This World Cup has been a real banger.
Some great goals. Scandalous calls. Rumours that Neymar is still rolling about on the pitch.
We’ve seen several underdogs upset crowd favourites like Brazil, Argentina, Germany, and England.
The final, which will be this Monday morning at 3:00am in New Zealand, is sure to be a good one: France versus Croatia. Mbappe versus Modric.
Now I’m no betting man, but I hear the odds are decidedly in France’s favour. In two-way betting on which team wins the title, France is -210 and Croatia is +175.
But maybe that shouldn’t sway you.
The statisticians have done poorly this year. Check out this tweet from Tom Pair for example:
Source: Twitter @TomPair2
Tom’s point is a good one. Despite some of the best forecasting software in the world, financial giants like UBS and Goldman Sachs can’t seem to get it right.
There’s always room for error. Room for upsets. Room for surprises.
Deadly déjà vu
Does this sound familiar?
Neither UBS nor Goldman Sachs could foresee the Great Financial Crisis (GFC).
UBS lost over €50 billion in the crisis.
Goldman Sachs needed over $17 billion in bailouts just to survive.
And they weren’t alone, very few people got it right.
How did legions of financial analysts, and the world’s most ground-breaking software, get it so wrong?
In hindsight, we can look back and see that it was mostly a combination of blissful ignorance and greed. The banks chose not to pay attention to the red flags. Instead, they doubled down…opening the gates for new profit generators e.g. subprime mortgages.
Central banks weren’t without their share of the blame either. After the dotcom bubble, they pushed rates down to basement-bottom lows. They oversaw and essentially endorsed the greedy behaviour of the banks.
And consumers like you and I took the bait. We spent and borrowed. We bought houses and drove prices through the roof.
We listened to the mainstream pundits who claimed we had finally hit the never-ending bull run.
Here are a few of my favourite quotes from before the crisis:
‘“Housing bubble” worrywarts have long been hopelessly confused. It would have been financially foolhardy to listen to them in 2002. It still is.’
Washington Times, 2005
‘Housing bubble? What housing bubble? The signs are in place for a further run-up in real estate. Breathe easy, mortgage holders. There’s still no place like home.’
Jim Cramer, 2003
‘Home prices have been rising strongly since the mid-1990s, prompting concerns that a bubble exists in this asset class and that home prices are vulnerable to a collapse that could harm the U.S. economy… A close analysis of the U.S. housing market in recent years, however, finds little basis for such concerns.’
New York Federal Reserve, 2004
‘All the bond bears have been dead wrong in predicting sky-high mortgage rates. So have all the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market.’
Larry Kudlow, 2005
‘There is not a housing bubble. The supply had not kept up with demand.’
New Zealand today
You’d have to be blind to miss the similarities between pre-GFC America and today’s market in New Zealand.
Interest rates are low. Housing prices are skyrocketing. I can’t tell you how many people have told me that prices are due to ‘supply not keeping up with demand’.
Kiwis, particularly millennials, are borrowing far beyond their means.
The IMF issued a warning in April, provoking independent economist Cameron Bagrie to say:
‘Household debt levels are high and that is a vulnerability across New Zealand….
‘It’s really important because historically New Zealand tends to go a little bit too hard for too long at the top of the cycle. And if you go too hard for too long at the top of the cycle, it tends to require a visit from the Grim Reaper.’
He’s right. Market cycle theory suggests that people tend to get over-zealous towards the end of a bull run, which triggers a downturn — the Grim Reaper.
In New Zealand, this zeal is showing up most clearly in the housing market. People are confident. They expect the market to keep climbing. Maybe forever!
And they want to claim a slice of the housing pie…even if that means over-borrowing.
What happened when people did the same thing in 2004–2007?
They got burned. Many experienced default, unemployment, even homelessness. And that’s what could be in store for many Kiwis when this bubble bursts.
My advice? Be cynical. Question the party line. Keep an eye out for red flags.
We’ll do our best to do the same.
Editor, Money Morning New Zealand