Editorial: Finance world spins on a different axis

Mark Dawson, Editor of Wanganui Chronicle

"THE New Zealand sharemarket, which finished last year on a record high, ended the first trading day of 2016 [Tuesday, January 5] down just under 1 per cent, as concerns about world growth sent major markets sharply lower."

This, from yesterday's New Zealand Herald, was among a number of stories on television, online and in print awash with anxiety about share values plummeting around the world, particularly in China.

Should you worry? I found the price of milk and bread at the supermarket that night unchanged from the night before, and heaved a sigh of relief.

Sometimes it seems the world of stockmarkets and financial agents comes from a different planet. Isn't it a big game that a select group of young men in loud shirts, and older men in sober suits, play to keep themselves in loud shirts and sober suits?

Does the Shanghai Composite Index slumping to 3254.12 (as it did on Tuesday) matter in the real world where the rest of us live?

The answer is sort of yes and no. We are largely unaffected as the stockbrokers spin their roulette wheel. But, every now and then, the impacts can be serious for the man in the street.

One problem is the flawed fundamental theory underpinning market activity - that financial markets are efficient and will correct themselves over time.

Most people do not invest directly, relying on a fund manager or similar to look after, say, their KiwiSaver funds. These financial agents indulge in momentum investing (following a rising stock), and short-termism (particularly if they can earn performance fees) which results in mis-pricing, bubbles and crashes.

They also look to maximise profits through constant innovation of complex products, lack of transparency and fee structures that encourage gambling.

In the wake of the 2008 global financial crisis, Dr Paul Woolley, British financier, International Monetary Fund economist and academic, said: "Financial agents lie at the intersection of the savings and investment process for the entire economy.

"It follows that they have the potential to extract the bulk of the returns from the entire productive economy. They can bleed the economy dry."

You have been warned.