Predicting the Unpredicable

CONVENTIONAL economic wisdom says that when interest rates are lowered people are encouraged to borrow and spend more. Then again, conventional economic wisdom hasn’t been working that well of late.

Around the world, governments have dropped interest rates to (basically) zero and printed money in an attempt to fire up their economies. At best it’s been a failure, at worst it’s pushed places like America closer to defaulting on their debts.

What gives?

Consumer spending drives around 60 per cent of our economy. So if consumers and businesses become worried about the economy they spend and invest less – regardless of what economic models suggest they should do – and it becomes a self-fulfilling prophesy.

Yale professor Robert Schiller is one of the world’s leading lights on the study of so-called ‘behavioural finance’. And he’s used it to accurately predict both the top of the dot.com boom and the peak of the housing market in the US.

Schiller’s research explains why bad news in the media (like out-of-control government debt) becomes a discussion point at the pub, it has real long-term effects that can’t be measured by conventional economic models.

And right now, all around the world, debt is a four-letter word.

While politicians in Australia continually assure us we’re much better off than anywhere else, let’s be honest: we don’t exactly have a lot of faith in any of them. Our collective conversation increasingly seems to be that we’ve got some of the highest levels of household debt in the world, severe housing unaffordability, and rising costs of living.

In the US, housing prices have fallen for five years straight, despite the fact that you can get a 30-year fixed housing loan for under 4 per cent. In short, when people see property prices falling they hold off buying, regardless of how cheap the debt is (the buying is left to overseas ‘bargain hunters’ from Australia and elsewhere).

As I said last week, the period of deleveraging from our debts will be painful for people who haven’t woken up and seen that the cycle has changed – but it also promises to be one of the great opportunities of our lifetimes to buy great assets at bargain prices.

Or as the famous investment contrarian Warren Buffett says: “You can’t buy stocks when everyone else is and expect to get rich.”

Tread Your Own Path!