The Party Is Over For Stocks, Bonds and Real Estate


This is a copy of the Article I wrote for the National Business Review that appeared on 11 October 2013.

The Party is Over

Take a step back and ask yourself this simple question: “Why are so many investment asset classes at or near all time highs?”

US stocks, the NZX50, Australian stocks, UK stocks, government bonds, corporate bonds, residential real estate, commercial real estate etc, heck even the Iran Stock Exchange – are at all time highs. This is spectacularly unusual when you consider some other all time highs: US indebtedness, US poverty, and European unemployment.

But the reason is simple: coordinated international market manipulation. Let me explain.

After the GFC in 2007-2008, the US Federal Reserve (“the Fed”) made a momentous decision. After years of excess credit and excess consumer spending, we had the inevitable collapse in asset prices, and the freezing of credit markets. The Fed could have, and should have, allowed the age-old economic boom and bust cycle to clear out the dead wood, and punish those who overspent and took excess risks. Instead the Fed decided to bail out the over-spenders and excess risk takers by savagely cutting interest rates. By necessity, every other country in the western world followed suit.

Since 2008 the world has enjoyed the lowest interest rates since the 19th century. The only single exception was a brief period during the Second World War. Right now you can fix your mortgage at 4.94%. That is a rate not even dreamed of by anyone alive right now in New Zealand – or their parents.

The US effectively cut interest rates to zero. New Zealand didn’t go quite so low but the RBNZ cut rates from 8.25% to 2.5% in just eight months in 2008-2009.

When you have ultralow interest rates, there are a number of economic impacts:
•    businesses can borrow at very low rates to make capital expenditures, and operating expenditures which stimulates all areas of the economy;
•    businesses with large levels of debt can refinance at much lower rates;
•    households with excess consumer debt and large mortgage debt can refinance at hugely more affordable levels;
•    individuals, companies and investment funds can borrow cheaply to invest in appreciating and income producing assets.
This is exactly what we have seen around the world since 2009 – easy credit, more risk, overspending, and massive rises in investment asset prices.

Here is the key to understanding international money flows and asset allocation:

Money flows around the world seeking the highest possible return for the lowest possible risk.

So when you see price changes in oil, gold, commodities, stocks, bonds, real estate or anything else, it reflects precisely the market participants’ views on obtaining the greatest return for the least risk. The problem is, higher asset prices become a magnet and a self fulfilling prophecy, long after the economic value of an asset has been fully priced. To be clear, the views of market participants are frequently wrong, which is why after a boom, there is a bust.

So here we are just five short years from the fear and the staggering losses of the 2008 credit crisis, enjoying stock market and bond and real estate prices at record levels.

But here is the kicker, market participants think these asset prices are the “new normal”. They aren’t. The asset price gains are simply the result of a massive and manipulated reduction in interest rates. And it’s coming to an end.

Very few people accept that, because almost all of us suffer from two psychological biases – recency bias and anchoring. These biases cause us to anchor our price expectations to recent prices, rather than viewing them accurately in a historical context. Let’s see if you are a sufferer. The NZD USD exchange rate is currently around 0.8300. Before you read on, guess what it was four and a half years ago.

In March 2009 the rate was below 0.4880. The NZ dollar is currently 70% higher than it was just four and a half years ago. Very low interest rates in the US have made the NZ dollar much more attractive because our 2.50% is a lot more than the 0 to 0.25% rate in the US. And in an ultralow interest rate environment, everyone is rewarded for taking on risk assets, including commodity currencies like the NZ dollar.

We have had a manipulated asset price boom for the last four and a half years. It’s almost over. Change is already in the wind.

In June this year the Fed merely mentioned that their interest rate manipulation (called quantitative easing) would be diminished, if economic indicators continue to improve. They called the start of this gradual process “tapering”. Simply the whisper of the beginning of removing the stimulus caused the markets to wobble. Bond prices tanked, stocks fell, as interest rates ticked up. That was just a small taste of what is to come.

The latest market expectation is that the Fed will start tapering in December this year, and remove all stimulus by the end of next year.

Asset prices are artificially and unjustifiably high – stocks, bonds and real estate especially so. Now is not the time to load up on assets at prices that have been artificially inflated. In fact, now is the time to sell.

Yes, if you sell now you will probably be early. The interest rate cycle is more like a battleship than an America’s Cup boat – it takes a while to turn around. But once it starts turning, it’s not coming back. And if you wait, you will be caught like everyone else, running for the exit at the same time.

I have been a property investor since 1990. I have also been trading the financial markets seriously since January 2007. My average annual trading return for 2007 to 2012 was 47.17%, so here is some practical advice:
•    don’t buy real estate investments, and sell any that are negatively geared;
•    fix your mortgage while interest rates are still low;
•    underweight stocks and stockpile cash;
•    sell out of bonds. When interest rates go up, as they are about to do, the price of bonds go down;
•    companies requiring finance should issue bonds and/or obtain long term fixed loans as soon as possible;
•    don’t borrow to buy any non-productive assets, or to fund your lifestyle;
•    depending on the timing of the RBNZ increasing interest rates and the US tapering, the NZ dollar is likely to fall heavily in 2014. Other “risk on” currencies like the Australian dollar and Asian currencies are likely to do the same. Reduce your exposure;
•    emerging market stocks and currencies that have catapulted higher since 2009 because billions of dollars have flowed there in the last four years, will come down with a crash when those flows are reversed. Reduce your exposure.


Get ready for higher interest rates and put away your decorations. The party is over.


Oli Hille



  • Peter Kay says:

    I agree. I don’t think it’s a matter of if but when.

  • javier says:

    hi! Olie.

    What do you think is gonna happen to Nasdaq, S&P and DJ when this party gets over (and the dollar may falldown)? Are they gonna shoot up or down?, and the same cuestion with gold.

    and when do you spect this party to get over?

    I bought a book of yours but this trading thing is so deep.


    • admin says:

      Thanks Javier

      As a trend trader I will be ready when the trend changes to down! I’m not going to predict the date. Let me quote Yogi Berra “It’s tough to make predictions, especially about the future”.

      Oli :)

  • D A Willard says:

    Right On Oli
    I have read the same from a well healed economist
    Except he did not explain how to protect yourself

  • gold says:

    what about gold, commodities and the underlying equities? gold stocks have been beaten down now for over 2 years, pretty cheap.

    • admin says:

      With interest rates set to go up and gold have zero return, gold will be less attractive. However if the world goes off the cliff (not what I am suggesting) then yes gold will be the thing to own!

      Oli :)

  • Rod says:

    Tut, tut Oli, you’ve been reading Bob Prechter’s news letters again!

    However, the advantage of doing that is, he’s right!

    A lot of money to be made on the downside, very soon.

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