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

Druckenmiller has a point.

It is hard to ignore this guy.

I still have trouble with gold as an asset. It is pure speculation that someone will pay a higher price than you did, rather than analysis of cash in the hand and future cash in the hand.

Aussie dollar

In the short term, the movement in the Aussie dollar is due to weakness in the US dollar. In the medium to long term, it will move due to the weight of the China slowdown and have very little to do with what Janet Yellen says.

Low growth (USA) vs no growth (Australia)

Retirees won’t spend more money if you give them more money. Baby boomers have passed peak spending. They will spend less every year for the next few decades. A few bucks here or there won’t change that.

Until governments realise that, they will keep wasting money pushing on a string.

Economies need to become more global to keep up with their liabilities. The US will be fine because the tax revenues (whilst currently being manipulated to be lower than they should) will continue to grow due to their dominance of a number of industries. The tech sector in the US is absolutely powering. It will continue to grow at an extraordinary pace. Amazon, Google, Apple, Facebook and others such as Netflix and LinkedIn are all amazing businesses that were virtually non-existent 15 years ago.

Australia doesn’t have any businesses like that and so we will struggle. The US will continue to grow even though their baby boomer population will continue to grow as a liability over the next 2 decades. Australia’s baby boomer population liability will continue to grow, but we don’t do anything that will offset the liability. The mining boom is over. The housing bubble is about to be a very big problem.

Unproductive assets such as housing are a liability on society over the long term. The higher the house prices, the more money wasted in assets that produce nothing. Australia at 4 times GDP in housing has the biggest housing bubble in economic history of any country in the word. The US ratio is only 1.5. The cost to households to live because they aren’t wasting money on a mortgage is so much lower that allows them to be far more competitive than Australia. We are in for a rude shock going forward.

Johny Howard’s tax free super was the worst tax policy in the last few decades. Having the bulk of the population not paying tax just won’t work in the coming years. It was the dumbest thing Australia has done for a few decades. Reversing this decision will be difficult, but is paramount.

Crunch time for China

With China burning through foreign reserves at a rate of around $100 billion per month on top of their increase in $100 billion of foreign debt per month, there is now a time frame where China will likely run out of “net” foreign reserves.

Our estimate is for around March 2017 as the end of China’s debt experiment.

There are a few ways that China can play this conundrum. They can devalue their currency now, they can pretend that nothing is wrong and run into a currency crisis in around 15 months time or they can stop capital leaving China.

Either of these three methods is a terrible result for Australia. They all lead to a similar outcome. Chinese money will stop flowing to Australia leading to an enormous decrease in demand for our real estate and a significant reduction in supply for our dependence on overseas capital to fund our enormous mortgage debt. This is on top of the already obvious crash in mining and mining capital expenditure.

With a relatively specific due date for China’s problems to come to a head, we believe that the time to avoid Australian investments dependent on a 7% or so GDP growth in China has never been greater.

Australian property, Australian banks and Australian Miners and associated investments have all had a wonderful few decades. That golden period is now coming to an abrupt end some time between now and the middle of next year.

We fear that with a fast declining China, Australia’s dependence on overseas capital and increasing debt may put strain on our ability to borrow. Under these circumstances we may have a similar outcome to other commodity and capital dependent nations that have had to significantly increase interest rates into their decline. A number of borrowers would struggle with a half a percent increase in borrowing costs, let along a 3% or 4% increase in borrowing costs that a significant decline in China may cause.

To paraphrase Kerr Neilson, I believe that Australia’s economy is not too dissimilar to the emerging markets that have had significant currency and capital issues in the last year or two.

George Soros is very likely correct that China is almost certain to have a hard landing. There is still time to protect your hard earned savings.


There should be no surprises on what is happening in China. It is simply a good old fashioned debt bubble that is a simple Icarus style situation. They flew too close to the sun. They grew too fast gorging on debt.  Now they are paying the price.

It’s all about debt growth vs economic growth. When debt growth is multiples of economic growth, there is a 100% certainty of difficult times ahead. Simple maths could work out that their growth was going to hit a wall around now within a year or so accuracy.

Those that ignore debt will eternally miss the mark.

By by the way, Australia has the highest household debt to GDP in the world. Our debt wall is not far away. It may be brought closer with the China Crisis.

Dumb things vs Smart things to do in 2016

Back in mid 2014 we wrote a blog outlining dumb things and smart things to do. We got a number correct and protected capital for those that listened. We suggested to avoid the mining and high yield sectors which were two of the worst areas of 2015. Some of the dumb things we warned about have just got dumber. Remember that it is the avoidance of permanent capital loss that is the best way to grow wealth. It is much harder to make money back than to avoid losing it in the first place.

Here is the list of dumb things to do in 2016 (the list is still much longer than smart things!!!):

1. Australian residential property. At 3% gross yields (1.5% net rental yields). This may be the dumbest thing we can find right now. At 3.8 times the economy, property is now equal to Japan’s 1989 peak of their bubble. Avoid, Avoid, Avoid! The majority of Australians have all their eggs in this basket because it has been the place to be for 20 years. It may be the worst place to be for the next 20 years.

2. Australian bank shares. Purely based on the first point. When the tide turns, Aussie banks may see brutal cuts to their share prices. Most of them won’t pay dividends for years. The downside is somewhere between US banks from 2007 and Irish banks from 2007.

3. Australian bank hybrids. Sadly there are countless Self Managed retirees thinking that bank hybrids are a safe way to get a few extra points of yield. When the tide goes out on property, these instruments are not safe.

4. Bonds – earning very low single digit yields may one day prove silly. Inflation is difficult to predict. Over time central bankers will have their way and inflation will return. Earning 2% will yield 0% or worse after inflation over the long-term. In the short term, we are holding significant amounts of cash. We do not consider this an investment, but rather a holding pattern before we invest in another asset.

5. China! Pretty much most things banking on China being able to borrow multiples of their economic growth to stay afloat are unlikely to work out well. This means most investments in Australia. China has passed peak steel. They are going to use less iron ore for the rest of their days. The excess supply will continue to grow and iron ore prices are quite likely to test lows that even the majors will find unpalatable. Some professional investors have been buying into resource companies thinking they are good value. Sadly, this mining boom is a one off. It is not going to bounce back like after GFC.

6. The high flying tech stocks. These were the stellar performers of 2015. Many of them are trading at 100 times earnings. Buying stocks at 100 times earnings will usually be hazardous to your wealth.

7. Emerging markets. Most emerging markets were based on a 10% a year growth rate in China. Now that the headlines are finally coming around that this was was never going to work, emerging markets are having a tough time. There is likely more pain before it is time to invest. (We are less bearish than we were and we are getting more interested, however we are still cautious). Sir John Templeton’s “point of maximum pessimism” is getting closer, yet not there yet.

8. Buy highly geared energy companies thinking that the tide has completely gone out. There has to be more of a shake up and more bankruptcies before supply decreases meaningfully. Wait a bit longer for the cards to all be on the table before allocating capital.

9. Buying listed investment companies at 1.3 times NTA (Net Tangible Assets) when you can buy the unlisted fund at NTA. Why pay $1.30 for a dollar?

10. Buying Chinese listed companies. The great majority of Chinese companies are yet to understand that accounting is to be used to reflect business performance, not to pump up the stock price. There are a few exceptions, however this is a minefield that you should likely avoid.

11. US dollar strength will likely continue. Underestimating its strength and negative influence on multinationals based in the US will prove costly. (Whilst aware of this, we underestimated this drag on our investments).

Smart things to do in 2016:

1. Buying wonderful companies at a fair price (the list of companies at a fair price is short, however there are more opportunities than a year ago). Continue to favour businesses with no debt.
2. Getting a reasonable proportion of your money out of Australia assuming China is not going to borrow 30% more than its economic growth forever. Captain Glenn is correct that the Aussie dollar must go lower by “more than a few cents”
3. Maintain a reasonable cash balance.

4. Start to look at energy related investments over the next 6 months. The oil price has hit pre-GFC lows. There might be further to go, but opportunities are being created.

5. Start to look at emerging market investments over the next year. With emerging market currencies taking a bath. There may be some solid businesses thrown out with the bath water. Brazil and South Africa have been some of the most affected. There may be opportunities in this space.


We look forward to the day where our list of smart things is longer than our list of dumb things. Unfortunately, the zero bound interest rate policies of the globe have distorted market pricing mechanisms and caused global currency wars. A race to the bottom which no one wins. A return to normal policies is unlikely soon, however assuming virtually no inflation as a permanent feature may not prove wise. There is no person on the planet who knows exactly what will transpire. Our role in managing money is to look for places to allocate capital that is rational in the face of the risks that are most likely to cause permanent loss. Inflation is still one of the biggest risks in allocating capital. Over paying for an asset is usually the fastest way to reduce your buffer against difficult circumstances. Buying a substandard business is similarly likely to reduce your ability to ride out challenging conditions. We believe in buying wonderful businesses at prices that should produce around double digit returns as the investment that should stand the test of time through all economic conditions. This does not mean these businesses wont fluctuate in price, yet their economic value as a group over time will continue to create wealth in almost all economic periods.