Fran OSullivan: Beware the bird that delivers gloomy news


Warning — black swans ahead. That was the forecast from both a leading think tanker and the chair of New Zealand’s largest bank this week.

Bryce Wilkinson, a senior fellow at the New Zealand Initiative, and Sir John Key, chair of the ANZ, weren’t beating about the bush when they spoke at the launch of the Initiative’s latest publication, Walking the Path to the Next Financial Crisis.

Neither put a date on when the next international financial crisis might hit. The exact timing of these events is difficult to predict, otherwise fund investors — and traders — would be lining up gigantic shorts to make a killing.

It may seem counter-intuitive, but in some respects it was more intellectually challenging to tune in and listen to the pair on the Initiative’s webinar rather than yet another broadcast from the “podium of truth”.

TheCovid pandemic can be classified as a black swan event — more on that later.

And if a more dangerous variant emerges, it could have even more widespread effects.

But close to home, the Initiativeis highlighting the danger of an economic crash which could see asset prices collapse, businesses fail, and KiwiSaver funds and investment portfolios destroyed. Recent homebuyers may find themselves owing more on their mortgage than their home is worth, the organisation said.

The report’s authors say that government and central bank responses to the global financial crisis of 2008 laid the groundwork for the next financial crisis.

“With zero interest rates and money printing, asset prices have soared, consumer prices have risen and public debt has reached dangerous levels globally.”

Former Reserve Bank of New Zealand chair Arthur Grimes warns in a foreword to the report that there may be only a short time before the next financial crisis.

“Central bank actions through the pandemic … have placed New Zealand at greater risk of an asset price collapse with ensuing economic pain; the risk is heightened by the unsustainable fiscal and monetary policies globally,” he said.

Key who chairs a bank with a large mortgage loan book, did not think a major house price correction was just around the corner.

But in a webinar mid-week, he said, “the rapid rise in house prices is not sustainable and it can’t and will not continue.

“I don’t know that we’ll see a tremendously big correction. But I think the boom run’s over.”

Underlining Key’s concerns wereinflated asset prices, growing geopolitical uncertainty and debt levels which were “the ingredients to what could be a very dark time in our economic future, if we’re not careful or lucky”.

According to Investopedia, the classic definition of a black swan event is “an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.”

Here’s the unnerving point: “Black swan events are characterised by their extreme rarity, severe impact, and the widespread insistence they were obvious in hindsight.”

Just before the pandemic broke out, Faisal Khan, writing in the Data Driven Investor, identifies nine black swan events beginning with the Asian financial crisis of 1997.
They included: the dotcom crash (2000); 9/11 (2001); global financial crisis (2008); European sovereign debt crisis (2009); Fukushima nuclear disaster (2011); crude oil crisis (2014); black Monday in China (2015); and Brexit (2016).

The term was coined by Nassim Nicholas Taleb, a finance professor, writer and former Wall Street quant trader for 21 years, where he developed computer models for major financial institutions.

The GFC is the most significant event.

But back then, New Zealand had the comfort of a China blanket. In 2008, China’s books were in good order. Even though it was hit by a demand shock from its trading partners, it was able to move.

Yu Yongding, who was formerly a member of the monetary policy committee of the People’s Bank of China, has written that faced with the dramatic fall inGDP growth, the Chinese Government took action swiftly. “In November 2008, the Government introduced a Rmb4 trillion stimulus package for 2009 and 2010. The prescribed dosage of the stimulus was very large, at 14 per cent of GDP in 2008. In March 2009, the People’s Congress approved the Government’s new budget for 2009.”

The upshot was a huge fiscal stimulus that cranked China — and the region’s growth motor — into action so it could buy goods and services from other nations.

In 2009, Chinese investors also bailed out some Kiwi companies that were on the verge of collapse. But now, China’s own economy has been showing the strains, withconcerns about the fate of the property group Evergrande raising worries that a property collapse could occur.

Geopolitical strains don’t help.

Key has warned that China might not step up again to help New Zealand if the next black swan is a financial crisis.

“Maybe China’s not the life raft that it was in 08,” Key said.

If that’s so, New Zealand better get paddling in the right direction soon and start attacking debt levels.

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