Perspectives - Personal Finance Blog

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.

Linda says:

Financial and political crises are benefiting the price of gold.

With an ongoing crisis in the banking system, no shortage of political upheaval, especially now in nuclear armed Pakistan, 2008 is looking like a good year for investing in some gold. Precious metals were the investment darlings of the early 1980’s, but then lost money for investors for decades. The Bank of England and many other central banks sold down their gold reserves, and gold seemed archaic and only suitable for jewellery.

However since about 2003, gold has been making a comeback as an investment class. Gold may pay no interest or dividend, but it has been a store of value since the days of the pharaohs. A gold mining company may declare bankruptcy, but a gold bar cannot. And it does not have any hidden sub-prime loans on its balance sheet. It is not going to inform the market of a slowdown in construction activity. Thus it is a tangible asset and is seen as a traditional inflation hedge.

In the unstable Middle East, and among the newly prosperous classes in India and China, investment in gold is rising both as an inflation hedge and a traditional store of wealth. After losing money on complex mortgage related investments, the appeal of precious metals is also expected to rise in Western countries.

The US at the moment has negative real interest rates (treasury bond 2 year rates are less than the rate of inflation), which traditionally favours gold. Even one of the US presidential hopefuls, Dr Ron Paul, has been advocating returning the currencies to the gold standard.

If you are interested in putting some money into gold, it is prudent to start building a position shortly, before the rise is in the gold price is on every magazine cover. Gold shares are correlated to the price of physical gold, but also negatively impacted by any form of stock market correction. Rising costs for machinery and labour are impacting the gold mining shares adversely.

And Osama Bin Laden putting out a “Christmas message” urging more mayhem and strife, benefits the precious metals dealers (as well as the arms dealers, of course.) Gold was up 30% in 2007 and 2008 is likely to be a very good year.

Linda says:

America’s enemies are gloating in the falling value of the American currency.

Hugo Chavez has said that the fall of the dollar is not just the fall off the dollar, but the fall of the American empire.

Iranian President Mahmoud Ahmadinejad has implored his fellow OPEC members to sell their “black gold” in another currency. “We are selling our oil for the depreciating US dollar, a worthless piece of paper.”

That America and its currency is under attack from these parties is totally expected. (They are not exactly members of the George Bush fan club and America is leading a push to prevent Iran acquiring nuclear technology.)

But not making the same headlines is the fact that the Chinese and the Japanese are quietly selling their US Treasuries (US Government Bonds). Namely, well-informed parties who own enormous amounts of US dollar denominated investments are trying to sell down at least part of their holdings.

Ultimately, the US dollar (and every other paper currency) is a “worthless piece of paper” and its value is related entirely to the trust that people have in the government that issues it. For the entire lifetime of most of the people on this planet, the US dollar has been the world’s reserve currency. But that may be changing!

If sections of OPEC start to sell their oil in other currencies, (Chavez is most likely to do this, and Iran is already doing so), the demand world-wide for the US dollar will fall! Politics and economics are always intertwined and having your assets denominated in US dollars is likely to an unwise move.

If you live outside the US and don’t own American assets, you’re most likely to be affected by downward movements in the US stock market, as canny investors move to hold equities denominated in more stable currencies.

Lot of publications use sensational headlines because they sell!

Linda says:

Financial columnists have been equally prone to eye-catching statements recently, usually related to the sub prime mortgage mess or the impending collapse of the US dollar. There has been no shortage of gloom and doom scenarios discussed.

Amidst such pronouncements, the fact that an economist named Mr Mervyn King is warning of the risk of major falls in global equity markets could be otherwise only slightly noticed. But Mr King is in a role where he would be expected not to be making such statements. He is the Governor of the Bank of England.

Certainly, Mr Alan Greenspan has been making all sorts of headline market predictions of late, but he has undergone a metamorphosis from reserved, central banker to best selling author. But Mr King is still the incumbent Governor, and not prone to rash statements.

“It is very striking that despite the developments we’ve seen in the last three months, despite the stresses and strains in the banking sector, equity prices are higher now than they were in August,’ he said. A recent report by the Bank of England has highlighted the vulnerability of the UK stock market.

But he is not just talking about problems in Britain. Mr King also said, “This is true around the world, and in emerging markets they’re 20pc higher. There must be some downside risks there.”
IT DOES sound like a good time to take some profits! While no one can accurately time financial markets, the fact that such prestigious individuals are sounding warnings, means it would be prudent to review your particular investments. This is particularly so, if they involve borrowed money in the form of margin loans or some other gearing.

What do you think?

Wreckage from the US mortgage crisis now appears to have reached British shores as well. UK politicians may be blaming the Yanks, for the fact that the Bank of England has had to step in and bail out Northern Rock.

However, the organisation has not been lending in the US. Before its current problems Northern Rock was growing rapidly, but dependent on wholesale markets for its money. Its own aggressive lending in the UK is at the root of its problems, combined with the global credit crunch.

Gabby says:

“No one can say that we don’t live in interesting times, and judging by both my own personal experience and the news stories day in, day out things are very interesting in the current world of personal finance.

I find the fallout from this subprime mess in the US a little worrying, and for a few good reasons:

1. It’s spreading worldwide
2. It looks set to take its toll on property and the availability of, and the cost of credit.

We can see this starting to happen already.

On the one hand I am thankful that I haven’t gone out and taken on a house and a big mortgage. At this stage in my life I don’t know if it’s wise, but more to the point the two groups being hit the most by the subprime fallout are banks (lenders) and new property buyers (borrowers). I’m thankful to not be in either of those groups right now…

Several of my friends have gone out and bought big, perhaps bigger than they should have, and not at low prices. The cost of housing has increased dramatically here in the past couple of years, and in many cases the increases seem almost ridiculous. But people pay them, and even more people are becoming willing to pay them - out of fear that if they don’t buy now they may be priced out of the market forever.

Personally, I don’t think that fear, rising prices and uncertainty about economic sustainability and interest rates are good reasons to rush out and buy a house - it’s just as easy to lose money with property as it is to make it, perhaps even easier. But I do worry about the overall affordability of housing, and the relationship between what’s going on in the land of property sales and how that relates to me as someone that rents.

Suppose rent is a very relevant issue to me, as I’ve recently been given notice to move. But I will talk about that more some other time…“

Linda says:

 

“ A change in attitude to credit risk and lending is sweeping the world. Aggressive lending for housing has not just happened in America; it has been a phenomenon in many countries.

While some have bought just to put a roof over their heads, many properties have been bought for pure speculation (and the rental return is too low to have justified the purchase).

I feel the gradual unwinding of this phenomenon is likely to affect many individuals and industries in different ways. The effects will extend beyond the obvious parties such as mortgage companies, real estate agents and the construction groups. The biggest risk to the overall economy is from a fall in general confidence, a perception of decreased wealth and a fall in the willingness to spend.

You can see that, in the UK at least, people are losing confidence in their banks - and in the case of Northern Rock customers this has meant getting their money out of there as soon as possible.

Many houses I see now are larger and more ostentatious (the McMansion) than they would have been otherwise, simply to maximise the effects of price appreciation. While having a beautiful home is in itself an enjoyable experience, being saddled with a huge mortgage and hefty repayments is not!

I believe the joys of home ownership will rapidly evaporate if property prices go into reverse, courtesy of the global credit crunch.“