The Valor Blog.
Investment News and Views, Direct from Our Team.

My first ever blog post…

I am not sure if this is going to be a regular thing our just a way to get through to existing and future clients in the most efficient manner, but here it is…

In Search of Yield

The dangerous game of hunting for yield could lead to less than desirous results for investors who don’t understand the economics of the businesses they invest in.

The banks are not “safe as houses” and those grabbing for yield could be in for a rough ride.

With one of the highest mortgage debt to GDP ratios in the world, Australia does not have a significant upside in our ability to borrow more for housing. This combined with a huge reliance on overseas funding puts our banks in a less than stable position over the next 5 to 10 years. If unemployment follows a pattern similar to any of the previous cycles in history, then it is unlikely to remain steady at low 5% range for ever. At some stage, rising unemployment with enormous mortgage debt becomes a problem. It may not be this year or next year, but a cyclical turning point is likely at some stage and those holding bank shares may not get their “utility like” returns (http://www.macrobusiness.com.au/2012/08/bank-gloomsters-are-from-mars/).

Anecdotally, I am speaking to clients, friends and family who have mortgages that take my breath away at 5,6 and even 7 times their incomes. Whilst they have previously had a bit of a buffer in the equity in the house, the house price falls of the last few years is slowly eating away at their margin of safety.

“Be fearful when others are greedy and greedy when others are fearful.” (Buffett)  When the market capitilisation of Commonwealth Bank is more than the market capitilisation of Bank of America or Citigroup, I know which company I would be more fearful of owning.

Aussie Dollar

The mining stocks and Australian dollar are confusing me at present. I am not sure if I am missing something, but the recent “real data” coming from China is pointing to a significant slowdown. With electricity figures running at a negative year on year growth for the first time in a while, I would suspect that China is in the early to middle stages of a hard landing. There is likely more of a slowdown coming.

Having traveled to China dozens of times in the last 15 years, I am very suspect of the reported news that eventually hits our papers. You need to scratch under the surface to really understand what is going on in their economy. Half of the Chinese figures are so ridiculous that it makes them laughable.

In the short term, things can be irrational and the latest movements of the Australian Dollar and mining stocks are missing the point that no economy in history has had a smooth transition from an investment based economy to a consumption based economy and I doubt that China has rewritten the laws of economics.