Golden generation reaps rewards
In the great debt boom of the past 46 years, property and equity investors simply had to jump in and hang on to make their fortunes
Ihave spent 39 years in the stockmarket, which is an embarrassingly long time because the truth is, as Emma keeps reminding me, if I was any good at it she would have been in the Bahamas years ago being waited on by a couple of nannies and a well-cut pool boy. But she’s not, we’re not, and many millions of us aren’t.
Well, actually, some people are; they are the “lucky generation” and, amazingly, most of them don’t even know it. They are the generation of investors in the property and equity markets who have ridden a nearly 40-year credit boom – a previously unseen engorgement of debt and an access to money that created a golden wave of investment returns between about 1974 and 2007 and, after that hiccup in 2008, has continued to the present day.
It all started in the early ’70s when my dad bought a house in Henley on Thames in the UK for £35,000 and a year later someone walked up the drive and offered him £45,000 for it.
He couldn’t believe it. In those days people didn’t buy houses to make money; they bought them to live in and houses didn’t go up in price. On top of that, when Dad bought the house it was new. Mum couldn’t understand why someone would want to pay more now that it was secondhand. That’s how people thought in those days. They thought the guy bidding them £45,000 was a crook, so they turned him down. Good thing they did. Not because he was a crook, but because they eventually sold it for £280,000.
The debt boom caught up with me in the early ’80s. I had recently started in stockbroking. I was renting a house in Brixton, in London. It was so plush that Jamie and I serviced our motorbikes in the living room (on the landlord’s cheap industrial carpets) and I owned a tenthhand Ford Cortina that had a gear stick that came off, a useful anti-theft device in those days and in that suburb. And I was happy.
Then in 1984 I moved brokers to UBS
Phillips & Drew, and that’s when it all began, when the big international banks arrived in the UK with a previously inaccessible access to global money supplies that they then spread among their clients and, as a side issue, to their employees.
They offered me a lease car and a mortgage at three times my current salary and a subsidised mortgage rate. Within a month I had moved from Brixton to more upmarket Putney and was driving a brandnew Ford XR3i, a black one with fat racing tyres and go-faster stripes. It is still the most fun car I have ever owned.
Without planning on it, I was suddenly in the rat race, laden with debt, bled for interest, but wallowing in asset price appreciation. The debt didn’t matter: the house went up in price, the stockmarket was going up in price, I was making an ’80s stockbroker’s salary, it was good and there are no regrets. Anyone who didn’t join in got left behind.
Have a look at this chart. This is the US S&P 500 for the last 100 years. It is a
chart of two eras – eras that happened in Australia, the UK and the world over.
In the first half, for the 46 years from October 1928 to October 1974, the S&P 500 went up 2.80%pa compound (plus dividends). In the second half, from October 1974 to today, another 46-year period (convenient), the S&P 500 went up 9.46%pa compound (plus dividends). I don’t have a chart for Australia’s All Ordinaries Index, which only started in 1980, but they have back-calculated it to 1960 and the equivalent compound return since 1974 for the All Ordinaries Index was an 8.09% annual compound return to today. Similar.
Interestingly, in the first 46 years when the stockmarket was going up 2.80%pa, inflation was at 4%, so nobody made money. The real return from the stockmarket was negative. That’s why books like The Intelligent Investor became so popular, because you had to pick stocks to make money, you had to have skills, because there was no underlying tide in the equity market, or the housing market, that made you profitable even if you were a nuff nuff. It was a skill, not a norm, to make money in stocks. Participation alone was not enough.
In the next 46 years, the equity market in Australia went up 38 times or 8.09%pa compound before dividends, about 13.5%pa including dividends. At the same time, the performance of the banks perverted and indoctrinated the average Australian investor into thinking that capital growth and 7% yields were normal. This was also the period in which my neighbour bought the two blocks of land behind me for £400 while I had to pay $400,000 for one (now worth $3 million?).
The bottom line is that people who bought houses and invested in the stockmarket pre1974 were strugglers. There was no asset appreciation of note. But, thanks to the credit boom (sorry, “debt” boom) from 1974 until now, anyone who started investing or bought houses from 1974 onwards bought into a truly golden age. Anyone who had the money to invest or the balls to borrow experienced the best investment years many of us will ever see in any of our lifetimes. I’m not sure our kids will experience anything quite so easy.
Net result: if you were born pre-1954 you have enjoyed the whole run (you were 20 when it started) and you can pretty much measure anyone’s net worth depending on how much later than that they were born.
I was a decade and a half later than perfect (born 1961) so caught a lot of it, but not all of it.
Obviously, the GFC brought it all to an end (briefly), but we have recovered from even that courtesy of our appetite for debt and borrowing, which has underpinned both the housing market and equity markets.
The end result is that if you’re still sitting on a multimillion-dollar house that you paid $80,000 for and a multimillion-dollar share portfolio that’s been invested in the banks since the 1990s and has achieved a 7% yield on top, without you having to do anything clever at all, then you can thank your lucky stars that you have lived when you have lived. You are indeed blessed. You are the golden generation and in that knowledge you need to understand that your job is not to now sit there whingeing about the pitiful return on term deposits; your job is to appreciate how lucky, ballsy or clever you were and focus on not losing it again.
Marcus Padley is the author of the daily stockmarket newsletter Marcus Today. For a free trial of the Marcus Today newsletter, please go to marcustoday.com.au.
Karoon Energy has a long history of paralysis and mismanagement, and – this is a big one – it hasn’t produced any oil or gas in its near 20-year history. That is all about to change. Karoon has renewed its directors, found new management and bought new assets. It is now producing oil for the first time and has a credible way to turn oil resources into cash. Despite these developments, and a higher oil price to boot, Karoon’s share price remains stagnant.
The name still repels investors who have been conditioned with years of disappointment and stagnation. Those long memories might be a source of opportunity.
Founded in 2003 and listed on the ASX a year later, Karoon was just another anonymous explorer until 2009, when it was part of a venture that made a big gas discovery off the coast of
Western Australia. Its stake was eventually sold for an eye-watering $US600 million cash, with Karoon’s market capitalisation peaking at over $2 billion.
The company, flush with cash, spent millions on exploration and millions on management salaries. Concerns were brushed aside and investors lost interest until new management was installed.
In 2019, Karoon got a new chairman, Bruce
Phillips, a 40-year veteran of the oil and gas sector and founder of AWE. Peter Botten, the former CEO of Oil Search, joined the board in 2020 just months after the founder and CEO of Karoon, Robert Hosking, left the business.
Several other board changes have been made and a new CEO, with plenty of relevant experience, was appointed late last year. The board and management that presided over years of decline and controversy have been replaced by new individuals with excellent track records.
After board renewal, Karoon got busy with a renewal of assets, including the purchase of a shallow field known as Bauna in Brazil. Bauna is already tied to a floating processing facility (known as an FPSO) that is running at 50% capacity. The field currently produces about 16,000 barrels of oil a day (bopd) but that can easily double.
There are further expansion options. During its halcyon days, Karoon found two oil fields in shallow waters near Bauna. The business could never economically extract those fields in the past but, by using Bauna’s processing facilities, it can finally bring those barrels to production.
Karoon currently counts 100mmbbl of oil resources on its books. Resources are barrels that have a high geological probability but are currently uneconomic to extract. Using the newly acquired Bauna infrastructure and cash flows, most of those resources should be able to be produced.
The Bauna field itself currently produces 5.8mmbbl of oil annually at a cost of $US25 a barrel. To this we add $US20 a barrel for capital expenditure and another $US7 a barrel for tax which, at a $US60 oil price, results in a margin of $US8 a barrel.
That should result in about $65 million in free cash flow for nine years. A field like that might be worth about 70c per share. At a $US70 oil price, the value rises to about $1.60 a share.
That is okay but hardly a table-thumping opportunity. More upside comes from increasing production rates by replacing pumps and expanding the field. This is a low-risk expansion that can be funded from the $130 million in net cash on Karoon’s balance sheet or from operating cash flow.
Raising production to 9.4mmbbl per year and adding additional reserves already found in the Bauna concession would be worth about $1 a share at $US60 oil and over $2 a share at $US70 oil.
Then we consider Karoon’s stranded oil resources: 50mmbbl of resources from two fields known as Neon & Goia, which are within piping distance of Bauna and can share production facilities. Bringing those into production could add $1-$2 per share of value.
All counted, there could be around $4 a share in value if Karoon meets its potential. If all it does is milk the Bauna field at existing rates, we should expect between 70c-$1 in value.
Those are attractive payoffs. If oil prices stick to $US60-$US70 a barrel, we have the chance of a significant gain at the risk of a small loss. That is the essence of intelligent speculation.
Oil prices remain the greatest unknown. We don’t pretend to know where they will go but, with so much expenditure cancelled over recent years, there has been an underinvestment in new supply.
We don’t introduce Karoon because we wish to bet on oil prices. There have been big changes in the business over a short time. The board and management have changed and impressive industry veterans have bought in. The new CEO, Julian Fowles, led Shell in Brazil so knows the market well.
Energy stocks have generally lagged higher oil prices but this one, with its poor history and disappointments, has been doubly ignored. With new management and new assets, this isn’t the Karoon of old. The turnaround has come. SPECULATIVE BUY up to $1.40.
Gaurav Sodhi is deputy research director at Intelligent Investor.
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Financial markets have been on edge ever since they got the first whiff of “taper” in the air. This started when the minutes of the US Federal Open Market Committee (FOMC) meeting on April 27-28 revealed that “a number of participants suggested that if the economy continued to make rapid progress toward the committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases”.
Cue horror! From this time on, every dip in the equity markets – and, more generally, risk-off moves – became one of the major go-to excuses. Good news on the US economy and progress on vaccinations stirred taper talks. Bad news for the bulls and risk assets.
That was until the Federal Reserve’s September 21-22 FOMC meeting. This time it became a case of heads, bulls win; tails, bears lose.
In its statement, the Fed noted that America’s economy “has made progress” towards its goals toward “maximum employment, and inflation has risen to 2% and is on track to moderately exceed 2% for some time”. Therefore, “the committee judges that a moderation in the pace of asset purchases may soon be warranted”.
Risk assets rallied and the CBOE VIX index – the fear gauge – dropped from a four-month high of 25.7 just before the Fed meet to 20.9. At the time of writing, it’s 18.6.
To be sure, the Fed’s announcement came simultaneously with the seeming resolution of the debt problems of Evergrande, China’s second biggest property developer. Then again, the Fed was never worried about it. In his press conference, chairman Jerome Powell intimated that “in terms of the implications for us, there’s not a direct United States exposure. The big Chinese banks are not tremendously exposed.”
But with the Fed poised to start reducing its asset purchases as early as this month, and with the September dot-plot showing that nine of 18 FOMC participants expect the funds rate to increase in 2022 – up from only seven in the June 2021 meeting – financial markets should have been scared, very scared. Then again, methinks the bulls have it. The Fed’s September Economic Projections provide the rationale and the justification for its planned action.
While it expects economic growth to slow to 5.9% in 2021 from the 7% it forecast three months earlier, it now expects GDP to expand faster next year (3.8% versus 3.3% predicted three months before) and in 2023 (2.5% versus 2.4%). Similarly, it predicts the unemployment rate to be higher this year (4.8% from 4.5%) before declining to 3.8% next year and 3.5% in 2023 – both unchanged from its June forecasts. The same with inflation – expected to rise by 4.2% in 2021 (from 3.4% projected in June 2021) before slowing to 2.2% (from 2.1%) in 2022 and 2.2% (unchanged) in 2023. These economic projections take into account the Fed’s forecast for the funds rate to increase to 0.3% next year (from 0.1% assumed in June 2021) and to 1% in 2023 (from 0.6%) and, of course, continued tapering that markets expect will start soon.
A rosy narrative. But as the Fed admits, “the risks to the economic outlook remain”. For sure and for certain, the Fed would be more than willing to change course should Murphy’s Law prevail. Powell wouldn’t want to go out with a disastrous policy prescription for America – and the world – would he? His term expires in February next year.
Benjamin Ong is director of economics and investments at Rainmaker Information.