The Great New Zealand Economic Bubble
No doubt over the next few days/weeks some advisers will receive contact from some clients asking about the contentious article which appeared in the NZ Herald, reporting that the NZ economy was about to collapse under the weight of over-exposed domestic residential lending, weak bank financials, and rising interest rates. Who knows – the dude may be right, but I doubt it.
What I am absolutely certain is that markets will rise and markets will fall, bonds will look attractive at some point and equally equities will appear promising at a different point in time, interest rates will rise, fall, or stay the same. All of these movements are likely to occur at one time or another – but who knows when and by what order of magnitude?
The ability to predict movement in investment markets, categories, or sectors is impossible.
From Nick Murray’s work “The Game of Numbers”, I quote unashamedly -
“The greatest equity investor the world has ever produced, or will ever produce, Warren Buffet, said “ I never met a man who could forecast the market”. Pay strict attention here, because this is the greatest investor who ever lived, telling you that not only no one (including himself) can consistently predict markets, but that the inability to predict markets is no bar – indeed, is perfectly irrelevant to successful investing. In addition to not being able to anticipate markets or the economy, you will never be able scientifically or mathematically to select investments for superior future relative performance. Again, no shame in this; neither can anyone else. There is no statistical evidence for the persistence of performance”
This is a hugely significant statement, because if it is not investment movement, selection and de-selection, which drives returns, the only remaining determinant of portfolio performance is investor behavior.
The alarm bells which were attempted to be set off by the Forbes article could well be one of those occasions when clients panic, question, or exhort advisers to take pre-emptive action by changing the mix of investments in their portfolios in order to avoid the pending collapse of the NZ economy.
Modern portfolio theory has clients acting appropriately armed with all relevant data behaving rationally and in a timely manner.
We all know that this is not the case. Investors behave quite irrationally and cause more likelihood of their portfolio returns being massacred, than anything that happens in local or international markets in whatever class of investments under consideration.
So if client behaviour is crucial to portfolio returns, it surely follows that advisers armed with a deep knowledge of their clients’ likely reaction to such articles appearing in the media, would be forewarned and forearmed to manage such events effectively?
The recent arrival of DNA Behaviour International Ltd on NZ shores provides advisers with an opportunity of analysing the client financial personality at the beginning of the proposed relationship, and creates a framework for managing clients through such media circuses as eventuate from time tom time.
By establishing a scientifically constructed profile of the clients financial DNA, the adviser has tools at his disposal to prevent inappropriate reaction from clients who are persuaded to believe that a) ‘this time it’s different’, or b) the sky is falling.
Rational analysis of even the most elementary indices suggests that this time isn’t different, and that the sky is not falling
The article in question is poorly researched and has little supporting evidence for the assertion that the collapse of the NZ economy is imminent.
This is not to claim that the economy is without issues.
It would be a strange state of affairs to find a free market entirely in balance and synchronised with every other market on the planet.
Reality dictates that there are always segments of the market lagging while others lead.
It this tension that maintains the dynamic of the free market and which ultimately creates evolutionary progress and advantage to the vast majority of the citizenry of that market. And as we have made unheralded advances from the time of the industrial revolution through to the communication age in which we now live, it is appropriate to assume that the momentum of progress is continuing and rapidly accelerating as technology takes us into an ever more imaginative and innovative era.
Here I revert back to Murray’s observation about human progress. Essentially, he ascertains that miracles becomes quickly everyday commodities, and quotes the micro-processor, computers, and cell-phones as classic examples of inventions which appeared miraculous on arrival, but which quickly became commonplace, less expensive – and very much smaller!
So these periodic so-called revelations by economic gurus are of no more significance than the passing of the slide rule, the ‘brick’ portable phone, or the XT computer – quaint, interesting, but certainly nothing by which to determine behavior.