Perspectives - Personal Finance Blog

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:

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: 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: 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:

(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:

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:

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.