probably) will also do an IT degree like his older brother. So he'll probably be living at home for at least another 6-7 years. He'll probably be moving out around the same time I retire from full-time employment.

My parents are in the process of putting their rural property up for sale, and have decided that they probably won't be moving into the lake house property as it is a bit far from the nearest shops and doctor, and a long (>1 hr) drive from the nearest decent hospital. This would be an issue as mum's eyesight isn't good enough for driving these days, and my dad has also had a few 'dizzy spells' that make driving inadvisable. They *might* move into my 'off-the-plan' investment property in Sydney when it is completed in late 2022/early 2023. I would have to charge them the going 'market rent' (so that the loan interest and other expenses are still tax deductible and the rental income will be taxable). It would probably be a 'good fit' as they will have plenty of cash available to pay rent after they have sold their current property, and as they are both around 90 years old they won't have too worry too much about making their money last (they also get the full Age Pension). The apartment is only a few minutes walk from local shops and restaurants and a major hospital. It is also only a few minutes walk from a train station and will also be a few minutes walk to the new metro station when it opens in a couple of years. As it will only be three train stops (two metro stops) to the Sydney CBD, it will be very convenient if they want to visit museums, art galleries etc. in the city.

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Friday 6 May 2022

Degearing my stock market positions

As I think I mentioned in my monthly NW update, I decided to liquidate my stock market and mutual fund investments in my St George and Commsec margin lending accounts, as I was concerned that the market may be at the start of a significant bear market/correction phase due to a combination of high inflation, rising interest rates, Covid lockdown impact on Chinese economy, and Russo-Ukraine war impact on global food supplies, etc. All of which could negatively impact global GDP and stock markets over the next 1-2 years. Borrowing at relatively high margin loan interest rates (with interest rates rising) doesn't make much sense in a bear market.

I had sold off my speculative investments in oil (OOO.AX ETF) and food/agribusinesses (FOOD.AX ETF) as the price hadn't moved in the direction I had anticipated at the start of the Ukraine invasion, and as I had decided to ungear overall, I thought I might as well close out those positions. To sell the Vanguard International Index Fund and Diversified High Growth Fund holdings on my St George margin lending account I had to fill in a St George form requesting the Redemption of those managed funds, which SGML then forwarded to Vanguard Australia for execution. That redemption appears to have been processed on 3 May, although the funds haven't cleared yet.

To sell the Colonial First State Geared Global Share Fund holding on my Comsec margin lending account I had to fill in the redemption request from from CFS (which meant filling in the PDF form, printing it, physically signing it, then taking a photo to send as a PDF to Comsec ML for action). I got a response from Comsec enquiries the next day stating that the form was dated more the 12 months old so couldn't be processed. Upon checking it turned out I had put my birthdate in the signature section instead of the current date (D'Oh!). I had been in a rush to fill in the PDF form to email it to DW at her workplace so she could print it out for my signature (as I don't have a printer at home). So I then had to change the signature date and initial that change, take another photo/PDF image and email the updated form to Comsec ML. It doesn't appear to have been processed as yet, so the redemption price will be lower due to the recent slump in the US and local share markets. Fortunately the CFS mutual fund investment was only about $55K whereas the Vanguard mutual fund investments were about $115K, so at least I got the larger holding sold off at the better price.

I'll use the sale proceeds to pay off any remaining margin loan amounts (probably keeping a few hundred dollars sitting in the  ML 'cash' accounts to keep these margin loan facilities active in case I want to invest again in future), and pay off the balance of my St George portfolio loan (that had been used to fund the initial deposit and stamp duty when I bought my off-the-plan investment apartment a couple of years ago). Any residual cash I'll leave in my 'high interest' online savings account (currently paying 0.45% interest) until I need cash to 'settle' my off-the-plan apartment purchase when construction is completed at the end of this year or early next year.

I'll retain my long term investments in the Vanguard High Growth Fund inside out SMSF, as I don't plan to retire for at least 5-7 years, so may as well ride out any market gyrations. I also will retain my current investment allocations in my Investment Bond (as that is intended as a very long term investment to form the core of a testamentary trust investment upon my death).

It will be interesting to see how the markets perform over the next few years. I suspect the US market and European markets will see significant declines, which might also drag down the Australian share market. There may be a good 'buying opportunity' in a few years time if/when markets bottom out. A comparison of the S&P500 US index and the Australian All Ords index shows that often when there is a major correction in the US market the Australian market gets pushed down well below the long term trend line, which suggests it is often a good time to buy into the Australian stock market at the tail end of a major correction in the US share market.

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Tuesday 3 May 2022

Net Worth: Apr 2022

My monthly NW estimate has been updated in NetWorthShare for the end of April. Chart is in the side-bar.

Stocks and managed fund investments suffered from US and local market declines during this past month, down -$16,494 (-5.45%) to have $286,130 net equity in my geared share portfolios. I am in the process of liquidating most of my geared share and managed fund investments outside of superannuation, as the market seems poised for a substantial bear market due to the war, rising inflation and interest rates, and impact of severe Covid lockdowns in China. I can't see much upside potential and I might need liquidity when my off-the-plan investment unit construction is completed towards the end of this year and I need to access funds for settlement (and might not be able to arrange a mortgage). This reduction in geared stock portfolio holdings will be reflected in next month's data.

Our estimated house price for April (my half) rose $30,057 (2.58%) to $1,196,057. There is still a mild decline in Sydney real estate but our suburb reported some price appreciation during the month.

The value of my retirement savings decreased during April due to the stock market weakness to $1,447,656 (down -$40,922 or -2.75%). Overall, my estimated NW decreased slightly to $3,266,965 by the end of April - down by -$25,613 (-0.78%).

However, if I was including price movements in my holiday home (lake house) and the estimated value of my off-the-plan apartment my NW would have slightly increased.

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