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:

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:

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:

The result that Australian home loan approvals have slumped in February confirmed that Australia, will not be an island of stability in a sea of global real estate woes. The multiple interest rate rises and headlines of domestic and International turmoil, have convinced the average person that now is not the time to rush into a big home loan.

The Reserve bank wanted to cool the economy and it is getting what it wanted, a big slump in home loan approvals, down by 5.9% in February. About the only good news out of this is that the if the boys at the Reserve Bank are scaring away the new home buyers, existing mortgage holders are less likely to be hit with yet another interest rate rise!

Which is good news if you are happy to stay in the mortgage and home you are in currently. If you are over committed or have speculated in an investment property, this news means that it will now be much harder to sell your property.

When people rush madly to buy real estate, they are often scared that prices are only going up and out of their reach. If they are now scared of higher and higher interest rates and economic gloom, the mood of the market changes again.

The home loan slump in Australia also means that more people are worried that property prices could FALL here as they are doing in other countries.

P.S.

Are you changing your ideas about investing or buying property?

Several of my friends have got far more cautious in just the last few weeks. Is that what you are thinking too?

Register to give us a comment of what you are seeing happen in your town.

(I am writing this from South East Queensland, which has been one of Australia’s hottest areas for rising property prices in recent years - But now I’m seeing new “For Sale” signs popping up every day)

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: 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: 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.