Perspectives - Personal Finance Blog

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:

(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.

Linda says:

Credit Crunch is developing into a global stock market rout which will affect more than just the market players.

We predicted on 19th november 2007 that world stock markets were looking dicey - and we were correct! Developments in America mean that money is likely to get tighter around the world and recession beckons. To quote Professor Roubini from New York University, “ This will be a much worse recession than the ones in 1990-91 and 2001.” The performance of global stock markets is summarized in the word CRASH!

There are ongoing problems emanating from the US, that are going to affect ordinary mortgaged householders and investors far away. Globalisation has a nasty side effect, in that as economies are more interrelated, problems spread easily from one to the other.

Whilst the massive losses at Citigroup and Merrill Lynch have been exposed, further problems lurk below the surface with the companies that insured many of the mortgage –backed securities.

These are organizations that normally do not rate much of a mention, but in the current climate are likely to be the next source of problems and headlines. The share prices of two of the largest such companies, Ambac Financial and MBIA have fallen markedly in recent times and a smaller insurer, ACA Capital is on the brink of insolvency. Panic that very major problems are developing is behind the tumultuous headlines.

The insurance that various financial institutions relied on to guarantee their bonds and securities is now questionable, with downgrades of these insurers expected. If this occurs, further write downs, and less money available for lending will be the consequence. This will put a further strain on many banks,with more headline losses.

Legendary investor Warren Buffet’s company, Berkshire Hathaway has set up a new bond insurance business in December and could do very well. His is a new business and therefore has no questionable loans hiding in the closet.

But the problems of his competitors, are likely to raise interest rates on loans, far away from Wall Street.

And what was fear last week, is now turning into panic.

Linda says:

Look beyond the headlines to help you decide what to do?

How do you figure out whether a recession is likely when governments, central banks, newspapers and other groups are often lying to you?

In the field of commodities, 2007 was a very good year with increases in grains, metals oil and gold.

But what does the future hold? If you try to get a picture of future economic activity, you can look at measures such as housing starts and building approvals. In the resources industry, with mega takeovers proposed, it is hard to get an unbiased and accurate picture as opposed to spin, and public relations statements.

One infrequently reported, but extremely important measure is the Baltic Dry Index.

This measure is actually London based, and measures the cost of moving bulk goods around the world by sea. It deals with cost of carrying materials such as ores, coal and grains but does not measure the carriage of manufactured goods.

In the last couple of years, being in the bulk goods business has been highly profitable, with the Baltic Dry Index rising 150% last year. But in the last week, there have been 3 major falls, with a Plunge of 5.7% in a single day. The index has fallen rapidly and is now 37% off from its highs.

When there are more goods to ship, than ships available, the cost goes up and this, of course, also works in reverse. Thus, if the cost of shipping is falling so rapidly, the demand for shipping is falling and there will be fewer bulk goods to transport. And, eventually, a decrease in manufactured goods as well. The shares of shipping companies are busy falling too!

Thus commodity prices and the economies dependent on them, may not be as insulated from global woes as they might like to think they are! In other words, mining and other commodity related stocks are likely to go DOWN if the demand for their products is falling. Instead of the crystal ball, keep an eye on the Baltic Dry Index.

Linda says:

How to lose absolutely astronomical amounts of money.

Most of us have at some stage in our lives lent money to a friend or work colleague with a hard luck story. I remember learning the lesson as a student that there were some people, who felt no priority in repaying money they had borrowed. As I noted the borrower to be spending on other items, but making no attempt to repay the debt to me, relations became quite unpleasant. But I learnt one of life’s basic lessons- namely be extremely careful whom you lend money to.

Old fashioned banking where money was lent to persons who had a deposit, and prospects of repaying the loan, appears to have been totally disregarded in the parallel universe called sub prime lending. The old fashioned “deposit” eliminated those who had compulsive spending problems, gambling, overly extravagant lifestyles or simply in sufficient income to service the loan. It was a useful test that even if you had a good income, could you manage your spending?

In the sub prime universe, commonsense appears to have flown out the window as bankers and brokers, paid themselves huge salaries and bonuses for making highly suspect loans, and then on selling these as AAA grade securities. Now, no amount of financial engineering can hide the smell of the rotten original loans. Prestigious firms have basically conned everyone, destroyed billions of capital and are now on their knees, to governments and central banks, to bail them out of an appalling mess.

In old fashioned banking, the first rule was not to lose money. Sure, money was lent to businesses and homebuyers, who eventually, could not keep up their repayments. But, at the time the original loan was made, the belief was that the loan could be serviced. A lot of these sub prime loans were totally rotten from their inception. The money was lent to people. who had no hope of being able to make the payments. It was lent by individuals and organizations, who were looking to shift the risk elsewhere, pocket their money, and did not care what happened down the track.

As the colossal losses that have materialized have shown, some of the involved parties have not been able to escape the real world consequences of their actions. Unfortunately, much of the collateral damage is going to affect ordinary people, who never profited from the financial games played in the parallel universe.

Linda says:

Financial fashions will radically alter in 2008.

My financial forecast for 2008 is a return to the virtues of simplicity.

No more convoluted financial models, which require an advanced degree in mathematics to have any hope of understanding.

No more investing in the blind faith, that name institutions in glossy premises are not going to lose you a truckload of money.

Out of fashion are any styles completely, of dodgy mortgage related securities that have some sort of down gradable rating on them.

Extremely fashionable will be some form of legal action, aimed at sellers of the dodgy mortgage related securities.

That last season’s hot number called private equity buyout will be replaced by the far less glamorous style of actually running a business in a viable, long term manner.

Second hand yachts and Ferraris are likely to be in ready supply and at good prices.

The fashion colour of 2008 is likely to lashings of bright RED, especially in terms of red ink in the balance sheets of some banks and brokerages.

Equally red may be some faces of CEOs, especially entering court.

Owning a condominium, in an empty building in Florida, will definitely not be admitted to by any fashionista.

Buying any asset to “flip”, especially real estate, will be seen as a total style disaster.

Dining “in” is going to be the look of the season, rather than dining “out”.

Throwing the credit cards on the barbecue, is another new fashion trend that is likely to be a hit.

Very well dressed will be the politicians on TV, calling for legislation to do something about whichever financial problem is in the headlines.

Excessive debt levels will equate to excessively high heels- likely to contribute to a wobble and probably a nasty fall.

Unfortunately, the camouflage, military look is also likely to a growing trend in numerous locations across the world, which are not usually known for setting fashion trends.

Linda says:

Food prices are an upcoming political issue.

Inflation and the rise in the price of food and fuel is becoming a mainstream media issue. In the United States the cost of heating oil has soared. As oil approaches a hundred dollars per barrel, more and more land is being planted with corn for ethanol production. This is land, which would otherwise be planted with grains, for human or livestock consumption.

Products such as wheat and soybeans are at record prices and the rising affluence of large populations in China and India is straining the demand, and price, of a large range of foodstuffs. Wheat has risen in price by 90% in twelve months. Whether it is the price of pasta in Italy or bread in Germany, price rises are a hot topic. A new inflationary cycle is beginning which could lead to demands for higher wages, to offset the rising cost of living.

Most affected are poorer people for whom foodstuffs represent a higher proportion of their expenditure - thus the risk of social unrest and upheaval is correlated to rises in food prices. Apart from the rises in price of food staples themselves, the rise in oil prices is increasing the costs of transportation to markets.

Droughts, pollution and loss of land to industrialization, (especially in China), are all playing their part in why the loaves at your local bakery are going up steeply in price.

Gabby says:

Every day we hear more and more about the sub prime mess.

At first it was said that it would just affect America, and that a quick recovery could be made.

Then there was a brief mess in the UK, with institutions such as Northern Rock being quickly eaten up by the crisis.

Then there was talk that it was all over. The credit crunch was dead. Past. On the road to correction.

And now it seems that this is clearly not the case at all. It is spreading Internationally and its bite is still to be felt by many.

When you look at the facts you can see that in the US 17.9 million homes were without residents in the third quarter of 2007. Never before have so many homes stood empty.

“According to Congressional estimates, up to 2 million families are expected to lose their homes over the next two years.” That’s on top of the 1.7 million foreclosures so far in 2007. 1

In Australia there is growing concern amongst many people about our ability to deal with debt - especially with mortgage defaults having soared by 329% since 2005. General credit defaults and interest rates are on the rise as well. In many respects it’s a disturbing trend, but it’s not as doom-and-gloom as the media puts it.

No matter how things transpire there are always options, and now that there’s a pretty good chance of a downturn on the horizon, now is a good time to start considering your options.

If there is economic bad weather on the horizon, what measures can you take now, in order to protect yourself when the storm hits?

The most obvious ones to me are to reduce debt and increase saving - and of course there are many more.
I’d love to hear your suggestions!

PS. Don’t forget to check out our new article “Inflation Returns” : No matter where you live, world wide inflationary pressures are back! And it requires different approaches to everything to do with money - including wage contracts, borrowing for whatever purpose and any form of investment.