3

Investophobia

Posted by David Smerdon on May 21, 2010 in Economics, Non-chess

First of all, let me equivocally thank the many of you who emailed me to brag about how many of the words you knew. Particular thanks to those chess players who wrote in to tell me they each knew all of them, thus negating the one viable excuse for my illiteracy. Phoey.

On the plus side, at least today’s new words are perfectly suited to describing the vicissitudal path of the Australian stockmarket. Financial uncertainty in Europe and the US has engendered a rapid decline in our markets and the Aussie dollar, leaving many investors in a state of penury and considering a career change to numismatics. While I don’t mean to sound glib or in any way impugn the Greek government for their various financial peccadilloes, their ingenuous and subsequently quixotic approach to sovereign debt has forced innocent Australians to ford through a fractious week in the markets with a Spartan parsimony.

Leaving my orotundity aside, the Aussie index fell a whopping three percent in the first 15 minutes of trading today, continuing the downward trend that has seen a record week of losses. While the turmoil in Europe for the Portuguese, Greek, Italian and Spanish (the so-called ‘PIGS’) economies is reason enough for their tortuous week, the same factors shouldn’t really be playing such a role for our market turbulence – and certainly shouldn’t exacerbate it. So what’s going on?

For starters, the globalised nature of today’s financial markets means that you simply can’t isolate the effect of regional factors to only those areas; international debt jitters will be felt everywhere, and we’re not going to escape on the basis of geographical remoteness. Nor can we count on China’s stability to pull us through a potential double-dip: uncertainty over the future of Chinese monetary policy and their housing market is only going to further ruffle feathers at home.

But most importantly at all, we probably need to start paying a bit more attention to our own economic fundamentals. We can no longer ignore the possibility that – shock! – we may have just gotten lucky throughout the global crisis. On the off chance that our resource sector pulled us through, perhaps a new Super Tax on mining is not the way to go. If we are actually in a housing bubble, then perhaps adopting some of the Henry Tax Review’s suggestions for slowing housing demand are worth another look.

Or perhaps we simply need to stop naively expecting our economy and markets to grow at irrationally high rates – and start thinking realistically about our future.

During the financial crisis, I once had a prominent chess parent come up to me while I was playing a tournament game and berate me for her stock portfolio collapsing. (Presumably, she incorrectly thought I represented the government, and somehow, therefore, the reason for the market collapse.)  Apparently, she expected her investments in Australian shares to continue to grow by at least 15 percent every year.

I tried to explain that if she really wanted to reduce the risk of losses in the portfolio, perhaps she should choose a less risky investment, such as a term deposit. “Why would I want to do that?” she exclaimed incredulously. “I wouldn’t make as much money!”

Perhaps our culture has gotten a little too comfortable in exceptionally positive market conditions and unsustainably high returns. We did come out of the crisis in good shape, but that’s no reason to get greedy. After all, we don’t want to turn into greedy, little PIGS, now do we?

 

DISCLAIMER:  As for every post on this website, the views expressed are my own and in no way represent those of the Australian Treasury, the Australian government, any other government, any other grandmaster, chess players generally, or anyone who rides a bike, whether clothed or not.

 
2

Bubble, Bubble, Soil and Rubble

Posted by David Smerdon on Apr 15, 2010 in Economics, Non-chess, Politics

What is up with Australia’s house prices? Everything, it seems.

I of course have some personal bias in the matter, being one of many potential Australian first-home buyers ‘in the market.’ But even leaving aside my personal gripes, it must be said that Australian housing prices are ridiculously inflated.

There are a number of possible causes propping up Australia’s bubble, such as ludicrous tax breaks for negatively geared speculators, the Government’s recent theoretically-dubious first home owner’s grant, and an overly optimistic level of consumer sentiment. But regardless of the root cause(s), the bubble is ominously, undeniably there.

Don’t believe me? Just ask Professor Stephen Keen.

In October 2008, Professor Keen bet Macquarie banker Rory Robertson that Australian house prices would fall by more than 40 percent over the course of 2009, with the loser having to walk the 224 kilometres from Canberra to Mount Kosciuszko. To Keen’s credit, he took his loss not as a failure, but as an opportunity to raise awareness about Australia’s housing crisis and the possible coming double-dip in our nation’s remarkable economic recovery. Kicking off this afternoon from Parliament House, the University of Western Sydney Professor of Economics will run and walk up to 30 kilometres every day, accompanied by dozens of loyal (and somewhat eccentric) followers brandishing shirts with graphs and slogans such as “I was hopelessly wrong on house pieces. Ask me how!”

While the bet was made and is being carried out in good spirit and cheer, and raising a fair bit of dough for charity on the side, the whole saga underlies some fundamental questions about the Australian economy. For one, does Rory (who is obviously quite a cluey guy) really believe that we aren’t in a real estate bubble, or did he simply correctly predict that it wouldn’t pop in 2009?

I, for one, am inclined to believe the latter. In fact, modern behavioural finance theory suggests that it can actually be rational for a sharp investor to invest in an asset bubble, even if she realises that prices are over-inflated above and beyond their true levels. Why? Because irrationality breeds irrationality, over-exuberance breeds over-exuberance, and consumer sentiment follows the herd. Of course, if you believe the bubble is going to pop at some point, you’ll have to time it to get out of your investment before the crash. But, just like haggling at a street market, you can push it a far way to grab a bargain before knowing when to quit. Besides which, Australia is facing a massive housing shortage, which will continue to bolster these ridiculous prices.

Still, the prospect of a housing collapse has scared the financier in me, and I’ve stopped looking at real estate for now. Such a deflation would resonate throughout other areas of the Australian economy, and would more than likely trigger a double-dipping effect of the global crisis. Even the Governor of the Reserve Bank of Australia, Glenn Stevens, warned last month of the risks of taking out large loans in order to jump on the housing bandwagon, implying that the current housing growth rate was unsustainable.

Perhaps I should head up to Parliament House this afternoon and join Keen for the first leg of his trek. Whether he’s right or wrong, it’d be useful to hear the insights of a man who has been nominated, along with ten other notable economists, for the Revere Award for Economics –which is awarded to the three economists “…who first and most clearly saw the Gobal Financial Collapse coming and whose work is most likely to prevent another GFC in the future.”

Maybe I’ll be able to get some tips on when he thinks things might start to turn, and what I should be doing to prepare for the calamity. At the very least, the exercise will do me good in the future.

Particularly if I have to sell my car to pay the mortgage.

 
2

Down the rabbit hole

Posted by David Smerdon on Jan 28, 2010 in Economics, Non-chess

My boss has kindly given me two days off to study for my exam, and so far I have naturally used it to procrastinate. Not on purpose, mind you, but it’s hard not to fall back into the student trap of never having anything to do, but never having any free time, either. It’s an amazing, wormhole-like paradox, but I have far more ‘spare’ time now that I’m stuck in the 9-5 office job. As a mathematician, I am fuddled.

Still, time elasticity paradoxes aside, it was on a procrastination trip to the shopping centre (to buy one non-essential item, might I add) that I realised just how much of a sucker I am. Heading out into the buzz of a city in the middle of a work day is both a fascinating and depressingly surreal experience. There were people everywhere: sitting in cafes, arguing politics on park benches, lounging around under trees playing guitars – and they weren’t even students. Where do all these people come from? Don’t they have jobs? And why do they look so damn happy?!

The answer to the last question, of course, is obvious: because they’re not at work. Rather, they’re out here in this parallel world of daywalkers, where everyone is happy and noone has to photocopy everything. Being absorbed into this culture, even for a moment, I was able to wander freely, inconspicuously, and take a closer look at how it all worked. I was shocked to realise, that – no! – some of these people were actually working. Scrbbling things in notebooks next to their lattes, typing on the netbook under the tree, discussing political arguments with a view to dissecting them on paper later. They had it all!

And then it struck me: I didn’t have to be a sucker. Why don’t they tell us this in school? I can make a living without a necktie or an alarm clock? Is it really so?

The obvious path to enter this world is, of course, to become a writer. Unfortunately, the economist in me knows that supply far outweighs demand in this hideous excuse for an industry. Fortunately, the American sitcom junkie in me is totally addicted to Californication, in which the lead character, Hank Moody, lives a chequered life of freedom and frivolity on the beach. (Of course, Hank, played by David Duchovny, is probably not the best role model to base a midlife-crisis-induced career change on – but I’ll let you Google his personality failings for yourself.)

Unfortunately, a career in professional chess (as perfect as it would be) is just a little beyond those of us floundering around the top 500. Not that it’s any different for those all the way to the top 50, mind you. Damn Carlsen!

The alternative, of course, is to pack in the game of kings and instead become a poker player. The drawbacks to this are numerous, however, and suffice to say that some of my colleagues who have chosen the path of darkness have lead far more morally dubious lives than Hank Moody can even dream of. So, it’s back to the books (and then office) for me.

Nevertheless, as I came home with nought but a queazy feeling of post-modernism and a solitary mango, I couldn’t help but think that it hardly seems fair that others can earn a living from the comfy couch of the local alternative cafe. I mean, sure, we are contributing to the public good by fighting through the dichotomy of politics and policy during the day, and furthering the wealth of human existence through academia at night… but tell that to the guy on the grass.

Sigh. Right, so: “Question 2: If x is fixed and y is a function of labour, calculate the….”

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