What do you call property prices falling 50%?

Tuesday, 23 July 2019
Adelaide, Australia
By Bernd Struben

  • The road to weed wealth
  • In the mailbag

Truly transformative events don’t come knocking every day. Or every year.

And when they do, most investors don’t take advantage. At least not until the transformation is well underway, by which point the biggest gains have been scooped up by shrewd early movers.

It’s a natural tendency among us hairless apes. We like to stick with what we know. With what’s been proven effective.

Change can be scary, after all. And for good reason.

Not all revolutionary trends pan out. Like if you’d gone all in on Sony’s Betamax. Or more recently, Google Glass in 2013.

Other trends have a lot more legs.

In today’s fast moving world, many of these are technology oriented.

Like the advent of the internet. Or the emergence of cryptocurrencies. Most early movers in both of these transformational events made eye-popping gains.

But you need to look beyond potentially transformational technologies. Many revolutionary changes are politically driven.

Just think back to 1971 when Nixon took the US off the gold standard. Gold started the year at US$37.33 per ounce. By 1980 it had reached US$843.00 per ounce. Early movers who bought bullion would have realised a nine year gain of  2,158%.

(You can discover why Greg Canavan believes gold is in for a repeat performance — and how you can make the most of it — here.)

Or fast forward 20 years to 1991, when the USSR dissolved and the Berlin Wall came tumbling down.

While most in the West celebrated the demise of communism, few were quick to jump on the opportunities it opened up.

Not so billionaire investor Boris Jordan.

We’ll get back to that right after the markets…

Markets

Overnight, the Dow Jones Industrial Average closed up 17.70 points, or 0.07%.

The S&P 500 closed up 8.42 points, or 0.08%.

In Europe the Euro Stoxx 50 index finished up 9.74 points, or 0.28%. Meanwhile, the FTSE 100 gained 0.08%, and Germany’s DAX closed up 29.33 points, or 0.24%.

In Asian markets Japan’s Nikkei 225 is up 251.87 points, or 1.18%. China’s CSI 300 is down 0.10%.

In Australia, the S&P/ASX 200 is up 33.76 points, or 0.50%.

West Texas Intermediate crude oil is US$56.22 per barrel. Brent crude is US$63.31 per barrel.

Turning to gold, the yellow metal is trading for US$1,421.86 (AU$2,023.75) per troy ounce. Silver is US$16.32 (AU$23.02) per troy ounce.

One bitcoin is worth US$10,230.80.

The Aussie dollar is worth 70.29 US cents.

The road to weed wealth

Back to transformative events…and the investors who leap on them…we return to Boris Jordan. A former Credit Suisse banker, Jordan is currently the CEO of Sputnik Group Ltd, which he launched in 1998.

In the leadup to that launch, Jordan made hay following communism’s demise, helping Russian businesses and government agencies take the leap into capitalism. Among the feathers in his cap he helped launch the Russian stock market and worked to privatise thousands of state owned assets.

Little wonder then that Jordan was quick to capitalise on one of the biggest transformative events of this decade. A breaking trend that’s still in its early days but has already created a brand new legal market worth upwards of US$20 billion per year…and growing.

I’m talking, as you may have guessed, about the legal cannabis market.

As Bloomberg reports:

Boris Jordan, 53, is getting rich from cannabis. His 31% stake in Curaleaf Holdings Inc., the biggest U.S. pot company by market value, is worth more than $1 billion, according to the Bloomberg Billionaires Index.

Jordan’s road to weed wealth started in 2013 when his Moscow-based private equity firm, Sputnik Group, invested in PalliaTech Inc., a medical-device maker. He and his partners spent more than $100 million to build it into a national chain now called Curaleaf, which announced Wednesday that it’s buying Chicago-based Grassroots Cannnabis in a cash-and-stock deal valued at about $875 million.

Curaleaf, with a market cap of US$3.4 billion, has gained about 60% so far this year.

Of course, not all pot stocks are enjoying these kinds of gains. Some have seen investors losing money.

But this transformative event is still underway. Annual revenues in the legal medicinal and recreational market are expected to grow more than 21% annually over the next five years.

According to a recent report from Zion Market Research, for example, the legal cannabis market in 2017 was worth around US$16.7 billion. By 2024 it’s expected to top US$62.9 billion. And as more nations see the wisdom of a legal taxed market over an illegal black market system, that figure is likely to keep right on growing.

The trick now isn’t just to pour your money into any old pot stocks. Or even to go with the growing field of cannabis ETFs, many of which are down for the year.

The trick is finding the right companies with the right ideas to capitalise on this booming, transformative global trend.

That’s where a little help from the likes of pot stock guru Sam Volkering can come in handy.

Sam’s been tracking the burgeoning legal weed markets since early 2017. He made his most recent cannabis related recommendation to subscribers of Australian Small-Cap Investigator in May 2019.

Since then, that ASX listed stock has gained 81.7%. And Sam’s confident that company, and other top pot stocks, have a lot further to run.

Want to know more? Get all the details here.

In the mailbag

Yesterday we looked at why lopping Australia’s sky high property prices in half might actually be good for the country…in the long run.

In the short term, it would obviously cause a lot of pain. Not just for home owners and property investors who watch hundreds of thousands of dollars get wiped from their perceived wealth. But for stamp duty funded government programs and the people who depend on those.

Yesterday I wrote that alarm bells are already sounding for ‘governments with big spending promises watching their stamp duties slump’. Since then Moody’s Investor Services released a report estimating that states will have $5.5 billion less at their disposal in 2020 than they budgeted for last year.

Which gives you a good picture of why the government is willing to chuck in everything, kitchen sink included, to keep home prices from falling much further. Regardless of whether that’s in Australia’s long term interest or not.

And that brings us to our reader mail.

Asked if a 50% fall in Aussie home prices was ‘a good start’, reader ‘M’ writes in the following:

So what do you call a 50% fall in property prices?

Unlikely.

Yep, unlikely it is. Though unlikely events do happen…more often than you think. Best not to take your eyes off this one for a while.

Then there was this from reader Elsa:

Yes Bernd — agree. I like your idea of a productive use of capital and disposable income from a drop in housing prices to a more reasonable level being redeployed and put to good use that in turn generates value in the economy.’

John is also on board for a far bigger price correction. He writes:

You’re right 100% property prices have choked anything good production, spending innovation.

But if they were to fall after the bad debts and defaults were expunged, the cycle would start again, people would speculate again and housing with banks help would just start all over .

It’s all happened before, nothing new under the sun.

Great article I liked it.

John makes a great point on the cycle. Indeed, if the system were left as it is today, a 50% drop in property prices would quickly see a new real estate bubble begin to form. Preventing that would require real reform in areas like the banking industry and foreign ownership regulations. And real reform is a rare bird these days.

I’d actually expected some strong dissent when I penned that article. But I’ve yet to hear from anyone making a living flipping houses. Or perhaps earning their paycheques from the Property Council of Australia.

Do feel free to write in and explain why we’re so wrong.

That’s all for today.

Remember to send your replies or feedback to letters@portphillipinsider.com.au. When we get some good responses, I’ll publish them here.

If you write in and your letter is not published, please don’t take it personally. We generally don’t have the space to publish every mail we receive. But keep writing in!

Cheers,
Bernd