Refreshed

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Fort Knox

That is Senator Mike Lee of Utah. The question becomes “is the gold really there?”. The Elon Musk DOGE team seems pretty keen to find out as well.

Is it strange though that nobody has ever actually counted the gold? Companies all over the world are required to have audits every year because the sensible thing to do in these circumstances is to check. Whenever nobody checks, it often results in some shocking revelation. 

Remember Westpac and the photocopiers? They loaned A$500m to someone who was buying photocopiers and then never checked to see if they existed. Then one day someone checked……no photocopiers. One of the biggest frauds in Australian history. Similar story with Bernie Madoff, nobody was allowed to check anything because of ‘confidentiality’. 

My guess? The gold is there; but not all of it. The reason will be convoluted. Something like it has been loaned to banks or overseas countries. “Its temporarily with the Central Bank of Botswana” kind of thing. The explanation will be opaque and the public will be reassured that the gold is there, simply, the situation is ‘complex’.

More importantly though, it doesn’t matter. Even if the gold is there it is worth only $425 billion. The United States Government spends that amount of money every 21 days, it adds that much to its deficit roughly every 90 days. The gold is a nothingburger. It’s a story to provide some sort of reassurance that the dollar is actually worth something. 

The real risk is that it shines a light on the fact that the fiat banking regime stands on its head. It is quite literally backed by nothing. Many people believe that their government currency is still, somehow, backed by gold (the last survey in the US revealed 30% of adults thought so). The exact allegation bankers make against bitcoin is their own achilles heel. If the Fort Knox audit helps people understand that, then it will be worthwhile.

If the gold is there or if it isn’t. No difference. Gold died in 1971.  

You should buy a house….

Not if you are a foreigner though. The dynamics of Australian property are becoming rather wild. It is the number two voter issue (second to the cost of living) going into the Federal election. The government’s response is to ban temporary residents from buying houses for two years. The only downside is that it takes a bit of demand from a very stretched market. 

When measured against famous property bubbles (like Japan), Australia is starting to look like a very expensive place. Residential land in 2021 was valued at 3.5x GDP; things have moved on since. It now approaches 4x. Just considering the macro level analysis, the economy simply does not generate enough income to pay meaningful yield at that level. The two options:

1. The Economy grows faster than house prices (highly unlikely in Australia)

2. House prices fall. 

There aren’t really any other options. Option one is particularly unlikely because of the innate corruption that operates particularly at state and local government level in Australia. The nation is structured, almost entirely, to prevent the adoption of new technologies that disrupt incumbents. For example, why do the trains here still have drivers? Why does Melbourne not have a train line from the airport to the city (a good summary of the 60 year odyssey can be found here)? Why have we not adopted self driving vehicles in a country this large (other than in the mines). 

This week Australia’s Productivity Commission pointed out a huge regression in our ability to build houses (in quite an honest appraisal)

“The Australian housing construction sector is only building half as many homes relative to the number of hours worked compared with 30 years ago”

It’s astonishing that we could get so much worse at something over three decades given the technological shift in that time period. Adopting technology and automation would be a massive boon to a very large country that doesn’t have enough skilled people. Even though that is very obvious, Australia will do everything to prevent that from happening. 

By way of example, any of the leading AI’s now could do a better job on approving planning applications than a committee. They can consume the plans, the rules, the recent decisions in minutes and make recommendations. A process that currently takes months. It won’t happen though, because of the grift associated with the planning process. 

Option two isn’t that good for the government either. A policy of “we will make house prices fall” does not win elections. So housing is likely to continue to enjoy its tax advantages with the insane policy of negative gearing set to live another day. 

Ultimately though, here is what happened in Japan. House prices entered a 15 year decline. Obviously the demographic situation in Japan is different but in the period to 2005, Japan’s population was still growing, only recently did it start to fall. 

It seems unlikely that this will be repeated in Australia at quite the scale that we saw in Japan. Perhaps because there is very clear enormous demand for houses at nearly every level here and it doesn't look like it's going away. 

Even so, they are expensive. They have massive maintenance costs, they have huge tax costs and the net yield on property is absolutely in the basement. The prospects do not look good, how do you get meaningful capital growth from these levels? 

What’s more, so much wealth is concentrated in housing that governments at every level will begin to increase taxes on property in any way they can, particularly at state and local level. Taxes on wages and salaries are going to have to come down as the relative earning power of labour falls.

My view: housing is a sitting duck. Dare I even say you would be better off buying government bonds. 

Sovereign Wealth

Abu Dhabi’s largest sovereign wealth fund (Mubadala Investment Company) acquired $450m in the IBIT Bitcoin Trust in the last quarter. It's an allocation of 0.16% of the total fund and coincided (conveniently) with BlackRock receiving a digital asset license in the UAE in November.  

Putting aside the usual suspects of El Salvador and Bhutan, the list is growing. The Norwegian Sovereign fund led the way in 2020 defending their much criticised investment with this

“ Bitcoin has become an “unavoidable” asset in a diversified portfolio”.

The Korean Investment Corporation (on behalf of their national pension scheme) is invested in Microstrategy (now known as Strategy), albeit in the very small amount of $34m. The amount matters less than the ability to get the investment approved. 

Then we have Oman which has so far spent $750m on mining equipment preferring to directly mine bitcoin than to invest in it directly. 

There remains reluctance for corporations or even individuals to admit they hold some bitcoin or have an exposure at all. “I did it because it was unavoidable” etc. Slowly though, the dominoes are falling. 

Mubadala is the real deal. A serious fund, run by serious people with real money. Their entry into this market is significant. Interestingly, it did not make the Australian financial press at all.

Refreshed

A quarterly report from the National Australia Bank:


“We have started FY25 well. Our 1Q25 performance is sound and execution of our refreshed strategy is underway.

……….Our refreshed strategy is focused on becoming the most customer centric company in Australia and New Zealand. While still early days, we have made good progress during 1Q25 laying the foundations required to successfully execute our strategy. We remain optimistic about the outlook and are well placed to manage our business for the long term and deliver sustainable growth and returns for shareholders.”

I’m being unkind because I have been in these meetings where the nuanced wording of announcements is bounced around. On reading the announcement I could visualise the meeting:

“we can’t look like we’re flip flopping, the strategy is the same it’s just…….refreshed”

 “Yeah, excellent, ‘refreshed’ it is”

The market was a bit less refreshed by the results and the shares fell 8% but to be fair to the NAB they clocked at $1.7 billion profit, in 90 days. The CBA recently did $2.6 billion for the quarter. 

There is something very striking about Australia’s banks. They seem to totally dominate the economy in a way that is perhaps unhealthy. Banks should, if they make bad lending decisions, be able to go bust. It is fundamental to the whole concept of economies and risk. If you have a situation where your banks simply cannot go bust (and none of Australia’s big four would ever be allowed to) you have a fundamental issue. They have become an arm of the state. Listed in name but really they are government institutions. 

Five of the seven biggest companies are banks? How? How is it possible for the banking industry to dominate an economy it is supposed to serve? Surely by definition it could only ever be a small fraction of the total. A bank can’t make more than the clients it serves. 

How is it that mining, agriculture or construction do not dominate the exchange? The five banks below are 30% of the market cap of the Top 50 companies. I’m genuinely interested in how that could possibly make sense. 

By comparison, Germany has one bank in the top 20 companies (Deutsche Bank which is #20); America has one in the top 10, JP Morgan. In market cap terms it's nothing. 

I’m open to suggestions but something is wrong. 

Euro-Trash

Before we begin this week's Euro-Trashing, a reader has emailed in pointing out we are “too negative on Europe”. Notably he points out that life expectancy in Europe is higher than the US because the overall quality of life is better, food is better and the shorter working week is an excellent measure of well being. 

He shared this on how European health firms are massively advancing technology on health and life expectancy. 

One of the interesting companies on that list is Neko Health  founded by Daniel Ek (the Spotify founder). They just raised $260m for their business and have a waiting list in Stockholm alone of 25,000 people waiting for their preventative scans. 

With that said….let the normal programming resume. 

Mario Drahgi popped up in the FT to dunk on his former Euro-colleagues. The long and short of it being that “we have regulated ourselves out of existence”. 

The truth is that the whole purpose of the EU was to bring down barriers to trade, but for every one they remove they seem to invent seven more.

Draghi’s example of GDPR is a good one. That legislation was designed to protect Europeans from data privacy breaches etc. The truth was it was a direct attack on American tech firms. Since they were the disproportionately large providers of technology on the internet. The compliance costs and the fines became absolutely enormous. Websites in the EU have become an unusable soup of pop-ups and tick boxes that are utterly maddening and do nothing to achieve the original goal. 

It did slow down American tech in Europe though; that was the actual political goal and it worked. US tech firms release new products much more slowly to Europe now as they retrofit compliance after products go-live around the rest of the world. It also meant that nobody in their right mind would establish a tech company in Europe. 

The strategy document to address the issue is going to fail. It is a political document about ‘net zero’. European firms will not be able to compete globally when they are required to pay twice as much for electricity as their competitors. It's pretty much that simple.

Further information

Our January 2025 report to investors can be found here.

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