How to prepare your finances for the next global financial crisis

Wednesday, 18 April 2018

Households and businesses can do things in good times that strengthen their financial resilience.

The spectre of a second global financial crisis haunts investors.

The UK's Ann Pettifor, who predicted the first GFC, was in New Zealand earlier this month, predicting a sequel.

The foundation of her fears is that a mega-crisis was only averted following the GFC in 2007-2009 by creating a massive amount more debt, and that another GFC was due, and this time central banks' box of tricks is empty.

Her chilling prediction raises questions about whether households can do anything to increase their financial resilience in case Pettifor is right.

* We're back to where we were before the GFC, and doomed to repeat history

IMPOSSIBLE TIMING

When it comes to trying to win big on the wealth front from predicting a fresh GFC, you have to not only be right about it happening, but you have to be right at the right time.

Ann Pettifor, who predicted the Global Financial Crisis, and is now predicting another.

People who thought a second GFC was nigh at the start of 2017, missed out on double digit returns on many share funds, Jeff Matthews from Forsyth Barr said.

'Nobody rings a bell to say when it is time to sell, and when it is time to buy again,' he said.

Those who turned their backs on risky investments like shares after the GFC had missed out on 'nine phenomenal years', Matthews said.

Pettifor provides a case in point.

She recalled that a relative bought a London flat in 2014. She was dead against it.

Prices have since skyrocketed.

Had the relative followed her advice, they'd be a deal poorer now, though the debt that funded the purchase is still there, she says.

New Zealand investment adviser Louis Boulanger said it wasn't possible to predict when the next global crisis would be.

'You can't. Absolutely,' he said.

Whenever a financial crisis is expected, 'gold rears its ugly head', says investment adviser Jeff Matthews from Forsyth Barr.

Like Pettifor, Boulanger doesn't believe the current debt-fuelled global economic system is sustainable - and nor are the asset prices that it, and low interest rates have helped create - but there is so much manipulation by politicians and central banks that it's anybody's guess when the next crisis will come.

'There are very few, if any free markets,' Boulanger said.

TRIM EXPENSES

Many of the things ordinary households can do to prepare to boost their financial resilience are things that take time to achieve.

These are things like aggressively paying down debt on the household home, and building up emergency cash savings to call on in the event of an income earner losing their job in a recession.

But households can act now to cut expenses.

In a financial crisis households do tend to cut their spending, showing it can be done.

First thing to go in a crisis is spending on big ticket items like cars, whiteware, and home renovations.

Matthews has invested through a lot of market ups and downs.

The best time to cut expenses, however, is in the good times, when disposable income can be used to maximum wealth-building effect enabling both investing, and reducing debt, to build family financial stability.

EMERGENCY SAVINGS

Over the past four years, as many have pondered the likelihood of a GFC mark 2 emerging, bloggers, journalists and money experts have published lists of how to prepare your finances for the next big one.

One common tip is for households to build their emergency savings.

In a global financial crisis economic activity contracts leading to job losses. Having savings means households whose incomes are disrupted can continue to pay the bills for a time.

For those with investments, it can mean something else too; not having to cash up investments at a time when prices have fallen. An owner who can hold onto them is able to recoup losses should there be a rebound in prices when (if) the crisis abates.

Having cash available also provides an opportunity. It can be spent buying new investments at bargain prices.

Matthews owns shares in renowned investor Warren Buffet's Berkshire Hathaway investment company. Following the GFC, their value plunged. Matthews did not sell. He actually bought more. The price recovered, and then raced away.

THE LONG TERM

If ordinary people couldn't predict when a GFC would happen, and when it would abate, the sensible thing was to invest for the long term, and try to look through any crisis that emerged, Matthews believed.

'In the long term people get rewarded for taking risk,' said Matthews.

Matthews said some forecasters were forecasting a global recession in 2020.

If true, that would give households the rest of the year to take steps to build their financial resilience, but taking a long-term approach would argue for people leaving their KiwiSaver in growth-oriented funds, if they were still a long way from retirement.

Taking risk off the table was not always straightforward.

Shifting from a growth KiwiSaver into a conservative KiwiSaver reduced exposure to shares, but conservative funds were heavy in bonds. Bonds tended to rise in price as interest rates fell, and lose value when interest rates were rising, as they are now.

Having a long-term investment plan enabled people to 'take the emotion' out of investing, Matthews said.

CUT DEBT

Consumer debt carries an obligation to pay the lender, regardless of whether the borrower loses their job.

It can be a serious barrier to cutting costs in a crisis.

Repaying debt increases a household's financial resilience in a crisis

It isn't, however as important as maintaining employment income through a crisis, which means keeping skills up to date, and remaining relevant at work, or in command of a business able to weather an economic downturn.

Credit insurance is costly, but can fund repayments should a borrower be made redundant.

Like consumer debt, mortgage repayments are an obligation that must be met, crisis or no crisis.

Taking on debt in a boom, or the aftermath of a financial crisis, can result in massive wealth gains. All else being equal, households with lower mortgages, and more equity, are more financially resilient than those with higher debts, and less equity.

BUY GOLD

Boulanger believes investors should put some money aside 'outside the system', which he sees as unsustainable.

By that he means investing in gold and silver bullion, the real stuff, not financial promises linked to the precious metals.

Some might see owning gold as akin to taking out insurance, but Boulanger believes it makes good long-term investment sense alongside of a more traditional investment portfolio.

Hold that gold, he advises, and wait for its value to rise as the unsustainability of the current system is revealed in crisis.

How much money to set aside (outside the system) depended on client circumstances, needs, preferences and risk tolerance, he said.

His 'strategic advice' to all clients is to maintain two portfolios: an investment portfolio, broadly allocated between financial assets (shares, bonds, etc) and a saving portfolio of gold and silver bullion bars held in insured storage.