What’s The Fuss About

The chart below is of the RBA cash rate – if you blow the chart up and squint really hard you can see the recent rise in the cash rate. Apparently, this return to normal transmission where interest rates do something other than go down continually is causing a few people to have conniptions.

Taking the chart back to 1990 you could argue that we have had three decades of downward drift in interest rates- with the occasional blip upwards. And since 2010 this downward trend accelerated as the cash rate collapsed. Looking at this chart does cause me to ask what the expectation of borrowers and investors were – did they think that interest rates would stay at near zero forever?

Apparently they did.

I understand the angst of home owners because they have just woken up to the fact that irrespective of how they seem themselves they are leveraged investors with a contingent liability. The situation is obviously worse for those with multiple properties but risk is part of the investment process and if you are unaware of your downside risk then you probably shouldn’t be in any market.

This is a case f the only reality existing is the reality I have experienced and there is no reality other than this one. Without wishing to be too cynical I can almost guarantee that 90% of home buyers never gave a moment’s thought to what would happen if interest rates began to rise. After all, why should they – interest rates had never risen in their experience so therefore they should never rise at all.

This inability to generate a variant perception and ask yourself the question what happens if I am wrong and what does me being wrong look like is one of the main cognitive reasons for investors failing. Home buyers could never imagine interest rates going up just as Netflix investors could never envisage the stock losing 70% from its peak in a series of spectacular falls. The instruments differ but the psychological failing that afflicts both is identical.