The spectre of a second global financial crisis haunts investors. UK analyst Ann Pettifor, who predicted the first GFC, was in New Zealand this month, predicting a sequel.
The foundation of her fears is that a mega-crisis following the GFC in 2007-2009 was averted only when a massive amount of debt was created.
She believes another GFC is due, and this time central banks’ box of tricks is empty.
Her chilling prediction raises questions about whether households can do anything to increase their financial resilience in case Pettifor is right.
When it comes to trying to win big on the wealth front by predicting a fresh GFC, you have to not only be right about it happening, but you have to be right at the right time.
Anyone who thought a second GFC was nigh at the start of 2017 missed out on double-digit returns on many share funds, Jeff Matthews from Forsyth Barr said.
‘‘Nobody rings a bell to say when it is time to sell, and when it is time to buy again,’’ he said.
Those who turned their backs on risky investments like shares after the GFC had missed out on ‘‘nine phenomenal years’’, Matthews said.
Pettifor provides a case in point. She recalled that a relative bought a London flat in 2014. Pettifor had been dead against it. Prices have since skyrocketed. Had the relative followed her advice, they’d be a deal poorer now, though the debt that funded the purchase is still there, she said.
New Zealand investment adviser Louis Boulanger said it wasn’t possible to predict the arrival of the next global crisis.
‘‘You can’t. Absolutely,’’ he said.
Like Pettifor, Boulanger did not believe the current debt-fuelled global economic system was sustainable, but there was so much manipulation by politicians and central banks that it was anybody’s guess when the next crisis would come.
‘‘There are very few, if any, free markets,’’ Boulanger said.
Many of the things ordinary households can do to prepare to boost their financial resilience are steps that take time to achieve.
These include aggressively paying down debt on the household home, and building up emergency cash savings to call on in the event of an income earner becoming unemployed in a recession.
But households can act now to cut expenses.
In a financial crisis households do tend to cut their spending, showing it can be done.
First thing to go is spending on big-ticket items such as cars, whiteware and home renovations.
The best time to cut expenses, however, is in the good times, when disposable income can be used to maximum wealth-building effect, enabling both investment and debt-reduction to build family financial stability.
Over the past four years, as many have pondered the likelihood of a GFC 2.0 emerging, bloggers, journalists and money experts have published lists of ways to prepare your finances for the next big one.
One common tip is for households to build their emergency savings.
In a global financial crisis economic activity contracts, leading to job losses. Having savings means households whose incomes are disrupted can continue to pay the bills for a time.
For those with investments, it can mean something else, too; not having to cash up investments at a time when prices have fallen. An owner who can hold onto them is able to recoup losses should there be a rebound in prices when (if) the crisis abates.
Having cash available also provides an opportunity. It can be spent buying new investments at bargain prices.
Matthews owns shares in renowned investor Warren Buffet’s Berkshire Hathaway investment company. Following the GFC, their value plunged. Matthews did not sell. He actually bought more. The price recovered, and then raced away.
If ordinary people couldn’t predict when a
GFC would arrive, and when it would abate, the sensible thing was to invest for the long term, and try to look through any crisis that emerged, Matthews believed.
‘‘In the long-term people get rewarded for taking risk,’’ he said.
Some forecasters were forecasting a global recession in 2020.
If true, that would give households the rest of the year to take steps to build their financial resilience, but a longterm approach would argue that KiwiSavers who were still a long way from retirement should leave their money in growthoriented funds. Taking risk off the table was not always straightforward.
Shifting from a growth KiwiSaver fund into a conservative one reduced exposure to shares, but conservative funds were heavy in bonds. Bonds tended to rise in price as interest rates fell, and lose value when interest rates were rising, as they are now.
Having a long-term investment plan helped ‘‘take the emotion’’ out of investing, Matthews said.
Consumer debt carries an obligation to repay the lender, regardless of whether the borrower loses their job.
It can be a serious barrier to cutting costs in a crisis.
Repaying debt increases a household’s financial resilience in a crisis.
It isn’t, however, as important as maintaining employment income through tough times, which means keeping skills up to date, and remaining relevant at work, or in command of a business able to weather an economic downturn.
Credit insurance is costly, but can fund repayments should a borrower be made redundant.
Like consumer debt, mortgage repayments are an obligation that must be met, crisis or no crisis.
Taking on debt in a boom, or the aftermath of a financial crisis, can result in massive wealth gains. All else being equal, households with lower mortgages, and more equity, are more financially resilient than those with higher debts, and less equity.
Boulanger believed investors should put some money aside ‘‘outside the system’’, which he sees as unsustainable.
By that he meant investing in gold and silver bullion – the real stuff – not financial promises linked to the precious metals.
Some might see owning gold as akin to taking out insurance, but Boulanger believed it made good long-term investment sense alongside a more traditional investment portfolio.
Hold that gold, he advised, and wait for its value to rise as the unsustainability of the current system was revealed in a crisis.
How much money to set aside (outside the system) depended on client circumstances, needs, preferences and risk tolerance, he said.
His ‘‘strategic advice’’ to all clients is to maintain two portfolios: an investment portfolio, broadly allocated between financial assets (shares, bonds, etc) and a saving portfolio of gold and silver bullion bars held in insured storage.