Public Sector Pay in Australia

Ted Baillieu, after defeating John Brumby in the 2010 Victorian State Election, has made it clear that he wants to get to work on fixing the state's problems inherited from the previous government by holding a parliamentary sitting day early on 21 December 2010. During this parliamentary sitting day, the new Treasurer of Victoria Kim Wells MP presented the Budget Update 2010-11.

One of the key messages of this budget update is that the size of the Victorian government has gotten too big and is unsustainable. Because of this, the Liberals will need to implement an austerity measure that will see a minimum $100 million net operating surplus achieved per year in addition to an election promise to find $1.6 billion in savings over the next four years.

Page 2 of the Budget Update states the following: "Growth in the size and cost of government threatens to reduce Victoria’s tax competitiveness, without generating any offsetting improvements in productivity."

Recent statistics show that public sector wages have increase by 6.3 per cent in the three months from May 2010 to Aug 2010, more than private sector wage increases of 4.3 per cent during the same period of time. (Source: Are We Paying the Public Sector Too Much?)

The biggest increases are found among those working in the public sector in finance roles (8.7 per cent increase) and public administration (5.5 per cent increase).

"On average, public sector employees earned just shy of $60K per year — $8k more if you work for the Commonwealth government. Those working in electricity, gas, water and waste averaged more than $82K per year (no wonder the bills keep going up), compared to those in education who managed $51K."

What if the Aussie Dollar Collapsed?

One of my hobbies in life is to read financial porn, i.e. stories about how the economy will collapse in the future. One such scare story I have read is in the Contrarian Investors' Journal titled Will There Be an AUD Currency Crisis?

This piece explains that the Australian economy is highly leveraged to the mortgage debt market. Even though public debt in Australia is around 7 per cent of GDP, this masks the massive extent of private sector debt in the country, mainly held by invididuals in the form of mortgage debt.

Everything will be fine if Australians continue to be able to pay their mortgages, and signs so far seem to suggest that Australians are managing to pay their mortgages. Pay your mortgages like the obediant slaves you are!

However, if something bad happens, chances are the government will take over these banks and, as in America, private debt will be nationalized and public debt will skyrocket. Furthermore, foreigners will be less likely to lend to Australians (both Australian governments and Australian banks) and this will cause the Aussie dollar to collapse. Furthermore, the unwinding of the carry trade will also smash the Australian dollar.

A great deleveraging and unwinding of the carry trade occured in late 2009 at the height of the GFC. During this great period of deleveraging, the Australian dollar collapsed to the point where A$1 = US$0.65. However, there was a recovery in the stock market, the American government started to print money like crazy, and now the Australian dollar has soared against the US dollar where A$1 = US$1.01. I feel very superior to the Americans at the moment because this means that my salary in US dollars rises a lot and I admit a guilty pleasure of mine in my spare time is to browse through Wikipedia and check out the median incomes of people in certain states and counties in America and then compare my income to their income. Because the Australian dollar has soared so much, my income converted into US dollars is approaching the median incomes in many of the exclusive areas in America! This means I have become rich according to American standards! (I know I am not really rich and that this illusory wealth is just a product of American money becoming worthless.)

Given that everything is going so well at the moment, I often wonder how long it will last. If life has taught me any great lesson it is that you should always have a plan B. You should always have an exit strategy. What if the Aussie dollar collapsed? What do you do?

One thing we can look at is what happened in the last deleveraging when the Australian dollar. Some people suggest that buying American shares is a good idea if you want to protect yourself from a falling Aussie dollar. But the graph below shows that the American stock market--as measured by the S&P500 index--collapsed with the Australian dollar.

What can you do? The graph above suggests that gold is a good idea. Even the GFC struck, stocks fell, and the Aussie dollar plummeted, the price of gold in Australian dollars went up.

This analysis is purely technical and looks only at historical data. It does not look at any fundamental reasons why gold would be a good hedge against an Aussie dollar collapse. Personally I believe that those who are worried about an Aussie dollar collapse should convert Aussie dollars into both US dollars and gold (physical gold or gold ETFs). But I don't necessarily believe the Aussie dollar will necessarily crash. If Australians continue to pay their mortgages, then all should be fine. Even if they cannot afford to pay their mortgages, surely the Australian central bank will lower interest rates.

Public Finance and Private Finance

How can these principles of public finance help us with personal finance? Personal finance is similar to public finance in that often an individual wants to save money for the future but is tempted to go on spending binges to fulfill needs like food as well as wants like intimate relationships, family, holidays, and luxury cars. According to behavioral economics, the dual-self model is used to explain how often an individual will behave as if he has two selves. One self is the sensible, long-term thinking self (the long-term self) who wants to exercise, wants to save up money, and so forth. The other self is the impulsive and short-term thinking self (the short-term self) that wants to spend money via impulse shopping, watching television, eating junk food, and so forth.

All accounting is for the sake of fulfilling the need for a principle to be able to monitor and control the actions of an agent. In other words, accounting is a necessity in principle-agent relationships. In managerial accounting, financial statements are used by managers and executives to allow them to monitor their workers. In public finance, financial statements are also used by politicians (who work on behalf of the general public) to monitor the public sector or the bureaucracy. In personal finance, because of the economic insights of the dual-self model of human behavior, financial statements can be used by individuals to allow the long-term self to monitor the short-term self. In other words, the relationship within an individual person between the long-term self and the short-term self can be modeled as a principle-agent relationship, and the insights we can get from other forms of accounting (e.g. managerial accounting and public finance) can be used to improve personal finance.

In public finance, citizens pay taxes that go to government who then spend the money for the betterment of citizens. In personal finance, the long-term self makes the short-term self work hard to earn money to save so that there is more money in the future to benefit the long-term self. In terms of accountability, in public finance the government is accountable to the people. In personal finance, the short-term self is accountable to the long-term self.

AREIT Funds - Vanguard vs APN

It is my opinion that a great investing opportunity exists in AREITs, so I plan to start investing in AREITs.

I have just been looking at Lonsec's Australian Property Securities Funds Sector Review 2010, which interestingly is found on Vanguard's website and highly recommends Vanguard's AREIT fund, which predicatbly tracks the S&P/ASX 300 A-REIT Accumulation Index.

Strangely, Lonsec's study recommend's Vanguard's fund over the APN AREIT Fund, which is find startling given that my prima facie examination suggests that APN's fund seems superior.

One of the reasons for this, according to Lonsec, is that Vanguard, which employs passive management, offers low fees compared to those funds that employ active management: Page 7 of Lonsec's review states the following: "[A] majority of funds are still charging relatively high fees for low conviction 'active management'. This is disappointing, given that most managers hold over a third of their portfolios in the Westfield Group.... To this end, Vanguard has retained its 'Highly Recommended' rating. This rating reflects Lonsec‘s confidence in Vanguard, should advisers choose to invest in a low-cost, index fund in this asset class."

However, Vanguard's management fees that it charges for its managed fund (0.90% per annum for the first $50,000 invested) is much higher than the fees it charges for its AREIT ETF (0.34% per annum). Furthermore, APN AREIT Fund's management fees are even lower than Vanguard's (0.85% per annum where no adviser remuneration is paid) (Source, APN AREIT Fund PDS, p. 1). To top it off, Vanguard's fund pays distributions half yearly whereas the APN fund pays distributions monthly. As of 2 December 2010, the APN AREIT Fund's current yield is running at a phenomenal annualized rate of 9 per cent!
 
One of the supposes strengths of Vanguard's AREIT fund is the fact that it tracks an index. But as Lonsec pointed out in its report, this AREIT index is about 40 per cent made up of the Westfield Group. Why pay Vanguard 0.90% per year in management fees to essentially invest in Westfield? There is little diversification. APN, however, are "index unaware," which means they are not constrained by having to follow some index. This allows them to seek out value, maximize diversification, and minimize risk -- and they do all this with lower management fees.
 
I am not saying I don't like Vanguard. I believe they offer a good diversified bond fund. I am also invested in their high yield fund, although I am not satisfied with this investment as it claims to pay monthly distributions but in actual fact seems to pay zero distributions every third month. Quick calculations of the last few years of distributions received reveals that Vanguard's high yield fund only gives a running yield of about 4 or 5 per cent per annum, which is quite disappointing for a fund that is described as "high yield." This may not be the fault of the fund manager and can be blamed on market conditions, but nevertheless it certainly is disappointing for investors.

Helping Friends Spend Less - Don't Do It!

I was having lunch with a friend of mine who I used to work with. His name is Harper. We went to Nando's and while there he started criticizing me for eating out all the time, saying that it is bad for my health. I told him that it is possible to buy food that is healthy, e.g. salads and sandwiches. He then claimed that I should not eat out because it is a waste of money.

When my friend tried to lecture me about how I should spend my money, it made me feel really wrong. I admit I used to do it in the past. I would tell people that they should not spend money on luxury items and that they should spend it instead on necessities so that they can save money. I even went so far as to criticize people for having children since I believed that children are expensive luxury goods. But since then I have learned that it is best to let people spend their own money on whatever they want to spend it on. Other people have different values and different goals in life, and unless you are walking in their shoes, you don't really understand and you are in no position to lecture.

I do admit I eat out whenever I am at work simply because I don't like to prepare food and I don't like to make my own food or have a family member make it for me (because it tastes bad). When you're busy dealing with the stress of work, the last thing you want is to have to deal with bad quality food that stinks up the office. In addition to eating out at work I also drink coffee. On some days I drink one cup and on other days I have two. All this eating out and coffee adds up to maybe $3000 to $4000 per year. It's a lot of money, I admit, but I kept records of how much I have spent for many years now and according to calculations that I did today I found that I only spend about 15 per cent of my gross income from work. Some people may be able to achieve better savings rates than that but this is what I am comfortable with. My friend Harper, on the other hand, had a girlfriend who he spends bucketloads of money on. I also remember him going on about a $1000 wristwatch he purchased. He wears fairly trendy clothing and even wears men's jewellery. Based on his history of spending on luxury goods, I am surprised he is lecturing me on the differences between needs and wants and how eating out and drinking coffee are expensive habits!

The lesson from this story is that in your interactions with people it is, in my opinion, a good idea to have a non-interventionist policy whereby you let other people decide for themselves what they want to do with their lives. This doesn't mean you should not help a friend in need, but there is a fine line between helping a friend and imposing your values on him.

Beyond Social Business and Microcredit

The Problem with Microcredit

Wikipedia defines microcredit as follows: "Microcredit is the extension of very small loans (microloans) to those in poverty designed to spur entrepreneurship. These individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. Microcredit is a part of microfinance, which is the provision of a wider range of financial services to the very poor."

The problem with microcredit is that it is doubtful that it works. What microcredit does is allow poor people to get loans. Making poor people rich with microcredit is like trying to make a young university student rich by giving him a credit card. In theory the young university student, with his credit card, could buy computers and other equipment and then start up an IT business in a garage and then suddenly become a millionaire. This could happen. But it's unlikely. (Read From Uni Dropouts to Software Magnates.) Likewise, a poor entrepreneur could borrow money, start up a business, and become very successful, but it's unlikely.

How do young university students escape from poverty? They get jobs. Once a university student gets a job, he can pay off his credit card bills and start saving up for a house, car, marriage, children, or whatever.

Similarly, for a poor person to escape from poverty, he needs a job! We know this works because it has worked in China. The greatest escape from poverty in human history has already occured China, and it occured through massive employment of poor people in low-skilled manufacturing jobs. This is the answer to world poverty.

Social Business

Muhammad Yunus, who won the Nobel Prize for inspiring a global microfinance movement, seems to be growing skeptical about microcredit. According to Banker to the Poor Goes Beyond Microlending, Muhammad wants to encourage "social business" instead. Social businesses are businesses are designed for social purposes and not profit. They make money only to pay for operating costs.

I believe there are many problems with this idea. The main one being that if there is no profit then the incentives for starting a social business are non-existent. This means that there will not be many social businesses and hence there will be little employment. Because there is no profit to be made, a social business will not be as competitive compared to a for-profit business.

The Solution

Here is my solution. Currently we have the situation illustrated in the diagram below. A worker and a company come together. The worker gives labor to the company and the company gives a salary to the worker. Unemployment is created when the value of labor is less than the salary so that the company has no incentive to hire the worker.

My solution involves a philanthrophic investor stepping in and paying the worker's salary. This may sound like a major sacrifice if we look at wages in developed countries, but many of the world's population can live on about $1 per day, so it is not a big deal for a wealthy philanthropist to pay the salary of a worker. In fact, the philanthropist can set aside about $7300 worth of government bonds whose income will pay the worker's salary, assuming the government bond yields 5 per cent per annum.

The philanthropist will pay the worker's salary and in return the company will give the philanthropist shares in the company. If the worker is being paid $1 per day then the philanthropist can put aside $7300 worth of government bonds to fund this salary. The philanthropist can then demand $7300 worth of shares in the company.

The company should be happy with this because it gets free labor and companies want demand for their shares to be high. Labor for a company is a major obligation. Paying shareholders is optional. This means that the risks for a company is significantly reduced. It is more likely to want to hire more labor and this will reduce unemployment and aid in the reduction of poverty.

The worker is happy because he has a job that provides a stable income. The only damage that is being done is being done to the philanthropist who no longer has converted a stable income into an unstable income from dividends from shares. In other words, the philanthropist will be exposed to more risk.

However, the damage should be very little because wealthy people tend to want to increase risk on their investments anyway because more risk means more return. In the long run, history shows that the returns on the stock market are higher than the returns on safer assets like government bonds. Therefore, there is a reasonably good chance that the philanthropist will make even more money, and because his gains will be in the form of capital gains rather than income, he will get tax benefits as well.

This idea works because rich people are in more of a position to take risk than poor people. Rich people can take risk because they can afford to. If something goes wrong, they have a lot of money to bail them out. A poor person cannot take significant risks because he needs a steady income to buy essentials like food. The relationship between a poor worker and the philanthrophic investor in this scenario is similar to the relationship between an insurane company and a client. An insurance company has vast pools of money that can be paid out to clients to fund some expensive disaster (e.g. if you crash your car or if something is stolen from your house) but in return the client pays the insurance company a regular amount.

Avoid the Joneses. Otherwise, Talk Sport.

One of the difficulties of being human (or perhaps any animal) is having to deal with status anxiety. Status anxiety is an obsession about how powerful other people are relative to you.

What I find is that among people who are obviously my superiors (e.g. my bosses) status anxiety is not a problem because it is clear what the relationship is. When I talk to my boss it is clear that he or she has more power over me and that he or she tells me what to do, and I dutifully follow these orders. I also try to learn from these people.

If I am among people who are obviously my inferiors then likewise I find that those at the bottom tend to show admiration towards me. When you are among your inferiors, you have a choice of either being cruel and belittling to them or alternatively you can be compassionate and try to guide, help, and develop these people. As Thomas Carlyle said, "A great man shows his greatness by the way he treats little men."

However, it is the relationship among people of more or less equal status that is difficult. The uncertainty about who is superior to whom spurs competition. Your colleague at work who is at the same pay level as you wants to think he is better than you by talking up how important his work is. Your neighbor across the road will want to impress you with hus expensive car.

The Avoid-the-Joneses Strategy

I get along well with my superiors and my inferiors, but not my equals. The mainstream solution to this problem is to tell yourself that buying status symbols and showing off is childish and silly, and not to be worried about it. In other words, when Jones shows off his new Ferrari and trophy wife, just forget about it.

The problem with this solution is that it ignores how much status anxiety affects us all. It is human nature that we feel jealous when our equals seem to be getting ahead. This is because we are losing control and losing power. When we see the neighbor showing off his luxury car and trophy wife, it will create pain. We must accept it. There is no point denying your own biological urges and trying to wish them away. These instincts will exist and will continue to exist.

The solution then is not to try to deny the problem or to try to forget about it. The solution is to simply not be friends with your equals and try to limit the amount of interaction you have with them. In other words, avoid your equals.

This strategy of trying to associate with people who are clearly your superiors or your inferiors, in my opinion, leads to peace and harmony because everyone knows his role and position. But how do you avoid your equals if these people are the people you work with, your neighbours, relatives, and so forth? Even if you try your hardest to spend little time with your equals, there is a good chance you will still have to be polite with them, to talk to them, and so forth.

Talk about Sports

If you are with your equals, try to limit the amount of time you spend with them, and try to talk about topics that do not create status anxiety, e.g. do not talk about personal finance, work, or money. It is better to talk about trivial topics like the weather, sports, film, or television. Many people already do this instinctively, which is why discussions about sport are very popular and why discussions about topics like wages are taboo.

The Implications of Class Mobility

People move around quite a bit. Your boss may lose his superior status because of a multitude of reasons. He may get fired or he may get divorced and lose all his money. But if your boss suddenly becomes less fortunate than you, this should not create too much anxiety for you. The real danger is if your inferiors suddenly become your equals or if your inferiors become your superiors.

Your inferiors may become your superiors in a very short period of time as they may advance more quickly than you. It is important then to estimate how likely it is that a particular inferior person you are talking to will advance in status to the point where he is equal to you. If it is reasonably likely, then try not to talk too much about topics that elicit status anxiety. Try instead to talk about trivial topics. The more risk averse you are, the more you should talk about trivial topics.

Image: Neither Fanboy

Differences Between Gold and Real Estate

One of the benefits of investing in gold is that it protects against inflation. One cause of inflation is a rise in the money supply, which can be caused by money printing by the government. Money printing is very tempting for governments because it gives politicians more money to spend without actually increasing taxes. Even though printing money runs the risk of increasing prices, it's a more subtle way of raising revenue rather than directly taxing people. Printing money also devalues the currency, making exports more attractive.

Gold cannot be printed, so it is much more difficult for the supply of gold to increase. Gold can be mined from the ground, but obviously this is not as simple as printing money.

Some people suggest that real estate is a good investment that can keep up with inflation and has similar safe haven properties as gold. They argue that in times of hardship, you can grow food on your land. Furthermore, land cannot be printed. There is a finite supply.

It is true that you can grow food on land, but there being a finite supply is hardly helpful. The major problem with land is that governments have too much control over it. Physical gold is difficult to tax. It is almost pointless for government to tax gold because people tend to buy physical gold and trade among themselves, leaving no paper trail. Gold is portable and can be easily stored and hidden. Land, on the other hand, is not portable. It cannot be smuggled out of the country. You cannot hide it from the government. The result is massive taxation. The reason why banks are very happy to lend to home buyers is because they know that if they lend to you, they have you by the balls. You cannot run off to another country if you cannot pay your debt. The bank can easily sieze your land and sell it. Gold is different. If you borrow money from the bank to buy gold, you could easily run off to another country with the gold. Gold is freedom. Real estate is slavery.

If government were to slap a tax on gold, people would simply move it out of the country or just do informal transactions. If government were to slap a tax on land, people cannot do anything about it but to accept it. Just as government can print money, government can also print land. Not literally! For example, the government can control the amount of land released for residiential development by altering the urban growth boundary. If government wants to keep land prices higher to collect more land tax or land transfer duties, it can limit the supply of land. If government wants to help out property developers, it can increase the supply of land.

In an end-of-the-world scenario, when banks collapse and civilization as we know it is finished, land ownership will be worth nothing because the land you own is land you own thanks to a piece of paper enforced by the judiciary. If civilization breaks down, it is assumed that the judiciary has no power and hence your land is gone. Even though you may live on it, it's not really yours. Gold is different. Physical gold is held by you and hidden by you. Since you control it and since you own it by force or threat of force, then it is yours, regardless of what a Supreme Court judge says.

Aurora Property Buy-Write Income Trust

The Aurora Property Buy-Write Income Trust (ASX: AUP) is currently yielding about 10% per annum, which is very high. It achieves this by buying listed Australian real estate trusts and then selling call options on these securities to earn extra income. A portion of the income it earns from selling these securities are then used to buy put options for protection against price falls. This is a strategy that I am definitely unfamiliar with. Regardless of the strategy, the fund pays very attractive dividends. This is something I will strongly consider, even though this fund seems to have very high fees. It may be worth it consider the attractive dividends. It's worth a try.

Aurora Funds Management has a number of other investments, such as funds that employ a technique of dividend stripping on Australian equities, a fund that employs the buy-write strategy to global infrastructure, and a hedge fund called Van Eyk Alternatives Plus whose performance has been underwhelming, and a brief skim of this hedge fund's PDS reveals things like commissions for financial advisors. Most impressive of all, Aurora Funds Management has a fund (ASX: ABW) that pays 8.4 per cent and has been able to track the ASX200. It is able to track the ASX200 by using future contracts and other derivatives. An investment that tracks the ASX200 and pays dividends of 8.4 per cent is very impressive. Given that the ASX200 has average about 8 per cent over the long run and given that this fund's yield is 8 per cent, you are looking at potentially 16 per cent total return for this fund.

Below are Aurora funds listed on the ASX with their estimated yield (estimated by CommSec).

ASX Ticker	Estimated Yield (%)
AOD	6.2
ABW	8.4
AUP	10.0
AIB	8.4
VBP	4.6

Like I said, I will consider these, but I do not like the high fees, and I'm not sure if I get any currency diversification. Aurora's funds, its investment strategy, and so forth have a Bernard Madoff feel to it, so some more reading would be necessary before I jump in. The great thing about these listed investments is that you can put a few thousand dollars in and if you are dissatisfied with the fund's performance (e.g. it pays low dividends) then you can simply stop putting more money in. If you feel like the performance is good you can put money in as you go. This control that I get from investing in listed securities is why I am pro-shares and anti-real estate. (When I talk about real estate I am talking about homes, not A-REITs.) If you buy a home, you are all in. The average house in Melbourne costs $500,000. If you decide to buy a house you borrow maybe $450,000 and then you are a slave to the bank for the rest of your life. You work like a slave to pay the mortgage and then when the banks raise interest rates you complain and complain. This is the typical behaviour of that breed of Australian known as the Aussie battler. As you can see I am passionately anti-debt, but that is not the main focus on this blog post, so I will hold my tongue. I have a tendency to drift to unrealted topics. The rant about the Aussie battler will have to wait until later.

Spend Less vs Earn More

In this blog I speak a lot about investing and personal finance. Investing is not a precise science as there are so many market uncertainties. For example, it's hard to tell if the US dollar is going to keep going down or whether it will strenghten in the fiture. These uncertainties are what I love about investing.

I consider investing to be a hobby. I do it in my spare time and I find that it is a lot of fun. Someone once said to me, "Dude, why do you spend so much time studying investments. You should be spending time increasing your income instead." My friend, in my opinion, believed that work and investing is a trade-off. If you do more of one thing you must do less of another. I think this is wrong. My response to his comment is that I do spend time increasing my income. I do try to do the work I need to do at work to the best of my abilities. I don't study investing at work. Investing to me is leisure, so I do it at home after work or during the weekends. It does not interfere with work. If I weren't studying investments at home, I'd probably be doing some other leisure activity, e.g. watching reruns of Survivor or Shaytards.

Some people argue that saving money, investing and so forth is a waste of time because you should be focusing on improving your career, getting promotions, and so forth. Everyone has his own preferences but personally I find saving money and investing to be a lot of fun. The investing is certainly more fun than saving money, but saving money and investing as a whole is more fun and certainly more easy than working hard.

Working hard actually involves hard work! If you listen to all the career gurus, they will tell you that doing well in your career requires major analysis on office politics. You've got to do all sorts of difficult things like networking and watching what you say, making sure that give good impressions to others, and so forth. Some people are naturally good at this. I am not. You can call me old fashioned but I believe that you go ot work to simply do the work you're given. If you are given X then you do X to the best of your ability. There is no need to go beyond that. There is no need to stay back at the office just to show off to the boss. There is no need to set up coffee with every single person in your division to expand your network. There is no need to walk around the office and volunteer to do everything and find that with so much work to do you are overloaded and cannot cope. Like I said, for some increasing your income is easily, but for me it is difficult. Furthermore, because I work for the government, our pay structure does not include bonuses and other complex incentives structures that reward you for hard work--nor should it be because working in government is not really about hitting certain KPIs, as what is good for the organization is public welfare, not something measurable like profit or stock price appreciation.

Saving money and investing is simple. In fact, saving money is very simple because you don't do anything. If you want to advance in your career you usually have to do something, e.g. impress your boss. To save money you have to not do anything. The less you do, the more you save. If you spend your free time going to bars, pubs, casinos, movies, nightclubs, and so forth, then you will pay big. But if you don't do any of these things, you don't pay anything and you save money. Some people are what I call active savings in that they save money by aggressively trying to find hihg-value goods. These are the people who will not buy a coffee because $3 for a cup of coffee is not good value because you can make your own coffee for 50 cents. These are the people who are happy that they spent $5000 on their wedding because the average price for a wedding is $30,000. Active savers spend a lot but whenever they spend they save a lot of money. This is not me. I am a passive saver, which means that the way I end up saving money is simply by not buying things. The active saver will be happy if he spends $5000 on a wedding rather than $30,000. A passive saver will not get married and ends up paying nothing. I am not saying that I don't value marriage or leisure. I am just lazy, but this laziness has its benefits.

Estimated Yield of iShares S&P Global 100

I am keen on producing high yields from my investments. Due to the strong Australian dollar, I have recently purchased on iShares S&P Global 100 ETFs (ASX: IOO). According to the iShares website, this ETF's distribution yield is estimated to be around 9.5 per cent, which seems very high. However, when I actually did the numbers myself using data on the ETF's actual distribution history, I noticed that the yield is more like 2 to 3 per cent. I am not saying iShares has misled anyone. On their site they clearly state that their figure is an estimate with various assumptions. Clearly iShares's assumptions were different to mine. I suspect that the main difference is that I took all the historical distributions from about three years back and then divided it by the current price. Perhaps iShares took the historical distributions and then divided it by a weighted average. Perhaps they also accounted for exchange rate fluctuations between the US dollar and the Australian dollar. It would make sense that this ETF would give low yields if you consider that currently the Australian dollar is strong and has been appreciating against the US dollar for a while now. If the Australian dollar were to suddenly pull back for whatever reason (e.g. American money printing actually turns out to be a valid plan that strengthens corporate America and and the US dollar with it) then I should expect yields on IOO to increase.

I am in a little bit of a dilemma because on one hand I want high yields but on the other hand I want to hedge against a collapse of the Australian dollar. I can hedge against a collapse of the Australian dollar if I buy US dollar denominated assets, but the problem is that as the US dollar weakens then my income from dividends gradually falls because the dividends are originally paid in US dollars and then is converted to Australian dollars. As the US dollar gets weaker, so too does the value of these dividends.

Arguments Against Rick Ferri’s Take on Gold

The latest round of US money printing has pushed the price of gold above US$1400 per ounce. The attackers of gold have come out and criticized the metal, claiming it is a poor investment. Some blog gives Rick Ferri's Take on Gold, providing arguments against gold. After reading this article, I felt like I had to respond to the points made by Rick Ferri.

Argument 1: Gold ETFs will not protect you in the event of financial or economic catastrophe.

Response: Just because there is an economic catastrophe, it doesn't mean the banking system will collapse. It doesn't mean all ETFs will lose value. The GFC is an economic catastrophe, yet ETFs didn't all go to zero.

If you believe that there will be a total collapse of civilization such that banks will not functions, stock exchanges will be no more, airlines will not work, and so forth, then gold ETFs are not good. But this does not mean gold is not useful as an investment. In such an end-of-the-world situation, physical gold, which you can feel in your own hands, is preferable. Many people prefer physical gold rather than ETFs.

I am an ETF buyer. I agree that in an apocalyptic situation, I'll likely lose my money. If the banks collapse, I agree I will likely lose money. So what? That is a risk I understand and that is a risk I am willing to take. I happen to believe it is possible that there will be an economic catastophe that is extreme enough that it will cause enough fear and inflation (or even stagflation) to cause gold prices to skyrocket. All this can happen without all banks collapsing or the entire financial system completely being wiped out. Stagflation has occured during the '70s. It occured in the late '00s as well just right after the GFC when oil prices skyrocketed. Stocks will not protect you during stagflation. Gold usually does.

Argument 2: Investing in gold is like investing in bricks. Bricks produce no dividends. A brick will always remain a brick. One brick will not become two bricks.

Response: An investment does not have to produce dividends or cashflow to be good. Gold can go up in value as measured by particular paper currencies. Gold can also maintain purchasing power.

Here is what Rick says:

You can take a bunch of bricks and pile them in your backyard and look at them every day and say, ‘Go up in value, go up in value.’ But you can’t say, ‘What kind of dividends are my pile of bricks going to pay me this year?’ Because it’s zero. How much interest am I going to get from my pile of bricks? None. Is my pile of bricks going to become two piles of bricks over the next 10 years? No, it’s going to be one pile of bricks a year from now, 10 years from now, and a hundred years from now. You’re just hoping that someone comes along who thinks that pile of bricks is worth much more than you paid for it.

Dividends and cashflow are great. If you put money into a bank savings account, you get cashflow from the interest. Many other investments don't do this. Stocks pay dividends, yes, but the dividend yield on stocks is usually less than the income yield from cash investments, but people invest in stocks because they want capital growth. Not everyone cares about dividends. Some people want capital growth. Gold does not pretend to do pay dividends to create cash inflows. That is not the point of investing in gold. Gold can, does, and has gone up in value. In fact, gold has gone up in value more than any other investment in the last three decades.

Australian Economy Powers Ahead

There is a guy on YouTube named George. In a video above, he talks about the difficulties of living in the United States as it stills suffers from the aftermath of the GFC.

The US dollar continues to fall, the Fed continues to print money, and official unemployment flirts the 10 per cent mark (while actual unemployment that includes discouraged jobseekers may actually be 20 per cent).

President Obama is facing a backlash as his promise of hope and change have not materialized and American citizens see nothing but the same old stuff. Many of the problems that led to the GFC in America were the result of a house price bubble that slowly grew during the presidency of George W. Bush, and when the bubble burst, Obama inherited the mess.

But here in Australia, all is good! It is true that the GFC hit Australia, but the country has rebounded back. Unemployment is around 5 per cent rather than 10 per cent. The Australian dollar is now at parity with the US dollar, which is unprecedented. Since Australia is a major exporter of natural resources and minerals, a combination of demand from emerging markets like China as well, as strong investor demands for safe-haven assets like gold, have seen mining profits explode, which increase the value of the Australian dollar. Australian house prices are one of the most expensive in the world and continue to increase.

Some executive in America who commented on malinvestments immediately prior to GFC said the following: "You cannot stop dancing while the music is playing."

Here in Australia, it seems like everyone is dancing and everyone expects the music to continue to play forever.

I am worried about the possibility of something going wrong with the Australian economy, which is why I am hoping for the best but starting to prepare for the worst. About 30 per cent of my wealth is in cash, ready to buy dirt-cheap shares if there is a post-1990 Nikkei-225-style double dip, which may lead to a full-blown depression, resulting in a lost decade or two. The Fed chairman seems willing to prevent deflation at all costs, so maybe worries of deflation are unfounded. If you believe the Americans will simply flood their economy with cash to jump-start it, then it is best that investor get out of cash and go into anything else, shares, gold, silver, platinum--anything but cash. Even the cash of countries other than America can be dangerous as a currency war may see multiple countries printing money to devalue their currencies and benefit their exporters even though it is means higher prices for everything.

The bottom line is you should be careful. I recommend being mostly in shares but keep a significant amount of cash ready just in case there is a deflationary collapse. Furthermore, for Australians, I believe now is a good time to start selling Australian dollars and going into foreign currency. Today I just purchased some ETFs that invest in global multinational corporations (see the iShares Global 100 ETF). In my opinion, now is not the time to buy real estate. Interest rates are so high that you will find the value of your assets being dwarfed by the value of your debts. There is no guarantee--and it is highly unlikely--that the Australian residential real estate market can sustain the kinds of growth rates needed for you to just break even considering the immensely high mortgage rates currently offered by Australian banks (around 7.5 per cent).

Banks Lifting Rates Over RBA Rate

Today the RBA lifted the official cash rate by 25 basis points from 4.5 per cent to 4.75 per cent.

The Commonwealth Bank immediately lifted its standard variable mortgage rate by 45 basis points, almost double the increase in the official cash rate.

Many mortgage holders are up in arms, claiming that the banks have no right to lift interest rates over and above that of Australia's central bank.

But I think otherwise.

The cash rate and the mortgage rates are two completely different interest rates. The cash rate is the rate at which banks lend to each other overnight. The variable mortgage rate is the rate at which home buyers borrow from the bank to buy homes. They are two completely different products. To say that these two rates must be perfectly correlated is like saying that the price of oil and the price of coal must be the same. They are different products hence they have different prices.

One key factor that influences the rate at which banks lend money is risk. The higher the risk of the borrower, the higher the interest rate the banks need to charge in order to compensate for the risk. For example, if the bank were lending to the government (i.e. purchasing government treasury bonds) there is very low risk that the government will default and hence bond rates are usually low at around 4 to 5 per cent per annum depending on the country as well as other factors. However, if the bank is lending to people who are starting their own business, there is a fair chance that a significant number of them will default. The bank must therefore increase interest rates so that the increase in interest repayments the bank gets compensates for the expected loss because of these defaults.

The same concept applies to mortgage loans. When banks lend to people to buy homes, this is a fairly safe loan compared to business loans and credit card loans, but there are still risks. Many things can go wrong--house prices could go down and borrowers may lose their jobs. It therefore makes sense for banks to keep interest rates high to protect themselves against borrowers who do not pay what is owed to the banks.

The only argument against the lifting of interest rates by banks is the argument that thre is not enough competition in the banking sector in Australia. This argument may have some merit as the Australian banking sector seems to be dominated by four major players. However, there are other banks out there. Many people do not like being slugged with fees on their transaction accounts, but by switching to ME Bank (Members Equity Bank) they can avoid fees. Many don't like the interest rates that the big four banks charge, but there are dozens of building societies, credit unions, and other small players who provide cheaper loans. But I have spoken to many people and suggested they switch bank. None of them do. Either they are too lazy or they say they like their bank.

No Difference Between Gambling and Investing

Today is the day of the Melbourne Cup, which means over 100,000 people will flock to Flemington to engage in betting on the outcomes of numerous horse races.

Due to personal reasons I will not engage in any betting during the Melbourne Cup as I believe horse racing is animal cruelty. In my opinion, racing a horse is similar to raping a horse. But that is not the main topic of this blog post.

I remember a long time ago I had a friendly argument with a friend over betting versus investing. I put to him the idea that betting and investing are the same thing. He disagreed and believed that betting is a losers game whereas investing is a winners game.

Most agree that conventional investing involves taking ownership of some company or some asset that will appreciate in value in the future thereby making you a profit.

But if you believe an asset will rise in value, is owning the asset the only way to take advantage of this? Why not bet? What is the difference? Usually betting does not involve taking ownership of the asset that will appreciate. For example, suppose I believe that UK house prices will go up in a month's time. My friend believes that if you think UK house prices will go up in a month's time then the way to win from this is to buy a house in the UK. Very simple. This is the conventional way of investing.

However, why not bet? Using IG Index's house price spread betting platform, you can wager that house prices will rise and make money from it. In fact, there are many arguments in favour of betting rather than investing in this case. By betting, you don't actually own the house and therefore you don't have to pay numerous taxes including stamp duty and land taxes. You avoid all sorts of other costs associated with buying houses such as real estate agent fees, lawyers fees, bank fees, and so forth. However, it is not costless to bet on house price increases. IG Index makes money through bid-ask spreads. But nevertheless, what's the difference? Both methods (investing and betting) involve costs. Both methods involve risk. Both methods involve you assessing the situation, taking a position, and making a bet.

There is no difference between gambling and investing.

But my friend believes otherwise. He says that gambling institutions never lose because if it were likely that house prices will rise then they will change the bid-ask spread so that they take a substantial amount of your winnings. But how is this any different to investing? If it were likely that UK house prices would go up, that would already be factored into prices. The high demand for houses would push up prices thereby increasing the costs of buying houses. This effectively increases the costs of betting that house prices will rise. Because house prices are higher, they are more likely to fall. Try this thought experiment. Imagine you have 100 people. Imagine every single one of those people believed house prices will go up. This means they all buy houses and house prices rise. Can house prices go up further? No, it cannot because there are no more buyers. Everyone who had faith in house prices rises has already purchases houses and there are no more buyers left in the market. There can only be selling, and selling reduces prices. Since there are no more buyers, prices cannot go up anymore.

Image: Waffler

Rising Private School Costs

I went to private schools when I was a kid and from what I saw there did seem to be a correlation between how much parents paid and the quality of the education. That more expensive schools provide better education should not be surprising since schools that are driven by profit have more incentive to provide better education. However, even though the environment may be right for a kid to succeed in school, ultimately it depends on the determination and work ethic of the kid himself. I have heard many stories of kids going to expensive schools but failed because they were distracted by parties, alcohol, or sports.

A recent article in The Age states that private school fees are rising greater than the rate of inflation in Melbourne (See High Price of Staying Private).

The private schools are blaming this rise in private school fees on reducations in government funding and the rising costs of teachers (driven mainly by rising teacher salaries in public schools). Many parents I know who bring their children to private schools are up in arms about the price rising, claiming that the government should provide more funding to private schools. One particular parent said, "If I choose to send my child to a private school, why should I have to pay more?"

I personally don't see why these parents are complaining. A private school is a private school, and hence government ideally should not be interfering with it. A private school is allowed to set whatever fee it wants simply because it is private. If the government were to dictate prices, then it would hardly be a private school. Can you image if the government suddenly raided the boardroom of BHP and demanded that they change the price of their iron ore exports? Could you imagine if government took control of all private enterprise and ran them? It has happened before in many countries and it has not worked well. When government controls private enterprise, it is called communism.

Strong Aussie - Time to Buy Foreign ETFs?

The Australian dollar has now reached parity with the US dollar, meaning that one Australian dollar equals one US dollar. This is the first time this has happened since the Australia dollar was floated way back in 1983.

Many Australians are taking advantage of the strong Australian dollar by going on holidays overseas. Perhaps one good idea is to take advantage of the strong Australian dollar by buying other countries' shares. Exposure to foreign shares can easily be achieved via iShares' range of foreign ETFs.

Looking purely at the dividend history of these foreign ETFs, the best is the iShares MSCI Singapore ETF, which has distribution rate of 5.22% so far. The Australian dollar has indeed been strengthening against the Singaporean dollar for the past year. The Singaporean economy has been the fasting growing in the world post-GFC. The country seems to be ruled by very competent people and the population seems to be highly educated, although my discussions with people suggest that the Singaporean education system does not foster critical thinking. This lack of criticial thinking is evident in the fact that even though most Singaporeans have a lot of faith in their country's economy they are mostly unaware that Singapore has one of the world's highest public debt. The size of the public debt is greater than the size of Singaporean GDP. In Singapore's defence, I was told that much of this debt is held by Singapore's pension funds. That is, most of the government debt is held by Singaporeans. In America and Greece, much of the government debt is held by foreigners. I am not entirely sure how this makes a difference. The problem with government debt is that it needs to be paid off in the future, which means higher taxes, which slows economic growth. However, Singapore has a very large sovereign wealth fund (Temasek Holdings), so rather than resorting to high taxation to fund their debt, they can use their investments. Singapore's level of taxation is currently phenomenally low, especially compared to countries like Australia and the US.

Even if Singapore's government debt may not be a problem, there are other risks with investing in Singapore. An investment in iShares MSCI Singapore ETF exposes you heavily to the finance sector. A browse of the holdings of this ETF reveals that many of Singapore's largest listed companies are holding companies, banks, and real estate trusts. Buy buying into Singapore you are not really getting that much diversity in terms of sectors. Singapore's focus on finance takes it heavily dependent on other economies and can even, in my opinion, make Singapore's economy rather correlated to Australia's economy. After the GFC, Australia's economy rebounded strongly and currently interest rates in Australia are very high, much like interest rates in Singapore. Australia and Singapore seem very similar in that both are trade-focused and heavily dominated by the finance sector. Both the countries have increasing real estate prices. The main difference is that Australia has a massive resources sector while Singapore does not.

Unlike Singapore and Australia, Europe and the US has been dropping its interest rates, and the US has resorted to printing money to stimulate its economy. This has led to a devaluation of the US dollar to other currencies. This is a great opportunity then for Australians to buy American shares. Currently corporate America is paying virtually nothing in terms of divdends, so a better alternative is to buy the iShares S&P Global 100, which invests in 100 large, multinational companies. The benefits of investing in this, in my opinion, is that you are investing in very high-quality, internationally recognized companies. Most of these companies are European and American, meaning you buy for cheap in the countries that are hardest hit by the GFC. This then allows you to truly diversify your portfolio if, like mine, it is overweight in the shares of high-risk, high-interest rate countries like Australia. The yield on the Global 100 ETF is around 3 or 4 per cent, which is not bad but not as good as Singapore or Australia. If the Australian dollar does take a hit, investment in this ETF should pay off.

The argument for investing in the US now is that all the money printing will eventually jump start the economy again and once that happens, the American dollar will regain its strength. This is the argument put forth by Peter Switzer, the permabull, who in an piece in Yahoo!7 Finance titled Ignore Bears, But Not History, says the following: "I'm an optimist and trade long only and so I search for confirmation that my investment strategy is right." Is this guy crazy or what? You don't choose to be an optimist and then collect evidence to prove you are right. You look at the evidence first and then based on the evidence make a decision about whether you want to be optimistic or pessimistic. That is how a proper investor should behave.

Chinese Currency Manipulation - What Can You Do?

Many in America are angry about the Chinese government devaluing its currency to make its exports more attractive to buyers. Whether or not this is ethical, I cannot see what in the world the US can do about this.

One solution is to impose sanctions, e.g. the US government could put a tariff on Chinese goods. The major problem with this idea is that the price of goods will go up. Chinese people are willing to work for very little, resulting in goods prices that are very low. Americans have minimum wage laws. Unless the American people are willing to give up minimum wage laws and work for a few dollars a month, prices will rise, which will hurt American consumers, and voters will be outraged by price rises. Some argue that although prices will rise, this will be compensated for because Americans will have more jobs. But price rises destroy jobs as well. Every dollar you spend creates jobs. If all of a sudden I purchased a coffee every day, someone needs to make that, so someone is hired to make that coffee for me. However, if I suddenly had to pay more for t-shirts because Chinese goods were banned, then I would have less money left over to buy other others, and I will cut back on e.g. coffee and this reduces demand for coffee thereby resulting in job destruction.

Another solution is for the American government to continue devaluing its currency by printing more and more US dollars. The Chinese government, however, can easily respond by printing its own currency.

One way the Chinese government maintains its currency peg is to buy US Treasury bonds. One suggestion is to ban the Chinese government from buying US Treasury bonds. This could be a problem the US government because the Chinese government is a major consumer of US debt. If the Chinese do not lend to the US, the US will lose a major customer. Currently the US government relies on Chinese lending to fund its various stimuluses, so what the US needs to do then to depreciate its currency is to stop its stimuluses and replace lose Chinese demand for US sovereign debt by selling Treasury bonds to US citizens, which means US citizens will need to suddenly become thrifty savers. I will let the reader decide whether that is likely to ever happen.

Legal Tax Minimisation - Work Deductions, Negative Gearing, and Salary Sacrificing

Many people are keen to reduce their taxes, which makes sense. However, in my own experience I find that many methods of reducing tax, although they allow you to reduce your tax, may have other questionable consequences.

I will talk about three methods to reduce tax in Australia, namely business expense deductions, negative gearing, and salary sacrificing.

Any business expense you have can be claimed as a deduction, thereby reducing your taxable income. For example, if you work as an accountant and you subscribe to an accounting-related magazine, you can claim the cost of this subscription and reduce your taxes. Many people subscribe to the magazine and then say, "I don't care about the costs because it's deductable." This is not a good attitude. Suppose the magazine subscription costs $100. Suppose your taxable income is $50,000 per year. Any additional dollar you earn is taxed at 30 per cent. By getting $100 deducted, your taxable income is $49,900, which means that you effectively pay $70 for your magazine and you save $30. Even though you paid less for your magazine, you are not getting it for free. You still have to pay $70 for it. You cannot therefore simply buy useless crap that you don't need to reduce your tax. The stuff you buy needs to actually be something you want or something you need. You will need to make an evaluation as to whether the benefits of subcribing to the accounting magazine is greater than $70 per year. If it is, buy the magazine. Claiming work expenses like crazy reminds me of people who always buys products if they are heavily discounted. If they see that some product is 50 per cent off at the mall, they are highly likely to buy it, even though the discounted product may still be expensive and maybe they didn't really want it in the first place.

Negative gearing is another tax dodge that people like to talk about, especially in Australia where it is very fashionable to invest in real estate. Negative gearing involves borrowing money from the bank to buy some income-producing asset (e.g. a house). If the repayments to the bank is greater than the income coming from the asset, then the difference can be used to reduce your taxable income. Many people think that by negative gearing they can simply borrow heaps of money, buy heaps of houses, and pay no taxes. But you should be very careful about doing this. To keep it simple, even though negative gearing allows you to reduce your tax per se, this reduction in tax is more than made up for by the increase in other expenses, most notably interest repayments. That is, even though you have reduced your tax debt to the government, you now have a loan debt to the bank. Even though you are paying less tax to the government, you are effectively paying a tax to the bank in the form of interest repayments. The government is happy to allow this tax dodge. Even though they lose money by allow citizens to pay less income tax, they make a lot of money simply by allowing bankers to make more money collecting interest and then taxing the profits of the banks to recoup their lost cash. There is nothing wrong with borrowing money to buy something for investment purposes. However, most people do not realize how difficult it is to come out ahead when borrowing to invest. Interest rates in Australia are very high. Mortgage interest rates are about 7 per cent now. If you borrow to invest, the banks will charge you more, probably 8 per cent or more. For you to break even, your investment will need to produce 8 per cent or more per year. This is highly unlikely. I do not know of any investment that gives 8 per cent per year with low risk. In fact, any investment that gives 8 per cent per year with low risk is probably a ponzi scheme or some other similar investment scam. Most people also underestimate just how much of a burden paying back a massive loan is. Einstein claimed that compounding interest is one of the major wonders of the world. It is definitely wonderful and pleasant if your savings or investment value went up in value exponentially due to compunding interest. However, compounding can work against you if you have debt because debt can compound over time.

Anohter tax minimisation strategy is salary sacrificing. You can salary sacrifice for many things, e.g. for a car or to put into your superannuation fund (retirement fund). I am a fan of this method as it delivers instant results and it is perfectly legal. It is also very simple as well. If you want to reduce the tax you pay, you can salary sacrifice into your super fund simply by talking to HR. A simple email can often do the job. Salary sacrificing into super works because the tax you pay in your super fund is 15 per cent. As of this year, if you earn over $37,000 per year, each additional dollar you earn is taxed by 30 per cent. If you salary sacrifice, say, $100 then that $100 will bypass income tax and go into your super fund where it will be taxed at 15 per cent rather than 30 per cent. You therefore save $15 for each $100 you salary sacrificing into your super fund. If you earn more money and each additional dollar you earn is taxed at the highest rate of income tax, which I think is 45 per cent, then paying 15 per cent instead is a massive saving.

There are three main problems with salary sacrificing into your super fund:

(1) Access to Money - The first and most obvious problem is that you will not be able to access your money until retirement. If you are in your mid-twenties (like I am) then retirement will be a long way off. You will have to wait another 40 years or thereabouts to get a hand on your money. However, super law dictates that if you are experiencing "hardship" then you allowed to access your money. When I save or invest money, much of the reason for why I do is to save for a rainy day, i.e. to save money so that I can use it if I am going through hardship. If money I earn normally is being used for that purpose (as insurance against hard times) and if it goes into super it will have tax benefits and I will still be able to use it for the same purpose, then I think it is worthwhile to put more money into super where it has a better chance of growing more with greater tax benefits.

(2) Limits on Super Salary Sacrifice - Salary sacrificing into your super fund was such a great way to reduce income tax that many people got into it. That is why the government eventually stepped in and put limits on the amount your can salary sacrifice into super. Young people can now only salary sacrifice a maximum of $25,000 per year into their super funds. Some people criticize this and say that this makes it not worth it. But I think that a little bit of a good thing is better than nothing at all.

(3) Government Risk - The biggest and most worrying risk with super is the performance. Many people are worried that super is an underperforming investment because much of super is invested in the stock market and after GFC, stock markts around the world tanked thereby destroying super wealth. However, I do not believe this is a major issue. Super funds allow you to switch your money from shares into other investments like cash. You can also start up a self-managed super fund (SMSF) and invest in anything you want, e.g. art, wine, antiques, gold, and real estate (rules may change regarding investment in exotic assets like wine). The biggest risk to performance, in my opinion, is government risk. Government may make superannuation a great investment today by giving it tax breaks, but government can also take away these benefits in the future. If the government is desperate for cash one year, who is to say it won't raid citizens' super funds? It would be politically unpopular, certainly, but it is definitely a risk. However, money outside your super fund in other investments, e.g. shares and real estate, is also subject to government risk as government can change capital gains tax, land tax, stamp duty, and so forth. Therefore, the only way you can get risk of government risk is to move your money outside of the country, which is most cases is illegal if you are doing so to dodge taxes.

Has Feminism Failed?

I have been reading Are We There Yet? which is about feminism and whether it has made any progress today even though recent statistics reveale that women still earn about 20 per cent less than men. The study claims that women earn less mainly because they take time off work to have children.

Arguements can be made that companies should be more child friendly and have subsidized childcare. The Australian government has already started implementing paid parental leave. In my opinion, paid parental leave--to be paid for by increasing company tax rates--is a poor idea. Companies will likely pass on these cost increases by decreasing wages and increasing the prices of goods. Everyone who has made a lifestyle choice not to have chidlren are punished so that those who decide to have children are subsidized. But some argue that government should encourage higher population growth with subsidies. But this runs contrary to the planned reduction in immigration that both Labor and Liberal are planning. How can you on one hand reduce immigration citing too high a population and on the other hand maintain subsidies like the Baby Bonus?

Back to the topic of feminism. In my opinion, the best way to increase women's pay is to somehow encourage them not to have children or at least to get the husband to do the childrearing. But the reality I see is that women themselves want to have children. Women themselves are the ones who choose to take time off work, choose to take care of children, and choose to do the housework. It is something they like and enjoy and according to their actions they seem happy to forego money for it. If that is what they want, perhaps it is better to simply let them have what they want rather than try to push them to do something they don't want.

Women nowadays have it good. For those women who choose not to have children--or have children but get the husband to take care of them--they often do very well in their careers. I have seen very many successful women who are very focused on their careers.

The statistic that women earn less than men also hides the fact that many stay-at-home mothers get subsidized by their breadwinner husbands. The husband goes to work and earns money while the wife stays home and takes care of the children and does the housework. When the husband comes homes, he gives maybe 50 to 70 per cent of his income to the wife. The wife's earnings in this case does not show up in official income statistics but it is a legitimate source of income for the wife nevertheless.

The Parent Trap (1998)

I have finished watching The Parent Trap, starring a young Lindsay Lohan.

The movie is about two twin sisters who meet at a summer camp. One girl has a mother who lives in England and the other sister has a father who lives in a vineyard in California. Both these people used to be together in an intimate relationship but then separated. Both little girls want their parents to get back together again, so they hatch a plan to switch places and persuade their parents to meet again.

As an obstacle to the two getting together again, the man who owns a vineyard is engaged to be married to a golddigger woman.

Lindsay Lohan who plays both the sisters Annie and Halle was adorable as a teenager. But unfortunately the the Parent Trap can be too cliched and sterotypical. The golddigger publicist who does not like camping is one such stereotype that went too far. But nevertheless, this was a very cute movie and I would recommend it to others.

Survivor Nicaragua Episode 1 - Young at Heart

This blog post contains spoilers.

I've seen all seasons of Survivor. There have been 20 so far, and Nicaragua is the 21st. In this season, the two tribes are divided by the older players (over 40) and the younger players (under 30).

Let me just say early on that after watching last season's Survivor Heroes vs Villains, the first episode of Survivor Nicaragua was quite disappointing mainly because not much seemed to happen. It was great to watch Survivor again after waiting for a bit, but all in all this was an average episode.

During the immunity challenge, the young tribe won and the old tribe went to tribal council where they voted out a woman named Wendy who looked young but was actually about 48. My opinion was that the main problem with her is that she was not physically strong (it is normal in Survivor for weaker players to be voted out early) and because she did not bond well with the rest of her tribe. She knew that she was different and tried hard to bite her tongue and not say much. She spent much of her time working by herself rather than bonding with others players. It is important for players to not only try to work and to show that they are valuable and strong but to also put some effort into socializing with others. During the tribal council she came out strong and effectively blamed everyone else in her tribe for not being nice to her. After her outburst I was sure that she would go. You don't demand respect from others. You earn it.

The preview for the second episode sort of suggests that the younger tribe (called La Flor) will go to tribal council and there will be massive argumetns involving one of the younger blonde male players, pejoratively called Fabio.

Gold Does Not Produce Income

Even though there have been fears of a double-dip, the stock market has gone up. The All Ords has moved from about 4500 last month to 4700 now. Surveys indicate that fears of a double dip are starting to go away. During this period of stock market growth, the price of gold continues to go up as the US dollar continues to deteriorate. Gold is reaching US$1270 per ounce now, citing some people to call it a bubble.

But if gold is a bubble, why would it be? Before we label any asset price increase a bubble we must ask ourselves first if there is a sensible reason for asset price going up. Gold is valuable because its chemical properties make it suitable for use as a currency (read Properties of Good Money for more information about this concept). Many currencies around the world are being devalued because of money printing by government, leading to the price of goods going up. Gold cannot be easily produced as it requires mining, which is difficult. This means that the rarity of gold, which affects its value, is out of the hands of government and therefore gold is free of corruption.

The ABC came out with an article claiming that gold is a bubble (read The Gold Rush is Fools' Gold). The reasons for this are uninspiring. The article mainly appeals to authority by citing Gearge Soros. It also claims that because gold produces no income (e.g. real estate produces rent, stocks produce dividends, etc) then gold therefore has no value and therefore it must be in a bubble. 

"Gold will never generate cash flows, so for purist investors it has no value. From this point of view, gold itself is in a bubble driven by investor fear, implying that the price of gold will collapse when investors realise the world is not ending," Ms Howitt noted in a statement.

This is the worst argument I have ever heard. An investment doesn't need to produce cash flow to be valuable. An investment is any asset that holds or increases in value. Some assets produce income, which gives it value. However, there are many assets that do not produce income that can go up in value, e.g. gold, paintings, and wine.

If you invest in stocks at the moment in Australia, you'll get a dividend yield of about 3 per cent. If you invest in bank term deposits, you'll get about 6 per cent. If we went by the rule that an investment's income is the only indicator of the investment's value, then it would be wise to invest in bank term deposits. However, many people invest in shares because even though the dividend yield is relatively lower now, there is the potential for future capital growth as companies reinvest profits back in their businesses. The most successful investment in history--shares in Warren Buffett's Berkshire Hathaway--has never produced any income. However, term deposits, which give income yields of around 6 to 8 per cent on average, have zero capital growth. Measuring gains with both capital gains and dividends shows that the historical performance of stocks and gold have been better than than that of term deposits.

Bob Katter's Protectionist Demands

The 2010 Federal Elections in Australia created a hung Parliament. In order for one of the two major parties to gain enough seats in the lower house of parliament to form government, a coalition needs to be formed with a bunch of independents. Most of these independents are either urban socialists (Greens politicians) or rural socialists (the ex-Nationals). One of these independents is Bob Katter.

On a recent episode of Q&A, Bob went off about how Australia should apply tariffs to protect its manufacturing and agriculatural sector. He claims that Australia should do this because so many other countries do it. The problem with tariffs on agricultural goods is that they will increase the costs of food. When you go to buy your groceries you will pay more. The costs of living are high enough and a tariff will only increase those costs. Why will food prices go up if there is a rise in tariffs? Tariffs discourage imports. If there are fewer imports, there is less competition. Australian farmers can raise prices of goods without worrying about foreign imports undercutting their products. That other governments protect their agricultural industries is no excuse for the Australian government doing so. That the American government or the European governments apply tariffs only benefits the farmers at the expense of everyone else who pays higher prices for food.

Saving Money by Collecting Coins

There are many benefits of credit cards. There are credit cards out there that have no annual cost. You don't pay anything for them but when you buy things with them you get automatic insurance as well as other benefits, such as cheaper petrol. So long as you pay off any debt you have every month, you will not have to pay any interest. Examples of free credit cards that allow this include the Bankwest Zero credit cards and the Coles Group Source credit cards. I highly recommend both of these credit cards. In fact, I have both.

There is one major problem with credit cards and it is not really an economic argument but rather a psychological argument. The problem with credit cards is that is that they make it easy for you to spend money. It is so easy to be walking in the mall and all a sudden you see something you like. It is so easy for you to whip out your credit card and then buy it. Because it is so easy to use a credit card, most people (me included) tend to overuse it.

Debit Cards Don't Help

Many people think that they can replace their credit cards with a debit card and the problem is solved. It is believed that debit cards are better because you are spending your own money and therefore you will be careful with it. If you spend someone else's money, you won't be careful with it. I think this is illogical. In fact, I think debit cards are quite bad. The problem with debit cards is that it is linked to your transaction account and if your balance becomes zero, the bank will charge you a penalty (maybe $40 or so). It is much safer to simply fill up your credit card with lots of cash so that your credit card account is in surplus. Then you use your credit card as if it were a debit card. If for some reason you make a mistake an go under, it doesn't matter because you will just be using a credit card as if it were a normal credit card. It is true that the bank can slap a penalty on you if you go over the credit limit on a credit card, but having a debit card does not fix that problem.

Using Cash Helps

For small purchases, using cash is good. Cash is good because it allows you to spend a set amount and you cannot go under. With debit cards and credit cards you can spend more than you have. With cash, it is impossible to spend more than you have. If you have only $10 in cash in your hands, you cannot buy something worth $20 with cash.

However, there is a problem with cash. If you carry around a large amount of cash, it is too easy to spend it all. If you carry around $5000 worth of cash in a mall, apart from the fact that there exists the risk of theft (assume you keep your cash in the bank and take it out via the ATM) it is still very easy to spend the money. It is easy to spend using credit card, but it is almost as easy to spend cash. In practice, any cash you have in your wallet is as good as gone. It is so easy to spend that you will find yourself spending it on lattes or sandwiches. Using a credit card at a cafe is frowned upon because it slows things down, but every shop or restaurant loves receiving cash. It is so quick and easy to hand over cash and if you carry high denominations of cash, you could lose money very quickly.

The way to fix this problem is to leave in your transaction account or wallet only the amount you need for the week and then put aside the rest. E.g. if you are paid $1500 per fortnight, you can estimate that one meal will cost $10 and you will have one meal per day for 10 days, which comes to a total of $100. You leave $100 in your transaction account and put the remaining $1400 away where it is difficult to access it, e.g. a term deposit. This is a good idea because it ensures you will only spend $100 for the forthnight. Assuming you have no credit card and only use your ATM card to withdraw money before you spend it and don't withdraw more than you have, then you will only spend $100 per fortnight, which is quite little. The problem with this is that you may be in an emergency situation in which you need money. Suppose you only have $20 in your transaction account and you are in the city on a Friday night with your friends. You have a meal and then all of a sudden you have no money in your bank account. Suppose you are driving home and all of a sudden you need to fill up on petrol. If you have no money, you may be stranded. This is why so many people carry credit cards. A credit card is useful in case of an emergency, but like a double-edged sword although the credit card can help you during emergencies, it can hurt you because it is easy to spend money. I have found a solution to this problem. It involves collecting coins.

Collect Coins

I carry around credit cards, but during periods in my life when I want to save money, I keep my credit cards locked away in my bedroom. Whenever I buy something with cash, I put all the notes in my wallet and put all the coins in a special zip pockets on my jacket. When I get home, I put the coins into a jar. Once this jar has got enough coins, I put some of those coins inside my car--in the cigarette box, in the glove box, etc. I also put coins in drawers in my desk at work. There is a risk that the coins will be stolen, which is why I tend to only keep silver coins in my car and at work, and I only keep in total about $20 to $40 worth of silver coins both at work and in my car. This means that if some thief steals the money, they won't steal much and it simply won't be worth the hassle to carry all those silver coins just to steal a small amount. I keep the gold coins locked up in my house--but I don't have much.

Why is it a good idea to do this? If I wanted to save money, I could lock up my credit cards and then use cash all the time. If in the event I run out of cash, I can simply tap into my coin stash. For example, if I am driving and I have no paper money in my wallet and all of a sudden my car needs petrol, I can simply collect silver coins in my cigarette box in my car and use that to buy petrol at the petrol station. It is true that using silver coins to buy petrol is slow and embarrassing--but that is the point! Because it is so embarrasing and slow to use silver coins to buy something, you are less likely to spend money (unlike if you have a credit card or paper cash). However, although silver coins are slow and embarrasing to spend, in the event of an emergency, you can use it.

Peter Switzer - A Prophet of the Cult of Equity

I've been reading Pep Talk Time on Yahoo!7 Finance. In this article, Peter Switzer claims that even though we are going through times of great uncertainty with many people fearing a double-dip recession, it is now that we should actually be starting to pile up into dividend-paying stocks. His analysis offers no reasons as to why things will improve in the future. The arguments for a double-dip recession are strong: massive public debt caused by massive stimulus, which will require either extreme money printing or massive taxation, which will retard future economic growth. This is black-and-white logical reasoning for why difficult economic conditions are ahead of us. But Switzer resorts to cheap tactics like name calling, calling those who are pessimistic about the economy "nervous Nellies." His reasons for why the good times are ahead are completely illogical:

1. The contrarian argument - Everyone thinks things are bad. Therefore things are good. According to Switzer, "The best piece of analysis of why it's unlikely that we will see another stock market crash, like the one of 2008, is because there are so many prophets of doom out there who are preparing lots of people for another stock market slump." This is a horrible argument. It is wrong to believe something is correct just because everyone else believes it, but it is also just as wrong to believe that somthing is wrong just because everyone else believes it.
2. Faith - The economy will do well in the future because it just will. According to Switzer, "I knew it would take time for the repair jobs and the stimulus to kick in but I knew or suspected on the strength of history, informed opinion and economics it would happen." I should add that nowhere in the article does Switzer actually explain what sort of "informed opinion" or "economics" he used to argue that we are in for good times ahead. His argument is simply based on faith, faith that things will be good in the future. Switzer goes on to say the following: "Eventually the global economy will turn from doubtful growth to definite growth and then stronger growth culminating in very strong growth. However, that will take a few years and the market will anticipate this gradual improvement but now is not the time." In other words, in the long run everything will be okay. But does he present actual reasons why this will happen? No. He just says it will for no reason. This is blind faith.
3. Speculation has been retarded - According to Switzer, there are no more asset price bubbles because all the bubbles that have been blown in the past have popped. People are now parking their wealth in cash. They money on the sidelines means that there is no more rampant speculation, which is what causes bubbles and leads to crashes. According to Switzer, "all of this caution and the enormous amount of cash that's on the sidelines in bonds and bank deposits as investors play it safe, actually stops the unbridled enthusiasm that creates excessive booms and then crashes." This may have been true after the GFC when asset price bubbles popped all over the world, leading to an economic disaster. But right after the GFC, the world's government implemented a massive stimulus program, which has reinflated the bubbles again. It used to be the case that keeping your money in cash is a safe option, but this is not the case anymore. The rising price of gold shows that investors are worried about the status of government currency as an actual currency. Rampant inflation (rising prices of goods) makes dollars a poor store of wealth, and so people are forced to beat inflation by investing, either in stocks, real estate, gold, or many other assets. Does this reduce speculation? Far from it. Speculation should increase as people seek assets that hold value.

This faith that the economy will always recover in the long run looks very much like a religion or a cult. Robert Buckland from Citigroup called this the "Cult of Equity" and argued that this faith-based cult is under attack. If buy-and-hold (a more apt term is buy-and-hope) is a cult then Peter Switzer is a prophet of the cult of equity. Prophets are those religious figures who believe they have communication with God. Cult of equity prophets believe that through supernatural faith they can forecast the future and infer that the the economy will grow strongly in the long run.

Right after GFC, when I heard on the news that governments would engage in massive stimulus of the economy, I made every effort I could to buy shares. The market rallied strongly by about 50 per cent. However, the stimulus does nothing. It creates jobs and income by inducing demand for products, but where the private sector gains due to the stimulus the government sector must suffer because stimulus money comes from the government. Government must somehow make up for their losses, which means they must increase taxes inthe future. The losses of yesterday's private sector is today's government sector loss, which is tomorrow's private sector loss. If we add interest costs if government borrows money to fund the stimulus, this means that in the long run the private sector ends up paying more to cover up the losses of the past. This is crazy. It is like a teenager paying off a credit card with another credit card. I am not necessarily saying that we are in for a double-dip recession, but I am now pessimistic, and I am no longer 100% in the stock market. I have sold off shares and am now starting to load up on cash, bonds, and gold.

Suspicious of Undercover Boss

I have watched a few episodes of Undercover Boss and I am very suspicious of the show. The basic premise of the show is that the CEO goes undercover as an entry-level worker on the front lines of the job to see how it is run.

Some people have expressed skepticism over how genuine it is since the undercover CEO walks around with camera crew, which would make workers suspicious. However, the show explains this by claiming that the workers are all told that the cameras are there because they are recording for a show about an entry-level worker.

The main issue that I have with this show is that every single worker you see happens to be a saint and they always seem to work hard and then right on cue they always tell a sob story about how tough their life is. Then predictably at the end these poor workers are rewarded for their hard work by the kind CEO. Is it just a coincidence that just about every single worker the CEO comes into contact with has a sob story? I think that many of the workers who come into contact with the undercover CEO actually know that he or she is the CEO and they pitch their sob story with the hope of striking it rich. Another explanation is that the show is rigged and the undercover CEO is led towards workers who are filtered initially to make sure they have an interesting sob story.

Further Reading: Undercover Boss is the Most Rigged Reality Show I Have Ever Seen (WrestleZone Forums)