Perspectives - Personal Finance Blog

: 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When there are changed trends and circumstances, acting quickly rather persisting with outdated ideas is important.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 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:

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.

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: 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.