Perspectives - Personal Finance Blog

Linda says:

Why are various financial markets still in a state of paralysis, or ongoing downturn?
Because in the world of investment banking and broking, no one trusts any one else (to be financially sound). Thus, with large quantities of doubtful loans on the books, each bank is hoarding cash, to survive whilst others may go under.

As for the ordinary people who trusted their banks, brokers and numerous other financial professionals to look after their money responsibly and not take excessive risks, the current financial meltdown has been a very nasty shock.

In the center of the crisis, in the United States, large neighborhoods are already filled with foreclosed homes and homeowners who are struggling to pay their mortgages.

The sub prime crisis is affecting both those who speculated and used their home as a giant ATM, and those who were far more cautious but still are surrounded with foreclosed homes and impacted by a nasty recession. Indulging in a blame game may be to the advantage of the politicians and regulators, but that is not going to help you.

What will make a difference to you and those who are close to you, is how you view the situation and what measures you can personally take to improve it! DON’T WAIT FOR OFFICIAL ACTION - it may or may not help you! Governments in the US and elsewhere are more concerned with the integrity of the banking system, (and state of various brokers and markets) rather than the woes of individuals.

TRUSTING OTHERS TO LOOK AFTER YOUR FINANCIAL WELFARE HAS NOT WORKED!
There has been too much greed, speculation and excessive risk taking. The individuals who you have thought were looking after your investments and your money, have been more interested in their bonuses and astronomical salaries, rather than the soundness of their lending practices. The investment bankers have behaved like Las Vegas high rollers, and the regulators have been busy looking the other way, at what has been going on.

Sure there will be prosecutions and court cases, which may make you feel better, but it will not bring your money back and pay your bills!

DO EVERY THING THAT YOU CAN DO, TO TAKE CONTROL OF YOUR OWN SITUATION AS FAST AS YOU CAN.

Linda says: Especially the Panda

While some world markets have staged a rebound of varying degrees, a market in the Asian time zone is deflating, quietly behind the scenes of the headlines in Western media.
On March the 27th, the Shanghai market fell to be 45% below its high of six months ago. Whilst China’s well publicized problems with Tibetan dissents have earned widespread coverage, the pronounced hiss of a rapidly deflating bubble in Shanghai, is far more low key in the press outside China.

The fall is symptomatic of an attempt by the Chinese government and central bank to rein in out of control inflation, especially in food prices. Rising food prices equals discontent of the poor, amongst all of the Chinese people, not only the vocal ethnic groups.

So for those depending on the “Great Wall of China”, to shelter them from the consequences of reckless lending and “Made in the USA mortgage mess”-BEWARE!
The Chinese government values political stability (and retention of its own political control) above all else and is now trying to slow the Chinese economy.

For all those economies (and stock markets), which are dependent on the rate of Chinese growth, especially in Asia, a clear warning sound of tougher times is audible. With the US believed to already be in recession, with house prices continuing to fall, a slowdown in China will also adversely impact the world economy.

A bear market of Panda type will infect other stock markets across Asia. Don’t just look to Wall Street for a foretaste of likely events.

Linda says: YOU DO!

Easter is a religious festival but also a time for catching up with family members. As well as the usual topics of conversation there was a new topic mentioned- namely SAVING MONEY! And it was mentioned from an unusual source –namely my adult children who are in their early twenties. I have alluded to excess spending patterns before, but it has previously been as well received as my multiple other parental lectures on excessive drinking, too much partying etc, etc.

But suddenly I discovered that the turmoil in the world financial markets had had an unexpected benefit, namely an onslaught of THRIFT! Children who had grown up in a world of easy credit, economic expansion and low unemployment levels were suddenly aware of storm clouds hitting the economy. Though they both had not been personally affected yet, a marked change in attitudes from Christmas less than three months previously was evident.

And they admitted that many of their friends were thinking similarly and deciding to cut back their spending and save some money. Saving for the proverbial “rainy day’ has long fallen out of fashion, while there has been a very prolonged period of economic sunshine!
Whilst asset values have been rising quickly, it has made far more sense to borrow to buy stocks or real estate.

Trying to grow your assets by cutting back spending and saving some of your income has seemed incredibly old fashioned. The runaway growth in asset prices HAS been the way to go. But borrowing money to buy assets that are actually falling in value is a sure fire way to end up in trouble. Until real estate markets, stock markets and others stabilize, holding cash, cutting your debts and saving money is the way to go!

And your actions and those of many millions of others will determine the direction of the world economy, more than the strategies of investment bankers, hedge funds, governments and central banks.

Linda says: A drastic change is going to be long lasting.

By March it is quite obvious that the big debt party of the last couple of years is over and the year of the super hangover has begun!

The fashion impact of announcing astronomical losses is starting to bore to tears. This has been an overdone trend, which unfortunately is going to be trans seasonal and is having an increasingly, international flavor.

The revolutionary “in” look of the year will go to any financial institution that actually will manage to shock everyone by making money. (for the investors not the executives…..) This will be breathtaking and quite stunning.

A new class of culinary award, a variant of the Michelin star, should be awarded for the most creative accounts. Perhaps the super soufflé award for resembling a grand French culinary creation but collapsing on delicate probing or the heat of a proper audit. The super soufflé could be awarded with or without a smattering of rogue traders to add some spice to the concoction.

Accounting, normally the most staid and boring of professions, is likely to implicated in a number of superb super soufflés and transform itself into an exciting, long running series of courtroom dramas. Insolvency experts will be highly prized and a very “hot” item.

Being the CEO of certain financial institutions will be regarded as favorably as standing on street corners, scantily dressed and looking for customers. The latter business model is far more “transparent” and easily understandable, than some financial products sold by the CEOs concerned.

Inflation is back! The supposedly conquered scourge of the seventies is on everyone’s lips and evenly heavily fudged government statistics are admitting there is a problem. Only the Japanese government is running around with the proverbial white cane- unable to find any evidence of rising prices.

Complaints about rising prices of food and energy are highly fashionable. They have replaced the boasts of yesteryear of rising house prices as a favorite topic of conversation. Only if you are lucky enough to live somewhere like Dubai ( where the gas price is heavily subsidized), can you radiate the glow of rising national wealth, courtesy of the oil price.

Linda says: Dicey days for the US dollar are ahead.

Politics and economics are always intertwined. President Bush will leave office in January 2009 leaving behind a country and an economy considerably weakened from that which he inherited. Others in the world are already seeing the opportunity to advance their own national interest, at the expense of the United States.

The fall of the US dollar is in part symptomatic of the fall in prestige and standing of the United States, and the confidence in its government managing both economic policy and foreign policy. The US dollar (like all other paper currencies) has no inherent value: its value depends on trust in the government in Washington to pay its debts and preserve the value of its currency.

The now open intention of the Federal Reserve is to drop interest rates to try to bail out mortgage holders and and now a major bank in the United States (and also support the stock market in the process.) The obvious casualty will be the American dollar, which will be good for American exporters or American manufacturers competing with imported goods. And it is bad news for the holders of American currency, both inside and outside the United States.

The financial crisis now hitting the American banking system resembles a margin call on the entire American way of doing business. The excessive American government spending and the reckless lending practices have created pressures, which have destroyed trust. This will not be easily restored.

Inflation is taxation by stealth, destroying the value of savings of ordinary citizens, who don’t appreciate the implications of government and central bank actions. The sophisticated brokers and traders will take action to preserve their wealth and purchasing power whilst the average citizen, who is not aware of the implications of government policies, will end up suffering the consequences.

ACCESS TO INDEPENDENT INFORMATION is your only way to protect yourself and those close to you. If you have any friends or neighbours who have experienced out of control inflation first hand – those who remember the seventies, talk to them. Even more so people from Mexico or Argentina, who have seen the complete financial devastation that can engulf the unprepared and destroy the financially unwary, are well educated in the problems that could arise.

I am not predicting problems of the level of Latin America, but smaller doses will still cause havoc for the uninformed and unprepared. The information is available for free to protect yourself and your family.

Linda says: Analysis followed by Action will beat worry or panic!!

With the financial headlines, constantly talking about crises- sub-prime, banking, mortgage bonds or recession, bailouts ,impending bankruptcies- it is easy enough to feel a bit gloomy. However, crises past have always provided great opportunities to profit, and this one is not going to be any different. The psychological trick is to see beyond the general pessimistic mood, to whatever opportunities may emerge. Visualize the silver lining, not the dark cloud.

To put it in very, simplified terms, there have been good or booming times in many industries and geographical locations. A lot of the boom has been fed by easy money and excessive risk taking. The risks being taken just got bigger and then BIGGER! The rules of the game have now altered, and are not going to change back until much of the excess risk has been resolved. The best strategy is to get yourself and your affairs into a position, where YOU are going to be a winner rather than a loser from the major changes taking place in the world.

What will happen, will happen whether you like it or not. All you can choose is how you try to handle the circumstances to your own advantage. A ruthless analysis of your own position is a priority. Imagine yourself as the CEO of your own enterprise- what assets do you have and what are your debts and outgoings? Is your income (namely your job or business) secure, or are you in an industry that is likely to be badly affected by any economic slowdown?

Are you retired and dependent on a pension or investment income? Are you currently cash rich or up to your eyeballs in debt? Excess levels of debt are the anchor dragging companies down and will drag you down. Now is not the time for procrastination and hoping for a miracle. Take a long hard look at your position! If there are measures that need to be taken, take them quickly. See the current difficulties in the world as a huge opportunity- to bring about changes in your business or your personal affairs, that would be much harder to implement in booming times.

If despite all your efforts, there does not appear any way of winning out of your particular circumstances, look at how you can limit your losses. Try to think laterally and seek advice if need be. No one has the ability to forecast the future accurately , so develop several plans to use, depending what particular circumstances develop. This is much easier than agonizing if you have picked the correct course of action.

Linda says:

The financial headlines have moved from the business pages to the FRONT PAGE.
But every worrying headline that you read, tends to benefit mortgage holders and precious metals.

If the US economy is on the brink of recession, other countries may be also in trouble. Four economies already showing signs of a slowdown are Japan, Britain, Spain and Singapore. Pressure is now mounting for interest rate cuts from central bankers in countries other than the United States. Even where the central bank is threatening to raise interest rates, as in Australia, more shock headlines and stock market wobbles hold a glimmer of hope for embattled mortgage holders.

The worse the news gets, the less likely that any central bank will actually dare raise mortgage rates. Those bankers still talking tough, may actually be forced eventually, to cut rates to stimulate their economies. Thus, the ill wind that is blowing on the stock markets and credit markets of the world, may be a blessing for mortgage holders, who are being already hit by rising food and oil prices.

Negative comments on world growth are coming from multiple sources, including top bankers and brokers. Mr Strauss- Kahn, the new head of the IMF has called for both lower interest rates and government stimulatory policies, from many countries in addition to the United States. Warnings on further banking problems spreading from sub-prime loans, to credit card and consumer loans, has come from John Thain, the new head of Merrill Lynch.

There has not been good press recently, for the entire banking industry. How some “rogue trader” can have liabilities that equal the capitalisation of the bank itself is amazing and downright scary. If it can happen in Paris, it unfortunately can probably happen in your bank. No wonder gold bullion looks good and solid by contrast. As opposed to some concocted derivative strategy, that might just blow your money up somewhere in cyberspace.

What is becoming readily apparent is that the volume of complex financial products is out of control. How many gung-ho traders are out there playing games, and taking colossal risks while sitting at a computer screen??? Unfortunately, your savings and investments might be a casualty; it is unlikely that problems are confined to Societe Generale.

Warren Buffet has called these derivatives “financial weapons of mass destruction.”

The size of these markets is far larger than the GDP of the worlds’ economies. By contrast, the supply of gold is finite and mining output is actually falling. And you can’t just print it or manufacture it out of thin air, as paper currencies can be and are.
In South Africa itself, production of gold has been cut since a major crisis in electricity supply hit the gold and other mines. Since the electricity supply is unreliable, miners can’t go down to the mines because they can’t guarantee power supply to the lifts to get them out again.

Several countries are now experiencing ” negative real interest rates”, meaning the bank rates of interest are less than the rate of inflation. Countries affected include the United States and the Persian Gulf countries. Thus, you are guaranteed to lose by leaving money in a bank deposit, in these countries.

A traditional inflation hedge such as gold looks good by contrast. Wealthy Arabs (and Chinese) are choosing to shift some of their assets, which were based in US dollars, into gold.

Supply problems will only accentuate the rush

Linda says:

(Or how the cost of food and money goes up, whilst the assets you own are going down!)

The infamous sub prime mess and credit crunch is actually a markedly deflationary event!!! This statement may cause you to wonder, because your bills are not going down at all. But it actually is, because large amounts of money have been destroyed by greed, recklessness and speculation. The huge amounts of money lost, by banks and others, are no longer there in the system to lend to any one else.

In a simplified form, more money in the system tends to lead to rising prices and asset values, whilst less money tends to lead to a fall in prices. Without intervention by governments and central banks, DEFLATION would be a likely consequence of the American stock market and credit problems, similar to what happened in Japan in the 1990’s.

But that is not what people are seeing. The cost of everything is going up, especially food and fuel, in a contradictory fashion!!! It does not appear to be making any sense!!
And that is because a silent war is being waged; by governments and central banks, to prevent the onset of Japanese-style, deflationary slump.

To make up for the money that has been lost by the Wall Street operators, shonky lenders, and others, governments are printing money at a great rate. The only two notable exceptions are Switzerland and Japan. Mr Bernanke, in the United States, is printing dollar bills furiously, to bail out the US economy. His boss, the Texas cowboy, is throwing $150 billion around to stimulate the economy.

In the land that gave the world fast food, and has masses of debt-laden consumers, inflation is preferable to deflation. Deflation is a lot more politically unpalatable, because it triggers insolvency in householders and businesses that have large borrowings. And a certain government, with a known fondness for expensive foreign military adventures, is also tempted to pay its debts via the printing press!

The battle is going to rage on with an uncertain outcome………

Subscribe FREE to get regular updates …. What YOU should do, to protect yourself, and those close to you, depends on how the WAR is going….

Linda says:

(Or it is far easier to make a longer term prediction)

Volatility has returned to the stock markets of the world with a vengeance and it is not for those afraid of dizzying falls. Trying to predict what is going to happen next week after we have had a week of the biggest falls in many markets since September 11th 2001, major rate cuts in the United States and a huge rogue trader scandal in Europe is practically impossible. Though the market has bounced back to a degree, the coming weeks are far from certain.

It is probably wiser not to dabble in such a pursuit, and leave it to technical analysts, astrologers and tea leave readers. Trying to make sense of what to do in such circumstances is very confusing; a lot of contradictory viewpoints, are being expressed by experts. But ordinary people, have to make a decision whether it is best to sell or buy.

Distancing oneself from the daily headlines, and looking at the bigger picture and trends is the only sane solution. What the majority is almost agreeing on now, is that the US economy is heading to a recession. And actions speak louder than words. Mr Bush would not be organizing a $150 billion stimulus package, if he and his advisors did not think there was a problem.

Similarly, Mr Bernanke, from the Federal Reserve would not be calling emergency meetings, and dropping US interest rates by 1.25% if there was not a crisis looming. In a US recession, the US stock market ALWAYS falls between 20 and 46%. In all the US recessions since 1945, there has been a negative economic effect beyond the United States and world stock markets have caught a chill from Wall Street.

Will this time be different? Officials in China are already warning of a negative effect on Chinese exports from American problems. Most other countries are acknowledging the likelihood of a significant American problem impacting on them. Most countries banking systems have already been impacted by the sub prime crisis.

Thus while it is not possible to accurately predict what will happen next week or next month, if a recession does occur in the US, it will pull American stock markets down with it at some point. In the balance of probabilities, the effect on other countries’ economies will be negative, with the only debate being the degree. The longer term forecast is down rather than up for world markets. BUT next week, anything could happen!!!!

Linda says:

Beware Asian Problems (in the upcoming year of the Rat)

The last week has not been good on Wall Street, but keep an eye out for problems in China. If you are an Australian investor (or have a superannuation fund do the investing for you), every day has been colored in red ink. Not good!!! For the total masochists, or those who are sleeping very poorly, there have been the European and American markets to look at in the middle of the night. The news from there has not been conducive to a good night’s rest!

How previously highly regarded corporations, such as Merrill Lynch and Citigroup, could lose such astounding sums is mind blowing. But while all the attention has been on Wall Street and the sub prime loan shambles, there is a market in our own time zone to keep a close eye on.

The most speculative market in the world is to the north of us, in Shanghai. Whilst foreigners are largely excluded from dabbling in it, the biggest gambling den in China is not in Macau but in the Shanghai Stock market. There are lots of crazy valuations here, for those nostalgic for the Nasdaq at the height of the dot-com boom.

The communist party bosses in Beijing are presiding over a large scale, frenzy of ridiculous prices with shares in some companies selling at 95% more in Shanghai, than shares in the identical company are selling for in Hong Kong. Even the famous Mr Alan Greenspan, has called Shanghai “a Bubble”.

Enthusiastic, ordinary Chinese are mortgaging their houses to participate in the easy, riches of the Shanghai market. The government is worried, and trying to slowly raise interest rates to control inflation and excesses. A 9% fall in Shanghai on February 27th, 2007, triggered losses around the world. This is a market known for rapid movements.

Since a quarter of China’s economy depends on exports to the US, the widely expected American slowdown may complicate the Chinese problems.

Problems in Shanghai are a question of when, rather than if, with direct implications for Australian resource stocks.