Bubble-ology - Context and pedigree are vital

Over recent days the New Zealand media has been awash with commentary on a column written by Jesse Colombo- a self proclaimed 'expert' on economic bubbles.  The column was  published as a contribution to the online edition of Forbes magazine.  12 Reasons Why New Zealand's Economic Bubble Will End In Disaster. 

This article was published on www.stuff.co.nz on Saturday and was followed by commentary in all the major New Zealand media.  Here is a sample of the coverage:

NZ bubble 'going to burst',  NZ economy set to crash, says expert,  Brian Fallow: Four reasons not to panic about a property bubble

So, the question is 'Just because it was covered in the media, does this mean it is true?  Does this mean we should take this as gospel?

What is context and why does it matter?

Context provides the framework that information has been considered within. It provides reference points to understand the commentary.

To illustrate, I suggest that we look at Body Mass Index (BMI).  This is a commonly used calculation that works out whether people are overweight or obese.  Based on this statistic, Richie McCaw and many of our All Blacks are obese. (McCaw tips scale at 'obese'). 

Therefore, if you are looking at the numbers (the statistics) only, you would say 'my goodness, that man needs to lose weight quickly - he is so young, but so overweight!.  BUT, if you look at the statistics in context, you would be able to understand that he is a professional athlete, that pretty much all of his 1.88m is made up of muscle and not fat.  This would give you a quite different interpretation of the statistics.

If we now look at economic and investment statistics, it is easy to make up any interpretation of numbers if that is all you are looking at.  Jesse Colombo has achieved a measure of fame by doing this.  However, if you look at these statistics in context you can end up with an entirely different interpretation of the situation.

Here are some examples of why further research behind the numbers might have lead to a different conclusion:

1. In the USA many mortgages are 'non-recourse' loans.  This means that if the loan owing is more than the property is worth, the owner is not responsible for the shortfall and can hand the keys back to the bank and walk away.  This leaves the debt with the bank.  This isn't the case in New Zealand, where the property owner remains liable for any shortfall personally.

2. In the USA there are many tax deductions available in relation to your personal home.  In New Zealand in general there are none. However, in New Zealand it could be said that there are distortions in the tax system that lead to an over investment in investment property.

3. While our property market appears to be highly overvalued (in comparison to our average income and ability to service our debt, and by many other measures), there is also a mismatch between supply and demand (in Auckland and Christchurch in particular) -.13 11 RBNZ A Closer look at supply and demand of housing in NZ

4.  New Zealand commentators have been warning about the 'housing bubble' bursting and bringing calamity for many years.  While it did take a backward step in 2007 - 2008, New Zealanders do seem to have a strong 'love affair' with property ownership and property investment.  This is aided by our unique situation and history with the 1987 sharemarket crash, finance company crashes and our level of financial literacy.

These are just a handful of factors that need to be taken into account in any rigourous and respected analysis of the base numbers.  There are a number of other factors that other commentators have raised in various media articles over the last week.

The important point is 'all information has to be considered in context.  Statistics are just numbers - they don't speak for themselves'.

This leads on to how you can sort out who to listen to and who to only give fleeting attention to.

What constitutes  an expert these days?

Historically the commentary that received coverage in our media was from people who had attained the status of 'expert' through experience, or academic achievement.  However, with the rise of social media, any person can be considered an 'expert' if they publish enough information.  Does this mean that we should listen to everyone?  No.

It is more important than ever to understand the context of any commentary that you read or hear.  To understand what research that commentator has done.  What experience do they have?  Are they a blogosphere expert, or do they have a proven track record of considered opinion?

What is their expertise?  Who has recommended them? What have they achieved that means that we should listen to them?

The legal, medical and scientific communities have a long history of identifying 'who is an authority'.  This is based on published peer reviewed research and achievements.  Unfortunately, with the economic and investment environment, there are a wider range of people who commentate, and it makes it more difficult to work out who is worth listening too.

To work this out takes quite a lot of research and time.  Just because someone is published somewhere - this doesn't mean that they are automatically an 'authority'.

At Moneyworks, we spend a lot of time studying the available information and looking at the source and context of commentary.  This is a key part of our work on your behalf. However, this doesn't help you when you see a newspaper report. So here are some tips and thoughts to consider:

1. What academic qualifications does the commentator have?  Please note that some very experienced respected commentators don't necessarily have any academic qualifications, but as more people achieve academic qualifications this is becoming a baseline.  Just having a qualification is not necessarily an indicator.  The institution that it is received from and the level of achievement (Undergraduate, Honours, Masters, Doctorate) can also give you some tips.

2. What experience does that person have?  For example, we are extremely reluctant to use a Fund Manager who hasn't had extensive experience in a large institution.  Experience does matter.  I can remember that in my mid 20's flush with a Degree in Economics and post graduate Diploma in Applied Finance, I thought I knew lots of the answers. I believe that this is a common characteristic of people at this age.  But now that I am twice that age, I now realise how much I don't know, and that I have to research.  Experience does matter.

3. What references does that person have?  Where are they published?  Are they a blogger, or a 'contributor' or are they are regular columnist in a respected publication (eg Fran O'Sullivan and Brian Gaynor in NZ Herald.)

There are many other tips that will be personalised to the situation.

For our clients, if you read something that concerns you, or that you wonder about - we recommend that you contact us (as a number of our clients have over the 'bubble' articles) and get our opinion on how that will impact on you and your investment portfolio.  Remember, we are continually reading, listening to and researching a wide range of commentary and we understand how such comments fit in with the overall environment.

If you have any more questions on the 'bubble-ology' story, or how to work out what comments should be considered word or word and which might be able to be discarded, please don't hesitate to contact Carey or Peter.

If you have any thoughts or opinions that you would like to share, visit us at our Twitter, Facebook or Linked In pages, and comment.


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