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When there are changed trends and circumstances, acting quickly rather persisting with outdated ideas is important.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

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:

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:

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.

Linda says: Analysis followed by Action will beat worry or panic!!

With the financial headlines, constantly talking about crises- sub-prime, banking, mortgage bonds or recession, bailouts ,impending bankruptcies- it is easy enough to feel a bit gloomy. However, crises past have always provided great opportunities to profit, and this one is not going to be any different. The psychological trick is to see beyond the general pessimistic mood, to whatever opportunities may emerge. Visualize the silver lining, not the dark cloud.

To put it in very, simplified terms, there have been good or booming times in many industries and geographical locations. A lot of the boom has been fed by easy money and excessive risk taking. The risks being taken just got bigger and then BIGGER! The rules of the game have now altered, and are not going to change back until much of the excess risk has been resolved. The best strategy is to get yourself and your affairs into a position, where YOU are going to be a winner rather than a loser from the major changes taking place in the world.

What will happen, will happen whether you like it or not. All you can choose is how you try to handle the circumstances to your own advantage. A ruthless analysis of your own position is a priority. Imagine yourself as the CEO of your own enterprise- what assets do you have and what are your debts and outgoings? Is your income (namely your job or business) secure, or are you in an industry that is likely to be badly affected by any economic slowdown?

Are you retired and dependent on a pension or investment income? Are you currently cash rich or up to your eyeballs in debt? Excess levels of debt are the anchor dragging companies down and will drag you down. Now is not the time for procrastination and hoping for a miracle. Take a long hard look at your position! If there are measures that need to be taken, take them quickly. See the current difficulties in the world as a huge opportunity- to bring about changes in your business or your personal affairs, that would be much harder to implement in booming times.

If despite all your efforts, there does not appear any way of winning out of your particular circumstances, look at how you can limit your losses. Try to think laterally and seek advice if need be. No one has the ability to forecast the future accurately , so develop several plans to use, depending what particular circumstances develop. This is much easier than agonizing if you have picked the correct course of action.

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………

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