Buy Banks, not Houses #Budget2017

Buy bank ETFs and rent a cheap unit instead.

Recently the Australian government has announced in its Budget 2017 that there will be a bank tax applied to the five biggest banks in Australia. This may affect me because I live off dividends, and much of these dividends come from Australian banks via ETFs. When I mentioned my concerns to others, I was surprised at how much hatred others have for banks in Australia, which is surprising to me.

I am not too concerned by the bank tax, and I will continue to invest in ETFs that invest in high-dividend paying stocks (e.g. HVST) as well as the finance and banking sector (e.g. OZF and MVB).  The reason why I am confident is because I feel that banks can simply pass on the tax expense to borrowers by raising interest rates and fees. Many people may be unhappy about this, but they have the freedom to take their business to other banks.

Banks should also benefit from the cutting of the corporate tax rate from 30% to 25%.

The housing affordability scam

The budget also includes a complex scheme whereby people saving up for a deposit to buy a home can salary sacrifice at most $30k per year into their superannuation fund thereby obtaining tax benefits and then taking that money out to use as a deposit on a home.

This, in my opinion, is such a scam because it is effectively the same as the various grants that the government gave to home buyers. Why put first home buyers through the whole process of putting money into super to get tax benefits and then taking it back out again? Why not just give the expected tax savings to these first home buyers directly?

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The scheme also does nothing to address housing affordability because every economist knows that the price of housing will go down if demand goes down and supply goes up. If there are tax benefits to using super, and if super is used to buy houses, this will only increase demand, which increases prices. Make no mistake, this scheme does not help buyers. It is designed to prop up the market.

Once again, first home buyers are being scammed. The major problem is that most first home buyers don’t understand economics and believe that the government giving them money will help them buy a house. Rather, it will simply drive house prices up even more thereby requiring them to get into even larger debt. The debt that they’d be getting themselves into will also be nondeductible debt, which means they pay more tax than if they had borrowed the money to buy a investment property or other investment e.g. ETFs.

What should you do?

Unfortunately I don’t see the housing affordability issue being addressed because too many people benefit from high house prices, so governments will do what they can to prop up the market. Homeowners benefit from higher prices; banks earn interest from mortgages; and real estate agents, property developers, builders, and lawyers also make money from the property boom. Those hoping to buy a house suffer, but the solution seems to be to help them become homeowners, and when these young homeowners finally buy a house with government support, they have a vested interest in high property prices, but what many of them don’t seem to understand is that they are buying into a very expensive market by loading themselves up with so much debt they effectively become slaves to the bank.

Those who borrow from banks to buy houses believe they are oppressing renters, but really in most cases it is the other way around. Rental yields are so low that the average Melbourne house only produces about 3% in rental yield. If you had $1 million and invested it in a house and rented it out, you make $30k in rent. Had you invested that money in NAB shares as of today you’d be earning 8% dividend yield, i.e. $80k per year if you invested $1 million, which means you could invest your $1 million in bank stocks, earn $80k, rent that house you wanted for $30k, and have $50k leftover. By buying the house, you lose $50k in opportunity cost.

The market will continue to be propped up because everyone benefits, and those who don’t benefit think they are benefitting. First home buyers think that by receiving government money they are closer to buying a home, but they don’t realize that homes will be more expensive. Those who recently bought a home think they are better off than if they rented, but they don’t understand how much they will pay in interest nor will they understand how much opportunity cost there is in owning property. The best slaves are those who believe that they are the oppressors.

The major problem with housing is that it is commonly associated with a debt-fuelled depraved and wasteful materialistic lifestyle. Once someone borrows large sums from the bank, it is not just a massive house that they buy. They increase their spending in other ways, e.g. furniture and renovations. The debt that they hold tricks them into believing that they have more than they actually have.

The solution then is to go back to basics. Own bank ETFs and live cheaply off the dividends. You can rent a cheap self-contained unit in the outer suburbs for less than $250 per week and then wake up early to commute to work via train. Insecure tenancy is not a problem in the age of Airbnb. Renting gives you the freedom to move to different areas to minimize costs and maximize opportunities. Renting also frees up cash flow to enable you to seek out the best investments.

 

Trump Inflation Will Hurt Families

Many people complain that government spending and debt was high under an Obama Administration, but government spending and debt will still rise under a Trump Administration.

Whereas the Democrats tax and spend, the Republicans will spend and spend.

Trump will increase government spending with a massive government infrastructure program. He will also lower corporate and income taxes.

Lower taxes and higher spending means more money going out and less coming in. You don’t need to be an accountant to know that if there is more money going out and less coming in, you need to either go into debt or print more money.

Either way, the amount of money in circulation will increase, which will cause inflation (see “Investors are betting that Trump will be the inflation president“).

This is very bad for families because although money can be printed from thin air, value cannot be. The more money there is, the more inflation there is, which means the cost of living is higher, and families tend to spend a lot.

Thankfully, I am am single and childfree. No wife and no children means I don’t need to spend much money. I only feed one mouth rather than three to five.

My recommendation to others is to live a minimalist lifestyle and invest your money in assets that go up with inflation (e.g. stocks, property, gold, and inflation-indexed government bonds). The breadwinners in families with massive costs of living will need to slave away in a desperate attempt to keep on top of the inflation that will ravage their household finances.

Investing Under a Trump Presidency [Podcast]

I am certainly not a Trump fan. I actually find the man quite disgusting, and I watched in horror as he was elected President of the USA. That being said, the stock market boom following his election has increased my net worth considerably, and I expect more gains in 2017. However, there are significant risks involved in investing in American equities at this time, so while you should be exposed to the market to capture all the gains from this bull market, you must be prepared to exit the market quickly once it is clear the boom is over.

Other topics discussed in this podcast include Wall Street’s complete takeover of the White House as well as reasons why residential real estate is a bad investment.

 

Does Too Much News Overstimulate?

There is something I’ve noticed recently, and that is that news or a lot of material on the internet is highly addictive. When you read something controversial or scandalous or sensationalist, it is stimulating, and often in real life there are many moments of boredom, so I turn to the news on my phone in order to stimulate myself, but what ends up happening is that this stimulation is so overwhelming that it takes over my mind, and I find I cannot concentrate at all. When I am at work, I am distracted by my thoughts.

I’ve decided to implement a zero politics policy into my personal life whereby I block all political news. The only exception, of course, is political news as it relates to financial markets, so I need to keep track of financial news because I am a dividend investor. However, I am very selective. I tend of only read trusted dedicated financial news websites, such as Bloomberg or MarketWatch.

I am blocking political news because much of it nowadays, I believe, is fake, regardless of which side of politics you subscribe to. The individual also has little control over the political process, so knowledge of politics is of little use. Politics only serves to distract and stress you out.

There has been a trend lately of many people who manufacture drama and conspiracy on the internet in order to advertise ebooks that they are selling, so it is not just politics I am blocking but also manufactured drama and conspiracy. There is so much out there on the internet that I am blocking. In general, I am just more discriminatory now with what I look at because the internet is very vast. We cannot look at everything, and a lot that is on the internet is wasteful and harmful.

Social media apps such as Twitter are very useful because it’s very easy to unfollow and mute certain people. Something else I find is useful is to turn off notifications unless it is from someone you really trust. Too often social media apps recommend news to you. This should be turned off because it distracts you all day.

The Yerkes-Dodson Law

Lately I have discovered the Yerkes-Dodson law. Here is Wikipedia’s definition of the Yerkes-Dodson law:

The YerkesDodson law is an empirical relationship between arousal and performance, originally developed by psychologists Robert M. Yerkes and John Dillingham Dodson in 1908. The law dictates that performance increases with physiological or mental arousal, but only up to a point.

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Too little arousal leads to boredom but too much leads to strong anxiety, which impairs performance

I realize that I may be a victim of impaired performance due to overdosing on arousal on the internet, and this is having a crowding out effect because sensationalist contrived drama and conspiracy on the internet is taking over my brain and preventing me from dedicating my attention to the dull but important things in my life.

All this arousal from conspiracy, negativity, and drama is stealing time and energy from me, time and energy that I could use for more important things. I need to cut it out.

 

Appeasing Donald Trump Supporters

The week before the US elections, I remember being overcome by a surreal feeling. I was worried because I feared Donald Trump would win. I was always concerned about this, so many months ago I purchased over $20,000 worth of GDX (a gold mining ETF) and about three weeks before the election I bet $50 on Trump to win at $5.00 odds. I had a feeling the events of Brexit would play out again. Just by browsing various Internet forums, I could feel the distrust in the American people. I could feel the pain and anger they were feeling. I knew that the markets were wrong. Those who feel they have been disrespected by the elite live in a completely different world to the investors making the bets.

It turned out I was right. Donald Trump won. It all started to go wrong a little before lunch. I was watching both the betting odds as well as the ASX200, the main Australia stock market index. The ASX200 surged initially but at lunch it completely turned around and started to crash. The betting odds also turned around. I went for a walk in the gardens during lunch. When I left the office the probability of a Trump win was about 20% but when I came back it was around 60% and was climbing fast.

Everyone around me was shocked. I am pretty sure everyone expected and wanted Hillary to win. One of my coworkers I think is a closet Trump supporter but by far most people didn’t want Trump to win.

My concern is that this victory empowers the crazies. The racists and sexists who believe it’s okay to bully women and non-whites will have the power of the government behind them. It is illegal in workplaces to sexually harass women, but when the harassment is done by those more powerful than you, you have no choice but to submit. There’s no telling whether Trump’s racism and sexism will result in policies that will disadvantage women or non-whites. Some people say he will moderate his position. Just because someone boasts about grabbing women “by the pussy” it doesn’t mean he will necessarily overturn legislation that criminalizes such behavior.

Among those who are disgusted by Donald Trump’s behavior, there is a lot of wishful thinking. The reason why the markets were wrong about a Trump victory was because no one wanted to believe that it was possible, so the suggestion that it could happen was easily dismissed. There was a lot of wishful thinking, and I think yet again people are engaging in wishful thinking by entertaining the idea that Trump will moderate his views or that he was only acting crazy during the campaign.

Supposedly Trump was elected mainly by working class people in swing states who were fed up with wealth inequality and the dominance of Wall Street. I don’t see how Donald Trump will fix any of that. His idea of applying a tariff on Chinese goods will only lead to a protectionist trade war. China will simply retaliate by not buying American exports such as Boeings, and this will only lead to more job losses. Meanwhile, the American working class is fixated by feminism, multiculturalism, Muslims, and homosexuals as if they are the reasons why they’re poor. It is as if rich people eat cake and everyone else fights over the crumbs. Instead of focusing on why the rich are eating all the cake, the white working class is fixated by the crumbs eaten by a Mexican person.

Now more than ever, the idea of a universal basic income is starting to sound good. Basically you tax the rich and give, say, $10,000 per year to everyone. This ensures that everyone has enough money to live. Technological advances through automation and robots as well as artificial intelligence as well as free flow of labor and capital will all create immense chaos. It is all part of the creative destruction of capitalism, and even if, as a whole, we benefit, there will be losers, and there needs to be a way of appeasing these losers. The easiest way to do it is to simply transfer money to them or, to make it fairer, to transfer money to everyone so that no one needs to work.

All in all, I’m trying not to think too much about politics. We don’t have much control over what happens in the world, so we should try to think about what we can control.

Why Left vs Right is Dumb

One of the most absurd ideas in politics is that everything is either left or right. You are either a liberal or a conservative. The reason why this is absurd is because there are many different political systems that can be used and within a government there are many different policies that can be implemented. Politics is complex, and left versus right oversimplifies.

For example, I once spoke to someone and told him that one simple way that the government can raise more revenue is to increase taxes and then all of a sudden this person called me a “liberal” and then started criticizing me for supporting abortion. I make one comment about taxation and then suddenly my views on everything else is known. I am pro-abortion, for gay rights, etc.

This is very similar to racism. Racists will assume, for instance, that just because someone’s skin is black that he is a criminal when logically this is false. Not all black people are criminals. Likewise, just because someone wants to increases taxation, it doesn’t mean they are pro-abortion. In fact, what does taxation have to do with abortion?

This is what is wrong with left versus right. The views lumped together on the left have nothing to do with each other. Just because someone is pro-abortion, why would that mean he is pro-taxation? Just because someone is anti-taxation, why would that mean he is anti-military?

There is absolutely no logic to the political spectrum, but I suspect many people love it because it fulfills the human need to belong to groups.