There are the sheer numbers, which were released by the cadre of bankers on Wall Street on Wednesday night: the company will raise at least $US75 billion ($105 billion) at a valuation of at least $US1.75 trillion ($2.45 trillion). Should the bankers really try to squeeze every bit of juice out of this deal, the valuation could rise to $US1.8 trillion.

This will be the biggest float in history. And even though the free-float – the amount of stock actually being sold off to new investors – is small compared with SpaceX’s valuation, it is still more than double the near $US30 billion that oil giant Saudi Aramco raised in its $US1.7 trillion initial public offering in 2019.

The total addressable market SpaceX claims is similarly gigantic, at a staggering $US29 trillion. This is not built on SpaceX’s actual space ventures – including its very real and quite profitable Starlink satellite business and its very unproven data-centres-in-space pipedream – but on selling the same artificial-intelligence services to the world that Anthropic and OpenAI are now desperately trying to flog to businesses globally.

Then there’s the raw power that SpaceX founder, chairman, chief executive and chief technology officer Elon Musk will hold over the company, courtesy of his 82 per cent voting stake.

And finally, there’s the risk. Layers and layers and layers of enormous risks.

Neither profitable nor predictable

SpaceX is not a highly profitable, highly predictable company like Saudi Aramco but a conglomerate that lost almost $US5 billion last year, and is likely to keep losing money for at least the next two years and possibly longer. And yet, it is about to float on the public market at an eye-watering valuation that is equivalent to about 6 per cent of US GDP.

Former Lehman Brothers trader Larry McDonald, the founder of research service The Bear Traps Report and author of bestseller How to Listen When Markets Speak, says that’s 847 times more expensive than the Microsoft IPO in 1986, 653 times more expensive than the Tesla IPO in 2010 and 14 times more expensive than the Facebook IPO in 2012.

That’s, of course, if you actually believe the $US1.75 trillion valuation. Analysts Nicolas Owens and Suryansh Sharma of Morningstar, a firm that famously relies on the Warren Buffett theory of economic moats to assess companies, could get their valuation of SpaceX to only $US780 billion. That is still pretty impressive, at more than double BHP’s market capitalisation.

The Morningstar team’s big problem was that the economic moat around SpaceX’s AI business – again, this is where SpaceX itself says the really big opportunity lies – is “indeterminate, and it also poses a material threat of value destruction to the company”. Gulp.

If you’re willing to cast aside those concerns about fundamental valuation and put your faith in the admittedly proven ability of Musk to create value by selling a vision for the future, then you need to ask another question: why now?

Why is it that SpaceX, Anthropic and OpenAI are suddenly in this urgent race to list on public markets at valuations that will probably make all of them trillion-dollar companies? Dario Perkins, global macro strategist at TSLombard, asks the question another way: “If AI is going to transform the world, why are tech giants deciding to share the wealth with normies? Perhaps they know something we don’t.”

Big-bang IPOs that marked the end of booms

Yes, access to capital markets will be vital, given the funding requirements of this AI revolution, which is only getting more expensive. But Perkins says history is replete with examples of big-bang IPOs that marked the end of booms.

There was the float of Blackstone in 2007, just before the global financial crisis. There was the IPO of Glencore in 2011, which marked the end of the mining super cycle. The miner has traded above its issue price for only one month of its life as a public company. And then there was a string of top-of-the-cycle IPOs in the late 1990s, including VA Linux, Pets.com and AskJeeves. With most of those deals, company insiders were prevented from selling their shares for periods of about six months – just as in the SpaceX IPO.

Those lock-ups expired from around October 1999 to April 2000. Within months, the dotcom bubble had burst. “Insiders know when public investors are overvaluing the business and decide to get out while the times are good,” Perkins says.

To be clear, all of these risks are in plain sight – Musk is not pulling the wool over anyone’s eyes here.

Markets have tweaked the rules

But hundreds of millions of investors around the world will be exposed to this risk whether they like it or not, thanks to recent decisions by index providers including FTSE Russell, Nasdaq and CRSP, which have tweaked their rules in the past few months to allow mega floats such as SpaceX a much faster entry into benchmark indices than in the past.

“The concentration risk that exists in equity markets hasn’t been this great in 100 years.”

— Global chief investment officer of Robeco, Anton Eser

Once upon a time – about three months ago – inclusion in these indices involved passing strict hurdles. A company would have to wait about three months after listing to be considered for inclusion, have a free float (shares not controlled by existing shareholders) of more than 10 per cent, and be profitable for a certain period.

But with the floats of SpaceX, Anthropic and OpenAI on the horizon, these rules have suddenly been changed. SpaceX will become eligible for inclusion in the Russell 2000 index within just five days and in the Nasdaq indices within 15 days. S&P Dow Jones, the world’s biggest index provider, is due to announce its new rules on June 8. Competitive forces will surely force it to fall in line.

But what’s already clear is that these rule changes mean the hundreds of trillions of dollars tracking indices through passive strategies – including the world’s most popular exchange-traded funds – are going to be required to buy shares in companies such as SpaceX almost as soon as it lists, in what’s certain to be a blaze of bubbly hype.

That includes tens of millions of Australians, both retail investors who hold ETFs directly and super fund members, whose funds are increasingly reliant on passive or passive-like strategies across their equity portfolios.

Some commentators, such as The Bear Traps Report‘s McDonald, say the index providers have failed to protect investors by changing their rules to allow fast entry into key benchmarks. They believe investors’ retirement savings are about to be hijacked and used as exit liquidity for insiders at companies such as SpaceX, as they sell shares over the next 12 months.

‘Dangerous, dangerous territory’

Anton Eser, the global chief investment officer of Dutch funds management giant Robeco, isn’t so worried about that. He points out that most benchmark indices are weighted according to the free-floats of their constituents, and the free-floats of SpaceX, Anthropic and OpenAI are likely to be small, at least initially.

But Eser, whose firm manages about $425 billion and about $65 billion of Australian institutions – most of which is held in quantitative strategies that broadly track sharemarket indices, and then find small pockets of above-market returns – says the float of SpaceX and other giants should force all investors to consider just how concentrated big sharemarket indices have become from the AI trade.

The best estimate, from Bank of America, suggests that when SpaceX, Anthropic and OpenAI list, about 48 per cent of the S&P 500 will be weighted to 13 AI-related companies. We haven’t seen anything like that since the railroad boom of the late 1800s.

“The concentration risk that exists in equity markets hasn’t been this great in 100 years,” Eser tells Chanticleer during a visit to Australia. “We are in dangerous, dangerous territory.”

What he particularly struggles with is modelling the profits that the companies selling AI products and services – such as SpaceX, Anthropic, OpenAI and other hyperscalers – can actually generate.

He’s not alone. Committed AI sceptics such as Ed Zitron have long argued that the return on investment on AI is illusory because the value it creates is illusory. But new concerns about rising AI costs have brought these concerns into the mainstream.

A new report from consulting giant Bain & Co this week found 40 per cent of companies that have measured cost savings through AI have cut costs by 10 per cent or less. “The technology worked. The value didn’t arrive,” Bain concluded.

If AI is not generating returns for users, how will it generate earnings for companies such as SpaceX and the other firms pouring trillions of dollars into AI infrastructure? If the faith of AI customers is eroded, will the brakes be applied to the AI buildout?

If nothing else, the SpaceX float reminds us that every passive investor and every super fund member is now incredibly exposed to a sector whose economic model is still largely built on hope.

The post SpaceX is $2trn of hype and risk. You’re exposed, like it or not appeared first on AMCO Public Accountants / AMCO Strategic Financial Advice.

Weekly asking rents across the capital cities rose an average 6.9 per cent from a year ago, SQM Research figures on Wednesday showed, with the combined figure for houses and units in Sydney up 7.1 per cent year-on-year, up 6.3 per cent in Melbourne and 8.7 per cent in Brisbane.

The yearly rate of gain is likely to go as high as 10 per cent over the next year – putting it above the 9.2 per cent chalked up in November 2023 – as the underlying shortfall of rental houses is exacerbated by last week’s federal budget, leading to a reduction in rental housing supply, said SQM managing director Louis Christopher.

“I’m seeing no change with building numbers or suggestions there will be equilibrium between supply and demand any time soon,” he said.

“Going forward with the property tax changes, we can expect a decline in available rental stock over the course of the next two years. Rental yields will need to rise to encourage investors back into the market and that will happen through a combination of housing price falls and rises in rents.”

The budget announcement that negative gearing and the 50 per cent discount on nominal capital gains will no longer be available to investors for existing homes – although they both remain available for investment in new builds – has stoked debate about the extent to which the tax breaks subsidise rents.

Investor advocates have said negative gearing – which allows a landlord to offset losses from a rental property against other forms of income, such as wages – keeps rents lower than they would otherwise be.

“Rents are a persistent inflation … That 7 per cent you have today is embedded in 6 months’ time. There’s almost nothing you can do about it.”

— Jo Masters, Barrenjoey chief economist

“Anything that eases their investor cash flow enables them to hold a property,” said Cate Bakos, a buyers’ agent and chair of industry body Property Investment Professionals of Australia.

“It’s a crude way of putting it, but it certainly subsidises rent. It alleviates their holding costs.”

That was seen during the COVID-19 pandemic when lower interest rates made it easier for landlords to accept rental reductions or freezes, Bakos said.

“It was far easier to say ‘yes’ because holding costs were less,” she said.

Independent economist Saul Eslake said, however, that rents were set more by vacancy rates and what the market would bear, rather than costs faced by landlords.

“Rental is not a cost-plus business,” he said. “That is, landlords charge what the market will bear, which is driven largely by vacancy rates.”

Rents did not fall last year when the Reserve Bank of Australia was cutting interest rates and they had not risen this year as a result of borrowing costs rising again or because council rates rose for landlords, he said.

Rather, negative gearing had allowed landlords to borrow more to push up prices, Eslake said.

“By incentivising landlords to borrow more money to bid up, forcing up the price of housing we’ve already got, they’ve inflated the price of housing,” he said.

“If negative gearing didn’t exist property prices wouldn’t be as high as they are and rents as a percentage of the cost of property wouldn’t be higher, either. Landlords wouldn’t need to raise rents as much to make a return on their asset.”

Higher rents do raise risks for inflation. Christopher said the near 7 per cent capital city annual rate of increase for rents was the highest since the post-pandemic period.

Barrenjoey chief economist Jo Masters said rents made up the second-largest line item in the official CPI basket – after the cost of building a new home – and that the trend of rising rents was a risk.

The CPI rental figure represents the so-called stock of all rents – that is, all rental prices, whether they are renewed or not – so it will be lower than the current rise in asking rents.

But Barrenjoey’s forecast this calendar year is for 3.9 per cent CPI rent inflation, which Masters said was “quite strong”.

“Rents are a persistent inflation,” she said. “That 7 per cent you have today is embedded in 6 months’ time. There’s almost nothing you can do about it.”

Bakos said when investors were pressured financially they would push to get the highest rent they could.

“We’ve seen it with land tax; we’ve seen it with increased interest rates,” she said.

Christopher said the post-pandemic acceleration of rents, which have jumped from a yearly growth rate of 2.5 per cent in May last year to 6.9 per cent now, would put pressure on headline inflation.

“Is it a return back to the days of 2021 and 2022? Not yet, but it’s clear the re-acceleration will feed into the Australian Bureau of Statistics’ CPI soon,” he said.

The post Surging rents add to supply concerns amid tax changes appeared first on AMCO Public Accountants / AMCO Strategic Financial Advice.

Neither the UAE nor New Zealand imposes the extent of taxes levied on property investments that Australia does, including through a capital gains tax on real estate or land tax, respectively, they said.

Among those with skin in the game is real estate agency Whitefox, which has operated across Australia since 2017. It opened its first office in New Zealand in 2023 and an agency in Dubai earlier this year.

“Australia’s proposed tax changes are becoming increasingly punitive for property investors,” Whitefox founder Marty Fox told The Australian Financial Review. “Already 30 per cent of our transactions in New Zealand are from Aussies and that will likely go up for Wanaka and Queenstown.”

Fox, who is himself in the process of applying for a loan to purchase property in Dubai, said the UAE city had emerged as one of the world’s most “tax-efficient property markets for globally mobile investors”.

It is one of the reasons why Australian property investors, like Fox, may be more willing consider turning their real estate lens onto foreign markets following Labor’s decision to abolish negative gearing and axe the 50 per cent discount on capital gains, unveiled in its May 12 budget.

The United Arab Emirates doesn’t impose income tax or capital gains tax on individuals. Residential rental yields in Dubai also average around 6 to 8 per cent, compared with Sydney, where typical rental yields sit at about 2 to 4 per cent.

Australian investors may qualify for a UAE Golden Visa – a renewable five-year or 10-year residence visa – if they purchase property worth a minimum of $AED2 million (about $766,000) upfront, using a loan from specific local banks, or off the plan through an approved local real estate firm, according to Henley & Partners.

Nahi Beaini, director of Sydney-based buyers agency Dubai Property Playground, said there had been a significant number of inquiries from Australians wanting to purchase Dubai property more recently, mainly from investors wishing to diversify their assets and also because of its investment into AI and data centres.

“Dubai has always been a destination to invest, even before the [latest Australian federal] budget, but the new compliances and rules around the budget just makes it more compelling to invest in a place such as the UAE,” he said.

“We’re definitely expecting, especially from people who are first-time investors, [for inquiry to accelerate] over the next few months. There’s a lot of people talking about it, but it’s still early stages.”

While the war in the Middle East has disrupted that investment in the past few months, Beaini said would-be investors were looking past that to planning investment decisions in the future.

In New Zealand, some of the benefits of owning property include no stamp duty or national land tax. Landlords can also claim 100 per cent of their mortgage interest as an expense.

However, under what’s called the bright-line rule, any profit made from selling a property within two years of its acquisition is subject to tax, except if it’s a person’s primary residence.

Fox is expecting a pick-up in inquiries from Australians wanting to invest in Dubai and New Zealand’s real estate markets following the property tax changes.

“Investors are not necessarily leaving Australia because they dislike property,” he said. “They are increasingly questioning whether the after-tax environment still rewards ambition, risk and long-term investment.

“Markets like New Zealand and Dubai are benefiting from being perceived as simpler, more stable and significantly more investor-aligned.”

However, a note of warning was sounded by Mark Molesworth, tax partner at professional services firm BDO, who said if an individual was living in Australia, it was much more likely that they would be treated as an Australian tax resident, who is taxable on their worldwide income.

“You’re subject to tax in Australia on rent, even if it’s derived from a rental property offshore, and you’re subject to tax on the capital gain that you make, if any, on the sale of that property,” he said.

“If an investor is looking to invest in Dubai property on the basis that it will be more [favourably] taxed than Australian property, then that’s not correct from an Australian tax point of view.”

The post Dubai calling? Property investors may be tempted by UAE, New Zealand appeared first on AMCO Public Accountants / AMCO Strategic Financial Advice.

Or, as he describes it, “roadkill”. With every new announcement outlining new tasks that AI platforms can automate – the latest was Anthropic’s Claude, which can apparently replicate the work that specialist legal software does – technology stocks look deeper into the abyss.

That development, overnight on Tuesday, pushed the Nasdaq-listed shares of LegalZoom, which provides services to small legal practices, down 19.7 per cent. Thomson Reuters dropped 17 per cent. Atlassian, the Sydney-headquartered, New York-listed workplace software developer, saw its shares down 8.7 per cent. On the ASX, accounting tool Xero and logistics management platform WiseTech Global both took big hits.

“For some big software companies there are big switching costs, or they may have inputs from lots of changing private datasets that are difficult for an AI platform to match, but the key driver in the market today is that there will be lots of [software] businesses that aren’t that strong,” said Petre, the co-founder of Airtree Ventures and a former Microsoft executive.

Beyond the public markets, Petre is heavily invested in some of the country’s biggest and most promising private software businesses, from graphic design platform Canva to workplace tracking group SafetyCulture.

“Investing has now got a lot harder than it has been for the last 10 years and if a venture capital firm is not worried about this, then you have to question their capabilities in understanding what is happening,” he said.

Markets have been stunned by how quickly AI platforms like Claude seem to be able to offer tools that are comparable with software firms, allowing so-called vibe coders to build models without possessing specialist skills.

Alex Pollak, the chief investment officer at Loftus Peak, which has more than $1.1 billion under management, said the sell-off in software stocks was “probably overdone” and that products released by companies like Anthropic were unlikely to match those produced by traditional players, who can also provide ongoing support and frequent updates.

On Tuesday, Xero chief executive Sukhinder Singh Cassidy made a similar argument as she tried to convince investors that Xero’s accounting software was AI-proof. Atlassian chief executive Mike Cannon-Brookes will be pressed to do the same at his company’s quarterly earnings call on Friday.

Cloud and software names account for about 19 per cent of the Loftus Peak Global Disruption Fund, with about $700 million under management, and Pollak said it hasn’t sold these names yet. But he said the AI revolution “was creating this schizoid stockmarket” as investors fret over disruption, spending on infrastructure and how to monetise the new technology.

“This is the most disruptive moment for business and society since the introduction of the internet in 1999. We’ve been poring over this for months now, we can’t find a single industry that’s not affected by AI,” Pollak said.

“It is going to work. It’s already commercial, it’s deployed widely enough. It’s got enough acolytes, power users and corporations using it. We’re not going back. The question then becomes, is it being priced properly?”

Defensive moats

Two start-up founders who recently raised big money to build AI that will automate professional tasks also claim to be unperturbed by Claude.

Thomas Kelly, the chief executive and co-founder of Heidi Health, a medical scribe platform last valued at $US465 million ($662 million), and Phil Thurner, whose legal practice management software developer Nexl is now worth $100 million, both said their products were too embedded in the way that their customers worked to be easily replaced by AI-led replacements.

“The key question is where value actually accrues. In industries with low regulatory barriers and high interoperability, large general-purpose AI platforms will put real pressure on specialist software by abstracting away systems of record. We are already seeing early signs of that,” Kelly said.

“Healthcare is different. Value does not accrue solely to the model, it sits in regulatory compliance, deep clinical integration, trusted workflows and longstanding partnerships. You cannot simply plug in an API and operate safely at scale, and consumer AI platforms are not compliant with healthcare regulation in Australia, the US or Europe.”

An API, or application programming interface, is used to let different digital services and applications communicate and work together.

Thurner said Anthropic was an API business rather than a software rival, making its money from token usage, with more interest in pulling users away from OpenAI than replacing legal technology software vendors.

He said software like Nexl had a “defensive moat” against the disruption through its own data models, its grounding in firm-specific proprietary data and hard-earned knowledge of those businesses’ workflows. Anthropic and OpenAI were more of a threat to applications with limited features, he said.

“For serious vertical platforms Anthropic is more of an enabler,” Thurner added. “I’d frame this less as Anthropic eating legal tech and more as Anthropic competing to be the backbone for legal and professional-services AI. The real question for vertical software players is whether they’ve built real depth, or just a thin user interface on an AI model.”

Ahead of its earnings call, Canaccord Genuity analyst David Hynes said there was little Atlassian could do to turn negative sentiment around in the short term. He said Atlassian’s own AI efforts were going well, and its margins were generally growing across its applications.

“For an analyst who’s spent nearly 20 years covering a space that’s generally been loved, it’s wildly frustrating,” Hynes wrote. “It’s a fear of the unknown, the disprovable AI-bear thesis, and for that, there’s no magic elixir.”

Petre’s Airtree Ventures co-founder and a current partner at the firm Craig Blair said there was more variation in the impact of AI on software than was currently being displayed by a general market sell-off.

“The market is right that AI will have profound effects across software, services and investment businesses, but it’s not yet very discerning about who will benefit versus who will face headwinds,” he said.

“The future isn’t cleanly utopian or dystopian – outcomes will be shaped by new business models, products and pricing regimes so the future is nuanced and less predicable than simple headlines suggest.”

The post AI comes for the software giants, and Australia is no safe haven appeared first on AMCO Public Accountants / AMCO Strategic Financial Advice.

On Tuesday night, software stocks got clobbered because artificial intelligence was going to demolish their business models. On Wednesday night, tech stocks got clobbered because AI isn’t demolishing things fast enough.

While the selling pressure on software and data stocks eased, a wave of selling hit AI stocks after investors decided they were very displeased with the December quarter results of chipmaker AMD.

This was a strange one. AMD smashed analyst expectations for both profits and revenue – revenue in its data centre business surged 39 per cent in the December quarter, and is forecast to surge 60 per cent in the March quarter. Chief executive Lisa Su used the very technical term “going gangbusters” to describe the demand AMD was seeing.

“What I would tell yo16 ARTIFICIAL INTELLIGENCE & CYBER CRIMEu from someone on the inside is that AI is accelerating at a pace that I would not have imagined,” Su told CNBC.

And how did AMD’s share price react? Down 16 per cent on Wednesday night, of course.

This dragged Nvidia down more than 3 per cent, tech darling Palantir down almost 13 per cent, data centre junior CoreWeave down more than 7 per cent, Oracle down 4.5 per cent and the Nasdaq Composite index down more than 2 per cent at its intraday low, before it bounced a little.

The problem, apparently, was that AMD’s guidance was a little softer than the market wanted to see. For investors, that clearly didn’t quite add up. If demand is going gangbusters and AI investment is climbing seemingly by the minute from Tulsa to Tasmania, shouldn’t those growth rates be even stronger than they are?

This is another perfect example of what veteran tech investor Alex Pollak, chief investment officer at Loftus Peak, described as the market’s “schizoid” approach to the AI revolution.

One day, investors are panicking that AI players such as OpenAI and Anthropic are going to allow businesses and consumers to replicate the products of the cloud computing and software giants that have been market darlings for a decade. The next day, investors are worried that this process isn’t going fast enough.

Both of these sentiments can be right, of course – the AI players could wipe out the software players, and the AI players could face a squeeze on the earnings, operations and balance sheets if the speed at which they are monetising the AI revolution doesn’t match the speed at which they are investing in AI infrastructure.

What investors are wrestling with is the time frame over which both of these things occur, and, most importantly, the price that they should ascribe to these stocks as the AI revolution rolls on.

Indeed, after Wall Street closed for Wednesday night, we got more examples of investor nervousness. Google’s parent Alphabet smashed analyst expectations by producing a 30 per increase in profits to $US34.5 billion in the December quarter, but then shocked Wall Street by doubling it plans for capex spending in calendar 2026 to as much as $US185 billion, far above analyst expectations for about $US120 billion. Google stock fell 2 per cent in overnight trade.

Meanwhile, shares in chip design giant ARM fell almost 9 per cent on softer than expected earnings guidance.

It’s the market’s healthy scepticism

Obviously, this has felt very messy in the past few days. But zoom out, and the direction of travel looks a bit clearer.

Deutsche Bank strategist Jim Reid has examined the drawdown of a set of major stocks connected to the AI revolution (that is, the amount the stocks have fallen from their recent peaks), and the numbers tell the story of two fears. First, of AI disruption, and second, that there is going to be a nasty gap between AI investment and returns.

On the software side, names such as Duolingo (down 78 per cent from its peak), ServiceNow (down 53 per cent), Salesforce (down 45 per cent) and Adobe (down 41 per cent) are among the biggest casualties.

But even the stocks which are thought to be the safest bets in the AI revolution – the so-called shovel and pick names – have had a tough time of it. Nvidia is down 13 per cent from its peak. Palantir is down 24 per cent. Microsoft is also down 24 per cent. Broadcom is down 22 per cent. Oracle is down 51 per cent.

In other words, this has not just been about two days of confusion. This is the market’s very healthy scepticism about AI playing out over a period of weeks and months.

For all that though, it’s important to note that the S&P 500, the global benchmark for risk in financial markets, remains within 3 per cent of its all-time highs.

Indeed, while tech was having another conniption on Wednesday night, something remarkable happened. Eighty-two members of the S&P 500 hit one-year highs before midday, including giants such as Walmart, ExxonMobil, Johnston & Johnston, Caterpillar and wind turbine maker GE Vernova.

Indeed, seven of the 11 S&P sectors were in the green, suggesting that even as investors have shifted away from tech, they have not been shifting away from stocks, and the rally is broadening out.

For index investors – and let’s face it, that includes everyone from retail punters to superannuation funds these days – this is good news. As US strategist Warren Pies notes, never before has an S&P sector that is such a large chunk of the index (software is more than 8 per cent of the S&P’s total market cap) sold off so hard (a more than 25 per cent fall) and the market has remained within 3 per cent of all-time highs.

The numbers don’t lie. But it’s also true that this tech sell-off feels nasty, and for a very good reason: we’ve got lots of stocks down between 30 per cent and 60 per cent, and the market’s concentration around tech has been intense. This feels like a moment because it is.

The post Tech sell-off isn’t stopping. Thank goodness for this quiet miracle appeared first on AMCO Public Accountants / AMCO Strategic Financial Advice.

Convicted fraudster and Ponzi scheme mastermind Bernie Madoff was at the peak of his fund-raising powers in October 2007 when he told a small audience at the Philoctetes Centre in New York about the conflicts at the heart of investing.

“You have to understand. Wall St is one big turf war … by benefiting one person you’re disadvantaging another person,” Madoff said, according to The Wizard of Lies by Dianna B. Henriques.

Her book describes how, within a few months of that speech, an unstoppable run of redemption requests hit Madoff’s hedge fund, culminating in its closure in December 2008 with losses to investors of $US65 billion ($93 billion).

Almost 20 years after Madoff went bust, US capital markets remain rife with conflicts of interest, which are defended using the lame excuse that it all depends on how they are managed.

In Australia, conflicts of interest have been a common feature of every major collapse of a non-bank financial entity for the past 40 years, according to a comprehensive analysis conducted by legal scholar David Millhouse as part of his PhD at Bond University’s law school.

Millhouse’s analysis of 199 senior court judgments published between 1984 and 2018 shows a high correlation in the top decile and top quartile samples between related party transactions and egregious behaviours.

He estimates that about $52 billion in investor funds were lost or impaired during the 34-year period covered by his analysis. That is a huge loss of productive capital that could have supported the economy.

Turning to conflicts of interest at Shield, I should say upfront that Shield was not shut down following a run on redemptions. Instead, it was closed because the Australian Securities and Investments Commission initiated interim stop orders in February 2024.

Also, it was not, as far as we know, a Ponzi scheme, and any allegations of fraud are yet to be fully tested in court.

But it is clear from multiple court filings lodged by ASIC and Jason Tracy, one of the joint liquidators of Shield’s responsible entity Keystone Asset Management, that this particular managed investment scheme was riven with conflicts of interest.

Not all of those conflicts were obvious from reading the product disclosure statements lodged with ASIC or the favourable research reports published by SQM Research.

The PDS and SQM documents were relied on by investment advisers who recommended Shield to 5800 clients who pumped about $500 million into the fund between April 2022 and February 2024.

The PDS and SQM documents make it plain that Keystone’s founders, Ilya Frolov and Paul Chiodo, were directors of Shield’s responsible entity as well as directors of Shield’s investment manager, CF Capital Investments.

In effect, Frolov and Chiodo, as trustees, were guarding the best interests of Shield investors against the actions of themselves, as fund managers.

But scratch below the surface and you find that there were some related party disclosures not made known to retail investors.

The Shield PDS says the direct property component of the “multi-asset fund” is invested in the Advantage Diversified Property Fund, a wholesale property fund which, in turn, “invests in individual property development and financing projects” managed by a company controlled by Chiodo, the Chiodo Corporation.

What the PDS does not reveal is that nine of the 11 property projects financed by the ADPF, with a book value of $214 million, were controlled by Chiodo or companies he was a director of.

Chiodo says that information was freely available to anyone who requested a copy of the ADPF information memorandum. Also, he says he did not attend CF Capital investment committee meetings which discussed investments in the ADPF.

SQM Research founder Louis Christopher says he was unaware that Chiodo controlled the ADPF properties.

“The Shield collapse should be the catalyst for federal government reform of our treatment of conflicts of interest.”

The CF Capital investment committee has an interesting history. Its only independent member, Werner Stals, only lasted about a year, and his successor as an independent member of the committee, Robert Talevski, says he was not a member of the committee despite his name being listed in a Shield 2023 PDS and in a 2024 SQM report.

Chiodo says Talevski became a member of the CF Capital investment committee after doing asset consulting work.

But Talevski says during the consulting engagement he became aware of inaccurate representations in certain materials of his role, at which point he issued formal legal notice requiring immediate correction and removal. Subsequently, he terminated the engagement.

Meanwhile, there is extensive legal action by ASIC and Tracy to protect the interests of Shield investors, recover funds for distribution and hold people to account.

Tracy is suing City Built Pty Ltd and its owner, Roberto Filippini and their related parties who were paid approximately $158 million in respect of ADPF property developments. Chiodo and Chiodo Corporation are also parties to the claim. Tracy says this could take two years, but Chiodo says it will take five years.

Tracy, who is managing director of consulting firm Alvarez and Marsal, is suing Frolov and his related entities for $17 million paid to them from investor funds. Tracy says this case will go for two years.

Caveats have been lodged on a number of properties owned by Chiodo, Frolov and Filippini to protect recovery from those assets in the event the above proceedings are successful.

Separate from all that, Chiodo Corporation has also filed an application in the Supreme Court against Tracy, setting aside the liquidator’s rejection of Chiodo Corporation’s proof of debt in the sum of $8,939,426. Tracy is fighting that claim.

I agree with Millhouse when he says that the Shield collapse should be the catalyst for federal government reform of our treatment of conflicts of interest.

At the moment, conflicts of interest are statutorily permitted in Australia, provided there is a prioritisation of members “interests” with their “informed consent”. Millhouse says there is no prohibition which applied traditionally in trust law and which applies in other jurisdictions.

“What this means is that it is open to the directors to determine what the statutory best interest duty under section 601FC(1)(c) of the Corporations Act means, or whether they have allegedly exercised it rather than their own self-interest,” Millhouse says.

Banning conflicts of interest in the investment supply chain ought to go hand-in-hand with a new statutory definition of fiduciary duty, which can be enforced throughout the investment chain. This is already law in Singapore, Canada and several European Union countries.

Unfortunately, the vested interests that would argue against these changes to our financial system infrastructure are extremely powerful, especially the industry super funds who would be unable to continue with their highly conflicted investment strategies.

The post Madoff’s lessons on conflicts of interest appeared first on AMCO Public Accountants / AMCO Strategic Financial Advice.

Many of the 11,000 victims were unwitting SMSF members. They were convinced by social media posts, cold calls and high-pressure sales tactics from financially incentivised intermediaries to shift their money into Shield and First Guardian.

Now, the bill is coming due for the wreckage and the financial services industry and/or taxpayers will be on the hook for some of the damage.

Macquarie and Netwealth have agreed with the corporate regulator to pay $321 million and $101 million respectively to clients who lost money on their platforms, but Equity Trustees and Diversa are fighting the Australian Securities and Investments Commission in court.

The federal government’s Compensation Scheme of Last Resort (CSLR) will again be called on to make up the shortfall.

The relatively new scheme, which is only two years old, provides compensation up to $150,000 per consumer who are victims of financial misconduct as determined by Australian Financial Complaints Authority (AFCA).

The bailout scheme is a back-up option when a financial firm cannot pay compensation, often because they are insolvent or refuse to pay, and other recovery options have been exhausted.

“As the SMSF levies bite, I expect we would see a lot less punters choosing to shift out of APRA funds, and less CSLR claims as a result.”

— Angus Barker

The scheme began operating in 2024 based on recommendations from the 2017 Ramsay Review and the Hayne Royal Commission interim report submitted in 2018 under the former Coalition government, which highlighted gaps in compensation arrangements.

Incredibly, fees imposed on the financial services industry to fund the CSLR will be approaching $1 billion by later this decade – much larger than anyone envisaged.

Since its inception, the scheme has raised $345 million from industry.

The scheme’s initial $240 million in costs were overwhelmingly driven by losses incurred by SMSF clients of Dixon Advisory’s poorly performing high-fee property fund, many of them former public servants in Canberra.

CSLR chief executive David Berry released a preliminary estimate that the scheme could cost the finance industry an additional $137.5 million in the 2026-27 financial year alone.

That is a low-ball estimate because it excludes an initial estimate of $125 million that could be paid to some of the victims of the $1 billion collapse of Shield and First Guardian.

Hence, the total cost next year alone is likely to exceed the legislated $250 million annual cap.

Hundreds of millions more will be paid out in future years.

Much of this will be paid to SMSF members who invested in Shield, First Guardian, Dixon, United Global Capital and Global Capital Property Fund, among other failed schemes.

Compensation is funded by extra levies on financial advisers, brokers, banks, fund managers and insurers.

Assistant Treasurer Daniel Mulino revealed last month that large and regulated retail and industry superannuation funds will be forced to pay into the scheme, to help spread the financial burden as thinly as possible across the finance sector.

The $1 trillion SMSF sector has so far been excluded, but large superannuation representatives raised with Mulino the prospect of levying SMSFs.

This columnist has previously expressed strong reservations about the existence of the scheme and its widening net.

The CSLR is a scheme where good operators bail out consumers for the deeds of bad financial players.

The risk is growing that the CSLR is becoming a catch-all for investors who make unwise investment decisions.

The bailout scheme may be indirectly inciting more risky behaviour by both financiers and investors, in a classic case of moral hazard.

But the fact is, it exists, after being progressed by the former Coalition government and ultimately legislated by Labor in 2023 with bipartisan support.

Why SMSFs should chip in

The more one thinks about it, the more convincing it becomes that the 650,000 SMSFs should pay an annual levy if they want to be covered for losses.

Like any form of insurance, if SMSFs can make claims on the CSLR, they should also pay an annual premium.

Clients of financial advisers, banks, insurers, managed funds and stockbrokers (and soon big superannuation funds) already indirectly pay the fees that are inevitably passed on to them, so why not also make pay SMSFs who the biggest users of the bailout scheme?

It is not often that a free-market, small-government Liberal says so.

Company director and former investment banker Angus Barker was working as chief of staff to former Liberal superannuation minister Jane Hume when the Coalition was setting up the CSLR.

Barker had philosophical reservations about the scheme’s moral hazard. He says it has since been worsened by AFCA finding a backdoor way to broaden compensation for “faulty advice” relating to investors in failed managed investment schemes. The Coalition deliberately excluded MISs due to their high risks.

“SMSFs are the root cause of exploding CSLR costs,” Barker says.

“SMSF members make an active choice to take their money out of the safety of professionally managed, APRA regulated super funds.”

Barker has no doubt SMSFs should be among the first levied. He suggests that a levy of, say, $150 a year, on the 653,000 SMSFs would generate about $100 million for the CSLR.

Or $100 fee on the 1.2 million SMSF members would generate $120 million per year.

“If as a society we want less of something, we tax it,” Barker says.

“We want to see less SMSF-generated claims to the CSLR.

“So SMSFs should be levied for the claims they cause and see what happens: As the SMSF levies bite, I expect we would see a lot less punters choosing to shift out of APRA funds, and less CSLR claims as a result. Mission accomplished.”

This ticks the boxes of the economic policy principles of price signals, cost recovery and user pays.

Treasury last year warned the government it is too easy for criminals to exploit the more than a million people who direct their own retirement savings, suggesting the barriers to setting up SMSFs are too low.

“There are … few barriers preventing people from quickly establishing an SMSF and little-to-no restrictions on the class of assets a trustee can invest in,” the advice from Treasury said.

“This includes the products offered by the entities referred to in this brief [Shield and First Guardian].

“The same ease-of-establishment [is then] used to sign people up to high-risk, illiquid, and/or poorly diversified investments [and] is also exploited by scammers to steal retirement savings from SMSFs,” Treasury said.

The government has flagged it is considering introducing rules that would slow how quickly workers could switch super products.

Meanwhile, according to the head of a national financial advice firm with many SMSF clients, “SMSFs should not be able to claim against a pool of funds they don’t contribute to.”

“Arguably, SMSFs are the most at risk for a claim as there is no education requirement to establish a fund, there is little oversight and dodgy advisers use this to take advantage of people,” he says.

“There is far less compliance and regulation than the large funds and there is no large trustee to make good when a SMSF loses money, so it’s the last-resort pool funding for every person when something goes wrong.”

If SMSFs oppose paying an insurance premium, there is another easy solution.

“Legislate so SMSF trustees cannot make a claim against financial advisers for faulty advice or against MISs in any situation,” Barker says.

The post Self-managed super investors should pay a fee for bailout insurance appeared first on AMCO Public Accountants / AMCO Strategic Financial Advice.

“They ask, ‘How much can we give to the kids to help them into their first home?’” says Quinlan, the co-founder of Brisbane-based Solace Financial. Their second question, he says, is “How do we structure it so that we don’t run out of money before pine box day?”

The consequences of getting it wrong can be costly. If you give too little, you risk making your children struggle more than they need and reduce your overall family wealth. If you give too much, even if you’re wealthy, you could struggle to fund your retirement and even be forced to sell your home.

But if you get it right, it’s a win-win.

“It’s a deeply personal issue, and the approach depends on factors, like the level of wealth, the children’s ages and the children’s own financial position,” says Caitlin Laffey, a partner at high net wealth adviser Koda Capital. The key is “not giving too much too early so that you are not able to live the lifestyle that you intend to live yourselves”, she says.

How that might play out is illustrated by modelling done by Laffey’s colleague, James Hawthorne.

The wrong way No. 1: Giving away your spending money

Hawthorne crunched the numbers to show what can go wrong when a couple with $10 million in total assets – $6 million in their home and $4 million mostly in their superannuation – give $1 million to each of their two children.

The hypothetical couple is recently retired and has income of about $200,000 a year from their super. That amount represents 2 per cent of their total assets each year so they feel they can afford to give 20 per cent away as an early inheritance.

The graph above shows what happens if they were to take $2 million from their super as a lump sum and give it to their children. If they keep spending $200,000 a year, their money runs out in less than 14 years.

The problem is that they took the money from their income-generating assets.

They still have a decent pool of money, but they will be forced to sell their home or drastically reduce their spending to cover that gift to their children.

Hawthorne uses the chart as a lesson to show clients how unplanned giving can lead to unplanned consequences.

“It’s a really crude example, but the parents are just being too generous,” Hawthorne says. “They are not looking after themselves first. A lot of the time it’s our job to say to very generous parents like these: Stop. Just make sure that you can continue to live the way that you deserve to live.”

Hawthorne says he would advise the clients in this situation to consider downsizing their home soon after or around the time they give the money.

Alternatively, the parents could consider initially giving a smaller amount or (if they have multiple children) giving one their share of the money before the others.

“You do not want to eat into your income assets too early,” Hawthorne says.

That’s a point echoed by family office adviser Lipman Burgon & Partners’ Jason Rademan, who provided his own modelling for another big risk that we’ll get to later.

“If there is any risk that a proposed gift could compromise the parents’ future ability to meet their own living expenses, it often makes sense to stage the assistance in several tranches rather than making one large, irreversible payment,” he says. “That way, parents can review their position over time and adjust the level of support if markets or personal circumstances change.”

Another solution might be to structure such a gift at least partly as an interest-paying loan.

How a loan instead of a gift might solve the problem

The main advantage of loaning the money – even if it is a no-interest loan – instead of gifting it comes down to asset protection.

When you make a loan, you still have ultimate control of the money. That means that should anyone make a claim against your child’s assets, it won’t be counted as belonging to them. This is particularly relevant in the case of a divorce or partnership breakdown but also applies to business dealings.

“When you structure support as a gift without conditions, you forfeit any ability to protect that capital,” says Paul Green, director at Vincents Private Wealth.

Loans are also assets of the estate, which is useful if your children don’t need help at the same time, Solace Financial’s Quinlan says.

“If the kids are different ages, they have different needs,” he says.

“Say Johnny is 25 and ready to buy his first home, but Mary is 17, and she might be less mature, and might not buy a home until she’s 30.

“So we do it as a loan, which helps to equalise the will. If Mum and Dad pass away, then that debt forms part of the will – Johnny has to repay his loan or it’s forgiven out of the estate and Mary isn’t penalised.”

Sometimes, it can make sense to give it as a gift outright, Quinlan adds. That can be particularly beneficial if you are planning to access the Centrelink age pension at some stage because after five years, loans are not counted in the means test.

The post The right way to give your kids money (and 2 very wrong ways) appeared first on AMCO Public Accountants / AMCO Strategic Financial Advice.

The good news is that it’s far less scary than you’d imagine, and there are many ways to protect against the financial equivalent of a broken bone.

We asked under-30s to send us their questions. Here are the results.

Q: What’s the first step to investing? Do I need a broker to get started?

There are dozens of online platforms that allow you to invest using your phone – no broker necessary. Many platforms no longer have a minimum investment amount, meaning that you can get started with spare change.

Start by creating an account with a trading platform (more about choosing a platform below) and deposit some cash into that account. Once your identity is verified, you can usually start investing immediately. The whole process can take less than five minutes.

The federal government’s Moneysmart website is a good source of reliable information for beginners.

Fractional investing, which allows you to buy a portion of a unit in a share or ETF rather than restricting you to buying only whole units, has made is easy and cheap for beginners to build a diversified portfolio.

Craig Semmens, the chief executive of stockbroking firm Phillip Capital Australia, says trading apps have made real-time news, price alerts, charts and commentary readily available to everybody.

“Advancements in technology have also meant overseas markets that once felt out of reach for retail investors are suddenly more accessible,” he says. “US heavyweights like Tesla, Apple, Meta and Nvidia sit in the same portfolios as the big four banks and the likes of Rio Tinto, BHP and Wesfarmers for example, giving investors exposure to sectors and stories shaping the global economy.”

Q: How much do I need to start investing? How often should I invest?

There’s no right answer to this, but investing small amounts regularly can be a good strategy for those who don’t have the liquidity to invest big sums in one go. It’s called dollar-cost averaging.

Some platforms allow people to invest with as little as $5 or $10.

One option is “round-up” investing. If you buy a coffee for $5.50, for example, the purchase gets rounded up to $6 and the additional 50¢ is invested into your portfolio.

Q: Is it better to invest in ETFs or individual stocks?

Choosing what to invest in can be a daunting task.

Patricia Garcia, a financial adviser at Your Vision Financial Solutions, says investing in ETFs is an easy and cheap way to diversify your portfolio.

Diversification is the process of investing across various asset classes, industries and geographies.

ETFs can be bought and sold on a stock exchange, just like a regular share, and they are automatically diversified given their multipart compositions.

“If you’re starting with a very small amount, and adding small amounts over time, you’re not going to be able to get much diversification if you’re building your own stock portfolio,” Garcia says.

Morningstar associate investment specialist Simonelle Mody says she previously bought individual stocks but found she underperformed the wider market so now buys ETFs. Plus, self-managing a portfolio of individual shares is time-consuming.

Q: What’s the best share trading platform in Australia?

Platforms have proliferated so it can feel daunting. The short answer is that different platforms serve different purposes.

The table below lists 20 of the most popular investment platforms, their minimum deposit amount and whether they offer US shares, ETFs and cryptocurrency.

Q: Are there any fees and costs when deciding to invest?

The cost of investing comes down to a combination of things including brokerage, trading, investment and administration fees. There’s no uniform way of charging, so it’s difficult for us to provide a list.

The above table shows the fees charged to execute a single trade. These are generally known as trading fees.

Some are dependent on the size of the trade, others are just a flat fee. Some platforms have zero trading costs, but charge administration fees.

Q: Should I invest in cryptocurrency?

Crypto is a complicated beast. If you get lucky, the returns can be eye-watering, but if you don’t, the losses can bring their own tears,

“Crypto should just be a high-risk part of a portfolio, if you’re wanting to do it as a sort of hobby on the side, and a very small percentage of your overall wealth creation strategy,” Mody says.

Q: Can I manage my own investments or should I go with a ready-made portfolio?

While some investors prefer to select their own stocks, others like the simplicity of investing in a pre-made portfolio, which is usually constructed according to an individual’s risk appetite and investment horizon.

But pre-made portfolios can be a little more expensive.

Morningstar’s Mody compared the fees for pre-made portfolios offered on six platforms. She assumed an initial investment of $1000, annualised monthly fees and a five-year investment period.

Mody also assumed a 7 per cent annual average return for a balanced portfolio over the next five years, which broadly aligns with Morningstar’s long-term return expectations.

The portfolios tend to include a component of ASX, S&P 500 and other high-performing, often tech-heavy, international stocks.

Some portfolios have delivered much higher returns in recent years – who cares if fees are high if your returns are shooting the lights out, right? – but past returns are not a reliable predictor of future earnings.

This comparison is focused on fees, does not account for variation in returns and should only be used as guide for further research by investors themselves.

Stockspot chief executive Chris Brycki defended his organisation’s comparatively high fee by saying: “For our fee, clients get access to a licensed financial adviser and free kids accounts. Our higher allocation to gold has also helped our portfolios outperform all other diversified options over one, three, five and 10 years.”

Q: Should I keep my money in the bank, or should I invest in stocks/ETFs?

While interest rates have been higher recently, the Reserve Bank of Australia is in a cutting cycle. This means the interest paid to savers with money in savings accounts is falling and at present, the best high-interest savings account rates are about 5 per cent. But money in a savings account is safe, which makes these accounts well suited for short-term goals, like holidays and emergency funds.

“Unfortunately, you can’t park all your money in a savings account and expect to build real wealth,” Mody says. “High-yield savings accounts definitely don’t come close to beating inflation over time, and even though it feels psychologically safer, you’re definitely quietly losing money every year.”

If you’re saving for a house deposit and keeping the money invested, it’s possible that if the market crashes, a substantial portion of your savings goes out the window with it. So, exercise caution.

Garcia says the risks associated with an ETF are fairly low.

“If you’re being exposed to thousands of units, thousands of different companies, there’s a very low chance that all of those companies will disappear,” she says.

Q: Should I buy Australian or overseas investments?

One isn’t better than the other, but it’s always good to diversify, and that includes by country. Australia’s economy is relatively small, so exposing your portfolio to larger markets is a useful way of buffering against fluctuations in the domestic market.

“Australia is a small country in the big scheme of things when it comes to the world economy, so it’s good to make sure that you’re exposed to multiple countries, and you can do that through pre-mixed portfolios, ETFs and managed funds,” Garcia says.

Q: Is it better to buy and sell or buy and hold?

It depends on what your investment goals are, but normally, the longer you stay invested in a diversified portfolio, the better.

“Short-term investing is much higher risk,” Garcia says. “It’s about time in the market, not timing the market.”

Mody agrees. “I have a long term-mindset and tangible goals, so I can grow my wealth steadily, as opposed to chasing those crazy returns through things like crypto,” she says.

One of her main goals is to achieve a $100,000 portfolio by age 30. She hopes to achieve this by dollar-cost averaging into ETFs monthly.

Q: What level of investment risk should I take as a young person?

Again, this is goal-dependent, but the general thesis is that the younger you are, the more risk you can afford to take. This is because you have more time to recoup any investment losses you might make.

That being said, if you intend to make a substantial purchase in the next couple of years using the money you have invested, investing may not be the right strategy. If you lose a decent chunk of your portfolio to market fluctuations, you won’t have time to build it back up again.

“If you’re wanting to buy a property in the next year or two, for example, you might not want to invest those funds because you don’t have what we call the right timeframe to invest. You have to be able to ride out the market ups and downs,” Garcia says.

She explains that it’s fine to invest if you’re willing to delay your purchase. Then, once you’ve recouped your losses you can sell all your investments and put the cash towards a deposit.

Semmens says to “be prudent. Don’t rush in. It’s about investing over the long term”.

Mody says losing money early into your investing journey can have a larger impact than later on, when you are more financially equipped to weather bad economic conditions. So, it’s worth considering how much you’re willing to lose.

Q: What are the tax implications of investing?

If you are invested in shares that pay dividends, these need to be included as income in your end of financial year tax return, and are taxed at your marginal income tax rate.

Tax implications also arise when you sell your investments – if they have appreciated in value.

But if you hold on to them, you aren’t taxed until you sell for a profit.

You will be taxed on your profit at your marginal income tax rate, but if you sell an asset like a share, an ETF or crypto that you’ve owned for at least 12 months, you will be eligible for a 50 per cent capital gains tax discount.

All you have to do is declare the capital gains, and the dates you bought and sold the asset on your tax return.

The table below shows the potential capital gains tax implications of a $1000 investment that has appreciated to $1400.

So, there it is. Do your research, start small and don’t be intimidated if you choose to embark on an investing journey.

The post I’ve never bought shares. How do I start investing? appeared first on AMCO Public Accountants / AMCO Strategic Financial Advice.

The post What it takes to be in Australia’s top 1 per cent appeared first on AMCO Public Accountants / AMCO Strategic Financial Advice.