Perspectives - Personal Finance Blog

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:

(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.