Perspectives - Personal Finance Blog

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:
The news papers are full of individuals having to sell assets with overexposed margin loans and excess debt.

While many prominent names and companies have fallen, many smaller people who have invested in fashionable investments or highly geared property or share markets schemes, are privately looking at their situation to turn it around.

The most important factor to recognize is that the seasons or cycles have drastically changed: from fair weather to storm: from greed for gain to panic at loss; from optimism to pessimism etc. And the strategies which were good at one time, are going to result in grief now!

Markets are about 90% psychology and emotion and only 10% related to fundamental values.
Thus the US residential housing market has seen in the last couple of months, a resurgence of fear to replace greed. The access to easy money allowed price inflation that was completely out of step with salaries.

And the problems are spreading out from the United States. We have been alerting our readers of the trends for months.
BUT- there are always winners too!

The winners appreciate that the rules have changed and have cut their debt levels and are waiting to buy undervalued assets when the time comes.

NOT YET - but use this time to be in a position to take advantage of opportunities as they arise.

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.

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.