More evidence that our housing is not cheap...

A good article here regarding our overpriced houses.

It may be that our house prices remain elevated for many years, however we believe firmly that it is not wise owning highly geared assets dependent on the concept that we have reached a new "permanently high plateau of prosperity".

China's rebound is not a good thing...

China appears to be rebounding from its lows mid last year. The problem with this rebound is that it is exactly what the economy doesn't need.

Iron ore prices are back up and Twiggy must be counting his lucky stars. If he followed the common sense option, he would raise some capital whilst the going is good and reduce his debt. Unfortunately, I think he has ambitions of being the richest man in the world and diluting his shareholding would smash this dream.

There is a new dangerous build up of trusts and wealth management products to continue funding many of these non-productive assets. These alternate financing arrangements are the sub-prime of China and are growing very rapidly. How this ends is unknown, but it appears to be area of thin ice in the Chinese economy.

Up until now, the extremely low costs of financing empty offices, empty apartments, empty airports and empty shopping centres has meant that making no money on them doesn't pose much of a problem. When you are stealing from the peoples bank accounts and only paying them less than 1% interest, you don't have to make much money on your empty Lego buildings to do ok. With the higher interest rates of the trusts and wealth management products, actual thought needs to be put into what you build to make a greater return than your cost of capital. This is something the Chinese are yet to get a greasy grip on. This change in financing their growth is well sumarised in this article.

At some stage China needs to rebalance. They cant keep building for the sake of building forever. Whilst there are ridiculous propaganda reports coming out that China will overtake the US by 2019 and continue to grow at 8% for 20 years after that, we are firm believers that the one child policy (or the four grandparent policy as John Hempton likes to call it) and the unbalanced and overweight fixed asset bubble will mean this is highly unlikely.

They need to take their medicine and this medicine is not going to be pleasant. The new premier Xi Jinping has promised to continue reforms, but this rhetoric is not much different to Bob Hawke promising that there would be no child in poverty by the year 1990. The more they delay the rebalancing, the more pain they create for the future.

These are a few of our favourite things - Berkshire Hathaway (by Marc Lerner)

Some of our favourite things – Berkshire Hathaway

Marc Lerner

Part of the brilliance of Berkshire Hathaway’s structure – in addition to having Warren Buffett as the head of the company – is that it has a source of capital that is literally costless. This is the “float” that is generated by its insurance operations, just part of a massive portfolio of wonderful and diverse businesses. Float is money received in insurance premiums that does not have to be immediately paid out in the form of insurance claims. Assuming the company only breaks even on its insurance operations, float provides Berkshire with a costless source of capital, which can then be used to purchase profitable businesses and stocks.  (In the past, Berkshire has made a profit here as well, but there is no guarantee, as Buffett points out, that this will continue). If the company does manage to at least break even on its insurance operations, this is like a loan – minus the interest! Buffett, in fact, uses float as an alternative supply of funds to borrowing money, with which he likes to be very conservative. In his typical easy-to-understand style, Buffett characterises float as “money that doesn’t belong to us, but that we get to invest for Berkshire’s benefit.”

Buffett then uses this money to purchase businesses, either outright or in the form of shares in the stockmarket. The company owns, outright, businesses in insurance, a major railroad, utilities, energy, and many others, ranging from See’s Candies to Nebraska Furniture Mart. In addition, Berkshire owns significant stock in publicly traded companies – for example, an 8.8% shareholding in the Coca-Cola Company is one large stake. In the past, buying shares in companies in this way was Berkshire’s focus. Given its size, however, in recent decades this has become difficult to do in anything but the largest companies, and Buffett now directs his efforts largely towards buying companies outright.

The fact that so many different businesses are owned gives an investor in Berkshire significant diversification – not being overly exposed to any one sector of the economy, or the fortunes of any one industry in particular. The polar opposite of Berkshire in this regard is a company like Fortescue Metals, which is really just a leveraged bet on the iron ore price - its shareholders are entirely at the mercy of that one figure. In Berkshire, in contrast, it is highly unlikely that Berkshire’s businesses would be performing badly all at once. If this was the case, then chances are pretty much everything else is struggling too.

In the shorter term, another advantage is that Berkshire’s recently announced buyback of shares from a long-term investor’s estate will likely put a floor under the price as Buffett continues to repurchase shares should they fall to levels he considers to be undervalued.