I’m a terrible skier. 

In the few times I’ve tried it I’ve caused otherwise competent skiers to lose their poise and collapse on the ground in hysterics. I’m at my best on the chair lift. It’s nice to glide through the air surrounded by pristine views. 

But what happens when you get off at the top and two signs confront you? The first is double black diamonds – you’re out of your depth and great caution is required. The second says ‘Avalanche Risk’; fate is not entirely in your hands.

Our world has felt fragile since Covid-19 arrived – in terms of its threat to our loved ones, a health system that might not cope and how profoundly divisive it has been in society. The vaccine zealots and vaccine sceptics are mostly intolerant of each other. I haven’t felt so much tension since the Springbok Tour in 1981. 

On top of this is the horrendous trauma experienced by small business owners. Much of our tourism sector is closed for business, the hospitality industry has experienced death by 1,000 cuts and the events industry has ridden a rollercoaster of hope and despair. Institutions like Friday drinks, Saturday sports and Sunday church have been cancelled, restricted or labelled ‘potential super-spreader events’. 

Our emotional shock absorbers are worn out.

Risk is cumulative and there is much else to be concerned about. How about soaring inflation likely followed by soaring interest rates? We have sky high public and private debt, overpriced financial markets with technology allowing new and naïve investors to join the late cycle boom. It’s not so long ago there was no Reddit crowd, meme stocks, Sharsies, Robinhood or multiplicity of crypto currencies. 

Geopolitical tensions are on the rise with both China and Russia having expansionist ambitions. Who would you rate as stronger and smarter – Xi Jinping and Putin or Biden and Bojo? Throughout the western world there has been a loss in trust of governments and democracy, an increase in inequity, the erosion of social cohesion and rise of polarising leaders.

Basic economics 

From an economic wellbeing standpoint, the factor that worries me the most are the supply chains. 

When there are supermarket restrictions on breadcrumbs and oat milk, consumers can reasonably conclude there is trouble brewing. Modern delivery systems are highly optimised. In Hawke’s Bay we simply don’t have 50 nurses or 50 truck drivers sitting idle. If there is a Covid outbreak in the wrong place at the wrong time it will be immensely disruptive. Our exporters are also spooked. Freight rates are up an average of 60% and the shipping schedule quite unreliable.

Second on the list are the impacts of inflation. Legendary economist Milton Friedman said “inflation is always and everywhere a monetary phenomenon”. The money supply is controlled and regulated by government and all inflations are caused by governments. 

What we learned from the Great Financial Crisis (GFC) is that Quantitative Easing (money printing) isn’t inflationary in terms of the CPI. The new money is distributed through the banks and shores up the financial system. If this does empower the banks to lend, it’s to their financial buddies, the corporations and perhaps to ‘safe’ home loans. This isn’t surprising as central banks have breakfast with the bankers and lunch with corporate CEOs. 

What the GFC showed us is that little of this money makes its way into the hands of those that need it most, but the stock market, the bond market and house prices soar. It’s worth pondering why a ‘kind’, left-of-centre government would allow policies that increase the wealth gap between the rich and poor. The government’s fiscal spending and various support packages are inflationary, but at least some of the cash ends up in the hands of ordinary people. 

The Governor of the Reserve Bank denies monetary policy was too easy and the Prime Minister denies fiscal expenditure has been inflationary. That’s dishonestly or stupidity, or a combination of the two. There is no other explanation. 

The most egregious of lies to watch out for is that ‘Inflation is a global issue’ and that we are not masters of our own destiny. Where there is a floating currency, each government controls its own inflation. For this reason inflation is close to zero in Switzerland and 36% in Turkey. 

Inflation is non-linear, a schizophrenic beast. You pump in $1b and nothing happens. Another $1b and still nothing happens. A third $1b and whammo … you have inflation. Stopping it is equally unpredictable. A great deal of what feels like pointless pain can be incurred before finally inflation is bought under control. 

Manage your risks

I’m not sure what will trigger it, but there are so many risks that we’re surely on the precipice of disruptive change to the financial and social order. So how should you negotiate these tricky slopes? I’m not a financial advisor and no one should take my advice, but I can tell you what I’ve done.

Sell any property you don’t want to hold for a decade 

A great many baby boomers have a residential rental or commercial property as their retirement investment. If you’re 70, now is a good time to cash up. The two big drivers for house price growth are immigration and low interest rates. The new lending laws have also become a real roadblock to first home buyers. After going up 50% in the last two year, the property market will blow cold for a while.

Reduce your debt 

During the GFC Mr Market wanted a debt deleveraging. He still does and Mr Market always wins eventually. Government debt, household debt and business debt are all much higher than they were in 2008 and vulnerable to economic shocks. I’m fearful for so many young people who have signed up to 30-year mortgages and are about to have their mortgage rates double and their equity evaporate.

Hold some cash

The stock market is at giddy heights with the S&P500 up almost 77% in three years. An investment firm I respect says that the number one driver for the stock market is monetary policy. It’s not profits, innovation or productivity, but what levers the government and reserve bank are pulling. And they’ve clearly signalled they’re tightening the purse strings and raising interest rates. I’m not saying you should sell everything but it’s a good time to hold maybe 30% in cash or gold. Holding cash you might lose 6% a year to inflation, but the rule of thumb for bear markets is that they last a year and the stock market drops by 36%.

Be careful when listening to experts

This is particularly true of financial advisors if they make their money by investing your wealth. Many will say ‘stay in the market’ as it suits their interests. Excepting some Covid palpitations, this has been the longest bull market in history, beginning 13 years ago. The party won’t go on forever. 

If you don’t own much, you can relax a little. ‘The rich man has much to lose’ said Seneca and they’re the ones that will lose sleep. 

In tough times my grandfather planted up the vege garden and bought a side of mutton from over the fence. Plant some winter greens, buy a book from the Little Red Bookshop, bake those lockdown scones and have a cuppa with the neighbours. There is so much pleasure in the small things of life. Maybe that lesson is the good thing to come out of the pandemic.

For now the world looks a prosperous place. Many are out to lunch or installing a swimming pool on the basis their house has doubled in value. The wealth effect of paper profits can lead us astray. 

Governments always try to deflate financial bubbles slowly and over several years, but it never works out that way. One day animal spirits will rise to the fore and they can’t be reined in or regulated. It’s best to watch the carnage from a safe distance if you can.

Today as I write our endless summer casts warm rays across the bountiful harvest of the Heretaunga Plains, but make no mistake – the ice queen cometh. It’s worth contemplating the hazards ahead and just how you might negotiate the unavoidable downslope. 

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2 Comments

  1. Great article, Paul. Timely as the next 12-24 months will be bumpy, rocky and full of the unexpected. It is essential people wake up and attend to their values and responsibilities. Changes in government, banking, and social constructs are necessary, the old systems are no longer adequate.

  2. I agree. The old ways are. Becoming extinct and we need to focus on cocreatimg the kinder, more conscious health, education, Governance , legal, business and community building systems together.

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