Perspectives - Personal Finance Blog

Linda says:

Relief appears to be around the corner for oil prices, hopefully for oil dependent countries and poor motorists.The words “demand destruction” are being used to describe the phenomenon. The rationale for the fall appears to be that multiple countries are heading towards some form of economic slowdown with signs of trouble involving now Europe and Japan. And thus the private and commercial use of oil is falling.

In its normal cycle, demand will not start rising until the colder months of the Northern hemisphere. Apart from demand, prices are heavily impacted by changes in production and various types of geopolitical instability. Iran remains an uncertainty, Iraq is improved but not stable, and strife has impacted Georgia.

Georgia is home to current pipelines supplying Europe and the future home of several proposed pipelines. Russia’s government and it military are heavily funded by oil revenues. And, not surprisingly its military are now in parts of Georgia, reasserting Russia’s traditional influence in the area.

Whilst there are other issues such as missiles, and proposed NATO membership for Georgia involved in the conflict, the aim of many of the pipeline projects is to supply Europe with alternate energy sources to those under Russian control. Countries such as Russia and Iran are not favorably disposed to a fall in prices, and can be expected to try to influence the price back up.

While the economic situation would appear to favor a price fall, military actions or threats may be designed to counter this trend.

: Linda says:

As the French say- “The more things change, the more they remain the same.” Saving money has been out of fashion for years. Why bother when even for major purchases like housing, you could get a loan often with minimal deposit. But the rules have drastically changed, which is a problem for those with an existing mortgage and an enormous profit opportunity for those without one.

All the economic gloom and doom is likely to result in a major fall in property prices in many countries. The simple fact that most financial institutions now require a sizable deposit, favors savers, over those who do not control their spending. Only people who can save a deposit and qualify for a loan, are going to be able to take advantage of the new circumstances. Property profits are going to be dependent on the ability to save.

The precise timing of property price falls is going to vary, but housing affordability, which has been woeful in many countries, is about to markedly improve. To save money to take advantage of this situation, is going to take a period of time. But the residential property market is looking at a prolonged downturn, so time is should be available for anyone who wants to profit from this situation.

When there are changed trends and circumstances, acting quickly rather persisting with outdated ideas is important. Saving money will be the hot new trend, recognise it now and be ahead of people who still believe that last year’s strategies will work.

Linda says:

The average central banker is usually the last person to admit to the obvious- namely inflation is going out of control. Which is strange since the wanton printing of money, is the prime contributor to the aforementioned inflation. And most ordinary people are prohibited from printing their own or likely to be jailed for successful efforts. But it certainly is the province of central banks.

While Western countries certainly have their problems, the degree of inflation is considerably worse in Asian economies. Figures for some of these countries include about 8%in both China and India with a horrendous level of 25% in Vietnam. Vietnam is trying to stop imports of gold, which are in great demand by a populace witnessing a major fall in their paper currency purchasing power.

While perhaps seized upon by all forms of speculators, inflation destroys the purchasing power of average wages and the savings of average householders. It is generally bad for stocks and business, since it cuts the profitability of companies and therefore stocks.

The major way of controlling inflation is to raise interest rates, so even if it is not happening everywhere yet, the likely “cure” is going to inflict pain when it comes. If you can reduce debts- do it now, before higher rates hit.

Some central bankers are still of the belief that the financial system is too fragile to inflict the pain of higher rates. But that pain will still be necessary at some point, if inflation is to be brought under control.

Linda says:

The time is here to look beyond the beyond the downfall and woes of big speculative players, and apply the same lessons to our own lives and our own finances. Whilst the high flyers are getting the headlines, it is in our own lives that we can make the biggest difference.

While we can’t control the price of oil or the big events in world affairs, the power that each of us has is to take control and see ourselves as chief financial officers of our own small enterprise. Apart from the benefit to our own “balance sheet”, it is the best way to avoid feeling overwhelmed by negative news and sensational headlines.

There have always been better and worse times in the world of money and finance, like in the natural seasons. The idea that we had entered a period of economic sunshine, with growth in asset prices, and speculation replacing old fashioned economic sense has been shown to be false. Unrealistic expectations are always a source of disappointment and heartache.

The Wall Street bankers have caused a world wide mess with excessive debt, and massive bonus levels, that have encouraged a Las Vegas attitude to risk. Unfortunately, much of the money taken to the casino has belonged to ordinary investors and pension funds. Easy money and excess debt is, however, not just a problem for the hedge fund operators.

The other side of the coin is that a season of harder times allows us an opportunity for personal growth, and also an opportunity to build better for the future. If you are weighed down by debt, look at ways to reduce it. If you are in the habit of spending on impulse on purchases that you don’t really need, this is a habit that you need to alter. Sound principles apply equally to the world of money as they do to the rest of our lives. It
was simply a myth that the old rules had altered.

Linda says:

A couple of years ago, a fashionable idea was that the world’s central planners’ had become so clever that the economic cycle was dead!!!!! No more booms, no more busts, there would be just smooth sailing.

Like many other “hot” theories, this is another one for the dustbin of history. The recessions and economic slowdowns that many older adults have experienced before are back with a vengeance.

For those asking what has happened,the simplest explanation is that major debt problems have surfaced. Whilst there have been productive technology advances and rapid development in countries such as China and India, much of the boom was also being financed by ever increasing debt levels.

A nasty consequence of the calm economic conditions, was that they encouraged the taking of bigger and bigger risks. The hedge fund became the fashionable investment of the day, with often leverage of 100 to 1. So as the stakes have become too high, there has been a bit of panic and a resulting fall in many asset prices.

The rapid collapse of house prices in the US and the sub prime debt crisis have also exposed the degree of risk taking, which has occurred in other areas of the economy. The problems are not over , because the level of risk has been recognized as excessive in many areas and will need to be progressively reduced.

Linda says:

You would have thought that demand for oil would have fallen with the way prices are heading higher and higher. Whilst there is evidence that demand is falling in the United States, in the form of a general economic slowdown, consumption is still rising rapidly in many other areas.

In China the cost of fuel is subsidized so there is less pressure from price rises. The oil rich countries of the Middle East have cheap oil as well, so traffic jams in Dubai are not going to be curtailed by a rising world price. The falling US dollar is also cushioning some countries from the full rise in the US dollar price.

The price is also being driven higher by speculation and the continual instability in the Middle East. The threat of some form of confrontation involving Iran does remain, certainly until Bush leaves office. Knowing what is really happening there, in the midst of bluff and counter bluff is impossible.

However, the current high prices will cause slowing of the world economy in oil importing countries. The governor of the European Central Bank, M Trichet, has admitted as much when he has cautioned that further turmoil of financial markets could occur. The rise in oil will also dampen many economies and worsen inflation problems. If inflation goes higher, interest rates are likely to follow.

Linda says:

Or any of the other big mining companies with known huge resources in the ground and major cashflow. You may not realize it, but that is who you are now competing with to get money you may need for your business, or to fund a real estate purchase or other investment. Like food and oil, the cost of money is going up be it in your mortgage, overdraft or credit card.

What the sub prime crisis has done is make credit harder to obtain and more expensive.
The big mining companies and other large financial institutions, in days gone by, could obtain money that they needed cheaply overseas. But these cheap money supplies are no longer available, so they are now borrowing money from Australia’s big banks.

Which is good news if you are cash rich, and find a term deposit preferable to venturing back into the stock market. But don’t depend on a quick change in conditions, or being able to get credit again easily in the near future.

We have passed from a season of easy credit and relatively low interest rates to a time of much tighter money. Even in parts of the world such as the United States where official interest rates have fallen, mortgage rates have not moved and banks are far less willing to lend.

As we have warned multiple times before, now is the season to cut back your debts, and be aware that having your own savings will place you in a good position to weather uncertain times.

Linda says:

Warren Buffett, in an interview on CNBC has commented that ‘my general feeling is that the recession will be longer and deeper than most people think.’ Is the world’s wealthiest man and a legendary investor right?

Certainly he has age and massive experience on his side and an extremely successful record. Markets are looking a lot better than in mid March, and many are saying that the sub prime crisis is about to improve. Others, are far more cautious such as Mr Buffett and George Soros, another billionaire, also in his seventies and a former hedge fund operator.

Certainly, stock markets appear to be recovering, as the real economies of many nations appear to be slowing with falling consumer confidence and rising unemployment in several countries. No stabilization has been achieved in the US housing market with more foreclosures, falling house prices and no bottom yet in sight. And inflation, quiet for so long is becoming a worsening problem. (See our recent article - “Australia’s Inflation Rate Rises to 4.2%”‘ )

Falls in real estate prices are also now being experienced in the UK, Spain and Ireland with some other countries likely to follow. With the price of most people’s main asset still falling or likely to fall, the rise in the stock market may be premature.

If business activity and retail sales fall, the profits of many companies will also be affected and this will cause share prices to fall as a result. Therefore the outlook is still uncertain and the legendary Warren Buffett may be correct in his recession call.

Linda says:

The result that Australian home loan approvals have slumped in February confirmed that Australia, will not be an island of stability in a sea of global real estate woes. The multiple interest rate rises and headlines of domestic and International turmoil, have convinced the average person that now is not the time to rush into a big home loan.

The Reserve bank wanted to cool the economy and it is getting what it wanted, a big slump in home loan approvals, down by 5.9% in February. About the only good news out of this is that the if the boys at the Reserve Bank are scaring away the new home buyers, existing mortgage holders are less likely to be hit with yet another interest rate rise!

Which is good news if you are happy to stay in the mortgage and home you are in currently. If you are over committed or have speculated in an investment property, this news means that it will now be much harder to sell your property.

When people rush madly to buy real estate, they are often scared that prices are only going up and out of their reach. If they are now scared of higher and higher interest rates and economic gloom, the mood of the market changes again.

The home loan slump in Australia also means that more people are worried that property prices could FALL here as they are doing in other countries.

P.S.

Are you changing your ideas about investing or buying property?

Several of my friends have got far more cautious in just the last few weeks. Is that what you are thinking too?

Register to give us a comment of what you are seeing happen in your town.

(I am writing this from South East Queensland, which has been one of Australia’s hottest areas for rising property prices in recent years - But now I’m seeing new “For Sale” signs popping up every day)

Linda says:

Recession may be hitting the United States but the IMF (International Monetary Fund) is still forecasting that Australia’s growth rate will be 3%. Forecasts are always a variable and probability thing- just ask the weather bureau. This pronouncement has appeared at the same time as another wonderful, pronouncement from the Washington based IMF – that the total losses from the global credit crunch may well total $ 1 trillion dollars. The World’s Banks are supposed to be responsible for half of that loss at $500 Billion dollars.

The statistics coming out of these official sources now defy comprehension, and mean simply that there is a huge mess. And the mess is so big that officials are no longer bothering, to reassure the average person, that it is not going to affect them. The forecasts for other countries around the world are not as rosy with words such as severe recession, US dollar crisis and probable stagflation abounding.

The IMF, in its crystal ball department, has also forecast that property prices in the UK and Ireland may fall by 30%. The UK Prime Minister, Mr Gordon Brown is calling for homeowners not to panic. Others are calling for the world’s central banks, to bail out the banks and stockbrokers with taxpayer’s funds i.e. YOUR AND MY MONEY.

Yes, it is possible that Australia will remain an island of prosperity in a sea of global woes! But if that is not to be, recession proof your finances, cut your debts and have a “lifeboat” of cash to tide you over no matter what happens around you. If times turn out better, you will simply have a nest egg to invest or spend as you choose.