Australian Property Bubble

This is blog about the sharemarket and in particular stocks and trading methods. No I have not gone off the rockers in writing this blog article about the Australian property market. So why am I writing about the property market? Few reasons are:
- the Australian economy is partly sustained by the booming property market, not just the resources sector.
- the Australian banks with huge exposures to property market are highly vulnerable if there is a bursting of the property bubble. If the banks suffer, the rest of the economy will follow.
- Usually the property market lags the sharemarket, so why bother with predicting a property market crash? The fact is that is already happening. The sharemarket seems to be highly volatile and can fall significantly any day now. Throughout this time, the property market data has shown signs of easing and more commentators have begun to write about this. Although the sharemarket may fall first, the downturn momentum pulling the property market with it (like being tied with a rock thrown into the sea) will mean the effect on the Australian economy will be so much worse before it can get better.

There are many more people who are more qualified in commenting on the property market and the economic drivers than me. The main goal of this blog article is to collect news articles regarding the slowing property market and general economy. The number of articles have increased recently.


Housing starts up in smoke
Peter Martin  May 17, 2011
HOUSING approvals have collapsed to a 10-year low, falling 12 per cent between December and March and sliding 9 per cent in Victoria.
While the Queensland floods contributed to the fall, Bureau of Statistics figures released yesterday show that, excluding Queensland, nationwide approvals fell 11 per cent.

Real estate slump will leave banks in pain, too

May 17, 2011

More an orderly retreat than a rout. Australian real estate, long the subject of global concern, bears all the symptoms of a market that simply has run out of puff.

Ever since America's housing bubble burst in 2007, setting off a chain reaction in Britain and across Europe - which then infected the global financial system - international pundits have been warning of a similar catastrophe here.

Endless boom a shaky theory and China's economy is likely to stall
The Australian May 16, 2011 12:00AM
A MEMBER of the Coalition's leadership team says China's economy will stall in the next year and the resulting commodity price plunge will push the budget deficit back to $30 billion or more.


Housing finance falls to 10-year low
AAP May 16, 2011 12:26PM
THE number of home loans approved in March fell to a 10-year low, dragged down by the Queensland floods and by the November rate hike. The number of home loans approved in March fell 1.5 per cent, to a seasonally adjusted 44,968, its lowest level since February 2001. Economists' forecasts had centred on a 2.0 per cent rise in housing finance commitments for the month.

How to Profit from Black Swans or At Least Don't Lose Your Nest Egg

This blog article is inspired following my reading of the book called Black Swan (not the Ballet movie with Natalie Portman) written by Nassim Nicholas Taleb, mathematician, professor, philospher, writer, Wall Street options trader. The Black Swan book is more than interesting, it is intellectually fascinating and courageous as it takes on the established world of mathematical finance dominated by PhDs and turns it upside down. Technically, the author criticises and shows with detail why the Gaussian approximation, which is at the hearts of many derivatives pricing, can be so wrong because it fails badly when some rare event happens.

This blog article will leave the details of the book to the book itself. Instead from here on, I have developed some thoughts on how to make the most out of the markets based on having read the book. The suggestions here will be divided into 2 broad categories. The definition of Black Swan here are unexpected events which are almost inconceivable and have huge impact.

How to survive Black Swans
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Some of the points here are along the strategy of diversification but there are subtle details relevant to black swan events.

- It has been said that to be save, invest in blue chips rather than speculative stocks. However, throughout history, most recently the GFC, blue chip companies with huge reputation and operating for more than half a century, have collapsed in a matter of days. Investors in such supposedly save companies are caught out much more severely than investors who invest a little amount in a certain speculative stock.

- There is no safe stock or even safe sector. By definition, a Black Swan happens when we least expect it and with the biggest impact. So diversify across stocks, sectors, or even classes of investment, say property or cash.

- Expect the worse to happen, then make decisions on the investments with such possibilities in mind. When we expect the worse or the unexpected, we take away the element of surprise and the event loses its sting. Furthermore, having expected the unexpected, the amount invested would incorporate risk measures, thus the amount of loss may be minimized. Examples:
    - expect the Australian currency to hit US$2.00 and asses what that would do to export companies.
    - expect some powerful nations to default and make appropriate plans.
    - expect commodity prices to go extreme in either way and see how it affects companies.
    - expect commodity prices to plummet and assess your investments in the mining companies.


How to profit from Black Swans
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Black swan events are not always there to cause damage. It is quite possible to make tons of money when exposed to a positive Black Swan. Here are some ideas:

- Expose yourself to investment opportunities that may present a positive Black Swan. This is not too different to what venture capitalist do. They invest in companies with totally new ideas and concepts, knowing that most will fail, but the one that succeeds will have an enormous return on investment.

- Speculative stocks are not necessarily Black Swans. One may first think that mining companies that can hit a jackpot is some big discovery or biotech company with potential ground breaking drug may be classified as Black Swan events. However, by definition the Black Swan being very rare and unexpected, mining and biotech companies cannot be true Black Swans because many investors expect them to have breakthroughs.

- An extraordinary event may still make a mining or biotech company a Black Swan type investments. Examples may include a mining company that has been in production for years and has almost no exploration program. Then suddenly that company happens to find a large mineral rich deposit on a very large scale. A biotech company may already have some drugs in the market and suddenly found that the same drug can be used to cure something totally different or unexpected.

- It is very hard to catch a positive Black Swan event due to its rarity in its class. However, in the overall sense, such as look at the entire sharemarket, there are enough Black Swans that occur that can be profitable. One of the key is that as the Black Swan event unfolds, not many will recognise it in the early stages, so those who paid attention enough may make a profit. One example in the resources sector is the advent of Coal Seam Gas CSG. Not that any CSG company are Black Swan itself but the entire CSG phenomenon is a Black Swan because before that, it simply did not exist. Then a few companies came into existence that tried to harvest this new resource and initially no one paid attention - this was the time to get in. When the majority of investors understand CSG, the early investors would have made a significant profit.



More ideas are most welcomed. Note that the investment ideas above are not from the author of the Black Swan book. Rather they are my ideas inspired after reading the book.