Maximum Pessimism Here In New Zealand

You could even call them despondent. The New Zealand Institute of Economic Research’s latest Quarterly Survey of Business Opinion shows 71% of New Zealand businesses expect a downturn in the next 12 months. It’s the worst number in 35 years. Other surveys showed similar results, so it looks to be pretty close to true.

To make matters worse, New Zealand’s people are tapped out...

You can’t blame New Zealanders. Their sins are the same as everyone everywhere else around the developed world. In short, New Zealanders binged on property...

In 2003, real estate across the country was up by 25%. More desirable areas have more than doubled in just a few years time. New Zealanders caught speculation fever in property. Folks here went on a borrowing binge, taking equity out of their homes, and heading to the store to buy stuff.

The borrowing and spending binge has just been ridiculous... In a recent paper, New Zealand’s central bank said: “Households in New Zealand do not actually save anything out of current income but instead dis-save around 12 per cent of income per annum. New Zealand households stand out as having the worst savings record in the [developed world].

Generally, at a point of maximum pessimism like this, it’s time to acquire assets. But after such a borrowing-driven real estate binge, a fall in real estate prices of some sort seems almost inevitable. Real estate is not a buy here, yet. We’ve got a few years to go before it is...

In addition to New Zealanders being tapped out, another risk to real estate is interest rates... New Zealand’s central bank has been pushing up rates incredibly high... It’s to the point now where the interest rate on an adjustable mortgage in New Zealand now averages 9.5%.

New Zealand’s central bank has got its work cut out for it... Between the commodity price boom, the housing boom and the subsequent spending boom by New Zealanders, the central bank has been hiking interest rates to cool things off.

The central bank has raised interest rates to 7.25% -- the highest in the developed world (with the exception of tiny Iceland). High interest rates in a safe country usually end up attracting money from investors.

Analysts are incredibly bearish on New Zealand’s currency... in the latest issue of New Zealand Investor magazine, the Bank of New Zealand predicts the currency will crash from current levels of about 66 cents versus the dollar down to 56 cents by June of 2007.

Everyone is hoping for and predicting a fall in the currency. Before Christmas, Finance Minister Michael Cullen and Reserve Bank governor Alan Bollard toured the financial capitals of the world talking down the New Zealand dollar, discouraging people from investing here.

I’m not so sure it will fall like everyone wants. The central bank was very specific about this in its latest statement, saying “Certainly we see no prospect of [cutting interest rates].”

With unanimous sentiment against the New Zealand dollar, and high interest rates here, parking some short-term money in New Zealand for the rest of this year is a contrarian idea that could make you some real money. (My father’s firm www.keywp.com and Everbank www.everbank.comcan help you do this.)

As for New Zealand stocks, well, I have more work do to here on the fundamentals. But it’d be hard to convince me to buy right now, as they just hit lows not seen since March 2004 (as measured by the MSCI New Zealand index).

Summing up:

1) The New Zealand consumer is tapped out, or close to it. There’s no hurry to buy property here now

2) Interest rates here are incredibly high for a developed country, and everyone expects the currency to crash... so earning high rates of interest safely in New Zealand might be your best bet.

3) Stocks here might be getting cheap, but the downtrend in stocks here is downright scary now. While there’s more work to do, I don’t want fight that downtrend. It’s against the way we buy in my newsletter True Wealth.

I have to keep hunting for opportunity. You can’t have a point of maximum pessimism, and not find a great opportunity. So I’ll keep looking...

That’s all for now from Kiwi land...

Good investing,

Steve