Bits & pieces 3 September 2021

We sold the house – Now what? ….. Part 2 - Two years ago I had to decide which asset classes
the funds from the sale of our house would be allocated to. This is what I wrote at the time (Aug
2019): Do I allocate funds to:

• Gold? – it’s done well but things could just be starting

• Cash? – apart from providing minimal return nowadays it comes with addition risk due to new post-GFC
rules
• Real Estate? – for me it’s property bubble characteristics in Commonwealth countries versus the risk of
not been “in” if central banks get their way and inflation rips
• Bonds? – some 40% of global bonds now yield less than 1.00% says Bloomberg - blah
• Equities? – U.S markets are at all-time highs but not so in Asia

In summary I decided to allocate the proceeds to a mix of real estate (but less than before), gold and gold
equities (adding to an existing position) and equities with an Asia-Pac focus. A cash allocation in some safe
institutions was also made for a decent night’s sleep but bonds were a “no thanks”. How have things panned
out since then?

Then (Aug 2019) and now

Change
Bonds Bloomberg Barclays Global Aggregate Bond Index +8%
Real Estate Median house price Cottesloe (AUD) +10%
Gold Spot USD/oz +26%
Cash Reserve Bank of Australia Cash Target Rate (%) -90%
Equities MSCI World Index +41%
S&P 500 Index +52%
Nasdaq Comp Index +86%
MSCI Asia ex-Japan Index +31%
ASX 200 Index +11%

Now the question is where to allocate for the next two years?

We’ve just started construction of a new house and that will take approximately 2 years to
complete. Which asset classes should I be allocating funds towards now in the hope of earning a
return to pay for it? A few other asset classes are added into the mix this time: digital assets,
commodities and carbon credits. My best guesses are inside follow with a summary at the end.

“Carbon credits will turn out to be the commodity of the 21st Century.” Resources investor Marin Katusa on
an asset class I am allocating funds toward

A desired allocation within equities is to Quality stocks that you can sleep easy with in terms of them:
• being well managed
• holding dominant market positions (with barriers to entry)
• having a long-term growth story (backed by moat characteristics)
• having solid balance sheets and decent returns on capital
• having market cap size and liquidity so it is relevant and accessible

“ARK believes that the “genomic age” could create trillions of dollars in equity market capitalization by 2024.
Advanced molecular diagnostic tests could command tens of billions in annual revenues, while connected
medical devices generate hundreds of billions, and living drugs in oncology alone more than $200 billion”.
I’m looking to allocate funds to the “longevity” theme. The ARK Genomic Revolution ETF looks like an option.

“The “Decarbonisation” theme is accelerating. There is no electrification without commodities.” Tribeca

Golbal Natural Resources. An allocation to battery metals and other resources makes sense to me.

“71% of institutional investors plan to buy or invest in digital assets in the future ….. more than 90% of
institutions interested in digital assets expect to have an allocation by 2026.” Fidelity Digital Assets. This is a
train ride (hopefully not over a cliff) that I want to be on.

Plus
• Last Word – The blind date

Damian Kestel Australian mobile: (+61) 401 362629 [email protected]

Allocate to Real Estate?
• Then (Aug 2019) – “for me it’s property bubble characteristics in Commonwealth countries versus the risk of not
been “in” if central banks get their way and inflation rips”

• Now – it was too big a risk to take to be out of the market having sold the main residence and thank goodness that
soon after selling we bought the block directly behind our old place. The chart below tells the story of what has since
happened in our suburb with the average median house price up 25% YoY. Similar (and much more impressive) gains
have been witnessed around much of the world during Covid as interest rates fell, people were stuck at home and
central bank “Brrrrring” leads to a grab for real assets. But I’m full up with real estate for now, especially with
headlines like these. We’ll sit on what we’ve got and try and find upside elsewhere to pay for construction (the cost
of which is also climbing given input and labour cost rises thanks to government stimulus packages).

Should the Fed tackle the US property bubble? The Straits Times
Switzerland’s Housing Market May Become the Newest Property Bubble – Bloomberg

The Real Cause of Seoul’s Real Estate Bubble – The Diplomat

The Canadian Property Bubble Has Grown For 24 Years - Better Dwelling

Cooling measures doing little to slow New Zealand's housing boom - Reuters

How could Australia’s property bubble burst? Australian Broker

< A 25% YoY gain - it's

been a feeding frenzy
here

Construction has just

started (this expensive hole
is a pool). 2 years to go.
What other asset classes
can provide some upside to
help pay for it?
 Allocate to Cash?
Russell Napier - The Day Money Died
Be careful where you put it
It is with regret and sadness we announce the death of money on November 16th 2014 in
Brisbane, Australia

On Sunday in Brisbane the G20 will announce that bank deposits are just part of commercial banks’
capital structure, and also that they are far from the most senior portion of that structure. With
deposits then subjected to a decline in nominal value following a bank failure, it is self-evident that a
bank deposit is no longer money in the way a banknote is. If a banknote cannot be subjected to
a decline in nominal value, we need to ask whether banknotes can act as a superior store of value than
bank deposits? If that is the case, will some investors prefer banknotes to bank deposits as a
form of savings? Such a change in preference is known as a "bank run."

Each country will introduce its own legislation to effect the ‘ bail-in’ agreed by the G20 this coming
weekend. The consultation document from the UK’s Treasury lists the following bank creditors who will
rank ABOVE depositors in a ‘failing’ financial institution:

 Liabilities representing protected deposits (in the UK the government guarantee protects 100% of
deposits up to the value of GBP85,000)
 any liability, so far as it is secured
 Liabilities that the bank has by virtue of holding client assets
 Liabilities arising with an original maturity of less than 7 days owed by the banks to a credit institution
or investment firm
 Liabilities arising from participation in designated settlement systems
 Liabilities owed to central counterparties recognized by the European Securities and Markets
Authorities… on OTC derivatives, central counterparties and trade depositaries
 Liabilities owed to an employee or former employee in relation to salary or other remuneration, except
variable remuneration
 Liabilities owed to an employee or former employee in relation to rights under a pension scheme,
except rights to discretionary benefits
 Liabilities owed to creditors arising from the provision to the bank of goods or service (other than
financial services) that are critical to the daily functioning of its operations

The above list makes it clear that deposits larger than GBP85,000 will rank ahead of the
bond holders of banks, but they will rank above little else.
Thanks a lot Mr Government
Large deposits at banks are no longer money, as this legislation will formally push them down through
the capital structure to a position of material capital risk in any "failing" institution. In our last
financial crisis, deposits were de facto guaranteed by the state, but from November 16th holders of
large-scale deposits will be, both de facto and de jure, just another creditor squabbling over their
share of the assets of a failed bank.

Interestingly, HM Treasury uses the word ‘failing’ rather than "failed" in its consultation document and
investors could find their large deposits frozen for a prolonged period in any "failing" institution while
the courts unpick the capital structure and decide exactly where any losses should fall.

IF THAT'S The smell of counter-

HOW THEY party risk.

WANT TO Cash is far less attractive

now than pre-GFC times
PLAY THEN when you could get 5-6%
..... on your deposit.

STUFF IT I'M GOING HOME