Written by Mike Taylor, Founder, CEO and CIO

In 2005, eccentric hedge fund manager Michael Burry – played by Christian Bale in the film, The Big Short – believed that the US housing market was in a bubble fuelled by sub-prime mortgages to people with low credit scores.

His theory was that these sub-prime loans that had been packaged and then re-packaged to become AAA rated bonds, were nothing more than junk bonds. He believed that as house prices fell and interest rates rose (unethically, the borrowers were all signed up, often unknowingly, on low teaser rates that re-set to higher levels typically after the first year or two) these financial instruments would collapse. Burry was early, very early and was lucky that his fund survived long enough to see his trade through to completion.

In 2006 and early 2007 many of his investors pulled out in disgust, believing he was wasting their capital trying to short US housing, which of course never went down. Those who remained ended up making close to 500% as the housing market eventually did collapse. The Case-Shiller US house price index fell over 40%, not bottoming until 2012, with many cities suffering much worse than this. However, in the aftermath Burry, fed up with it all, closed his fund shortly thereafter. I can sympathise. Investors are hard to please!

Not fun times as a fund manager

2007 was of course the year I started Pie Funds, not something I am going to forget in a hurry. But it marks the official start of one of the worst market meltdowns in history, and has been named The Great Recession and The Global Financial Crisis (or GFC) culminating in a total collapse of all asset prices, making it the toughest conditions for investing since the 1930s. I couldn’t have picked a more challenging time to be working as a fund manager, let alone starting a new one! The timeline following this article shows how the events unfolded.

Money printing

One of the great quotes I remember from early 2007 was from then US Federal Reserve Chairman Ben Bernanke who reassured investors by saying the sub-prime crisis was contained. Unfortunately, that couldn’t have been further from the truth. Eventually though, helicopter Ben, as he was later known for metaphorically throwing money around, probably did save us all from financial Armageddon with the commencement of Quantitative Easing (money printing). This stabilised the financial markets and enabled the recovery we are all enjoying today to commence.

Where is the next crisis?

Ten years on, have we learnt anything? Probably not, because as those who were involved grow older, the nightmares begin to fade and are replaced by a bull market lullaby, and newcomers forget that winter is a season that affects investments too.

Global debt levels continue to climb, and most countries indebtedness, whether at government or household level, now exceeds pre-crisis levels. The good news is that the financial services sector is stronger now and more heavily regulated.

Banks undergo regular stress testing and as we know fund managers for example are under more scrutiny. All this means that if you think the next crisis will be in financial services, you are looking in the wrong place. To find it, you have to look where nobody else is and unearth something that is a contrarian view.

Good luck, there’s a lot of noise out there and do let me know when are you on to something.

Market Watch: The GFC 10 years on

Article by Liam Dann, originally published in the NZ Herald

Looking back on the global financial crisis 10 years on: When did the cracks first start to appear in the asset bubble? What exactly were sub-prime mortgages? What have we learned? And could it happen again?

This week on Market Watch, Pie Funds chief executive Mike Taylor explains how a US property boom evolved into the biggest global market crash in a generation.

And while market regulation has improved, risks still remain around global debt and housing bubbles.

This article is for information purposes only. It is not intended to be financial advice and has been prepared without taking into account any particular persons financial situation or investment objectives.  Past performance is not a guarantee of future returns. Material or views expressed on specific companies are not recommendations to buy, sell or hold financial products.