3
November
2009
Author:
John Bolton

Really?  It’s over?  Just like that?  I’m slightly bemused by how quickly some commentators are proclaiming the end of this – the mother of all recessions. If that’s it – finished – then the recession was quite dull by past standards and I will happily eat my shorts.

The world is becoming a much faster place so I’m thinking that recessions may have also sped up. Either that or we have incredibly short attention spans!

Anyway, the rational side of me says “we still have more pain to come.” Globally, we have applied a fiscal band aid without addressing the fundamental issues. Governments are now borrowing to maintain the status quo. At some point governments will have to rein in their spending or increase taxes, and only then will we truly understand the reality of the global economy.

Over the past 10 years our economy has been fuelled by debt-driven consumption – and so much of our economy relies on this continuing. Yet consumers are gradually deleveraging and have reduced their spending.

The strongest signal of the true state of the global economy is international trade. International trade is down 30%. Evidence of this can also be seen off the coast of Malaysia where there are over 1,000 empty container ships moored.

Supply can only significantly exceed demand for so long before it needs to adjust, and that means significant business closures and unemployment. Government spending cannot prevent this in the long term.

This is why I believe we will not see “high global inflation.” My view is that instead we will see a long period of low inflation. We will have high unemployment preventing wage growth and a lack of demand/over-supply  keeping prices down. Reduced government spending will then create room for low interest rates.

What we now need to see is the government rein in spending.  Ouch… That won’t be easy – but it does not make sense for the New Zealand Government to continue to borrow $250m per week, much of which does not support productivity. Globally, all governments are under political pressure to rein in their fiscal stimulus (especially the United States).

What about New Zealand?

  1. For the past 18 months I’ve taken a pragmatic view of New Zealand. My view is that we will come through the global turmoil better off than most. This is simply because we are not a high-growth, high-wage economy. If you don’t go too high, then you don’t have too far to fall.
  2. We also went into the recession with a lack of spare capacity (record low unemployment with Kiwis working long hours.) One of the early adjustments we saw was reduced hours as opposed to increasing unemployment.
  3. Fundamentally we export food which is more recession-proof than other products.
  4. We have a growing population.
  5. Finally, contrary to popular opinion, I don’t think there are that many home buyers out there. Much of the hype has been based on “pent up” demand from 2008. A lack of listings combined with media hype is pushing prices up, but I doubt this will be sustained.

What about me?

  1. You should make the most of short-term mortgage rates. Pay your mortgage off faster and plan ahead for higher interest rates. As a rule of thumb I’m encouraging clients to set repayments based on an interest rate of 8%.
  2. Everyone should have a revolving credit account so they can build up a buffer as they pay off their mortgage.
  3. Stay away from any form of hire purchase or consumer finance debt. If you have outstanding debts then pay them off as fast as possible, even if they’re interest free. Consumer finance debt is asking for trouble.
  4. Review your life insurances and don’t be silly about it. Life insurance is not one of those things you want to reflect on “in hindsight.” At some point everyone realises their health is their most important priority.
  5. For investors, improve your portfolio yields and get out of poorly-performing properties early. Also make sure you do not have all of your eggs in one basket (everything with one bank.)
  6. Don’t rely on your “special tax code.” This has a high probability of disappearing next year with tax changes. Higher interest rates and not being able to claim tax losses against other income will cripple many highly-geared investors.
  7. You do not need to be in a rush to buy in this property market but there are good buys out there if you are patient and look hard enough.
John Bolton
Chief Squirrel

The former General Manager at ANZ National Bank, JB has brought his broad depth of experience in the banking industry to Squirrel, which is his own company. JB has directly managed over $30 billion of mortgages and deposits and is a regular commentator on the mortgage market in the press and on TV. JB has a BCA from Victoria University and has undertaken post graduate study at University of London. He’s easy going most of the time, except when it comes to his calculator (he’s pretty neurotic with it).