When my financial planning career began in 1987 I really had no idea about the workings of markets.
There was a share boom happening at the time and the ‘entrepreneurial’ sector was the darling of the market — names like Christopher Skase, Alan Bond, Laurie Connell and other lesser-known entrepreneurs. As a young man who harboured dreams of creating wealth, I revered the achievements of these ‘businessmen’.
The 1987 share market crash was my first lesson in how markets work. Booms always bust. After the 1987 crash the entrepreneurial sector returned to earth with a thud and in the cold light of a market bust the antics of these so-called businessman were laid bare. Skase became a fugitive and Bond spent time in jail.
With hindsight it was all so obvious to a novice planner what had happened but prior to the 1987 crash there was hardly a dissenting voice among the mainstream media and investment institutions.
I have observed this pattern repeating a few times throughout my career in financial planning – the property trust boom and bust of the early 1990’s; the tech boom and bust of late 90’s/2000 and the sub-prime debacle.
During all these periods, the majority of so-called market experts (mainstream economists, investment institutions and market analysts) never picked the ‘bubble’ conditions that were developing.
In their professional opinion we would always have ‘a soft landing’. No-one wanted to upset the apple cart of fees by calling the conditions for what they were.
A ‘bubble’ is when too much money flows into one market sector and over-inflates the value of that sector. Consequently, as the temporary wealth effect of the bubble spreads, it lifts the prices in other asset classes.
For example the sub-prime lending fiasco initially inflated US house prices. Householders felt wealthy so they borrowed against the assumed wealth stored in the value of their home and invested in the share market.
Again, with hindsight everyone is wise to what happened and why. There were those who predicted the meltdown in the sub-prime sector but their voices were drowned out by the noise of the boom. Even the highest financial authority in the world, the Chairman of the US Federal Reserve, scoffed at the naysayers.
To give you an analogy, imagine you are at a great party and it is really pumping – music blaring, people drunk and having a really good time. Now imagine a lone sober person entering the party and wanting to remove the alcohol and turn down the music.
How popular do you think that person would be? Do you think the people at the party would be happy? No. Do you think the pub supplying all the alcohol would be happy? No.
The same holds true for ‘market parties’. Investors become intoxicated on the instant hit of wealth. The investment institutions that sell this much-desired wealth product sure as hell do not want the party to end and ruin their bonuses.
What I have learned is that the advice of experts and commentators who have a vested interest in keeping the party going or getting it restarted (after the boom has busted) is not worth the paper it is written on.
Economists who are employed by banks, stockbrokers, investment institutions, high-profile financial planners, market analysts and mainstream media economic commentators are vested in perpetuating the good times. There is little value in standing on their shoulders as you will not see much further than the rest of the herd.
for The Daily Reckoning Australia