Liam Dann: Who's swimming naked as tide of easy money goes out?

When the tide goes out, what will it reveal about you and your investments? Photo / Getty Images

OPINION:

"Only when the tide goes out do you discover who's been swimming naked," sharemarket legend Warren Buffett once said.

I hope I'm less prescient than Herald columnist Brian Fallow, who opened with that same line in August 2007.

The old adage seems suddenly relevant again.

Fallow was writing about the credit crunch, an early warning sign of what eventually blew up into the 2008 Global Financial Crisis.

The line itself is so old that I can't find any reference online to when Buffet first said it.

But the 91-year-old was on stage last weekend at the annual Berkshire Hathaway shareholders meeting delivering much the same message.

Buffet (who admittedly grew up in a more modest age with regard to public nudity) means that a high tide of cheap credit and bull market growth makes us all look good.

When the tide goes out, it exposes the reckless and unprepared.

The tide is now going out. And it's going out fast.

So, crash, slump, correction or bust? Call it what you want, it is happening.

All the market noise is just the sound of central banks sucking cash out of the economy.

In 2008, when the global financial system froze, people complained there was no warning.

That may have been true to some extent, although, as Fallow's column proves, anyone reading the business pages had several months' warning.

This time the problem is not so much the lack of warning, but that there have been so many warnings for so long people have stopped listening.

The credit crunch in 2007 and the market crash in 2008 were different to what we'd seen before.

The markets froze then as confidence evaporated in complex new debt derivative investments.

Central banks slashed interest rates and printed money to head off the total collapse of the system.

This time around, markets are faltering because central banks are hiking rates fast to beat inflation.

It's actually a more traditional economic cycle. But it's one we haven't seen for decades because of the weirdness of the GFC.

The return to more normal pricing for debt should have happened years ago but recession risk kept delaying the rebalancing.

It was finally getting underway - and might have proceeded in a more orderly fashion -when the pandemic hit.

Faced with the threat of economic and social meltdown, central banks and governments everywhere prescribed the same stimulus medicine.

In hindsight, the stimulus was overdone. Although I'd still rather have had it than not.

Those pointing the finger of blame now seem to have short memories and an inability to distinguish hindsight from foresight.

They also invariably undervalue the social importance of maintaining low unemployment - which the stimulus achieved.

I suspect the tide will go out for every asset class in the next year.

My teenage children, who have mates trading sneakers online, argue that limited-edition Nike Air Force 1s will never lose value.

Maybe the sneaker market is the inflation-proof safe-haven investors are all looking for.

I doubt it, but I'm interested to watch just how far the great re-balancing spreads.

Cryptocurrencies and NFTs are already under pressure.

Where is the big risk for New Zealand? Surprise, surprise - it's property.

Sharemarket falls aren't great for our KiwiSaver funds but they won't rip through our economy the same way a property crash could.

In 2008 and through the subsequent few years, the GFC took a terrible toll on the property sector.

The total collapse of property-leveraged finance companies was a disaster for investors.

New builds stalled and lack of supply led us to the next housing bubble.

Boom, bust, boom, bust ... it's a cycle New Zealand needs to shake.

There should be a safer regulatory environment now but there are still storm clouds gathering over the construction sector and, to some extent, residential property.

You can bet Warren Buffett's togs are securely fastened. Photo / AP

Last week, Stats NZ figures showed building consents hitting another record high above 50,000 for the year to March.

Last week we also saw a Wellington property developer going into liquidation.

Supply issues and building-product inflation risk creating delays and cashflow issues for developers.

Those issues will create serious problems for those with high debt as rates rise and banks get tough on lending.

Residential property, where most New Zealanders have their largest investment, should hold up better because of the handy utility the sector has - people like to buy houses to live in them.

So I don't think we'll see a house price crash.

But the forecasts are for a sizable correction - as much as 15 per cent across the next two years according to Westpac's latest report.

That's still dramatic for a market that has grown accustomed to double-digit growth.

The Reserve Bank last week presented a range of scenarios, including "worst case" of a 30 per cent crash.

I'm summarising the finer points of the RBNZ Financial Stability Report here but it's accurate to say they think this would be very bad.

Here's hoping New Zealand is better placed to handle the down cycle this time. And here's hoping the cycle itself isn't as bad as last time.

If it's short and sharp and deals to inflation, then we should count it as a win.

It bears repeating: the pandemic did not make the world a richer place.

So wherever it may have inflated paper wealth - your house price, your KiwiSaver or even the cash in your bank account - expect to see a rebalancing.

Hold onto your togs - the tide is going out.