John Bolton says it's wise to be prepared for the next financial crisis, whenever and however it comes along

John Bolton says it's wise to be prepared for the next financial crisis, whenever and however it comes along

By John Bolton*

Will there be a market correction in 2015?

It is a scary question and one for which I don’t have a reliable answer.

There will be a market correction at some point in the not too distant future. It is a natural part of our capitalist system. No amount of political meddling can prevent it, eventually.

The timing is hard to predict because politicians (and those reliant on maintaining the status quo) will kick the proverbial can down the road for as long as they are able. In effect a market correction (aka crisis) is inevitable. Bank economists never want to predict one and can’t. The market is driven by confidence so the bank’s can hardly show a lack of confidence even when the system is fundamentally stuffed.

What if the GFC was just the start? Could we see some sort of market correction in 2015 and if so, are you ready?

I can’t tell you when it will happen only that lots of big problems exist any of which could cause it. What I can do is help you be better prepared by acknowledging the risks.

Some of the things that could trigger the next crisis:

A Sovereign default in Europe (Spain, or Greece round 2);
Another bank default (probably in Europe);
Russian economic crisis;
Falling commodity prices (in particular oil price);
Chinese property bubble or shadow banking system blowing up;
Share market sell off similar to 1987 (starting in the US driven by just about anything and magnified by derivatives and synthetic hedging). And;
Emerging market crisis driven by a strengthening US dollar.

These are just the obvious triggers and it could be driven by something far less obvious.

Market corrections are in a way exciting because if you’re one of the few who are prepared then you can do very well on the other side of it. It requires zigging when others zag. It means ignoring ‘hype’ and it means largely ignoring our main stream media.

In a nutshell cash is king. From a property perspective, now is not the time to be over leveraged. You should be working to lower your loan to value ratio (LVR), not leveraging up to buy more property. Get yourself into a position to buy assets when prices fall.

So what am I doing?

Personally I haven’t bought an investment property for two years now. Doesn’t mean I won’t buy, I just haven’t seen anything that meets my criteria which is now firmly focused on yield. So, instead I’m finishing my property developments and selling down all of our development stock. It’s actually mostly sold down already.

The proceeds from this will go 100% into repaying debt. By the middle of this year I’ll be at around 30% LVR and intend to stay there. Any extravagances (like renovating the house) are on hold which Anna-Lisa (the wife) is not impressed about!

From a business perspective I’m continuing to diversify our revenue to make sure it is more resilient to a downturn. That means more reoccurring revenue streams, broader market reach, and flexibility around expenses. You may have seen in the media that we are in the process of getting licensed for peer-to-peer lending and are also looking at KiwiSaver. Both of these are about diversification as much as market opportunity. We’re also making our staff shareholders in the business. That’s about giving them a stake, but also making sure they understand cashflow.

Personally, I am moving my KiwiSaver into a low risk ‘cash’ portfolio. I’m happy for lower returns over the next few years for capital preservation. (That’s a personal decision based on my own personal situation … which is complicated. It is not financial advice. You should consult your financial advisor for personal advice on any shares or investments you have and on your own personal situation).

From a lending perspective I still have most of my personal lending with ANZ and are happy with that. I’ve split the business from my personal affairs so they are completely separate and I’ve set up around $600,000 of what will be available revolving facilities.

I’m also looking at bringing in external capital to Squirrel (possibly listing on the NXT Exchange end of 2015) to make sure we have a strong balance sheet to take advantage of growth opportunities as they arise. I want to use more equity and not borrow excessively.

My situation's different to yours

My situation will be very different to yours. For a start I’m heavily exposed to property through investments, development and through my businesses which are mostly property related. I have every reason to feel more concerned about where the market might go! I say might, because my view of the world could be completely wrong and there will be plenty who think so.

Hopefully, what you’ll see from the above is that I’m continually looking at growing the business and everything that I do, but at the same time making sure there is always plenty of fuel in the tank. Crises are a natural part of life. We don’t know when they’ll come and there’s no point stressing about them. It’s simply about being prepared and thinking through your game plan should one bite.

At the very least think about what you’d do, and what you can do to be better prepared. Don’t procrastinate and be prepared to make the difficult decisions now. If a property is a poor performer going forward, sell it! Equally don’t base your assessment of a property on what you paid for it. Assess it on what it is worth now.

What you do with your investments or your business are very personal things and specific to your situation. I’d highly recommend seeking out advice from a range of sources (accountant, business advisor, financial advisor … ) then make sure you have a game plan, and most importantly, execute it.

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John Bolton is managing director at Squirrel Mortgages. This item first appeared here and is used above with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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This article is spot on John but where would you put the proceeds of cashing up if all mortgage debt has been repaid so that you can avoid an OBR haircut? For those who don't know what that means banks in NZ are no longer govt guaranteed and you could simply have money taken from your term deposit account and you would have no say in it - Google "Open Bank Resolution NZ" if you want the full picture.

Or you can see our 'What might happen if the Reserve Bank's Open Bank Resolution Polcy was implemented' article here - http://www.interest.co.nz/bonds/64411/if-bank-failed-and-open-bank-resol...

Most likely that as interest rates plummet house prices in Auckland will continue to increase through 2015 quite significantly - there is always a surge in values prior to a bust and factors in play this time include net migration surge, exodus of Kiwis to Australia is now well and truly over, lack of new home construction in Auckland, 7% wage growth in 2014, Chinese influence, lack of stock on the market etc,etc. so quite difficult to choose the time to cash up property investments and then when you do where do you put your money to protect yourself from an OBR haircut, an equities slump and soon probably only get 3% for term deposits anyway. 

Another good article John.
 
I like the fact that you point out booms are always followed by busts - or "corrections" as you call them.  It's just a matter of when.
 
People forget so fast.  It wasn't that long ago that everyone (including the media) recognised the property clock and it's reoccurring cycle.  However for some reason many people (if not most on Auckland) seem to think the property clock has finished ticking and is now stuck at 12 o'clock forever.  Fat chance of that.  The clock never stays at 12! 

2001.  The symbolic hit on the World Trade Centre
7 years later 
2008.  The GFC.   Financial meltdown.   
7 years later. 
2015.  The year of the breakdown of individual nations currency.   Move towards a global currency.  
 

It's good to see a story thats not all about borrowing. (aka.  The New Zealand Disease)
Anyway.  What can you do with the assets in the imminent Crash ?
Cash ? Usually means a deposit, not actual notes and coins.  Will you actually get who you lent to, to pay you.  Maybe not.
Real estate ?  Could go down.  More likely in Auckland.  Look at oil and milk.
Shares ?  Been great.  Could go seriously bad.
What the heck do you do ?

Where do the Pros run and hide?
 

In property, steven

USD

Property is precisely the opposite to cash and liquidity.
.

A property is a good asset when borrowing against it (used as equity), but as soon as the Minsky moment appears properties will be impossible to sell unless willing to lose a lot.

There is no really where to hide. Maybe Swiss francs at negative interest. Personally I'll keep liquid savings in low leveraged NZ banks.

Is there any way to see what is each bank's exposure to the property market?

Government bonds (assuming the crash is not because of rising bond yields)
 

You say cash is king but what about the OBR??????
I suspect that the only thing which resembles a king are kiwibonds..... Or possibly, to a lesser extent a Kiwibank term deposit.

I wouldnt gamble kiwibank is safe especially as its small-ish. 
 

smallish can be good.

The Swiss move on thursday just about took out FXCM, they're the largest open FX trader.

Hi John, i agree with you.  Id like to also add that it wasn't so much the GFC that caused so much stress for people.....  It was the new cars and the Gold Coast holidays they took annually in the years preceeding it.   Regardless of whether you are in property or party planning; preparing for a rainy season is never a bad thing!