Same Old Same Old

One of the things I have noticed about travel is that being human is largely universal – that would seem to be an odd statement that touches on the banal. But the natural human instinct is to think that people who are not like us are different. The tendency is to split the world into them and us and to assume that we are different from them. Only the naïve and unworldly think that way – unfortunately most people are naïve and unworldly.

As you travel through Asia you notice that they do some things differently to us – they have solved problems that are familiar to us but in different ways. These solutions reflect culture and history in much the same way that architecture reflects history and culture. We all have a basic need for shelter but the design aesthetic that drives the solutions is different around the world. Same problem different solution but notice the problem is a basic one – the need for shelter. It is not a special need that is reserved for one group, it is a universal need.

This commonness in motivations can also be seen in markets. One of the things I do when I go to new places is to price an analogue to my own home, this gives me a sense of what the country might be like to live in. I undertook this exercise whilst in Hong Kong and noticed some things that surprised me and some that did not. The surprising part was how expensive Hong Kong real estate is, to purchase a house that was the equivalent of the one I have in Melbourne would set me back between $HK200M and $HK300M which is about $A35 to $A50M. The most expensive residential place I found was a partially completed house that would probably equivalent to what you would find in Toorak or Double Bay. Whilst it is only partially completed it will set you back a staggering $HK1.8B. Prices such as these make the debate about housing affordability in Australia see somewhat second rate.

The chart below gives a you sense of the trend in price – there was a dip at the point of the handover to China and the SARS epidemic but since then prices have climbed steadily. Housing affordability is non-issue in Hong Kong for the simple reason that no one can afford anything.

Source – TradingEconomics 

What this illustrates to me is the universal notion of mania surrounding a given instrument. My impression is that valuations no longer matter because they have long been overtaken by an irrationality that simply drives the boom. This is a wonderfully universal trait and is the fuel that drives all markets. Whilst reading their papers it was interesting to see the different narratives that are used to support these sorts of valuations and whether the narratives are true or not, they are largely irrelevant. All that matters is the trend in price. Whether you think something is expensive or not is irrelevant so long as there is someone else who thinks it is cheap.

This is true in our market – the chart below is of S&P500 trailing PE Ratio.

                                               Source – FactSet

The logic behind this metric is that it is used to determine whether the market is expensive or not. The point being made by this chart is that the current market PE is high when compared to historical averages even after the current pullback.  However, we run into the same problem that investors who have stood out of the Hong Kong real estate market have found. Nobody cares what you think or what your valuations say – the only time you will be right is when the market decides that you will be right. Undoubtedly there will be someone who pays $HK1.8B for a house in Hong Kong because they can and because they want to. Likewise, if investors want to bid the market up, they will – this is simply the nature of markets. In the end all you are left with is the data, everything else is narrative that is used to either justify or dismiss the data. And unfortunately a narrative is merely an opinion that has been filtered through a set of biases and as such probably doesn’t count.