Is the market turning turtle?

Traders in every commodity and marketplace are constantly attempting to predict  the future direction of the market. Some, such as traders at Deutsche Bank, take predicting a little too far and actually manipulate the market. But, for most of us, we are simply trying to gather data, ascertain emotions, and predict direction and turning points.

And so, the question – Is our market about to turn turtle? Or are we experiencing the reverse of the “dead cat bounce”?

We have written previously about the evidence proving the “dead cat bounce” in various industries. Essentially, just like a bungy, or a dead cat on a rope, when the market appears to reach bottom, it bounces, often several times, before settling.

Could our current market be in the reverse of this?

Bouncing off it’s highs, or lows if you talk in yields, before settling somewhere around the current high points.

Alternatively , could it be that the market has actually turned off it’s high, and is about to change direction totally?

Or indeed could it be that we are misinterpreting a collective gasp for fresh air, in totally the wrong way. It could be that it won’t be long before we hit zero yields, and every tenant can buy their premises with free money. About the same time as the great bacon shortage, as all the pigs have flown away.
 
There is conflicting evidence. We now see massive amounts of international capital parked on negative yields. Which makes even 2 to 3 % property yields look attractive. We see commentary that the US dollar is heading towards losing it’s reserve currency status. Then we see the USD strengthening. We see commentary that as lowering central bank interest rates clearly isn’t working – perhaps raising them is the answer. We are told that 52 % of American workers are paid some type of benefit. And that the free money for students scheme (commonly called interest free student loans) is a $140 M a year burden on taxpayers.

All of which points to? Well, we don’t know! What it does tell us that there is a lot of money floating around trying to find a home where it can be useful. And that some of the people who make decisions regarding that money make some really dumb decisions as to what to do with it.
 
For some time we have felt that what is likely to change the direction of our market is an external shock. With immigration and tourism as major drivers, the New Zealand economy appears in good shape. But the downside of being so inter-connected globally is that external, and very remote, factors can blindside us. Internationally, over all classes of investments, there has been a chase for yield. This has resulted in increasingly riskier assets and speculative positions being adopted. Any rapid change to those speculative positions could have a very rapid flow-on impact, and ultimately on our market. We can’t predict where the next shock may come from. It could be US election uncertainty. It could be Italian banks unravelling. Or it could be central banks giving up on lowering interest rates as a tool to stimulus, and trying the opposite.
 
In our local market what we  mostly see is that investors, and particularly part-time investors, need time to adjust to changes in the marketplace. The negative feedback we most commonly receive at present is “I won’t pay that yield in that location”. Which is just an echo of the feedback from 3, 6 or 12 months ago. It is just that the yield number has changed. We all thought 4 and 5 per cent yields were crazy money 12 months ago. And now we are paying those numbers.
 
We also see that market discernment takes a holiday as prices rise. We have seen commentary that “there is a strong focus on quality assets”. Isn’t there always?  But what that statement disguises is the lack of disconnect between quality and second tier assets. Our experience is that the costs involved in management and upkeep of second tier industrial assets are diverging significantly from similar costs for prime assets. With increased focus by insurance companies on mitigating their risk, together with new Health and Safety legislation, and increasingly erratic council enforcement, repair and maintenance costs for secondary buildings are rising much faster than for prime. Not all of those costs can be passed on to tenants. Theoretically this disconnect should be reflected in values. But it isn’t.
 
So perhaps the market hasn’t turned turtle just yet. It’s just that the reality of the market has moved quicker than most investors are able to process. And a collective breath is being taken before the market charges on again.
But then, we still have that nagging reminder of the time back in ’87 when we were paying the bank 27% for our borrowings. And the Asian Financial Crisis of ’97. And the GFC not so long ago.
It is a wonder we are ever able to make a decision!